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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, 1998
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 (I.R.S. Employer Identification No.)
Incorporation or Organization)
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 July 31, 1998
was 8,584,321.
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The Chalone Wine Group, Ltd.
PART I. - FINANCIAL INFORMATION
Item 1. Financial Statements
Page
Consolidated Balance Sheets as of June 30, 1998, and March 31, 1997. 3
Consolidated Statements of Operations for the three-month periods
ended June 30, 1998 and 1997. 4
Consolidated Statements of Cash Flows for the three-month periods
ended June 30, 1998 and 1997. 5
Notes to Consolidated Financial Statements. 6
The Chalone Wine Group, Ltd.
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
(unaudited)
June 30, March 31,
1998 1998
-------- --------
Current assets:
Cash and cash equivalents $ 177 $ 2,232
Accounts receivable, less allowance for doubtful
accounts of $90 and $92, respectively 5,995 6,597
Notes receivable 197 197
Note receivable from officer -- 65
Inventory 35,185 34,277
Prepaid expenses 577 450
Deferred income taxes 14 14
-------- --------
Total current assets 42,145 43,832
Investment in Chateau Duhart-Milon 10,076 9,480
Notes receivable, long-term portion 130 130
Property, plant and equipment - net 31,867 30,131
Goodwill and trademarks - net 6,520 6,473
Other assets 261 248
-------- --------
Total assets $ 90,999 $ 90,294
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,550 $ 3,425
Bank lines of credit 7,291 10,952
Other short term debt -- 952
Current maturities of long-term obligations 1,728 709
-------- --------
Total current liabilities 11,569 16,038
Long-term obligations, less current maturities 8,148 9,624
Convertible subordinated debentures 8,500 8,500
Settlement advance 4,500 --
Deferred income taxes 2,049 2,049
-------- --------
Total liabilities 34,766 36,211
-------- --------
Minority interest 3,850 3,678
Shareholders' equity:
Common stock 48,857 46,871
Stock subscription receivable (1,007) --
Retained earnings 6,712 5,993
Cumulative foreign currency translation adjustment (2,179) (2,459)
-------- --------
Total shareholders' equity 52,383 50,405
-------- --------
Total liabilities and shareholders' equity $ 90,999 $ 90,294
======== ========
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 June 30
--------------------------
1998 1997
------- -------
Gross revenues $ 9,015 $ 8,287
Excise taxes (203) (211)
------- -------
Net revenues 8,812 8,076
Cost of wines sold (4,720) (4,658)
------- -------
Gross profit 4,092 3,418
SG&A expenses (2,534) (1,920)
------- -------
Operating income 1,558 1,498
Other income (expense)
Interest expense (419) (455)
Other, net 8 19
------- -------
(411) (436)
Equity in Chateau Duhart-Milon 316 193
Minority interests (243) (143)
------- -------
Income before income taxes 1,220 1,112
Income tax expense (500) (445)
------- -------
Net income $ 720 $ 667
======= =======
Net income per common share:
Basic $ 0.08 $ 0.08
Diluted $ 0.08 $ 0.08
Average number of shares used in income per share computation:
Basic 8,580 7,936
Diluted 8,873 8,456
<FN>
The accompanying notes are an integral part
of the consolidated financial statements
</FN>
4
The Chalone Wine Group, Ltd.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands)
Three months ended June 30
--------------------------
1998 1997
------- -------
Cash flows from operating activities:
Net earnings $ 719 $ 667
Non-cash transactions included in earnings:
Depreciationaccounts of $92 thousand and 464 381
Amortizationand, respectively (60) 45
Equity in net income of Chateau Duhart-Milon (316) (193)
Increase in minority interest 243 143
Exchange rate gain -- (9)
Loss on sale of equipment -- 2
Changes in:
Settlement advance 4,500 --
Accounts and other receivable 602 92
Inventory (908) (84)
Prepaid expenses and other assets (127) (68)
Accounts payable and accrued expense (875) 273
------- -------
Net cash provided by operating activities 4,242 1,249
------- -------
Cash flows from investing activities:
Capital expenditures (2,200) (2,019)
Proceeds from disposal of property and equipment -- 5
Net increase in notes receivable -- 125
------- -------
Net cash used in investing activities (2,200) (1,889)
------- -------
Cash flows from financing activities:
Net change under line of credit agreement (3,661) 858
Decrease in short-term debt (952) --
Distribution to minority interest (71) (38)
Repayment of long-term debt (457) (337)
Proceeds from issuance of common stock 1,044 45
------- -------
Net cash provided by financing activities (4,097) 528
------- -------
Net decrease in cash (2,055) (112)
Cash at beginning of period 2,232 246
------- -------
Cash at end of period $ 177 $ 134
======= =======
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 June 30, 1998, the consolidated statement
of operations for the three-month periods ended June 30, 1998, and 1997, and the
consolidated statement of cash flows for the three-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 cash
flow at June 30, 1998, 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 10-K for the year ended March 31, 1998, 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 - Earnings per Share
The Company adopted Statement of Financial Accounting No.128 ("SFAS 128") -
Earnings per Share. As a result of the adoption of SFAS 128, earnings per share
amounts for the three months ended June 30, 1998, have been restated to conform
to the new standard. This standard requires dual presentation of two earnings
per share ("EPS") amounts, basic EPS and diluted EPS. Basic EPS represents the
income available to common stockholders divided by the weighted average number
of common shares outstanding for the period. Diluted EPS represents the income
available to common stockholders divided by the weighted average of common
shares outstanding while also giving effect to 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. The Company's
convertible debentures are excluded from the computation, as these have had, and
continue to have, an antidilutive effect.
