FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 31, 2000 --------------- 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 0-7570 Delaware CONSTELLATION BRANDS, INC. 16-0716709 and its subsidiaries: New York Batavia Wine Cellars, Inc. 16-1222994 New York Canandaigua Wine Company, Inc. 16-1462887 New York Canandaigua Europe Limited 16-1195581 England and Wales Canandaigua Limited 98-0198402 New York Polyphenolics, Inc. 16-1546354 New York Roberts Trading Corp. 16-0865491 Netherlands Canandaigua B.V. 98-0205132 Delaware Franciscan Vineyards, Inc. 94-2602962 California Allberry, Inc. 68-0324763 California Cloud Peak Corporation 68-0324762 California M.J. Lewis Corp. 94-3065450 California Mt. Veeder Corporation 94-2862667 Delaware Barton Incorporated 36-3500366 Delaware Barton Brands, Ltd. 36-3185921 Maryland Barton Beers, Ltd. 36-2855879 Connecticut Barton Brands of California, Inc. 06-1048198 Georgia Barton Brands of Georgia, Inc. 58-1215938 Illinois Barton Canada, Ltd. 36-4283446 New York Barton Distillers Import Corp. 13-1794441 Delaware Barton Financial Corporation 51-0311795 Wisconsin Stevens Point Beverage Co. 39-0638900 Illinois Monarch Import Company 36-3539106 (State or other (Exact name of registrant as (I.R.S. Employer jurisdiction of specified in its charter) Identification No.) incorporation or organization) 300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450 ------------------------------------------------------- (Address of principal executive offices) (Zip Code) (716) 218-2169 ------------------------------------------------------- (Registrants' telephone number, including area code) ------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrants (1) have 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 Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of September 30, 2000, is set forth below (all of the Registrants, other than Constellation Brands, Inc., are direct or indirect wholly-owned subsidiaries of Constellation Brands, Inc.): CLASS NUMBER OF SHARES OUTSTANDING ----- ---------------------------- Class A Common Stock, Par Value $.01 Per Share 15,276,809 Class B Common Stock, Par Value $.01 Per Share 3,088,572 - 1 - PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ------- -------------------- CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) August 31, February 29, 2000 2000 ------------ ------------ (unaudited) ASSETS ------ CURRENT ASSETS: Cash and cash investments $ 4,150 $ 34,308 Accounts receivable, net 358,297 291,108 Inventories, net 604,346 615,700 Prepaid expenses and other current assets 64,723 54,881 ------------ ------------ Total current assets 1,031,516 995,997 PROPERTY, PLANT AND EQUIPMENT, net 530,069 542,971 OTHER ASSETS 778,474 809,823 ------------ ------------ Total assets $ 2,340,059 $ 2,348,791 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable $ 43,300 $ 26,800 Current maturities of long-term debt 20,775 53,987 Accounts payable 137,717 122,213 Accrued excise taxes 43,530 30,446 Other accrued expenses and liabilities 250,964 204,771 ------------ ------------ Total current liabilities 496,286 438,217 ------------ ------------ LONG-TERM DEBT, less current maturities 1,144,984 1,237,135 ------------ ------------ DEFERRED INCOME TAXES 116,918 116,447 ------------ ------------ OTHER LIABILITIES 31,836 36,152 ------------ ------------ COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value- Authorized, 1,000,000 shares; Issued, none at August 31, 2000, and February 29, 2000 - - Class A Common Stock, $.01 par value- Authorized, 120,000,000 shares; Issued, 18,378,475 shares at August 31, 2000, and 18,206,662 shares at February 29, 2000 184 182 Class B Convertible Common Stock, $.01 par value- Authorized, 20,000,000 shares; Issued, 3,714,297 shares at August 31, 2000, and 3,745,560 shares at February 29, 2000 37 38 Additional paid-in capital 252,168 247,949 Retained earnings 402,468 358,456 Accumulated other comprehensive income- Cumulative translation adjustment (23,262) (4,149) ------------ ------------ 631,595 602,476 ------------ ------------ Less-Treasury stock- Class A Common Stock, 3,119,112 shares at August 31, 2000, and 3,137,244 shares at February 29, 2000, at cost (79,353) (79,429) Class B Convertible Common Stock, 625,725 shares at August 31, 2000, and February 29, 2000, at cost (2,207) (2,207) ------------ ------------ (81,560) (81,636) ------------ ------------ Total stockholders' equity 550,035 520,840 ------------ ------------ Total liabilities and stockholders' equity $ 2,340,059 $ 2,348,791 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these balance sheets. - 2 - CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data)
For the Six Months Ended August 31, For the Three Months Ended August 31, ----------------------------------- ------------------------------------- 2000 1999 2000 1999 -------------- -------------- -------------- -------------- (unaudited) (unaudited) (unaudited) (unaudited) GROSS SALES $ 1,603,190 $ 1,519,834 $ 828,668 $ 814,845 Less - Excise taxes (380,120) (368,085) (191,178) (193,265) -------------- -------------- -------------- -------------- Net sales 1,223,070 1,151,749 637,490 621,580 COST OF PRODUCT SOLD (838,558) (806,499) (436,851) (432,452) -------------- -------------- -------------- -------------- Gross profit 384,512 345,250 200,639 189,128 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (256,344) (235,821) (129,935) (125,320) NONRECURRING CHARGES - (5,510) - - -------------- -------------- -------------- -------------- Operating income 128,168 103,919 70,704 63,808 INTEREST EXPENSE, net (54,814) (50,675) (27,187) (28,640) -------------- -------------- -------------- -------------- Income before income taxes 73,354 53,244 43,517 35,168 PROVISION FOR INCOME TAXES (29,342) (21,297) (17,407) (14,067) -------------- -------------- -------------- -------------- NET INCOME $ 44,012 $ 31,947 $ 26,110 $ 21,101 ============== ============== ============== ============== SHARE DATA: Earnings per common share: Basic $ 2.41 $ 1.78 $ 1.43 $ 1.17 ============== ============== ============== ============== Diluted $ 2.36 $ 1.73 $ 1.40 $ 1.14 ============== ============== ============== ============== Weighted average common shares outstanding: Basic 18,265 17,994 18,300 18,010 Diluted 18,621 18,459 18,664 18,499 The accompanying notes to consolidated financial statements are an integral part of these statements.
