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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, 1997
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 July 28, 1997
was 7,661,793.
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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, 1997, and March 31,
1997.
Consolidated Statements of Operations for the three-month periods
ended June 30, 1997 and 1996.
Consolidated Statements of Changes in Financial Position for the
three-month periods ended June 30, 1997 and 1996.
Notes to Consolidated Financial Statements.
<PAGE>
The CHALONE Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
June 30, March 31,
1997 1997
(unaudited)
------- -------
Current assets
Cash .................................................$ 134 $ 246
Accounts receivable, less allowance for
doubtful accounts of $84,070 and $70,550,
respectively ....................................... 4,234 3,944
Notes receivable ..................................... 1,225 1,291
Distribution receivable .............................. -- 382
Note receivable from officer ......................... 28 83
Inventories .......................................... 28,315 28,231
Prepaid expenses ..................................... 257 219
Deferred income taxes ................................ 23 23
------- -------
Total current assets ............................. 34,216 34,419
Investment in Chateau Duhart-Milon ................... 10,199 10,372
Notes receivable, long-term portion .................. 394 398
Property, plant and equipment - net .................. 26,394 24,763
Goodwill and trademarks .............................. 5,549 5,591
Other assets ......................................... 343 316
------- -------
Total assets ................................ $77,095 $75,859
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank lines of credit ................................ $ 8,629 $ 7,771
Current maturities of long-term obligations ......... 580 564
Accounts payable and accrued liabilities ............ 2,074 1,801
-------- --------
Total current liabilities ....................... 11,283 10,136
Long-term obligations - less current maturities .......... 9,526 9,879
Convertible subordinated debentures ...................... 8,500 8,500
Deferred income taxes .................................... 1,318 1,318
Minority interest ........................................ 3,296 3,191
Shareholders' equity
Common stock .......................................... 41,886 41,841
Retained earnings (deficit) ........................... 3,250 2,583
Cumulative foreign currency translation adjustment .... (1,964) (1,589)
-------- --------
Total shareholders' equity ...................... 43,172 42,835
-------- --------
Total liabilities and shareholders' equity ...... $ 77,095 $ 75,859
======== ========
The accompanying notes are an integral part
of the consolidated financial statements
3
<PAGE>
The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in thousands, except per-share data)
Three Months Ended
June 30,
--------------------
1997 1996
------- -------
Gross revenues ........................................... $ 8,287 $ 8,449
Less excise taxes ................................... 211 235
------- -------
Net revenues ............................................. 8,076 8,214
Cost of wines sold ....................................... 4,658 5,044
------- -------
Gross profit ........................................ 3,418 3,170
Selling, general and administrative expenses ............. 1,920 1,707
------- -------
Operating income .................................... 1,498 1,463
Other income (expense)
Interest expense .................................... (455) (391)
Other, net .......................................... 19 13
------- -------
(436) (378)
Equity in net income of Chateau Duhart-Milon ............. 193 148
Minority interests ....................................... (143) (128)
------- -------
Income before income taxes .......................... 1,112 1,104
Income tax expense ....................................... (445) (451)
------- -------
Net income .......................................... $ 667 $ 653
======= =======
Net income per common share .............................. $ .08 $ .08
Average number of shares used in income
per share computation .................................. 8,456 8,158
The accompanying notes are an integral part
of the consolidated financial statements
4
<PAGE>
The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(unaudited)(in thousands)
Three Months Ended
June 30,
---------------------
1997 1996
------- -------
Cash flows from operating activities:
Net earnings ...................................... $ 667 $ 653
Non-cash transactions included in earnings:
Depreciation .................................... 381 309
Amortization .................................... 45 31
Equity in net income of Chateau Duhart-Milon .... (193) (148)
Increase in minority interest ................... 143 128
