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SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 0-13406
The CHALONE Wine Group, Ltd.
(Exact name of Registrant as specified in its charter)
California 94-1696731
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
621 Airpark Road
Napa, California 94558
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 707-254-4200
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 _________ No _____X_____
The number of shares outstanding of Registrant's Common Stock on July 30, 1995
was 4,973,580
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<PAGE>
The CHALONE Wine Group, Ltd.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Incorporated herein is the following unaudited financial information:
Consolidated Balance Sheets as of June 30, 1995, and December 31,
1994.
Consolidated Statements of Operations for the three-month and
nine-month periods ended June 30, 1995 and 1994.
Consolidated Statements of Changes in Financial Position for the
three-month and nine-month periods ended June 30, 1995 and 1994.
Notes to Consolidated Financial Statements.
<PAGE>
The CHALONE Wine Group, Ltd.
<TABLE>
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
JUNE 30, December 31,
1995 1994
-------- --------
(unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash ....................................................................... $ 101 $ 70
Accounts receivable, less allowance for doubtful accounts of $20
and $27 .................................................................. 5,709 4,509
Inventories ................................................................ 27,030 29,422
Prepaid expenses and other assets .......................................... 245 209
Deferred income tax benefit ................................................ 312 312
-------- --------
Total current assets ................................................. 33,397 34,522
Investment in Domaines Barons de Rothschild(Lafite) ........................ 12,524 12,524
Property, plant and equipment - net ........................................ 20,284 20,444
Intangible assets arising from acquisitions, less amortization of
$832 and $780 ............................................................ 3,199 3,251
Other assets ............................................................... 1,491 1,484
-------- --------
Total assets ......................................................... $ 70,894 $ 72,225
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable .............................................................. $ 13,335 $ 13,874
Current maturities on long-term obligations ................................ 586 799
Accounts payable and accrued expenses ...................................... 2,358 2,713
-------- --------
Total current liabilities ............................................ 16,279 17,386
Long-term obligations, less current maturities ................................ 5,512 5,541
Convertible subordinated debentures ........................................... 20,884 20,884
Deferred income taxes ......................................................... 1,036 1,172
Minority interests ............................................................ 3,140 3,043
Shareholders' equity
Common stock ............................................................... 24,509 24,472
Retained earnings (deficit) ................................................ (466) (273)
-------- --------
Total shareholders' equity ........................................... 24,043 24,199
======== ========
Total liabilities and shareholders' equity ........................... $ 70,894 $ 72,225
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
</TABLE>
<PAGE>
The CHALONE Wine Group, Ltd.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in thousands, except per-share data)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- --------------------------
1995 1994 1995 1994
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Wine sales ......................................... $ 7,411 $ 5,512 $ 11,834 $ 9,579
Cost of wines sold ................................. 5,166 3,650 8,092 6,246
-------- -------- -------- --------
Gross profit .................................. 2,245 1,862 3,742 3,333
Operating expenses ................................. 1,266 1,108 2,487 2,209
-------- -------- -------- --------
Operating income .............................. 979 754 1,255 1,124
Other income (expense)
Interest expense .............................. (766) (682) (1,502) (1,359)
Other, net .................................... 83 88 92 61
Minority interests ................................. (167) (54) (172) (91)
-------- -------- -------- --------
Income (loss) before income taxes
128 106 (328) (265)
Income tax benefit (expense) ....................... (58) (49) 135 106
-------- -------- -------- --------
Net income (loss) ............................. $ 70 $ 57 $ (192) $ (159)
======== ======== ======== --------
Net income (loss) per common share ................. $ .01 $ .01 $ (.04) $ (.04)
Average number of shares used in income
(loss) per share computation..................... 4,962 4,782 4,962 4,692
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
</TABLE>
<PAGE>
The CHALONE Wine Group, Ltd.
