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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to________
Commission File Number: 0-13406
The CHALONE Wine Group, Ltd.
(Exact name of Registrant as specified in its charter)
California 94-1696731
(State or other jurisdiction of
incorporation or organization) (I.R.S. Employer Identification No.)
621 Airpark Road
Napa, California 94558
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 707-254-4200
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of Registrant's Common Stock on November 11,
1997 was 7,676,421.
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The CHALONE Wine Group, Ltd.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Incorporated herein is the following financial information:
Consolidated Balance Sheets as of September 30, 1997, and March
31, 1997.
Consolidated Statements of Operations for the three-month and
six-month periods ended September 30, 1997 and 1996.
Consolidated Statements of Changes in Financial Position for the
three-month and six-month periods ended September 30, 1997 and
1996.
Notes to Consolidated Financial Statements.
The CHALONE Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Sept. 30, March 31,
1997 1997
(unaudited)
-------- --------
Current Assets:
Cash ................................................ $ 122 $ 246
Accounts receivable, less allowance for
doubtful accounts of $92 thousand and
$71 thousand, respectively ...................... 6,235 3,944
Notes receivable ................................... 93 1,291
Distribution receivable ............................ -- 382
Note receivable from officer ....................... 28 83
Inventory .......................................... 30,360 28,231
Prepaid expenses ................................... 260 219
Deferred income taxes .............................. 23 23
-------- --------
Total current assets ........................... 37,121 34,419
Investment in Chateau Duhart-Milon ..................... 10,116 10,372
Notes receivable, long-term portion .................... 394 398
Property, plant & equipment, net ....................... 28,454 24,763
Goodwill and trademarks ................................ 5,508 5,591
Other assets ........................................... 351 316
-------- --------
Total assets ................................... $ 81,944 $ 75,859
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit ............................... $ 11,597 $ 7,771
Current maturities of long-term obligations ........ 557 564
Accounts payable and accrued liabilities ........... 3,720 1,801
-------- --------
Total current liabilities ....................... 15,874 10,136
Long-term obligations, less current maturities ......... 8,788 9,879
Convertible subordinated debentures .................... 8,500 8,500
Deferred income taxes .................................. 1,318 1,318
Minority interest ...................................... 3,551 3,191
-------- --------
Total liabilities ............................... 38,031 33,024
-------- --------
Shareholders' equity:
Common stock ....................................... 41,897 41,841
Retained earnings ................................. 4,054 2,583
Cumulative foreign currency translation adjustment . (2,038) (1,589)
-------- --------
Total shareholders equity ....................... 43,913 42,835
-------- --------
Total liabilities and shareholders' equity ...... $ 81,944 $ 75,859
======== ========
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 Six Months
Ended Ended
September 30, September 30,
-------- -------- -------- --------
1997 1996 1997 1996
-------- -------- -------- --------
Gross revenues ........................ $ 9,250 $ 8,207 $ 17,537 $ 16,656
Less excise taxes ..................... 243 276 454 511
-------- -------- -------- --------
Net revenues .................... 9,007 7,931 17,083 16,145
Cost of wines sold .................... 5,224 4,774 9,882 9,818
-------- -------- -------- --------
Gross profit .................... 3,783 3,157 7,201 6,327
Operating expenses .................... 1,838 1,448 3,758 3,155
-------- -------- -------- --------
Operating income ................ 1,945 1,709 3,443 3,172
-------- -------- -------- --------
Other income (expenses):
Interest ........................... (518) (440) (973) (831)
Other, net ......................... 168 14 187 27
-------- -------- -------- --------
(350) (426) (786) (804)
Equity in net income of Ch.Duhart-Milon -- 40 193 188
Minority interests .................... (255) (192) (398) (320)
-------- -------- -------- --------
Income before income taxes ...... 1,340 1,131 2,452 2,236
-------- -------- -------- --------
Income tax expense .................... (536) (463) (981) (915)
-------- -------- -------- --------
Net income ...................... $ 804 $ 668 $ 1,471 $ 1,321
======== ======== ======== ========
Net income per common share ..... $ 0.10 $ 0.08 $ 0.18 $ 0.16
Average number of shares used
in income per share comp ..... 8,283 8,073 8,370 8,115
<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
September 30, September 30,
--------- -------- --------- ---------
1997 1996 1997 1996
--------- -------- --------- ---------
Cash flows from operating activities:
