SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 1999
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 February 9,
2000 was 9,366,038.
<PAGE>
The Chalone Wine Group, Ltd.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements Page
Consolidated Balance Sheets as of December 31, 1999, and March 31, 1999. 3
Consolidated Statements of Income for the three-month and
nine-month periods ended December 31, 1999 and 1998. 4
Consolidated Statements of Cash Flows for the three-month and
nine-month periods ended December 31, 1999 and 1998. 5
Notes to Consolidated Financial Statements. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Disclosures about market risk 12
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
<TABLE>
The Chalone Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
ASSETS
<CAPTION>
December 31, March 31,
1999 1999
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 274 $ 1,670
Accounts receivable, less allowance for doubtful
accounts of $117 and $86, respectively 10,416 8,086
Notes receivable 109 109
Income tax receivable 519 616
Inventory 52,641 40,926
Prepaid expenses 515 492
Deferred income taxes 899 158
--------- ---------
Total current assets 65,373 52,057
Investment in Chateau Duhart-Milon 9,651 10,409
Notes receivable, long-term portion 119 119
Property, plant and equipment - net 40,333 33,591
Goodwill and trademarks - net 7,588 6,196
Other assets 1,035 1,099
--------- ---------
Total assets $ 124,099 $ 103,471
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 7,570 $ 2,494
Current maturities of long-term obligations 1,054 371
--------- ---------
Total current liabilities 8,624 2,865
Bank line of credit 18,364 3,938
Long-term obligations, less current maturities 21,782 22,835
Convertible subordinated debentures -- 8,500
Deferred income taxes 3,108 2,765
--------- ---------
Total liabilities 51,878 40,903
--------- ---------
Minority interest 4,545 4,277
Shareholders' equity:
Common stock - authorized 15,000,000 shares no par value;
issued and outstanding: 9,366,038 and 8,720,771
shares, respectively 54,491 48,965
Stock subscription receivable (38) (1,007)
Retained earnings 16,238 12,629
Accumulatedfotherncomprehensivenlossion adjustment (3,015) (2,296)
--------- ---------
Total shareholders' equity 67,676 58,291
--------- ---------
Total liabilities and shareholders' equity $ 124,099 $ 103,471
========= =========
<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 Income
(in thousands, except per-share data)
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
-------------------------- --------------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Gross revenues $ 16,361 $ 12,573 $ 40,366 $ 32,949
Excise taxes (424) (401) (1,013) (852)
-------- -------- -------- --------
Net revenues 15,937 12,172 39,353 32,097
Cost of wines sold (8,468) (6,565) (21,034) (17,567)
-------- -------- -------- --------
Gross profit 7,469 5,607 18,319 14,530
Other revenues from operations 9 43 62 66
Selling, general and administrative expenses (3,826) (2,703) (10,271) (7,849)
-------- -------- -------- --------
Operating income 3,652 2,947 8,110 6,747
Interest expense (674) (439) (1,766) (1,281)
Equity in Chateau Duhart-Milon 168 187 698 718
Minority interests (338) (432) (967) (1,007)
Other, net 20 25 41 (11)
-------- -------- -------- --------
Income before income taxes 2,828 2,288 6,116 5,166
Income taxes (1,159) (936) (2,507) (2,117)
-------- -------- -------- --------
Net income $ 1,669 $ 1,352 $ 3,609 $ 3,049
======== ======== ======== ========
Net income per common share
Basic $ 0.18 $ 0.16 $ 0.39 $ 0.35
Diluted $ 0.18 $ 0.16 $ 0.38 $ 0.35
Average number of shares used
in income per share computation
Basic 9,366 8,697 9,332 8,656
Diluted 9,511 8,718 9,451 8,828
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>
5
<PAGE>
<TABLE>
The Chalone Wine Group, Ltd.
