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 December 31, 2002
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 or 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. [ ]
Indicate by check mark whether the registrant is an accelarated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
As of March 10, 2003 there were 3,551,620 shares of the Company's voting no par
value common stock, with an aggregate market value of $36.2 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 March 13, 2003, there were
12,068,944 shares outstanding of the Company's voting no par value common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2003 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 December
31, 2003, 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 Pinot Noir, Cabernet
Sauvignon, Merlot, Syrah, Chardonnay 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 Moon Mountain Vineyard,
Edna Valley Vineyard, Chalone Vineyard, Acacia Vineyard, 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 "Provenance Vineyards(R),"
"Chalone Vineyard(R)," "Edna Valley Vineyard(R)," "Dynamite(R) Vineyards,
"Acacia(R)," "Canoe Ridge(R) Vineyard," "Jade Mountain(R)," "Sagelands
Vineyard(R)," and "Echelon Vineyards."
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 terms "we" and
"Company" used in this report refer 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
THE CHALONE WINE GROUP PURCHASED A WINERY IN RUTHERFORD AS HOME FOR PROVENANCE
VINEYARDS
The Company announced in August 2002 that it had purchased a winery in the
heart of the Rutherford District for the home of Provenance Vineyards, its new
Napa Valley Cabernet Sauvignon winery. Formerly known as Chateau Beaucanon
Winery, the winery and 45 acres of estate vineyard are located on Highway 29 in
Rutherford. Provenance focuses on Rutherford Cabernet Sauvignon and makes a
smaller amount of Merlot from the Carneros region and Cabernet Sauvignon from
the Oakville District.
THE COMPANY SOLD THE CARMENET BRAND TO FOCUS ON MOON MOUNTAIN VINEYARD AND
DYNAMITE VINEYARDS
In September 2002 the Company signed an agreement with Beringer Blass Wine
Estates to sell the Carmenet brand name and inventory. Beringer Blass purchased
all inventory of the Carmenet brand, which includes Carmenet Reserve Sauvignon
Blanc, Old Vines Zinfandel, Cabernet Franc, Copa de Morado Zinfandel Port, Copa
de Oro Late Harvest Semillon and Sonoma Merlot and Cabernet Sauvignon. The
company retains ownership of the estate winery and vineyard in Sonoma County
where Carmenet began, now called Moon Mountain Vineyard. The company also
retains ownership of Dynamite Vineyards.
VINTAGE LANE WINERY SOLD AS PART OF DYNAMITE VINEYARDS' MOVE TO LAKE COUNTY
Because of the growing demand for Dynamite Vineyards wines, the Company
projected it would soon reach the production capacity limit at Vintage Lane, in
Glen Ellen, California, where Dynamite wines were made. In December 2002 the
Company sold the Vintage Lane winery to Justi Creek LLC. The sale included only
the winery and none of the inventory or grape contracts of Dynamite Vineyards.
The sale will allow Dynamite to expand and to move to Lake County, which is
quickly becoming a major source of its grapes.
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
Moon Mountain Vineyard 100.0% Corporation Sonoma, California
(1)
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 (2) 100.0% Corporation Yakima Valley, Washington
Suscol Creek Vineyard 100.0% Corporation Napa, California
Hewitt Vineyard 100.0% Corporation Rutherford, California
Provenance Vineyards 100.0% Corporation Rutherford, California
(1) Formerly known as Carmenet Vineyard.
(2) Formerly known as Staton Hills Winery.
2
With the exception of Chateau 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 Chateau 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 microclimates of each vineyard from
which it obtains its grapes are particularly suitable for the 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."
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 2002, 2001
and 2000 vintages. The wines' vintage is the year during which the grapes are
harvested. 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.
2002 2001 2000
------------------------ ------------------------ -----------------------
Equivalent Equivalent Equivalent
Number of Number of Number of
Cases % of Total Cases % of Total Cases % of Total
---------- ----------- ---------- ----------- ---------- -----------
Chardonnay 268,190 40% 243,750 37% 288,990 40%
Sauvignon Blanc 4,940 1% 12,350 2% 9,425 1%
Pinot Blanc 1,170 0% 4,290 1% 4,420 1%
Other white wines 3,835 1% 11,115 1% 13,130 2%
---------- ----------- ---------- ----------- ---------- -----------
Total white wines 278,135 42% 271,505 41% 315,965 44%
---------- ----------- ---------- ----------- ---------- -----------
Pinot Noir 96,720 15% 92,365 14% 75,920 11%
Cabernet Sauvignon 149,175 22% 127,725 19% 117,520 17%
Merlot 93,730 14% 126,685 19% 131,820 18%
Syrah 42,250 6% 36,855 6% 64,220 9%
Other red wines 3,705 1% 7,670 1% 5,525 1%
---------- ----------- ---------- ----------- ---------- -----------
Total red wines 385,580 58% 391,300 59% 395,005 56%
---------- ----------- ---------- ----------- ---------- -----------
Total production 663,715 100% 662,805 100% 710,970 100%
========== =========== ========== =========== ========== ===========
3
The Company's wines are aged primarily in new and used oak barrels before
they are bottled. Generally, white wines are aged between six and nine months,
and red wines between nine and eighteen months, after harvest. The wine is then
bottled and stored for further aging.
CHALONE VINEYARD: Chalone Vineyard sales represented 10.12% of the
Company's consolidated revenues and 5.5% of its consolidated case sales for the
year ended December 31, 2002.
Chalone Vineyard has been producing Chardonnay, Pinot Blanc, Pinot Noir,
and small quantities of Chenin Blanc since 1969. It has also begun growing Syrah
and released 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.
CARMENET WINERY: Carmenet Winery sales represented 2.2% of the Company's
consolidated revenues and 5.4% of its consolidated case sales for the year ended
December 31, 2002.
On September 26, 2002, the Company sold the Carmenet brand name and
inventory to Beringer Blass Wine Estates. Beringer Blass purchased all inventory
of the Carmenet brand, which includes Carmenet Reserve Sauvignon Blanc, Old
Vines Zinfandel, Cabernet Franc, Copa de Morado Zinfandel Port, Copa de Oro Late
Harvest Semillon and Sonoma Merlot and Cabernet Sauvignon.
MOON MOUNTAIN VINEYARD: Moon Mountain sales represented 1.6% of the
Company's consolidated revenues and .5% of consolidated case sales for the year
ended December 31, 2002.
On September 26, 2002, the Company sold the Carmenet brand name and
inventory to Beringer Blass Wine Estates. The Company retained ownership of the
estate winery and vineyard in Sonoma County where Carmenet began and that is now
called Moon Mountain Vineyard. This winery will continue to produce what had
been called Carmenet Moon Mountain Reserve Cabernet Sauvignon and starting with
the 2000 vintage will be called Moon Mountain Vineyard Cabernet Sauvignon.
On July 31, 1996, a wildfire damaged approximately 75% of the producing
acreage at what then was called 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"), which has publicly acknowledged its
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, Moon Mountain
Vineyard's ability to make estate-bottled wines will be limited. To supplement
Moon Mountain'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.
DYNAMITE VINEYARDS: Dynamite Vineyard sales represented 13.6% of the
Company's consolidated revenues and 12.2% of consolidated case sales for the
year ended December 31, 2002.
On September 26, 2002, the Company sold the Carmenet brand name and
inventory to Beringer Blass Wine Estates. The Company retained ownership of what
had been known as Carmenet Dynamite and is now called Dynamite Vineyards. It
will continue to produce Cabernet Sauvignon, Merlot and Sauvignon Blanc from
vineyards in the North Coast AVA of California.
EDNA VALLEY VINEYARD: Edna Valley Vineyard sales represented 27.9% of the
Company's consolidated revenues and 26.8% of consolidated case sales for the
year ended December 31, 2002.
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 Vineyard Company, our partner in
the Edna Valley Vineyard Joint Venture, and are estate bottled.
ACACIA VINEYARD: Acacia sales represented 13.7% of the Company's
consolidated revenues and 9.9% of its consolidated case sales for the year ended
December 31, 2002.
The winery produces Chardonnay and Pinot Noir wines under the "Acacia"
label. The grapes for the production of Pinot Noir and Chardonnay come from the
Carneros region. Approximately 50% of this production come from Company-owned
vineyards and Company-leased vineyards.
CANOE RIDGE VINEYARD: Canoe Ridge Vineyard sales represented 5.1% of the
Company's consolidated revenues and 3.7% of its consolidated case sales for the
year ended December 31, 2002.
The Canoe Ridge Vineyard commenced operation in 1994 and produces primarily
Merlot and Cabernet Sauvignon 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 VINEYARDS: Echelon sales represented 15.5% of the Company's
consolidated revenues and 23.5% of its consolidated case sales for the year
ended December 31, 2002.
The 1997 vintage was the first to be released under the Echelon label,
which features Chardonnay, Cabernet Sauvignon, Merlot, Viognier, Pinot Noir,
Syrah and Pinot Grigio (Pinot Gris). Most varieties have a Central Coast
appellation. The 2001 Viognier and 2000 Syrah feature the designation of
Esperanza Vineyard, from the Clarksburg AVA.
SAGELANDS VINEYARD: Sagelands Vineyard represented 3.8% of the Company's
consolidated revenues and 7.1% of the consolidated case sales for the year ended
December 31, 2002.
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. Sagelands primarily produces
Cabernet Sauvignon and Merlot from the "Four Corners" area of Columbia Valley,
Washington.
4
JADE MOUNTAIN: Jade Mountain represented 1.3% of the Company's consolidated
revenues and .8% of its consolidated case sales for the year ended December 31,
2002.
The Company purchased the Jade Mountain name and inventory in 2000, after
serving as the brand's sole domestic distributor since 1992. Since 1988 Jade
Mountain has specialized in ultra-premium Syrah.
PROVENANCE VINEYARDS: Provenance sales represented 1.45% of the Company's
consolidated revenues and .8% of its consolidated case sales for the year ended
December 31, 2002.
The winery's inaugural release was its 1999 Rutherford Cabernet Sauvignon,
which became available to consumers in December 2001. In 2002 the winery
released its 2000 Rutherford Cabernet Sauvignon and its first-ever Carneros
Merlot from the 2000 vintage.
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 are primarily directed toward our
core product line, 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: 3.8% of the Company's consolidated revenues and 2.4% of
its consolidated case sales in the year ended December 31, 2002 were primarily
comprised of import wines and, to a lesser degree, domestic wines purchased by
the Company for resale purposes.
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,
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
The Company's wines are marketed by independent distributors in all 50
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. The Company's wines are
marketed and distributed in Mexico by Monte Xanic. 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 year ended December 31, 2002, the nine-month transition period
ended December 31, 2001; and fiscal years ended March 31, 2001 and 2000:
Year ended December Nine Months ended Year Ended March 31,
31, 2002 December 31, 2001
2001 2000
-------------------- ----------------- ------------------- -------------------
Number % of Number % of Number % of Number % of
of Cases Total of Cases Total of Cases Total of Cases Total
-------------------- ------------------------------------------------------------------
Independent distributors
United States 478,172 72% 218,256 57% 315,486 60% 238,600 53%
International 31,206 5% 12,586 3% 24,317 3% 23,700 5%
-------------------- ------------------------------------------------------------------
Total distributors 509,378 77% 230,842 60% 339,803 63% 262,300 58%
-------------------- ------------------------------------------------------------------
Company direct
California wholesale 97,169 15% 111,196 29% 149,208 27% 124,700 28%
Custom brands 18,226 3% 13,905 4% 23,786 4% 25,000 6%
Catalog and winery retail 36,041 5% 28,843 7% 33,811 6% 35,500 8%
-------------------- ------------------------------------------------------------------
Total Company direct 151,436 23% 153,944 40% 206,805 37% 185,200 42%
-------------------- ------------------------------------------------------------------
Total 660,814 100% 384,786 100% 546,608 100% 447,500 100%
-------------------- ------------------------------------------------------------------
5
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. Attached to the Company's central executive office is a
64,000-square-foot central distribution center in 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.