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(unaudited)(in thousands)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ---------------------
1995 1994 1995 1994
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings ......................................... $ 70 $ 57 $ (192) $ (159)
Non-cash transactions:
Depreciation ....................................... 315 318 629 636
Amortization ....................................... 36 36 76 73
Increase in minority interest ...................... 167 53 173 90
Loss (gain) on sale of equipment
(23) 3 (20) 40
Changes in:
Deferred income taxes ............................ 58 37 (135) (118)
Accounts receivable .............................. (2,414) (803) (1,200) 21
Inventories ...................................... 1,710 896 2,392 1,331
Prepaid expenses and other assets
(84) (116) (67) (73)
Accounts payable and accrued expense
784 (234) (355) (1,249)
------- ------- ------- -------
Net cash provided (required by)
operating activities ........................... 619 247 1,300 592
------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures ................................. (327) (139) (527) (264)
Proceeds from disposal of
equipment ........................................ 51 15 78 20
------- ------- ------- -------
Net cash used in investing activities
(276) (124) (449) (244)
------- ------- ------- -------
Cash flows from financing activities:
Net repayments under line of credit
agreement .......................................... (373) (1,351) (539) (1,587)
Repayment of long-term debt .......................... (147) (112) (242) (373)
Distribution to minority interest .................... (6) (156) (76) (156)
Proceeds from issuance of common stock ...............
42 1,501 37 1,503
------- ------- ------- -------
Net cash provided from financing
activities ....................................... (484) (118) (820) (613)
------- ------- ------- -------
Net increase (decrease) in cash ......................... (141) 5 31 (265)
Cash at beginning of year ............................ 242 151 70 421
------- ------- ------- -------
Cash at end of period .............................. $ 101 $ 156 $ 101 $ 156
======= ======= ======= =======
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
</TABLE>
<PAGE>
The CHALONE Wine Group, Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1995, the consolidated
statement of operations for the three-month and six-month periods ended June 30,
1995 and 1994, and the consolidated statement of changes in financial position
for the three-month and six-month periods then ended have been prepared by the
Company, without audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly position,
results of operations and changes in financial position at June 30, 1995, and
for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's December 31, 1994, audited
financial statements.
NOTE 2 - Seasonal Factors
The results for the interim periods are not necessarily indicative of
the results to be expected for the year, due to seasonal factors.
<PAGE>
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
<TABLE>
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to revenue
of certain items in the Company's statements of operations for the three-month
and six-month periods ended June 30, 1995 and 1994, and the percentage change in
such items between the comparable periods in those years.
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------------------- ----------------------------------
Percentage Percent Percentage Percent
of Wine Sales Change of Wine Sales Change
-------------------- -------- -------------------- --------
1994 vs. 1994 vs.
1995 1994 1995 1995 1994 1995
----- ----- ---- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Wine sales ....................... 100.0% 100.0% 34.4% 100.0% 100.0% 23.5%
Cost of wines sold ............... 69.7 66.2 41.5 68.4 65.2 29.6
----- ----- ----- -----
Gross profit .................. 30.3 33.8 20.5 31.6 34.8 12.3
Operating expenses ............... 17.1 20.1 14.2 21.0 23.1 12.6
----- ----- ----- -----
Operating income .............. 13.2 13.7 29.7 10.6 11.7 11.6
Other income (expense)
Interest expense .............. (10.3) (12.4) 12.3 (12.7) (14.2) 10.5
Other, net .................... 1.1 1.6 (6.9) 0.8 0.6 48.9
Minority interests ............... (2.3) (1.0) 211.1 (1.5) (0.9) 89.6
----- ----- ----- -----
Income (loss) before income
taxes ........................ 1.7 1.9 19.4 (2.8) (2.8) 24.2
Income tax (benefit) expense (0.7) (0.9) 16.6 1.0 1.1 28.3
----- ----- ----- -----
Net income (loss) ........... 1.0% 1.0% 21.7 (1.8%) (1.7%) 21.4
===== ===== ===== =====
</TABLE>
Wine Sales
Sales were $7,411,000 for the second quarter ended June 30, 1995, and
$11,834,000 for the six months then ended. Sales for the three-month and
six-month periods increased by 34% and 24%, respectively, over the comparable
periods in 1994, due primarily to higher sales levels in the out-of-California
markets and in custom branded wines at Edna Valley Vineyard and Carmenet.