Consolidated Statements of Cash Flows
(in thousands, except per-share data)
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
----------------------- -----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 1,669 $ 1,352 $ 3,609 $ 3,049
Non-cash transactions included in earnings:
Depreciation and Amortization 2,621 2,245 3,960 3,339
Equity in net income of Chateau Duhart-Milon 569 (187) 39 (718)
Minority interest 339 432 968 1,007
Loss(gain) on sale of equipment (11) (63) (12) 29
Changes in:
Deferred income taxes (398) (2,261) (398) (2,261)
Settlement advance -- -- -- 4,500
Accounts and other receivables (401) (124) (2,330) (1,822)
Inventories (7,712) (6,619) (9,099) (6,786)
Prepaid expenses and other assets (1,315) (679) (1,425) (1,103)
Accounts payable and accrued liabilities 2,289 868 5,076 244
-------- -------- -------- --------
Net cash used by operating activities (2,350) (5,036) 388 (522)
-------- -------- -------- --------
Cash flows from investing activities:
Capital expenditures (2,216) (1,117) (7,850) (6,667)
Purchase of Staton Hills Winery, net of cash acquired -- -- (6,127) --
Proceeds from disposal of property and equipment 39 125 104 125
Increase in notes receivable -- 85 -- 65
Distributions from Duhart-Milon -- -- 738 --
-------- -------- -------- --------
Net cash provided by (used for) in investing activities (2,177) (907) (13,135) (6,477)
-------- -------- -------- --------
Cash flows from financing activities:
Borrowings on line of credit - net 5,204 3,850 14,426 4,429
Increase (repayment) of short-term debt -- 5,237 -- 4,285
Distributions to minority interests (400) (405) (700) (476)
Repayment of long-term debt (10) (81) (2,370) (1,648)
Issuance (purchase) of common stock (3) 42 (5) 1,090
-------- -------- -------- --------
Net cash provided by financing activities 4,791 8,643 11,351 7,680
-------- -------- -------- --------
-------- -------- -------- --------
Net increase (decrease) in cash 264 2,700 (1,396) 681
Cash at beginning of period 10 213 1,670 2,232
-------- -------- -------- --------
Cash at end of period $ 274 $ 2,913 $ 274 $ 2,913
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements
</FN>
</TABLE>
6
<PAGE>
The Chalone Wine Group, Ltd.
Note 1 - Consolidated Financial Statements
The consolidated balance sheet as of December 31, 1999, and the consolidated
statements of income and cash flows for the three-month and nine-month periods
ended December 31, 1999, and 1998, 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 the Company's financial
position, results of operations and cash flow at December 31, 1999, 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. For further information, reference should be
made to the consolidated financial statements and notes included in the
Company's Form 10-K for the year ended March 31, 1999, on file with the
Securities and Exchange Commission.
NOTE 2 - Reclassifications
Certain prior-period amounts have been reclassified in order to conform with the
current period presentation.
NOTE 3 - Comprehensive Income
<TABLE>
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.130 ("SFAS 130") - Reporting Comprehensive
Income. SFAS 130 requires the reporting of a comprehensive income which takes
into account certain elements otherwise recorded directly in equity. The
following is a reconciliation of net income and comprehensive income (in
thousands):
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
---------------------- ----------------------
1999 1998 1999 1998
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Net income $ 1,669 $1,352 $ 3,609 $3,049
Change in cumulative foreign currency translation adjustment (557) 8 (719) 1,030
----------- ---------- ----------- ----------
Total comprehensive income $ 1,112 $1,360 $ 2,890 $4,079
=========== ========== =========== ==========
</TABLE>
NOTE 4 - Earnings per Share (EPS)
Basic EPS represents the income available to common shareholders divided by the
weighted average number of common shares outstanding for the period. Diluted EPS
represents the income available to common shareholders divided by the weighted
average of common shares outstanding, giving effect to 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 is due
to the dilutive effect of stock options and stock warrants calculated using the
treasury stock method, as shown below.
In April 1999, debentures with a face value of $6.5 million were converted into
738,014 shares of the Company's common stock. At such time, holders of the
remaining $2.0 million in debentures elected not to exercise their conversion
rights and the Company repaid the $2.0 million using available borrowings under
its line of credit. For all periods, these convertible debentures were
outstanding. The computation of diluted EPS excludes such securities because
they were antidilutive.
