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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, 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 August 12, 1996
was 7,600,360.
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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 June 30, 1996, and December 31 1995.
Consolidated Statements of Operations for the three-month and six-month
periods ended June 30, 1996 and 1995.
Consolidated Statements of Changes in Financial Position for the three-month
and six-month periods ended June 30, 1996 and 1995.
Notes to Consolidated Financial Statements.
The CHALONE Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
June 30, December 31,
1996 1995
--------- ------------
Current assets
Cash ............................................$ 26 $ 32
Accounts receivable, less allowance for
doubtful accounts of $37,739 and $25,550...... 7,071 7,653
Note receivable from officer..................... -- 100
Inventories...................................... 25,332 27,499
Prepaid expenses................................. 113 199
Deferred income taxes............................ 167 167
--------- ---------
Total current assets.......................... 32,709 35,650
Investment in Chateau Duhart-Milon............... 11,583 12,059
Property, plant and equipment - net.............. 22,168 19,865
Goodwill and trademarks, less amortization of
$1,015,616 and $955,050....................... 3,098 3,148
Other assets..................................... 1,879 1,847
--------- ---------
Total assets.................................$ 71,437 $ 72,569
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Bank lines of credit...........................$ 7,989 $ 10,239
Current maturities of long-term obligations.... 742 774
Accounts payable and accrued liabilities....... 2,351 2,565
----------- ---------
Total current liabilities................... 11,082 13,578
Long-term obligations - less current maturities... 5,555 5,011
Convertible subordinated debentures............... 8,500 8,500
Deferred income taxes............................. 1,615 1,073
Minority interest................................. 3,188 3,025
Shareholders' equity
Common stock................................... 41,497 41,556
Retained earnings (deficit).................... 717 (66)
Cumulative foreign currenty translation
adjustment.................................. (717) (108)
----------- ---------
Total shareholders' equity................. 41,497 41,382
----------- ---------
Total liabilities and shareholders' equity. $ 71,437 $ 72,569
=========== =========
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 Six Months Ended
Ended June 30, June 30,
-------------------- ---------------------
1996 1995 1996 1995
-------- -------- -------- -------
Gross revenues ........................................ $ 8,449 $ 7,411 $13,845 $11,834
Less excise taxes................................... 235 221 385 353
-------- -------- ------- -------
Net revenues .......................................... 8,214 7,190 13,460 11,481
Cost of wines sold .................................... 5,044 4,945 8,342 7,739
-------- -------- ------- -------
Gross profit........................................ 3,170 2,245 5,118 3,742
Operating expenses..................................... 1,707 1,266 2,996 2,487
-------- -------- ------- -------
Operating income ................................... 1,463 979 2,122 1,255
Other income (expense)
Interest expense.................................... (391) (766) (829) (1,502)
Other, net.......................................... 13 83 (5) 92
-------- -------- ------- -------
(378) (683) (834) (1,410)
Equity in net income of Chateau Duhart-Milon .......... 148 -- 200 --
Minority interests..................................... (128) (167) (163) (172)
-------- -------- ------- -------
Income (loss) before income taxes ..................... 1,104 128 1,325 (328)
Income tax benefit (expense) .......................... (451) (58) (542) 135
-------- -------- ------- -------
Net income (loss) .................................. $ 653 $ 70 $ 783 $ (192)
======== ======== ======= =======
Net income (loss) per common share .................... $.08 $.01 $.10 $(.04)
Average number of shares used in income (loss)
per share computation .............................. 8,158 4,962 8,160 4,962
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
4
The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(unaudited)(in thousands)
Three Months Six Months Ended
Ended June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
--------- -------- -------- ----------
Cash flows from operating activities:
Net earnings............................................. $ 653 $ 70 $ 783 $ (192)
Non-cash transactions:
Depreciation........................................... 309 315 629 629
Amortization........................................... 31 36 61 76
Equity in net income of Chateau Duhart-Milon (Duhart).. (148) -- (200) --
Increase in minority interest ...................... 128 167 163 173
Loss (gain) on sale of equipment....................... 5 (23) 17 (20)
Changes in:
Deferred income taxes................................ 452 58 542 (135)
Accounts receivable ................................. (2,242) (2,414) 682 (1,200)
Inventories.......................................... 1,827 1,710 2,167 2,392
Prepaid expenses and other assets.................... (41) (84) 43 (67)
Accounts payable and accrued expense................. 829 784 (213) (355)