EMPLOYEES
On December 31, 2002, the Company had 169 full-time employees, of which 92
were in grape growing and winemaking, 37 in sales and 40 in administration.
During the spring and summer, the Company adds approximately 25 to 30 part-time
employees for vineyard care and maintenance and 70 to 80 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 regulations.
TRADEMARKS
CANOE RIDGE, STATON HILLS, CHALONE VINEYARD, SAGELANDS, JADE MOUNTAIN,
ACACIA and the Acacia "A" logo, MOON MOUNTAIN, DYNAMITE, and ARCHSTONE are
federally registered trademarks owned by the Company. EDNA VALLEY VINEYARD is a
federally registered trademark owned 50% by Chalone Wine Group, Ltd. and 50% 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.
GAVILAN is registered with the State of California. 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 an "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 our annual
Shareholder Celebration. For a nominal fee, attendees attend an all-day wine
tasting, auction and luncheon, which is traditionally held on the grounds of the
Chalone Vineyard in Monterey County, California. In 2002, approximately 1,200
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
Woodward/Graff Foundation (the "Foundation") formerly known as the Chalone Wine
Foundation. In addition, shareholders' interests are given a priority in the
Foundation's donation program.
SEASONALITY
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of the seasonal nature of the
Company's business.
6
ITEM 2. PROPERTIES.
The Company's principal winemaking activities presently are conducted at
ten locations; seven in California, two in eastern Washington and one in France.
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 Chalone AVA. 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.
MOON MOUNTAIN VINEYARD
On September 26, 2002, the Company sold the Carmenet brand name and inventory to
Beringer Blass Wine Estates. The Company retained ownership of the estate winery
and vineyard in Sonoma County where Carmenet began and that is now called Moon
Mountain Vineyard. The vineyard is located on approximately 300 acres in Sonoma
County, California (of which 130 acres are plantable), located in the Sonoma
Valley AVA. This winery produces what had been called Carmenet Moon Mountain
Reserve Cabernet Sauvignon and starting with the 2000 vintage will be called
Moon Mountain Vineyard Cabernet Sauvignon.
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 Moon Mountain Vineyard provides natural
protection against frost. The vineyard was certified organic by the California
Certified Organic Farmers in 2002.
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.
EDNA VALLEY VINEYARD
Edna Valley Vineyard leases land from Paragon 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.
ACACIA VINEYARD
Acacia Vineyard produces primarily ultra-premium Chardonnay and Pinot Noir
wine with a small amount of sparkling wine and brandy marketed under the
"Acacia" brand.
The winery is located on one of four contiguous parcels that together total
approximately 156 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.
7
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 third 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 has planted approximately 41 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 2003 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 four
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 Company announced in July 2000 that it
had sold the 10,000-square foot Hewitt House and four surrounding landscaped
acres for $7.3 million. The vineyard consists of 68 acres, 58 that are planted,
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 2004 with a limited annual
release. 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.
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, Cabernet Sauvignon and small amounts of
Chardonnay.
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.
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, none of which are currently planted to
grapes. 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 "Four
Corners" of Columbia Valley AVA. These four areas are Rattlesnake Hills, Wahluke
Slope, Horse Heaven Hills, and Walla Walla Valley. 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.
PROVENANCE VINEYARDS
In August 2002 the Company announced it had purchased a winery in the heart
of the Rutherford District for the home of Provenance Vineyards, its new Napa
Valley Cabernet Sauvignon winery. Formerly known as Chateau Beaucanon Winery,
the winery and 45 acres of estate vineyard are located on Highway 29 in
Rutherford. Provenance purchases most of its grapes through long term agreements
with growers in Rutherford and Oakville districts for Cabernet Sauvignon and
buys a small amount of Merlot from a grower in the Carneros District. The winery
is permitted to produce 36,000 cases a year.
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
8
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.
The Company had previously disclosed an alleged violation of Section
25502(a)(2) of the California Business and Professions Code based on a notice
received in 1998 from the California Department of Alcoholic Beverage Control.
The ultimate disposition of this alleged violation remains pending. The Company
believes that the ultimate outcome will not have a material adverse effect on
the Company's consolidated financial condition or the results of its operations
or its cash flows.
The Company is subject to litigation in the ordinary course of its
business. In the opinion of management, the ultimate outcome of existing
litigation will not have a material adverse effect on the Company's consolidated
financial condition or the results of its operations or its cash flows.
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 fourth quarter of the fiscal year covered by this Report.
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 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
------------------------------ -------------------- -------------------
December 31, 2002 $ 9.55 $ 7.61
September 30, 2002 9.80 7.50
June 30, 2002 11.15 8.25
March 31, 2002 11.52 9.16
December 31, 2001 9.15 8.85
September 30, 2001 9.65 8.88
June 30, 2001 8.60 8.25
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
On March 14, 2003 the closing price for the common stock was $8.09 per
share. The average weekly trading volume of the stock was approximately 2,967
shares during the year ended December 31, 2002.
HOLDERS OF RECORD.
As of March 14, 2003, there were approximately 5,008 holders of record of
the Company's stock.
9
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 25% of its aggregate net
income.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data for the year ended
December 31, 2002, nine-month transition period ended December 31, 2001; and
fiscal years ended March 31, 2001, 2000, and 1999 are derived from the Company's
audited consolidated financial statements. Financial data for the nine months
ended December 31, 2002 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 nine-month period, which coincides with the
Company's current reporting period. This data should be read in conjunction with
the financial statements and notes thereto. See "Item 8. Financial Statements
and Supplementary Data."
SELECTED FINANCIAL DATA
(IN THOUSANDS EXCEPT PER SHARE DATA)
Nine Months ended Year ended
December 31, Dec 31, Year ended March 31,
---------------------------------------------------------------------
2002 2001 2002 2001 2000 1999
---------------------------------------------------------------------
(Unaudited)
STATEMENT OF OPERATIONS:
Net revenues $ 51,504 $ 41,194 $ 67,005 $ 57,695 $ 49,227 $ 40,970
Gross profit 16,777 15,590 22,128 18,252 20,692 17,769
Other operating revenues, net (41) 195 (448) 213 40 194
Selling, general and administrative expenses (10,521) (9,884) (13,700) (12,342) (11,711) (8,949)
Operating income 6,215 5,901 7,980 6,123 9,021 9,014
Interest expense (3,641) (3,217) (4,549) (3,824) (2,225) (1,761)
Other income (63) 6 (43) 891 - -
Equity in net income of Duhart-Milon 694 509 842 761 735 766
Minority interest (542) (512) (748) (377) (1,290) (1,219)
Carmenet fire settlement gain - - - - - 4,447
Net income $1,818 $1,593 $ 2,296 $ 2,050 $ 3,681 $ 6,636
Net income per common share $ 0.15 $ 0.15 $ 0.19 $ 0.20 $ 0.34 $ 0.77
BALANCE SHEET DATA:
Working capital $ 57,986 $ 52,276 $ 57,986 $ 41,381 $ 29,981 $ 49,192
Total assets 200,194 183,909 200,194 157,891 145,665 103,471
Long-term obligations less current maturities 59,082 50,061 59,082 49,490 31,041 35,273
Shareholders' equity 94,793 91,315 94,793 75,134 73,672 58,291
In July 2002, the Company shifted a major distribution channel from a
broker to a distributor. Commissions and shipping costs incurred for sales to
the broker were recorded as selling, general and administrative expenses. Case
prices charged to the distributor have been reduced by an amount equal to these
commission and shipping costs. This caused a reduction of $1,266,000 in gross
revenues for the year ended December 31, 2002, when compared to previous
periods. For comparability purposes, the Company reclassified $2,130,000, for
the nine months ended December 31 2001, $2,866,000, $2,230,000 and $1,856,000 of
commissions and shipping costs from selling, general and administrative expenses
to net revenues for the fiscal years ended March 31, 2001, 2000 and 1999. The
reclassification made for the fiscal year ended March 31, 2001 was made only for
the purpose of information presented in the MD&A, and is not included in the
actual financial statements presented in Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
In the ordinary course of business, the Company has made a number of
estimates and assumptions relating to the reporting of results of operations and
financial condition in the preparation of its financial statements in conformity
with accounting principles generally accepted in the United States of America.
Actual results could differ significantly from those estimates under different
assumptions and conditions. The Company believes that the following discussion
addresses the Company's most critical accounting policies, which are those that
are most important to the portrayal of the Company's financial condition and
results. The Company constantly re-evaluates these significant factors and makes
adjustments
10
where facts and circumstances dictate. Historically, actual results have not
significantly deviated from those determined using the necessary estimates
inherent in the preparation of financial statements. Estimates and assumptions
include, but are not limited to, customer receivables, inventories, assets held
for sale, fixed asset lives, contingencies and litigation. The Company has also
chosen certain accounting policies when options were available, including:
o The first-in, first-out (FIFO) method to value a majority of our
inventories; and
o The intrinsic value method, or APB Opinion No. 25, to account for our
common stock incentive awards; and
o We record an allowance for credit losses based on estimates of
customers' ability to pay. If the financial condition of our customers
were to deteriorate, additional allowances may be required.
These accounting policies are applied consistently for all years presented.
Our operating results would be affected if other alternatives were used.
Information about the impact on our operating results is included in the
footnotes to our consolidated financial statements.
The Company changed its fiscal year end from March 31 to December 31 in May
2001. As a result, in item 7 the Company discusses the results of operations for
the fiscal year ended December 31, 2002; the nine-month transition period ended
December 31, 2001; the nine-month periods ended December 31, 2002 (unaudited)
and December 31, 2000 (unaudited); and the fiscal year ended March 31, 2001.
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 ((3)) 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 or grow its volume and revenue;
(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; and (vi) regulatory changes which
might restrict or hinder the sale and/or distribution of alcoholic beverages.
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.
RECENT ACCOUNTING PRONOUNCEMENTS - The Financial Accounting Standards Board
(FASB) has issued the following accounting pronouncements:
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
requires that an obligation associated with the retirement of tangible
long-lived assets and the associated asset retirement costs be recognized as a
liability when incurred. Upon initial recognition of a liability for an asset
retirement obligation, an entity would capitalize that cost by recognizing an
increase in the carrying amount of the related long-lived asset by the same
amount as the liability. An entity would subsequently allocate that asset
retirement cost to expense using a systematic and rational method over its
useful life. The Company has adopted SFAS No. 143 for its calendar year
beginning January 1, 2003. The adoption of SFAS No. 143 should not have a
material effect on the Company's operating results or financial position.
SFAS No.145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. This Statement rescinds SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement amends SFAS No. 13, Accounting for
Leases, to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects similar to sale-leaseback transactions.
The Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. The adoption of SFAS No. 145 is not expected to have a
material effect on the Company's consolidated financial statements.
SFAS No.146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 is not expected to have a material effect on
the Company's consolidated financial statements.
