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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 March 31, 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
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The number of shares outstanding of Registrant's Common Stock on May 7, 1996 was
7,592,766.
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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 March 31, 1996, and December 31, 1995.
Consolidated Statements of Operations for the three-month periods ended
March 31, 1996 and 1995.
Consolidated Statements of Changes in Financial Position for the
three-month periods ended March 31, 1996 and 1995.
Notes to Consolidated Financial Statements.
The CHALONE Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
March 31, December 31,
1996 1995
--------- ------------
Current assets
Cash $ 2 $ 32
Accounts receivable, less allowance for
doubtful accounts of $34,709 and $25,550....... 4,829 7,653
Note receivable from officer....................... -- 100
Inventories........................................ 27,159 27,499
Prepaid expenses................................... 103 199
Deferred income taxes.............................. 167 167
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Total current assets........................... 32,260 35,650
Investment in Chateau Duhart-Milon................. 11,775 12,059
Property, plant and equipment - net................ 19,961 19,865
Goodwill and trademarks, less amortization
of $980,395 and $955,050...................... 3,123 3,148
Other assets....................................... 1,854 1,847
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Total assets.............................. $68,973 $72,569
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank lines of credit............................... $ 7,940 $ 10,239
Current maturities of long-term obligations........ 774 774
Accounts payable and accrued liabilities........... 1,523 2,565
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Total current liabilities...................... 10,237 13,578
Long-term obligations - less current maturities......... 4,915 5,011
Convertible subordinated debentures..................... 8,500 8,500
Deferred income taxes................................... 1,163 1,073
Minority interest....................................... 3,060 3,025
Shareholders' equity
Common stock.......................................... 41,478 41,556
Retained earnings (deficit)........................... 64 (66)
Cumulative foreign currency translation adjustment (444) (108)
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Total shareholders' equity...................... 41,098 41,382
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Total liabilities and shareholders' equity...... $68,973 $ 72,569
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The accompanying notes are an integral part
of the consolidated financial statements
3
The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in thousands, except per-share data)
Three Months Ended
March 31,
---------------------
1996 1995
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Gross revenues........................................... $ 5,396 $ 4,423
Less excise taxes................................... 150 132
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Net revenues............................................. 5,246 4,291
Cost of wines sold....................................... 3,298 2,794
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Gross profit 1,948 1,497
Selling, general and administrative expenses............. 1,289 1,221
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Operating income.................................... 659 276
Other income (expense)
Interest expense.................................... (438) (736)
Other, net ....................................... (18) 9
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(456) (727)
Equity in net income of Chateau Duhart-Milon............. 52 --
Minority interests....................................... (35) (5)
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Income (loss) before income taxes 221 (456)
Income tax (benefit) expense............................. 91 (193)
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Net income (loss)................................... $ 130 $ (263)
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Net income (loss) per common share....................... $ .02 $ (.05)
Average number of shares used in income (loss)
per share computation ................................ 7,590 4,961
The accompanying notes are an integral part
of the consolidated financial statements
4
The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(unaudited)(in thousands)
Three Months Ended
March 31,
---------------------
1996 1995
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Cash flows from operating activities:
Net earnings ...................................... $ 130 $ (263)
Non-cash transactions:
Depreciation .................................... 320 314
Amortization .................................... 30 40
Equity in net income of Chateau Duhart-Milon .... (52) --
Increase in minority interest ................... 35 5
Loss (gain) on sale of equipment ................ 12 3
Changes in:
Deferred income taxes ......................... 90 (193)
Accounts receivable ........................... 2,924 1,214
Inventories ................................... 340 682
Prepaid expenses and other assets ............. 84 17
Accounts payable and accrued expense .......... (1,042) (1,139)
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Net cash provided (required by) operating
activities .................................. 2,871 681
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Cash flows from investing activities:
Capital expenditures ............................ (475) (200)
Proceeds from disposal of equipment ............. 46 27
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Net cash used in investing activities ........... (429) (173)
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Cash flows from financing activities:
Net repayments under line of credit agreement ..... (2,298) (166)
Repayment of long-term debt ....................... (95) (95)
Distribution to minority interest ................. -- (70)
Net proceeds from issuance of common stock ........ 24 (5)
Purchase and retirement of common stock ........... (103) --
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Net cash provided from financing activities ..... (2,472) (336)
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Net increase (decrease) in cash ...................... (30) 172
Cash at beginning of year ......................... 32 70
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Cash at end of period ........................... $ 2 $ 242
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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 March 31, 1996, the consolidated
statement of operations for the three-month period ended March 31, 1996 and
1995, 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 March 31, 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
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 March 31, 1996 and 1995, and the percentage change in such items
between the comparable periods in those years.
