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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 December 31, 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 January 30,
1998 was 7,692,911.
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The CHALONE Wine Group, Ltd.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1997, and March 31, 1997.
Consolidated Statements of Operations for the three-month and nine-month
periods ended December 31, 1997 and 1996.
Consolidated Statements of Changes in Financial Position for the
three-month and nine-month periods ended December 31, 1997 and 1996.
Notes to Consolidated Financial Statements.
The CHALONE Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Dec 31, March 31,
1997 1997
(unaudited)
-------- --------
Current Assets:
Cash ............................................................................... $ 63 $ 246
Accounts receivable, less allowance for
doubtful accounts of $76 thousand and
$71 thousand, respectively .................................................... 7,762 3,944
Notes receivable .................................................................. 1,493 1,291
Distribution receivable ........................................................... -- 382
Note receivable from officer ..................................................... 28 83
Inventory ......................................................................... 32,872 28,231
Prepaid expenses .................................................................. 427 219
Deferred income taxes ............................................................. 23 23
-------- --------
Total current assets ........................................................... 42,668 34,419
Investment in Chateau Duhart-Milon ..................................................... 10,092 10,372
Notes receivable, long-term portion .................................................... 407 398
Property, plant & equipment, net ....................................................... 27,924 24,763
Goodwill and trademarks ................................................................ 5,467 5,591
Other assets ........................................................................... 294 316
-------- --------
Total assets ................................................................... $ 86,852 $ 75,859
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines of credit .............................................................. $ 13,008 $ 7,771
Current maturities of long-term obligations ....................................... 556 564
Accounts payable and accrued liabilities .......................................... 5,547 1,801
-------- --------
Total current liabilities ...................................................... 19,111 10,136
Long-term obligations, less current maturities ......................................... 8,710 9,879
Convertible subordinated debentures .................................................... 8,500 8,500
Deferred income taxes .................................................................. 1,318 1,318
Minority interest ...................................................................... 3,952 3,191
-------- --------
Total liabilities ............................................................. 41,591 33,024
-------- --------
Shareholders' equity:
Common stock ...................................................................... 41,968 41,841
Retained earnings ................................................................. 5,458 2,583
Cumulative foreign currency translation adjustment ................................ (2,165) (1,589)
-------- --------
Total shareholders' equity ..................................................... 45,261 42,835
-------- --------
Total liabilities and shareholders' equity ..................................... $ 86,852 $ 75,859
======== ========
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
3
The CHALONE Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)(in thousands, except per-share data)
Three Months Nine Months
Ended Ended
December 31, December 31,
-------------------------- --------------------------
1997 1996 1997 1996
-------- -------- -------- --------
Gross revenues ............................................. $ 11,178 $ 9,857 $ 28,715 $ 26.513
Less excise taxes .......................................... 243 204 697 715
-------- -------- -------- --------
Net revenues .......................................... 10,935 9,653 28,018 25,798
Cost of wines sold ......................................... 6,057 5,553 15,939 15,371
-------- -------- -------- --------
Gross profit .......................................... 4,878 4,100 12,079 10,427
Operating expenses ......................................... 2,039 1,838 5,797 4,993
-------- -------- -------- --------
Operating income ...................................... 2,839 2,262 6,282 5,434
-------- -------- -------- --------
Other income (expenses):
Interest .............................................. (387) (576) (1,360) (1,407)
Other, net ............................................ 186 17 373 44
-------- -------- -------- --------
(201) (559) (987) (1,363)
Equity in net income of Ch. Duhart-Milon ................... 103 64 296 252
Minority interests ......................................... (401) (266) (799) (586)
-------- -------- -------- --------
Income before income taxes ............................ 2,340 1,501 4,792 3,737
-------- -------- -------- --------
Income tax expense ........................................ (936) (613) (1,917) (1,528)
-------- -------- -------- --------
Net income ............................................ $ 1,404 $ 888 $ 2,875 $ 2,209
======== ======== ======== ========
Net income per common share:
Basic ........................................... $ 0.18 $ 0.11 $ 0.37 $ 0.29
Dilutive ........................................ $ 0.17 $ 0.11 $ 0.34 $ 0.27
Average number of shares used
in income per share computation:
Basic ........................................... 7,813 7,773 7,692 7,652