SFAS No.148, Accounting for Stock-Based Compensation. This Statement amends
SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This Statement permits two additional transition
methods for entities that adopt the preferable method of accounting for
stock-
11
based employee compensation. Both of those methods avoid the ramp-up
effect arising from prospective application of the fair value based method. In
addition, to address concerns about the lack of comparability caused by multiple
transition methods, this Statement does not permit the use of the original
Statement 123 prospective method of transition for changes to the fair value
based method made in fiscal years beginning after December 15, 2003. The Company
has not yet evaluated whether to adopt this statement nor has it evaluated the
potential impact on the Company's consolidated financial statements if the
statement is adopted. As of December 31, 2002, the Company has adopted the
disclosure requirements of the Statement and continues to follow the intrinsic
value method to account for stock-based employee compensation.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. The interpretation clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. It also significantly expands
the disclosures guarantors must include in their financial statements. While the
interpretation's accounting provisions are effective prospectively to guarantees
issued or modified after December 31, 2002, its disclosure requirements
generally apply to all guarantees and must be included in financial statements
of interim and annual periods ending after December 15, 2002. The adoption of
Interpretation No. 45 is not expected to have a material effect on the Company's
consolidated financial statements.
FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
addresses consolidation by business enterprises of variable interest entities in
which 1) the equity investment is insufficient for the entity to finance its
activities without additional financial support through other interests who will
absorb some or all of the entity's expected losses, or 2) the equity investors
lack one or more essential characteristics of a controlling interest. Those
characteristics include the ability to make decisions about an entity's
activities through voting rights or similar rights; the obligation to absorb the
entity's expected losses, which makes it possible for the entity to finance its
activities; and the right to receive the entity's expected residual returns as
compensation for the risk of absorbing expected losses. This interpretation is
effective for the Company no later than the third quarter of 2003, and is not
currently expected to have a material effect on the Company's consolidated
financial statements.
RESULTS OF OPERATIONS
The following table represents financial data as a percentage of net
revenues for the indicated periods:
Year ended Nine Months Year ended
December 31, ended December 31, March 31,
----------- ------------------------------ ----------
2002 2002 2001 2000 2001
----------- ------------------------------ ----------
Net revenues 100 % 100 % 100 % 100 % 100 %
Gross profit 33 % 33 % 38 % 32 % 32 %
Other operating revenues, net (1)% 0 % 0 % 0 % 0 %
Selling, general and administrative expenses (20)% (20)% (24)% (23)% (21)%
Operating income 12 % 12 % 14 % 10 % 11 %
Interest expense, net (7)% (7)% (8)% (7)% (7)%
Other income 0 % 0 % 0 % 2 % 2 %
Equity in net income of Chateau Duhart-Milon 1 % 1 % 1 % 1 % 1 %
Minority interest (1)% (1)% (1)% (1)% (1)%
Net income 3 % 4 % 4 % 4 % 4%
As previously noted, in July 2002, the Company shifted a major distribution
channel from a broker to a distributor. Commissions and shipping costs incurred
for sales to the broker were recorded as selling, general and administrative
expenses. Case prices charged to the distributor have been reduced by an amount
equal to these commission and shipping costs. This caused a reduction of 1% in
gross profit and a corresponding increase of 2% in selling, general and
administrative costs for the year ended December 31, 2002, when compared to
previous periods. For comparability purposes, the Company reclassified
commissions and shipping costs from selling, general and administrative expenses
to net revenues for the nine months ended December 31, 2001 and the fiscal years
ended March 31, 2001, 2000 and 1999. This reclassification resulted in a
decrease in gross profit of 3%, 3% and 2%, and a corresponding increase in
selling, general and administration costs of 4%, 2% and 3% for the nine months
ended December 31, 2001, the fiscal year ended March 31, 2001, and the
nine-months ended March 31, 2000.
REVENUES
Net revenues for the year ended December 31, 2002 increased $25.8 million
or 63% as compared to the nine-month period ended December 31, 2001. Net
revenues for the nine months ended December 31, 2002, increased $10.3 million or
25% over the comparable period in the preceding year. The increase in 2002
relative to comparable periods in 2001 is primarily due to the tragic events
surrounding September 11, 2001 and the consequential economic downturn
experienced by the hospitality industry. Had sales trends remained
uninterrupted, 2002 revenue increases would have been more consistent with
comparable periods. To a lesser extent, the increases in 2002 net revenues were
influenced by the sale of the Carmenet brand and related inventories. Net
revenues for the nine-months ended December 31, 2001 decreased $3.0 million or
7% over the
12
comparable period in the prior year. Once more, the decrease in net revenue
reflects the economic decline resulting from the aforementioned events, which
was most acutely felt by the Company in the last three months of 2001.
GROSS PROFIT
Gross profit for the year ended December 31, 2002 increased $6.5 million or
42% as compared to the nine-months ended December 31, 2001. Gross profit for the
nine months ended December 31, 2002 increased $1.2 million over the comparable
period in the preceding year. This was primarily the result of sales volume
growth offset by increased discounts and slightly higher costs attributable to
the release and sale of 2001 vintage wines.
Gross profit for the nine-months ended December 31, 2001 increased $1.5
million or 11% over the comparable period in the preceding year. This was
primarily the result of lower costs attributable to the release and sale of 2000
vintage wines.
The gross profit percentage remained consistent at 33% for the year and
nine months ended December 31, 2002, compared to 38% reported for the nine
months ended December 31, 2001. This decrease on gross profits is as expected
due to an oversupply of premium wine and increased competition within the wine
industry. Gross profit percentage increased to 38% for the nine months ended
December 31, 2001, compared to 31% for the nine months ended December 31, 2000
due to increased average sales prices coupled with lower per unit wine costs
resulting from higher 1996 and 1997 harvest yields.
OTHER OPERATING REVENUES, NET
Revenue from other operations primarily consists of net profit (loss) from
sales of bulk wine and revenue obtained from third-party wineries, net of
related expenses, for grape crushing or wine bottling. This aspect of the
Company's operation is normally not significant. The Company cannot predict the
significance of such 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 December 31, 2002 decreased $.6 million as
compared to the nine-months ended December 31, 2001. Such revenue for the nine
months ended December 31, 2002 decreased $.2 million over the comparable period
in the preceding year. Such revenue for the nine months ended December 31, 2001
decreased $.04 million over the comparable period in the preceding year. This
was attributable to an increase in losses on the sale of bulk wine, due to
quality or other factors, for product that is not required in the Company's
product line.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December
31, 2002, increased $3.8 million or to 20% of net revenues as compared to the
nine-month period ended December 31, 2001. Selling, general and administrative
expenses for the nine-months ended December 31, 2002, decreased from 24% to 20%
of net revenues as compared to the nine-month period ended December 31, 2001.
This decrease is due to an increase in sales volume and the resulting net
revenues growth. These changes are due to a strategic focus to grow selling and
marketing expenditures to remain competitive in these difficult economic times
offset by strict operating expense control.
The Company reduced its selling, general and administrative costs by $.01
million for the nine-months ended December 31, 2001 as compared to the
comparable period in the preceding year.
OPERATING INCOME
Operating income for the year ended December 31, 2002 increased $2.0
million or 35% as compared to the nine-month period ended December 31, 2001.
Operating income for the nine-months ended December 31, 2002 increased $.3
million or 5% as compared to the nine-month period ended December 31, 2001.
Operating income for the nine-months ended December 31, 2001 increased $1.6
million or 37% as compared to the nine-month period ended December 31, 2000. The
increases are due to the increase in gross profits, partially offset by the
increases in selling, general and administrative expenses as described above.
INTEREST EXPENSE
For the year ended December 31, 2002, interest expense increased by $1.3
million or 41% as compared to the nine-month period ended December 31, 2001.
Interest expense for the nine months ended December 31, 2002 and 2001 increased
$.4 million and $.3 million, respectively, over the comparable periods in the
preceding year. This increase was a result of higher average outstanding
borrowings, which are a result of continuing capital expenditures related to
winery and vineyard expansions, amortization of indebtedness renewal costs
offset by a reduction in interest rates with the Company's revolving bank loan.
Additionally, interest expense increased from the issuance of two-convertible
subordinated promissory notes. The notes are more fully described in "Liquidity
and Capital Resources - Borrowing Arrangements" below.
OTHER INCOME
For the year ended December 31, 2002, other income decreased $.05 million
as compared to the nine-month period ended December 31, 2001. Other income for
the nine months ended December 31, 2002 and 2001 decreased $.07 million and
increased $.9 million, respectively, over the comparable periods in the
preceding year. Although not significant to the Company's operations, the other
income is due to net gains (losses) from the sale of non-strategic assets during
2002.
For the nine-months ended December 31, 2000, the increase in other income
was the net result of the sale of the 10,000-square foot Hewitt House and four
surrounding landscaped acres.
EQUITY IN NET INCOME OF DUHART-MILON
13
The Company's 23.5% equity interest in the net income of Duhart-Milon for
the year ended December 31, 2002 and for the nine months ended December 31,
2002, 2001 and 2000 were $842,000, $694,000, $509,000, and $714,000,
respectively.
The Company monitors its investment in Duhart-Milon primarily through its
on-going communication with DBR. Such communication is facilitated by the
presence of 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 separate component
of shareholders' equity. The amount recorded was decreased to $3.5 million from
$4.6 million for the year ended December 31, 2002 as compared to the prior year,
due to the increase in the relative worth of the "EURO" when compared to the
U.S. dollar.
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):
Nine Months Ended Year Ended Year Ended
December 31, December 31, March 31,
------------------ --------------------------
Venture Minority Owner 2002 2001 2002 2001
------- -------------- ------------------ --------------------------
Edna Valley Vineyard Paragon Vineyard Co., Inc. (50.0%) $542 $512 $ 748 $ 165
Canoe Ridge Vineyard Various (49.5%) - - - 212
------------------- ---------------------------
$542 $512 $748 $ 377
=================== ===========================
The financial statements of Edna Valley Vineyard ("EVV") are consolidated
with the Company's financial statements. The interest in EVV attributable to
parties other than the Company is accounted for as a "minority interest". The
increase in minority interest was $.2 million, or 46% for the year ended
December 31, 2002 as compared to the nine-months ended December 31, 2001. The
minority interest for the nine months ended December 31, 2002 and 2001,
increased $.03 million and $.2 million, respectively. These increases were
primarily due to increased EVV net income attributable to higher sales volume
with EVV wines. The Company acquired the remaining 49.5% minority interest in
Canoe Ridge Vineyard, LLC from the other partners in February 2001. 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 December 31, 2002 was $2.3 million, an
increase of $.7 million, or 44% as compared to the nine-month period ended
December 31, 2001. Net income for the nine-months ended December 31, 2002 and
2001, increased $.2 million and $.02 million as compared to the preceding period
in the prior year. These increases were primarily due to increased sales volume
offset by higher selling, general and administrative expenses and interest
expense.
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
during the end of the third and beginning of the fourth quarters.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital as of December 31, 2002 was $58 million, compared to
$51.7 million at December 31, 2001. The $6.3 million increase was primarily
attributable to an increase in inventory ($4.6 million) accounts receivable
($4.3 million), accounts payable and accrued liabilities ($3.8 million) offset
by a net increase in revolving bank loan borrowings ($6.4 million).
The Company has historically funded its growth through increases in
borrowings and cash flow from operations. During 2002, the Company's primary use
of its capital was to finance capital expenditures of $18.05 million and a $4.6
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 $78.4
million for the year ending December 31, 2003.
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 "2000 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
14
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. At December 31, 2002 and 2001, the Company was in
compliance with all bank covenants. Management is in constant communication with
our lenders regarding compliance with the financial covenants through December
31, 2003. In the event that economic conditions weaken from 2002, one or more of
the financial covenants could be impacted. Our lenders are aware of this
possibility and management believes that a waiver or amendment could be
obtained.