-------- -------- ------- -------
Net cash provided (required by)
operating activities................................ 1,803 619 4,674 1,300
-------- -------- ------- -------
Cash flows from investing activities:
Capital expenditures..................................... (2,523) (327) (2,998) (527)
Proceeds from disposal of equipment.................... 3 51 49 78
Investment in Duhart................................. 67 -- 67 --
-------- -------- ------- -------
Net cash used in investing activities................ (2,453) (276) (2,882) (449)
-------- -------- ------- -------
Cash flows from financing activities:
Net repayments under line of credit agreement............ (48) (373) (2,250) (539)
Repayment of long-term debt.............................. (343) (147) (438) (242)
Proceeds from long-term debt............................. 950 -- 950 --
Distribution to minority interest........................ -- (6) -- (76)
Proceeds from issuance of common stock................... 19 42 43 37
Purchase and retirement of common stock .............. -- -- (103) --
-------- -------- ------ --------
Net cash provided from financing activities........... 674 (484) (1,798) (820)
-------- -------- ------ --------
Net increase (decrease) in cash............................ 24 (141) (6) 31
Cash at beginning of period.............................. 2 242 32 70
-------- -------- ------ --------
Cash at end of period ................................ $ 26 $ 101 $ 26 $ 101
======== ======== ====== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
5
The CHALONE Wine Group, Ltd.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Consolidated Financial Statements
The consolidated balance sheet as of June 30, 1996, the consolidated
statement of operations for the three-month and six-month periods ended June 30,
1996 and 1995, and the consolidated statement of changes in financial position
for the three-month and six-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 June 30, 1996, and
for all periods presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's December 31, 1995, audited
financial statements.
NOTE 2 - Seasonal Factors
The results for the interim periods are not necessarily indicative of the
results to be expected for the year, due to seasonal factors.
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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
six-month periods ended June 30, 1996 and 1995, and the percentage change in
such items between the comparable periods in those years.
Three Months Ended June 30, Six Months Ended June 30,
---------------------------- ----------------------------
Percentage Percent Percentage Percent
of Wine Sales Change of Wine Sales Change
--------------- --------- --------------- ----------
1995 vs. 1995 vs.
1996 1995 1996 1996 1995 1996
------ ------ --------- ------ ------ ----------
Wine sales.......... 100.0% 100.0% 14.2% 100.0% 100.0% 17.2%
Cost of wines sold.. 61.4 68.8 2.0 62.0 67.4 7.8
----- ----- ----- -----
Gross profit...... 38.6 31.2 41.2 38.0 32.6 36.8
Operating expenses.. 20.8 17.6 34.9 22.3 21.7 20.5
----- ----- ----- -----
Operating income 17.8 13.6 49.5 15.7 10.9 69.1
Other income (expense)
Interest expense.. (4.8) (10.7) (48.9) (6.2) (13.1) (44.8)
Other, net........ 0.2 1.2 (84.5) - 0.8 -
Equity in net income 1.8 - - 1.5 - -
Minority interests.. (1.6) (2.3) (23.1) (1.2) (1.5) (5.1)
Income (loss) before
income taxes..... 13.4 1.8 764.0 9.8 (2.9) -
Income tax (benefit)
expense........... (5.5) (0.8) 685.1 4.0 1.2 -
----- ---- ----- -----
Net income (loss) 7.9% 1.0% 828.6 5.8% (1.7%) -
===== ==== ===== =====
Wine Sales
Sales were $8,449,000 for the second quarter ended June 30, 1996, and
$13,845,000 for the six months then ended. Sales for the three-month and
six-month periods increased by 14% and 17%, respectively, over the comparable
periods in 1995, due to a combination of unit increases and price increases
across all of the Company's product lines. These increases were offset in part
by the delay in recognition of some $800,000 in revenues from private label
wines, recorded in June of last year, until July, 1996.
Gross Profit
Gross profit for the three-month and six-month periods ended June 30,
1996, increased approximately 41% and 37%, respectively, over the comparable
periods in 1995. These increases were due primarily to the higher sales levels
mentioned above. Gross profit as a percentage of sales increased to
approximately 38% and 37% for the three-month and six-month periods in 1996 from
31% and 33% in the comparable periods in 1995. The increases were attributable
to a change in product mix to higher priced wines with higher gross profit
margins and the delay in recognition of lower gross profit private label wines,
mentioned above.
Operating Expenses
Operating expenses include selling, general and administrative expenses.
Operating expenses for the three-month and six-month periods increased by 35%
and 21%, respectively, from the comparable periods in 1995. These increases are
the result of increased selling expenses due to higher selling levels discussed
above. Operating
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The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
expenses as a percentage of sales for the three-month and six-month periods were
21% and 22%, respectively, compared to 18% and 22% in the comparable periods in
1995. These increases are due primarily to the recognition of selling and
administrative expenses typically incurred in the second half of the year.