Gross Profit
Gross profit for the three-month and six-month periods ended June 30,
1995, increased approximately 21% and 12%, respectively, over the comparable
periods in 1994. These increases were due primarily to the higher sales levels
mentioned above. Gross profit as a percentage of sales declined to approximately
30% and 32% for the three-month and six-month periods in 1995 from 34% and 35%
in the comparable periods in 1994. The decreases were primarily attributable to
the increased sale of custom branded wines at lower gross profits.
Operating Expenses
Operating expenses include selling, general and administrative
expenses. Operating expenses for the three-month and six-month periods increased
by 14% and 13%, respectively, from the comparable periods in 1994. These
increases are the result of increased selling expenses resulting from the hiring
of additional regional sales personnel in the out-of-California sales market.
Operating expenses as a percentage of sales for the
<PAGE>
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
three-month and six-month periods were 17% and 21%, respectively, compared to
20% and 23% in the comparable periods in 1994. These decreases are the result of
operating expenses increasing at a lesser rate than sales increases experienced
during those periods.
Interest Expense
Interest expense increased 12% and 11% for the three-month and
six-month periods in 1995, over the comparable periods in 1994. These increases
were due to higher borrowings required for increased receivables resulting from
the increased sales activity discussed above, and from working capital
borrowings required for the Canoe Ridge Winery operation that is in its first
full year of operation. Additionally, interest rates on our bank borrowings have
increased over 1994 by approximately 2%, due to a higher `prime' rate.
Minority Interest
The Company currrently has three ventures in which there is a minority
interest. The "minority interest" in earnings (losses) of these ventures for the
periods ended June 30, 1995, consisted of the following:
<TABLE>
<CAPTION>
Minority Interest in Earnings
(Loss)
---------------------------------
3 Months 6 Months
Minority Ended Ended
Venture Minority Owner % June 30, 1995 June 30, 1995
------- -------------- -------- ------------- --------------
<S> <C> <C> <C> <C>
Edna Valley Vineyard (EVV) Paragon Vineyard Co., Inc. 50% $ 117,596 $ 134,585
CanoeCo Partners CRVI 50% (6,752) (14,866)
Canoe Ridge Winery (CRW) Various 49% 56,397 52,254
----------------------------
$ 167,241 $ 171,973
============================
</TABLE>
The "minority interest" amount for EVV represents an increase of 90%
from the comparable period in 1994 due primarily to higher sales of custom
branded wines produced at EVV. The "minority interest" amount for CRW represents
the results for its first full year of operation. Allocations to "minority
interest" increase as income from EVV and CRW increases. The Company believes
that EVV and CRW will continue to contribute significantly to its income, and
hence that "minority interest" will continue, proportionately. An additional
small factor in the "minority interest" calculation consists of the operations
of the CanoeCo "Canoe Ridge" vineyard joint venture, which to date has produced
small losses resulting primarily from interest expense on the growing crop due
to be harvested later in the year.
SEASONALITY
The Company's wine sales from quarter to quarter are highly variable
because the exact dates when wines are released for sale vary from year to year.
Sales are typically highest during the fourth quarter, because of heavy holiday
sales and because most wines are released around the end of the third and
beginning of the fourth quarters.
FINANCIAL CONDITION
The Company's working capital decreased by $20,000 during the six-month
period ending June 31, 1995, to $17,116,000, due to normal capital expenditures,
planned repayments of long-term debt and the net loss incurred.
At August 4, 1995, the Company had lines of credit totaling $15,700,000
of which $12,588,218 had been drawn.
<PAGE>
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
The Company is not aware of any potential impairments to its liquidity
and believes that its capital resources, including those resulting from and
discussed in "SIGNIFICANT EVENT" below, are adequate to meet the current and
historic levels of capital expenditures and liquidity needs of the Company.