The Company's revolving bank loan expired March 31, 2002 and two extensions
were provided extending the maturity date to April 30, 2002. On April 22, 2002,
the Company finalized the borrowing arrangement with the bank that had provided
the revolving bank loan. The new borrowing arrangement with its bank involves
both (1) a $55 million revolving credit facility secured first by inventory and
accounts receivable and second by substantially all of the Company's fixed
assets (other than certain specified assets), and (2) a $17.5 million term loan
secured first by certain of the Company's fixed assets (other than certain
specified assets) and second by the Company's inventory and accounts receivable,
each on a pari passu basis with the holders of the 2000 Notes. In connection
with the finalization, the Company amended certain of the provisions applicable
to the Notes.
On August 23, 2002, the Company acquired the winery and vineyard site
formerly known as Chateau Beaucanon Winery in Rutherford, California. The site
will be used as the home for the Provenance Vineyard brand. The purchase price
was $8.9 million.
The acquisition was funded by the issuance of two convertible subordinated
promissory notes in exchange for $11 million in cash (the "2002 Notes"). The
2002 Notes were issued to Les Domaines Baron de Rothschild (Lafite) ("DBR"), in
the amount of $8.25 million, and SFI Intermediate Limited or its affiliates
("SFI"), in the amount of $2.75 million. The 2002 Notes accrue interest on the
principal sum at a rate of 9% per annum. The principal sum and all accrued
interest are due and payable in full, two years from the date of the 2002 Notes
(the "Maturity Date"). At the Maturity Date, the Company may elect to pay all of
the outstanding principal and accrued interest in cash or may elect to repay all
or part of these amounts through conversion into shares of Company common shares
at the Conversion Price of $9.4207 per share (the "Conversion Price"). DBR or
SFI may elect to convert all outstanding principal only in the event of a change
of control transaction, as defined in the terms of the 2002 Notes.
In conjunction with the above activities, the Company, its lenders under
the Company's Credit Agreement and its noteholders under the Company's Amended
and Restated Note Purchase Agreement amended the Company's Credit Agreement and
its Amended and Restated Note Purchase Agreement (1) to reflect the lenders' and
noteholders' consent to the Beaucanon acquisition and the issuance of the Notes
and (2) to make certain amendments in the Credit Agreement and the Amended and
restated Note Purchase Agreement, including the exclusion of the Notes from the
financial covenants contained in those agreements.
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. (See Note 7 to the Company's
Consolidated Financial Statements).
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. 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.
A large portion of our expenses is 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, WHICH COULD CAUSE OUR MARKET PRICE TO FLUCTUATE
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.
15
OUR PROFITS DEPEND LARGELY ON SALES IN CERTAIN STATES AND ON SALES OF
CERTAIN VARIETALS
In the year ended December 31, 2002, approximately 85% 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 87% of our net revenues in the year ended December 31,
2002were concentrated in our top four selling varietal wines. Specifically,
sales of Chardonnay, Pinot Noir, Cabernet Sauvignon and Merlot accounted for
43%, 16%, 14% 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 COULD ADVERSELY AFFECT OUR BUSINESS
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 an 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, which resulted in colder and
wetter soils than are typical during California's grape growing season.
Consequently, the 1999 harvest was postponed by approximately four to six weeks
depending on the geographic location and varietals. 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 vintage
Chardonnay, Cabernet, and Merlot varietals. Together these varietals have
historically comprised between 80% to 89% 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.
AN OVERSUPPLY OF GRAPES MAY HARM OUR BUSINESS.
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 increase in grape production has resulted 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 ten largest distributors combined represented
approximately 22% and 42%, respectively, of our net revenues for the year ended
December 31, 2002. Sales to our ten largest distributors are expected to
continue to represent a substantial portion of
16
our net revenues in the future. Effective July 1, 2002, the Company switched
from a single broker to a distributor in California. 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. Any
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
excise 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 and by additional borrowings or additional equity.
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 5% of total consolidated revenue for the nine months
ended December 31, 2002 and the volume of international transactions is
increasing, which may increase this risk in the future.
17
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 Provenance Vineyards, Hewitt Vineyard, Suscol Ranch,
Staton Hills Winery (renamed Sagelands Vineyard), the Jade Mountain brand,
enlarging Canoe Ridge Vineyard and buying out our partners, and potential future
acquisitions involve risks associated with assimilating these operations into
our Company; integrating, retaining and motivating key personnel; integrating
and managing geographically-dispersed operations integrating the technology and
infrastructures of disparate entities; risks inherent in the production and
marketing wine and replanting of existing vineyards from white wine grapes to
red wine grapes.
We relied on debt financing to purchase Provenance Vineyards, Hewitt
Vineyard, Suscol Ranch, Staton Hills Winery, the Jade Mountain brand, enlarging
Canoe Ridge Vineyard and buying out our partners and other vineyard land and
related assets during the fiscal years ended December 31, 2001 and 2002.
Consequently our debt-to-equity ratio is high in relation to our historical
standards, even after the successful completion of our rights offering in
November 2001. 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.
18
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
THE CHALONE WINE GROUP, LTD.
INDEX TO FINANCIAL STATEMENTS
PAGE
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets......................................... 20
Consolidated Statements of Income................................... 21
Consolidated Statements of Shareholders' Equity..................... 22
Consolidated Statements of Cash Flows............................... 23
Notes to Consolidated Financial Statements.......................... 24
INDEPENDENT AUDITORS REPORTS..............................................37, 38
19
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
(All amounts in thousands, except share data)
ASSETS
December 31, December 31,
2002 2001
---- ----
Current assets:
Cash $ - $ -
Accounts receivable, net 15,770 11,475
Notes receivable 190 181
Income tax receivable 223 223
Inventory 81,272 76,658
Prepaid expenses and other current assets 1,000 1,359
----------------------
Total current assets 98,455 89,896
----------------------
Investment in Chateau Duhart-Milon 10,067 7,897
Non-current notes receivable 447 653
Property, plant and equipment - net 77,953 73,232
Goodwill, 8,582 8,582
Trademarks 2,875 2,797
Other assets 1,815 852
----------------------
Total assets $200,194 $183,909
======================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term obligations $ 2,295 $ 2,034
Current portion of related party note payable - 18
Current portion of obligations under capital lease 716 716
Revolving bank loan 18,523 12,086
Accounts payable and accrued liabilities 18,935 22,766
----------------------
Total current liabilities 40,469 37,620
Long-term obligations, less current maturities 46,753 47,082
Long-term obligations, convertible subordinated debt 11,000 -
Obligations under capital lease, less current portion 1,329 2,110
Related party note payable, less current portion - 869
Liability on interest rate swap contract 1,355 664
Deferred income taxes 923 1,048
----------------------
Total liabilities 101,829 89,393
----------------------
Minority interest 3,572 3,201
Shareholders' equity:
Common stock - authorized 15,000,000 shares no
par value; issued and outstanding: 12,075,101 and
12,067,504 shares, respectively 76,474 76,433
Retained earnings 21,790 19,494
Accumulated other comprehensive loss (3,471) (4,612)
----------------------
Total shareholders' equity 94,793 91,315
----------------------
Total liabilities and shareholders' equity $200,194 $183,909
======================
The accompanying notes are an integral part of the consolidated financial statements
20
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF INCOME
(All amounts in thousands, except per share data)
Year ended Nine Months Year ended
December 31, ended December 31, March 31,
----------- ------------------------------ ----------
2002 2002 2001 2000 2001
----------- ------------------------------ ----------
(Unaudited) (Unaudited)
Gross revenues $ 69,001 $ 53,040 $ 42,353 $ 45,481 $ 62,213
Excise taxes (1,996) (1,536) (1,159) (1,252) (1,652)
-------- -------- -------- -------- --------
Net revenues 67,005 51,504 41,194 44,229 60,561
Cost of wines sold (44,877) (34,727) (25,604) (30,125) (39,443)
-------- -------- -------- -------- --------
Gross profit 22,128 16,777 15,590 14,104 21,118
Other operating revenues (expenses), net (448) (41) 195 160 213
Selling, general and administrative expenses (13,700) (10,521) (9,884) (9,971) (15,208)
-------- -------- -------- -------- --------
Operating income 7,980 6,215 5,901 4,293 6,123
Interest expense, net (4,549) (3,641) (3,217) (2,887) (3,824)
Other income (expense) (43) (63) 6 868 891
Equity in net income of Chateau Duhart-Milon 842 694 509 714 761
Minority interests (748) (542) (512) (315) (377)
-------- -------- -------- -------- --------
Income before income taxes 3,482 2,663 2,687 2,673 3,574
Income taxes (1,186) (845) (1,094) (1,096) (1,524)
-------- -------- -------- -------- --------
Net income $ 2,296 $ 1,818 $ 1,593 $ 1,577 $ 2,050
======== ======== ======== ======== ========
Net income available to common shareholders $ 2,296 $ 1,818 $1,593 $1,577 $2,050
Earnings per share-basic $ 0.19 $ 0.15 $ 0.15 $ 0.20 $ 0.20
Earnings per share-diluted $ 0.19 $ 0.15 $ 0.15 $ 0.20 $ 0.20
The accompanying notes are an integral part of the consolidated financial statements
21
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(All amounts in thousands)
Common Stock Accumulated
____________________ Other Compre-
Number of Retained Comprehensive hensive
Shares Amount Earnings Loss Total Income
--------- ------- ------- ------------- ------- -------
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
Employee stock purchase plan 3 23 - - 23 -
Options exercised 53 188 - - 188 -
Profit sharing, net of repurchases (1) (15) - - (15) -
Foreign currency translation
adjustment - - - 80 80 80
Cumulative effect of adopting
SFAS No. 133 (net of tax of $129) - - - (189) (189) (189)
Changes in fair value of derivatives
(net of tax of $141) - - - (203) (203) (203)
Transition Adjustment reclassified - - - - - -
in earnings (net of tax of $32) 45 45 45
Rights Offering 1,765 14,659 - - 14,659 -
Net income - - 1,593 - 1,593 1,593
------ ------- ------- ------- ------- -------
Balance, December 31, 2001 12,068 $76,433 $19,494 $(4,612) $91,315 $ 1,326
------ ------- ------- ------- ------- -------
Employee stock purchase plan 4 29 - - 29 -
Options exercised 1 13 - - 13 -
Profit sharing, net of repurchases 2 (1) - - (1) -
Foreign currency
translation adjustment - - - 1,436 1,436 1,436
Changes in fair value of derivatives
(net of tax of $284) - - - (408) (408) (408)
Transition Adjustment reclassified
in earnings (net of tax of $78) - - - 113 113 113
Net income - - 2,296 - 2,296 2,296
------ ------- ------- ------- ------- -------
Balance, December 31, 2002 12,075 $76,474 $21,790 $(3,471) $94,793 $ 3,437
------ ------- ------- ------- ------- -------
The accompanying notes are an integral part of the consolidated financial statements
22
THE CHALONE WINE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All amounts in thousands)
Year Ended Nine Months Year Ended
December 31, Ended December 31, March 31,
------------ ----------------------------------- ---------
2002 2002 2001 2000 2001
------------ -------- -------- -------- ---------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net income $ 2,296 $ 1,818 $ 1,593 $ 1,577 $ 2,050
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 9,019 7,512 5,644 5,318 5,877
Equity in net income of Chateau Duhart-Milon (842) (694) (509) (714) (761)
Increase in minority interests 748 543 512 315 377
Other (208) (209) 44 (803) (799)
Changes in:
Accounts and other receivables (4,295) (3,785) (1,347) (1,734) 1,266
Income taxes receivable - - (223) - -
Inventories (4,614) (10,172) (17,325) (11,776) (5,365)
Prepaid expenses and other assets (750) (323) (368) 281 (34)
Deferred income taxes 167 152 1,426 - (734)
Accounts payable and accrued liabilities (3,840) 11,729 14,952 8,783 1,281
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities (2,319) 6,571 4,399 1,247 3,158
-------- -------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (9,301) (8,005) (8,305) (10,821) (15,200)
Property and business acquisitions (8,912) (8,912) - (3,518) (3,500)
Distributions to minority partner (377) (377) - - -
Proceeds from disposal of property and equipment 4,862 4,855 136 7,518 7,536
Net changes of notes receivable 197 148 (834) - (470)
Investment in Edna Valley Vyd brand name and
joint venture - - (1,050) - -
Acquisition of minority interest in Canoe Ridge
Vineyard - - - - (3,960)
Distributions from Duhart-Milon 108 108 519 557 1,294
-------- -------- -------- -------- --------
Net cash used in investing activities (13,423) (12,183) (9,534) (6,264) (14,300)
-------- -------- -------- -------- --------
Cash flows from financing activities:
Borrowings (repayment) on revolving bank
loan-net 6,437 (3,919) (7,913) (14,057) (7,018)
Distributions to minority interests - - - (700) (700)
Proceeds from issuance of long-term debt 11,000 11,000 - 30,000 30,000
Net change in capital lease obligation (781) (597) (326) - -
Repayment of long-term debt (887) (868) (1,537) (10,272) (11,285)
Repayment of short-term debt (68) (68) - - -
Net proceeds from rights offering - - 14,659 - -
Proceeds from issuance of common stock 41 64 196 46 201
-------- -------- -------- -------- --------
Net cash provided by financing activities 15,742 5,612 5,079 5,017 11,198
-------- -------- -------- -------- --------
Net increase (decrease) in cash and equivalents - - (56) - 56
Cash and equivalents at beginning of year - - 56 - -
-------- -------- -------- -------- --------
Cash and equivalents at end of year $ - $ - $ - $ - $ 56
======== ======== ======== ======== ========
Other cash flow information:
Interest paid $ 5,242 $ 4,065 $ 3,373 $ 3,018 $ 3,449
Income taxes paid 1,701 869 984 222 370
Non-cash investing and financing activities:
Interest swap flucuation, net $ 1,141 $ 1,028 $ 347 $ - $ -
Equipment acquired under capital lease - - 3,152 - -
The accompanying notes are an integral part of the consolidated financial statements
23
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 5%, 3% and 4%, respectively, of total revenue for the year ended
December 31, 2002, nine months ended December 31, 2001, and for the fiscal year
ended March 31, 2001. The Company supplies some of its grape needs from its
estate-owned vineyards but utilizes independent grape growers for a majority 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 13). Intercompany transactions and balances have been eliminated.
