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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 September 30, 1996
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 X No
----- -----
The number of shares outstanding of Registrant's Common Stock on October 31,
1996 was 7,611,604.
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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 September 30, 1996, and December
31 1995.
Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 1996 and 1995.
Consolidated Statements of Changes in Financial Position for the
three-month and nine-month periods ended September 30, 1996 and
1995.
Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
The CHALONE Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<CAPTION>
ASSETS
September 30, December 31,
1996 1995
-------- --------
<S> <C> <C>
Current assets
Cash .............................................................................. $ 58 $ 32
Accounts receivable, less allowance for doubtful accounts
of $34,709 and $25,550 ........................................................ 6,244 7,653
Note receivable from officer ...................................................... -- 100
Inventories ....................................................................... 26,922 27,499
Prepaid expenses .................................................................. 271 199
Deferred income taxes ............................................................. 167 167
-------- --------
Total current assets .......................................................... 33,662 35,650
Investment in Chateau Duhart-Milon ................................................ 11,604 12,059
Property, plant and equipment - net ............................................... 25,291 19,865
Goodwill and trademarks, less amortization of $980,395 and
$955,050 ...................................................................... 3,072 3,148
Other assets ...................................................................... 2,024 1,847
-------- --------
Total assets ............................................................. $ 75,653 $ 72,569
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank lines of credit .............................................................. $ 7,442 $ 10,239
Current maturities of long-term obligations ....................................... 772 774
Accounts payable and accrued liabilities .......................................... 3,076 2,565
-------- --------
Total current liabilities ..................................................... 11,290 13,578
Long-term obligations - less current maturities ........................................ 8,235 5,011
Convertible subordinated debentures .................................................... 8,500 8,500
Deferred income taxes .................................................................. 2,078 1,073
Minority interest ...................................................................... 3,380 3,025
Shareholders' equity
Common stock ........................................................................ 41,535 41,556
Retained earnings (deficit) ......................................................... 1,385 (66)
Cumulative foreign currency translation adjustment
(750) (108)
-------- --------
Total shareholders' equity .................................................... 42,170 41,382
-------- --------
Total liabilities and shareholders' equity .................................... $ 75,653 $ 72,569
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
</TABLE>
3
<PAGE>
<TABLE>
The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in thousands, except per-share data)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -----------------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross revenues ............................................. $ 8,207 $ 5,380 $ 22,052 $ 17,214
Less excise taxes ..................................... 276 146 661 564
-------- -------- -------- --------
Net revenues ............................................... 7,931 5,234 21,391 16,650
Cost of wines sold ......................................... 4,774 3,299 13,116 10,973
-------- -------- -------- --------
Gross profit .......................................... 3,157 1,935 8,275 5,677
Operating expenses ......................................... 1,448 1,238 4,444 3,725
-------- -------- -------- --------
Operating income ...................................... 1,709 697 3,831 1,952
Other income (expense)
Interest expense ...................................... (440) (743) (1,269) (2,245)
Other, net ............................................ 14 15 9 106
-------- -------- -------- --------
(426) (728) (1,260) (2,139)
Equity in net income of Chateau Duhart-Milon
40 -- 240 --
Minority interests ......................................... (192) (11) (355) (183)
-------- -------- -------- --------
Income (loss) before income taxes ....................... 1,131 (42) 2,456 (370)
Income tax benefit (expense) ............................... (463) 13 (1,005) 149
-------- -------- -------- --------
Net income (loss) ..................................... $ 668 $ (29) $ 1,451 $ (221)
======== ======== ======== ========
Net income (loss) per common share $ .08 $ (.01) $ .18 $ (.04)
Average number of shares used in income
(loss) per share computation
8,073 4,983 8,125 4,968
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
</TABLE>
4
<PAGE>
<TABLE>
The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(unaudited)(in thousands)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ------------------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings ........................................................ $ 668 $ (29) $ 1,451 $ (221)
Non-cash transactions:
Depreciation ...................................................... 332 293 961 922
Amortization ...................................................... 28 37 89 113
Equity in net income of Chateau
Duhart-Milon (Duhart) ........................................... (40) -- (240) --