7
<PAGE>
NOTE 4 - Earnings per Share (Continued)
The following is a reconciliation of share information used to compute basic EPS
and diluted EPS:
<TABLE>
(in thousands, except per-share data)
<CAPTION>
Basic EPS Diluted EPS
--------------- ---------------
Income
available to
Income common
available to shareholders
common Stock and assumed
shareholders Warrants options conversion
---------------------------- -----------------------------
<S> <C> <C> <C> <C>
Three months ended December 31, 1999:
Income $ 1,669 - - $ 1,669
Shares 9,366 145 - 9,511
--------------- ---------------
EPS $ 0.18 $ 0.18
=============== ===============
Three months ended December 31, 1998:
Income $ 1,352 - - $ 1,352
Shares 8,697 21 8,718
--------------- ---------------
EPS $ 0.16 $ 0.16
=============== ===============
Nine months ended December 31, 1999:
Income $ 3,609 - - $ 3,609
Shares 9,332 119 - 9,451
--------------- ---------------
EPS $ 0.39 $ 0.38
=============== ===============
Nine months ended December 31, 1998:
Income $ 3,049 - - $ 3,049
Shares 8,656 172 8,828
--------------- ---------------
EPS $ 0.35 $ 0.35
=============== ===============
</TABLE>
NOTE 5 - Acquisition of Staton Hills Winery
On June 15, 1999, the Company purchased 100% of the outstanding shares of SHW
Equity Company, a holding company which, in turn, owns Staton Hills Winery
("SHW") and its adjacent vineyards in Yakima County, Washington. The acquisition
cost which included assumption of $3.3 million of SHW's notes payable that were
repaid by the Company at the date of the acquisition, was approximately $6.0
million and was financed with the Company's long-term bank line of credit.
The acquisition was recorded using the purchase method of accounting and the
acquisition price was allocated to the assets acquired and liabilities assumed
based on their estimated fair values. The excess of the acquisition price over
the fair value of net assets acquired was recorded as goodwill and is being
amortized over 20 years.
NOTE 6 - Subsequent Event (Acquisition of Vineyard)
On December 3, 1999, the Company entered into two conditional purchase contracts
to acquire two parcels, totaling 73 acres of property in the Napa Valley for an
aggregate purchase price of $16.4 million. All contractual conditions to the
purchase were removed on January 24, 2000. The property includes two homes and
an existing 57-acre cabernet sauvignon vineyard. The source of funding for the
purchase was the Company's existing bank line of credit.
8
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
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-Q) may contain statements which are
not historical facts, so called "forward looking statements" that involve risks
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-Q, the terms "anticipates," "expects," "projects," "may,"
"may not," "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 2, Management's Discussion and Analysis
of Financial Condition and Results of Operations, relating to projections or
predictions about the Company's future investments in vineyards, other capital
projects and future operating results 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 (i) 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 volume and revenue growth; (iii) interest rates and
other business and economic conditions which could increase significantly the
cost and risks of projected capital spending; (iv) the price and availability in
the marketplace of grapes meeting the Company's quality standards and other
requirements; (v) the effect of weather and other natural forces on growing
conditions and, in turn, the quality and quantity of grapes produced by the
Company and (vi) the risks associated with the assimilation of Staton Hills
Winery and other acquisitions that may be made in the future. 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, including the Company's annual report on Form 10-K for the year
ended March 31, 1999.
DESCRIPTION OF THE BUSINESS
The Company produces, markets and sells super, ultra and super-ultra premium
white and red varietal table wines, primarily Chardonnay, Pinot Noir, Cabernet
Sauvignon and Merlot. The Company operates six wineries; four located in various
counties of California, and two located in the State of Washington. The
Company's wines are made principally from grapes grown at the Chalone
Vineyard(R), Carmenet(R) Vineyard, Edna Valley Vineyard(R), Company-owned
vineyards adjacent to the Acacia(TM) Winery in California and the Canoe Ridge(R)
Vineyard in Washington State. These wines are primarily sold under the labels
"Chalone Vineyard," "Edna Valley Vineyard," "Carmenet," "Acacia," "Canoe Ridge
Vineyard," and "Echelon(TM)".
As a result of a substantial investment in the Company by France-based Les
Domaines Barons de Rothschild (Lafite) ("DBR"), the Company receives an
allocation of DBR wines, including the wines of Chateau Lafite-Rothschild and
Chateau Duhart-Milon, first-growth and fourth-growth Bordeaux region wines,
respectively.
The Chalone Wine Group, Ltd. was incorporated under the laws of the State of
California on June 27, 1969. Unless otherwise indicated, the term "Company" as
used in this report refers 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. Today, the Company is one
of only nine publicly held U.S. corporations whose principal business is in the
production, marketing and selling of wine.