At December 31, 2002, Domaines Baron de Rothschild (Lafite) ("DBR"), a
French company, owned approximately 45.7% 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.
ACCOUNTS RECEIVABLE
Accounts receivable are reported at net realizable value. The Company has
established an allowance for doubtful accounts based upon factors pertaining to
the credit risk of specific customers, historical trends, and other information.
Delinquent accounts are written-off when it is determined that the amounts are
uncollectible. Receivables in excess of 90 days were approximately $340,000 at
December 31, 2002.
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 receivables. 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.
24
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. For financial reporting purposes depreciation of
property, plant and equipment, which includes assets under capital lease is
provided on the straight-line method, with the exception of barrels, which is
depreciated using an accelerated method. For tax reporting purposes accelerated
methods are used.
In August 2002, the Company purchased substantially all of the assets of a
winery in Napa County, California (See Note 7). The costs of property, plant and
equipment were 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 ((3)) 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 $1.2 million, $.7 million and $.8 million was capitalized to
property, plant and equipment for the year ended December 31, 2002, nine months
ended December 31, 2001 and the fiscal year ended March 31, 2001, respectively.
Caves represent improvement costs to dig into hillsides and structurally
reinforce underground tunnels used to age and store the Company's wines.
INTANGIBLE ASSETS
The Company's intangible assets consist of goodwill and trademarks. As of
January 1, 2002 the Company adopted SFAS No. 142, GOODWILL AND OTHER INTANGIBLE
ASSETS. Accordingly, goodwill and trademarks that have been determined to
possess indefinite lives will not be amortized, but instead will be reviewed for
impairment at least annually. Impairment is the condition that exists when the
carrying amount of goodwill exceeds its implied fair value. The Company applied
impairment tests to its recorded goodwill in accordance with SFAS 142 and
determined that no impairment loss had occurred during the year ended December
31, 2002.
For purposes of pro forma disclosure, had the Company's goodwill and
trademarks been accounted for under SFAS No. 142, net income and earnings per
share would have been increased to the following pro forma amounts (IN
THOUSANDS, EXCEPT PER SHARE DATA):
Nine Months
Year Ended Ended Year Ended
December 31, December 31, March 31,
------------ ------------ ----------
2002 2001 2001
------------ ------------ ----------
Reported net income $ 2,296 $ 1,593 $ 2,050
Goodwill amortization - 280 290
Trademark amortization - 109 145
------------ ------------ ----------
Adjusted net income $ 2,296 $ 1,982 $ 2,485
BASIC EARNINGS PER SHARE
Reported net income $ 0.19 $ 0.15 $ 0.20
Goodwill - 0.03 0.03
Trademark - 0.01 0.01
------------ ------------ ----------
Adjusted net income $ 0.19 $ 0.19 $ 0.24
DILUTED EARNINGS PER SHARE
Reported net income $ 0.19 0.15 0.20
Goodwill - 0.03 0.03
Trademark - 0.01 0.01
------------ ------------ ----------
Adjusted net income $ 0.19 $ 0.19 $ 0.24
IMPAIRMENT OF LONG-LIVED ASSETS
As of December 31, 2002 the Company adopted SFAS No. 144, ACCOUNTING FOR
THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. Statement 144 establishes a
single-accounting model for long-lived assets to be disposed of while
maintaining many of the provisions relating to impairment testing and valuation.
The adoption of this Statement will not materially change the way the Company
reviews and calculates asset impairment charges.
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
25
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.
SHIPPING COSTS
Shipping costs are included in selling, general and administrative expense
and totaled $290,200, $114,000 and $836,000 for the year ended December 31,
2002, for the nine months ended December 31, 2001 and for the fiscal year ended
March 31, 2001 (See Note 17).
ACCOUNTING FOR INCOME TAXES
The Company provides for income taxes under the liability method.
Accordingly, deferred income tax assets and liabilities are computed for
differences between the financial statement and tax bases of assets and
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Valuation allowances are
established when necessary to reduce deferred tax assets to amounts, which are
more likely than not to be realized.
STOCK BASED COMPENSATION
The Company has elected to follow Accounting Principles Board Opinion No.
25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, Under APB 25,
because the exercise price of the Company's employee stock options equals the
market price of the underlying stock on the date of grant, no compensation
expense is recognized. 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:
Twelve Months Nine Months Twelve Months
ended ended ended
December 31, December 31, December 31,
2002 2001 2000
------------ ------------ ------------
Expected life, following vesting (months) 117 117 117
Stock volitility 32.5% 31.2% 28.2%
Risk-free interest rate 5.2% 6.5% 6.9%
Dividends - - -
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) (See Recent Accounting
Pronouncements):
26
Twelve Months Nine Months
Ended Ended Year Ended
December 31, December 31, March 31,
------------ ------------ ----------
2002 2001 2001
------------ ------------ ----------
Net income:
As reported $ 2,296 $ 1,593 $ 2,050
Pro forma $ 1,739 $ 1,003 $ 1,759
Earnings per share:
Basic $ 0.19 $ 0.15 $ 0.20
Diluted $ 0.19 $ 0.15 $ 0.20
Pro forma basic $ 0.14 $ 0.10 $ 0.17
Pro forma diluted $ 0.14 $ 0.09 $ 0.17
DERIVATIVE FINANCIAL INSTRUMENTS
The Company uses derivative instruments to manage exposures to interest
rate risks in accordance with its risk management policy. The Company's
objectives for holding derivatives are to minimize the risks using the most
effective methods to eliminate or reduce the exposure to interest rate
fluctuations. The Company formally documents the relationship between hedging
instruments and hedged items as well as its risk management objective and
strategy for undertaking its hedging activities. The Company formally designates
derivatives as hedging instruments on the date the derivative contract is
entered into. The Company assesses, both at inception of the hedge and on an
ongoing basis, whether derivatives used as hedging instruments are highly
effective in offsetting the changes in the fair value or cash flows of hedged
items. If it is determined that a derivative is not highly effective as a hedge
or ceases to be highly effective, the Company discontinues hedge accounting
prospectively.
Changes in the fair value of derivative instruments designated as cash flow
hedges, to the extent the hedges are highly effective, are recorded in other
comprehensive income, net of related tax effects. The ineffective portion of the
cash flow hedge, if any, is recognized in current-period earnings. Other
comprehensive income is relieved when current earnings are affected by the
variability of cash flows relating to the derivative hedged. During the periods
ended December 31, 2002 and 2001, the Company's derivative contracts consisted
only of an interest rate swap used by the Company to convert a portion of its
variable rate long-term debt to fixed rate.
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 contracts 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 Company did not
transact in forward exchange contracts during the 2002 year. The nominal amounts
and related foreign currency transaction gains and losses, net of the impact of
hedging, were not significant in nine months ended December 31, 2001 and the
fiscal year ended 2001.
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, the effect of which is
calculated using the treasury stock method as shown below. The convertible
common stock was not included in the computation of diluted earnings per share
because the effect of conversion would be antidilutive.
The following reconciles audited amounts reported in the financial
statements (IN THOUSANDS, EXCEPT PER SHARE DATA):
27
Effect of dilutive securities
-----------------------------
Stock
Basic EPS Warrants options Diluted EPS
--------- -------- ------- -----------
Year ended December 31, 2002:
Income available to common stockholders $ 2,296 - - $ 2,296
Weighted average shares outstanding 12,072 - 19 12,091
------- -------
Earnings per common share $ 0.19 $ 0.19
======= =======
Nine months ended December 31, 2001:
Income available to common stockholders $ 1,593 - - $ 1,593
Weighted average shares outstanding 10,558 - 58 10,616
------- -------
Earnings per common share $ 0.15 $ 0.15
======= =======
Year ended March 31, 2001:
Income available to common stockholders $ 2,050 - - $ 2,050
Weighted average shares outstanding 10,238 - 14 10,252
------- -------
Earnings per common share $ 0.20 $ 0.20
======= =======
Recent Accounting Pronouncements - The Financial Accounting Standards Board
(FASB) has issued the following accounting pronouncements:
SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143
requires that an obligation associated with the retirement of tangible
long-lived assets and the associated asset retirement costs be recognized as a
liability when incurred. Upon initial recognition of a liability for an asset
retirement obligation, an entity would capitalize that cost by recognizing an
increase in the carrying amount of the related long-lived asset by the same
amount as the liability. An entity would subsequently allocate that asset
retirement cost to expense using a systematic and rational method over its
useful life. The Company has adopted SFAS No. 143 for its calendar year
beginning January 1, 2003. The adoption of SFAS No. 143 should not have a
material effect on the Company's operating results or financial position.
SFAS No.145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement No. 13, and Technical Corrections. This Statement rescinds SFAS
No. 4, Reporting Gains and Losses from Extinguishment of Debt, and an amendment
of that Statement, SFAS No. 64, Extinguishments of Debt Made to Satisfy
Sinking-Fund Requirements. This Statement also rescinds SFAS No. 44, Accounting
for Intangible Assets of Motor Carriers. This Statement amends SFAS No. 13,
Accounting for Leases, to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects similar to sale-leaseback
transactions. The Statement also amends other existing authoritative
pronouncements to make various technical corrections, clarify meanings, or
describe their applicability under changed conditions. The adoption of SFAS No.
145 is not expected to have a material effect on the Company's consolidated
financial statements.