The following is a reconciliation of the figures used in deriving basic EPS and
those used in calculating diluted EPS:
(in thousands, except per-share data)
Basic EPS Diluted EPS
------------ -----------
Effect of Income
dilutive securities available to
Income ------------------- common
available to stockholders
common Stock and assumed
stockholders Warrants options conversion
------------ -------- ------- ----------
Three months ended June 30, 1998:
Income $ 719 -- -- $ 719
Shares 8,580 227 66 8,873
------ ------
EPS $ 0.08 $ 0.08
====== ======
Three months ended June 30, 1997:
Income $ 667 -- -- $ 667
Shares 7,936 375 145 8,456
------ ------
EPS $ 0.08 $ 0.08
====== ======
6
The Chalone Wine Group, Ltd.
NOTE 4 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No.130 ("SFAS 130") - Reporting Comprehensive
Income. SFAS 130 requires the additional reporting of a new measure of income
which takes into account certain elements otherwise recorded as part of equity.
For all periods presented, the difference between net income and comprehensive
income consists of the changes in the cumulative foreign currency translation
adjustment included as part of the Company's equity.
The following is a reconciliation of net income and comprehensive income (in
thousands):
Three months ended
June 30
---------------
1998 1997
------ ------
Net income $ 720 $ 667
Change in cumulative foreign currency translation adjustment 280 (375)
------ ------
Comprehensive income $1,000 $ 292
====== ======
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, Ltd. 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(R) in Monterey County, Acacia(TM)
Winery in the Carneros District of Napa County, Carmenet(R) Vineyard in Sonoma
County, and in conjunction with its 50% joint-venture partner, Paragon Vineyard
Co., owns and operates Edna Valley Vineyard(R) in San Luis Obispo County. In the
State of Washington, the Company owns a 50.5% interest in Canoe Ridge(R)
Vineyard. In the Bordeaux region of France, the Company owns 23.5% of the
fourth-growth estate of Chateau Duhart-Milon, in partnership with Domaines
Barons de Rothschild (Lafite) ("DBR") who own the other 76.5%. In April 1998,
the Company also started selling its newest product under the "Echelon(TM)"
brand name.
In addition to and as a result of an investment in the Company by DBR, the
Company receives an allocation of DBR wines for resale purposes, including the
wines of Chateau Lafite-Rothschild, a first growth Bordeaux region wine, and
Chateau Duhart-Milon, a fourth growth Bordeaux region wine.
RESULTS OF OPERATIONS
The following table sets forth the percentage relationship to net revenues of
certain items in the Company's statements of operations for the three-month
periods ended June 30, 1998, and 1997, and the percentage change in such items
between the comparable period in those years:
Three months ended Percent
March 31 Change
------------------ --------
1998 1997 98 vs 97
---- ---- --------
Net revenues 100.0 % 100.0 % 9.1 %
Cost of wines sold (53.6)% (57.7)% 1.3 %
----- -----
Gross profit 46.4 % 42.3 % 19.7 %
SG&A expenses (28.8)% (23.8)% 32.0 %
----- -----
Operating income 17.6 % 18.5 % 4.0 %
----- -----
Other income (expenses):
Interest (4.8)% (5.6)% (7.9)%
Other, net 0.1 % 0.2 % (57.9)%
----- -----
(4.7)% (5.4)% (5.7)%
Equity in net income 3.6 % 2.4 % 63.7 %
Minority interests (2.7)% (1.8)% 69.9 %
----- -----
Income before income taxes 13.8 % 13.7 % 9.7 %
----- -----
Income tax expense (5.6)% (5.5)% 12.4 %
----- -----
Net income 8.2 % 8.2 % 7.9 %
===== =====
Net Revenues
Sales for the three months ended June 30, 1998, increased approximately 9% over
the comparable period in the prior year, primarily as a result of increased
average sales price per case resulting from changes in product mix as well as
selected price increases.
8
The Chalone Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
Gross Profit
Gross profit for the three months ended June 30, 1998, increased by
approximately 20% over the comparable period in the prior year, primarily as a
result of the increased sales price per case mentioned above, without
corresponding increases in production cost.
Selling, General and Administrative (SG&A) Expenses
SG&A expenses for the three months ending June 30, 1998, increased by 32% over
the comparable period in the prior year. This increase is primarily the result
of planned increases in marketing expenditures and increases in selling expenses
attributable to increased sales revenue.
Operating Income
Operating income for the three months ended June 30, 1998, increased by 4% from
the comparable period in the prior year. 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 ended June 30, 1998, decreased by 6%
from the comparable period in the prior year, primarily due to improved terms on
short-term debt financing first attained in June of 1997, as well as slightly
lower average levels of outstanding interest-bearing debt.
