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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, 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 October 31,
1995 was 7,596,018.
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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, 1995, and December 31,
1994.
Consolidated Statements of Operations for the three-month and
nine-month periods ended September 30, 1995 and 1994.
Consolidated Statements of Changes in Financial Position for the
three-month and nine-month periods ended September 30, 1995 and 1994.
Notes to Consolidated Financial Statements.
The CHALONE Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
September 30, December 31,
1995 1994
------------- ------------
Current Assets ....................................... (unaudited)
Cash .............................................. $ 3 $ 70
Accounts receivable, less allowance for doubtful
accounts of $30 and $17 ........................ 5,129 4,509
Inventories ....................................... 26,553 29,422
Prepaid expenses and other assets ................. 358 209
Deferred income tax benefit ....................... 312 312
-------- --------
Total current assets ........................ 32,355 34,522
Investment in Domaines Barons de Rothschild(Lafite) 12,524 12,524
Property, plant and equipment - net ............... 21,195 20,444
Intangible assets arising from acquisitions, less
amortization of $906 and $829 ................... 3,174 3,251
Other assets ...................................... 1,485 1,484
-------- --------
Total assets ................................ $ 70,733 $ 72,225
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Notes payable ..................................... $ 13,192 $ 13,874
Current maturities on long-term obligations ....... 586 799
Accounts payable and accrued expenses ............. 2,451 2,713
-------- --------
Total current liabilities ................... 16,229 17,386
Long-term obligations, less current maturities ....... 5,426 5,541
Convertible subordinated debentures .................. 20,884 20,884
Deferred income taxes ................................ 1,022 1,172
Minority interests ................................... 3,151 3,043
Shareholders' equity
Common stock ...................................... 24,515 24,472
Retained earnings (deficit) ....................... (494) (273)
-------- --------
Total shareholders' equity .................. 24,021 24,199
-------- --------
Total liabilities and shareholders' equity .. $ 70,733 $ 72,225
======== ========
The accompanying notes are an integral part
of the consolidated financial statements
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The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in thousands, except per-share data)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
1995 1994 1995 1994
------- ------- -------- --------
Wine sales............................ $ 5,380 $ 4,998 $ 17,214 $ 14,577
Cost of wines sold.................... 3,445 3,113 11,537 9,359
------- -------- ------- --------
Gross profit..................... 1,935 1,885 5,677 5,218
Operating expenses.................... 1,238 1,235 3,725 3,443
------- ------- -------- --------
Operating income................. 697 650 1,952 1,775
Other income (expense)
Interest expense................. (743) (691) (2,245) (2,052)
Other, net .................... 15 133 106 195
Minority interests.................... (11) (43) (183) (134)
------- ------- -------- --------
Income (loss) before income taxes.. (42) 49 (370) (216)
Income tax benefit (expense).......... 13 (34) 149 72
------- ------- -------- --------
Net income (loss)................ $ (29) $ 15 $ (221) $ (144)
======= ======= ======== ========
Net income (loss) per common share.... $ (.01) $ .00 $ (.04) $ (.03)
Average number of shares used in
income (loss) per share
computation........................ 4,983 4,961 4,968 4,784
The accompanying notes are an integral part
of the consolidated financial statements
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The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(unaudited)(in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ------------------
1995 1994 1995 1994
------- ------- ------- -------
Cash flows from operating activities:
Net earnings.......................... $ (29) $ 15 $ (221) $ (144)
Non-cash transactions:
Depreciation........................ 293 316 922 952
Amortization........................ 37 37 113 110
Increase in minority interest....... 10 40 183 130
Loss (gain) on sale of equipment.... (8) (3) (29) 37
Changes in:
Deferred income taxes............. (14) 15 (149) (103)
Accounts receivable............... 581 (310) (619) (289)