Dilutive ........................................ 8,398 8,283 8,368 8,168
<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 Nine Months
Ended Ended
December 31, December 31,
------------------------ ------------------------
1997 1996 1997 1996
------- ------- ------- -------
Cash flows from operating activities:
Net earnings ................................................ $ 1,404 $ 888 $ 2,875 $ 2,209
Non-cash transactions included in earnings:
Depreciation .......................................... 1,700 1912 2,445 2,553
Amortization .......................................... 41 32 124 91
Equity in Chateau Duhart-Milon ........................ (103) (64) (296) (252)
Increase in minority interest ......................... 401 266 799 586
Loss on sale of equipment ............................. 3 4 6 74
Changes in:
Accounts receivable ................................... (1,527) (1,435) (3,436) (2,851)
Inventory ............................................. (2,512) (1,905) (4,641) (1,668)
Prepaid expenses and other assets ..................... (110) 26 (186) (320)
Other receivables ..................................... -- (419) -- (419)
Accounts payable and accrued expenses ................. 1,827 2,177 3,746 4,645
------- ------- ------- -------
Net cash provided by operating activities ................ 1,124 1,482 1,436 4,648
------- ------- ------- -------
Cash flows from investing activities:
Capital expenditures ........................................ (1,197) (79) (5,736) (6,160)
Net change in notes receivable .............................. (1,413) (473) (156) (470)
Investment in Duhart-Milon .................................. -- 169 -- 156
Proceeds from disposal of equipment ......................... 24 211 124 316
------- ------- ------- -------
Net cash used in investing activities .................... (2,586) (172) (5,768) (6,158)
------- ------- ------- -------
Cash flows from financing activities:
Net change under line of credit agreement ................... 1,411 (948) 5,237 (1,447)
Repayment of long-term debt ................................. (79) (5,313) (1,177) (5,728)
Proceeds from issuance of long-term debt .................... -- 5,162 -- 8,894
Distribution to minority interest ........................... -- (200) (38) (200)
Purchase and retirement of common stock ..................... -- 103 -- 103
Net proceeds from issuance of common stock .................. 71 35 127 93
------- ------- ------- -------
Net cash provided by financing activities ................ 1,403 (1,161) 4,149 1,715
------- ------- ------- -------
Net increase (decrease) in cash .......................... (59) 149 (183) 205
Cash at beginning of period .............................. 122 58 246 2
------- ------- ------- -------
Cash at end of period .......................................... 63 207 $ 63 207
======= ======= ======= =======
<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 December 31, 1997, the
consolidated statement of operations for the three-month and nine month periods
ended December 31, 1997 and 1996, 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 the Company's financial position, results of operations and
changes in financial position at December 31, 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. For further information, reference
should be made to the consolidated financial statements and notes included in
the Company's Form 10K for the transition period ended March 31, 1997, 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 - Net Income per Share
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS
128). SFAS 128 requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share excludes dilution and is computed by dividing
net income by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects 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 earnings per share for the Company is the
inclusion of dilutive stock options and stock warrants, the effect of which is
calculated using the treasury stock method as shown below. Note that convertible
debentures are excluded from the computation, as these have had, and continue to
have, an antidilutive effect.
6
The CHALONE Wine Group, Ltd.
NOTE 3 - Net Income per Share (continued)
(unaudited) (in thousands, except per-share data)
Three Months Three Months
Ended Ended
December 31, 1997 December 31, 1996
-------------------------- --------------------------
Income Shares EPS Income Shares EPS
(1) (2) (1)/(2) (1) (2) (1)/(2)
------ ----- -------- ------ ------ --------
Basic EPS
Income available to
common stockholders .... $1,404 7,813 $ 0.18 $ 888 7,773 $ 0.11
Effect of Dilutive
Securities
Warrants ................... -- 453 -- 416
Stock Options .............. -- 132 -- 94
------ ------ ------ ------
Diluted EPS
Income available to
common stockholders &
assumed conversions .... $1,404 8,398 $ 0.17 $ 888 8,283 $ 0.11
====== ===== ======== ====== ===== ========
Three Months Three Months
Ended Ended
December 31, 1997 December 31, 1996
-------------------------- --------------------------
Income Shares EPS Income Shares EPS
(1) (2) (1)/(2) (1) (2) (1)/(2)
------ ----- -------- ------ ------ --------
Basic EPS
Income available to
common stockholders .... $2,875 7,692 $ 0.37 $2,209 7,652 $ 0.29
Effect of Dilutive
Securities
Warrants ................... -- 515 -- 418
Stock Options .............. -- 161 -- 98
------ ------ ------ ------
Diluted EPS
Income available to
common stockholders &
assumed conversions .... $2,875 8,368 $ 0.34 $2,209 8,168 $ 0.27
====== ===== ======== ====== ===== ========
7
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations
DESCRIPTION OF THE BUSINESS
The Chalone Wine Group is a Napa, California-based company that
produces, markets and sells premium white and red varietal table wines. In
California, the company owns and operates Chalone Vineyard in Monterey County,
Acacia Winery in the Carneros District of Napa County, Carmenet Vineyard in
Sonoma County, and in conjunction with its joint-venture partner, Paragon
Vineyard Co., owns and operates Edna Valley Vineyard in San Luis Obispo County.
