Chalone Wine Group Ltd.
Filed 3/31/03
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
EX-3.(I)
3
ex3-7.txt
EXHIBIT 3.7 - RESTATED ARTICLES OF INCORPORATION
EXHIBIT 3.7
CERTIFICATE OF AMENDMENT
OF
RESTATED ARTICLES OF INCORPORATION
OF
THE CHALONE WINE GROUP, LTD.,
a California corporation
The undersigned, Thomas B. Selfridge and Daniel E. Cohn,
hereby certify that:
ONE: They are the duly elected and acting President and Chief
Executive Officer and the Secretary, respectively, of The Chalone Wine Group,
Ltd. a California corporation.
TWO: Article THIRD of the Restated Articles of Incorporation
of this corporation is amended to read in its entirety as follows:
"THIRD. The Corporation is authorized to issue only one class
of stock; and the total number of shares which the Corporation
is authorized to issue is Twenty-Five Million (25,000,000)."
THREE: The foregoing amendment of the Restated Articles of
Incorporation of this corporation has been duly approved by the Board of
Directors of this corporation.
FOUR: The foregoing amendment of the Restated Articles of
Incorporation of this corporation has been duly approved by the required vote of
shareholders in accordance with Sections 902 and 903 of the California
Corporations Code. The total number of outstanding shares is 12,068,944. The
percentage vote required was fifty percent (50%) or more of the outstanding
shares and the number of shares voting in favor of the foregoing amendment
equaled or exceeded the vote required.
We further declare under penalty of perjury that the matters
set forth in the foregoing certificate are true and correct of our own
knowledge.
Executed at Napa, California, on June 18, 2002.
/s/ THOMAS B. SELFRIDGE
__________________________________
Thomas B. Selfridge, President and
Chief Executive Officer
/s/ DANIEL E. COHN
__________________________________
Daniel E. Cohn, Secretary
EX-10
4
ex10-54.txt
EXHIBIT 10.54 - CREDIT AGREEMENT
================================================================================
THE CHALONE WINE GROUP, LTD.
________________________________
CREDIT AGREEMENT
Dated as of April 19, 2002
________________________________
COOPERATIEVE CENTRALE RAIFFEISEN -
BOERENLEENBANK B.A.,
"RABOBANK INTERNATIONAL", NEW YORK BRANCH
ARRANGER, ADMINISTRATIVE AGENT SWINGLINE LENDER AND ISSUING LENDER
================================================================================
TABLE OF CONTENTS
PAGE
ARTICLE I DEFINITIONS ......................................................1
SECTION 1.01 Certain Defined Terms........................................1
SECTION 1.02 Accounting Principles.......................................24
(A) ACCOUNTING TERMS.....................................24
(B) GAAP CHANGES.........................................24
(c) "FISCAL YEAR" AND "FISCAL QUARTER"...................24
SECTION 1.03 Interpretation..............................................24
ARTICLE II THE LOANS.......................................................25
SECTION 2.01 The Loans...................................................25
(A) REVOLVING LOANS......................................25
(B) TERM LOANS...........................................26
(C) SWINGLINE LOANS......................................26
(D) ADDITIONAL TERM LOANS................................26
SECTION 2.02 Borrowing Procedure - Revolving Loans and Term Loans........26
(A) NOTICE TO THE AGENT..................................26
(B) NOTICE TO THE LENDERS................................27
(C) NON-RECEIPT OF FUNDS.................................27
SECTION 2.03 Borrowing Procedure--Swingline Loans........................27
(A) NOTICE TO THE AGENT..................................27
(b) PARTICIPATIONS IN SWINGLINE LOANS:...................28
SECTION 2.04 Lending Offices.............................................29
SECTION 2.05 Evidence of Indebtedness....................................29
SECTION 2.06 Minimum Amounts.............................................30
SECTION 2.07 Required Notice.............................................30
ARTICLE III THE LETTERS OF CREDIT..........................................30
SECTION 3.01 The Letter of Credit Subfacility............................30
(A) LETTERS OF CREDIT....................................30
(B) CONDITIONS TO ISSUANCE...............................31
SECTION 3.02 Issuance, Amendment and Renewal of Letters of Credit........32
(A) NOTICE TO ISSUING LENDER OF ISSUANCE REQUEST.........32
(B) ISSUANCE OF LETTERS OF CREDIT........................32
(C) NOTICE TO ISSUING LENDER OF AMENDMENT REQUEST........32
(D) NOTICE TO ISSUING LENDER OF RENEWAL REQUEST..........33
(E) EXPIRY OF LETTERS OF CREDIT..........................33
(F) CONFLICTS WITH L/C-RELATED DOCUMENTS.................33
(G) DELIVERY OF COPIES OF LETTERS OF CREDIT..............33
(H) NOTICES TO LENDERS...................................33
SECTION 3.03 Participations, Drawings and Reimbursements.................34
(A) PARTICIPATIONS OF LENDERS IN ADDITIONAL LETTERS
OF CREDIT..........................................34
(B) DRAWING AND REIMBURSEMENT............................34
(C) FUNDING BY LENDERS...................................34
i.
PAGE
(D) L/C UNREIMBURSED DRAWINGS............................35
(E) OBLIGATION OF LENDERS ABSOLUTE.......................35
SECTION 3.04 Repayment of Participations.................................35
SECTION 3.05 Role of the Issuing Lender..................................35
(A) NO RESPONSIBILITY OF ISSUING LENDER..................35
(B) NO LIABILITY OF AGENT/IB-RELATED PERSONS.............36
SECTION 3.06 Obligations of Borrower Absolute............................36
SECTION 3.07 Cash Collateral Pledge......................................37
SECTION 3.08 Letter of Credit Fees.......................................37
(A) CERTAIN LETTER OF CREDIT FEES........................37
(B) CERTAIN ADDITIONAL FEES AND CHARGES..................38
(C) FEES NONREFUNDABLE...................................38
SECTION 3.09 Applicability of ISP98......................................38
ARTICLE IV INTEREST AND FEES; CONVERSION OR CONTINUATION...................38
SECTION 4.01 Interest....................................................38
(A) INTEREST RATE........................................38
(B) INTEREST PERIODS.....................................39
(C) INTEREST PAYMENT DATES...............................39
(D) NOTICE TO THE BORROWER AND THE LENDERS...............40
SECTION 4.02 Default Rate of Interest....................................40
SECTION 4.03 Fees........................................................40
(A) COMMITMENT FEE.......................................40
(B) UPFRONT FEE..........................................40
(C) ANNUAL AGENCY FEE....................................40
(D) FEES NONREFUNDABLE...................................40
SECTION 4.04 Computations................................................40
SECTION 4.05 Conversion or Continuation..................................41
(A) ELECTION.............................................41
(B) AUTOMATIC CONVERSION.................................41
(C) NOTICE TO THE AGENT..................................41
(D) NOTICE TO THE LENDERS................................41
SECTION 4.06 Highest Lawful Rate.........................................42
ARTICLE V REDUCTION OF COMMITMENTS; REPAYMENT; PREPAYMENT..................42
SECTION 5.01 Reduction or Termination of the Commitments.................42
(A) OPTIONAL REDUCTION OR TERMINATION....................42
(B) MANDATORY TERMINATION................................42
(C) OTHER MANDATORY REDUCTIONS...........................42
(D) NOTICE...............................................43
(E) ADJUSTMENT OF COMMITMENT FEE; NO REINSTATEMENT.......43
SECTION 5.02 Repayment of the Loans......................................43
(A) REVOLVING LOANS......................................43
(B) TERM LOANS...........................................43
(C) SWINGLINE LOANS......................................43
ii.
PAGE
SECTION 5.03 Prepayments.................................................43
(A) OPTIONAL PREPAYMENTS.................................43
(B) MANDATORY PREPAYMENTS................................44
(C) ORDER OF APPLICATION.................................45
(D) NOTICE; APPLICATION..................................46
ARTICLE VI YIELD PROTECTION AND ILLEGALITY.................................46
SECTION 6.01 Inability to Determine Rates................................46
SECTION 6.02 Funding Losses..............................................47
SECTION 6.03 Regulatory Changes..........................................47
(A) INCREASED COSTS......................................47
(B) CAPITAL REQUIREMENTS.................................47
(C) REQUESTS.............................................48
SECTION 6.04 Illegality..................................................48
SECTION 6.05 Funding Assumptions.........................................48
SECTION 6.06 Obligation to Mitigate......................................48
SECTION 6.07 Substitution of Lenders.....................................48
ARTICLE VII PAYMENTS.......................................................49
SECTION 7.01 Pro Rata Treatment..........................................49
SECTION 7.02 Payments....................................................49
(A) PAYMENTS.............................................49
(B) APPLICATION..........................................49
(C) EXTENSION............................................49
SECTION 7.03 Taxes.......................................................50
(A) NO REDUCTION OF PAYMENTS.............................50
(B) DEDUCTION OR WITHHOLDING; TAX RECEIPTS...............50
(C) INDEMNITY............................................50
(D) FORMS................................................50
(E) MITIGATION...........................................51
SECTION 7.04 Non-Receipt of Funds........................................51
SECTION 7.05 Sharing of Payments.........................................51
ARTICLE VIII CONDITIONS PRECEDENT..........................................52
SECTION 8.01 Conditions Precedent to the Initial Credit Extensions.......52
(A) FEES AND EXPENSES....................................52
(B) LOAN DOCUMENTS.......................................52
(C) DOCUMENTS AND ACTIONS RELATING TO COLLATERAL.........52
(D) ADDITIONAL CLOSING DOCUMENTS AND ACTIONS.............53
(E) CORPORATE DOCUMENTS..................................54
(F) LEGAL OPINIONS.......................................54
(G) SENIOR SECURED NOTE DOCUMENTS........................55
(H) PRO-FORMA DEBT TO EBITDA RATIO.......................55
SECTION 8.02 Conditions Precedent to All Credit Extensions...............55
(A) NOTICE...............................................55
iii.
PAGE
(B) MATERIAL ADVERSE EFFECT..............................55
(C) REPRESENTATIONS AND WARRANTIES; NO DEFAULT...........55
(D) ADDITIONAL DOCUMENTS.................................56
ARTICLE IX REPRESENTATIONS AND WARRANTIES..................................56
SECTION 9.01 Representations and Warranties..............................56
(A) ORGANIZATION AND POWERS..............................56
(B) AUTHORIZATION; NO CONFLICT...........................56
(C) BINDING OBLIGATION...................................56
(D) CONSENTS.............................................56
(E) NO DEFAULTS..........................................57
(F) TITLE TO PROPERTIES; LIENS; USE......................57
(G) LITIGATION...........................................57
(H) COMPLIANCE WITH ENVIRONMENTAL LAWS...................57
(I) GOVERNMENTAL REGULATION..............................57
(J) ERISA................................................57
(K) SUBSIDIARIES.........................................58
(L) MARGIN REGULATIONS...................................58
(M) TAXES................................................58
(N) PATENTS AND OTHER RIGHTS.............................58
(O) INSURANCE............................................59
(P) FINANCIAL STATEMENTS.................................59
(Q) LIABILITIES..........................................59
(R) LABOR DISPUTES, ETC..................................59
(S) SOLVENCY.............................................59
(T) DISCLOSURE...........................................59
ARTICLE X COVENANTS........................................................59
SECTION 10.01 Reporting Covenants.........................................59
(A) FINANCIAL STATEMENTS AND OTHER REPORTS...............60
(B) ADDITIONAL INFORMATION...............................62
SECTION 10.02 Financial Covenants.........................................63
(A) LEVERAGE RATIO.......................................63
(B) MINIMUM CONSOLIDATED TANGIBLE NET WORTH..............63
(C) INTEREST COVERAGE RATIO..............................63
(D) FIXED CHARGE COVERAGE RATIO..........................64
(E) CAPITAL EXPENDITURES.................................64
SECTION 10.03 Additional Affirmative Covenants............................65
(A) PRESERVATION OF EXISTENCE, ETC.......................65
(B) PAYMENT OF OBLIGATIONS...............................65
(C) MAINTENANCE OF INSURANCE.............................65
(D) KEEPING OF RECORDS AND BOOKS OF ACCOUNT..............66
(E) INSPECTION RIGHTS....................................66
(F) COMPLIANCE WITH LAWS, ETC............................66
(G) MAINTENANCE OF PROPERTIES, ETC.......................66
iv.
PAGE
(H) LICENSES.............................................66
(I) ACTION UNDER ENVIRONMENTAL LAWS......................66
(J) USE OF PROCEEDS......................................67
(K) ADDITIONAL SUBSIDIARIES..............................67
(L) PROCEEDS OF EVENTS OF LOSS...........................67
(M) FURTHER ASSURANCES AND ADDITIONAL ACTS...............67
SECTION 10.04 Negative Covenants..........................................67
(A) INDEBTEDNESS.........................................67
(B) LIENS; NEGATIVE PLEDGES..............................69
(C) CHANGE IN NATURE OF BUSINESS.........................69
(D) RESTRICTIONS ON FUNDAMENTAL CHANGES..................69
(E) SALES OF ASSETS......................................69
(F) LOANS AND INVESTMENTS................................70
(G) SALES AND LEASEBACKS.................................71
(H) DISTRIBUTIONS. (i)..................................71
(I) AMENDMENTS OF CERTAIN DOCUMENTS......................72
(J) REDEMPTION OF SUBORDINATED DEBT......................72
(K) TRANSACTIONS WITH RELATED PARTIES....................72
(L) HAZARDOUS SUBSTANCES.................................73
(M) ACCOUNTING CHANGES...................................73
(N) FOREIGN SUBSIDIARIES.................................73
ARTICLE XI EVENTS OF DEFAULT...............................................73
SECTION 11.01 Events of Default...........................................73
(A) PAYMENTS.............................................73
(B) REPRESENTATIONS AND WARRANTIES.......................73
(C) FAILURE BY BORROWER TO PERFORM CERTAIN COVENANTS.....73
(D) FAILURE BY BORROWER TO PERFORM OTHER COVENANTS.......73
(E) INSOLVENCY; VOLUNTARY PROCEEDINGS....................74
(F) INVOLUNTARY PROCEEDINGS..............................74
(G) DEFAULT UNDER OTHER INDEBTEDNESS.....................74
(H) JUDGMENTS............................................75
(I) ERISA................................................75
(J) DISSOLUTION, ETC.....................................75
(K) MATERIAL ADVERSE EFFECT..............................75
(L) CHANGE IN OWNERSHIP OR CONTROL.......................75
(M) FAILURE BY GUARANTOR TO PERFORM COVENANTS;
INVALIDITY OF GUARANTY.............................75
(N) ENVIRONMENTAL INDEMNITY..............................76
(O) SUBORDINATION PROVISIONS.............................76
(P) COLLATERAL DOCUMENTS.................................76
SECTION 11.02 Effect of Event of Default..................................76
v.
PAGE
ARTICLE XII THE AGENT 77
SECTION 12.01 Authorization and Action....................................77
SECTION 12.02 Limitation on Liability of Agent; Notices; Closing..........77
(A) LIMITATION ON LIABILITY OF AGENT AND ISSUING
LENDER.............................................78
(B) NOTICES..............................................78
(C) CLOSING..............................................78
SECTION 12.03 Agent and Affiliates........................................79
SECTION 12.04 Notice of Defaults..........................................79
SECTION 12.05 Non-Reliance on Agent and Issuing Lender....................79
SECTION 12.06 Indemnification.............................................79
SECTION 12.07 Delegation of Duties........................................80
SECTION 12.08 Successor Agent.............................................80
SECTION 12.09 Collateral Matters..........................................80
(A) AUTHORIZATION........................................80
(B) COLLATERAL RELEASES..................................81
ARTICLE XIII MISCELLANEOUS.................................................81
SECTION 13.01 Amendments and Waivers......................................81
SECTION 13.02 Notices.....................................................82
(A) NOTICES..............................................82
(B) FACSIMILE AND TELEPHONIC NOTICE......................83
(C) ELECTRONIC MAIL......................................83
SECTION 13.03 No Waiver; Cumulative Remedies..............................83
SECTION 13.04 Costs and Expenses; Indemnification.........................83
(A) COSTS AND EXPENSES...................................83
(B) INDEMNIFICATION......................................84
(C) OTHER CHARGES........................................84
SECTION 13.05 Right of Set-Off............................................85
SECTION 13.06 Survival....................................................85
SECTION 13.07 Obligations Several.........................................85
SECTION 13.08 Benefits of Agreement.......................................85
SECTION 13.09 Binding Effect; Assignment..................................86
(A) BINDING EFFECT.......................................86
(B) ASSIGNMENT...........................................86
SECTION 13.10 Governing Law...............................................87
SECTION 13.11 Submission to Jurisdiction..................................87
(A) NO LIMITATION........................................88
vi.
PAGE
SECTION 13.12 Waiver of Jury Trial........................................88
SECTION 13.13 Limitation on Liability.....................................88
SECTION 13.14 Confidentiality.............................................88
SECTION 13.15 Entire Agreement............................................89
SECTION 13.16 Payments Set Aside..........................................89
SECTION 13.17 Severability................................................90
SECTION 13.18 Counterparts................................................90
vii.
ANNEXES
Annex 1 Pricing Grid
SCHEDULES
Schedule 1 Commitments and Pro Rata Shares
Schedule 2 Lending Offices; Addresses for Notices
Schedule 3 Existing Indebtedness
Schedule 4 Existing Liens
Schedule 5 Litigation
Schedule 6 Subsidiaries
Schedule 7 Specified Assets
Schedule 8 Description of Hewitt Ranch Property
Schedule 9 Affiliate Transactions
EXHIBITS
Exhibit A Form of Borrowing Base Certificate
Exhibit B Form of Compliance Certificate
Exhibit C Form of Deed of Trust
Exhibit D Form of Environmental Indemnity
Exhibit E-1 Form of Guaranty
Exhibit E-2 Form of Guaranty of Edna Valley Vineyard
Exhibit F Form of Patent and Trademark Security Agreement
Exhibit G Form of Revolving Note
Exhibit H-1 Form of Security Agreement
Exhibit H-2 Form of Security Agreement of Edna Valley Vineyard
Exhibit I Form of Swingline Note
Exhibit J Form of Term Note
Exhibit K Form of Notice of Borrowing
Exhibit L-1 Form of Opinion of Counsel to the Borrower and the
Guarantor
Exhibit L-2 Form of Opinion of Special Washington Counsel to the
Collateral Agent
Exhibit M Form of Assignment and Acceptance
Exhibit N Form of Update Certificate
Exhibit O Form of Intercreditor and Collateral Agency Agreement
viii.
CREDIT AGREEMENT
THIS CREDIT AGREEMENT (this "Agreement"), dated as of April 19
2002, is made among The Chalone Wine Group, Ltd., a California corporation (the
"Borrower"), the financial institutions listed on the signature pages of this
Agreement under the heading "LENDERS" (each a "Lender" and, collectively, the
"Lenders"), Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., "Rabobank
International", New York Branch ("Rabobank") as letter of credit issuing bank
(in such capacity, the "Issuing Lender"), as swingline lender (in such capacity,
the "Swingline Lender") and as administrative agent for the Lenders hereunder
(in such capacity, the "Agent").
The Borrower has requested that the Lenders, and the Lenders
have agreed to, make certain credit facilities (including a letter of credit
subfacility) available to the Borrower, upon the terms and subject to the
conditions set forth in this Agreement.
Accordingly, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.01 CERTAIN DEFINED TERMS. As used in this Agreement
(including in the recitals hereof), the following terms shall have the following
meanings:
"ACQUISITION" means any transaction or series of related
transactions for the purpose of, or resulting, directly or indirectly, in (a)
the acquisition of all or substantially all of the assets of a Person, or any
line or segment of business or division of a Person, (b) the acquisition of in
excess of 50% of the capital stock, partnership interests, membership interests
or equity of any Person, or otherwise causing any Person to become a Subsidiary,
or (c) a merger or consolidation or any other combination with another Person
(other than a Person that is a Subsidiary) provided that (i) the Borrower or a
Subsidiary is the surviving entity or (ii) after giving effect to such merger or
consolidation, such other Person has become a Subsidiary of the Borrower.
"AFFECTED LENDER" has the meaning set forth in Section 6.07.
"AFFILIATE" means any Person which, directly or indirectly,
controls, is controlled by or is under common control with another Person. For
purposes of the foregoing, "control," "controlled by" and "under common control
with" with respect to any Person shall mean the possession, directly or
indirectly, of the power (i) to vote 10% or more of the securities having
ordinary voting power of the election of directors of such Person, or (ii) to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
"AGENT" has the meaning set forth in the introduction to this
Agreement.
1.
"AGENT/IB-RELATED PERSONS" means Rabobank as Agent, Swingline
Lender and Issuing Lender, any successor Agent arising under Section 12.08,
together with their respective Affiliates, and the officers, directors,
employees, agents and attorneys-in-fact of such Persons and Affiliates.
"AGENT'S ACCOUNT" means the account of the Agent set forth on
Schedule 2 or such other account as the Agent from time to time shall designate
in a written notice to the Borrower and the Lenders.
"APPLICABLE FEE AMOUNT" means with respect to the commitment
fee and letter of credit fee payable hereunder, the amount set forth opposite
the indicated Level below the heading "Commitment Fee" and "Letter of Credit
Fee," respectively, in the pricing grid set forth on Annex I in accordance with
the parameters for calculations of such amount also set forth on Annex I.
"APPLICABLE MARGIN" means (i) with respect to Base Rate Loans,
the amount set forth opposite the indicated Level below the heading "Revolving
Loan Base Rate Spread" or "Term Loan Base Rate Spread", as applicable, in the
pricing grid set forth on Annex I in accordance with the parameters for
calculations of such amounts also set forth on Annex I, and (ii) with respect to
Eurodollar Rate Loans, the amount set forth opposite the indicated Level below
the heading "Revolving Loan Eurodollar Rate Spread" or "Term Loan Eurodollar
Rate Spread", as applicable, in the pricing grid set forth on Annex I in
accordance with the parameters for calculations of such amounts also set forth
on Annex I.
"ASSIGNMENT AND ACCEPTANCE" has the meaning set forth in
Section 12.02(a).
"ATTRIBUTABLE INDEBTEDNESS" means, on any date, (a) in respect
of any Capital Lease of any Person, the capitalized amount thereof that would
appear on a balance sheet of such Person prepared as of such date in accordance
with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized
amount of the remaining lease payments under the relevant lease that would
appear on a balance sheet of such Person prepared as of such date in accordance
with GAAP if such lease were accounted for as a Capital Lease.
"BANKRUPTCY CODE" means Title 11 of the United States Code
entitled "Bankruptcy."
"BASE RATE" means for any day the higher of: (a) 0.50% per
annum above the latest Federal Funds Rate; and (b) the rate of interest in
effect for such day as publicly announced from time to time by Rabobank as its
reference rate. (The reference rate is a rate set by Rabobank based upon various
factors including Rabobank's costs and desired return, general economic
conditions and other factors, and is used as a reference point for pricing some
loans, which may be priced at, above, or below such announced rate.) Any change
in the reference rate announced by Rabobank shall take effect at the opening of
business on the day specified in the public announcement of such change. Each
change in the interest rate on the Loans or other Obligations bearing interest
at the Base Rate based on a change in the Base Rate shall be effective as of the
effective date of such change in the Base Rate.
2.
"BASE RATE LOAN" means a Revolving Loan, a Term Loan or an L/C
Advance bearing interest based on the Base Rate.
"BORROWER" has the meaning set forth in the introduction to
this Agreement.
"BORROWER'S ACCOUNT" means the account of the Borrower set
forth on Schedule 2, or such other account as the Borrower from time to time
shall designate in a written notice to the Agent.
"BORROWING" means a borrowing consisting of a Revolving Loan,
a Swingline Loan or a Term Loan, or of simultaneous Revolving Loans, Swingline
Loans or Term Loans, as the case may be, made at any one time by the Borrower
from the Lenders pursuant to Article II or III.
"BORROWING BASE" means, in respect of the Borrower at any
time, the aggregate sum of (i) in the case of Eligible Inventory consisting of
bulk wine to be sold in the bulk wine market, 60% of (A) fair market value (as
reported in the most recently published quarterly Turrentine Collateral Value
Report or, if not available, an equivalent compilation selected in the Agent's
reasonable discretion) MINUS (B) Grower Payables, if any, incurred in connection
with such bulk wine, PLUS (ii) in the case of Eligible Inventory consisting of
other bulk wine, 70% of (A) book value at the date of determination MINUS (B)
Grower Payables, if any, incurred in connection with such bulk wine, PLUS (iii)
in the case of Eligible Inventory consisting of cased wine or separately bottled
wine, 65% of the posted F.O.B. selling price at the date of determination for
the immediately preceding calendar month, PLUS (iv) in the case of Eligible
Inventory consisting of Wine Bottling Inventory, 60% of book value at the date
of determination (in the case of each of the preceding clauses (i), (ii), (iii)
and (iv), net of depletion allowances), PLUS (v) 85% of Eligible Receivables at
such time.
"BORROWING BASE CERTIFICATE" means a certificate of a
Responsible Officer of the Borrower, in substantially the form of Exhibit A,
with such changes thereto as the Agent or any Lender may from time to time
reasonably request.
"BUSINESS DAY" means a day other than a Saturday, a Sunday, or
a day on which commercial banks in New York City, New York, are authorized to
close and, if the applicable day relates to any Eurodollar Rate Loan, means a
Eurodollar Business Day.
"CANOE RIDGE INTERCOMPANY LOAN AMOUNT" means the sum of (i)
$7,000,000 PLUS (ii) on each anniversary of the Closing Date, 10% of the Canoe
Ridge Intercompany Loan Amount in effect immediately prior to such anniversary.
"CAPITAL LEASE" means, for any Person, any lease of property
(whether real, personal or mixed) which, in accordance with GAAP, would, at the
time a determination is made, be required to be recorded as a capital lease in
respect of which such Person is liable as lessee.