- 3 - CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Six Months Ended August 31, ----------------------------------- 2000 1999 ------------ ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 44,012 $ 31,947 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 23,240 23,733 Amortization of intangible assets 12,825 10,410 Loss (gain) on sale of assets 1,513 (1,486) Amortization of discount on long-term debt 241 208 Deferred tax benefit - (1,697) Stock-based compensation expense - 769 Change in operating assets and liabilities, net of effects from purchases of businesses: Accounts receivable, net (77,926) (64,766) Inventories, net 4,575 20,585 Prepaid expenses and other current assets (10,177) (12,559) Accounts payable 20,655 9,383 Accrued excise taxes 14,286 (8,076) Other accrued expenses and liabilities 48,542 48,417 Other assets and liabilities, net (3,813) 2,230 ------------ ------------ Total adjustments 33,961 27,151 ------------ ------------ Net cash provided by operating activities 77,973 59,098 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (25,249) (30,759) Proceeds from sale of assets 912 1,071 Purchases of businesses, net of cash acquired - (452,491) ------------ ------------ Net cash used in investing activities (24,337) (482,179) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of long-term debt (220,509) (242,529) Payment of issuance costs of long-term debt (1,547) (10,751) Proceeds from issuance of long-term debt, net of discount 119,400 664,080 Net proceeds from (repayments of) notes payable 18,212 (12,676) Exercise of employee stock options 3,178 1,194 Proceeds from employee stock purchases 761 601 ------------ ------------ Net cash (used in) provided by financing activities (80,505) 399,919 ------------ ------------ Effect of exchange rate changes on cash and cash investments (3,289) (143) ------------ ------------ NET DECREASE IN CASH AND CASH INVESTMENTS (30,158) (23,305) CASH AND CASH INVESTMENTS, beginning of period 34,308 27,645 ------------ ------------ CASH AND CASH INVESTMENTS, end of period $ 4,150 $ 4,340 ============ ============ SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Fair value of assets acquired, including cash acquired $ - $ 554,235 Liabilities assumed - (99,255) ------------ ------------ Cash paid - 454,980 Less - cash acquired - (2,489) ------------ ------------ Net cash paid for purchases of businesses $ - $ 452,491 ============ ============ The accompanying notes to consolidated financial statements are an integral part of these statements.