SFAS No.146, Accounting for Costs Associated with Exit or Disposal
Activities. This Statement addresses financial accounting and reporting for
costs associated with exit or disposal activities and nullifies Emerging Issues
Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The provisions of this Statement are
effective for exit or disposal activities that are initiated after December 31,
2002. The adoption of SFAS No. 146 is not expected to have a material effect on
the Company's consolidated financial statements.
SFAS No.148, Accounting for Stock-Based Compensation. This Statement amends
SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of Statement 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. This Statement permits two additional transition
methods for entities that adopt the preferable method of accounting for
stock-based employee compensation. Both of those methods avoid the ramp-up
effect arising from prospective application of the fair value based method. In
addition, to address concerns about the lack of comparability caused by multiple
transition methods, this Statement does not permit the use of the original
Statement 123 prospective method of transition for changes to the fair value
based method made in fiscal years beginning after December 15, 2003. The Company
has not yet evaluated whether to adopt this statement nor has it evaluated the
potential impact on the Company's consolidated financial statements if the
statement is adopted. As of December 31, 2002, the Company has adopted the
disclosure requirements of the Statement and continues to follow the intrinsic
value method to account for stock-based employee compensation.
FASB Interpretation No. 45, Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of
Others. The interpretation clarifies that a guarantor is required to recognize,
at the inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. It also significantly expands
the disclosures guarantors must include in their financial statements. While the
interpretation's accounting provisions are effective prospectively to guarantees
issued or modified after December 31, 2002, its disclosure requirements
generally apply to all guarantees and must be included in financial statements
of interim and annual periods ending after December 15, 2002. The adoption of
Interpretation No. 45 is not expected to have a material effect on the Company's
consolidated financial statements.
28
FASB Interpretation No. 46, Consolidation of Variable Interest Entities,
addresses consolidation by business enterprises of variable interest entities in
which 1) the equity investment is insufficient for the entity to finance its
activities without additional financial support through other interests who will
absorb some or all of the entity's expected losses, or 2) the equity investors
lack one or more essential characteristics of a controlling interest. Those
characteristics include the ability to make decisions about an entity's
activities through voting rights or similar rights; the obligation to absorb the
entity's expected losses, which makes it possible for the entity to finance its
activities; and the right to receive the entity's expected residual returns as
compensation for the risk of absorbing expected losses. This interpretation is
effective for the Company no later than the third quarter of 2003, and is not
currently expected to have a material effect on the Company's consolidated
financial statements.
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
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.
NOTE 3 - VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
A summary of the changes in the Company's allowance for doubtful accounts
receivable is as follows:
Balance at Charges to Balance at
Beginning of Costs and End of
Period Expenses Deductions Period
------------ ---------- ---------- ----------
Year ended March 31:
2001 $ 129 $ 320 $ (56) $ 393
===== ===== ===== =====
Nine months ended December 31:
2001 $ 393 $ 490 $(105) $ 778
===== ===== ===== =====
Year ended December 31:
2002 $ 778 $ 490 $(931) $ 337
===== ===== ===== =====
NOTE 4 - INVENTORY
Inventory consists of the following (IN THOUSANDS):
December 31, December 31,
2002 2001
------------ ------------
Bulk wine $ 48,312 $ 44,616
Bottled wine 32,171 31,303
Wine packaging supplies 415 313
Other 374 426
-------- --------
Total $ 81,272 $ 76,658
======== ========
29
NOTE 5 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following (IN THOUSANDS):
December 31, December 31,
2002 2001
------------ -----------
Land $ 20,737 $ 18,091
Vineyards 12,960 8,310
Vineyards under development 17,583 18,291
Caves 1,678 1,678
Buildings 26,592 24,541
Machinery and equipment 36,136 33,123
-------- --------
115,686 104,034
Accumulated depreciation (37,733) (30,802)
-------- --------
Total $ 77,953 $ 73,232
======== ========
NOTE 6 - ACQUISITION
On August 23, 2002, the Company acquired substantially all of the assets of
the winery and vineyard site formerly known as Beaucanon Winery in Rutherford,
California. The purchase price was $8.9 million and was accounted for using the
purchase method of accounting in accordance with SFAS 141, Business
Combinations. The purchase price was allocated to each asset acquired based on
their relative estimated fair values at the date of acquisition. No goodwill or
other intangible assets were recorded. The Company financed the acquisition with
subordinated debit to related parties (See Note 8).
NOTE 7 - INVESTMENT IN CHATEAU DUHART-MILON
Duhart-Milon's condensed balance sheet as of December 31, 2002 and 2001 and
the results of its operations for the year ended December 31, 2002, nine months
ended December 31, 2001 and fiscal year ended March 31, 2001 are as follows
(translated into U.S. dollars at the year-end and average exchange rate for the
period, respectively) (IN THOUSANDS):
December 31, December 31,
------------ ------------
2002 2001
------------ ------------
Inventory $ 3,887 $ 3,307
Other current assets 9,475 7,678
-------- --------
Current assets 13,362 10,985
-------- --------
Property and equipment, net 2,825 1,673
-------- --------
Total assets $ 16,187 $ 12,658
======== ========
Current liabilities $ 2,668 $ 1,960
Partner's equity 13,519 10,698
-------- --------
Total liabilities and equity $ 16,187 $ 12,658
======== ========
Duhart-Milon's results of operations are summarized as follows (IN
THOUSANDS):
30
Year Nine Months Year
Ended Ended Ended
December 31, December 31, March 31,
2002 2001 2001
------------ ------------ ---------
Revenues $ 6,726 $ 3,504 $ 5,470
Cost of Sales (2,955) (1,355) (2,453)
------- ------- -------
Gross profit 3,771 2,149 3,017
------- ------- -------
Revenues (expenses) from other
operations, net (189) 19 221
------- ------- -------
Net earnings $ 3,582 $ 2,168 $ 3,238
======= ======= =======
Equity in investment of Duhart-Milon $ 842 $ 509 $ 761
======= ======= =======
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
$2,830,000 as of December 31, 2002. This amount decreased from $4,265,000 as of
December 31, 2001 due to the increase in the relative worth of the French franc
when compared to the U.S. dollar during the twelve months ended December 31,
2002.
31
NOTE 8 - BORROWING ARRANGEMENTS
Borrowing arrangements consist of the following (IN THOUSANDS):
December 31, December 31,
2002 2001
------------ ------------
Revolving bank loan of $25,000,000, interest at
LIBOR +1.375% (3.255% at December 31, 2001),
interest payable monthly, unsecured, due March
2002 (see below) $ - $ 12,086
Revolving bank loan of $50,000,000, interest at
the Eurodollar Rate based on LIBOR plus an
indexed spread (3.89% combined at December 31,
2002), interest payable on the last day of each
interest period ranging from one to six months,
secured, due April 2009 (see below) 16,098 -
Swingline bank loan of $5,000,000, interest at
0.5% per annum above the latest Federal Funds
Rate plus an indexed spread (3.34% combined at
December 31, 2002), interest payable monthly,
secured, due April 2005 (see below) 2,425 -
Senior unsecured notes (Series A, B, C), interest
at rates ranging from 8.90% to 9.05%, payable
monthly, principal payments due annually start-
ing September 2004 - 30,000
Senior secured notes (Series A, B, C), interest
at rates ranging from 8.90% to 9.23% at December
31, 2002 payable monthly, principal payments
commencing September 2004, payable annually
through September 15, 2010 (see below) 30,000 -
Bank term loan, interest at the Eurodollar Rate
based on LIBOR plus an indexed spread (4.39%
combined at December 31, 2002), interest payable
on the last day of each interest period ranging
from one to six months, principal payments
commencing June 2003 payable quarterly through
April 2009 (see below) - 17,500
Bank term loan, interest at the Eurodollar Rate
based on LIBOR plus an indexed spread (4.39%
combined at December 31, 2002), interest payable
on the last day of each interest period ranging
from one to six months, principal payments
commencing June 2003 payable quarterly through
April 2009 (see below) 17,500 -
Mortgage note payable to financial institution,
interest at varying rates (3.25% at December 31,
2002), principal and interest payable monthly
through August 2021 1,548 1,616
-------- --------
67,571 61,202
Less current maturities (20,818) (14,120)
-------- --------
Long-term obligations, net of current maturities $ 46,753 $ 47,082
======== ========
Related party note payable, interest at 7.03%,
paid in full during 2002 $ - $ 887
Convertible subordinated note to related party,
interest at 9.00% per annum, interest and
principal due August 2004 (convertible into
common stock at $9.4207 per share) 2,750 -
Convertible subordinated note to related party,
interest at 9.00% per annum, interest and
principal due August 2004 (convertible into
common stock at $9.4207 per share) 8,250 -
-------- --------
11,000 887
Less current maturities - (18)
-------- --------
Related party note payable, net of current
maturities $ 11,000 $ 869
======== ========
At December 31, 2001 the revolving credit facility and term loan were
pursuant to an agreement with a bank that was entered into in March 1999. The
agreement included 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 "2000 Notes"). Proceeds
from the 2000 Notes were used to repay $20 million of revolving bank borrowings
under a previous credit agreement and $10 million of the $30 million term loan.
Currently, interest on the 2000 Notes is payable quarterly at rates ranging from
8.90% to 9.05% and annual principal repayments are scheduled to begin September
15, 2004 through maturity on September 15, 2010.
32
The 2000 Notes were issued pursuant to a Note Purchase Agreement, which
contained restrictive covenants including requirements to maintain certain
financial ratios and restrictions on additional indebtedness, asset sales,
investments, and payment of dividends.
In 2002, the Company's revolving bank loan expired and two extensions were
provided extending the maturity date to April 30, 2002. On April 22, 2002, the
Company finalized the borrowing arrangement with the bank that had provided the
revolving bank loan. The new borrowing arrangement with its bank involves both
(1) a $55 million revolving credit facility secured first by inventory and
accounts receivable and second by substantially all of the Company's fixed
assets (other than certain specified assets), and (2) a $17.5 million term loan
secured first by certain of the Company's fixed assets (other than certain
specified assets) and second by the Company's inventory and accounts receivable,
each on a pari passu basis with the holders of the 2000 Notes. In connection
with the finalization, the Company amended certain of the provisions applicable
to the 2000 Notes.
In connection with the $55 million revolving credit facility, the Company
is obligated for the payment of fees relative to the unused portion at indexed
rates ranging from 0.25% to 0.45%. The fees are computed daily on the
outstanding unused balance. At December 31, 2002, the unused portion of the
facility commitment was $36.5 million.
On August 23, 2002, the Company acquired the winery and vineyard site
formerly known as Chateau Beaucanon Winery in Rutherford, California. The site
is the home for the Provenance Vineyard brand. The purchase price was $8.9
million. The acquisition was funded by the issuance of two convertible
subordinated promissory notes in exchange for $11 million in cash (the "2002
Notes"). The 2002 Notes were issued to Les Domaines Baron de Rothschild (Lafite)
("DBR"), in the amount of $8.25 million, and SFI Intermediate Limited or its
affiliates ("SFI"), in the amount of $2.75 million. The 2002 Notes accrue
interest on the principal sum at a rate of 9% per annum. The principal sum and
all accrued interest are due and payable in full, two years from the date of the
2002 Notes (the "Maturity Date"). At the Maturity Date, the Company may elect to
pay all of the outstanding principal and accrued interest in cash or may elect
to repay all or part of these amounts through conversion into shares of Company
common shares at the Conversion Price of $9.4207 per share (the "Conversion
Price"). DBR or SFI may elect to convert all outstanding principal only in the
event of a change of control transaction, as defined in the terms of the 2002
Notes.