"CHANGE OF CONTROL" means (a) any "person" (as such term is
used in subsections 13(d) and 14(d) of the Exchange Act) or group of persons on
or after the Closing Date other than members of the Board of Directors of the
Borrower and their "affiliates" (as such term is used in
3.
Rule 405 of the Securities Act of 1933), is or becomes the "beneficial owner"
(as defined in Rule 13d-3 under said Act), directly or indirectly, of securities
of the Company representing 51% or more of the combined voting power of the
Borrower's then-outstanding voting securities, or (b) the existing directors for
any reason cease to constitute a majority of the Borrower's board of directors.
"Existing directors" means (x) individuals constituting the Borrower's board of
directors on the Closing Date, and (y) any subsequent director whose election by
the board of directors or nomination for election by the Borrower's shareholders
was approved by a vote of at least a majority of the directors then in office,
which directors either were directors on the Closing Date or whose election or
nomination for election was previously so approved.
"CLOSING DATE" means the date on which all conditions
precedent set forth in Section 8.01, and in Section 8.02 with respect to any
Credit Extensions to be made on the Closing Date, are satisfied or waived by all
the Lenders (or, in the case of Section 8.01(a), waived by the Person entitled
to receive such payment).
"COLLATERAL" means the property described in the Collateral
Documents, and all other property now existing or hereafter acquired which may
at any time be or become subject to a Lien in favor of the Collateral Agent, the
Agent or the Lenders pursuant to the Collateral Documents or otherwise, securing
the payment and performance of the Obligations.
"COLLATERAL AGENT" means Rabobank in its capacity as
collateral agent for the Lenders and the holders of the Senior Secured Notes
pursuant to the Intercreditor and Collateral Agency Agreement, and any successor
collateral agent thereunder.
"COLLATERAL DOCUMENTS" means the Deeds of Trust, the Security
Agreement, the Patent and Trademark Security Agreement, any other agreement
pursuant to which the Borrower, the Guarantors or any other Person provides a
Lien on its assets in favor of the Lenders, or in favor of the Collateral Agent
or the Agent for the benefit of the Lenders, or in favor of the Collateral Agent
for the benefit of the Agent, the Lenders and the Senior Noteholders, and all
financing statements, fixture filings, patent, trademark and copyright filings,
assignments, acknowledgments and other filings, documents and agreements made or
delivered pursuant thereto.
"COMMITMENT" means, for each Lender, the sum of its Term
Commitment and its Revolving Commitment.
"COMPLIANCE CERTIFICATE" means a certificate of a Responsible
Officer of the Borrower, in substantially the form of Exhibit B, with such
changes thereto as the Agent or any Lender may from time to time reasonably
request.
"CONSOLIDATED EBIT" means, for any period, Consolidated Net
Income (computed without giving effect to any gains or losses from dispositions
of assets and other extraordinary items) PLUS Consolidated Interest Expense PLUS
income tax expense, in each case, which were deducted in determining
Consolidated Net Income of the Borrower and its Subsidiaries on a consolidated
basis as determined in accordance with GAAP.
"CONSOLIDATED EBITDA" means, for any period, Consolidated Net
Income (computed without giving effect to any gains or losses from dispositions
of assets and other
4.
extraordinary items) PLUS Consolidated Interest Expense PLUS income tax expense
PLUS depreciation expense, amortization expense and other non-cash expenses, in
each case, which were deducted in determining Consolidated Net Income of the
Borrower and its Subsidiaries on a consolidated basis as determined in
accordance with GAAP.
"CONSOLIDATED INDEBTEDNESS" means, as of any date of
determination, (a) the total Indebtedness of the Borrower and its Subsidiaries
on a consolidated basis MINUS (b) accounts payable to trade creditors for goods
and services and current operating liabilities (not the result of the borrowing
of money) incurred in the ordinary course of the Borrower's or the Subsidiaries'
business in accordance with customary terms and paid within the specified time
(unless contested in good faith by appropriate proceedings and reserved for in
accordance with GAAP) MINUS (c) until such time as the Indebtedness owing as of
the date hereof by the Borrower to the estate of Richard Graff is repaid in
full, Indebtedness owing by the Borrower to the estate of Richard Graff in a
principal amount not to exceed $1,000,000.
"CONSOLIDATED INTEREST EXPENSE" means, for any period,
interest expense (including that attributable to Capital Leases) of the Borrower
and its Subsidiaries on a consolidated basis, including all commissions,
discounts and other fees and charges owed with respect to standby letters of
credit, as determined in accordance with GAAP.
"CONSOLIDATED NET INCOME" means, for any period, the net
income of the Borrower and its Subsidiaries on a consolidated basis for such
period taken as a single accounting period, as determined in accordance with
GAAP.
"CONSOLIDATED RENT EXPENSE" means, for any period, operating
lease expense of the Borrower and its Subsidiaries on a consolidated basis, as
determined in accordance with GAAP.
"CONSOLIDATED TANGIBLE NET WORTH" means, as of any date of
determination, Consolidated Total Assets PLUS Subordinated Debt MINUS
Consolidated Total Liabilities; PROVIDED, HOWEVER, that there shall be excluded
from Consolidated Total Assets all assets which would be classified as
intangible assets in accordance with GAAP, including goodwill, organizational
expense, research and development expense, patent applications, patents,
trademarks, trade names, brands, copyrights, trade secrets, customer lists,
licenses, franchises and covenants not to compete.
"CONSOLIDATED TOTAL ASSETS" means, as of any date of
determination, the total assets of the Borrower and its Subsidiaries on a
consolidated basis, as determined in accordance with GAAP.
"CONSOLIDATED TOTAL LIABILITIES" means, as of any date of
determination, the total liabilities of the Borrower and its Subsidiaries on a
consolidated basis, as determined in accordance with GAAP.
"CREDIT EXTENSION" means each of (a) the making of any Term
Loans, Revolving Loans or Swingline Loans hereunder; (b) the continuation of any
Eurodollar Rate Loan or conversion of any Loan pursuant to Section 4.05; (c) the
issuance of any Letters of Credit hereunder; and (d) the amendment or renewal of
any Letters of Credit hereunder.
5.
"DEEDS OF TRUST" means each deed of trust or mortgage entered
into by the Borrower, any Guarantor or any other Person, as trustor or
mortgagor, for the benefit of the Collateral Agent or the Agent, as beneficiary
or mortgagee on behalf of the Lenders and the Senior Noteholders, in
substantially the form of Exhibit C.
"DEFAULT" means an Event of Default or an event or condition
which with notice or lapse of time or both would constitute an Event of Default.
"DOLLARS" and the sign "$" each means lawful money of the
United States.
"EDNA VALLEY INTERCOMPANY LOAN AMOUNT" means the sum of (i)
$20,000,000 PLUS (ii) on each anniversary of the Closing Date, 10% of the Edna
Valley Intercompany Loan Amount in effect immediately prior to such anniversary.
"EFFECTIVE AMOUNT" means (i) with respect to any Revolving
Loans, Swingline Loans and Term Loans on any date, the aggregate outstanding
principal amount thereof after giving effect to any Borrowings and prepayments
or repayments of Term Loans, Revolving Loans and Swingline Loans, as the case
may be, occurring on such date; and (ii) with respect to any outstanding L/C
Obligations on any date, the amount of such L/C Obligations on such date after
giving effect to any issuances of Letters of Credit occurring on such date and
any other changes in the aggregate amount of the L/C Obligations as of such
date, including as a result of any reimbursements of outstanding unpaid drawings
under any Letters of Credit or any reductions in the maximum amount available
for drawing under Letters of Credit taking effect on such date; PROVIDED that
for purposes of subsection 5.03(b), the Effective Amount shall be determined
without giving effect to any mandatory prepayments to be made under subsection
5.03(b).
"ELIGIBLE ASSIGNEE" means (i) a commercial bank organized
under the laws of the United States, or any state thereof, and having a combined
capital and surplus of at least $100,000,000; (ii) a commercial bank organized
under the laws of any other country which is a member of the OECD, or a
political subdivision of any such country, and having a combined capital and
surplus of at least $100,000,000, PROVIDED that such bank is acting through a
branch or agency located in the United States and licensed by the United States
or any state thereof; (iii) a Person that is primarily engaged in the business
of commercial banking and that is (A) a Subsidiary of a Lender, (B) a Subsidiary
of a Person of which a Lender is a Subsidiary, or (C) a Person of which a Lender
is a Subsidiary, or (iv) any other Person (other than an individual) which is an
"accredited investor" (as defined in Regulation D under the Securities Exchange
Act of 1934) which extends credit or buys loans as one of its businesses,
including insurance companies, mutual funds and lease financing companies.
"ELIGIBLE INVENTORY" means, in respect of the Borrower at any
time, the aggregate amount of the Borrower's and each Subsidiary Guarantor's
Inventory consisting of bulk wine, cased wine, separately bottled wine, Wine
Bottling Inventory, which is of marketable quality and held for sale or use in
the ordinary and usual course of business, net of applicable allowances and
reserves (including allowances or reserves for shrinkage or obsolescence),
excluding the following:
6.
(i) Inventory (other than bulk wine and Wine Bottling
Inventory) consisting of raw materials, supplies or work in process;
(ii) Inventory which is not owned by the Borrower or a
Subsidiary Guarantor free and clear of all Liens and rights of others (other
than the Liens in favor of the Agent on behalf of the Lenders, Growers' Liens or
Production Liens);
(iii) Inventory in which the Agent on behalf of the Lenders
shall not have a valid and perfected first priority Lien, other than Growers'
Liens or Production Liens;
(iv) Inventory which is located in any location other than
California, Washington, the locations listed on Schedule 1 to the Security
Agreement, or any other locations agreed to in writing after the Closing Date by
the Agent;
(v) Inventory which is not in the direct possession of the
Borrower or a Subsidiary Guarantor at one of the locations set forth in Part 1
of Schedule 1 to the Security Agreement or at a location set forth in a notice
from the Borrower to the Agent pursuant to Section 5(e) of the Security
Agreement;
(vi) Inventory on lease or consignment or subject to
warehousing arrangements, except for Inventory subject to warehousing
arrangements (1) in form and substance acceptable to the Agent and approved in
writing by the Agent and (2) which contain, or as to which the Agent has
received, a subordination and/or waiver by the warehouseman in form and
substance satisfactory to the Agent;
(vii) Inventory which is used or intended to be used in
research and development;
(viii) Inventory which is obsolete, unmerchantable, spoiled,
damaged or unfit for sale or further processing;
(ix) Inventory which is packaging, shipping, or advertising
materials (other than the Wine Bottling Inventory); and
(x) Inventory which is, in the exercise of the Agent's
reasonable credit judgment, exercised in good faith, unacceptable due to age,
type, category or quantity or is otherwise ineligible.
Any Inventory which is at any time Eligible Inventory, but
which subsequently fails to meet any of the foregoing requirements, shall
forthwith cease to be Eligible Inventory until such time as such Inventory shall
meet all of the foregoing requirements.
"ELIGIBLE RECEIVABLE DEBTOR" means, for purposes of clause
(xi) of the definition of "Eligible Receivables," a Receivable Debtor for which
the Borrower has provided or caused to be provided to the Agent financial
statements of such Receivable Debtor which are satisfactory in form and
substance to the Agent and the Majority Lenders and who the Agent and the
Majority Lenders deem creditworthy in their reasonable credit judgment.
7.
"ELIGIBLE RECEIVABLES" means, in respect of the Borrower at
any time, the aggregate amount of the Borrower's and each Subsidiary Guarantor's
Receivables, payable in cash in Dollars, net of applicable allowances, reserves,
discounts, returns, credits or offsets (including allowances or reserves for
doubtful accounts), excluding the following:
(i) Receivables for which the Borrower's or a Subsidiary
Guarantor's right to receive payment has not been fully earned by performance or
is contingent upon the fulfillment of any condition whatsoever or which
otherwise do not arise from a bona fide completed transaction;
(ii) Receivables against which there are asserted any
defenses, counterclaims, discounts (other than normal trade discounts) or
offsets of any nature, whether well-founded or otherwise (but only to the extent
of such asserted defenses, counterclaims, discounts or offsets) to the extent
not already deducted as an allowance for doubtful accounts;
(iii) Receivables that do not comply in all material
respects with all applicable legal requirements, including all laws, rules,
regulations and orders of any Governmental Authority;
(iv) Receivables which represent a prepayment or progress
payment or arising out of the placement of goods on consignment, guaranteed sale
or other arrangement by reason of which the payment by the Receivable Debtor may
be conditional or contingent;
(v) Receivables which are not owned by the Borrower or a
Subsidiary Guarantor free and clear of all Liens and rights of others (other
than the Liens in favor of the Collateral Agent or the Agent on behalf of
Lenders, Growers' Liens or Production Liens);
(vi) Receivables in which the Collateral Agent or the
Agent, on behalf of the Lenders, shall not have a valid and perfected
first-priority Lien (other than Growers' Liens or Production Liens);
(vii) Receivables owing (A) by the United States or any
department, agency or instrumentality thereof or (B) by a State or any
department, agency, instrumentality or political subdivision thereof (other than
State owned stores or other equivalent alcohol beverage control Receivable
Debtors to the extent that there are no statutory, regulatory or other
governmental restrictions on the grant of security interests in Receivables due
from such Receivable Debtors), unless, in the case of Receivables described in
sub-clause (A), the Agent has agreed to the contrary in writing and the Borrower
has complied with the Federal Assignment of Claims Act with respect to such
Receivables;
(viii)Receivables owing by any Receivable Debtor who is not a
resident of or located in the United States or the Dominion of Canada;
(ix) Receivables not paid in full within 90 days from the
date of invoice (to the extent not already deducted as an allowance for doubtful
accounts;
8.
(x) Receivables owing by any Receivable Debtor who has
failed to make full payment within 90 days from the date of invoice on more than
20% of the aggregate amount of Receivables owing to the Borrower and the
Subsidiary Guarantors by such Receivable Debtor;
(xi) that portion of Receivables owing by any single
Receivable Debtor (other than an Eligible Receivable Debtor) which exceeds 20%
of the aggregate amount of Eligible Receivables owing to the Borrower and the
Subsidiary Guarantors by all Receivable Debtors (to the extent not already
deducted as an allowance for doubtful accounts);
(xii) Receivables which constitute the proceeds of Inventory
which Inventory is at the same time included in the Borrowing Base;
(xiii)Receivables owing by any Receivable Debtor who is the
subject of an Insolvency Proceeding;
(xiv) Receivables owing by any Affiliate of the Borrower or of
a Subsidiary Guarantor; and
(xv) Receivables with respect to which the Agent, in its
reasonable discretion, deems the creditworthiness or financial condition of the
Receivable Debtor to be unsatisfactory or the prospect of payment or performance
to be impaired, and other Receivables which, in the exercise of the Agent's good
faith reasonable credit judgment, are otherwise ineligible.
Any Receivable which is at any time an Eligible Receivable,
but which subsequently fails to meet any of the foregoing eligibility
requirements, shall forthwith cease to be an Eligible Receivable until such time
as such Receivable shall meet all of the foregoing requirements.
"ENVIRONMENTAL INDEMNITY" means the Environmental Indemnity of
the Borrower and the Subsidiary Guarantors, in substantially the form of Exhibit
D.
"ENVIRONMENTAL LAWS" means all federal, state or local laws,
statutes, common law duties, rules, regulations, ordinances and codes, together
with all administrative orders, directives, requests, licenses, authorizations
and permits of, and agreements with (including consent decrees), any
Governmental Authorities, in each case relating to or imposing liability or
standards of conduct concerning public health, safety and environmental
protection matters, including the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Clean Air Act, the Federal Water
Pollution Control Act of 1972, the Solid Waste Disposal Act, the Federal
Resource Conservation and Recovery Act, the Toxic Substances Control Act, the
Emergency Planning and Community Right-to-Know Act, the California Hazardous
Waste Control Law, the California Solid Waste Management, Resource Recovery and
Recycling Act, the California Water Code and the California Health and Safety
Code.
"ERISA" means the Employee Retirement Income Security Act of
1974, including (unless the context otherwise requires) any rules or regulations
promulgated thereunder.
9.
"ERISA AFFILIATE" means any trade or business (whether or not
incorporated) which is under common control with the Borrower or any Guarantor
within the meaning of Section 4001(a)(14) of ERISA and Sections 414(b), (c) and
(m) of the Internal Revenue Code.
"EURODOLLAR BUSINESS DAY" means a Business Day on which
dealings in Dollar deposits are carried on in the interbank eurodollar market
where the eurodollar funding operations of Rabobank are customarily conducted.
"EURODOLLAR RATE" means for each Interest Period for each
Eurodollar Rate Loan the rate per annum (rounded upward, if necessary, to the
nearest 1/100 of 1%) determined by the Agent pursuant to the following formula:
Eurodollar Rate = Interbank Rate
------------------------------------
100% - Eurodollar Reserve Percentage
The Eurodollar Rate shall be adjusted automatically as of the effective date of
any change in the Eurodollar Reserve Percentage.
"EURODOLLAR RATE LOAN" means a Revolving Loan or a Term Loan
bearing interest based on the Eurodollar Rate.
"EURODOLLAR RESERVE PERCENTAGE" means the maximum reserve
requirement percentage (including any ordinary, supplemental, marginal and
emergency reserves), if any, as determined by the Agent, then applicable under
Regulation D in respect of Eurocurrency funding (currently referred to as
"Eurocurrency Liabilities") of a member bank in the Federal Reserve System with
deposits exceeding $1,000,000,000.
"EVENT OF DEFAULT" has the meaning set forth in Section 11.01.
"EVENT OF LOSS" means with respect to any asset of the
Borrower or its Subsidiaries any of the following: (i) any loss, destruction or
damage of such asset; (ii) any pending or threatened institution of any
proceedings for the condemnation or seizure of such asset or of any right of
eminent domain; or (iii) any actual condemnation, seizure or taking, by exercise
of the power of eminent domain or otherwise, of such asset, or confiscation of
such asset or requisition of the use of such asset.
"EXISTING CREDIT FACILITY" means the Credit Agreement dated
March 31, 1999, between the Borrower and Rabobank, as amended.
"FEE LETTER" means that certain letter agreement dated March
__, 2002, between the Borrower and Rabobank.
"FEDERAL FUNDS RATE" means, for any day, the rate per annum
(rounded upward, if necessary, to the nearest 1/100 of 1%), as determined by the
Agent, equal to the weighted average of the rates on overnight Federal funds
transactions with members of the Federal Reserve System arranged by Federal
funds brokers, as published for any day of determination (or if such day of
determination is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a
10.
Business Day, the average of the quotations for such day on such transactions
received by the Agent from three Federal funds brokers of recognized standing
selected by it.
"FINAL MATURITY DATE" means April 19, 2009.
"FOREIGN SUBSIDIARY" means each Subsidiary of the Borrower
organized under the laws of any jurisdiction outside of the United States or
which is domiciled outside of the United States.
"FRB" means the Board of Governors of the Federal Reserve
System, and any Governmental Authority succeeding to any of its principal
functions.
"GAAP" means generally accepted accounting principles in the
U.S. as in effect from time to time.
"GOVERNMENTAL AUTHORITY" means any federal, state, local or
other governmental department, commission, board, bureau, agency, central bank,
court, tribunal or other instrumentality or authority, domestic or foreign,
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"GROWER PAYABLES" means, in respect of the Borrower or any
Subsidiary Guarantor, the aggregate amount due from the Borrower or such
Subsidiary Guarantor to any other Person on account of any crops, produce, or
other farm products supplied by such Person to the Borrower or such Subsidiary
Guarantor as to which crops, produce or other farm products such Person has
statutory lien rights.
"GROWERS' LIENS" means statutory Liens securing the payment of
amounts due from the Borrower or any Subsidiary Guarantor to any other Person on
account of any crops, produce or other farm products supplied by such Person to
the Borrower or such Subsidiary Guarantor, including but not limited to, Liens
in favor of growers arising pursuant to Article 9 (commencing with Section
55631), Chapter 6, Division 20 of the California Food and Agricultural Code, as
now in effect or hereafter amended.
"GUARANTOR" means each Subsidiary Guarantor and each other
Person party to a Guaranty in its capacity as a guarantor hereunder.
"GUARANTOR DOCUMENTS" means each Guaranty and all other
certificates, documents, agreements and instruments delivered to the Agent, the
Issuing Lender and the Lenders under or in connection with a Guaranty.
"GUARANTY" means the Guaranty of each Guarantor, in
substantially the form of Exhibit E-1 (or in substantially the form of Exhibit
E-2, in the case of Edna Valley Vineyard), and any other guaranty under any
separate agreement executed by any Guarantor pursuant to which it guarantees the
Obligations.
"GUARANTY OBLIGATION" means, as applied to any Person, any
direct or indirect liability, contingent or otherwise, of that Person with
respect to any Indebtedness, lease, dividend, letter of credit or other
obligation (the "primary obligations") of another Person (the
11.
"primary obligor"), including any obligation of that Person (i) to purchase,
repurchase or otherwise acquire such primary obligations or any property
constituting direct or indirect security therefor, or (ii) to advance or provide
funds (A) for the payment or discharge of any such primary obligation, or (B) to
maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency or any balance sheet item, level of income
or financial condition of the primary obligor, or (iii) to purchase property,
securities or services primarily for the purpose of assuring the owner of any
such primary obligation of the ability of the primary obligor to make payment of
such primary obligation, (iv) in connection with any synthetic lease or other
similar off balance sheet lease transaction, or (v) otherwise to assure or hold
harmless the holder of any such primary obligation against loss in respect
thereof.
"HAZARDOUS SUBSTANCES" means any toxic or hazardous
substances, materials, wastes, contaminants or pollutants, including asbestos,
PCBs, petroleum products and byproducts, and any substances defined or listed as
"hazardous substances," "hazardous materials," "hazardous wastes" or "toxic
substances" (or similarly identified), regulated under or forming the basis for
liability under any applicable Environmental Law.
"HEWITT APPRAISAL" has the meaning set forth in subsection
2.01(d).
"HEWITT RANCH PROPERTY" means the Borrower's real property and
improvements located in Rutherford, California, and further described on
Schedule 8 hereto.
"INDEBTEDNESS" means, for any Person: (i) all indebtedness or
other obligations of such Person for borrowed money or for the deferred purchase
price of property or services; (ii) all obligations evidenced by notes, bonds,
debentures or similar instruments, including obligations so evidenced incurred
in connection with the acquisition of property, assets or businesses; (iii) all
indebtedness created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person (even
though the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property); (iv)
all obligations under Capital Leases and Synthetic Lease Obligations; (v) all
reimbursement or other obligations of such Person under or in respect of letters
of credit and bankers acceptances, and all net obligations in respect of Rate
Contracts in an amount equal to the Swap Termination Values thereof; (vi) all
reimbursement or other obligations of such Person in respect of any bank
guaranties, shipside bonds, surety bonds and similar instruments issued for the
account of such Person or as to which such Person is otherwise liable for
reimbursement of drawings or payments; (vii) all Guaranty Obligations; and
(viii) all indebtedness of another Person secured by any Lien upon or in
property owned by the Person for whom Indebtedness is being determined, whether
or not such Person has assumed or become liable for the payment of such
indebtedness of such other Person. For all purposes hereof, the Indebtedness of
any Person shall include the Indebtedness of any partnership or joint venture
(other than a joint venture that is itself a corporation or limited liability
company) in which such Person is a general partner or a joint venturer, unless
such Indebtedness is expressly made non-recourse to such Person (subject only to
customary recourse exceptions acceptable to the Agent in its reasonable
discretion). The amount of any Capital Lease or Synthetic Lease Obligation as of
any date shall be deemed to be the amount of Attributable Indebtedness in
respect thereof as of such date.
12.
"INSOLVENCY PROCEEDING" means, with respect to any Person, (i)
any case, action or proceeding before any court or other Governmental Authority
relating to the bankruptcy, reorganization, insolvency, liquidation,
receivership, dissolution, winding-up or relief from debt of such Person, or
(ii) any general assignment by such Person for the benefit of creditors,
composition, marshalling of assets for creditors, or other, similar arrangement
in respect of its creditors generally or any substantial portion of its
creditors, in each case undertaken under U.S. Federal, state or foreign law,
including the Bankruptcy Code.
"INTERBANK RATE" means the rate per annum determined by the
Agent to be the average (rounded upward, if necessary, to the nearest 1/16 of
1%) of the rates at which deposits in Dollars are offered to Rabobank by prime
banks in the interbank eurodollar market where the eurodollar funding operations
of Rabobank are customarily conducted, at approximately 11:00 (London time), two
Eurodollar Business Days before the first day of such Interest Period, in an
amount substantially equal to the proposed Eurodollar Rate Loan to be made,
continued or converted by Rabobank and for a period of time comparable to such
Interest Period.
"INTERCREDITOR AND COLLATERAL AGENCY AGREEMENT" means the
Intercreditor and Collateral Agency Agreement among the Lenders, the holders of
the Senior Secured Notes, the Collateral Agent and the other parties thereto, in
substantially the form of Exhibit O.
"INTEREST PAYMENT DATE" means a date specified for the payment
of interest pursuant to Section 4.01(c).
"INTEREST PERIOD" means, with respect to any Eurodollar Rate
Loan, the period determined in accordance with Section 4.01(b) applicable
thereto.
"INTERNAL REVENUE CODE" means the Internal Revenue Code of
1986, including (unless the context otherwise requires) any rules or regulations
promulgated thereunder.
"INVENTORY" means all "inventory" (as such term is defined in
the UCC). For purposes of this Agreement, bulk wine shall be deemed Inventory
regardless of whether bulk wine is properly classified as "inventory" under the
UCC.
"IRS" means the Internal Revenue Service, or any successor
thereto.
"ISSUING LENDER" has the meaning set forth in the introduction
to this Agreement.