Net earnings ................................ $ 804 $ 668 $ 1,471 $ 1,321
Non-cash transactions included in earnings:
Depreciation ............................... 364 332 745 641
Amortization ............................... 41 28 86 59
Equity in Chateau Duhart-Milon ............. -- (40) (193) (188)
Increase in minority interest .............. 255 192 398 320
Exchange rate loss ......................... 9 -- -- --
Loss on sale of equipment .................. 1 65 3 70
Changes in:
Deferred income taxes .................... -- 463 -- 915
Accounts receivable ...................... (756) 826 (664) (1,416)
Inventory ................................ (2,045) (1,590) (2,129) 237
Prepaid expenses and other assets ........ -- (305) (68) (346)
Accounts payable and accrued expenses .... 1,646 724 1,919 1,553
------- ------- ------- -------
Net cash provided by operating activities . 319 1,363 1,568 3,166
------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures ......................... (2,520) (3,558) (4,539) (6,081)
Net change in notes receivable ............... (125) -- -- 3
Investment in Duhart-Milon ................... -- (13) -- (13)
Proceeds from disposal of equipment .......... 95 38 100 105
------- ------- ------- -------
Net cash used in investing activities ..... (2,550) (3,533) (4,439) (5,986)
------- ------- ------- -------
Cash flows from financing activities:
Net change under line of credit agreement .... 2,968 (547) 3,826 (499)
Repayment of long-term debt .................. (760) (72) (1,097) (415)
Proceeds from issuance of long-term debt .... -- 2,782 -- 3,732
Distribution to minority interest ............ -- -- (38) --
Net proceeds from issuance of common stock ... 11 39 56 58
------- ------- ------- -------
Net cash provided by financing activities . 2,219 2,202 2,747 2,876
------- ------- ------- -------
Net increase (decrease) in cash ........... (12) 32 (124) 56
Cash at beginning of period ............... 134 26 246 2
------- ------- ------- -------
Cash at end of period ........................... $ 122 $ 58 $ 122 $ 58
======= ======= ======= =======
<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 September 30, 1997, the
consolidated statement of operations for the three-month and six month periods
ended September 30, 1997 and 1996, 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 the Company's financial position, results of operations and
changes in financial position at September 30, 1997, and for all periods
presented have been made.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes included in the Company's March 31, 1997 audited financial
statements.
NOTE 2 - Seasonal Factors
The results for the interim periods are not necessarily indicative of
the results to be expected for the year, due to seasonal factors.
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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 September 30, 1997 and 1996, and the percentage
change in such items between the comparable periods in those years.
Three Months Ended Sept. 30, Six Months Ended Sept. 30,
---------------------------------- -------------------------------
Percentage of Percent Percentage of Percent
Wine Sales Change Wine Sales Change
---------------------------------- -------------------------------
1997 1996 97 vs 96 1997 1996 97 vs 96
----------- --------- ------------ --------- --------- -----------
Net revenues ................................ 100.0 % 100.0 % 13.6 % 100.0 % 100.0 % 5.8 %
Cost of wines sold ............................. 58.0 % 60.2 % 9.4 % 57.8 % 60.8 % 0.7 %
----------- ---------- --------- ---------
Gross profit................................. 42.0 % 39.8 % 19.8 % 42.2 % 39.2 % 13.8 %
Operating expenses ............................ 20.4 % 18.3 % 26.9 % 22.0 % 19.5 % 19.1 %
----------- ---------- --------- ---------
Operating income ............................ 21.6 % 21.5 % 13.8 % 20.2 % 19.6 % 8.5 %
----------- ---------- --------- ---------
Other income (expenses):
Interest .................................... (5.8)% (5.5)% 17.7 % (5.7)% (5.1)% 17.1 %
Other, net .................................. 1.9 % 0.2 % 1.100.0 % 1.1 % 0.2 % 592.6 %
----------- ---------- --------- ---------
(3.9)% (5.4)% (17.8)% (4.6)% (5.0)% (2.2)%
Equity in net income ........................... -- 0.5 % (100.0)% 1.1 % 1.2 % 2.7 %
Minority interests ............................. (2.8)% (2.4)% 32.8 % (2.3)% (2.0)% 24.4 %
----------- ---------- --------- ---------
Income before inc. taxes .................... 14.9 % 14.3 % 18.5 % 14.4 % 13.8 % 9.7 %
----------- ---------- --------- ---------
Income tax expense ............................. (6.0)% (5.8)% 15.8 % (5.7)% (5.7)% 7.2 %
----------- ---------- --------- ---------
Net income .................................. 8.9 % 8.4 % 20.4 % 8.6 % 8.2 % 11.4 %
=========== ========== ========= =========
Wine Sales
Sales for the three months and six months ended September 30, 1997,
increased approximately 14% and 6%, respectively, over the comparable periods in
1996. The number of cases sold in the six months ended September 30, 1997 was 4%
less than the comparable period in 1996 due to a shortage of some wines. This
was more than offset by an increase in the average per case realization of over
10% for the same period.