Three Months Ended March 31,
---------------------------------
Percentage Percent
of Wine Sales Change
----------------- ---------
1994 vs.
1996 1995 1995
----- ----- --------
Net revenues............................. 100.0% 100.0% 22.2%
Cost of sales............................ 62.9 65.1 18.0
----- -----
Gross profit.......................... 37.1 34.9 30.1
Selling, general and administrative
expenses.............................. 24.6 28.5 5.6
----- -----
Operating income...................... 12.5 6.4 138.8
Other income (expense)
Interest expense...................... (8.3) (17.2) (40.5)
Other, net............................ (0.3) 0.2 --
Equity in net income of Ch. Duhart-Milon. 1.0 --
Minority interests....................... (0.7) (0.1) 600.0
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Income (loss) before income taxes..... 4.2 (10.6) (L ) to P
Income taxes............................. (1.7) 4.5 (L ) to P
----- -----
Net earnings (loss)................. 2.5 (6.1) (L ) to P
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Wine Sales
Sales for the three months ended March 31, 1996, increased
approximately 22% over the comparable period in 1995. This increase was due to
increased unit volume from wholesale markets with California leading the way
with an increase of 30%. Also contributing to the increased sales were higher
average per case realizations with an increase of approximately 6% over the
comparable period in 1995. Because of grape supply shortages due to a smaller
than normal 1995 harvest, management believes that sales of certain of its
wines, while expected to remain at levels higher than 1995, will moderate during
the fourth quarter of the year.
Gross Profit
Gross profit for the three months ended March 31, 1996, increased by
approximately 30% from the comparable period in 1995. Gross profits as a
percentage of total increased to 37% in 1995 from 35% in the comparable period
in 1995. This increase is attributable to changes in the sales mix to higher
margin wines coupled with selected price increases. Management believes that the
sales mix will continue to improve during the remainder of the year resulting in
continued strengthening of the gross margin percentage.
Selling, General and Administrative Expenses
Selling, general and administrative expenses in the first quarter of
1996 increased by 6% over the comparable period in 1995. This increase was due
primarily to selling expenses related to higher sales levels. Operating expenses
as a percentage of sales declined to 25% for the three-month period of 1995 from
29% for the comparable three-month period in 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 Income
Operating income for the three months ended March 31, 1996, increased
139% from the comparable period in 1995. This increase was due to higher gross
margins and the decrease of operating expenses as a percentage of sales, both
discussed above.
Other Income (Expense)
Interest expense for the three months ended March 31, 1996, decreased
by 41% from the comparable period in 1995. This decrease is 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 occurring in the fourth quarter of 1995.
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. 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
months ended March 31, 1996, was $52,000.
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
year ended March 31, 1996, consisted of the following:
Minority
Interest in
Venture Minority Owner Minority Earnings
- ------- -------------- % (Loss)
-------- -----------
Edna Valley Vineyard Paragon Vineyard Co., Inc. 50% $ 54,816
Canoe Ridge Vineyard, LLC (CRV) Various 51% (20,018)
--------
$ 34,798
========
The minority interest in earnings for Edna Valley Vineyard during the
three-month period of 1996 represents an increase of 223% from the comparable
period in 1995, and was due to higher unit sales and higher per case
realizations and the resulting higher profits for the period. 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 is released in June of this year,
only limited amounts of wine were available for sale by CRV during the first
quarter of 1996, resulting in a small loss for that period.
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 March 31, 1996, was $130,000, as
compared to a loss of $263,000 in the comparable period in 1995, due primarily
to higher sales, lower interest costs, and the addition of an equity in net
income of Chateau Duhart-Milon, all as discussed above.
8
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital remained essentially unchanged during the
three-month period ending March 31, 1996, at approximately $22,000,000. Normal
capital expenditures and planned repayments of long-term debt were offset by the
net income achieved after adding back depreciation and amortization.
At May 7, 1996, the Company had lines of credit totaling $15,700,000 of
which $7,560,255 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.
PART II. - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27 Financial Data Schedule
(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: May 10, 1996 BY /s/ William L. Hamilton
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William L. Hamilton
Executive Vice President
and Chief Financial Officer