Equity in Net Income of Chateau Duhart-Milon
The Company's 23.5% equity interest in the net income of Societe Civile Chateau
Duhart-Milon ("Duhart-Milon") for the three months ended June 30, 1998, was
$316,000, as compared to $193,000 during the comparable period in the prior
year. This 63% increase is primarily attributable to increased demand for
Bordeaux wines and corresponding price-increases of the wines.
The investment in Duhart-Milon is a long-term investment denominated in French
Francs. The Company maintains a reserve for currency translation which was
valued at $2,179,000 as of June 30, 1998.
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 interests of parties other than the Company in the net
earnings of EVV and CRV are accounted for as "minority interests." The minority
interests for the three-month periods ended June 30, 1998, and 1997, were as
follows (in thousands):
Three months ended
June 30
Minority ------------------
Venture Minority Owner Percent 1998 1997
- ------- -------------- ------- ------ ------
EVV Paragon Vineyard Co., Inc. 50.00% $ 172 $ 121
CRV Various 49.50% 71 22
------ ------
$ 243 $ 143
====== ======
The approximately 70% increase in the minority interests of EVV and CRV reflects
the improved net results of EVV and CRV between the three-month periods ended
June 30, 1997, and 1998.
Net Income
Net income for the three months ended June 30, 1998, and 1997, was $720,000 and
$667,000, respectively, reflecting an increase of 8% primarily as a result of
all factors discussed above.
9
The Chalone Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
SEASONALITY
The company has and will experience changes in net revenue from quarter to
quarter as a result of seasonal factors. Although the timing of wine released
for sale varies from year to year, most wines are released around the September
and October months. Additionally, sales are typically highest during the last
three months of the calendar year due, in part, to heavy holiday sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital increased $2,782,000, or 10%, during the
three-month period ending June 30, 1998. This resulted primarily from the
following: 1) $1 million received due to an exercise of warrants (which resulted
in a purchase of 142,857 shares); 2) an advance of $4.5 million from Pacific Gas
and Electric ("PG&E") related to the Carmenet Vineyard fire of July 1996 - this
advance was recorded as a "Settlement advance" in the Company's balance sheet as
of June 30, 1998 (items 1 and 2 were more fully described in the Company's Form
10-K for the year ended March 31, 1998, on file with the Securities and Exchange
Commission). These items were partly offset by investments in inventory in
anticipation of next year sales.
As of July 31, 1998, the Company had lines of credit totaling $16.3 million of
which $7.2 million 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.
"EL NINO"
The weather phenomenon commonly referred to as "El Nino" produced heavy Spring
rains which resulted in colder and wetter soils than are typical during
California's grape growing season. Consequently, California vines are
experiencing a delay in flowering and fruit setting, which is expected to
postpone the harvesting of such grapes by approximately two to three weeks. A
risk associated with such a delay in harvest is the possibility of rot, due to
potential exposure to early winter rains, which could affect quality and
quantity. Although this risk exists every year, 1998 weather conditions appear
to be less predictable than usual and thus increases the possibility thereof.
Excluding the potential risk of rot described above, however, there is currently
no indication whether the Company's 1998 harvest will be affected by El Nino in
terms of quality. With respect to quantities of its most significant crops,
however, the Company has estimated that the harvest of Chardonnay, Merlot and
Cabernet Sauvignon will yield normal-size crops on average. The harvest of Pinot
Noir, on the other hand, will yield a smaller than normal-size crop in terms of
quantity. By comparison, the 1997 harvest yielded above-normal quantities for
all the above varietals.
YEAR 2000
The year 2000 issue is the result of computer programs being written using two
digits rather than four to determine the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in
miscalculations causing disruptions of operations, including, among other
things, temporary inefficiencies in processing transactions, sending invoices,
or engaging in similar normal business activities.
The Company has an ongoing program designed to ensure that its operational and
financial systems will not be adversely affected by Year 2000 software failures.
While the Company believes it is doing everything technologically possible to
assure Year 2000 compliance, it is to some extent dependent upon vendor
cooperation. However, preliminary estimates of the compliance-related costs,
based on internal projections, are approximately $15,000. The Company also
recognizes that any Year 2000 compliance failures could result in additional
expenses to the Company, the materiality of which cannot be predicted at this
time.
10
The Chalone Wine Group, Ltd.
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations (Continued)
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 herein relating to the anticipated effects of "El
Nino", the sufficiency of funds for the Company's working capital requirements,
and the Company's expectation that sufficient 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 and past weather
and general farming conditions affecting annual harvest quantity as well as
quality; (ii) variations in market taste as well as demand; and (iii) changes in
the wine industry regulatory environment. Each of these 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 March 31, 1998.
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: August 10, 1998 The Chalone Wine Group, Ltd.
--------------------------------
(Registrant)
/s/ Thomas B. Selfridge
--------------------------------
Thomas B. Selfridge
President and Chief Executive
Officer
Dated: August 10, 1998 /s/ Francois P. Muse
--------------------------------
Francois P. Muse
(Acting) Chief Financial Officer
and Treasurer
12