Interest Expense
Interest expense declined 49% and 45% for the three-month and six-month
periods in 1996, over the comparable periods in 1995. These decreases were
primarily attributable to lower short-term borrowings made possible by the
addition of $4.5 million in new equity and the conversion of $12.4 million of
convertible debentures to equity, both 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 (Duhart). The effect of this transaction was to convert an
essentially passive 11.3% interest in DBR into an interest in an active,
operating vineyard and winery operation accounted for using the equity method of
accounting. The Company's 23.5% equity interest in Duhart-Milon's net income for
the three-month and six-month periods ended June 30, 1996, were $148,000 and
$200,000, respectively.
The investment in Duhart is denominated in French Francs and accordingly a
reserve for currency translation is recorded in the equity section of the
balance sheet. The reserve for the six months ended June 30, 1996, was $717,000.
At August 9, 1996 that reserve had declined to $515,000.
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 June 30, 1996, consisted of the following:
Minority Interest in Earnings
(Loss)
-----------------------------
3 Months 6 Months
Minority Ended Ended
-------
Venture Minority Owner % June 30, 1996 June 30, 1996
- ------- -------------- - ------------- -------------
Edna Valley Vineyard (EVV) Paragon Vineyard Co., Inc. 50.0% $ 89,643 $ 144,459
Canoe Ridge Vineyard, LLC
(CRV) Various 49.5% 38,777 18,759
----------- ----------
$ 128,420 $ 163,218
=========== ==========
The "minority interest" amount for EVV represents an increase of 7% from
the comparable period in 1995, and is significantly offset 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, CRV, which the Company
owns 50.5%. CRW had its first (and only) complete year of operation in 1995, and
essentially sold its entire vintage in that year. The 1994 vintage of CRV was
released in the second quarter of 1996, and resulted in significantly higher
sales and profit levels. The Company believes that EVV and CRV will continue to
contribute significantly to its income, and hence that "minority interest" will
continue, proportionately.
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.
FINANCIAL CONDITION
The Company's working capital decreased by $945,000 during the six-month
period ending June 30, 1996, to $21,628,000, due to normal and planned capital
expenditures, and planned repayments of long-term debt.
At August 12, 1996, the Company had lines of credit totaling $15,700,000
of which $7,031,000 had been drawn.
The Company is not aware of any potential impairments to its liquidity and
believes that its capital resources, including those resulting from and
discussed in "SIGNIFICANT EVENT" below, are adequate to meet the current and
historic levels of capital expenditures and liquidity needs of the Company.
SIGNIFICANT EVENT
On July 31, 1996, a wildfire damaged approximately 75% of its producing
acreage at the Carmenet Vineyard in Sonoma County. The winery structures and
barrel inventory were untouched by the blaze and there were no injuries. The
fire was caused by electrical origin and Pacific Gas & Electric Company of
California has publicly acknowledged responsibility. The damaged acreage
consists of Cabernet Sauvignon, Merlot and Cabernet Franc grapes used for estate
bottled wines produced under the Carmenet label. Carmenet currently produces
approximately 38,000 cases of wine annually of which approximately 40% are
estate bottled. Management is currently assessing the extent of damage caused by
the fire and intends to seek compensation for losses suffered.
9
The CHALONE Wine Group, Ltd.
PART II. - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company's 1996 Annual Meeting of Shareholders was held at the
Company's executive offices, 621 Airpark Road, Napa, California, on May 13,
1996. In attendance, in person or by proxy, were 6,955,912 shares, or,
approximately 91.6% of total shares outstanding. The following actions were
taken:
Election of Directors. All 11 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 6,932,666 23,246
W. Philip Woodward 6,933,266 22,646
William L. Hamilton 6,933,133 22,779
Mark Hojel 6,929,996 25,916
Yves-Andre Istel 6,932,366 23,546
C. Richard Kramlich 6,933,166 22,746
William Myers 6,932,966 22,496
James H. Niven 6,933,266 22,646
Philip Plant 6,932,966 22,946
Eric de Rothschild 6,916,823 39,089
Christophe Salin 6,927,161 28,751
Appointment of Auditors. The Board's reappointment of Deloitte & Touche as
the Company's certified public accountants received due ratification, with
6,937,976 shares voting for, 7,369 shares voting against, and 10,567 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 14, 1996 BY /s/ William L. Hamilton
--------------------------------
William L. Hamilton
Executive Vice President
and Chief Financial Officer
10