In the State of Washington, the Company owns a 51% interest in Canoe Ridge
Vineyard. In the Bordeaux region of France, the Company owns 24% of the
fourth-growth estate of Chateau Duhart-Milon, in partnership with Domaines
Barons de Rothschild (Lafite) who own the other 76%.
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", which 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", "estimates",
"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 Item 2., Management's Discussion and Analysis of
Financial Condition and Results of Operations, relating to the sufficiency of
funds for the Company's working capital requirements during 1997 and the
Company's expectation that future cash flow will continue to be provided from
operations are forward looking statements. Factors that may cause such
differences include, but are not limited to: (i) future weather and general
farming conditions affecting annual harvest quantity as well as quality; (ii)
variations in market taste as well as demand; (iii) changes in the wine industry
regulatory environment. Each of the factors, and others, are discussed from time
to time in the Company's filings with the Securities and Exchange Commission
including the Company's annual report on Form 10-K for the year ended December
31, 1996 and Form 10-K for the transition period ended March 31, 1997.
8
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
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 December 31, 1997 and 1996, and the percentage
change in such items between the comparable periods in those years.
Three Months Ended Dec. 31, Nine Months Ended Dec. 31,
----------------------------------- ----------------------------------
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 % 13.3 % 100.0 % 100.0 % 8.6 %
Cost of wines sold .................. 55.4 % 57.5 % 9.1 % 56.9 % 59.6 % 3.7 %
-------- -------- -------- --------
Gross profit ..................... 44.6 % 42.5 % 19.0 % 43.1 % 40.4 % 15.8 %
Operating expenses .................. 18.6 % 19.0 % 10.9 % 20.7 % 19.3 % 16.1 %
-------- -------- -------- --------
Operating income ................. 26.0 % 23.5 % 25.5 % 22.4 % 21.1 % 15.6 %
-------- -------- -------- --------
Other income (expenses):
Interest ......................... (3.5)% (6.0)% (32.8)% (4.8)% (5.5)% (3.3)%
Other, net ....................... 1.7 % 0.2 % 994.1 % 1.3 % 0.2 % 747.7 %
-------- -------- -------- --------
(1.8)% (5.8)% (64.0)% (3.5)% (5.3)% (27.6)%
Equity in net income ................ 0.9 % 0.7 % 60.9 % 1.1 % 1.0 % 17.5 %
Minority interests .................. (3.7)% (2.8)% 50.8 % (2.9)% (2.3)% 36.3 %
-------- -------- -------- --------
Income before inc. taxes ......... 21.4 % 15.6 % 55.9 % 17.1 % 14.5 % 28.2 %
-------- -------- -------- --------
Income tax expense .................. (8.6)% (6.4)% 52.7 % (6.8)% 5.9)% 25.5 %
-------- -------- -------- --------
Net income ....................... 12.8 % 9.2 % 58.1 % 10.3 % 8.6 % 30.2 %
======== ======== ======== ========
Wine Sales
Sales for the three months and nine months ended December 31, 1997,
increased approximately 13% and 9%, respectively, over the comparable periods in
1996. The number of cases sold in the nine months ended December 31, 1997 was
0.2% less than the comparable period in 1996. The corresponding 8.6% increase in
net revenues was therefore primarily attributable to increases in average per
case realization for the same periods resulting from changes in product mix, as
well as selected price increases.