Increase in minority interest ..................................... 192 10 355 183
Loss (gain) on sale of
equipment ...................................................... 65 (8) 82 (29)
Changes in:
Deferred income taxes ........................................... 463 (14) 1,005 (149)
Accounts receivable ............................................. 826 581 1,508 (619)
Inventories ..................................................... (1,590) 477 577 2,869
Prepaid expenses and other assets ............................... (305) (120) (262) (187)
Accounts payable and accrued expense............................. 724 93 511 (262)
------- ------- ------- -------
Net cash provided (required by) operating
activities .................................................... 1,363 1,320 6,037 2,620
------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures ................................................ (3,558) (1,242) (6,556) (1,769)
Proceeds from disposal of
equipment ....................................................... 38 47 87 125
Investment in Duhart ............................................ (13) -- 54 --
------- ------- ------- -------
Net cash used in investing activities............................ (3,533) (1,195) (6,415) (1,644)
------- ------- ------- -------
Cash flows from financing activities:
Net repayments under line of credit agreement........................ (547) (143) (2,797) (682)
Repayment of long-term debt ......................................... (72) (86) (510) (328)
Proceeds from long-term debt ........................................ 2,782 3,732
Distribution to minority interest ................................... -- -- -- (76)
Proceeds from issuance of common stock .............................. 39 6 82 43
Purchase and retirement of common stock............................ -- -- (103) --
------- ------- ------- -------
Net cash provided from financing activities........................ 2,202 (223) 404 (1,043)
------- ------- ------- -------
Net increase (decrease) in cash ........................................ 32 (98) 26 (67)
Cash at beginning of period ......................................... 26 101 32 70
------- ------- ------- -------
Cash at end of period ............................................. $ 58 $ 3 $ 58 $ 3
======= ======= ======= =======
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Consolidated Financial Statements
The consolidated balance sheet as of September 30, 1996, the
consolidated statement of operations for the three-month and nine-month periods
ended September 30, 1996 and 1995, and the consolidated statement of changes in
financial position for the three-month and nine-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 September 30, 1996, 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, 1995, 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.
6
<PAGE>
<TABLE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
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 nine-month periods ended September 30, 1996 and 1995, and the percentage
change in such items between the comparable periods in those years.
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
--------------------------------------- --------------------------------------
Percentage Percent Percentage Percent
of Wine Sales Change of Wine Sales Change
----------------------- ---------- ----------------------- ------------
1995 vs. 1995 vs.
1996 1995 1996 1996 1995 1996
---------- ---------- ------------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Wine sales................ 100.0% 100.0% 51.5% 100.0% 100.0% 28.5%
Cost of wines sold........ 60.2 63.0 44.7 61.3 65.9 19.5
---------- ---------- ---------- ---------
Gross profit........... 39.8 37.0 63.2 38.7 34.1 45.7
Operating expenses........ 18.3 23.7 17.0 20.8 22.4 19.3
---------- ---------- ---------- ---------
Operating income....... 21.5 13.3 145.2 17.9 11.7 96.3
Other income (expense)
Interest expense....... (5.5) (14.2) (40.8) (6.4) (13.5) (43.5)
Other, net............. 0.2 0.3 (6.7) - 0.6 -
Equity in net income...... .5 - - 1.1 - -
Minority interests........ (2.4) (0.2) - (1.7) (1.1) 94.0
Income (loss) before income
taxes................. 14.3 (0.8) - 11.5 (2.2) -
Income tax (benefit) expense
(5.8) 0.2 - (4.7) 0.9 -
---------- ---------- ---------- ---------
Net income (loss).... 8.4% (0.6)% - 6.8% (1.3)%) -
========== ========== ========== =========
</TABLE>
Revenues
Net revenues were $7,931,000 for the third quarter ended September 30,
1996, and $21,391,000 for the nine months then ended. Sales for the three-month
and nine-month periods increased by 52% and 29%, respectively, over the
comparable periods in 1995, due to a combination of unit increases and price
increases across all of the Company's product lines.
Gross Profit
Gross profit for the three-month and nine-month periods ended September
30, 1996, increased approximately 63% and 46%, respectively, over the comparable
periods in 1995. These increases were due primarily to the higher sales levels
mentioned above. Gross profit as a percentage of sales increased to
approximately 40% and 39% for the three-month and nine-month periods in 1996
from 37% and 34% in the comparable periods in 1995. The increases were
attributable to a change in product mix to higher priced wines with higher gross
profit margins coupled with selected price increases on certain of the Company's
wines.
Operating Expenses
Operating expenses include selling, general and administrative
expenses. Operating expenses for the three-month and nine-month periods
increased by 17% and 19%, respectively, from the comparable periods in 1995.
These increases are the result of increased selling expenses due to higher
selling levels discussed above. Operating expenses as a percentage of sales for
the three-month and nine-month periods were 18%.
7
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
and 21%, respectively, compared to 24% and 22% in the comparable periods in
1995. These decreases were due to selling and administrative expenses increasing
at a rate slower than increases in revenues.