"L/C ADVANCE" means each Lender's participation in any L/C
Unreimbursed Draw in accordance with its Pro Rata Share.
"L/C AMENDMENT APPLICATION" means (i) an application form for
amendments of outstanding standby letters of credit as shall at any time be in
use at the Issuing Lender, as the Issuing Lender shall request and as shall be
satisfactory to the Agent.
"L/C APPLICATION" means such application form for issuances of
standby letters of credit as shall at any time be in use at the Issuing Lender,
as the Issuing Lender shall request and as shall be satisfactory to the Agent.
13.
"L/C COMMITMENT" has the meaning specified in subsection
3.01(a).
"L/C OBLIGATIONS" means at any time the sum of (a) the
aggregate undrawn amount of all Letters of Credit, PLUS (b) the amount of all
unreimbursed drawings under all Letters of Credit, including all L/C
Unreimbursed Draws.
"L/C-RELATED DOCUMENTS" means the Letters of Credit, the L/C
Applications, the L/C Amendment Applications and any other document, agreement
and instrument relating to any Letter of Credit, including any of the Issuing
Lender's standard form documents for letter of credit issuances.
"L/C UNREIMBURSED DRAW" means an extension of credit resulting
from a drawing under any Letter of Credit which shall not have been reimbursed
on the date when made nor converted into a Borrowing of Revolving Loans under
Section 2.01(a).
"LENDERS" has the meaning specified in the introductory clause
hereto. References to the Lenders shall include references to Rabobank in its
capacity as the Issuing Lender and the Swingline Lender; for purposes of
clarification only, to the extent that Rabobank may have any rights or
obligations in addition to those of the Lenders due to its status as the Issuing
Lender or the Swingline Lender, its status as such will be specifically
referenced. Unless the context otherwise clearly requires, the Lenders shall
include any such Person in its capacity as Swap Provider. Unless the context
otherwise clearly requires, references to any such Person as a Lender shall also
include any of such Person's Affiliates that may at any time of determination be
Swap Providers.
"LENDING OFFICE" has the meaning set forth in Section 2.04.
"LETTERS OF CREDIT" means any standby letter of credit issued
by the Issuing Lender pursuant to Article III.
"LEVERAGE RATIO" has the meaning specified in subsection
10.02(a).
"LIEN" means any mortgage, deed of trust, pledge, security
interest, assignment, deposit arrangement, charge or encumbrance, lien
(statutory or other), or other preferential arrangement (including any
conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing or any agreement
to give any security interest).
"LOAN" means an extension of credit, in the form of a Term
Loan, Revolving Loan, Swingline Loan or L/C Advance, by a Lender to the Borrower
pursuant to Article II or III.
"LOAN DOCUMENTS" means this Agreement, the Notes, the
Collateral Documents, the Intercreditor and Collateral Agency Agreement, the Fee
Letter, each Guaranty, the Guarantor Documents, the Environmental Indemnity, any
documents evidencing or relating to Specified Swap Contracts and all other
certificates, documents, agreements and instruments delivered to the Agent, the
Issuing Lender and the Lenders under or in connection with this Agreement, and
all L/C-Related Documents.
14.
"MAJORITY LENDERS" means as at any time of determination
Lenders then holding in excess of 60% of the then aggregate sum of (i) the
unused Commitments at such time (for so long as the Commitments are in effect)
PLUS (ii) the unpaid principal amount of the Loans and participations in the L/C
Obligations and Swingline Loans at such time; PROVIDED, however , that if any
Lender has failed to fund any portion of the Loans or participations in the L/C
Obligations or the Swingline Loans required to be funded by it hereunder, then
such Lender's unused Commitments, Loans and participations shall be excluded
from the calculation of the "Majority Lenders".
"MATERIAL ADVERSE EFFECT" means any event, matter, condition
or circumstance which (i) has or would reasonably be expected to have a material
adverse effect on the business, properties, results of operations or condition
(financial or otherwise) of the Borrower and its Subsidiaries taken as a whole;
(ii) would materially impair the ability of the Borrower, or any other Person to
perform or observe its obligations under or in respect of the Loan Documents, or
(iii) affects the legality, validity, binding effect or enforceability of any of
the Loan Documents or the perfection or priority of any Lien granted to the
Lenders, or the Collateral Agent or the Agent for the benefit of the Lenders,
under any of the Collateral Documents.
"MAXIMUM INTERCOMPANY LOAN AMOUNT" means the sum of (i)
$35,000,000 PLUS (ii) on each anniversary of the Closing Date, 10% of the
Maximum Intercompany Loan Amount in effect immediately prior to such
anniversary.
"MINIMUM AMOUNT" has the meaning set forth in Section 2.06.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" as defined
in Sections 3(37) and 4001(a)(3) of ERISA.
"NET ISSUANCE PROCEEDS" means, as to any issuance or other
incurrence of debt or any issuance of equity by any Person, cash proceeds
received or receivable by such Person in connection therewith, net of
out-of-pocket costs and expenses paid or incurred in connection therewith in
favor of any Person not an Affiliate of such Person.
"NET PROCEEDS" means, as to any sale, transfer or other
disposition of assets ("Disposition") by a Person, proceeds in cash, checks or
other cash equivalent financial instruments as and when received by such Person,
net of: (a) the direct costs relating to such Disposition excluding amounts
payable to such Person or any Affiliate of such Person, (b) sale, use or other
transaction taxes, and income taxes, paid or reasonably expected to be payable
by such Person as a direct result thereof, and (c) amounts required to be
applied to repay principal, interest and prepayment premiums and penalties on
Indebtedness secured by a Lien on the asset which is the subject of such
Disposition. "NET PROCEEDS" shall also include proceeds paid on account of any
Event of Loss, net of (i) all money actually applied or set aside within six
months after the receipt of such proceeds to repair, replace or reconstruct the
damaged property or property affected by the condemnation or taking, (ii) all of
the costs and expenses reasonably incurred in connection with the collection of
such proceeds, award or other payments, and (iii) any amounts retained by or
paid to parties having superior rights to such proceeds, awards or other
payments.
15.
"NOTES" means the Revolving Notes, the Swingline Note and the
Term Notes.
"NOTICE" means a Notice of Borrowing, a Notice of Conversion
or Continuation or a Notice of Prepayment.
"NOTICE OF BORROWING" has the meaning set forth in Section
2.02(a).
"NOTICE OF CONVERSION OR CONTINUATION" has the meaning set
forth in Section 4.05(c).
"NOTICE OF PREPAYMENT" has the meaning set forth in Section
5.03(d).
"OBLIGATIONS" means the indebtedness, liabilities and other
obligations of the Borrower and the Guarantors to the Collateral Agent, the
Agent or any Lender under or in connection with the Loan Documents, including
all Loans, all interest accrued thereon, all fees due under this Agreement and
all other amounts payable by the Borrower to the Collateral Agent, the Agent or
any Lender thereunder or in connection therewith, whether now or hereafter
existing or arising, and whether due or to become due, absolute or contingent,
liquidated or unliquidated, determined or undetermined.
"OECD" means the Organization for Economic Cooperation and
Development.
"OPERATING LEASE" means, for any Person, any lease of any
property of any kind by that Person as lessee which is not a Capital Lease.
"ORGANIZATION DOCUMENTS" means, (a) with respect to any
corporation, the certificate or articles of incorporation and the bylaws (or
equivalent or comparable constitutional documents with respect to any non-U.S.
jurisdiction); (b) with respect to any limited liability company, the articles
of formation and operating agreement; and (c) with respect to any partnership,
joint venture, trust or other form of business entity, the partnership, joint
venture or other applicable agreement of formation and any agreement,
instrument, filing or notice with respect thereto filed in connection with its
formation with the applicable Governmental Authority in the jurisdiction of its
formation, in each case as amended from time to time.
"PARTICIPATION DATE" has the meaning set forth in Section
3.03(c).
"PATENT AND TRADEMARK SECURITY AGREEMENT" means each Patent
and Trademark Security Agreement between the Borrower or a Subsidiary Guarantor
and the Collateral Agent, in substantially the form of Exhibit F.
"PBGC" means the Pension Benefit Guaranty Corporation, or any
successor thereto.
"PENSION PLAN" means any employee pension benefit plan covered
by Title IV of ERISA (other than a Multiemployer Plan) that is maintained for
employees of the Borrower, any Guarantor or any ERISA Affiliate or with regard
to which the Borrower, any Guarantor or an ERISA Affiliate is a contributing
sponsor within the meaning of Sections 4001(a)(13) or 4069 of ERISA.
16.
"PERMITTED INVESTMENTS" means any of the following Dollar
denominated investments, maturing within one year from the date of acquisition,
selected by the Borrower:
(i) marketable direct obligations issued or
unconditionally guaranteed by the United States government or issued by any
agency thereof and backed by the full faith and credit of the United States;
(ii) marketable direct obligations issued by any state of
the United States or any political subdivision of any such state or any public
instrumentality thereof and, at the time of acquisition, having the highest
credit rating obtainable from either S&P or Moody's;
(iii) commercial paper or corporate promissory notes
bearing at the time of acquisition the highest credit rating either of S&P or
Moody's issued by United States, Australian, Canadian, European or Japanese bank
holding companies or industrial or financial companies (other than an Affiliate
of the Borrower or any Guarantor);
(iv) certificates of deposit issued by and bankers
acceptances of and interest bearing deposits with any Lender, or with any United
States, Australian, Canadian, European or Japanese commercial banks having
capital and surplus of at least $500,000,000 or the equivalent and which issues
(or the parent of which issues) commercial paper or other short term securities
bearing the highest credit rating obtainable from either S&P or Moody's; and
(v) money market funds organized under the laws of the
United States or any state thereof that invest solely in any of the foregoing
investments permitted under clauses (i), (ii), (iii) and (iv).
"PERMITTED LIENS" means:
(i) Liens in favor of the Lenders,or the Collateral Agent or
the Agent for the benefit of the Lenders, to secure the Obligations;
(ii) the existing Liens listed in Schedule 4 or incurred in
connection with the extension, renewal or refinancing of the Indebtedness
secured by such existing Liens, PROVIDED that any extension, renewal or
replacement Lien shall be limited to the property encumbered by the existing
Lien and the principal amount of the Indebtedness being extended, renewed or
refinanced does not increase;
(iii) Liens for taxes, fees, assessments or other governmental
charges or levies, either not delinquent or being contested in good faith by
appropriate proceedings and which are adequately reserved for in accordance with
GAAP;
(iv) Liens of materialmen, mechanics, warehousemen, artisans,
carriers or employees or other like Liens (including Growers' Liens and
Production Liens) arising in the ordinary course of business and securing
obligations either not delinquent or being contested in good faith by
appropriate proceedings which are adequately reserved for in accordance with
GAAP;
17.
(v) Liens consisting of deposits or pledges to secure the
payment of worker's compensation, unemployment insurance or other social
security benefits or obligations, or to secure the performance of bids, trade
contracts, leases (other than Capital Leases), public or statutory obligations,
surety or appeal bonds or other obligations of a like nature incurred in the
ordinary course of business (other than for Indebtedness or any Liens arising
under ERISA);
(vi) easements, rights of way, servitudes or zoning or
building restrictions and other minor encumbrances on real property and
irregularities in the title to such property which do not in the aggregate
materially impair the use or value of such property or risk the loss or
forfeiture of title thereto;
(vii) statutory landlord's Liens under leases to which the
Borrower or any of its Subsidiaries is a party;
(viii) Liens arising solely by virtue of any statutory or
common law provision relating to banker's liens, rights of set-off or similar
rights and remedies as to deposit accounts or other funds maintained with a
creditor depository institution; PROVIDED that (i) such deposit account is not a
dedicated cash collateral account and is not subject to restrictions against
access by the Borrower in excess of those set forth by regulations promulgated
by the FRB, and (ii) such deposit account is not intended by the Borrower or any
Subsidiary to provide collateral to the depository institution;
(ix) Liens securing Indebtedness incurred by the Borrower or
any Subsidiary which is permitted under Section 10.04(a)(x); provided that (i)
such Liens do not at any time encumber any property other than the property
financed by such Indebtedness and (ii) the Indebtedness secured thereby does not
exceed the cost or fair market value, whichever is lower, of the property being
acquired on the date of acquisition;
(x) Liens on specific tangible assets of Persons which
become Subsidiaries after the date of this Agreement; PROVIDED, HOWEVER, that
(A) such Liens existed at the time the respective Persons became Subsidiaries
and were not created in anticipation thereof, (B) any such Lien does not by its
terms cover any assets after the time such Person becomes a Subsidiary which
were not covered immediately prior thereto, (C) any such Lien does not by its
terms secure any Indebtedness other than Indebtedness existing immediately prior
to the time such Person becomes a Subsidiary, and (D) such Indebtedness is
permitted by Section 10.04(a)(x); and
(xi) Liens securing the Senior Secured Notes and Senior
Secured Notes Guaranties, subject to the Intercreditor and Collateral Agency
Agreement.
"PERMITTED PREFERRED STOCK" means preferred stock of the
Borrower, subject to the following: such preferred stock shall not (a) have
mandatory redemption rights, or redemption at the option of the holder, sinking
fund payments, guaranteed return or exchange ability or conversions into debt
instruments or any other "debt-like" features other than any mandatory rights of
redemption effective not earlier than six months after the Final Maturity Date,
and (b) require the payment of any dividends thereon while any Event of Default
exists hereunder.
18.
"PERSON" means an individual, corporation, partnership,
limited liability company, joint venture, trust, unincorporated organization or
any other entity of whatever nature or any Governmental Authority.
"PLAN" means any employee pension benefit plan as defined in
Section 3(2) of ERISA (including any Multiemployer Plan) and any employee
welfare benefit plan, as defined in Section 3(1) of ERISA (including any plan
providing benefits to former employees or their survivors).
"PREMISES" means any and all real property, including all
buildings and improvements now or hereafter located thereon and all
appurtenances thereto, now or hereafter owned, leased, occupied or used by the
Borrower or any of its Subsidiaries.
"PRIMARY TRADEMARKS" means the following trademarks: ACACIA,
CHALONE VINEYARD, GAVILAN, SAGELANDS, STATON HILLS, MISTY RIDGE and PHOENIX.
"PRINCIPAL PAYMENT DATE" means a day on which the Borrower is
required to make a payment of principal pursuant to Section 5.02(b).
"PRODUCTION LIENS" means statutory Liens securing the right of
Persons who have rendered services for the storage, protection, improvement,
safekeeping, carriage, alteration, repair, harvest or crushing of any grapes or
Inventory, including without limitation, artisans and service liens under
California Civil Code Section 3051, thresher's liens under California Civil Code
Section 3061, and harvesters liens under California Civil Code Section 3061.5.
"PRO RATA SHARE" means, as to any Lender at any time, the
percentage equivalent (expressed as a decimal, rounded to the ninth decimal
place) at such time of (a) in the case of the Revolving Commitments or the
Revolving Loans, such Lender's Revolving Commitment divided by the combined
Revolving Commitments of all Lenders (or, if all Revolving Commitments have been
terminated, the aggregate principal amount of such Lender's Revolving Loans PLUS
the its participations in the L/C Obligations and Swingline Loans divided by the
aggregate principal amount of the Revolving Loans and the participations in L/C
Obligations and Swingline Loans then held by all Lenders), (b) in the case of
the Term Commitments or the Term Loans, such Lender's Term Commitment divided by
the combined Term Commitments of all Lenders (or, if all Term Commitments have
been terminated, the aggregate principal amount of such Lender's Term Loans
divided by the aggregate principal amount of Term Loans then held by all
Lenders), and (c) in all other cases, such Lender's unused Commitment PLUS its
outstanding Loans and participations in the L/C Obligations and Swingline Loans
divided by the combined unused Commitments and the outstanding Loans and
participations in L/C Obligations and Swingline Loans of all Lenders (or, if all
Commitments have been terminated, the aggregate principal amount of such
Lender's Loans and participations in L/C Obligations and Swingline Loans divided
by the aggregate principal amount of Loans and participations in L/C Obligations
and Swingline Loans then held by all Lenders). The initial Pro Rata Shares of
each Lender are set forth opposite such Lender's name in SCHEDULE 1.
"RABOBANK" has the meaning set forth in the introduction to
this Agreement.
19.
"RATE CONTRACTS" means interest rate swaps, caps, floors and
collars, currency swaps, or other similar financial products designed to provide
protection against fluctuations in interest, currency or exchange rates.
"RECEIVABLE DEBTOR" means any Person obligated on a
Receivable.
"RECEIVABLES" means all rights to payment arising out of the
sale or lease of goods or the performance of services in the ordinary and usual
course of business, however evidenced.
"REGULATION D" means Regulation D of the FRB.
"REGULATORY CHANGE" has the meaning set forth in Section 6.03.
"RELATED PARTY" has the meaning set forth in Section 10.04(k).
"RELATED PERSON" has the meaning set forth in Section
13.04(b).
"REPLACEMENT LENDER" has the meaning set forth in Section
6.07.
"REQUIRED NOTICE DATE" has the meaning set forth in Section
2.07.
"REQUIREMENT OF LAW" means, as to any Person, any law
(statutory or common), treaty, code, decree, order, rule or regulation or
determination of an arbitrator or of a Governmental Authority, in each case
applicable to or binding upon the Person or any of its property or to which the
Person or any of its property is subject.
"RESPONSIBLE OFFICER" means, with respect to any Person, the
chief executive officer, the president, the chief financial officer or the
treasurer of such Person, or any other senior officer of such Person having
substantially the same authority and responsibility; or, with respect to
compliance with financial covenants, the chief executive officer, the chief
financial officer or the treasurer of any such Person, or any other senior
officer of such Person involved principally in the financial administration or
controllership function of such Person and having substantially the same
authority and responsibility.
"REVOLVING COMMITMENT" means, when used with reference to any
Lender at the time any determination thereof is to be made, the amount set forth
opposite the name of such Lender as its "Revolving Commitment" on Schedule 1, as
from time to time reduced pursuant to Section 5.01, or, where the context so
requires, the obligation of such Lender to make Revolving Loans up to such
amount on the terms and conditions set forth in this Agreement. The initial
aggregate Revolving Commitments of all the Lenders shall be $55,000,000, as the
same may from time to time be reduced pursuant to Section 5.01.
"REVOLVING EXPIRY DATE" means April 19, 2005.
"REVOLVING LOAN" has the meaning set forth in Section 2.01(a).
"REVOLVING NOTE" means a Promissory Note of the Borrower
payable to the order of a Lender, in substantially the form of Exhibit G.
20.
"SEC" means the Securities and Exchange Commission, or any
successor thereto.
"SECURITY AGREEMENT" means the Security Agreement among the
Borrower and the Subsidiaries party thereto in favor of the Collateral Agent for
the benefit of the Agent, the Lenders and the Senior Noteholders, in
substantially the form of Exhibit H-1 (or in substantially the form of Exhibit
H-2, in the case of Edna Valley Vineyard).
"SENIOR NOTEHOLDERS" means the noteholders from time to time
holding one or more of the Senior Secured Notes and in whose name such Senior
Secured Note(s) are registered in the register maintained by the Borrower
pursuant to the Senior Secured Note Documents.
"SENIOR SECURED NOTE DOCUMENTS" means the note purchase
agreement, documents and agreements evidencing the Senior Secured Notes,
including all deeds of trust, mortgages, security agreements and other documents
and agreements purporting to grant a Lien on the assets of the Borrower or any
Subsidiary or any other Person to secure the obligations owing by the Borrower
or any other Person under the Senior Secured Notes and Senior Secured Notes
Guaranties.
"SENIOR SECURED NOTES" means (a) the Borrower's $5,000,000
Adjustable Rate Senior Guaranteed Notes, Series A, Due September 15, 2010; (b)
the Borrower's $10,000,000 Adjustable Rate Senior Guaranteed Notes, Series B,
Due September 15, 2010; and (c) the Borrower's $15,000,000 Adjustable Rate
Senior Guaranteed Notes, Series C, Due September 15, 2010, as amended and
restated concurrently herewith.
"SENIOR SECURED NOTES GUARANTIES" means the Subsidiary
Guarantee Agreements entered into by the Subsidiary Guarantors in favor of the
Senior Noteholders to guaranty the Borrower's obligations under the Senior
Secured Notes and the other Senior Secured Note Documents.
"SHW INTERCOMPANY LOAN AMOUNT" means the sum of (i) $8,000,000
plus (ii) on each anniversary of the Closing Date, 10% of the SHW Intercompany
Loan Amount in effect immediately prior to such anniversary.
"SOLVENT" means, as to any Person at any time, that (i) the
fair value of the property of such Person is greater than the amount of such
Person's liabilities (including disputed, contingent and unliquidated
liabilities) as such value is established and liabilities evaluated for purposes
of Section 101(32) of the Bankruptcy Code; (ii) the present fair saleable value
of the property of such Person is not less than the amount that will be required
to pay the probable liability of such Person on its debts as they become
absolute and matured; (iii) such Person is able to realize upon its property and
pay its debts and other liabilities (including disputed, contingent and
unliquidated liabilities) as they mature in the normal course of business; (iv)
such Person does not intend to, and does not believe that it will, incur debts
or liabilities beyond such Person's ability to pay as such debts and liabilities
mature; and (v) such Person is not engaged in business or a transaction, and is
not about to engage in business or a transaction, for which such Person's
property would constitute unreasonably small capital.
"SPECIFIED ASSETS" means the assets of the Borrower and its
Subsidiaries identified on Schedule 7 hereto which are being held for sale.
21.
"SPECIFIED SWAP CONTRACT" means any Rate Contract made or
entered into at any time, or in effect at any time (whether heretofore or
hereafter), whether directly or indirectly, and whether as a result of
assignment or transfer or otherwise, between the Borrower and any Swap Provider
which Rate Contract is or was intended by the Borrower to have been entered
into, in part or entirely, for purposes of mitigating interest rate or currency
exchange risk relating to any Loan (which intent shall conclusively be deemed to
exist if the Borrower so represents to the Swap Provider in writing).
"SUBORDINATED DEBT" means any Indebtedness of the Borrower or
any Subsidiary incurred after the date hereof in accordance with Section
10.04(a)(xi).
"SUBSIDIARY" means any corporation, association, partnership,
joint venture or other business entity of which more than 50% of the voting
stock or other equity interest is owned directly or indirectly by any Person or
one or more of the other Subsidiaries of such Person or a combination thereof.
"SUBSIDIARY GUARANTOR" means each of Edna Valley Vineyard,
Canoe Ridge Vineyard L.L.C., Canoe Ridge Winery, Inc., SHW Equity Co., Staton
Hills Winery Company Limited and each other Subsidiary that becomes party to a
Guaranty.
"SWAP PROVIDER" means any Lender, or any Affiliate of any
Lender, that is at the time of determination party to a Rate Contract with the
Borrower.
"SWAP TERMINATION VALUE" means, in respect of any one or more
Rate Contracts, after taking into account the effect of any legally enforceable
netting agreement relating to such Rate Contracts, (i) for any date on or after
the date such Rate Contracts have been closed out and termination value(s)
determined in accordance therewith, such termination value(s), and (ii) for any
date prior to the date referenced in clause (a) the amount(s) determined as the
mark-to-market value(s) for such Rate Contracts, as determined by the Borrower
based upon one or more mid-market or other readily available quotations provided
by any recognized dealer in such Rate Contracts (which may include any Lender).
"SWINGLINE COMMITMENT" has the meaning specified in subsection
2.01(c).
"SWINGLINE LENDER" has the meaning specified in the
introduction to this Agreement.
"SWINGLINE LOAN" has the meaning specified in subsection
2.01(c).
"SWINGLINE NOTE" means a Promissory Note of the Borrower
payable to the order of the Swingline Lender, in substantially the form of
Exhibit I.
"SYNTHETIC LEASE OBLIGATION" means the monetary obligation of
a Person under (a) a so-called synthetic, off-balance sheet or tax retention
lease, or (b) an agreement for the use or possession of property creating
obligations that do not appear on the balance sheet of such Person but which,
upon the insolvency or bankruptcy of such Person, would be characterized as the
indebtedness of such Person (without regard to accounting treatment).
22.
"TAXES" has the meaning set forth in Section 7.03(a).
"TERM COMMITMENT" means, when used with reference to any
Lender at the time any determination thereof is to be made, the amount set forth
opposite the name of such Lender as its "Term Commitment" on Schedule 1 or,
where the context so requires, the obligation of such Lender to make a Term Loan
up to such amount on the terms and conditions set forth in this Agreement. The
initial aggregate Term Commitments of all the Lenders shall be $17,500,000.
"TERMINATION EVENT" means any of the following:
(i) with respect to a Pension Plan, a reportable event
described in Section 4043 of ERISA and the regulations issued thereunder (other
than a reportable event not subject to the provisions for 30-day notice to the
PBGC under such regulations);
(ii) the withdrawal of the Borrower,any Guarantor or an ERISA
Affiliate from a Pension Plan during a plan year in which the withdrawing
employer was a "substantial employer" as defined in Section 4001(a)(2) or
4062(e) of ERISA;
(iii) the taking of any actions (including the filing of a
notice of intent to terminate) by the Borrower, any Guarantor, an ERISA
Affiliate, the PBGC, a Plan Administrator, or any other Person to terminate a
Pension Plan or the treatment of a Plan amendment as a termination of a Pension
Plan under Section 4041 of ERISA;
(iv) any other event or condition which might constitute
grounds under Section 4042 of ERISA for the termination of, or the appointment
of a trustee to administer, any Pension Plan; or
(v) the complete or partial withdrawal of the Borrower, any
Guarantor or an ERISA Affiliate from a Multiemployer Plan.
"TERM LOAN" has the meaning set forth in Section 2.01(b), and
shall include the additional Term Loans, if any, made pursuant to Section
2.01(d).
"TERM NOTE" means a Promissory Note of the Borrower payable to
the order of a Lender, in substantially the form of Exhibit J.