Gross Profit
Gross profit for the three months and six months ended September 30, 1997,
increased by approximately 20% and 14%, respectively, over the comparable
periods in 1996, primarily as a result of the increased per case realizations
mentioned above.
Operating Expenses
Operating expenses for the three months and six months ending September 30,
1997 increased by 27% and 19%, respectively, over the comparable periods in
1996. This increase is primarily the result of planned increases in marketing
expenditure and increases in selling expenses related to increased sales
revenue.
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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 and six months ended September 30,
1997, increased by 14% and 9%, respectively, from the comparable periods in
1996. This increase was due to higher gross profit, offset by increased
operating expenses, both discussed above.
Other Income (Expenses)
Net interest expense for the three months and six months ended September
30, 1997, increased by 18% and 17%, respectively, from the comparable periods in
1996, due to higher borrowings due to the financing on vineyards acquired in the
end of 1996, and increased working capital requirements in 1997.
Net other income for the three months and six months ended September 30,
1997 increased by $154,000 and $173,000, respectively, primarily as a result of
increased crushing fees for third party wineries during the three months ended
September 30, 1997.
Equity in Net Income of Chateau Duhart-Milon
The Company's 23.5% equity interest in Duhart-Milon's net income for the
six months ended September 30, 1997, was $193,000, as compared to $188,000 in
the comparable period in 1996. During the three months ended September 30, 1997,
no net income was recognized, while the comparable period in 1996 reflected net
income of $40,000.
The 1997 results, therefore, indicate similar trends as those experienced
in 1996, during which time Duhart-Milon's sales activity was lowest in the three
month period ended June September 30, 1996.
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 and serves to reduce the balance of the investment. The reserve as
of September 30, 1997, was $2,038,000, due to the declining value of the French
Franc since early 1996.
Minority Interest
The Company currently has two ventures in which there is a minority
interest. The "minority interest" in earnings of these ventures for the three
months and six months ended September 30, 1997, consisted of the following:
Minority Interest in Earnings
---------------------------------
3 Months 6 Months
Minority Ended Ended
Venture Minority Owner Percent Sept. 30, 1997 Sept. 30, 1997
- - ------- -------------- -------- -------------- --------------
Edna Valley Vineyard (EVV) Paragon Vineyard Co., Inc 50.0% $235,052 $355,780
Canoe Ridge Vineyard, LLC (CRV) Various 49.5% 19,897 41,994
-------- --------
$254,949 $397,774
======== ========
The minority interest in earnings for EVV during the three-month and six
month periods of 1997 reflects increases of 47% and 43%, respectively, from the
comparable periods in 1996. This is primarily the result of an increase in
average case realizations and the resulting increase in gross margin per case.
The minority interest in earnings for CRV during the three months and six months
ending September 30, 1997 reflects decreases of 37% and 40%, respectively, over
the comparable periods in 1996. This is primarily due to higher financing costs
incurred in 1997 as a result of planned increases in working capital.
8
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Minority Interest (Continued)
The Company believes that Edna Valley Vineyard will continue to contribute
significantly to its income, and hence that the minority interest will continue
to increase in the future. Management also believes that CRV will contribute
more income, and that the minority interest will, therefore, increase.
Net Income
Net income for the three months and six months ended September 30, 1997,
was $804,000 and $1,471,000, respectively, reflecting increases of 20% and 11%
over the comparable periods in 1996.
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 last three months of the calendar year,
due to heavy holiday sales and because most wines are released around September
and October of each year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital decreased $1,686,000 and $3,036,000,
respectively, during the three-month and six month periods ending September 30,
1997, to $21,247,000. These decreases of 7% and 13%, respectively, are primarily
due to increased spending on capital expenditures for vineyard development at
four of the Company's properties and a new hospitality center at Edna Valley
Vineyard.
Effective August 1, 1997, the Company renegotiated its lines of credit
and term financing with Wells Fargo Bank. The new credit agreements are for
comparable borrowing limits to the previous agreements, but have changed the
rates from prime to prime less .5%. This agreement will be in effect until July
31, 1999.
At November 7, 1997, the Company had lines of credit totaling $16,300,000
of which $11,774,000 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.
9
The CHALONE Wine Group, Ltd.
PART II. - OTHER INFORMATION
Item 5. Other Information
Effective January 1, 1998, Tom Selfridge will join the Chalone Wine Group,
Ltd., as President. Philip Woodward, current President, will continue as Chief
Executive Officer and Chairman of the Board.
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: November 13, 1997 BY /s/ William L. Hamilton
------------------------
William L. Hamilton
Executive Vice President
and Chief Financial Officer
10