SIGNIFICANT EVENT
On April 27, 1995, the Board of Directors of the Company reached an
agreement with two of its largest shareholders, Domaines Barons de Rothschild
(Lafite) ("DBR") and Summus Financial, Inc. ("Summus"), to substantially
increase its equity base. Subject to the successful conclusion of definitive
agreements and approval by Chalone's shareholders, Chalone will receive equity
of $5 million at $6.00 per share provided equally by DBR and Summus. DBR and
Summus will also receive an equivalent number of warrants to purchase additional
shares at $8.00 per share. In addition, DBR has agreed to convert its $12.4
million holding of debentures, at $7.00 per share, into 1.77 million shares of
Chalone common stock. All other holders of the remaining outstanding debentures
will be offered the same conversion terms.
The Company will use the proceeds to pay down its bank lines of credit.
Along with the conversion of DBR's debentures, the resulting annual interest
savings will be over $1 million. Chalone's shareholder equity will increase from
$24 million to a minimum of $41 million.
Chalone will exchange substantially all of its existing ownership in
DBR for a 23.5% partnership interest in Chateau Duhart-Milon, a classified
fourth growth Bordeaux estate in Pauillac. DBR will continue as the managing
partner.
<PAGE>
The CHALONE Wine Group, Ltd.
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1995 Annual Meeting of Shareholders was held at the
Company's executive offices, 621 Airpark Road, Napa, California, on May 18,
1995. In attendance, in person or by proxy, were 4,380,509 shares, or,
approximately 88.3% of total shares outstanding. The following actions were
taken:
Election of Directors. All nine positions on the Company's Board of
Directors were to be filled for new one-year terms, and all nominees were duly
elected, each nominee receiving in excess of 99% of total shares voted. The
directors thus elected, with the precise votes for and against, were:
Director For Against
-------- --- -------
Richard H. Graff ....................... 4,354,946 25,563
W. Philip Woodward ..................... 4,355,672 24,837
William L. Hamilton .................... 4,355,542 24,967
Richard C. Hojel ....................... 4,353,272 27,237
C. Richard Kramlich .................... 4,356,372 24,137
John A. McQuown ........................ 4,355,472 25,037
James H. Niven ......................... 4,355,672 25,037
Eric de Rothschild ..................... 4,356,472 24,037
Christophe Salin ....................... 4,356,472 24,037
Amendment to Articles. An amendment to the Company's Articles of
Incorporation, increasing the authorized number of shares of stock from 10
million to 15 million, was duly adopted, with an affirmative vote of 4,240,220
shares, 91,470 shares voting against and 48,819 shares abstaining.
Appointment of Auditors. The Board's reappointment of Deloitte & Touche
as the Company's certified public accountants received due ratification, with
4,360,384 shares voting for, 8,696 shares voting against, and 11,429 shares
abstaining.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Not applicable.
(b) Reports. A report on Form 8-K, dated May 9, 1995, was filed with the
Commission to report the private-placement equity transaction discussed
in Part 1, Item 2, of this Form 10-Q.
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.
Dated: August 11, 1995 BY /s/ William L. Hamilton
------------------------
William L. Hamilton
Executive Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> APR-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 101
<SECURITIES> 0
<RECEIVABLES> 5,709
<ALLOWANCES> 0
<INVENTORY> 27,030
<CURRENT-ASSETS> 33,397
<PP&E> 32,209
<DEPRECIATION> (11,925)
<TOTAL-ASSETS> 70,894
<CURRENT-LIABILITIES> 16,279
<BONDS> 0
<COMMON> 24,509
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 70,894
<SALES> 0
<TOTAL-REVENUES> 7,411
<CGS> 5,166
<TOTAL-COSTS> 6,432
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 766
<INCOME-PRETAX> 128
<INCOME-TAX> 58
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 70
<EPS-PRIMARY> .00
<EPS-DILUTED> .01
</TABLE>