"UCC" means the Uniform Commercial Code of the jurisdiction
the law of which governs the Loan Document in which such term is used or the
attachment, perfection or priority of the Lien on any Collateral.
"UNFUNDED ACCRUED BENEFITS" means the excess of a Pension
Plan's accrued benefits, as defined in Section 3(23) of ERISA, over the current
value of that Plan's assets, as defined in Section 3(26) of ERISA.
"UPDATE CERTIFICATE" means a certificate of a Responsible
Officer of the Borrower in substantially the form of Exhibit N, with such
changes thereto as the Agent or any Lender may from time to time reasonably
request.
23.
"WINE BOTTLING INVENTORY" means Borrower's bottles, capsules,
corks and other supplies used in its wine production, bottling and packaging.
"WINE DIVIDEND CREDITS" means annual credits provided by the
Borrower to shareholders owning 100 or more shares of the Borrower's common
stock, which credits may be applied by each such shareholder, for a period not
to exceed one year following such shareholder's receipt of such credits, towards
up to 50% of the purchase price of mail-order or other direct purchases of wine
from the Borrower.
SECTION 1.02 ACCOUNTING PRINCIPLES.
(a) ACCOUNTING TERMS. Unless otherwise defined or the
context otherwise requires, all accounting terms not expressly defined herein
shall be construed, and all accounting determinations and computations required
under the Loan Documents shall be made, in accordance with GAAP, consistently
applied.
(b) GAAP CHANGES. If GAAP shall have been modified after the
Closing Date and the application of such modified GAAP shall have a material
effect on any financial computations hereunder (including the computations
required for the purpose of determining compliance with the covenants set forth
in Section 10.02), then, at the request of the Agent or the Majority Lenders,
such computations shall be made and the financial statements, certificates and
reports due hereunder shall be prepared, and all accounting terms not otherwise
defined herein shall be construed, in accordance with GAAP as in effect prior to
such modification, unless and until the Majority Lenders and the Borrower shall
have agreed upon the terms of the application of such modified GAAP.
(c) "FISCAL YEAR" AND "FISCAL QUARTER". References herein to
"fiscal year" and "fiscal quarter" refer to such fiscal periods of the Borrower.
SECTION 1.03 INTERPRETATION. In the Loan Documents, except to
the extent the context otherwise requires:
(i) Any reference to an Article, a Section, a Schedule or an
Exhibit is a reference to an article or section thereof, or a schedule or an
exhibit thereto, respectively, and to a subsection or a clause is, unless
otherwise stated, a reference to a subsection or a clause of the Section or
subsection in which the reference appears.
(ii) The words "hereof," "herein," "hereto," "hereunder" and
the like mean and refer to this Agreement or any other Loan Document as a whole
and not merely to the specific Article, Section, subsection, paragraph or clause
in which the respective word appears.
(iii) The meaning of defined terms shall be equally applicable
to both the singular and plural forms of the terms defined.
(iv) The words "including," "includes" and "include" shall be
deemed to be followed by the words "without limitation."
24.
(v) References to agreements and other contractual
instruments shall be deemed to include all subsequent amendments and other
modifications thereto, but only to the extent such amendments and other
modifications are not prohibited by the terms of the Loan Documents.
(vi) References to statutes or regulations are to be
construed as including all statutory and regulatory provisions consolidating,
amending or replacing the statute or regulation referred to.
(vii) Any table of contents, captions and headings are for
convenience of reference only and shall not affect the construction of this
Agreement or any other Loan Document.
(viii) In the computation of periods of time from a specified
date to a later specified date, the word "from" means "from and including"; the
words "to" and "until" each mean "to but excluding"; and the word "through"
means "to and including."
(ix) The use of a word of any gender shall include each of
the masculine, feminine and neuter genders.
(x) This Agreement and the other Loan Documents are the
result of negotiations among the Agent, the Borrower and the other parties, have
been reviewed by counsel to the Agent, the Borrower and such other parties, and
are the products of all parties. Accordingly, they shall not be construed
against the Lenders or the Agent merely because of the Agent's or Lenders'
involvement in their preparation.
ARTICLE II
THE LOANS
SECTION 2.01 THE LOANS.
(a) REVOLVING LOANS. Each Lender severally agrees, on the
terms and conditions set forth in this Agreement, to make revolving loans (each
a "Revolving Loan" and, collectively, the "Revolving Loans") to the Borrower
from time to time on any Business Day during the period from the Closing Date
until the Revolving Expiry Date, in an aggregate principal amount up to but not
exceeding at any time outstanding such Lender's Revolving Commitment; PROVIDED,
that (i) the Effective Amount of all Revolving Loans PLUS the Effective Amount
of all Swingline Loans PLUS the Effective Amount of all L/C Obligations shall
not exceed the aggregate Revolving Commitments and (ii) the Effective Amount of
all Revolving Loans PLUS the Effective Amount of all Swingline Loans PLUS the
Effective Amount of all L/C Obligations shall not exceed the Borrowing Base then
in effect; and PROVIDED FURTHER, that the Effective Amount of the Revolving
Loans of any Lender PLUS the participation of such Lender in the Effective
Amount of all Swingline Loans and L/C Obligations shall not exceed such Lender's
Revolving Commitment. Within the foregoing limits and subject to the other terms
and conditions hereof, during such period the Borrower may borrow, repay the
Revolving Loans in whole or in part, and reborrow, all in accordance with the
terms and conditions hereof.
25.
(b) TERM LOANS. Each Lender severally agrees, on the terms
and conditions set forth in this Agreement, to make a term loan (each a "Term
Loan" and, collectively, the "Term Loans") to the Borrower on the Closing Date,
in a principal amount up to but not exceeding such Lender's Term Commitment. Any
amount of the Term Loans repaid may not be reborrowed.
(c) SWINGLINE LOANS. The Swingline Lender agrees, on the
terms and conditions set forth in this Agreement, to make a portion of the
Revolving Commitment available to the Borrower by making swingline loans
denominated in Dollars (individually, a "Swingline Loan", and, collectively, the
"Swingline Loans") to the Borrower on any Business Day during the period from
the Closing Date to the Revolving Expiry Date in an aggregate principal amount
at any one time outstanding not to exceed $5,000,000, notwithstanding the fact
that such Swingline Loans, when aggregated with any other Credit Extensions made
by or participated in by the Swingline Lender, may exceed the Swingline Lender's
Revolving Commitment (the amount of such commitment of the Swingline Lender to
make Swingline Loans to the Company pursuant to this subsection 2.01(c), as the
same shall be reduced pursuant to Section 5.01, the Swingline Lender's
"Swingline Commitment"); PROVIDED that at no time shall (i) the sum of the
Effective Amount of all Swingline Loans PLUS the Effective Amount of all
Revolving Loans PLUS the Effective Amount of all L/C Obligations exceed the
combined Revolving Commitments, or (ii) the Effective Amount of all Swingline
Loans exceed the Swingline Commitment. Additionally, no more than one Swingline
Loan may be outstanding at any one time, and all Swingline Loans shall at all
times be Base Rate Loans or accrue interest at such other rate as may be agreed
to by the Swingline Lender and the Borrower. Within the foregoing limits, and
subject to the other terms and conditions hereof, the Borrower may borrow, repay
the Swingline Loans in whole or in part, and reborrow, all in accordance with
the terms and conditions hereof.
(d) ADDITIONAL TERM LOANS. Each Lender severally agrees, on
the terms and conditions set forth in this Agreement, to make an additional Term
Loan to the Borrower on or prior to April 30, 2002. The obligation of each
Lender to make such additional Term Loan shall be within its sole and absolute
discretion and shall be subject to the following: (i) the Agent shall have
received by no later than April 15, 2002, a written appraisal report in respect
of the fair market value of the Hewitt Ranch Property prepared by an ARA or MAI
certified appraiser (the "Hewitt Appraisal"); and (ii) the appraised fair market
value of the Hewitt Ranch Property set forth in the Hewitt Appraisal shall be
greater than $11,600,000. If the conditions set forth in the preceding clauses
(i) and (ii) are satisfied, then the Borrower may request additional Term Loans
in an aggregate amount not to exceed the lesser of (A) 70% of the difference
between the appraised fair market value of the Hewitt Ranch Property set forth
in the Appraisal MINUS $11,600,000 and (B) $2,500,000. Any amount of the
additional Term Loans repaid may not be reborrowed.
SECTION 2.02 BORROWING PROCEDURE - REVOLVING LOANS AND TERM
LOANS.
(a) NOTICE TO THE AGENT. Each Borrowing of Revolving Loans
or Term Loans shall be made on a Business Day upon written or telephonic notice
(in the latter case to be confirmed promptly in writing) from the Borrower to
the Agent, which notice shall be received by the Agent not later than 1:00 p.m.
(New York time) on the Required Notice Date. Each such
26.
notice, except as provided in Sections 6.01 and 6.04, shall be irrevocable and
binding on the Borrower, shall be in substantially the form of Exhibit K (a
"Notice of Borrowing") and shall specify whether the Borrowing consists of Base
Rate Loans or Eurodollar Rate Loans and the other information required thereby.
Notwithstanding the foregoing, the Borrower may give the Agent standing
instructions in writing to make a Swingline Loan on the date any interest is due
hereunder, in the amount of such interest, PROVIDED that the making of the
Swingline Loan would otherwise be permissible under Section 2.01(c) and Section
8.02, and prior to the rescission in writing by the Borrower of such standing
instructions, no further notice shall be necessary under this Section 2.02 with
respect to Borrowings of Swingline Loans to pay accrued and unpaid interest
owing hereunder.
(b) NOTICE TO THE LENDERS. The Agent shall give each Lender
prompt notice by telephone (confirmed promptly in writing) or by facsimile of
each Borrowing of Revolving Loans or Term Loans, specifying the information
contained in the Borrower's Notice and such Lender's Pro Rata Share of the
Borrowing. On the date of each such Borrowing, each Lender shall make available
such Lender's Pro Rata Share of such Borrowing, in same day or immediately
available funds, to the Agent for the Agent's Account, not later than 3:00 p.m.
(New York time). Upon fulfillment of the applicable conditions set forth in
Article VIII and after receipt by the Agent of any such funds, and unless other
payment instructions are provided by the Borrower, the Agent shall make such
funds available to the Borrower by crediting the Borrower's Account with same
day or immediately available funds on such Borrowing date.
(c) NON-RECEIPT OF FUNDS. Unless the Agent shall have
received notice from a Lender prior to the date of any Borrowing of Revolving
Loans or Term Loans that such Lender shall not make available to the Agent such
Lender's Pro Rata Share of such Borrowing, the Agent may assume that such Lender
has made such portion available to the Agent on the date of such Borrowing in
accordance with Section 2.02(b) and the Agent may, in reliance upon such
assumption, make available to the Borrower on such date a corresponding amount.
If and to the extent such Lender shall not have so made such Pro Rata Share
available to the Agent, and the Agent in such circumstances shall have made
available to the Borrower such amount, such Lender agrees to repay to the Agent
forthwith on demand such corresponding amount together with interest thereon,
for each day from the date such amount is made available to the Borrower until
the date such amount is repaid to the Agent, at the Federal Funds Rate. If such
Lender shall repay to the Agent such corresponding amount, such amount so repaid
shall constitute such Lender's Loan as part of such Borrowing for purposes of
this Agreement. If such amount is not made available by such Lender to the Agent
on the Business Day following the Borrowing date, the Agent shall notify the
Borrower of such failure to fund and, upon demand by the Agent, the Borrower
shall pay such amount to the Agent for the Agent's Account, together with
interest thereon for each day elapsed since the date of such Borrowing, at a
rate per annum equal to the interest rate applicable at the time to the Loans
comprising such Borrowing.
SECTION 2.03 BORROWING PROCEDURE--SWINGLINE LOANS.
(a) NOTICE TO THE AGENT. The Borrower shall provide the
Agent irrevocable written notice (including notice via facsimile confirmed
immediately by a telephone call) in the form of a Notice of Borrowing of any
Swingline Loan requested hereunder (which notice must be received by the Agent
prior to 1:00 p.m. (New York time) on the requested Borrowing date)
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specifying (i) the amount to be borrowed, which shall be in a Minimum Amount
(unless otherwise agreed by the Swingline Lender), and (ii) the requested
Borrowing date, which shall be a Business Day. Unless the Swingline Lender has
received notice prior to 2:00 p.m. (New York time) on such Borrowing date from
the Agent (including at the request of any Lender) (A) directing the Swingline
Lender not to make the requested Swingline Loan as a result of the limitations
set forth in the proviso set forth in the first sentence of subsection 2.01(a);
or (B) that one or more conditions specified in Article VIII are not then
satisfied; then, subject to the terms and conditions hereof, the Swingline
Lender will, not later than 3:00 p.m. (New York time) on the Borrowing date
specified in such Notice of Borrowing, make the amount of its Swingline Loan
available to the Borrower by crediting the Borrower's Account with same day or
immediately available funds on such Borrowing date.
(b) PARTICIPATIONS IN SWINGLINE LOANS.If:
(1) any Swingline Loan shall remain outstanding at 4:00 p.m.
(New York time) on the Business Day immediately prior to the date on which such
Swingline Loan is due and by such time on such Business Day the Agent shall have
received neither: (A) a Notice of Borrowing delivered pursuant to Section 2.02
requesting that Revolving Loans be made pursuant to subsection 2.01 on such due
date in an amount at least equal to the aggregate principal amount of such
Swingline Loan; nor (B) any other notice indicating the Borrower's intent to
repay such Swingline Loan with funds obtained from other sources; or
(2) any Swingline Loans shall remain outstanding during the
existence of a Default or Event of Default and the Swingline Lender shall in its
sole discretion notify the Agent that the Swingline Lender desires that such
Swingline Loans be converted into Revolving Loans;
THEN the Agent shall be deemed to have received a Notice of Borrowing from the
Borrower pursuant to Section 2.02 requesting that Base Rate Loans be made
pursuant to subsection 2.01(a) on such due date (in the case of the
circumstances described in clause (1) above) or on the first Business Day
subsequent to the date of such notice from the Swingline Lender (in the case of
the circumstances described in clause (2) above) in an amount equal to the
aggregate amount of such Swingline Loans, and the procedures set forth in
subsections 2.02(b) shall be followed in making such Base Rate Loans; PROVIDED,
that such Base Rate Loans shall be made notwithstanding the Borrower's failure
to comply with Section 8.02; and PROVIDED, FURTHER, that if a Borrowing of
Revolving Loans becomes legally impracticable and if so required by the
Swingline Lender at the time such Revolving Loans are required to be made by the
Lenders in accordance with this subsection 2.03(c), each Lender agrees that in
lieu of making Revolving Loans as described in this subsection 2.03(c), such
Lender shall purchase a participation from the Swingline Lender in the
applicable Swingline Loans in an amount equal to such Lender's Pro Rata Share of
such Swingline Loans, and the procedures set forth in subsections 2.02(b) shall
be followed in connection with the purchases of such participations. Upon such
purchases of participations the prepayment requirements of this subsection
2.03(c) shall be deemed waived with respect to such Swingline Loans. If any
Swingline Loan shall remain outstanding in lieu of a Borrowing of Revolving
Loans as provided above, interest on such Swingline Loan shall be due and
payable on demand and shall accrue at the rate then applicable to Base Rate
Loans. The proceeds of such Base Rate Loans, or participations purchased, shall
be applied to repay such Swingline Loans. A
28.
copy of each notice given by the Agent to the Lenders pursuant to this
subsection 2.03(c) with respect to the making of Revolving Loans, or the
purchases of participations, shall be promptly delivered by the Agent to the
Borrower. Each Lender's obligation in accordance with this Agreement to make the
Revolving Loans, or purchase the participations, as contemplated by this
subsection 2.03(c), shall be absolute and unconditional and shall not be
affected by any circumstance, including (1) any set-off, counterclaim,
recoupment, defense or other right which such Lender may have against the
Swingline Lender, the Borrower or any other Person for any reason whatsoever;
(2) the occurrence or continuance of a Default, an Event of Default or a
Material Adverse Effect; or (3) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing.
SECTION 2.04 LENDING OFFICES. The Loans made by each Lender
may be made from and maintained at such offices of such Lender (each a "Lending
Office") as such Lender may from time to time designate (whether or not such
office is specified on Schedule 2). A Lender shall not elect a Lending Office
(other than that set forth on Schedule 2) that, at the time of making such
election, increases the amounts which would have been payable by the Borrower to
such Lender under this Agreement in the absence of such election. With respect
to Eurodollar Rate Loans made from and maintained at any Lender's non-U.S.
offices, the obligation of the Borrower to repay such Eurodollar Rate Loans
shall nevertheless be to such Lender and shall, for all purposes of this
Agreement (including for purposes of the definition of the term "Majority
Lenders") be deemed made or maintained by it, for the account of any such
office; PROVIDED that Borrower shall not be required to pay any increased
amounts that would not have been payable to any such Lender absent such
election.
SECTION 2.05 EVIDENCE OF INDEBTEDNESS. The Loans made by each
Lender shall be evidenced by one or more loan accounts maintained by such Lender
in accordance with its usual practices. The loan accounts maintained by the
Agent and each such Lender shall be rebuttable presumptive evidence of the
amount of the Loans made by such Lender to the Borrower and the interest and
payments thereon. Any failure so to record or any error in doing so shall not,
however, limit or otherwise affect the obligation of the Borrower hereunder to
pay any amount owing with respect to the Loans. At the request of any Lender,
(i) as additional evidence of the Indebtedness of the Borrower to such Lender
resulting from the Revolving Loans made by such Lender, the Borrower shall
execute and deliver for account of such Lender pursuant to Article VIII a
Revolving Note, dated the Closing Date, setting forth such Lender's Revolving
Commitment as the maximum principal amount thereof, and (ii) as additional
evidence of the Indebtedness of the Borrower to such Lender resulting from the
Term Loan made by such Lender, the Borrower shall execute and deliver for
account of such Lender pursuant to Article VIII a Term Note, dated the Closing
Date, in the principal amount of the Term Loan made by such Lender on the
Closing Date. At the request of the Swingline Lender, as additional evidence of
the Indebtedness of the Borrower to the Swingline Lender resulting from the
Swingline Loans made by the Swingline Lender, the Borrower shall execute and
deliver for the account of the Swingline Lender pursuant to Article VIII a
Swingline Note, dated the Closing Date, setting forth the Swingline Lender's
Swingline Commitment as the maximum principal amount thereof. At the request of
any Lender that makes an additional Term Loan pursuant to Section 2.01(d), as
additional evidence of the Indebtedness of the Borrower to such Lender resulting
from the additional Term Loan made by such Lender, the Borrower shall execute
and deliver for the account of such Lender an additional Term Note, dated the
date of
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such additional Term Loan, in the principal amount of the additional Term Loan
made by such Lender.
SECTION 2.06 MINIMUM AMOUNTS. Any Borrowing, conversion,
continuation, Commitment reduction or prepayment of Revolving Loans or Term
Loans hereunder shall be in an aggregate amount determined as follows (each such
specified amount a "Minimum Amount"): (i) any Borrowing or partial prepayment of
Base Rate Loans (other than Swingline Loans) shall be in the amount of
$1,000,000 or a greater amount which is an integral multiple of $100,000; (ii)
any Borrowing, continuation or partial prepayment of, or conversion into,
Eurodollar Rate Loans shall be in the amount of $1,000,000 or a greater amount
which is an integral multiple of $100,000; (iii) any Borrowing or partial
prepayment of Swingline Loans shall be in the minimum amount of $100,000 or a
greater amount which is an integral multiple of $10,000; and (iv) any partial
Commitment reduction under Section 5.01(a) shall be in the amount of $1,000,000
or a greater amount which is an integral multiple of $100,000.
SECTION 2.07 REQUIRED NOTICE. Any Notice hereunder shall be
given not later than the date determined as follows (each such specified date a
"Required Notice Date"): (i) any Notice with respect to a Borrowing of, or
conversion into, Base Rate Loans (other than Swingline Loans) shall be given at
least one Business Day prior to the date of the proposed Borrowing or
conversion; (ii) any Notice with respect to any Borrowing or continuation of, or
conversion into, Eurodollar Rate Loans shall be given at least three Eurodollar
Business Days prior to the date of the proposed Borrowing, conversion or
continuation; (iii) any Notice with respect to a Borrowing or full or partial
prepayment of Swingline Loans shall be given not later than the date of the
proposed Borrowing or prepayment; (iv) any Notice with respect to any prepayment
under Section 5.03(a) (other than with respect to Swingline Loans) or Commitment
reduction under Section 5.01(a) shall, except as otherwise provided in Section
5.03(b), be given at least three Business Days prior to the proposed prepayment
or reduction date; (v) any notice with respect to the issuance of any Letter of
Credit shall, except to the extent the Issuing Lender may agree in a particular
instance to a shorter notice period in its sole and absolute discretion, be
given at least two Business Days prior to the proposed issuance date; and (vi)
any notice with respect to the amendment or renewal of any Letter of Credit
shall, except to the extent the Issuing Lender may agree in a particular
instance to a shorter notice period in its sole and absolute discretion, be
given at least two Business Days prior to the proposed amendment or renewal
date.
ARTICLE III
THE LETTERS OF CREDIT
SECTION 3.01 THE LETTER OF CREDIT SUBFACILITY.
(a) LETTERS OF CREDIT. On the terms and conditions
hereinafter set forth, (i) the Issuing Lender hereby agrees (A) from time to
time on any Business Day during the period from the Closing Date to the
Revolving Expiry Date to issue Letters of Credit for the account of the Borrower
in accordance with Section 3.02(a), and to amend or renew Letters of Credit
previously issued by it, in accordance with subsections 3.02(c) and 3.02(d), in
an aggregate amount not to exceed at any time $5,000,000 (the "L/C Commitment"),
and (B) to honor drafts under the
30.
Letters of Credit; and (ii) the Lenders severally agree to participate in
Letters of Credit issued for the account of the Borrower; PROVIDED, that the
Issuing Lender shall not be obligated to issue any Letter of Credit if (1) the
Effective Amount of all L/C Obligations PLUS the Effective Amount of all
Revolving Loans PLUS the Effective Amount of all Swingline Loans shall exceed
the aggregate Revolving Commitments, (2) the participation of any Lender in the
Effective Amount of all L/C Obligations PLUS the participation of such Lender in
the Effective Amount of all Swingline Loans PLUS the Effective Amount of the
Revolving Loans of such Lender shall exceed such Lender's Revolving Commitment,
(3) the Effective Amount of L/C Obligations shall exceed the L/C Commitment or
(4) the Effective Amount of all L/C Obligations PLUS the Effective Amount of all
Revolving Loans PLUS the Effective Amount of all Swingline Loans shall exceed
the Borrowing Base then in effect. Within the foregoing limits, and subject to
the other terms and conditions hereof, the Borrower's ability to obtain Letters
of Credit shall be fully revolving, and, accordingly, the Borrower may, during
the foregoing period, obtain Letters of Credit to replace Letters of Credit
which have expired or which have been drawn upon and reimbursed.
(b) CONDITIONS TO ISSUANCE. The Issuing Lender shall be
under no obligation to issue, amend or reinstate any Letter of Credit if:
(i) any order, judgment or decree of any Governmental
Authority or arbitrator shall by its terms purport to enjoin or restrain the
Issuing Lender from issuing, amending or reinstating such Letter of Credit, or
any law, rule or regulation applicable to the Issuing Lender or any request,
guideline or directive (whether or not having the force of law) from any
Governmental Authority with jurisdiction over the Issuing Lender shall prohibit,
or request that the Issuing Lender refrain from, the issuance, amendment or
reinstatement of letters of credit generally or such Letter of Credit in
particular or shall impose upon the Issuing Lender with respect to such Letter
of Credit any restriction, reserve or capital requirement (for which the Issuing
Lender is not otherwise compensated) not in effect on the Closing Date, or shall
impose upon the Issuing Lender any unreimbursed loss, cost or expense which was
not applicable on the Closing Date and which the Issuing Lender in good faith
deems material to it;
(ii) the Issuing Lender has received written notice from any
Lender, the Agent or the Borrower, at least one Business Day prior to the
requested date of issuance, amendment or reinstatement of such Letter of Credit,
that one or more of the applicable conditions contained in Article VIII is not
then satisfied;
(iii) the expiry date of any requested Letter of Credit is (A)
more than one year after the date of issuance, unless the Majority Lenders have
approved such expiry date in writing, PROVIDED that a Letter of Credit may state
that the expiry date thereof may be extended for an additional term as shall be
satisfactory to the Issuing Lender (either upon prior notice or automatically)
so long as the next succeeding additional term at any time is not more than one
year; or (B) after the Revolving Expiry Date, unless all of the Lenders have
approved such expiry date in writing and such Letter of Credit is fully cash
collateralized;
(iv) any requested Letter of Credit does not provide for
drafts, or is not otherwise in form and substance acceptable to the Issuing
Lender, or the issuance, amendment or renewal of a Letter of Credit shall
violate any applicable policies of the Issuing Lender; or
31.
(v) such Letter of Credit is denominated in a currency other
than dollars.
SECTION 3.02 ISSUANCE, AMENDMENT AND RENEWAL OF LETTERS OF
CREDIT.
(a) NOTICE TO ISSUING LENDER OF ISSUANCE REQUEST. Each
Letter of Credit shall be issued upon the irrevocable written request of the
Borrower received by the Issuing Lender (with a copy sent by the Borrower to the
Agent) not later than the Required Notice Date. Each such request for issuance
of a Letter of Credit shall be in writing, in the form of an L/C Application,
and shall specify in form and detail satisfactory to the Issuing Lender: (i) the
proposed date of issuance of the Letter of Credit (which shall be a Business
Day); (ii) the face amount of the Letter of Credit; (iii) the expiry date of the
Letter of Credit; (iv) the name and address of the beneficiary thereof; (v) the
documents to be presented by the beneficiary of the Letter of Credit in case of
any drawing thereunder; (vi) the full text of any certificate to be presented by
the beneficiary in case of any drawing thereunder; and (vii) such other matters
as the Issuing Lender may require.