9
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
RESULTS OF OPERATIONS
<TABLE>
The following table represents financial data as a percentage of net revenues
for the indicated periods:
<CAPTION>
Three months ended Percent Nine months ended Percent
December 31, Change December 31, Change
-------------------------- --------- ------------------------- -----------
-------------------------- --------- ------------------------- -----------
1999 1998 99 vs 98 1999 1998 99 vs 98
------------ ------------ --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenues 100.0 % 100.0 % 30.9 % 100.0 % 100.0 % 22.6 %
Cost of sales (53.1)% (53.9)% 29.0 % (53.4)% (54.7)% 19.7 %
------------ ------------ ------------ ------------
Gross profit 46.9 % 46.1 % 33.2 % 46.6 % 45.3 % 26.1 %
Other revenues from operations 0.1 % 0.4 % (79.1)% 0.2 % 0.2 % (6.1)%
Selling, general and admin. expenses(24.0)% (22.2)% 41.5 % (26.1)% (24.5)% 30.9 %
------------ ------------ ------------ ------------
Operating income 23.0 % 24.3 % 23.9 % 20.7 % 21.0 % 20.2 %
Interest Expense (4.2)% (3.6)% 53.5 % (4.5)% (4.0)% 37.9 %
Equity in Chateau Duhart-Milon 1.0 % 1.5 % (10.2)% 1.8 % 2.2 % (2.8)%
Minority interest (2.1)% (3.6)% (21.8)% (2.5)% (3.1)% (4.0)%
Other, net 0.1 % 0.2 % (20.0)% 0.1 % 0.0 % (472.7)%
------------ ------------ ------------ ------------
Income before income taxes 17.8 % 18.8 % 23.6 % 15.6 % 16.1 % 18.4 %
Income taxes (7.3)% (7.7)% 23.8 % (6.4)% (6.6)% 18.4 %
------------ ------------ ------------ ------------
Net income (loss) 10.5 % 11.1 % 23.4 % 9.2 % 9.5 % 18.4 %
============ ============ ============ ============
</TABLE>
Net Revenues
Net revenues for the three-month and nine-month periods ended December 31, 1999
increased approximately 30% and 23%, respectively, over the comparable periods
in the prior year. These increases were due almost equally to (i) increases in
average revenue-per-case from selected price increases and changes in product
mix, and (ii) increased sales volume.
Gross Profit
Gross profit for the three months and nine months ended December 31, 1999,
increased by approximately 33% and 26% respectively, over the comparable periods
in the prior year. For the quarter ended December 31, the gross margin increased
from 46.1% in 1998 to 46.9% in 1999, while the gross margin increased from 45.3%
to 46.6%, respectively, for the nine months ended December 31, 1998 and 1999.
These gross margin increases are the direct result of increases in average
revenue-per-case due to selected price increases and changes in product mix.
Other Revenue from Operations
Other revenue from operations consists of (i) custom bottling and other wine
processing and other revenue from third-party wineries and (ii) net profit from
sales of bulk wine. The Company cannot predict the effect on future operating
results, 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.
Other revenue from operations for the three months ended December 31, 1999 as
compared with same period in 1998 decreased from $43,000 to $9,000 was primarily
attributable to a decrease in revenue from custom operations.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months and nine
months ended December 31, 1999, increased by approximately $1.1 million, or
41.5%, and $2.4 million, or 31%, respectively, over the comparable periods in
the prior year. These increases are primarily as a result of increased selling
efforts consistent with the corresponding $3.8 million and $7.4 million increase
in gross revenues.
10
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Operating Income
Operating income for the three months and nine months ended December 31, 1999,
increased approximately 24% to $3.7 million, and 20% to $8.1 million,
respectively, because increased gross profit surpassed increases in selling,
general and administrative expenses as discussed above.
Interest Expense
Interest expense for the three months and nine months ended December 31, 1999,
increased approximately 54% and 38%, respectively, primarily due to higher
average outstanding borrowings which are a result of (i) the Staton Hills Winery
acquisition which occurred during the quarter ended June 30, 1999 and (ii)
continuing capital expenditures, related to winery-expansion over the past two
years.