Inventories....................... 477 (204) 2,869 1,127
Prepaid expenses and other assets (120) 24 (187) (49)
Accounts payable and accrued
expense........................ 93 312 (262) (937)
------- ------- ------- -------
Net cash provided (required by)
operating activities............ 1,320 242 2,620 834
------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures.................. (1,242) (992) (1,769) (1,256)
Proceeds from disposal of
equipment......................... 47 101 125 121
------- ------- ------- -------
Net cash used in investing
activities ..................... (1,195) (891) (1,644) (1,135)
------- ------- ------- -------
Cash flows from financing activities:
Net repayments under line of credit
agreement........................... (143) 774 (682) (813)
Repayment of long-term debt........... (86) (166) (328) (539)
Distribution to minority interest..... -- -- (76) (156)
Proceeds from issuance of common stock 6 (19) 43 1,484
------- ------- ------- -------
Net cash provided from financing
activities........................ (223) 589 (1,043) (24)
------- ------- ------- -------
Net increase (decrease) in cash.......... (98) (60) (67) (325)
Cash at beginning of period........... 101 156 70 421
------- ------- ------- -------
Cash at end of period............... $ 3 $ 96 $ 3 $ 96
======= ======= ======= =======
The accompanying notes are an integral part
of the consolidated financial statements
5
The CHALONE Wine Group, Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Consolidated Financial Statements
The consolidated balance sheet as of September 30, 1995, the
consolidated statement of operations for the three-month and nine-month periods
ended September 30, 1995 and 1994, 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, 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.
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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
and nine-month periods ended September 30, 1995 and 1994, and the percentage
change in such items between the comparable periods in those years.
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
Percentage Percent Percentage Percent
of Wine Sales Change of Wine Sales Change
---------------- -------- ----------------- --------
1994 vs. 1994 vs.
1995 1994 1995 1995 1994 1995
----- ----- ----- ----- ----- -----
Wine sales ................... 100.0% 100.0% 7.7% 100.0% 100.0% 18.1%
Cost of wines sold ........... 64.0 62.3 10.8 67.0 64.2 23.3
----- ----- ----- -----
Gross profit .............. 36.0 37.7 2.4 33.0 35.8 8.7
Operating expenses ........... 23.0 24.7 0.5 21.7 23.6 8.3
----- ----- ----- -----
Operating income .......... 13.0 13.0 6.0 11.3 12.2 9.5
Other income (expense)
Interest expense .......... (13.8) (13.8) 7.1 (13.0) (14.1) (9.4)
Other, net ................ 0.2 2.7 (88.9) 0.6 1.3 45.6
Minority interests ........... (0.2) (0.9) (73.5) (1.1) (0.9) 36.9
----- ----- ----- -----
Income (loss) before income
taxes .................... (0.8) 1.0 n/a (2.2) (1.5) 76.6
Income tax (benefit) expense 0.2 (0.7) n/a 0.9 0.5 116.1
----- ----- ----- -----
Net income (loss) ....... (0.6)% 0.3% n/a (1.3%) (1.0%) 57.3
===== ===== ===== =====
Wine Sales
Sales were $5,380,000 for the third quarter ended September 30, 1995,
and $17,214,000 for the nine months then ended. Sales for the three-month and
nine-month periods increased by 8% and 18%, 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. The
increase in sales for the three-month period appears lower than the nine-month
period, due to the effects of sales promotion in September, 1994, that was not
repeated in 1995, due to the sufficiently strong demand for the Company's wines
in 1995.
Gross Profit
Gross profit for the three-month and nine-month periods ended September
30, 1995, increased approximately 2% and 9%, 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
36% and 33% for the three-month and nine-month periods in 1995 from 38% and 36%
in the comparable periods in 1994. The decreases were primarily attributable to
the increased sale of custom branded wines at lower gross profits. Additionally,
the mix of sales on the Company's branded wines has shifted to lower priced, and
lower margin wines, especially at Carmenet and Chalone Vineyard. Management
believes this trend will reverse itself during the fourth quarter of 1995.
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The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Operating Expenses
Operating expenses include selling, general and administrative
expenses. Operating expenses for the three-month and nine-month periods
increased by 1% and 8%, respectively, from the comparable periods in 1994.