(b) ISSUANCE OF LETTERS OF CREDIT. At least two Business
Days prior to the issuance of any Letter of Credit or any amendment or renewal
of any Letter of Credit, the Issuing Lender shall confirm with the Agent (by
telephone or in writing) that the Agent has received a copy of the L/C
Application or L/C Amendment Application from the Borrower and, if not, the
Issuing Lender will provide the Agent with a copy thereof. Unless the Issuing
Lender has received notice on or before the Business Day immediately preceding
the date the Issuing Lender is to issue, amend or renew a requested Letter of
Credit from the Agent (i) directing the Issuing Lender not to issue, amend or
renew such Letter of Credit because such issuance, amendment or renewal is not
then permitted under Section 3.01(a) as a result of the limitations set forth in
clauses (1) through (4) thereof or Section 3.01(b); or (ii) that one or more
conditions specified in Article VIII are not then satisfied; then, subject to
the terms and conditions hereof, the Issuing Lender shall, on the requested
date, issue a Letter of Credit for the account of the Borrower or amend or renew
a Letter of Credit, as the case may be, in accordance with the Issuing Lender's
usual and customary business practices.
(c) NOTICE TO ISSUING LENDER OF AMENDMENT REQUEST. >From time
to time while a Letter of Credit is outstanding and prior to the Revolving
Expiry Date, the Issuing Lender shall, upon the written request of the Borrower
received by the Issuing Lender (with a copy sent by the Borrower to the Agent)
not later than the Required Notice Date, amend any Letter of Credit issued by
it. Each such request for amendment of a Letter of Credit shall be made in
writing, in the form of an L/C Amendment Application, and shall specify in form
and detail satisfactory to the Issuing Lender: (i) the Letter of Credit to be
amended; (ii) the proposed date of amendment of the Letter of Credit (which
shall be a Business Day); (iii) the nature of the proposed amendment; and (iv)
such other matters as the Issuing Lender may require. The Issuing Lender shall
be under no obligation to amend any Letter of Credit, and shall not permit the
amendment of a Letter of Credit, if: (A) the Issuing Lender would have no
obligation at such time to issue such Letter of Credit in its amended form under
the terms of this Agreement; or (B) the beneficiary of any such Letter of Credit
does not accept the proposed amendment to the Letter of Credit.
32.
(d) NOTICE TO ISSUING LENDER OF RENEWAL REQUEST. The Issuing
Lender and the Lenders agree that, while a Letter of Credit is outstanding and
prior to the Revolving Expiry Date, at the option of the Borrower and upon the
written request of the Borrower received by the Issuing Lender (with a copy sent
by the Borrower to the Agent) not later than the Required Notice Date, the
Issuing Lender shall be entitled to authorize the automatic renewal of any
Letter of Credit issued by it. Each such request for renewal of a Letter of
Credit shall be made in writing, in the form of an L/C Amendment Application,
and shall specify in form and detail satisfactory to the Issuing Lender: (i) the
Letter of Credit to be renewed; (ii) the proposed date of notification of
renewal of the Letter of Credit (which shall be a Business Day); (iii) the
revised expiry date of the Letter of Credit; and (iv) such other matters as the
Issuing Lender may require. The Issuing Lender shall be under no obligation so
to renew any Letter of Credit, and shall not permit any renewal (including any
automatic renewal of a Letter of Credit), if: (A) the Issuing Lender would have
no obligation at such time to issue or amend such Letter of Credit in its
renewed form under the terms of this Agreement; or (B) the beneficiary of any
such Letter of Credit does not accept the proposed renewal of the Letter of
Credit. If any outstanding Letter of Credit shall provide that it shall be
automatically renewed unless the beneficiary thereof receives notice from the
Issuing Lender that such Letter of Credit shall not be renewed, and if at the
time of renewal the Issuing Lender would be entitled to authorize the automatic
renewal of such Letter of Credit in accordance with this subsection (d) upon the
request of the Borrower but the Issuing Lender shall not have received any L/C
Amendment Application from the Borrower with respect to such renewal or other
written direction by the Borrower with respect thereto, the Issuing Lender shall
nonetheless be permitted to allow such Letter of Credit to renew, and the
Borrower and the Lenders hereby authorize such renewal, and, accordingly, the
Issuing Lender shall be deemed to have received an L/C Amendment Application
from the Borrower requesting such renewal.
(e) EXPIRY OF LETTERS OF CREDIT. The Issuing Lender may, at
its election (or shall, when required by the Agent at the direction of the
Majority Lenders), deliver any notices of termination or other communications to
any Letter of Credit beneficiary or transferee, or take any other action as
necessary or appropriate, at any time and from time to time, in order to cause
the expiry date of such Letter of Credit to be a date not later than the
Revolving Expiry Date, unless such later date has been previously approved by
the Agent and all the Lenders in writing and such Letter of Credit is fully cash
collateralized.
(f) CONFLICTS WITH L/C-RELATED DOCUMENTS. This Agreement
shall control in the event of any conflict with any L/C-Related Document (other
than any Letter of Credit).
(g) DELIVERY OF COPIES OF LETTERS OF CREDIT. The Issuing
Lender shall also deliver to the Agent, concurrently with or promptly following
its delivery of a Letter of Credit, or amendment to or renewal of a Letter of
Credit, to an advising bank or a beneficiary, a true and complete copy of each
such Letter of Credit or amendment to or renewal of a Letter of Credit.
(h) NOTICES TO LENDERS. The Agent shall promptly notify the
Lenders of the issuance, amendment or renewal of a Letter of Credit hereunder
(including the date thereof and the amount, expiry and reference number of such
Letter of Credit).
33.
SECTION 3.03 PARTICIPATIONS, DRAWINGS AND REIMBURSEMENTS.
(a) PARTICIPATIONS OF LENDERS IN ADDITIONAL LETTERS OF
CREDIT. Immediately upon the issuance of each Letter of Credit, the Issuing
Lender shall be deemed irrevocably to have sold and transferred to each Lender
without recourse or warranty, and each Lender shall be deemed to, and hereby
irrevocably and unconditionally agrees to, purchase and accept from the Issuing
Lender, for such Lender's own account and risk, an undivided interest and a
participation in such Letter of Credit and each drawing thereunder in an amount
equal to the product of (i) the Pro Rata Share of such Lender, times (ii) the
maximum amount available to be drawn under such Letter of Credit and the amount
of such drawing, respectively. For purposes of Section 3.01(a), each issuance of
a Letter of Credit shall be deemed to utilize the Revolving Commitment of each
Lender by an amount equal to the amount of such participation.
(b) DRAWING AND REIMBURSEMENT. In the event of any request
for a drawing under a Letter of Credit by the beneficiary thereof, the Issuing
Lender shall immediately notify the Borrower and the Agent. The Borrower shall
reimburse the Issuing Lender prior to 1:00 p.m. (New York time), on each date
that any amount is paid by the Issuing Lender under any Letter of Credit, in an
amount equal to the amount paid by the Issuing Lender on such date under such
Letter of Credit. In the event the Borrower shall fail to reimburse the Issuing
Lender for the full amount of any drawing under any Letter of Credit by 1:00
p.m. (New York time) on the same date such drawing is honored by the Issuing
Lender, the Issuing Lender shall promptly notify the Agent and the Agent shall
promptly notify each Lender thereof (including the amount of the drawing and
such Lender's Pro Rata Share thereof), and the Borrower shall be deemed to have
requested that Base Rate Loans be made by the Lenders to be disbursed on the
date of payment by the Issuing Lender under such Letter of Credit, subject to
the amount of the unutilized portion of the Revolving Commitment of each Lender
and subject to the conditions set forth in clauses (b) and (c) of Section 8.02.
The Borrower hereby directs that the proceeds of any such Loans deemed to be
made by it shall be used to pay its reimbursement obligations in respect of any
such drawing. Solely for the purposes of making such Loans, the Minimum Amount
limitations set forth in Section 2.06 shall not be applicable. Any notice given
by the Issuing Lender or the Agent pursuant hereto may be telephonic if
immediately confirmed in writing; PROVIDED that the lack of such an immediate
confirmation shall not affect the conclusiveness or binding effect of such
notice.
(c) FUNDING BY LENDERS. Each Lender shall upon receipt of
any notice pursuant to subsection (b) make available to the Agent for the
account of the Issuing Lender an amount in Dollars and in same day or
immediately available funds equal to its Pro Rata Share of the amount of the
drawing, whereupon the participating Lenders shall (subject to subsection(b))
each be deemed to have made a Revolving Loan consisting of a Base Rate Loan to
the Borrower in that amount. If any Lender so notified shall fail to make
available to the Agent for the account of the Issuing Lender the amount of such
Lender's Pro Rata Share of the amount of the drawing by no later than 3:00 p.m.
(New York time) on the date such drawing was honored by the Issuing Lender (the
"Participation Date"), then interest shall accrue on such Lender's obligation to
make such payment, from the Participation Date to the date such Lender makes
such payment, at a rate per annum equal to (i) the Federal Funds Rate in effect
from time to time during the period commencing on the Participation Date and
ending on the date three Business Days thereafter, and (ii) thereafter at the
Base Rate as in effect from time to time. The Agent shall promptly give
34.
notice of the occurrence of the Participation Date, but failure of the Agent to
give any such notice on the Participation Date or in sufficient time to enable
any Lender to effect such payment on such date shall not relieve such Lender
from its obligations under this Section 3.03.
(d) L/C UNREIMBURSED DRAWINGS. With respect to any
unreimbursed drawing that is not converted into Revolving Loans consisting of
Base Rate Loans to the Borrower in whole or in part, because of the Borrower's
failure to satisfy the conditions set forth in clauses (b) and (c) of Section
8.02 or for any other reason, the Borrower shall be obligated to the Issuing
Lender for an L/C Unreimbursed Draw in the amount of such drawing, which L/C
Unreimbursed Draw shall be due and payable on demand, together with interest,
and shall bear interest at a rate per annum equal to the Base Rate PLUS the
Applicable Margin PLUS 2% per annum, and each Lender's payment to the Issuing
Lender pursuant to subsection (c) shall be deemed payment in respect of its
participation in such L/C Unreimbursed Draw and shall constitute an L/C Advance
from such Lender in satisfaction of its participation obligation under this
Section 3.03.
(e) OBLIGATION OF LENDERS ABSOLUTE. Each Lender's obligation
in accordance with this Agreement to make the Revolving Loans or L/C Advances,
as contemplated by this Section 3.03, as a result of a drawing under a Letter of
Credit shall be absolute and unconditional and shall not be affected by any
circumstance, including (i) any set-off, counterclaim, recoupment, defense or
other right which such Lender may have against the Issuing Lender, the Borrower
or any other Person for any reason whatsoever; (ii) the occurrence or
continuance of a Default, an Event of Default or a Material Adverse Effect; or
(iii) any other circumstance, happening or event whatsoever, whether or not
similar to any of the foregoing.
SECTION 3.04 REPAYMENT OF PARTICIPATIONS. Upon(and only upon)
receipt by the Agent for the account of the Issuing Lender of funds from the
Borrower (i) in reimbursement of any payment made by the Issuing Lender under
the Letter of Credit with respect to which any Lender has theretofore paid the
Agent for the account of the Issuing Lender for such Lender's participation in
the Letter of Credit pursuant to Section 3.03, or (ii) in payment of interest
thereon, the Agent shall pay to each Lender, in the same funds as those received
by the Agent for the account of the Issuing Lender, the amount of such Lender's
Pro Rata Share of such funds, and the Issuing Lender shall receive the amount of
the Pro Rata Share of such funds of any Lender that did not so pay the Agent for
the account of the Issuing Lender. If the Agent or the Issuing Lender is
required at any time to return to the Borrower or to a trustee, receiver,
liquidator, custodian, or any official in any Insolvency Proceeding, any portion
of the payments made by the Borrower to the Agent for the account of the Issuing
Lender in reimbursement of a payment made under the Letter of Credit or interest
thereon, each Lender shall, on demand of the Agent, forthwith return to the
Agent or the Issuing Lender the amount of its Pro Rata Share of any amounts so
returned by the Agent or the Issuing Lender PLUS interest thereon from the date
such demand is made to the date such amounts are returned by such Lender to the
Agent or the Issuing Lender, at a rate per annum equal to the Federal Funds Rate
in effect from time to time.
SECTION 3.05 ROLE OF THE ISSUING LENDER.
(a) NO RESPONSIBILITY OF ISSUING LENDER. Each Lender and the
Borrower agrees that, in paying any drawing under a Letter of Credit, the
Issuing Lender shall not have any
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responsibility to obtain any document (other than any sight draft and
certificates expressly required by the Letter of Credit) or to ascertain or
inquire as to the validity or accuracy of any such document or the authority of
the Person executing or delivering any such document. The Borrower hereby
assumes all risks of the acts or omissions of any beneficiary or transferee with
respect to its use of any Letter of Credit; PROVIDED, HOWEVER, that this
assumption is not intended to, and shall not, preclude the Borrower's pursuing
such rights and remedies as it may have against the beneficiary or transferee at
law or under any other agreement. No Agent/IB-Related Person, nor any of the
respective correspondents, participants or assignees of the Issuing Lender,
shall be liable or responsible for any of the matters described in clauses (i)
through (vii) of Section 3.06; PROVIDED, HOWEVER, anything in such clauses to
the contrary notwithstanding, that the Borrower may have a claim against the
Issuing Lender, and the Issuing Lender may be liable to the Borrower, to the
extent, but only to the extent, of any direct, as opposed to consequential or
exemplary, damages suffered by the Borrower which the Borrower proves were
caused by the Issuing Lender's willful misconduct or gross negligence or the
Issuing Lender's willful failure to pay under any Letter of Credit after the
presentation to it by the beneficiary of a sight draft and certificate(s)
strictly complying with the terms and conditions of a Letter of Credit. In
furtherance and not in limitation of the foregoing: (i) the Issuing Lender may
accept documents that appear on their face to be in order, without
responsibility for further investigation, regardless of any notice or
information to the contrary; and (ii) the Issuing Lender shall not be
responsible for the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign a Letter of Credit or the rights
or benefits thereunder or proceeds thereof, in whole or in part, which may prove
to be invalid or ineffective for any reason.
(b) NO LIABILITY OF AGENT/IB-RELATED PERSONS. No
Agent/IB-Related Person nor any of the respective correspondents, participants
or assignees of the Issuing Lender shall be liable to any Lender for: (i) any
action taken or omitted in connection herewith at the request or with the
approval of the Lenders (including the Majority Lenders, as applicable); (ii)
any action taken or omitted in the absence of gross negligence or willful
misconduct; or (iii) the due execution, effectiveness, validity or
enforceability of any L/C-Related Document.
SECTION 3.06 OBLIGATIONS OF BORROWER ABSOLUTE.The obligations
of the Borrower under this Agreement and any L/C-Related Document to reimburse
the Issuing Lender for a drawing under a Letter of Credit, and to repay any L/C
Unreimbursed Draw and any drawing under a Letter of Credit converted into
Revolving Loans, shall be unconditional and irrevocable, and shall be paid
strictly in accordance with the terms of this Agreement and each such other
L/C-Related Document under all circumstances, including the following:
(i) any lack of validity or enforceability of this Agreement
or any L/C-Related Document;
(ii) any change in the time, manner or place of payment of,or
in any other term of, all or any of the obligations of the Borrower in respect
of any Letter of Credit or any other amendment or waiver of or any consent to
departure from all or any of the L/C-Related Documents;
(iii) the existence of any claim, set-off, defense or other
right that the Borrower may have at any time against any beneficiary or any
transferee of any Letter of Credit (or any
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Person for whom any such beneficiary or any such transferee may be acting), the
Issuing Lender or any other Person, whether in connection with this Agreement,
the transactions contemplated hereby or by the L/C-Related Documents or any
unrelated transaction;
(iv) any draft, demand, certificate or other document
presented under any Letter of Credit proving to be forged, fraudulent, invalid
or insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(v) any payment by the Issuing Lender under any Letter of
Credit against presentation of a draft or certificate that does not strictly
comply with the terms of any Letter of Credit; or any payment made by the
Issuing Lender under any Letter of Credit to any Person purporting to be a
trustee in bankruptcy, debtor-in-possession, assignee for the benefit of
creditors, liquidator, receiver or other representative of or successor to any
beneficiary or any transferee of any Letter of Credit, including any arising in
connection with any bankruptcy, reorganization or other insolvency proceeding;
(vi) any exchange, release or non-perfection of any
collateral, or any release or amendment or waiver of or consent to departure
from any other guarantee, for all or any of the obligations of the Borrower in
respect of any Letter of Credit; or
(vii) any other circumstance or happening whatsoever, whether
or not similar to any of the foregoing, including any other circumstance that
might otherwise constitute a defense available to, or a discharge of, the
Borrower or a guarantor.
SECTION 3.07 CASH COLLATERAL PLEDGE. Upon (i) the request of
the Agent, (A) if the Issuing Lender has honored any full or partial drawing
request on any Letter of Credit and such drawing has resulted in an L/C
Unreimbursed Draw hereunder, or (B) if, as of the Revolving Expiry Date, any
Letters of Credit may for any reason remain outstanding and partially or wholly
undrawn, or (ii) the occurrence of the circumstances described in Sections
5.03(b) or 11.02 requiring the Borrower to cash collateralize Letters of Credit,
the Borrower shall immediately pay over cash in an amount equal to the L/C
Obligations to the Collateral Agent for the benefit of the Lenders, to be held
by the Collateral Agent as cash collateral subject to the terms of this Section
3.07. Such amount, together with any amount received by the Collateral Agent in
respect of outstanding Letters of Credit pursuant to Section 11.02, when
received by the Collateral Agent, shall be held by the Collateral Agent as part
of the Collateral pursuant to the terms of the Security Agreement as cash
collateral for the reimbursement obligations of the Borrower under this
Agreement in respect of the L/C Obligations and for the other Obligations. Such
cash collateral shall bear interest for the benefit of the Borrower, PROVIDED
that all such accrued interest shall be held as additional cash collateral
hereunder and under the Security Agreement. All cash collateral shall be held by
the Collateral Agent until the release thereof shall be permitted pursuant to
the terms of the Security Agreement.
SECTION 3.08 LETTER OF CREDIT FEES.
(a) CERTAIN LETTER OF CREDIT FEES.The Borrower shall pay (i)
to the Agent for the account of each of the Lenders a letter of credit fee with
respect to the Letters of Credit equal
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to the Applicable Fee Amount multiplied by the average daily maximum amount
available to be drawn on the outstanding Letters of Credit, and (ii) to the
Issuing Lender a letter of credit fronting fee with respect to the Letters of
Credit equal to 0.125% per annum of the average daily maximum amount available
to be drawn of the outstanding Letters of Credit, computed in each case on a
quarterly basis in arrears on the last Business Day of each calendar quarter
based upon Letters of Credit outstanding for that quarter as calculated by the
Agent. Such letter of credit fees shall be due and payable quarterly in arrears
on the last Business Day of each calendar quarter during which Letters of Credit
are outstanding, commencing on the first such quarterly date to occur after the
Closing Date, through the Revolving Expiry Date (or such later date upon which
the outstanding Letters of Credit shall expire), with the final payment to be
made on the Revolving Expiry Date (or such expiration date).
(b) CERTAIN ADDITIONAL FEES AND CHARGES. The Borrower shall
pay to the Issuing Lender from time to time on demand the normal issuance,
presentation, amendment and other processing fees, and other standard costs and
charges, of the Issuing Lender relating to standby letters of credit as from
time to time in effect.
(c) FEES NONREFUNDABLE. All fees and charges payable under
this Section 3.08 shall be nonrefundable.
SECTION 3.09 APPLICABILITY OF ISP98. Unless otherwise
expressly agreed by the Issuing Lender and the Borrower when a Letter of Credit
is issued and subject to applicable laws, performance under Letters of Credit by
the Issuing Lender, its correspondents, and beneficiaries will be governed by
the rules of the "International Standby Practices 1998" (ISP98) or such later
revision as may be published by the Institute of International Banking Law &
Practice on any date any standby Letter of Credit may be issued.
ARTICLE IV
INTEREST AND FEES; CONVERSION OR CONTINUATION
SECTION 4.01 INTEREST.
(a) INTEREST RATE. The Borrower shall pay interest on the
unpaid principal amount of each Loan from the date of such Loan until such
principal amount shall be paid in full, at the following rates:
(i) during such periods as such Loan is a Base Rate Loan
(other than a Swingline Loan), at a rate per annum equal at all times to the
Base Rate plus the Applicable Margin;
(ii) during such periods as such Loan is a Eurodollar Rate
Loan, at a rate per annum equal at all times during each Interest Period for
such Eurodollar Rate Loan to the Eurodollar Rate for such Interest Period plus
the Applicable Margin.
(iii) during such periods as such Loan is a Swingline Loan, at
a rate per annum equal to a quoted rate as shall from time to time be mutually
agreed upon by the Borrower and the Swingline Lender.
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(b) INTEREST PERIODS. The initial and each subsequent
Interest Period for the Eurodollar Rate Loans shall be a period of one, two,
three or six months, or such other period as requested by the Borrower and
acceptable to all the Lenders. The determination of Interest Periods shall be
subject to the following provisions:
(A) in the case of immediately successive Interest Periods,
each successive Interest Period shall commence on the day on which the next
preceding Interest Period expires;
(B) if any Interest Period would otherwise end on a day
which is not a Business Day, that Interest Period shall be extended to the next
succeeding Business Day unless the result of such extension would be to carry
such Interest Period into another calendar month, in which event such Interest
Period shall end on the immediately preceding Business Day;
(C) the Borrower may select Interest Periods with respect to
Term Loans which commence before and end after a Principal Payment Date only to
the extent that the Base Rate Loans to be outstanding on such Principal Payment
Date PLUS the Eurodollar Rate Loans with Interest Periods ending on such
Principal Payment Date at least equal in principal amount the required principal
payment on such Principal Payment Date;
(D) no Interest Period shall extend beyond (1) the Revolving
Expiry Date with respect to any Revolving Loan, and (2) the Final Maturity Date
with respect to any Term Loan;
(E) any Interest Period that begins on the last Eurodollar
Business Day of a calendar month (or on a day for which there is no numerically
corresponding day in the ending calendar month of such Interest Period) shall
end on the last Eurodollar Business Day of the ending calendar month of such
Interest Period;
(F) there shall be no more than five Interest Periods in
effect at any one time.
(c) INTEREST PAYMENT DATES. Subject to Section 4.02,interest
on the Loans shall be payable in arrears at the following times:
(i) interest on each Base Rate Loan (other than Swingline
Loans) shall be payable quarterly on the last Business Day in each calendar
quarter, on the date of any prepayment or conversion of any such Base Rate Loan,
and at maturity;
(ii) interest on each Eurodollar Rate Loan shall be payable
on the last day of each Interest Period for such Eurodollar Rate Loan, PROVIDED
that (A) in the case of any such Interest Period which is greater than three
months, interest on such Eurodollar Rate Loan shall be payable on each date that
is three months, or any integral multiple thereof, after the beginning of such
Interest Period, and on the last day of such Interest Period, and (B) if any
prepayment, conversion, or continuation is effected other than on the last day
of such Interest Period, accrued interest on such Eurodollar Rate Loan shall be
due on such prepayment, conversion or continuation date as to the principal
amount of such Eurodollar Rate Loan prepaid, converted or continued; and
(iii) interest on each Swingline Loan shall be payable monthly
on the last Business Day in each calendar month and at maturity.
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(d) NOTICE TO THE BORROWER AND THE LENDERS. Each
determination by the Agent hereunder of a rate of interest and of any change
therein, including any changes in (i) the Applicable Margin, (ii) the Base Rate
during any periods in which Base Rate Loans shall be outstanding, (iii) the
Federal Funds Rate during any periods in which Swingline Loans are outstanding
and (iv) the Eurodollar Reserve Percentage (if any) during any periods in which
Eurodollar Rate Loans shall be outstanding, in the absence of manifest error
shall be conclusive and binding on the parties hereto and shall be promptly
notified by the Agent to the Borrower and the Lenders (or to the Swingline
Lender, as applicable). Such notice shall set forth in reasonable detail the
basis for any such determination or change. The failure of the Agent to give any
such notice specified in this subsection shall not affect the Borrower's
obligation to pay such interest or fees.
SECTION 4.02 DEFAULT RATE OF INTEREST.Notwithstanding Section
4.01, in the event that any amount of principal of or interest on any Loan is
not paid in full when due, or any other amount payable hereunder or under the
Loan Documents is not paid in full within three (3) Business Days of when due
(in each case, whether at stated maturity, by acceleration or otherwise), the
Borrower shall pay interest on such unpaid principal, interest or other amount,
from the date such amount becomes due until the date such amount is paid in
full, and after as well as before any entry of judgment to the extent permitted
by law, payable on demand, at a rate per annum equal at all times to the Base
Rate PLUS the Applicable Margin PLUS 2%.
SECTION 4.03 FEES.
(a) COMMITMENT FEE. The Borrower agrees to pay to the Agent
for the account of each Lender a commitment fee on the average daily unused
portion of such Lender's Revolving Commitment as in effect from time to time
from the Closing Date until the Revolving Expiry Date at a rate per annum equal
to the Applicable Fee Amount, payable quarterly in arrears on the last Business
Day of each calendar quarter in each year, commencing on the first such date
after the Closing Date, and on the earlier of the date such Revolving Commitment
is terminated hereunder or the Revolving Expiry Date. For purposes of
calculation of such unused portion of a Lender's Revolving Commitment, each
Lender's Revolving Commitment shall be considered used on any date to the extent
of its participation on such date in any Letter of Credit or Swingline Loan and
any L/C Advance made by it.
(b) UPFRONT FEE. The Borrower agrees to pay to the Agent for
the account of each Lender an upfront fee payable on the Closing Date as
specified in the Fee Letter.