In conjunction with the above activities, the Company, its lenders under
the Company's Credit Agreement and its noteholders under the Company's Amended
and Restated Note Purchase Agreement amended the Company's Credit Agreement and
its Amended and Restated Note Purchase Agreement (1) to reflect the lenders' and
noteholders' consent to the Beaucanon acquisition and the issuance of the 2002
Notes and (2) to make certain amendments in the Credit Agreement and the Amended
and restated Note Purchase Agreement, including the exclusion of the 2002 Notes
from the financial covenants contained in those agreements.
Maturities of borrowings for each of the next five years ending at December
31 are as follows (IN THOUSANDS):
2003 $ 20,818
2004 18,313
2005 7,317
2006 7,321
2007 7,325
Thereafter 17,477
------------
Total $ 78,571
============
In 1999 the Company entered into an interest-rate swap contract for a
notional amount of $20.0 million, maturing on April 6, 2006 the balance of which
was reduced to $17.5 million at December 31, 2002 and 2001. 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 that 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 at 6.95%. Effective
April 1, 2001, the Company adopted SFAS No.133, "Accounting for Derivative
Instruments and Hedging Activities" (See note 14). The fair value of the
contract was approximately $1.36 million on December 31, 2002. This amount (net
of tax effect) will be the cumulative transition adjustment recorded in other
comprehensive income as required under SFAS No. 133.
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-month period. As of December 31,
2002, approximately 139,538 options were available for future grant under the
Plan.
Option activity under the plans has been as follows:
33
Weighted
Average
Number of Exercise
Shares Price
--------- --------
Outstanding, March 31, 2000 662,419 $ 10.36
-------- -------
Granted (weighted average fair value of $4.56) 169,640 8.43
Exercised (17,800) 8.64
Canceled (23,765) 9.97
-------- -------
Outstanding, March 31, 2001 790,494 10.00
-------- -------
Granted (weighted average fair value of $5.91) 172,873 11.11
Exercised (121,105) 8.63
Canceled (5,059) 9.58
-------- -------
Outstanding, December 31, 2001 837,203 10.43
======== =======
Granted (weighted average fair value of $5.06) 207,978 9.60
Exercised (1,532) 8.38
Canceled (137,500) 11.22
-------- -------
Outstanding, December 31, 2002 906,149 $ 10.18
-------- -------
Additional information regarding options outstanding as of December 31,
2002 is as follows:
Options Outstanding (all exercisable)
---------------------------------------------------
Range of Weighted Avg.
Exercise Number Remaining Weighted Avg.
Prices Outstanding Contractual Life Exercise Price
-------- ----------- ---------------- --------------
$5.00-$7.99 25,480 1.5 years $ 6.83
$8.00-$9.99 433,369 5.5 years 9.17
$10.00-$12.99 447,300 5.0 years 11.34
------- --------- -------
906,149 5.1 years $ 10.18
------- --------- -------
All options outstanding at December 31, 2002 are exercisable, except for
9,600 options granted December 31, 2002 with an exercise price of $8.24.
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 3,923 shares for the twelve months ended December 31,
2002, 3,145 shares for the nine months ended December 31, 2001 and 6,735 shares
for the year ended March 31, 2001, respectively, at weighted average prices of
$7.43, $7.37 and $7.15, respectively. The weighted average fair value per share
of the awards in the twelve months ended December 31, 2002, for the nine months
end December 31, 2001 and for the year ended March 31, 2001 was $9.22, $8.67 and
$8.42, respectively. At December 31, 2002, 724 shares were reserved for future
issuances under the Purchase Plan.
NOTE 10 - COMMON STOCK
In connection with the issuance of convertible subordinated promissory
notes in August 2002, the Company may elect to pay all of the outstanding
principal and accrued interest in cash or may elect to repay all or part of
these amounts through conversion into shares of the Company's common shares at
the Conversion Price of $9.4207 per share. The note holders may elect to convert
all outstanding principal only in the event of a change of control transaction,
as defined in the terms of the Notes (See Note 7).
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 25% of its consolidated net income (See Note 7).
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 $57,000, $173,000 and $143,000 for the year ended December 31, 2002,
for the nine months ended December 31, 2001 and for the fiscal year ended March
31, 2001, respectively. At December 31, 2002, the plan held approximately 42,620
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
34
formula and contributed $193,000, $177,000, and $136,000 to this plan for the
year ended December 31, 2002, for the nine months ended December 31, 2001 and
for the fiscal year ended March 31, 2001, respectively.
NOTE 12 - INCOME TAXES
The provision for income taxes for the year ended December 31, 2002, nine
months ended December 31, 2001 and fiscal year ended March 31, 2001 are
summarized as follows (IN THOUSANDS):
Nine Months
Year ended ended Year ended,
December 31, December 31, March 31,
2002 2001 2001
------------ ------------ -----------
Federal
Current $ 967 $ (223) $ 1,782
Deferred (31) 1,047 (583)
------- ------- -------
936 824 1,199
------- ------- -------
State
Current 191 51 477
Deferred 59 219 (152)
------- ------- -------
250 270 325
------- ------- -------
$ 1,186 $ 1,094 $ 1,524
------- ------- -------
The provisions for income taxes differ from amounts computed at the U.S.
Federal statutory rate as follows (IN THOUSANDS):
Nine Months
Year ended ended Year ended,
December 31, December 31, March 31,
2002 2001 2001
------------ ------------ -----------
Income tax at statutory rate $ 1,282 $ 913 $ 1,215
State tax net of federal benefit 227 157 208
Change in valuation allowance (133) 704 -
Foreign tax credit (225) (550) -
Other 35 (130) 101
------- ------- -------
$ 1,186 $ 1,094 $ 1,524
======= ======= =======
The Company's deferred tax assets (liabilities) were as follows (IN
THOUSANDS):
Nine Months
Year ended ended
December 31, December 31,
2002 2001
------------ ------------
Net operating loss and tax credit carryforward $ 3,468 $ 3,800
Valuation Allowance (2,838) (2,971)
Basis Difference in property, plant and
equipment (1,896) (2004)
Basis Difference in inventory (1,046) (859)
Derivative financial instrument 532 261
Accrued compensation 485 301
Other (79) (69)
------- -------
Net deferred tax assets (liability) $(1,374) $(1,541)
======= =======
Classified as:
Current deferred tax assets (liabilities) $ (451) $ (493)
======= =======
Long-term deferred tax liabilities $ (923) $(1,048)
------- -------
The Company and its subsidiaries file their federal tax returns on a
consolidated basis. As of December 31, 2002, Sagelands Vineyard has a federal
net operating loss carryforward of approximately $8.9 million that will expire
through 2018. 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
35
change in Sagelands Vineyard. In addition, the Company has a foreign tax credit
carryforward of approximately $418,000 that will expire through 2007. A full
valuation allowance has been established against this credit.
NOTE 13 - TRANSACTIONS WITH RELATED PARTIES
The consolidated statements of income include the following transactions
with related parties (IN THOUSANDS):
Nine Months
Year Ended Ended Year Ended
December 31, December 31, 31-Mar
------------ ------------ ----------
2002 2001 2001
------------ ------------ ----------
Wine purchases from related parties $ 1,048 $ 2,054 $ 1,781
Grape purchases from related parties 5,313 5,781 5,002
Lease expense for land and facilities
to joint venture partner 96 96 15
Interest expense to related parties 376 75 -
NOTE 14 - COMMITMENTS AND CONTINGENCIES
As of December 31, 2002 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: (IN THOUSANDS)
2003 $ 1,099
2004 1,009
2005 976
2006 1,014
2007 998
Thereafter 5,443
-------------
Total $ 10,539
=============
Rent expense charged to operations was $969,000, $982,000 and $1,351,000
for the year ended December 31, 2002, nine months ended December 31, 2001 and
for the fiscal year ended March 31, 2001, 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, which provided for the Company's continued 50% ownership
throughout the remaining life of the joint venture. The payments made to extend
the life of the joint venture and maintain continuing ownership of the joint
venture are included in goodwill and were being amortized over 40 years through
December 31, 2001. Per FASB pronouncements No. 141 and 142, goodwill will no
longer be amortized. Also, in December 2001, the Company purchased 50% of the
brand name, Edna Valley, for $200,000, which is currently licensed to the joint
venture by Paragon.
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. Purchases
under these contracts were $18,883,000 and $19,570,000 for the year ended
December 31, 2002 and the nine-months ended December 31, 2001.
NOTE 15 - DERIVATIVE INSTRUMENTS
Effective April 1, 2001, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 as amended by SFAS 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", requires that
derivative instruments, including certain derivative instruments embedded in
other contracts, be recorded as assets or liabilities, measured at fair value.
For each period, changes in fair value are reported in current earnings or other
comprehensive income, depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 133
also requires the Company to formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting treatment. Upon
adoption of SFAS No. 133, the Company recorded a derivative liability of
$318,000 and, as other comprehensive income, $189,000 ($318,000 pre-tax)
representing the cumulative effect of this change in accounting principle as the
Company has designated the contract as a highly effective cash flow hedge. The
fair value of this derivative (an interest rate swap) as of December 31, 2002
was $1,355,000. The net change in the swap's carrying value from December 31,
2001 to December 31, 2002 of $408,000 (net of tax of $284,000) is reflected as a
reduction to other comprehensive loss in shareholders' equity. The estimated
loss expected to be reclassified into earnings for the year ending December 31,
2003 is $337,000.
36
NOTE 16 - OBLIGATIONS UNDER CAPITAL LEASE
The Company leases barrels under long-term leases and has the option to
purchase the barrels for a nominal cost at the termination of the lease.
Property, plant and equipment include $945,500 of assets held under capital
leases, which is net of accumulated amortization of $2,207,000. Future minimum
lease payments for assets under capital leases at December 31, 2002 are as
follows: (IN THOUSANDS)
2003 $ 891
2004 891
2005 467
-------
Total minimum lease payments $ 2,249
Less amount representing interest (204)
-------
Present value of net minimum lease payments 2,045
Less current portion (716)
-------
Obligations under capital lease, less current portion $ 1,329
========
NOTE 17 - QUARTERLY DATA (UNAUDITED)
The Company's quarterly operating results for the twelve-month period ended
December 31, 2002, the nine-month transition period ended December 31, 2001 and
the fiscal year ended March 31, 2001 are summarized below (IN THOUSANDS, EXCEPT
PER SHARE DATA):
Gross EPS
Quarter ended revenues Gross profit Net income (diluted)
------------------ -------- ------------ ---------- ---------
December 31, 2002 $ 20,801 $ 5,664 $ 694 $ 0.06
September 30, 2002 19,012 6,633 664 0.05
June 30, 2002 13,227 4,480 460 0.04
March 31, 2002 15,961 5,351 478 0.04
December 31, 2001 16,209 5,794 654 0.06
September 30, 2001 12,817 4,926 525 0.05
June 30, 2001 13,327 4,870 414 0.04
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
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 December 31, 2001 was calculated using net income available to
common stockholders.
NOTE 18 - RECLASSIFICATIONS
In July 2002, the Company shifted a major distribution channel from a
broker to a distributor. Commissions and shipping costs incurred for sales to
the broker were recorded as selling, general and administrative expenses. Case
prices charged to the distributor have been reduced by an amount equal to these
commission and shipping costs. This caused a reduction of $1,266,000 in gross
revenues for the year ended December 31, 2002, when compared to previous
periods. For comparability purposes, the Company reclassified $2,130,000 of
commissions and shipping costs from selling, general and administrative expenses
to net revenues for the nine months ended December 31, 2001.
In addition, certain other prior period amounts have been reclassified in
order to conform to the current period presentation.
37
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
The Chalone Wine Group, Ltd.