Operating expenses as a percentage of sales for the three-month and nine-month
periods were 23% and 22%, respectively, compared to 25% and 24% 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 7% and 9% for the three-month and nine-month
periods in 1995, over the comparable periods in 1994. The significant portion of
the Company's borrowings are tied to the "prime" rate charged by the Company's
bank, and that rate has increased by approximately 15% over 1994, resulting in
increased interest expense. That increase has been partially offset by lower
working capital borrowings primarily due to lower inventory levels.
Other Income
Other income decreased by 89% and 46% for the three-month and
nine-month periods in 1995, over the comparable periods in 1994. These decreases
are due primarily to the recognition of a one-time capital gain on the sale of a
49% interest in the "Canoe Ridge Vineyard" brand name and goodwill associated
with that name to a group of investors in September, 1994.
Minority Interest
The Company currently has three ventures in which there is a minority
interest. The "minority interest" in earnings (losses) of these ventures for the
periods ended September 30, 1995, consisted of the following:
Minority Interest in Earnings
(Loss)
-----------------------------
3 Months 9 Months
Ended Ended
Minority September September
Venture Minority Owner % 30, 1995 30, 1995
- ------- -------------- -------- --------- ---------
Edna Valley Vineyard (EVV) Paragon Vineyard Co., Inc. 50% $ 48,230 $ 182,815
CanoeCo Partners CRVI 50% (11,854) (26,720)
Canoe Ridge Winery (CRW) Various 49% (24,891) 27,363
--------------------------
$ 11,485 $ 183,458
==========================
The "minority interest" amount for EVV represents an increase of 37%
from the comparable nine-month 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.
8
The CHALONE Wine Group, Ltd.
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 $1,010,000 during the
nine-month period ending September 30, 1995, to $16,126,000, due to normal
capital expenditures, planned repayments of long-term debt and the net loss
incurred.
On October 25, 1995, the Company received $5,000,000 from the sale of
stock (see SIGNIFICANT EVENT, below.) Those proceeds were used to reduce
short-term borrowings under the Company's lines of credit. At November 10, 1995,
the Company had lines of credit totaling $15,700,000 of which $8,440,000 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.
SIGNIFICANT EVENT
Following a favorable vote from the Company's shareholders on October
25, 1995, the Company concluded a sale of stock to two of its largest
shareholders, Domaines Barons de Rothschild (Lafite) ("DBR") and Summus
Financial, Inc., 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 converted its
$12.4 million holding of debentures, at $7.00 per share, into 1.77 million
shares of Chalone common stock.
Additionally, effective October 1, 1995, Chalone exchanged
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 continues as the managing partner of Chateau Duhart-Milon.
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The CHALONE Wine Group, Ltd.
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
A Special Meeting of Shareholders was duly called and held at the
Company's Napa, California, executive offices on October 25, 1995, to consider
approval of a series of transactions between the Company and its two largest
shareholders, Domaines Barons de Rothschild (Lafite) and Summus Financial, Inc.,
all pursuant to a certain Omnibus Agreement among the three said parties dated
August 22, 1995. With the shares held by those two shareholders withheld from
voting, the matter passed with the affirmative vote of 2,038,116 shares, as
against 86,977 shares cast in opposition.
A copy of the Omnibus Agreement, with its schedules and exhibits, is
appended to this Report as Exhibit Two hereto.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
[1.] Financial Statements of Societe Civile de Duhart-Milon-Rothschild.
[2.] Omnibus Agreement with Domaines Barons de Rothschild (Lafite) and
Summus Financial, Inc., dated August 22, 1995.
[27] Financial Data Schedule
(b) Reports.
An initial report on Form 8-K, dated May 9, 1995, was filed to report
the parties' agreement in principle to the transactions ultimately
embodied in the Omnibus Agreement discussed under Part II, Item 4, of
this Report. Subsequent Forms 8-K/A, Amendments 1-3, were thereafter
filed on August 1, August 2, and September 20, 1995, respectively, to
report and update financial statements thereto.
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, 1995 BY /s/ William L. Hamilton
---------------------------
William L. Hamilton
Executive Vice President
and Chief Financial Officer
10