Interest Expense
Interest expense declined 41% and 44% for the three-month and
nine-month periods in 1996, over the comparable periods in 1995. These decreases
were primarily attributable to lower short-term borrowings made possible by the
addition of $4.5 million in new equity and the conversion of $12.4 million of
convertible debentures to equity, both reflected in the fourth quarter of 1995,
coupled with increased cash flows resulting from profits generated during the
periods covered.
Equity in Net Income of Chateau Duhart-Milon
Effective October 1, 1995, the Company exchanged essentially all of its
11.3% ownership interest in DBR for a 23.5% interest in Societe Civile Chateau
Duhart-Milon (Duhart). The effect of this transaction was to convert an
essentially passive 11.3% interest in DBR into an interest in an active,
operating vineyard and winery operation accounted for using the equity method of
accounting. The Company's 23.5% equity interest in Duhart-Milon's net income for
the three-month and nine-month periods ended September 30, 1996, were $40,000
and $240,000, respectively.
The investment in Duhart is denominated in French Francs and
accordingly a reserve for currency translation is recorded in the equity section
of the balance sheet. The reserve for the nine months ended September 30, 1996,
was $750,000. At November 11, 1996 that reserve had declined to approximately
$524,000.
<TABLE>
Minority Interest
The Company currently has two ventures in which there is a minority
interest. The "minority interest" in earnings (losses) of these ventures for the
periods ended September 30, 1996, consisted of the following:
<CAPTION>
Minority Interest in Earnings
---------------------------------
3 Months 9 Months
Minority Ended Ended
Venture Minority Owner % Sept 30, 1996 Sept 30, 1996
- ------- -------------- --- ------------- -------------
<S> <C> <C> <C> <C>
Edna Valley Vineyard (EVV) Paragon Vineyard Co., Inc. 50.0% $ 159,892 $ 304,351
Canoe Ridge Vineyard, LLC (CRV)
Various 49.5% 31,517 50,276
------------- -------------
$ 191,409 $ 354,627
============= =============
</TABLE>
The "minority interest" amount for EVV represents an increase of 45%
from the comparable nine-month period in 1995, resulting from increased sales
and profits for the EVV Joint Venture. Effective January 1, 1996, CanoeCo and
Canoe Ridge Winery (CRW) merged into one new Company, CRV, which the Company
owns 50.5%. CRW had its first (and only) complete year of operation in 1995, and
essentially sold its entire vintage in that year. The Company believes that EVV
and CRV will continue to contribute significantly to its income, and hence that
"minority interest" will continue, proportionately.
8
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
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 increased by $300,000 during the
nine-month period ending September 30, 1996, to $22,372,000, due to increased
profits for the period.
At November 11, 1996, the Company had lines of credit totaling
$16,300,000 of which $7,016,000 had been drawn.
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 July 31, 1996, a wildfire damaged approximately 75% of its producing
acreage at the Carmenet Vineyard in Sonoma County. The winery structures and
barrel inventory were untouched by the blaze and there were no injuries. The
fire was caused by electrical origin and Pacific Gas & Electric Company of
California has publicly acknowledged responsibility. The damaged acreage
consists of Cabernet Sauvignon, Merlot and Cabernet Franc grapes used for estate
bottled wines produced under the Carmenet label. Carmenet currently produces
approximately 38,000 cases of wine annually of which approximately 40% are
estate bottled. Management is currently assessing the extent of damage caused by
the fire and is in discussions with Pacific Gas & Electric regarding
compensation for losses suffered.
9
<PAGE>
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits. Not applicable.
(b) Reports. None.
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: November 14, 1996 BY /s/ William L. Hamilton
------------------------
William L. Hamilton
Executive Vice President
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
[9/30/96 Balance Sheets and Consolidated Statements of Operations]
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JUL-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 58
<SECURITIES> 0
<RECEIVABLES> 6,244
<ALLOWANCES> 0
<INVENTORY> 26,922
<CURRENT-ASSETS> 33,662
<PP&E> 25,291
<DEPRECIATION> 0
<TOTAL-ASSETS> 75,653
<CURRENT-LIABILITIES> 11,290
<BONDS> 0
<COMMON> 41,535
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 75,653
<SALES> 0
<TOTAL-REVENUES> 7,931
<CGS> 4,774
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,448
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (440)
<INCOME-PRETAX> 1,131
<INCOME-TAX> (463)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 668
<EPS-PRIMARY> .08
<EPS-DILUTED> .00
</TABLE>