Equity in Net Income of Duhart-Milon
The Company's 23.5% equity interest in the net income of Chateau Duhart-Milon
("Duhart-Milon") for the three months and nine months ended December 31, 1999
was $168,000 and $698,000, respectively. The 1996 and 1997 vintages are expected
to be among the Bordeaux Region's most successful vintages in the past 20 year's
period. Due to the exceptional nature of these vintages, current year results
may not be indicative of future results.
The Company monitors its investment in Duhart-Milon primarily through its
on-going communication with Domaines Barons de Rothschild (DBR). Such
communication is facilitated by the presence of the Company's chairman on DBR's
Board of Directors, and DBR's representation on the Company's Board of
Directors. Additionally, various key employees of the Company make frequent
visits to Duhart-Milon's offices and productions facilities.
The Company's investment in Duhart-Milon is a long-term investment denominated
in French Francs. The accumulated other comprehensive loss reserve for currency
translation adjustment was $3,015,000 as of December 31, 1999. This increased by
$717,000 since March 31, 1999, due to the decrease in the relative worth of the
French Franc when compared to the U.S. dollar. The European Union's transition
to "EURO" currency, which became effective as of January 1, 1999, is not
expected to materially affect the valuation of the Company's investment in
Duhart-Milon. Cumulative foreign currency translation adjustments are included
in accumulated other comprehensive loss in the equity section of the Company's
consolidated balance sheet.
Minority Interest
<TABLE>
The financial statements of Edna Valley Vineyard ("EVV") and Canoe Ridge
Vineyard, LLC ("CRV") are consolidated with the Company's financial statements.
The interest in the equity and net income of EVV and CRV attributable to parties
other than the Company is accounted for as minority interest. The minority
interest in the net income of EVV and CRV for the three months and nine months
ended December 31, 1999 and 1998 consisted of the following (in thousands):
<CAPTION>
Three months ended Nine months ended
Minority December 31, December 31,
-------------------------- ---------------------------
Venture Minority Owner Percent 1999 1998 1999 1998
- ----------- -------------------------------------- ----------- ------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
EVV Paragon Vineyard Co., Inc. 50.00% $ 260 $ 333 $ 722 $ 733
CRV Various 49.50% 78 99 245 274
----------- ------------- ------------ --------------
$ 338 $ 432 $ 967 $ 1,007
=========== ============= ============ ==============
</TABLE>
The minority interest in the net income of EVV decreased 22% and 2%,
respectively, during the three months and nine months ended December 31, 1999
when compared to the same periods last year. These decreases are primarily due
to decreased sales volume of EVV wines.
11
<PAGE>
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
The minority interest in the net income of CRV decreased $21% and 11%,
respectively, during the three months and nine months ended December 31, 1999
when compared to the same periods in 1998. The decrease as compared to the
previous year. is attributable to lower gross margins resulting from a change in
the sales product mix, along with an increase in selling, general and
administration expenses
Net Income
Net income for the three months and nine months ended December 31, 1999, was
$1,669,000 and $3,609,000, respectively, reflecting increases of 23% and 18%
over the comparable periods in the prior year. These increases are primarily due
to increased gross profits, offset by (i) higher selling, general and
administrative expenses and (ii) higher financing costs.
YEAR 2000
The Company has not experienced any significant Year 2000 related system
failures nor, to management's knowledge, have any of the Company's suppliers.
The Company intends to continue to monitor and test systems for ongoing Year
2000 compliance; however, management cannot guarantee that the systems of other
companies, upon which the we rely in varying degrees, have not been affected by
issues associated with the Year 2000 conversion.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital:
Working capital increased by 10% during the quarter ended December 31,1999,
starting at $51.5 million and ending at $56.7 million. During the nine months
ended December 31, 1999, working capital increased 15%, from $49.2 million to
$56.7 million primarily because of the acquisition of Staton Hills Winery
("SHW") which increased assets (current and long-term), but was financed using
the Company's non-current bank debt.
Cash Flows:
Operating Activities: Cash used by operating activities for the three months and
nine months ended December 31, 1999, decreased by $2.7 million and $900,000
respectively when compared to the prior year. These increases are primarily a
result of a timing difference in accounts payable.