Exchange rate gain .............................. (9) --
Loss on sale of equipment ....................... 2 5
Changes in:
Deferred income taxes ......................... -- 452
Accounts receivable ........................... 92 (2,242)
Inventories ................................... (84) 1,827
Prepaid expenses and other assets ............. (68) (41)
Accounts payable and accrued expense .......... 273 829
------- -------
Net cash provided by operating
activities .................................. 1,249 1,803
------- -------
Cash flows from investing activities:
Capital expenditures ............................ (2,019) (2,523)
Net decrease in notes receivable ................ 125 3
Proceeds from disposal of equipment ............. 5 67
------- -------
Net cash used in investing activities ........... (1,889) (2,453)
------- -------
Cash flows from financing activities:
Net repayments under line of credit agreement ..... 858 (48)
Repayment of long-term debt ....................... (337) (343)
Proceeds from issuance of long-term debt .......... -- 950
Distribution to minority interest ................. (38) --
Net proceeds from issuance of common stock ........ 45 19
Purchase and retirement of common stock ........... -- --
------- -------
Net cash provided by financing activities ....... 528 674
------- -------
Net increase (decrease) in cash ...................... (112) 24
Cash at beginning of year ......................... 246 2
------- -------
Cash at end of period ........................... $ 134 $ 26
======= =======
The accompanying notes are an integral part
of the consolidated financial statements
5
<PAGE>
The CHALONE Wine Group, Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1997, the consolidated
statement of operations for the three-month period ended June 30, 1997 and 1996,
and the consolidated statement of changes in financial position for the
three-month period 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, 1997, 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 March 31, 1997 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>
The CHALONE Wine Group, Ltd.
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
period ended June 30, 1997 and 1996, and the percentage change in such items
between the comparable periods in those years.
Three Months Ended June 30,
----------------------------
Percentage Percent
of Wine Sales Change
----------------- ---------
1996 vs.
1997 1996 1997
------ ------ -------
Net revenues ................................... 100.0% 100.0% (1.7%)
Cost of wine sold .............................. 57.7 61.4 (7.7)
------ ------
Gross profit ................................ 42.3 38.6 7.8
Selling, general & administrative expenses ..... 23.8 20.8 12.5
------ ------
Operating income ............................ 18.5 17.8 2.4
Other income (expense)
Interest expense ............................ (5.6) (4.8) 16.4
Other, net .................................. 0.2 0.2 46.2
Equity in net income of Ch. Duhart-Milon ....... 2.4 1.8 30.4
Minority interests ............................. (1.8) (1.6) 11.7
------ ------
Income (loss) before income taxes ........... 13.7 13.4 0.7
Income taxes ................................... (5.5) (5.5) (1.3)
------ ------
Net earnings (loss) ....................... 8.2 7.9 2.1
====== ======
Wine Sales
Sales for the three months ended June 30, 1997, increased approximately 2%
over the comparable period in 1996. The number of cases sold in the first
quarter was 9% less than the comparable period in 1996 due to a shortage of some
wines. This was more than offset by an increase in the average per case
realization of over 10% for the same periods.
Gross Profit
Gross profit for the three months ended June 30, 1997, increased by
approximately 8% over the comparable period in 1996, resulting primarily from
the increased per case realizations mentioned above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ending
June 30, 1997 increased by 13% over the comparable period in 1996. This increase
is primarily the result of planned increases in marketing expenditures.
Operating Income
Operating income for the three months ended June 30, 1997, increased by
over 2% from the comparable period in 1996. This increase was due to higher
gross profit as discussed above.
7
<PAGE>
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Other Income (Expense)
Net interest expense for the three months ended June 30, 1997, increased by 16%
from the comparable period in 1996, due primarily to higher borrowings due to
the financing on vineyards acquired in the second half of 1996.
Equity in Net Income of Chateau Duhart-Milon
The Company's 23.5% equity interest in Duhart-Milon's net income for the
three months ended June 30, 1997, was $193,000 as compared to $148,000 in the
comparable period in 1996. This 30% increase is primarily attributable to the
exceptionally strong demand for Bordeaux wines and corresponding increases in
prices of the wines.