(c) ANNUAL AGENCY FEE. The Borrower agrees to pay to the
Agent for its own account on the Closing Date and on each anniversary of the
Closing Date such fee for agency services as specified in the Fee Letter.
(d) FEES NONREFUNDABLE. All fees payable under this Section
4.03 shall be nonrefundable.
SECTION 4.04 COMPUTATIONS. All computations of interest,
commitment fees and letter of credit fees hereunder shall be made on the basis
of a year of 360 days for the actual number of days occurring in the period for
which such fee or interest is payable, which
40.
results in more interest being paid than if computed on the basis of a 365-day
year. Notwithstanding the foregoing, if any Loan is repaid on the same day on
which it is made, such day shall be included in computing interest on such Loan.
SECTION 4.05 CONVERSION OR CONTINUATION.
(a) ELECTION. The Borrower may elect (i) to convert all or
any part of (A) outstanding Base Rate Loans into Eurodollar Rate Loans, or (B)
outstanding Eurodollar Rate Loans into Base Rate Loans; or (ii) to continue all
or any part of a Loan with one type of interest rate as such; PROVIDED, HOWEVER,
that if the aggregate amount of Eurodollar Rate Loans in respect of any
Borrowing shall have been reduced, by payment, prepayment, or conversion of part
thereof to be less than $1,000,000, such Eurodollar Rate Loans shall
automatically convert into Base Rate Loans, and on and after such date the right
of the Borrower to continue such Loans as, and convert such Loans into,
Eurodollar Rate Loans shall terminate. The continued or converted Base Rate and
Eurodollar Rate Loans shall be allocated to the Lenders ratably in accordance
with their Pro Rata Shares. Any conversion or continuation of Eurodollar Rate
Loans shall be made on the last day of the current Interest Period for such
Eurodollar Rate Loans. No outstanding Loan may be converted into or continued as
a Eurodollar Rate Loan if any Event of Default has occurred and is continuing.
(b) AUTOMATIC CONVERSION. On the last day of any Interest
Period for any Eurodollar Rate Loans, such Eurodollar Rate Loans shall, if not
repaid, automatically convert into Base Rate Loans unless the Borrower shall
have made a timely election to continue such Eurodollar Rate Loans as such for
an additional Interest Period or to convert such Eurodollar Rate Loans, in each
case as provided in subsection (a) .
(c) NOTICE TO THE AGENT. The conversion or continuation of
any Loans contemplated by subsection (a) shall be made upon written or
telephonic notice (in the latter case to be confirmed promptly in writing) from
the Borrower to the Agent, which notice shall be received by the Agent not later
than 1:00 p.m. (New York time) on the Required Notice Date. Each such notice (a
"Notice of Conversion or Continuation") shall, except as provided in Sections
6.01 and 6.04, be irrevocable and binding on the Borrower, shall refer to this
Agreement and shall specify: (i) the proposed date of the conversion or
continuation, which shall be a Business Day (or a Eurodollar Business Day, for
conversions into or continuations of Eurodollar Rate Loans); (ii) the
outstanding Loans (or parts thereof) to be converted into or continued as Base
Rate or Eurodollar Rate Loans; (iii) the aggregate amount of the Loans which are
the subject of such continuation or conversion, which shall be in a Minimum
Amount; (iv) if the conversion or continuation consists of any Eurodollar Rate
Loans, the duration of the Interest Period with respect thereto; and (v) that no
Event of Default exists hereunder.
(d) NOTICE TO THE LENDERS. The Agent shall give each Lender
prompt notice by telephone (confirmed promptly in writing) or by facsimile of
(i) the proposed conversion or continuation of any Loans, specifying the
information contained in the Borrower's Notice and such Lender's Pro Rata Share
thereof or (ii), if timely notice was not received from the Borrower, the
details of any automatic conversion under subsection 4.05(b).
41.
SECTION 4.06 HIGHEST LAWFUL RATE. Anything herein to the
contrary notwithstanding, if during any period for which interest is computed
hereunder, the applicable interest rate, together with all fees, charges and
other payments which are treated as interest under applicable law, as provided
for herein or in any other Loan Document, would exceed the maximum rate of
interest which may be charged, contracted for, reserved, received or collected
by any Lender in connection with this Agreement under applicable law (the
"Maximum Rate"), the Borrower shall not be obligated to pay, and such Lender
shall not be entitled to charge, collect, receive, reserve or take, interest in
excess of the Maximum Rate, and during any such period the interest payable
hereunder shall be limited to the Maximum Rate.
ARTICLE V
REDUCTION OF COMMITMENTS;
REPAYMENT; PREPAYMENT
SECTION 5.01 REDUCTION OR TERMINATION OF THE COMMITMENTS.
(a) OPTIONAL REDUCTION OR TERMINATION. The Borrower may,
upon prior notice to the Agent as provided herein, terminate in whole or reduce
ratably in part, as of the date specified by the Borrower in such notice, any
then unused portion of the Revolving Commitments (including the L/C Commitment);
PROVIDED, HOWEVER, that each partial reduction shall be in a Minimum Amount; and
PROVIDED FURTHER, HOWEVER, that no such reduction or termination shall be
permitted if the Effective Amount of Revolving Loans, Swingline Loans and L/C
Obligations would exceed the amount of the aggregate Revolving Commitments
thereafter in effect; and PROVIDED FURTHER, HOWEVER, that once reduced in
accordance with this Section 5.01, the Revolving Commitment of any Lender may
not be increased. The amount of any such Revolving Commitment reductions shall
not be applied to the L/C Commitment unless otherwise specified by the Borrower
or unless the Revolving Commitments as so reduced would be less than the L/C
Commitment. All accrued commitment fees to, but not including, the effective
date of any termination of the Revolving Commitments shall be payable on the
effective date of such termination.
(b) MANDATORY TERMINATION.
(i) If on the Closing Date the Term Commitments of the
Lenders shall exceed the aggregate outstanding principal amount of the Term
Loans, such unused portion of the Term Commitments shall terminate on the
Closing Date. The parties agree and acknowledge that the termination of the Term
Commitments shall not affect the operation of subsection 2.01(d).
(ii) The Revolving Commitments shall terminate on the
Revolving Expiry Date.
(c) OTHER MANDATORY REDUCTIONS.
(i) Upon the making of any mandatory prepayment under clause
(ii), (iii) or (iv) of Section 5.03(b) on or prior to the Revolving Expiry Date,
the Revolving Commitment of each Lender shall automatically reduce by an amount
equal to such Lender's Pro Rata Share of the aggregate amount of principal of
Revolving Loans, Swingline Loans and L/C Advances
42.
prepaid and Letters of Credit cash collateralized, effective as of the date of
receipt by the Borrower or its Subsidiary of the Net Proceeds or Net Issuance
Proceeds, as the case may be, arising from the applicable disposition of assets,
incurrence of debt for borrowed money or Event of Loss.
(ii) If prior to the Revolving Expiry Date the amount
required to be paid on account of the Revolving Loans, Swingline Loans or L/C
Advances, or applied to cash collateralize the Letters of Credit, pursuant to
clause (ii), (iii) or (iv) of Section 5.03(b) shall exceed the outstanding
principal amount of the Revolving Loans, Swingline Loans and L/C Advances or the
amount of the L/C Obligations then outstanding, such automatic reduction shall
nonetheless occur and shall be determined on the basis of the amount of
Revolving Loans, Swingline Loans and L/C Advances that would be required to be
prepaid and Letters of Credit that would be required to be cash collateralized
assuming the Revolving Commitments were fully utilized.
(d) NOTICE. The Agent shall give each Lender prompt notice
of any termination or reduction of its Revolving Commitment under this Section
5.01.
(e) ADJUSTMENT OF COMMITMENT FEE; NO REINSTATEMENT. >From the
effective date of any reduction or termination prior to the Revolving Expiry
Date, the commitment fee payable under Section 4.03(a) shall be computed on the
basis of the Revolving Commitments as so reduced or terminated. Once reduced or
terminated, the Revolving Commitments may not be increased or otherwise
reinstated.
SECTION 5.02 REPAYMENT OF THE LOANS.
(a) REVOLVING LOANS. The Borrower shall repay to the Lenders
in full on the Revolving Expiry Date the aggregate principal amount of the
Revolving Loans outstanding on such date.
(b) TERM LOANS. The Borrower shall repay to the Lenders the
aggregate principal amount of the Term Loans in substantially equal consecutive
quarterly installments, commencing June 30, 2003, with subsequent installments
payable on the last day of each calendar quarter thereafter, to and including
the Final Maturity Date; PROVIDED, HOWEVER, that the last such installment shall
be in the amount necessary to repay in full the aggregate unpaid principal
amount of the Term Loans.
(c) SWINGLINE LOANS. The Borrower shall repay to the
Swingline Lender on each date as shall from time to time be mutually agreed upon
by the Swingline Lender and the Borrower the aggregate principal amount of the
Swingline Loans outstanding on such date; PROVIDED, HOWEVER, the aggregate
principal amount of the Swingline Loans outstanding on the Revolving Expiry Date
shall be due and payable on such date.
SECTION 5.03 PREPAYMENTS.
(a) OPTIONAL PREPAYMENTS. Subject to Section 6.02, the
Borrower may, upon prior notice to the Agent not later than the Required Notice
Date, prepay the outstanding amount
43.
of the Loans in whole or ratably in part, without premium or penalty. Partial
prepayments shall be in Minimum Amounts.
(b) MANDATORY PREPAYMENTS.
(i) Subject to Section 6.02, if on any date the Effective
Amount of all Revolving Loans PLUS the Effective Amount of all Swingline Loans
PLUS the Effective Amount of all L/C Obligations shall exceed the lesser of (A)
the aggregate Revolving Commitments then in effect and (B) the Borrowing Base
then in effect, the Borrower shall immediately, and without notice or demand,
prepay the outstanding principal amount of the Revolving Loans, L/C Advances and
Swingline Loans and/or cash collateralize the Letters of Credit by an amount
equal to the applicable excess. Additionally, if on any date the aggregate
outstanding amount of L/C Obligations shall exceed the L/C Commitment, the
Borrower shall cash collateralize on such date the outstanding Letters of Credit
in an amount equal to the excess of the maximum amount then available to be
drawn under the Letters of Credit over the L/C Commitment.
(ii) Upon the sale, transfer or other disposition of any
assets (or group of related assets), other than the Specified Assets, by the
Borrower or any Subsidiary under subsection 10.04(e)(iii) (to the extent the Net
Proceeds from the sale, transfer or other disposition of worn out or obsolete
assets are not promptly applied to replace such assets) or 10.04(e)(vi), the
Borrower shall, within one Business Day of the Borrower's or such Subsidiary's
receipt of the proceeds thereof, prepay the outstanding principal amount of the
Loans, in an amount equal to 100% of the Net Proceeds therefrom by depositing
such amount with the Collateral Agent for application by the Collateral Agent
under and pursuant to Section 6.10 of the Intercreditor Agreement to the Secured
Obligations; PROVIDED, HOWEVER, that in the case of prepayments of any Revolving
Loans, Swingline Loans and L/C Advances, the required prepayment shall be in an
amount equal to the excess, if any (after giving effect to the related mandatory
Commitment reduction under Section 5.01(c)), of the Effective Amount of the
Revolving Loans, Swingline Loans and L/C Obligations over the aggregate
RevolvingCommittments. If on the date of the foregoing required prepayment the
amount of any such required prepayment (after giving effect to the related
mandatory Commitment reduction under Section 5.01(c)) shall exceed the
outstanding principal amount of the Loans and there shall be any Letters of
Credit outstanding, then the Borrower shall apply such funds to cash
collateralize any such outstanding Letters of Credit.
(iii) Upon the incurrence of Indebtedness for borrowed money
other than Subordinated Debt by the Borrower or any Subsidiary, the Borrower
shall, within one Business Day of the Borrower's or such Subsidiary's receipt of
the proceeds thereof, prepay the outstanding principal amount of the Loans in an
amount equal to 100% of the Net Issuance Proceeds therefrom by depositing such
amount with the Collateral Agent for application by the Collateral Agent under
and pursuant to Section 6.10 of the Intercreditor Agreement to the Secured
Obligations; PROVIDED that in the case of prepayments of any Revolving Loans,
Swingline Loans and L/C Advances, the required prepayment shall be in an amount
equal to the excess (after giving effect to the related
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mandatory Commitment reduction under Section 5.01(c)) of the Effective Amount of
the Revolving Loans, Swingline Loans and L/C Obligations over the aggregate
Revolving Commitments. If on the date of the foregoing required prepayment the
amount of any such required prepayment (after giving effect to the related
mandatory Commitment reduction under Section 5.01(c)) shall exceed the
outstanding principal amount of the Loans and there shall be any Letters of
Credit outstanding, then the Borrower shall apply such funds to cash
collateralize any such outstanding Letters of Credit.
(iv) If any Event of Loss shall occur with respect to any
assets of the Borrower or any Subsidiary, the Borrower shall prepay the
outstanding principal amount of the Loans in an amount equal to the Net Proceeds
(after giving effect to repair or replacement as provided in the definition of
"Net Proceeds") therefrom by depositing such amount with the Collateral Agent
for application by the Collateral Agent under and pursuant to Section 6.10 of
the Intercreditor Agreement to the Secured Obligations, PROVIDED, HOWEVER, that,
(A) such prepayment shall not be required if such amount is less than $1,500,000
and (B) in the case of prepayments of any Revolving Loans, Swingline Loans and
L/C Advances, the required prepayment (subject to sub-clause (A) of this
proviso) shall be in an amount equal to the excess (after giving effect to the
related mandatory Commitment reduction under Section 5.01(c)) of the Effective
Amount of the Revolving Loans, Swingline Loans and L/C Obligations over the
aggregate Revolving Commitments. If on the date of the foregoing required
prepayment the amount of any such required prepayment (after giving effect to
the related mandatory Commitment reduction under Section 5.01(c)) shall exceed
the outstanding principal amount of the Loans and there shall be any Letters of
Credit outstanding, then the Borrower shall apply such funds to cash
collateralize any such outstanding Letters of Credit.
(v) If the appraised fair market value of the Hewitt Ranch
Property set forth in the Hewitt Appraisal shall be less than $11,600,000, the
Borrower shall prepay the outstanding principal amount of the Loans in an amount
equal to 70% of the difference between (A) $11,600,000 MINUS (B) the appraised
fair market value of the Hewitt Ranch Property set forth in the Hewitt
Appraisal.
(c) ORDER OF APPLICATION.
(i) Any prepayments pursuant to clause (i) of subsection
5.03(b) above shall be applied, first, to any Swingline Loans then outstanding,
second, to any L/C Advances then outstanding, third, to any Revolving Loans then
outstanding and, fourth, to cash collateralize any L/C Obligations then
outstanding;
(ii) Any prepayments pursuant to clauses (ii), (iii),(iv) and
(v) of subsection 5.03(b) above shall be applied, first, to any Term Loans then
outstanding, second, to any Swingline Loans then outstanding, third, to any L/C
Advances then outstanding, fourth, to any Revolving Loans then outstanding and,
fifth, to cash collateralize any L/C Obligations then outstanding; PROVIDED,
HOWEVER, that to the extent the Net Proceeds to be applied to prepay the Loans
pursuant to clauses (ii) and (iv) of subsection 5.03(b) above arise as a result
of the sale, transfer or other disposition of Inventory or as a result of an
Event of Loss with respect to Inventory, then such Net Proceeds shall be
applied, first, to any Swingline Loans then outstanding, second, to any L/C
Advances then outstanding, third, to any Revolving Loans then outstanding,
fourth, to cash collateralize any L/C Obligations then outstanding and, fifth,
to any Term Loans then outstanding.
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(iii) Subject to clauses (i) and (ii) of this subsection
5.03(c), any prepayments pursuant to subsection 5.03(b) above shall be applied,
first, to any Base Rate Loans then outstanding and, second, to Eurodollar Rate
Loans with the shortest Interest Periods remaining; PROVIDED, HOWEVER, that if
the amount of Base Rate Loans then outstanding is not sufficient to satisfy the
entire prepayment requirement, the Borrower may, at its option so long as no
Default or Event of Default has occurred and is continuing, place any amounts
which it would otherwise be required to use to prepay Eurodollar Rate Loans on a
day other than the last day of the Interest Period therefor in an
interest-bearing account pledged to the Collateral Agent for the benefit of the
Lenders under the Security Agreement until the end of such Interest Period, at
which time such pledged amounts will be applied to prepay such Eurodollar Rate
Loans. The Borrower shall pay, together with each prepayment under subsections
5.03(a) or 5.03(b), accrued interest on the amount of any Loans prepaid and any
amounts required pursuant to Section 6.02. Any voluntary prepayments of Term
Loans pursuant to subsection 5.03(a) shall be applied pro rata across each
remaining installment of principal. Any mandatory prepayments of Term Loans
pursuant to subsection 5.03(b) shall be applied to the remaining principal
installments in inverse order of maturity.
(d) NOTICE; APPLICATION. The notice given of any prepayment
(a "Notice of Prepayment") shall specify the date and amount of the prepayment
and whether the prepayment is of Base Rate Loans, Eurodollar Rate Loans or
Swingline Loans or a combination thereof, and if of a combination thereof the
amount of the prepayment allocable to each. Such Notice of Prepayment shall also
specify whether the prepayment is of L/C Advances, Revolving Loans, Term Loans,
Swingline Loans or a combination thereof. Upon receipt of the Notice of
Prepayment of L/C Advances, Revolving Loans or Term Loans, the Agent shall
promptly notify each Lender thereof. Upon receipt of the Notice of Prepayment of
Swingline Loans, the Agent shall promptly notify the Swingline Lender thereof.
If a Notice of Prepayment is given, the Borrower shall make such prepayment and
the prepayment amount specified in such Notice shall be due and payable on the
date specified therein, with accrued interest to such date on the amount
prepaid.
ARTICLE VI
YIELD PROTECTION AND ILLEGALITY
SECTION 6.01 INABILITY TO DETERMINE RATES. If the Agent shall
determine that adequate and reasonable means do not exist to ascertain the
Eurodollar Rate, or the Majority Lenders shall determine that the Eurodollar
Rate does not accurately reflect the cost to the Lenders of making or
maintaining Eurodollar Rate Loans, then the Agent shall give telephonic notice
(promptly confirmed in writing) to the Borrower and each Lender of such
determination. Such notice shall specify the basis for such determination and
shall, in the absence of manifest error, be conclusive and binding for all
purposes. Thereafter, the obligation of the Lenders to make or maintain
Eurodollar Rate Loans hereunder shall be suspended until the Agent (upon the
instructions of the Majority Lenders) revokes such notice. Upon receipt of such
notice, the Borrower may revoke any Notice then submitted by it. If the Borrower
does not revoke such Notice, the Lenders shall make, convert or continue Loans,
as proposed by the Borrower, in the amount specified in the Notice submitted by
the Borrower, but such Loans shall be made, converted or continued as Base Rate
Loans instead of Eurodollar Rate Loans.
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SECTION 6.02 FUNDING LOSSES. In addition to such amounts as
are required to be paid by the Borrower pursuant to Section 6.03, the Borrower
shall compensate each Lender, promptly upon receipt of such Lender's written
request made to the Borrower (with a copy to the Agent), for all losses, costs
and expenses (including any loss or expense incurred by such Lender in
obtaining, liquidating or re-employing deposits or other funds to fund or
maintain its Eurodollar Rate Loans), if any, which such Lender sustains: (i) if
the Borrower repays, converts or prepays any Eurodollar Rate Loan on a date
other than the last day of an Interest Period for such Eurodollar Rate Loan
(whether as a result of an optional prepayment, mandatory prepayment, a payment
as a result of acceleration or otherwise); (ii) if the Borrower fails to borrow
a Eurodollar Rate Loan after giving its Notice (other than as a result of the
operation of Section 6.01 or 6.04); (iii) if the Borrower fails to convert into
or continue a Eurodollar Rate Loan after giving its Notice (other than as a
result of the operation of Section 6.01 or 6.04); or (iv) if the Borrower fails
to prepay a Eurodollar Rate Loan after giving its Notice. Any such request for
compensation shall set forth the basis for requesting such compensation in
reasonable detail and shall, in the absence of manifest error, be conclusive and
binding for all purposes.
SECTION 6.03 REGULATORY CHANGES.
(a) INCREASED COSTS. If after the date hereof, the adoption
of, or any change in, any applicable law, rule or regulation, or any change
therein, or any change in the interpretation or administration thereof by any
Governmental Authority charged with the interpretation or administration thereof
(a "Regulatory Change"), or compliance by any Lender (or its Lending Office)
with any request, guideline or directive (whether or not having the force of
law) of any Governmental Authority, shall impose, modify or deem applicable any
reserve, special deposit or similar requirement (including any such requirement
imposed by the FRB, but excluding with respect to any Eurodollar Rate Loan any
such requirement included in the calculation of the Eurodollar Rate) against
assets of, deposits with or for the account of, or credit extended by, any
Lender's Lending Office or shall impose on any Lender (or its Lending Office) or
on the interbank eurodollar market any other condition affecting any Lender's
Eurodollar Rate Loans or its obligation to make Eurodollar Rate Loans or its
other obligations hereunder, and the result of any of the foregoing is to
increase the cost to such Lender (or its Lending Office) of agreeing to make or
making, funding or maintaining any Loan or participating in any L/C Obligations,
or increase the cost to the Issuing Lender of agreeing to issue or issuing or
maintaining any Letter of Credit or of agreeing to make or making, funding or
maintaining any unpaid drawing under any Letter of Credit, or to reduce the
amount of any sum received or receivable by such Lender (or its Lending Office)
or the Issuing Lender under this Agreement with respect thereto, by an amount
deemed by such Lender to be material, then from time to time, within 15 days
after demand by such Lender (with a copy to the Agent), the Borrower shall pay
to such Lender such additional amounts as shall compensate such Lender for such
increased cost or reduction.
(b) CAPITAL REQUIREMENTS.If any Lender shall have determined
that any Regulatory Change regarding capital adequacy, or compliance by such
Lender (or any corporation controlling such Lender) with any request, guideline
or directive regarding capital adequacy (whether or not having the force of law)
of any Governmental Authority issued or taking effect after the Closing Date,
has or shall have the effect of reducing the rate of return on such Lender's,
the Issuing Lender's or such corporation's capital as a consequence of such
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Lender's obligations hereunder to a level below that which such Lender, the
Issuing Lender or such corporation would have achieved but for such adoption,
change or compliance (taking into consideration such Lender's, the Issuing
Lender's or corporation's policies with respect to capital adequacy), by an
amount deemed by such Lender to be material, then from time to time, within 15
days after demand by such Lender (with a copy to the Agent), the Borrower shall
pay to such Lender such additional amounts as shall compensate such Lender for
such reduction.
(c) REQUESTS. Any such request for compensation by a Lender
under this Section 6.03 shall set forth the basis of calculation thereof and
shall, in the absence of manifest error, be conclusive and binding for all
purposes.
SECTION 6.04 ILLEGALITY.If any Lender shall determine that it
has become unlawful, as a result of any Regulatory Change, for such Lender to
make, convert into or maintain Eurodollar Rate Loans as contemplated by this
Agreement, such Lender shall promptly give notice of such determination to the
Borrower (through the Agent), and (i) the obligation of such Lender to make or
convert into Eurodollar Rate Loans, as the case may be, shall be suspended until
such Lender gives notice that the circumstances causing such suspension no
longer exist; and (ii) each of such Lender's outstanding Eurodollar Rate Loans,
as the case may be, shall, if requested by such Lender, be converted into a Base
Rate Loan not later than upon expiration of the Interest Period related to such
Eurodollar Rate Loan, or, if earlier, on such date as may be required by the
applicable Regulatory Change, as shall be specified in such request. Any such
determination shall, in the absence of manifest error, be conclusive and binding
for all purposes.
SECTION 6.05 FUNDING ASSUMPTIONS. Solely for purposes of
calculating amounts payable by the Borrower to the Lenders under this Article
VI, each Eurodollar Rate Loan made by a Lender (and any related reserve, special
deposit or similar requirement) shall be conclusively deemed to have been funded
at the Interbank Rate used in determining the Eurodollar Rate for such
Eurodollar Rate Loan by a matching deposit or other borrowing in the interbank
eurodollar market for a comparable amount and for a comparable period, whether
or not such Eurodollar Rate Loan is in fact so funded.
SECTION 6.06 OBLIGATION TO MITIGATE. Each Lender agrees that
as promptly as practicable after it becomes aware of the occurrence of an event
that would entitle it to give notice pursuant to Section 6.03(a) or 6.04, and in
any event if so requested by the Borrower, each Lender shall use reasonable
efforts to make, fund or maintain its affected Eurodollar Rate Loans through
another Lending Office if as a result thereof the increased costs would be
avoided or materially reduced or the illegality would thereby cease to exist and
if, in the reasonable opinion of such Lender, the making, funding or maintaining
of such Eurodollar Rate Loans through such other Lending Office would not in any
material respect be disadvantageous to such Lender or contrary in any material
respect to such Lender's normal banking practices.
SECTION 6.07 SUBSTITUTION OF LENDERS. Without limiting the
Borrower's obligations under Sections 6.03 and 7.03, upon the receipt by the
Borrower from any Lender (an "Affected Lender") of a request for compensation
under Section 6.03 or under Section 7.03, the Borrower may (i) request one or
more of the other Lenders to acquire and assume all or part of
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such Affected Lender's Loans and Commitment; or (ii) designate a replacement
commercial bank (which shall be an Eligible Assignee) satisfactory to the
Borrower to acquire and assume all or a ratable part of such Affected Lender's
Loans and Commitment (a "Replacement Lender"); PROVIDED, HOWEVER, that the
Borrower shall be liable for the payment upon demand of all costs and other
amounts arising under Section 6.02 that result from the acquisition of any
Affected Lender's Loan and/or Commitment (or any portion thereof) by a Lender or
Replacement Lender, as the case may be, on a date other than the last day of the
applicable Interest Period with respect to any Eurodollar Rate Loan then
outstanding. Any such designation of a Replacement Lender under clause (ii)
shall be effected in accordance with, and subject to the terms and conditions
of, the assignment provisions contained in Section 13.09, and shall in any event
be subject to the prior written consent of the Agent (which consent shall not be
unreasonably withheld).