Investing Activities: Cash utilized in investing activities for the three-month
period ended December 31, 1999 increased by $1.3 million, or 140%, when compared
to the prior year as a result if increased property, plant and equipment
expenditures. Cash utilized in investing activities for the nine-month period
ended December 31, 1999 increased by $6.6, million, or 103%, when compared to
the prior year, primarily due to the aforementioned $6.1 million SHW
acquisition.
Financing Activities: For the quarter ended December 31, 1999, cash provided by
financing activities decreased by $ 3.9 million when compared to the prior year
due to normal variations in the Company's need for the line(s) of credit. For
the nine months ended December 31, 1999, cash flows provided by financing
activities increased by $ 3.7 million when compared to the prior year, primarily
due to the aforementioned $6.1 million purchase of SHW, which was financed
through the Company's line of credit.
General:
The Company is not aware of any potential impairment to of its liquidity and
believes its capital resources are adequate to meet current and future operating
and capital expenditure requirements for at least the next twelve months.
12
<PAGE>
Item 3. 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 which
have been drafted in compliance with recently adopted regulations of the SEC
concerning the use of "Plain English." 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 effect of weather and other natural forces on growing
conditions and, in turn, the quality and quantity of grapes produced by us,
interest rates and other business and economic conditions. Additionally, our
sales-volume tends to be affected by price increases, distributors' 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 portion of our
expenses are 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 Profits Depend Largely on Sales in Certain States and on Sales of Certain
Varietals
In the nine months ended December 31, 1999, approximately 70% of our wine sales
were concentrated in 20 states. Changes in national consumer spending or
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 75% of our net revenues in the nine months ended
December 31, 1999 were concentrated in our top four selling varietal wines.
Specifically, sales of Chardonnay, Pinot Noir, Cabernet Sauvignon and Merlot
accounted for 55%,18%, 17% and 10% of our net revenues, respectively, for the
nine months ended December 31, 1999.
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.
Additionally, 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 adversely impacted to the
extent we are not able to compete successfully against such wine or alternative
beverage producers.
Our Business is Seasonal
Our business is subject to seasonal as well as quarterly fluctuations in
revenues and operating results. Our sales volume tends to increase during the
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 peak during
the winter when we have to pay for harvest costs and may have to make
contractual payments to grape growers. These and other factors may cause
fluctuations in the market price of our common stock.
13
<PAGE>
Item 3. Disclosures About Market Risk (Continued)
Bad Weather, Pests and Plant Diseases Could Harm Our Business
Winemaking and grape growing are subject to a variety of agricultural risks.
Various diseases and pests and extreme weather conditions can materially and
adversely affect the quality and quantity of grapes available to us. This could
reduce the quality or amount of wine we produce. A deterioration in the quality
of our wines could adversely impact our brand name, and a decrease in our
production could reduce our sales and profits. 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 have 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.
Many California vineyards, including vineyards in Northern California, have been
infested with Phylloxera, a root louse that renders a vine economically
unproductive within a few years after infestation. The current strain of
Phylloxera primarily affects vines of a certain type. Our vineyard properties
are primarily planted to rootstocks believed to be resistant to Phylloxera.
However, we cannot be certain that our existing vineyards or the rootstocks we
are now using in our planting and replanting programs will not in the future
become susceptible to current or new strains of Phylloxera, plant insects or
diseases, any of which could adversely impact our business.
The weather phenomenon commonly referred to as "El Nino" produced heavy rains
and cooler weather during the Spring of 1998, which resulted in colder and
wetter soils than are typical during California's grape growing season.
Consequently, the 1998 harvest was postponed by approximately four to six weeks
- - depending on the geographical location and varietals. The unusual weather
conditions resulting from El Nino impacted quantity and quality of the Company's
1998 estate harvest. The size of the Company's most significant crops ranged
from normal-sized yields to 50% of normal yields (depending on the varietal and
the particular estate). Despite the foregoing reduction in the yield of certain
crops, the harvested estate crops, in combination with contracted grape
purchases (most of which are tonnage-based), are expected to permit the Company
to meet originally anticipated sales-projections for its 1998 vintage
Chardonnay, Cabernet and Merlot varietals which, together, have historically
comprised between 80% and 85% of its aggregate annual production. The 1999
harvest was delayed by a month as a result of a late spring. However the usual
October rains did not materialize, and the quality of our crop is believed to be
very good. As a result of the shortened growing period the crop size was reduced
for all varieties except Chardonnay. We expect to make up for any shortages by
purchasing wine in the bulk wine market. This shortage will decrease a portion
of the Merlot and Pinot Noir sales for the next two fiscal years, but it is not
anticipated to have a significant impact on overall sales of the Company.