Gross Profit
Gross profit for the three months and nine months ended December 31, 1997,
increased by approximately 19% and 16%, respectively, over the comparable
periods in 1996, primarily as a result of the increased per case realizations
mentioned above without corresponding increases in production cost.
9
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Operating Expenses
Operating expenses for the three months and nine months ending December 31,
1997 increased by 11% and 16%, respectively, over the comparable periods in
1996. This increase is primarily the result of planned increases in marketing
expenditures and increases in selling expenses related to increased sales
revenue.
Operating Income
Operating income for the three months and nine months ended December 31,
1997, increased by 26% and 16%, 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 nine months ended December
31, 1997, decreased by 33% and 3%, respectively, from the comparable periods in
1996, due to improved terms on debt financing negotiated in 1997.
Net other income for the three months and nine months ended December 31,
1997 increased by $169,000 and $329,000, respectively, primarily as a result of
increased crushing fees received from third party wineries during the six months
ended December 31, 1997.
Equity in Net Income of Chateau Duhart-Milon
The Company's 23.5% equity interest in Duhart-Milon's net income for the
nine months ended December 31, 1997, was $296,000, as compared to $252,000 in
the comparable period in 1996. This 17% increase is primarily attributable to
exceptionally strong demand for Bordeaux wines and corresponding increases in
prices of the wines.
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 December 31, 1997, was $2,165,000, due to the declining value of the French
Franc since early 1996.
Minority Interest
The Edna Valley Vineyard (EVV) and Canoe Ridge Vineyard, LLC (CRV)
individual financial statements are consolidated in full within the Company's
financial statements. The interest in the net earnings of EVV and CRV which thus
belongs to parties other than the Company is accounted for as "minority
interest". This "minority interest" for the three months and nine months ended
December 31, 1997, consisted of the following:
Minority Interest in
Earnings
--------------------------
3 Months 9 Months
Ended Ended
Minority Dec. 31, Dec. 31,
Venture Minority Owner Percent 1997 1997
- ------- -------------- ------- ---------- ------------
Edna Valley Vineyard Paragon Vineyard
Co., Inc. 50.0% $339,052 $694,832
Canoe Ridge Vineyard, LLC Various 49.5% 61,765 103,759
---------- ------------
$400,817 $798,591
========== ============
10
The CHALONE Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
The minority interest in earnings for EVV during the three-month and nine
month periods of 1997 reflects increases of 52% and 47%, respectively, from the
comparable periods in 1996. This is primarily the result of an increase in net
revenues per case and the resulting increase in gross margin per case. The
minority interest in earnings for CRV during the three months ending December
31, 1997 reflects an increase of 52%, while the nine months ending December 31,
1997 yielded a decrease of 9% over the comparable periods in 1996.
Company management believes that EVV, and to a lesser degree, CRV will both
continue to contribute significantly to the Company's consolidated income
statement.
Net Income
Net income for the three months and nine months ended December 31, 1997,
was $1,404,000 and $2,875,000, respectively, reflecting increases of 58% and 30%
over the comparable periods in 1996.
SEASONALITY
The results for the interim periods are not necessarily indicative of
the results to be expected for the year, due to seasonal factors. 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 increased $2,310,000, or 11%, during the
three-month period ending December 31, 1997. Conversely, working capital
decreased by $726,000, or 3%, during the nine month period ending December 31,
1997, to $23,557,000. The notable increase during the quarter is consistent with
the comparable period in 1996, wherein working capital increased by 5%. This is
primarily the result of investments in inventory in anticipation of next year
sales.
As of December 31, 1997, the Company had lines of credit totaling
$16,300,000 of which $13,147,000 had been drawn. Subsequently, as of January 8,
1998, the Company had lines of credit increased to $18,300,000, of which
$15,690,000 were drawn on that date.
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.
11
The CHALONE Wine Group, Ltd.
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 13, 1998 The CHALONE Wine Group, Ltd.
- ------------------------ ----------------------------
(Registrant)
/s/ William L. Hamilton
----------------------------
William L. Hamilton
Executive Vice President
Dated: February 13, 1998 /s/ William L. Hamilton
- ------------------------ ---------------------------
William L. Hamilton
Chief Financial Officer
12