ARTICLE VII
PAYMENTS
SECTION 7.01 PRO RATA TREATMENT. Except as otherwise provided
in this Agreement, each Borrowing hereunder, each Commitment reduction, each
payment (including each prepayment) by the Borrower on account of the principal,
interest, drawings under Letters of Credit, fees and other amounts required
hereunder shall be made without set-off or counterclaim and, except as otherwise
expressly provided with respect to drawings under Letters of Credit, shall be
made ratably in accordance with the Pro Rata Shares. Each conversion or
continuation of Loans shall also be made ratably in accordance with the
respective Pro Rata Shares of the Lenders. Notwithstanding the foregoing, if one
or more Lenders elects in its sole discretion not to make an additional Term
Loan pursuant to subsection 2.01(d), then any Borrowing of additional Term Loans
pursuant to subsection 2.01(d) shall be made ratably in accordance with the
relative Pro Rata Shares of the Lenders electing in their sole discretion to
make such additional Term Loans.
SECTION 7.02 PAYMENTS.
(a) PAYMENTS. The Borrower shall make each payment under the
Loan Documents, unconditionally in full without set-off, counterclaim or other
defense, not later than 3:00 p.m. (New York time) on the day when due to the
Agent in Dollars and in same day or immediately available funds, to the Agent's
Account. The Agent shall promptly thereafter distribute like funds relating to
the payment on account of principal, interest, drawings under Letters of Credit,
commitment fee or any other amounts payable to the Lenders or to the Issuing
Lender, as the case may be, ratably (except as a result of the operation of
Article V) to the Lenders in accordance with their Pro Rata Shares, or to the
Issuing Lender, as the case may be.
(b) APPLICATION. Unless the Agent shall receive a timely
election by the Borrower with respect to the application of any principal
payments or as otherwise provided herein, each payment of principal by the
Borrower shall be applied (A) first, to the Base Rate Loans then outstanding,
and (B) second, to the Eurodollar Rate Loans then outstanding (in such manner as
the Agent shall determine in its sole discretion).
(c) EXTENSION.Whenever any payment hereunder shall be stated
to be due, or whenever any Interest Payment Date or any other date specified
hereunder would otherwise
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occur, on a day other than a Business Day, then, except as otherwise provided
herein, such payment shall be made, and such Interest Payment Date or other date
shall occur, on the next succeeding Business Day, and such extension of time
shall in such case be included in the computation of payment of interest,
commitment fee or letter of credit fee hereunder.
SECTION 7.03 TAXES.
(a) NO REDUCTION OF PAYMENTS. The Borrower shall pay all
amounts of principal, interest, fees and other amounts due under the Loan
Documents free and clear of, and without reduction for or on account of, any
present and future taxes, levies, imposts, duties, fees, assessments, charges,
deductions or withholdings and all liabilities with respect thereto excluding,
in the case of each Lender and the Agent, income and franchise taxes imposed on
it by the jurisdiction under the laws of which such Lender or the Agent is
organized or in which its principal executive offices may be located or any
political subdivision or taxing authority thereof or therein, and by the
jurisdiction of such Lender's Lending Office and any political subdivision or
taxing authority thereof or therein (all such nonexcluded taxes, levies,
imposts, duties, fees, assessments, charges, deductions, withholdings and
liabilities being hereinafter referred to as "Taxes"). If any Taxes shall be
required by law to be deducted or withheld from any payment, the Borrower shall
increase the amount paid so that the respective Lender or the Agent receives
when due (and is entitled to retain), after deduction or withholding for or on
account of such Taxes (including deductions or withholdings applicable to
additional sums payable under this Section 7.03), the full amount of the payment
provided for in the Loan Documents.
(b) DEDUCTION OR WITHHOLDING; TAX RECEIPTS. If the Borrower
makes any payment hereunder in respect of which it is required by law to make
any deduction or withholding, it shall pay the full amount to be deducted or
withheld to the relevant taxation or other authority within the time allowed for
such payment under applicable law and promptly thereafter shall furnish to the
Agent (for itself or for redelivery to the Lender to or for the account of which
such payment was made) an original or certified copy of a receipt evidencing
payment thereof, together with such other information and documents as the Agent
or any Lender (through the Agent) may reasonably request.
(c) INDEMNITY. If any Lender or the Agent is required by law
to make any payment on account of Taxes, or any liability in respect of any Tax
is imposed, levied or assessed against any Lender or the Agent, the Borrower
shall indemnify the Agent and the Lenders for and against such payment or
liability, together with any incremental taxes, interest or penalties, and all
costs and expenses, payable or incurred in connection therewith, including Taxes
imposed on amounts payable under this Section 7.03, whether or not such payment
or liability was correctly or legally asserted. A certificate of the Agent or
any Lender as to the amount of any such payment shall, in the absence of
manifest error, be conclusive and binding for all purposes.
(d) FORMS. Each Lender that is incorporated under the laws
of any jurisdiction outside the United States agrees to deliver to the Agent and
the Borrower on or prior to the Closing Date, and in a timely fashion
thereafter, IRS Form W-8BEN, IRS Form W-8ECI or such other documents and forms
of the IRS, duly executed and completed by such Lender, as
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are required under United States law to establish such Lender's status for
United States withholding tax purposes.
(e) MITIGATION. Each Lender agrees that as promptly as
practicable after it becomes aware of the occurrence of an event that would
cause the Borrower to make any payment in respect of Taxes to such Lender or a
payment in indemnification with respect to any Taxes, and in any event if so
requested by the Borrower following such occurrence, such Lender shall promptly
notify the Borrower in writing and use reasonable efforts to make, fund or
maintain its affected Loan (or relevant part thereof) through another Lending
Office if as a result thereof the additional amounts so payable by the Borrower
would be avoided or materially reduced and if, in the reasonable opinion of such
Lender, the making, funding or maintaining of such Loan (or relevant part
thereof) through such other Lending Office would not in any material respect be
disadvantageous to such Lender or contrary to such Lender's normal banking
practices. Upon receipt by the Borrower from any Lender of such notice, Borrower
may request a Replacement Lender pursuant to Section 6.07.
(f) SPECIFIED SWAP CONTRACTS. Nothing contained in this
Section 7.03 shall override any term or provision of any Specified Swap Contract
regarding withholding taxes relating to Rate Contracts.
SECTION 7.04 NON-RECEIPT OF FUNDS.Unless the Agent shall have
received notice from the Borrower prior to the date on which any payment is due
to any of the Lenders hereunder that the Borrower shall not make such payment in
full, the Agent may assume that the Borrower has made such payment in full to
the Agent on such date and the Agent may, in reliance upon such assumption,
cause to be distributed to each Lender on such due date an amount equal to the
amount then due such Lender. If and to the extent the Borrower shall not have so
made such payment in full to the Agent, each Lender shall repay to the Agent
forthwith on demand such amount distributed to such Lender together with
interest thereon, for each day from the date such amount is distributed to such
Lender until the date such Lender repays such amount to the Agent, at the
Federal Funds Rate.
SECTION 7.05 SHARING OF PAYMENTS. If any Lender shall obtain
any payment (whether voluntary, involuntary, through the exercise of any right
of set-off, or otherwise) on account of the Loans made by it (other than
pursuant to a provision hereof providing for non-pro rata treatment) in excess
of its Pro Rata Share of payments on account of the Loans obtained by all the
Lenders, such Lender shall forthwith advise the Agent of the receipt of such
payment, and within five Business Days of such receipt purchase from the other
Lenders (through the Agent), without recourse, such participations in the Loans
made by them as shall be necessary to cause such purchasing Lender to share the
excess payment ratably with each of them in accordance with the respective Pro
Rata Shares of the Lenders; PROVIDED, HOWEVER, that if all or any portion of
such excess payment is thereafter recovered by or on behalf of the Borrower from
such purchasing Lender, the purchase shall be rescinded and the purchase price
restored to the extent of such recovery, but without interest. The Borrower
agrees that any Lender so purchasing a participation from another Lender
pursuant to this Section 7.05 may exercise all its rights of payment (including
the right of set-off) with respect to such participation as fully as if such
Lender were the direct creditor of the Borrower in the amount of such
participation. No documentation other than notices and the like referred to in
this Section 7.05
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shall be required to implement the terms of this Section 7.05. The Agent shall
keep records (which shall be conclusive and binding in the absence of manifest
error) of participations purchased pursuant to this Section 7.05 and shall in
each case notify the Lenders following any such purchases.
ARTICLE VIII
CONDITIONS PRECEDENT
SECTION 8.01 CONDITIONS PRECEDENT TO THE INITIAL CREDIT
EXTENSIONS. The obligation of each Lender to make its initial Credit Extension
shall be subject to the satisfaction of each of the following conditions
precedent on or before the Closing Date:
(a) FEES AND EXPENSES. The Borrower shall have paid (i) all
fees then due in accordance with Section 4.03 and (ii) all invoiced costs and
expenses then due in accordance with Section 13.04(a).
(b) LOAN DOCUMENTS. The Agent shall have received the
following Loan Documents: (i) the Notes, executed by the Borrower; (ii) (in
sufficient copies for each of the Lenders and the Borrower) counterparts of this
Agreement, (iii) the Collateral Documents, the Guaranties, the Environmental
Indemnity and the Intercreditor and Collateral Agency Agreement, executed by
each of the respective parties thereto.
(c) DOCUMENTS AND ACTIONS RELATING TO COLLATERAL. The Agent
shall have received the following, in form and substance satisfactory to it and
the Lenders:
(i) evidence that all filings, registrations and recordings
have been made in the appropriate governmental offices, and all other action has
been taken, which shall be necessary to create, in favor of the Collateral Agent
on behalf of the Lenders, a perfected first priority Lien on the Collateral
(subject to Permitted Liens), including evidence of recordation of the Deeds of
Trust (which may consist of a written or telephonic confirmation from the title
insurance company), and filing of completed UCC-1 financing statements, in each
case in the appropriate governmental offices;
(ii) the results, dated as of a recent date prior to the
Closing Date, of searches conducted (A) in the UCC filing records in each of the
governmental offices in each jurisdiction in which personal property and fixture
Collateral is located, and (B) of the records maintained by the U.S. Patent and
Trademark Office and Copyright Office with respect to all United States patents
and patent applications and all United States registered trademarks and United
States registered copyrights constituting Collateral, which shall have revealed
no Liens with respect to any of the Collateral except Permitted Liens;
(iii) a title insurance policy (or a binding commitment
therefor) for the Deeds of Trust (A) issued by a title insurance company of
recognized standing satisfactory to the Agent, (B) in an amount and form
satisfactory to the Agent, (C) naming the Collateral Agent, for the ratable
benefit of the Lenders and the Senior Noteholders, as the insured thereunder,
(D) insuring that the Deeds of Trust insured thereby create a valid first
priority Lien on the property covered by each such Deed of Trust, subject to no
other Liens, other than Permitted Liens, and to no
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other exceptions, other than those satisfactory to the Agent, and (E) containing
such endorsements and affirmative coverage as the Agent or any Lender (through
the Agent) may reasonably request; and
(iv) such appraisals, collateral audits, consents of
landlords, estoppels from landlords, tenant subordination agreements and other
documents and instruments in connection with the Deeds of Trust as shall
reasonably be deemed necessary by the Agent or any Lender.
(d) ADDITIONAL CLOSING DOCUMENTS AND ACTIONS.The Agent shall
have received the following, in form and substance satisfactory to it and the
Lenders:
(i) confirmation that: (i) all amounts due under the
Existing Credit Facility shall have been paid in full concurrently with the
initial Credit Extension hereunder and (ii) the Existing Credit Facility shall
terminate on the Closing Date (subject to subsection 13.04(d));
(ii) evidence of completion to the satisfaction of the Agent
and the Lenders of such investigations, reviews and audits with respect to the
Borrower and the Guarantors and their respective operations as the Agent or any
Lender may deem appropriate;
(iii) evidence that all insurance required under this
Agreement and the Collateral Documents is in full force and effect, together
with copies of all policies of such insurance and all endorsements thereto
required under this Agreement and the Collateral Documents;
(iv) an environmental site assessment or other environmental
review report and opinion with respect to each Premises subject to the Lien of a
Deed of Trust, dated as of a recent date prior to the Closing Date, prepared by
a qualified environmental consulting firm acceptable to the Agent;
(v) evidence that all (A) authorizations or approvals of any
Governmental Authority and (B) approvals or consents of any other Person,
required in connection with the execution, delivery and performance of the Loan
Documents shall have been obtained;
(vi) (in sufficient copies for the Lenders) the audited
consolidated balance sheet of the Borrower and its Subsidiaries as at December
31, 2001, and the related consolidated statements of income, shareholders'
equity and cash flows for the fiscal year then ended;
(vii) a completed Borrowing Base Certificate as of the end of
the immediately preceding fiscal month, together with the related collateral
reports, also as of such date, specified in Section 10.01(a)(vii);
(viii)a completed Compliance Certificate, dated the Closing
Date, demonstrating the Borrower's compliance with the financial covenants set
forth in Section 10.02 as of the end of the immediately preceding fiscal
quarter, measured on a pro forma basis after giving effect to the Borrowings to
be made hereunder on the Closing Date;
(vii) a certificate of a Responsible Officer of the Borrower,
dated the Closing Date, stating that (A) the representations and warranties
contained in Section 9.01 and in the
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other Loan Documents are true and correct on and as of the date of such
certificate as though made on and as of such date and (B) on and as of the
Closing Date, no Default shall have occurred and be continuing or shall result
from the initial Credit Extension;
(viii)a certificate of a Responsible Officer of each
Guarantor, dated the Closing Date, stating that the representations and
warranties contained in Section 9 of the Guaranty and in the other Guarantor
Documents are true and correct on and as of the date of such certificate as
though made on and as of such date;
(e) CORPORATE DOCUMENTS. The Agent shall have received the
following, in form and substance satisfactory to it:
(i) certified copies of the Organization Documents of the
Borrower, together with certificates as to good standing, from the Secretary of
State or other Governmental Authority, as applicable, of the Borrower's state of
incorporation and certificates from the Secretary of State or other Governmental
Authority, as applicable, of the State of Washington as to the Borrower's status
as a foreign corporation and tax status, each dated as of a recent date prior to
the Closing Date;
(ii) a certificate of the Secretary or Assistant Secretary of
the Borrower, dated the Closing Date, certifying (A) the resolutions of the
Board of Directors of the Borrower authorizing the execution, delivery and
performance of the Loan Documents and (B) the incumbency, authority and
signatures of each officer of the Borrower authorized to execute and deliver the
Loan Documents and act with respect thereto, upon which certificate the Agent
and the Lenders may conclusively rely until the Agent shall have received a
further certificate of the Secretary or an Assistant Secretary of the Borrower
canceling or amending such prior certificate;
(iii) certified copies of the Organization Documents of each
Guarantor, together with certificates as to good standing, from the Secretary of
State or other Governmental Authority, as applicable, of the Guarantor's state
of incorporation and certificates from the Secretary of State or other
Governmental Authority as applicable, of California and Washington, as the case
may be, as to the Guarantor's status as a foreign corporation and tax status,
each dated as of a recent date prior to the Closing Date;
(iv) a certificate of the Secretary or Assistant Secretary of
each Guarantor, dated the Closing Date, certifying (A) the resolutions of the
Board of Directors or other governing body of the Guarantor authorizing the
execution, delivery and performance of the Guarantor Documents and (B) the
incumbency, authority and signatures of each officer of the Guarantor authorized
to execute and deliver the Guarantor Documents and act with respect thereto,
upon which certificate the Agent and the Lenders may conclusively rely until the
Agent shall have received a further certificate of the Secretary or an Assistant
Secretary of the Guarantor canceling or amending such prior certificate;
(f) LEGAL OPINIONS. The Agent shall have received the
following: (i) the opinion of Farella Braun and Martel LLP, counsel to the
Borrower and the Subsidiary Guarantors, dated the Closing Date, in substantially
the form of Exhibit L-1; and (ii) the opinion
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of Davis Wright Tremaine LLP, local Washington counsel to the Collateral Agent,
dated the Closing Date, in substantially the form of Exhibit L-2.
(g) SENIOR SECURED NOTE DOCUMENTS. The Agent shall have
received executed copies of the amended and restated Senior Secured Note
Documents, which shall be in form and substance reasonably satisfactory to the
Agent and the Majority Lenders.
(h) PRO-FORMA DEBT TO EBITDA RATIO. The ratio of (i)
Consolidated Indebtedness PLUS six times Consolidated Rent Expense (measured on
a trailing 12-month basis) to (ii) Consolidated EBITDA PLUS one times
Consolidated Rent Expense (in each case, measured on a trailing 12-month basis),
shall not be greater than 5.75 to 1.00, measured on a pro forma basis (after
giving effect to the Borrowings to be made hereunder on the Closing Date) as of
the last day of the immediately preceding fiscal quarter.
SECTION 8.02 CONDITIONS PRECEDENT TO ALL CREDIT EXTENSIONS.
The obligation of each Lender to make any Credit Extension to be made by it
hereunder (including its initial Credit Extension) is subject to the
satisfaction of the following conditions precedent on the relevant Credit
Extension date:
(a) NOTICE. The Agent shall have received a Notice of
Borrowing or Notice of Conversion or Continuation, as the case may be; or in the
case of any issuance, amendment or renewal of any Letter of Credit, the Issuing
Lender and the Agent shall have received an L/C Application or L/C Amendment
Application, as required under Section 3.02.
(b) MATERIAL ADVERSE EFFECT. On and as of the date of such
Credit Extension, there shall have occurred no Material Adverse Effect since
December 31, 2001.
(c) REPRESENTATIONS AND WARRANTIES; NO DEFAULT. On the date
of such Credit Extension date, both before and after giving effect thereto and
to the application of proceeds therefrom: (i) the representations and warranties
contained in Section 9.01 and in the other Loan Documents shall be true, correct
and complete on and as of the date of such Credit Extension date as though made
on and as of such date; and (ii) no Default shall have occurred and be
continuing or shall result from such Credit Extension. For purposes of this
Section 8.02(c), clause (i) shall be deemed instead to refer to the last day of
the most recent quarter and year for which financial statements have then been
delivered in respect of the representation and warranty made in Section 9.01(p);
clause (i) and shall not be deemed to refer to any other representations and
warranties which relate solely to an earlier date (PROVIDED that such other
representations and warranties shall be true, correct and complete as of such
earlier date); and clause (i) shall take into account any amendments to the
Schedules and other disclosures made in writing by the Borrower and the
Guarantors to the Agent and the Lenders after the Closing Date and approved by
the Agent and the Majority Lenders. The giving of any Notice of Borrowing or
Notice of Conversion or Continuation, as the case may be, the submission of any
L/C Application or L/C Amendment Application, and the acceptance by the Borrower
of the proceeds of each Borrowing following the Closing Date, shall each be
deemed a certification to the Agent and the Lenders that on and as of the date
of such Credit Extension such statements are true.
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(d) BORROWING BASE CERTIFICATE AND COLLATERAL REPORTS.
The Borrower shall have delivered to the Agent the completed Borrowing Base
Certificate, together with the related collateral reports, required under
Section 10.01(a), and the statements contained therein shall be true, correct
and complete on and as of the date of such Borrowing as though made on and as of
such date. The giving of any Notice of Borrowing or Notice of Conversion or
Continuation, as the case may be, the submission of any L/C Application or L/C
Amendment Application, and the acceptance by the Borrower of the proceeds of a
Borrowing, shall each be deemed a certification to the Agent and the Lenders
that on and as of the date of the Credit Extension such statements are true,
correct and complete.
(d) ADDITIONAL DOCUMENTS. The Agent shall have received, in
form and substance satisfactory to it, such additional approvals, opinions,
documents and other information as the Agent or any Lender (through the Agent)
may reasonably request.
ARTICLE IX
REPRESENTATIONS AND WARRANTIES
SECTION 9.01 REPRESENTATIONS AND WARRANTIES. The Borrower
represents and warrants to each Lender and the Agent that:
(a) ORGANIZATION AND POWERS. Each of the Borrower and its
Subsidiaries is a corporation, limited liability company or partnership duly
organized or formed, as the case may be, validly existing and in good standing
under the laws of the jurisdiction of its incorporation or formation, is
qualified to do business and is in good standing in each jurisdiction in which
the failure so to qualify or be in good standing would result in a Material
Adverse Effect and has all requisite power and authority to own its assets and
carry on its business and to execute, deliver and perform its obligations under
the Loan Documents.
(b) AUTHORIZATION; NO CONFLICT. The execution, delivery and
performance by the Borrower and each Guarantor of the Loan Documents to which
such Person is a party have been duly authorized by all necessary corporate
action of such Person and do not and will not (i) contravene the terms of the
Organization Documents of such Person or result in a breach of or constitute a
default under any indenture or loan or credit agreement or any other agreement,
lease or instrument to which such Person is a party or by which it or its
properties may be bound or affected; (ii) violate any provision of any law,
rule, regulation, order, writ, judgment, injunction, decree or the like binding
on or affecting such Person; or (iii) except as contemplated by this Agreement,
result in, or require, the creation or imposition of any Lien upon or with
respect to any of the properties of such Person.
(c) BINDING OBLIGATION. The Loan Documents constitute, or
when delivered under this Agreement will constitute, legal, valid and binding
obligations of the Borrower and the Guarantors, enforceable against the Borrower
and the Guarantors in accordance with their respective terms.
(d) CONSENTS. No authorization, consent, approval, license,
exemption of, or filing or registration with, any Governmental Authority, or
approval or consent of any other Person, is required for the due execution,
delivery or performance by the Borrower or the
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Guarantors of any of the Loan Documents, except for recordings or filings in
connection with the perfection of the Liens on the Collateral in favor of the
Collateral Agent on behalf of the Lenders.
(e) NO DEFAULTS. Neither the Borrower nor any of its
Subsidiaries is in default under any material contract, lease, agreement,
judgment, decree or order to which it is a party or by which it or its
properties may be bound.
(f) TITLE TO PROPERTIES; LIENS; USE. The Borrower and its
Subsidiaries have good and marketable title to, or valid and subsisting
leasehold interests in, their properties and assets, including all property
forming a part of the Collateral, there is no Lien upon or with respect to any
of such properties or assets, including any of the Collateral, except for
Permitted Liens, and the use, ownership, maintenance and operation of each
Premises by the Borrower or its Subsidiaries is in compliance in all material
respects with all applicable Requirements of Law.
(g) LITIGATION. Except as set forth on Schedule 5 hereto,
there are no actions, suits or proceedings pending or, to the best of the
Borrower's knowledge, threatened against or affecting the Borrower or any of its
Subsidiaries or the properties of the Borrower or any of its Subsidiaries before
any Governmental Authority or arbitrator which if determined adversely to the
Borrower or any such Subsidiary would result in a Material Adverse Effect.
(h) COMPLIANCE WITH ENVIRONMENTAL LAWS. Each of the Borrower
and its Subsidiaries is in full compliance with all Environmental Laws, whether
in connection with the ownership, use, maintenance or operation of its Premises
or the conduct of any business thereon, or otherwise. Neither the Borrower, any
of its Subsidiaries nor to the best of the Borrower's knowledge, after due and
diligent inquiry and investigation, any previous owner, tenant, occupant, user
or operator of the Premises, or any present tenant or other present occupant,
user or operator of the Premises has used, generated, manufactured, installed,
treated, released, stored or disposed of any Hazardous Substances on, under, or
at the Premises, except in compliance with all applicable Environmental Laws.
After due and diligent inquiry and investigation the Borrower has determined
that no Hazardous Substances have at any time been spilled, leaked, dumped,
deposited, discharged, disposed of or released or migrated on, under, at or from
the Premises, nor have any of the Premises been used at any time by any Person
as a landfill or waste disposal site. There are no actions, suits, claims,
notices of violation, hearings, investigations or proceedings pending or, to the
best of the Borrower's knowledge, threatened against or affecting the Borrower
or any of its Subsidiaries or with respect to the ownership, use, maintenance
and operation of the Premises, relating to Environmental Laws or Hazardous
Substances.
(i) GOVERNMENTAL REGULATION. Neither the Borrower nor any of
its Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Federal Power Act, the Investment Company Act of 1940,
the Interstate Commerce Act, any state public utilities code or any other
federal or state statute or regulation limiting its ability to incur
Indebtedness.
(j) ERISA.
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(i) The Borrower and all ERISA Affiliates have satisfied all
applicable contribution requirements under Section 412(c)(11) of the Internal
Revenue Code and have never sought a waiver under Section 412(d) of the Internal
Revenue Code;
(ii) no Termination Event has occurred and is continuing, or
is reasonably expected to occur;
(iii) the aggregate amount of Unfunded Accrued Benefits under
all Pension Plans (excluding in such computation Pension Plans with assets
greater than accrued benefits) does not exceed $1,500,000;
(iv) there is no condition or event under which the Borrower,
any ERISA Affiliate, or any Plan maintained by the Borrower or any ERISA
Affiliate could be subject to any risk of material liability under ERISA or the
Internal Revenue Code, regardless of whether the Borrower or any ERISA Affiliate
engaged in a transaction giving rise to the liability;
(v) neither the Borrower nor any ERISA Affiliate has
unfunded, contingent liability that exceeds $1,500,000 with respect to Plans
that provide post-retirement welfare benefits; and
(vi) all Plans maintained by, or contributed to by, the
Borrower or any ERISA Affiliate comply in all material respects, and have been
administered in material compliance with, the requirements of applicable law
(including, if applicable, foreign law, ERISA and the Internal Revenue Code),
and in accordance with each Plan's terms.