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. Industry trends point to
rapid plantings of new vineyards and replanting of old vineyards to greater
densities, with the expected result of significantly increasing the supply of
premium wine grapes and the amount of wine which will be produced in the future.
This expected increase in grape production could result in an excess of supply
over demand and force wineries to hold or possibly reduce wine prices. This risk
has been some what mitigated by our recent purchase of a 57 acre Cabernet
Sauvignon vineyard in January 2000. The new wine from this new vineyard is
expected to debut in 2004 with an estimated initial release of approximately
3000 cases. Ultimately, the Company expects this vineyard to produce up to
20,000 cases of luxury quality Bordeaux-style red wine.
14
<PAGE>
Item 3. Disclosures About Market Risk (Continued)
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 nineteen largest distributors combined,
represented approximately 5% and 42%, respectively, of our net revenues during
the nine months ended December 31, 1999. Sales to our nineteen largest
distributors are expected to continue to represent a substantial portion of our
net revenues in the future. We use a broker to sell our wines in California.
Such sales represent 32% of our net revenues during the nine month period ended
December 31, 1999. The laws and regulations of several states prohibit changes
of distributors, except under certain limited circumstances, making it difficult
to terminate a distributor without reasonable cause, as defined by applicable
statutes. The resulting difficulty or inability to replace distributors, poor
performance of our major distributors or our inability to collect accounts
receivable from our major distributors could adversely impact our business.
New Regulations or Increased Regulatory Costs Could Adversely Impact 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 adversely 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 and 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 or additional borrowings or other financing.
Adverse Public Opinion About Alcohol May Negatively Impact 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 negatively impact 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 and
other kinds of risks. 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.
15
<PAGE>
Item 3. Disclosures About Market Risk (Continued)
Contamination of Our Wines Would Harm Our Business
We are also subject to certain hazards and 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 general
liability and product liability insurance against these and other kinds.
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, packaging supplies
and various wine production needs 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. We do not believe that our foreign
exchange risk and international operations exposure is material at this time,
but the volume of international transactions is increasing and may increase
these risks in the future.
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 strong and vigilant enforcement of our trademarks. There can be
no assurance that competitors will refrain from 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 is expensive and tends to divert management's time and
attention.
Our Acquisition of Staton Hills Winery and Potential Future Acquisitions Involve
a Number of Risks
Our acquisition of Staton Hills Winery (and potential future acquisitions)
involves risks which include assimilating Staton Hills into our Company;
integrating, retaining and motivating key Staton Hills personnel; integrating
and managing geographically-dispersed operations because Staton Hills is in
Washington State and our Company is headquartered in California; integrating the
technology and infrastructures of the two companies; risks inherent in the
production of wine in, and marketing of wine from, Washington State, and the
risks to our Company of the increased negative cash flow and increased operating
expenses arising from the acquisition of, and plans for, Staton Hills.
The integration of the operations, technology and personnel of our Company and
Staton Hills' is expected to be a complex, time consuming and expensive process
and may disrupt our business if not completed in a timely and efficient manner.
Staton Hills and Chalone must operate as a combined organization utilizing
common information and communications systems, operating procedures, financial
controls and human resources practices. We may encounter substantial
difficulties, costs and delays, including potential incompatibility of our
business cultures, perceived adverse changes in our business plans, potential
conflicts in our supplier and customer relationships and the loss of key
employees and diversion of the attention of management from other ongoing
business initiatives.
16
<PAGE>
Item 3. Disclosures About Market Risk (Continued)
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.
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Number
27 Financial Data Schedule
(b) Reports.
None
Pursuant to the requirements 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.
Dated:February 23, 2000 The Chalone Wine Group, Ltd.
- ----------------------- ----------------------------
(Registrant)
/s/ Thomas B. Selfridge
Thomas B. Selfridge
President and Chief Executive Officer
Dated:February 23, 2000 /s/ Thomas B. Selfridge
- ----------------------- --------------------------
Thomas B. Selfridge
(Acting) Principal Financial Officer
17
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 12/31/99
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