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
three months ended June 30, 1997, consisted of the following:
Minority
Interest in
Venture Minority Owner Minority Earnings
- ------- -------------- % (Loss)
---- --------
Edna Valley Vineyard (EVV) Paragon Vineyard Co., Inc. 50% $ 120,728
Canoe Ridge Vineyard, LLC (CRV) Various 49.5% 22,097
---------
$ 142,825
=========
The minority interest in earnings for EVV during the three-month period of
1997 represents an increase of 35% from the comparable period in 1996, resulting
from an increase in average case realizations and the resulting increase in
gross margin per case. The minority interest in earnings for CRV during the
three months ending June 30, 1997 represents a decrease of 43% over the
comparable period in 1996. This is due to CRV having "sold out" of wines and its
next release not being available until June 1997.
The minority interest in earnings for Edna Valley Vineyard during the
three-month period of 1996 represents a decrease of 24% from the comparable
period in 1995, and was due to lower sales of custom branded wines produced at
EVV. Effective January 1, 1996, CanoeCo and Canoe Ridge Winery (CRW) merged into
one new Company, Canoe Ridge Vineyard LLC, 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. Consequently until the next vintage was
released in June of 1996, with only limited amounts of wine available for sale
by CRV, the three months period ending June 30, 1996 resulted in a small loss.
The Company believes that Edna Valley Vineyard will continue to contribute
significantly to its income, and hence that this minority interest will continue
to increase in the future. Management also believes that CRV will contribute
income, and that the minority interest will, therefore, increase.
Net Income
Net income for the three months ended June 30, 1997, was $667,000, an
increase of 2% over the comparable period in 1996.
8
<PAGE>
The CHALONE Wine Group, Ltd.
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 third quarter, because of heavy holiday
sales and because most wines are released around the end of the second and
beginning of the third quarters.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $909,000 during the three-month
period ending June 30, 1997, to $23,374,000. This 4% decrease is primarily due
to increased spending on capital expenditures for vineyard development at four
of our properties and a new hospitality center at Edna Valley Vineyard.
Effective August 1, 1997, the Company renegotiated its lines of credit
and term financing with Wells Fargo Bank. The new credit agreements are for
comparable borrowing limits to the previous agreements, but have changed the
rates from prime to prime less .5%. This agreement will be in effect until July
31, 1999.
At July 25, 1997, the Company had lines of credit totaling $16,300,000
of which $9,444,415 had been drawn.
The Company is not aware of any potential impairments to its liquidity
and believes that its capital resources are adequate to meet the current and
historic levels of capital expenditures and liquidity needs of the Company.
9
<PAGE>
The CHALONE Wine Group, Ltd.
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1997 Annual Meeting of Shareholders was held at the
Company's executive offices, 621 Airpark Road, Napa, California, on May 16,
1997. In attendance, in person or by proxy, were 7,009,654 shares, or,
approximately 91.6% 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 6,961,089 48,565
W. Philip Woodward 6,989,104 20,550
William L. Hamilton 6,962,423 47,231
Mark Hojel 6,986,005 23,649
Yves-Adres Istel 6,879,829 129,825
C. Richard Kramlich 6,988,704 20,950
William Myers 6,989,529 20,125
James H. Niven 6,986,711 22,943
Philip Plant 6,988,030 21,624
Eric de Rothschild 6,874,345 135,309
Christophe Salin 6,988,904 20,750
Approval of Company's 1997 Stock Option Plan. The Board's submission of
the 1997 Stock Option Plan received due ratification, with 5,719,404 shares
voting for, 263,617 shares voting against, and 36,612 shares abstaining.
Appointment of Auditors. The Board's reappointment of Deloitte & Touche
as the Company's certified public accountants received due ratification, with
6,977,591 shares voting for, 20,915 shares voting against, and 11,148 shares
abstaining.
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: August 12, 1997 BY /s/ William L. Hamilton
------------------------
William L. Hamilton
Executive Vice President
and Chief Financial Officer
10
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION ESTRACTED FROM 6/30/97
BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY RERERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> THE CHLAONE WINE GROUP,LTD.
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