(k) SUBSIDIARIES. The name, capital structure and ownership
of each Subsidiary of the Borrower on the date of this Agreement are as set
forth in Schedule 6. All of the outstanding capital stock of, or other interest
in, each such Subsidiary has been validly issued, and is fully paid and
nonassessable. Except as set forth in such Schedule, on the date of this
Agreement the Borrower has no equity interest in any Person.
(l) MARGIN REGULATIONS. The Borrower is not engaged in the
business of extending credit for the purpose of purchasing or carrying "margin
stock" (within the meaning of Regulation U of the FRB). No part of the proceeds
of the Loans will be used to purchase or carry any margin stock or to extend
credit to others for the purpose of purchasing or carrying any margin stock,
except in accordance with the provisions of Regulations T, U, and X of the FRB.
(m) TAXES.Each of the Borrower and its Subsidiaries has duly
filed all tax and information returns required to be filed, and has paid all
taxes, fees, assessments and other governmental charges or levies that have
become due and payable, except to the extent such taxes or other charges are
being contested in good faith and are adequately reserved against in accordance
with GAAP.
(n) PATENTS AND OTHER RIGHTS. Each of the Borrower and its
Subsidiaries possesses all permits, franchises, licenses, patents, trademarks,
trade names, service marks, copyrights and all rights with respect thereto, free
from burdensome restrictions, that are necessary for the ownership, maintenance
and operation of its business and neither the Borrower nor any such Subsidiary
is in violation of any rights of others with respect to the foregoing.
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(o) INSURANCE. The properties of the Borrower and its
Subsidiaries are insured, with financially sound and reputable insurance
companies, in such amounts, with such deductibles and covering such risks as is
customarily carried by companies engaged in similar businesses and owning
similar properties in the localities where the Borrower or such Subsidiary
operates.
(p) FINANCIAL STATEMENTS.(i)The audited consolidated balance
sheet of the Borrower and its Subsidiaries as at December 31, 2001, and the
related consolidated statements of income, shareholders' equity and cash flows
for the fiscal year then ended are complete and correct and fairly present the
financial condition of the Borrower and its Subsidiaries as at such dates and
the results of operations of the Borrower and its Subsidiaries for the periods
covered by such statements, in each case in accordance with GAAP consistently
applied. (ii) Since December 31, 2001, there has been no Material Adverse
Effect.
(q) LIABILITIES. Neither the Borrower nor any of its
Subsidiaries has any material liabilities, fixed or contingent, that are not
reflected in the financial statements referred to in subsection (p), in the
notes thereto or otherwise disclosed in writing to the Lenders.
(r) LABOR DISPUTES, ETC. There are no strikes, lockouts or
other labor disputes against the Borrower or any of its Subsidiaries, or, to the
best of the Borrower's knowledge, threatened against or affecting the Borrower
or any of its Subsidiaries, and no Event of Loss has occurred with respect to
any assets or property of the Borrower or any of its Subsidiaries, which may
result in a Material Adverse Effect.
(s) SOLVENCY. Each of the Borrower and its Subsidiaries is
Solvent.
(t) DISCLOSURE. None of the representations or warranties
made by the Borrower or any of its Subsidiaries in the Loan Documents as of the
date of such representations and warranties, and none of the statements or other
information contained in each exhibit, report, certificate or written statement
furnished by or on behalf of the Borrower or any of its Subsidiaries to the
Agent and the Lenders in connection with the Loan Documents, contains any untrue
statement of a material fact or omits any material fact required to be stated
therein or necessary to make the statements made therein, in the light of the
circumstances under which they are made, not misleading, as of the time made or
delivered; PROVIDED that to the extent any such exhibit, report, certificate or
written statement was based upon or constitutes a forecast or projection, the
Borrower represents only that it has acted in good faith and utilized reasonable
assumptions and due care in the preparation of such exhibit, report, certificate
or written statement (it being understood that forecasts and projections by
their nature involve approximations and uncertainties).
ARTICLE X
COVENANTS
SECTION 10.01 REPORTING COVENANTS. So long as any of the
Obligations shall remain unpaid, any Letter of Credit shall remain outstanding
or any Lender shall have any Commitment, the Borrower agrees that:
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(a) FINANCIAL STATEMENTS AND OTHER REPORTS. The Borrower
shall furnish to the Agent in sufficient copies for distribution to the Lenders:
(i) as soon as available and in any event within 45 days
after the end of the first three fiscal quarters of each fiscal year, a
consolidated and consolidating balance sheet of the Borrower and its
Subsidiaries as of the end of such quarter, and the related consolidated and, as
to statements of income only, consolidating statements of income, shareholders'
equity and cash flows of the Borrower and its Subsidiaries for such quarter and
the portion of the fiscal year through the end of such quarter, prepared in
accordance with GAAP consistently applied, subject to changes resulting from
normal, year-end audit adjustments and except for the absence of notes, all in
reasonable detail and setting forth in comparative form the figures for the
corresponding period in the preceding fiscal year, together with a certificate
of a Responsible Officer of the Borrower stating that such financial statements
fairly present the financial condition of the Borrower and its Subsidiaries as
at such date and the results of operations of the Borrower and its Subsidiaries
for the period ended on such date and have been prepared in accordance with GAAP
consistently applied, subject to changes resulting from normal, year-end audit
adjustments and except for the absence of notes;
(ii) as soon as available and in any event within 90 days
after the end of each fiscal year, a consolidated and consolidating balance
sheet of the Borrower and its Subsidiaries as of the end of such fiscal year,
and the related consolidated and, as to statements of income only, consolidating
statements of income, shareholders' equity and cash flows of the Borrower and
its Subsidiaries for such fiscal year, prepared in accordance with GAAP
consistently applied, all in reasonable detail and setting forth in comparative
form the figures for the previous fiscal year, and (A) in the case of such
consolidated financial statements, accompanied by an audit report thereon of
Moss Adams LLP or another firm of independent certified public accountants of
recognized national standing acceptable to the Majority Lenders, which report
shall not be qualified as to (1) going concern, or (2) any limitation in the
scope of the audit, and (B) in the case of such consolidating financial
statements, certified by a Responsible Officer of the Borrower;
(iii) together with the financial statements required pursuant
to clauses (i) and (ii), (A) a Compliance Certificate of a Responsible Officer
as of the end of the applicable accounting period and (B) an Update Certificate
of a Responsible Officer as of the end of the applicable accounting period;
(iv) promptly upon receipt thereof, copies of all reports
submitted to the Borrower by its independent certified public accountants in
connection with each annual, interim or special audit examination of the
Borrower and its Subsidiaries made by such accountants, including the
"management letter" submitted by such accountants to the Borrower in connection
with their annual audit;
(v) as soon as available and in any event not less than 30
days prior to the start of each fiscal year, a consolidated financial forecast
for the Borrower and its Subsidiaries for the following fiscal year and each
fiscal year thereafter through the Final Maturity Date, including forecasted
consolidated balance sheets, consolidated statements of income, shareholders'
equity and cash flows of the Borrower and its Subsidiaries which forecast shall
(A) state the
60.
assumptions used in the preparation thereof, (B) contain such other information
as reasonably requested by the Agent or the Majority Lenders and (C) be in form
reasonably satisfactory to the Agent and the Majority Lenders;
(vi) as soon as available and in any event not less than 30
days prior to the start of each fiscal year, budgets of the Borrower and its
Subsidiaries for each quarter of the following fiscal year, which budgets shall
(A) state the assumptions used in the preparation thereof, (B) be in form
satisfactory to the Agent and the Majority Lenders, and (C) be accompanied by a
statement of a Responsible Officer of the Borrower that, to the best of such
Responsible Officer's knowledge, such budgets are a reasonable and good-faith
estimate for the period covered thereby;
(vii) as soon as available and in any event not later than the
last Business Day of each fiscal month, (A) a completed Borrowing Base
Certificate, (B) full and complete reports with respect to the Receivables,
including information as to concentration, aging, identity of Receivable
Debtors, letters of credit securing Receivables, disputed Receivables and other
matters, as the Agent shall reasonably request, and (C) a detailed schedule of
the Borrower's Inventory, each as of the end of the immediately preceding fiscal
month and in form and substance reasonably satisfactory to the Agent;
(viii)promptly after the same are released, copies of all
press releases; and
(ix) promptly after the giving, sending or filing thereof,
copies of all reports, if any, which the Borrower or any of its Subsidiaries
sends to the holders of its respective capital stock or other securities and of
all reports or filings, if any, by the Borrower or any of its Subsidiaries with
the SEC or any national securities exchange.
As to any information contained in materials furnished pursuant to clause (ix),
the Borrower shall not be separately required to furnish such information under
clause (i) or (ii), but the foregoing shall not be in derogation of the
obligation of the Borrower to furnish the information and materials described in
clauses (i) and (ii) at the times specified therein. Additionally, reports
required to be delivered pursuant to clauses (i), (ii) or (ix) of subsection
10.01(a) (to the extent any such financial statements, reports or proxy
statements are included in materials otherwise filed with the SEC) may be
delivered electronically and if so, shall be deemed to have been delivered on
the date on which the Borrower posts such reports, or provides a link thereto,
either: (i) on the Borrower's website on the Internet at the website address
listed on Schedule 2; or (ii) when such report is posted electronically on
IntraLinks/IntraAgency or other relevant website to which each Lender and the
Agent have access (whether a commercial, third-party website or whether
sponsored by the Agent), if any, on the Borrower's behalf; PROVIDED that: (A)
the Borrower shall deliver paper copies of such reports to the Agent or any
Lender who requests the Borrower to deliver such paper copies until written
request to cease delivering paper copies is given by the Agent or such Lender;
(B) the Borrower shall notify (which may be by facsimile or electronic mail) the
Agent and each Lender of the posting of any such reports and provide to the
Agent by email electronic versions (I.E. soft copies) of such reports; and (C)
in every instance the Borrower shall provide paper copies of the Compliance
Certificates required by clause (iii) above to the Agent and each of the
Lenders. Except for such Compliance Certificates, the Agent shall have no
obligation to request the delivery or to maintain copies of the reports referred
to above, and in any
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event shall have no responsibility to monitor compliance by the Borrower with
any such request for delivery, and each Lender shall be solely responsible for
requesting delivery to it or maintaining its copies of such reports.
(b) ADDITIONAL INFORMATION. The Borrower will furnish to the
Agent:
(i) promptly after the Borrower has knowledge or becomes
aware thereof, notice of the occurrence of any Event of Loss with respect to its
property or assets aggregating $1,500,000 (or its equivalent in another
currency) or more;
(ii) promptly after the Borrower has knowledge or becomes
aware thereof, notice of the occurrence or existence of any Default;
(iii) promptly after any Person becomes a Subsidiary of the
Borrower (whether by acquisition or otherwise), prompt written notice thereof;
(iv) prompt written notice of (A) any proposed acquisition of
stock, assets or property by the Borrower or any of its Subsidiaries that could
reasonably be expected to result in environmental liability under Environmental
Laws, and (B)(1) any spillage, leakage, discharge, disposal, leaching, migration
or release of any Hazardous Substances required to be reported to any
Governmental Authority under applicable Environmental Laws, and (2) all actions,
suits, claims, notices of violation, hearings, investigations or proceedings
pending, or to the best of the Borrower's knowledge, threatened against or
affecting the Borrower or any of its Subsidiaries or with respect to the
ownership, use, maintenance and operation of the Premises, relating to (1)
Environmental Laws or Hazardous Substances or (2) any other Requirement of Law
that, in the case of this clause (2), may have a Material Adverse Effect;
(v) prompt written notice of all actions, suits and
proceedings before any Governmental Authority or arbitrator pending, or to the
best of the Borrower's knowledge, threatened against or affecting the Borrower
or any of its Subsidiaries which (A) if adversely determined would involve an
aggregate uninsured liability of $1,500,000 (or its equivalent in another
currency) or more, or (B) otherwise may have a Material Adverse Effect;
(vi) promptly after the Borrower has knowledge or becomes
aware thereof, (A) notice of the occurrence of any Termination Event, together
with a copy of any notice of such Termination Event to the PBGC, and (B) the
details concerning any action taken or proposed to be taken by the IRS, PBGC,
Department of Labor or other Person with respect thereto;
(vii) the information regarding insurance maintained by the
Borrower and its Subsidiaries as required under Section 10.03(c);
(viii)within 30 days of the date thereof, or, if earlier, on
the date of delivery of any financial statements pursuant to subsection (a),
notice of any material change in accounting policies or financial reporting
practices by the Borrower or any of its Subsidiaries;
(ix) promptly after the occurrence thereof, notice of any
labor controversy resulting in or threatening to result in any strike, work
stoppage, boycott, shutdown or other
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material labor disruption against or involving the Borrower or any of its
Subsidiaries which could result in a Material Adverse Effect;
(x) upon the request from time to time of the Agent or any
Lender (through the Agent), the Swap Termination Values, together with a
description of the method by which such values were determined, relating to any
then-outstanding Rate Contracts to which the Borrower or any of its Subsidiaries
is party;
(xi) prompt written notice of any other condition or event
which has resulted, or that could reasonably be expected to result, in a
Material Adverse Effect; and
(xii) such other information respecting the operations,
properties, business or condition (financial or otherwise) of the Borrower or
its Subsidiaries (including with respect to the Collateral) as any Lender
(through the Agent) may from time to time reasonably request.
Each notice pursuant to this subsection (b) shall be accompanied by a written
statement by a Responsible Officer of the Borrower setting forth details of the
occurrence referred to therein, and stating what action the Borrower proposes to
take with respect thereto.
SECTION 10.02 FINANCIAL COVENANTS. So long as any of the
Obligations shall remain unpaid, any Letter of Credit shall remain outstanding
or any Lender shall have any Commitment, the Borrower agrees that:
(a) LEVERAGE RATIO. The Borrower shall maintain a ratio of
(a) Consolidated Indebtedness PLUS six times Consolidated Rent Expense (measured
on a rolling 4-quarter basis) to (b) Consolidated EBITDA PLUS one times
Consolidated Rent Expense (in each case, measured on a rolling 4-quarter basis)
(such ratio, the "Leverage Ratio") as of the last day of each fiscal quarter of
not more than (i) 5.75 to 1.00 for the first, second, third and fourth fiscal
quarters of 2002, (ii) 5.50 to 1.00 for the first fiscal quarter of 2003, (iii)
5.25 to 1.00 for the second fiscal quarter of 2003, (iv) 5.00 to 1.00 for the
third and fourth fiscal quarters of 2003 and the first and second fiscal
quarters of 2004, (v) 4.75 to 1.00 for the third and fourth fiscal quarters of
2004, (vi) 4.50 to 1.00 for the first and second fiscal quarters of 2005, (vii)
4.00 to 1.00 for the third and fourth fiscal quarters of 2005 and the first and
second fiscal quarters of 2006 and (viii) 3.50 to 1.00 for the third fiscal
quarter of 2006 and each fiscal quarter ending thereafter.
(b) MINIMUM CONSOLIDATED TANGIBLE NET WORTH. The Borrower
shall maintain Consolidated Tangible Net Worth at all times of not less than
$76,000,000 PLUS the Net Issuance Proceeds received by the Borrower or any
Subsidiary from the sale or issuance of equity securities to any Person other
than the Borrower or any Subsidiary PLUS the Net Issuance Proceeds received by
the Borrower or any Subsidiary from the sale or issuance of Subordinated Debt to
any Person other than the Borrower or any Subsidiary PLUS 75% of positive
Consolidated Net Income, if any, for each fiscal quarter elapsed after December
31, 2001;
(c) INTEREST COVERAGE RATIO. The Borrower shall maintain a
ratio of Consolidated EBIT to Consolidated Interest Expense, for each period of
four consecutive fiscal quarters then ended, of not less than (i) 1.50 to 1.00
as of the last day of the first, second, third and fourth fiscal quarters of
2002, (ii) 1.75 to 1.00 as of the last day of the first, second, third and
fourth fiscal quarters of 2003, (iii) 2.50 to 1.00 as of the last day of the
first, second, third and
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fourth fiscal quarters of 2004, (iv) 3.00 to 1.00 as of the last day of the
first, second, third and fourth fiscal quarters of 2005 and (v) 3.50 to 1.00 as
of the last day of the first fiscal quarter of 2006 and each fiscal quarter
ending thereafter.
(d) FIXED CHARGE COVERAGE RATIO. The Borrower shall maintain
a ratio of (a) Consolidated EBITDA to (b) the sum of Consolidated Interest
Expense PLUS regularly scheduled principal payments on Indebtedness (including
such payments attributable to Capital Leases) PLUS cash income taxes PLUS cash
dividends, of the Borrower and its Subsidiaries on a consolidated basis, as
determined in accordance with GAAP, for each period of four consecutive fiscal
quarters then ended of not less than (i) 1.65 to 1.00 as of the last day of the
first fiscal quarter of 2002 through the last day of the second fiscal quarter
of 2004 and (ii) 1.25 to 1.00 as of the last day of the third fiscal quarter of
2004 and each fiscal quarter ending thereafter.
(e) CAPITAL EXPENDITURES. (i) The Borrower shall not, and
shall not permit any of its Subsidiaries to, make or become legally obligated to
make any expenditure in respect of the purchase or other acquisition of any new
wine barrels where such expenditure exceeds, in the aggregate for the Borrower
and its Subsidiaries during each fiscal year set forth below, the amount set
forth opposite such fiscal year:
FISCAL YEAR ENDING AMOUNT
__________________ ___________
2002 $4,500,000
2003 $5,000,000
2004 $5,500,000
2005 $6,000,000
2006 $6,500,000
2007 $7,000,000
2008 $7,500,000
2009 $8,000,000
(ii) The Borrower shall not, and shall not permit any of its
Subsidiaries to, make or become legally obligated to make any expenditure in
respect of the purchase or other acquisition of any fixed or capital assets
(excluding those assets set out in clause (i) above), where such expenditure
exceeds, in the aggregate for the Borrower and its Subsidiaries during each
fiscal year set forth below, the amount set forth opposite such fiscal year:
FISCAL YEAR ENDING AMOUNT
__________________ _____________
2002 $6,000,000
2003 $12,000,000
2004 $12,500,000
2005 $4,500,000
2006 $3,000,000
2007 $3,000,000
2008 $2,500,000
2009 $2,500,000
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PROVIDED, HOWEVER, that in respect of clauses (i) and (ii) above, so long as no
Default or Event of Default has occurred and is continuing or would result from
such expenditure, any portion of any such amount set forth above, if not
expended in the fiscal year for which it is permitted above, may be carried over
for expenditure in the next following fiscal year, but may not be carried over
for expenditure in any fiscal year thereafter.
SECTION 10.03 ADDITIONAL AFFIRMATIVE COVENANTS. So long as any
of the Obligations shall remain unpaid, any Letter of Credit shall remain
outstanding or any Lender shall have any Commitment, the Borrower agrees that:
(a) PRESERVATION OF EXISTENCE, ETC. The Borrower shall, and
shall cause each of its Subsidiaries to, maintain and preserve its legal
existence, its rights to transact business and all other rights, franchises and
privileges necessary or desirable in the normal course of its business and
operations and the ownership of its properties, except in connection with
transactions permitted by Section 10.04.
(b) PAYMENT OF OBLIGATIONS. The Borrower shall, and shall
cause each of its Subsidiaries to, pay and discharge (i) all taxes, fees,
assessments and governmental charges or levies imposed upon it or upon its
properties or assets prior to the date on which penalties attach thereto, and
all lawful claims for labor, materials and supplies which, if unpaid, might
become a Lien upon any properties or assets of the Borrower or any Subsidiary,
except to the extent such taxes, fees, assessments or governmental charges or
levies, or such claims, are being contested in good faith by appropriate
proceedings and are adequately reserved against in accordance with GAAP; (ii)
all lawful claims which, if unpaid, would by law become a Lien upon its property
not constituting a Permitted Lien; and (iii) all Indebtedness, as and when due
and payable, but subject to any subordination provisions contained in any
instrument or agreement evidencing such Indebtedness.
(c) MAINTENANCE OF INSURANCE. The Borrower shall, and shall
cause each of its Subsidiaries to, carry and maintain in full force and effect,
at its own expense and with financially sound and reputable insurance companies,
insurance in such amounts, with such deductibles and covering such risks as is
customarily carried by companies engaged in the same or similar businesses and
owning similar properties in the localities where the Borrower or such
Subsidiary operates, including fire, extended coverage, business interruption,
public liability, property damage and worker's compensation. Insurance on the
Collateral shall name the Collateral Agent, for the ratable benefit of the
Lenders as their interests may appear, as additional insured and as loss payee.
Upon the request of the Agent or any Lender, the Borrower shall furnish the
Agent from time to time with full information as to the insurance carried by it
and, if so requested, copies of all such insurance policies. The Borrower shall
also furnish to the Agent from time to time upon the request of the Agent or any
Lender a certificate of the Borrower's insurance broker or other insurance
specialist stating that all premiums then due on the policies relating to
insurance on the Collateral have been paid, that such policies are in full force
and effect and that such insurance coverage and such policies comply with all
the requirements of this subsection. All insurance policies required under this
subsection shall provide that they shall not be terminated or cancelled nor
shall any such policy be materially changed without at least 30 days' prior
written notice to the Borrower and the Agent. Receipt of notice of termination
or cancellation of any such insurance policies or reduction of coverages or
65.
amounts thereunder shall entitle the Agent to renew any such policies, cause the
coverages and amounts thereof to be maintained at levels required pursuant to
the first sentence of this subsection (c) or otherwise to obtain similar
insurance in place of such policies, in each case at the expense of the
Borrower.
(d) KEEPING OF RECORDS AND BOOKS OF ACCOUNT. The Borrower
shall, and shall cause each of its Subsidiaries to, keep adequate records and
books of account, in which complete entries shall be made in accordance with
GAAP, reflecting all financial transactions of the Borrower and its
Subsidiaries.
(e) INSPECTION RIGHTS. The Borrower shall upon reasonable
notice at any reasonable time during normal business hours and from time to time
(i) permit the Agent and the Lenders or any of their respective agents or
representatives to visit and inspect any of the properties of the Borrower and
its Subsidiaries and to examine and make copies of and abstracts from the
records and books of account of the Borrower and its Subsidiaries, and to
discuss the business affairs, finances and accounts of the Borrower and any such
Subsidiary with any of the officers, employees or accountants of the Borrower or
such Subsidiary, and (ii) permit the Agent or any of its agents or
representatives to conduct periodic audits of the Collateral at such frequencies
as the Agent or the Majority Lenders shall deem appropriate, in each case, at
the expense of the Borrower; PROVIDED, HOWEVER, that other than during the
occurrence and continuation of an Event of Default, the Borrower shall not be
required to pay for more than one such inspection or audit during any 12-month
period.
(f) COMPLIANCE WITH LAWS, ETC. The Borrower shall, and shall
cause each of its Subsidiaries to, comply in all material respects with the
requirements of all applicable laws, rules, regulations and orders of any
Governmental Authority (including all Environmental Laws) and the terms of any
indenture, contract or other instrument to which it may be a party or under
which it or its properties may be bound.
(g) MAINTENANCE OF PROPERTIES, ETC. The Borrower shall, and
shall cause each of its Subsidiaries to, maintain and preserve all of its
properties necessary or useful in the proper conduct of its business in good
working order and condition in accordance with the general practice of other
corporations or companies in similar businesses and of similar character and
size, ordinary wear and tear excepted.
(h) LICENSES. The Borrower shall, and shall cause each of
its Subsidiaries to, obtain and maintain all licenses, authorizations, consents,
filings, exemptions, registrations and other governmental approvals necessary in
connection with the execution, delivery and performance of the Loan Documents,
the consummation of the transactions therein contemplated or the operation and
conduct of its business and ownership of its properties.
(i) ACTION UNDER ENVIRONMENTAL LAWS. The Borrower shall, and
shall cause each of its Subsidiaries to, upon becoming aware of the presence of
any Hazardous Substance other than Hazardous Substances customarily used in
businesses such as Borrower's, which Hazardous Substances are used in strict
compliance with all applicable Environmental Laws, or the existence of any
environmental liability under applicable Environmental Laws with respect to the
Premises, take all actions, at their cost and expense, as shall be necessary or
reasonably
66.
advisable to investigate and clean up the condition of the Premises, including
all removal, containment and remedial actions, and restore the Premises to a
condition in compliance with applicable Environmental Laws. Nothing in this
Section 10.03(i) is intended to limit, derogate or otherwise reduce the rights
of the Collateral Agent and the Lenders under the Deeds of Trust with respect to
Environmental Laws.
(j) USE OF PROCEEDS. The Borrower shall use the proceeds of
the Loans solely for general corporate purposes not in contravention of any
Requirement of Law and to repay amounts owing under the Existing Credit
Facility.
(k) ADDITIONAL SUBSIDIARIES. (i) Promptly after the date the
Borrower incorporates, creates or acquires any additional Subsidiary and, in any
event, within ten Business Days of such incorporation, creation or acquisition,
the Borrower shall cause such Subsidiary to execute and deliver to the Agent (i)
an accession agreement, as provided for in Section 22 of the Security Agreement,
(ii) an accession agreement, as provided for in Section 26 of the Guaranty,
(iii) any UCC-1 financing statements which are required by the Collateral Agent
or the Agent for filing in each jurisdiction in which such filing is necessary
to perfect the security interest of the Collateral Agent in the Collateral of
such Subsidiary and (iv) such other items as reasonably requested by the Agent
in connection with the foregoing, including resolutions, incumbency and
officers' certificates, opinions of counsel, search reports and other
certificates and documents.
(l) PROCEEDS OF EVENTS OF LOSS. All proceeds paid to the
Borrower or any Subsidiary on account of any Event of Loss in excess of
$1,500,000 shall be deposited or otherwise held in a deposit account or
securities acco