We have audited the accompanying consolidated balance sheets of The Chalone
Wine Group, Ltd., as of December 31, 2002 and 2001, and the related consolidated
statements of income, shareholders' equity, and cash flows for the year ended
December 31, 2002 and the nine months ended December 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 audits 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 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., as of December 31, 2002 and 2001, and the results of its
operations and cash flows for the year ended December 31, 2002 and the nine
months ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2002, the Company adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets".
/s/ MOSS ADAMS LLP
Santa Rosa, California
February 21, 2003
38
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
The Chalone Wine Group, Ltd.
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows for the year 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 audit.
We conducted our audit 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 audit provide a reasonable
basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the results of operations and cash flows of The Chalone
Wine Group, Ltd. and subsidiaries for the year 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
39
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 2003 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after December 31, 2002.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 2003 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after December 31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDERS MATTERS.
The information required by this Item is incorporated herein by reference
to the Company's Proxy Statement relating to the 2003 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after December 31, 2002.
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 2003 Annual Meeting of
Shareholders to be filed with the Securities and Exchange Commission within 120
days after December 31, 2002.
ITEM 14. CONTROLS AND PROCEDURES.
Within the 90-day period prior to the date of the report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including its Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures. Based on that evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the
Company's disclosure controls and procedures are effective in a timely manner to
alert them to material information relating to the Company, which is required to
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act of 1934. There have been no significant changes in our
internal or other factors that could adversely affect these controls, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
PART IV
ITEM 15. 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......................................... 20
Consolidated Statements of Income................................... 21
Consolidated Statements of Shareholders' Equity..................... 22
Consolidated Statements of Cash Flows............................... 23
Notes to Consolidated Financial Statements.......................... 24
INDEPENDENT AUDITORS REPORTS............................................. 37, 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.
40
B. REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the last quarter of the
period covered by this Report:
C. EXHIBITS.
A copy of any exhibits (at a reasonable cost) or the Exhibit Index will be
furnished to any shareholder of the Company upon receipt of a written request
therefor. Such request should be sent to The Chalone Wine Group, Ltd., 621
Airpark Road, Napa, California 94558, Attention: Investor Relations.
41
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
3.1 Restated Articles of Incorporation, as amended through
June 3, 1985. ((3))
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)
3.7 Amendment to Restated Articles, filed June 24 ,2002
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.
42
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. ((3))
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)
4.12 Voting Agreement, dated August 31, 2001, between DBR and SFI (vi)
Intermediate, Ltd.
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.
(vi) Incorporated by reference to Exhibit No. 99.1 to the Company's
Current Report on Form 8-K Dated August 31, 2001.
43
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. ((3))
10.8 Vineyard Lease, between the Company and Henry P. and
Marina C. Wright, dated July 15, 1988. ((3))
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 ((3))
10.13 Easement Agreement between the Company and Stonewall
Canyon Ranches, dated August 19, 1988. ((3))
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.
44
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. ((3))
10.21 First Amendment to Credit Agreement between the Company
and Wells Fargo Bank incorporated as Exhibit 10.19, dated
March 18, 1993. ((3))
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.
45
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. ((3))
10.32 Promissory Note between the Company and Richard H. Graff,
dated July 1, 1996. ((3))
10.33 Secured Purchase Money Promissory Note between the Company
and Richard H. Graff, Trustee, Graff 1993 Trust, dated
July 1, 1996. ((3))
10.34 Residential Lease between the Company and Richard H. Graff,
dated July 1, 1996. ((3))
10.35 Consulting and Non-Competition Agreement between the Company
and Richard H. Graff, date July 1, 1996. ((3))
10.36 Credit Agreement between the Canoe Ridge Vineyard, LLC,
and Wells Fargo Bank, dated August 15, 1996. ((3))
10.37 Credit Agreement between the Company and Wells Fargo Bank,
dated September 25, 1996. ((3))
10.38 Amendment to Joint Venture Agreement of Edna
Valley Vineyard between Paragon Vineyard Co., Inc.,
and the Company, dated December 23, 1996. ((3))
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.
46
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. ((3))
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 Amendment 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)
10.54 Credit Agreement between Cooperative Centrale Raiffeisen-
Boerenleenbank B.A., "Rabobank International," New York
Branch and the Company, dated April 19, 2002.
----------
(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.
(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.
47
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
10.55 Amended and Restated Note Purchase Agreement between Agstar
Financial Services, Farm Credit Services of America and the
Company, dated April 19, 2002.
10.56 Second Amendment to Joint Venture Agreement of Edna Valley
Vineyard between Paragon Vineyard Co., and the Company, dated
June 2002.
10.57 Second Amended and Restated Grape Purchase Agreement between
Paragon Vineyard Co., and Edna Valley Vineyard, dated June 2002.
10.58 First Amendment to Credit Agreement and Consent between
Cooperative Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
International," New York Branch and the Company, dated August
2002
10.59 First Amendment and Consent to Amended and Restated
Note Purchase Agreement between the Company and
AgStar Financial Services and Farm Credit Services of
America, dated August 23, 2002.
10.60 Convertible Note Purchase Agreement between the Company and SFI
Intermediate Limited and Les Domaines Baron de
Rothchild (Lafite), dated August 21, 2002.
10.61 Convertible Subordinated Promissory Note between the Company and
Les Domaines Baron, de Rothchild (Lafite), dated August 21, 2002.
10.62 Subordination Agreement between Les Domaines Baron de
Rothchild (Lafite) and each of the Senior Lenders,
dated August 21, 2002.
10.63 Convertible Subordinated Promissory Note between the Company and
SFI Intermediate Limited, dated August 2002.
10.64 Subordination Agreement between SFI Intermediate
Limited and each of the Senior Lenders, dated August
21, 2002.
10.65 Registration Rights Agreement between the Company and SFI
Intermediate Limited and Les Domaines Baron de Rothchild
(Lafite), dated August 21, 2002.
23 Consent of Deloitte & Touche LLP to incorporation by reference,
dated March 29, 2002.
23.1 Consent of Moss Adams LLP to incorporation by reference, dated
March 27, 2002.
23.2 Consent of Deloitte & Touche LLP to incorporation by
reference, dated March 31, 2003.
23.3 Consent of Moss Adams LLP to incorporation by reference, dated
March 27, 2003.
48
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
49
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 M. CONROY BLOM
-----------------------------------------------------
Shawn Conroy Blom
Vice President of Finance and Chief Financial Officer
Dated: March 31, 2003
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 March 31, 2003
-------------------------------------
Thomas B. Selfridge
/s/ CHRISTOPHE SALIN Chairman March 31, 2003
-------------------------------------
Christophe Salin
/s/ W. PHILIP WOODWARD Director March 31, 2003
-------------------------------------
W. Philip Woodward
/s/ CRISTINA G. BANKS Director March 31, 2003
-------------------------------------
Cristina G. Banks
/s/ GEORGE E. MYERS Director March 31, 2003
-------------------------------------
George E. Myers
/s/ JAMES H. NIVEN Director March 31, 2003
-------------------------------------
James H. Niven
/s/ ERIC DE ROTHSCHILD Director March 31, 2003
-------------------------------------
Eric de Rothschild
/s/ MARK HOJEL Director March 31, 2003
-------------------------------------
Mark Hojel
50
/s/ YVES-ANDRE ISTEL Director March 31, 2003
-------------------------------------
Yves-Andre Istel
/s/ PHILLIP M. PLANT Director March 31, 2003
-------------------------------------
Phillip M. Plant
/s/ C. RICHARD KRAMLICH Director March 31, 2003
-------------------------------------
C. Richard Kramlich
51
THE CHALONE WINE GROUP, LTD.
DIRECTORS, OFFICERS & WINERY LOCATIONS
BOARD OF DIRECTORS
Christophe Salin, CHAIRMAN
Thomas B. Selfridge, PRESIDENT & CHIEF EXECUTIVE OFFICER
W. Philip Woodward
Cristina G. Banks
Mark A. Hojel
Yves-Andre Istel
C. Richard Kramlich
George E. Myers
James H. Niven
Phillip M. Plant
Eric de Rothschild
OFFICERS
Christophe Salin, CHAIRMAN
Thomas B. Selfridge, PRESIDENT & CHIEF EXECUTIVE OFFICER
Shawn M. Conroy Blom, VICE PRESIDENT OF FINANCE AND CHIEF FINANCIAL OFFICER
Robert B. Farver, VICE PRESIDENT OF SALES AND DISTRIBUTION
Alan S. Drage-Lussier, VICE PRESIDENT OF HUMAN RESOURCES
ACACIA VINEYARD
2750 Las Amigas Road, Napa, California 94559
707.226.9991
www.acaciavineyard.com
CANOE RIDGE VINEYARD
1102 W. Cherry Street, Walla Walla, Washington 99362
509.527.0885
www.canoeridgevineyard.com
MOON MOUNTAIN VINEYARD
1700 Moon Mountain Drive, Sonoma, California 95476
707.996.5870
CHALONE VINEYARD
Stonewall Canyon Road & Highway 146, Soledad, California 93960
831.678.1717
www.chalonevineyard.com
ECHELON VINEYARDS
2425 Mission Street, San Miguel, California 93401
707.254.4200
www.echelonvineyards.com
EDNA VALLEY VINEYARD
2585 Biddle Ranch Road, San Luis Obispo, California 93401
805.544.5855www.endavalley.com
JADE MOUNTAIN
621 Airpark RoadCalifornia 94558
707.254-4200
www.jademountainvineyard.com
SAGELANDS WINERY
71 Gangl Road, Wapato, Washington 98951
509.877.2112
www.sagelandsvineyard.com
52
PROVENANCE VINEYARDS
1695 St. Helena Highway, Rutherford, California 94573
707.968-3633
www.provenancevineyards.com
Hewitt Vineyard
1695 St. Helena Highway, Rutherford, California 94573
707-968-3633
CORPORATE OFFICE
621 Airpark Road, Napa, California 94558-6272
707.254.4200
WWW.CHALONEWINEGROUP.COM
CHALONE WINE FOUNDATION
1000 Main Street, Suite 210
Napa, CA 94559
707.254.1160
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
EquiServe
P.O. Box 8040
Boston, MA 02266-8040
Investor Relations Number 781.575.3120
Internet Address: HTTP://WWW.EQUISERVE.COM
INDEPENDENT AUDITORS
Moss Adams LLP
Santa Rosa, California
LEGAL COUNSEL
Farella Braun + Martel, LLP
San Francisco, California
ANNUAL MEETING
The Annual Meeting of Shareholders will be held on Thursday, May 29, 2003, at
2:00pm 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 December 31,
2002 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
53
CHALONE WINE GROUP, LTD.
I, SHAWN M. CONROY BLOM, certify that:
1. I have reviewed this annual report on Form 10-K of The Chalone Wine Group;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "EVALUATION DATE"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATED: MARCH 31, 2003 THE CHALONE WINE GROUP, LTD.
----------------------- ----------------------------
(Registrant)
/s/ SHAWN M. CONROY BLOM
------------------------------------------
Shawn M. Conroy Blom
Vice President and Chief Financial Officer
54
CHALONE WINE GROUP, LTD.
I, THOMAS B. SELFRIDGE, certify that:
1. I have reviewed this annual report on Form 10-K of The Chalone Wine Group;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "EVALUATION DATE"); and
(c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's auditors and the audit committee of registrant's
board of directors (or persons performing the equivalent function):
(a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
(b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls;
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
DATED: MARCH 31, 2003 THE CHALONE WINE GROUP, LTD.
---------------------- ---------------------------
(Registrant)
/s/ THOMAS B. SELFRIDGE
-------------------------------------
Thomas B. Selfridge
President and Chief Executive Officer
55