- 4 - CONSTELLATION BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 2000 1) MANAGEMENT'S REPRESENTATIONS: The condensed consolidated financial statements included herein have been prepared by Constellation Brands, Inc. and its subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2000. Certain February 29, 2000 balances have been reclassified to conform to current year presentation. 2) ACQUISITIONS: On April 9, 1999, in an asset acquisition, the Company acquired several well-known Canadian whisky brands, including Black Velvet, production facilities located in Alberta and Quebec, Canada, case goods and bulk whisky inventories and other related assets from affiliates of Diageo plc (the "Black Velvet Assets"). In connection with the transaction, the Company also entered into multi-year agreements with affiliates of Diageo plc to provide packaging and distilling services for various brands retained by the Diageo plc affiliates. The purchase price was $183.6 million and was financed by the proceeds from the sale of the Senior Subordinated Notes. The Black Velvet Assets acquisition was accounted for using the purchase method; accordingly, the acquired assets were recorded at fair market value at the date of acquisition. The excess of the purchase price over the estimated fair market value of the net assets acquired (goodwill), $36.0 million, is being amortized on a straight-line basis over 40 years. The results of operations of the Black Velvet Assets acquisition have been included in the Consolidated Statements of Income since the date of acquisition. On June 4, 1999, the Company purchased all of the outstanding capital stock of Franciscan Vineyards, Inc. ("Franciscan Estates") and, in related transactions, purchased vineyards, equipment and other vineyard related assets located in Northern California (collectively, the "Franciscan Acquisition"). The purchase price was $212.4 million in cash plus assumed debt, net of cash acquired, of $30.8 million. The purchase price was financed primarily by additional term loan borrowings under the senior credit facility. Also, on June 4, 1999, the Company acquired all of the outstanding capital stock of Simi Winery, Inc. ("Simi") (the "Simi Acquisition"). The cash purchase price was $57.5 million and was financed by revolving loan borrowings under the senior credit facility. The purchases were accounted for using the purchase method; accordingly, the acquired assets were recorded at fair market value at the date of acquisition. The excess of the purchase price over the estimated fair market value of the net assets acquired (goodwill) for the Franciscan Acquisition and the Simi Acquisition, $94.5 million and $5.8 million, respectively, is being amortized on a straight-line basis over 40 years. The Franciscan Estates and Simi operations are managed together as a separate business segment of the Company ("Franciscan"). - 5 - The results of operations of Franciscan have been included in the Consolidated Statements of Income since the date of acquisition. The following table sets forth the unaudited historical and unaudited pro forma results of operations of the Company for the six months ended August 31, 2000 and 1999, respectively. The unaudited pro forma results of operations for the six months ended August 31, 1999, gives effect to the acquisitions of the Black Velvet Assets and Franciscan as if they occurred on March 1, 1999. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of goodwill, interest expense on the acquisition financing and related income tax effects. The unaudited pro forma results of operations are based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations for the six months ended August 31, 1999, reflect total pretax nonrecurring charges of $12.4 million ($0.40 per share on a diluted basis) related to transaction costs, primarily for exercise of stock options, which were incurred by Franciscan Estates prior to the acquisition. The unaudited pro forma results of operations do not purport to present what the Company's results of operations would actually have been if the aforementioned transactions had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company's financial position or results of operations at any future date or for any future period. For the Six Months Ended August 31, ----------------------------------- 2000 1999 -------------- -------------- (in thousands, except per share data) Net sales $ 1,223,070 $ 1,179,113 Income before income taxes $ 73,354 $ 38,078 Net income $ 44,012 $ 22,847 Earnings per common share: Basic $ 2.41 $ 1.27 ============== ============== Diluted $ 2.36 $ 1.24 ============== ============== Weighted average common shares outstanding: Basic 18,265 17,994 Diluted 18,621 18,459 3) INVENTORIES: Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following: August 31, February 29, 2000 2000 ------------ ------------ (in thousands) Raw materials and supplies $ 31,713 $ 29,417 In-process inventories 363,615 419,558 Finished case goods 209,018 166,725 ------------ ------------ $ 604,346 $ 615,700 ============ ============ 4) BORROWINGS: SENIOR NOTES - In March 2000, the Company exchanged (pound)75.0 million aggregate principal amount of 8 1/2% Series B Senior Notes due in November 2009 (the "Sterling Series B Senior Notes") for the Sterling Senior Notes. The terms of the Sterling Series B Senior Notes are identical in all material respects to the Sterling Senior Notes. - 6 - In May 2000, the Company issued (pound)80.0 million (approximately $115.8 million) aggregate principal amount of 8 1/2% Series C Senior Notes due November 2009 at an issuance price of (pound)79.6 million (approximately $115.2 million, net of $0.6 million unamortized discount, with an effective rate of 8.6%) (the "Sterling Series C Senior Notes"). The net proceeds of the offering ((pound)78.8 million, or approximately $114.0 million) were used to repay a portion of the Company's British pound sterling borrowings under its senior credit facility. Interest on the Sterling Series C Senior Notes is payable semiannually on May 15 and November 15 of each year, beginning on November 15, 2000. The Sterling Series C Senior Notes are redeemable at the option of the Company, in whole or in part, at any time. The Sterling Series C Senior Notes are unsecured senior obligations and rank equally in right of payment to all existing and future unsecured senior indebtedness of the Company. The Sterling Series C Senior Notes are guaranteed, on a senior basis, by certain of the Company's significant operating subsidiaries. 5) EARNINGS PER COMMON SHARE: Basic earnings per common share exclude the effect of common stock equivalents and are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period for Class A Common Stock and Class B Convertible Common Stock. Diluted earnings per common share reflect the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per common share assume the exercise of stock options using the treasury stock method and assume the conversion of convertible securities, if any, using the "if converted" method. The computation of basic and diluted earnings per common share is as follows:
For the Six Months For the Three Months Ended August 31, Ended August 31, ------------------------ ------------------------ 2000 1999 2000 1999 ---------- ---------- ---------- ---------- (in thousands, except per share data) Income applicable to common shares $ 44,012 $ 31,947 $ 26,110 $ 21,101 ========== ========== ========== ========== Weighted average common shares outstanding - basic 18,265 17,994 18,300 18,010 Stock options 356 465 364 489 ---------- ---------- ---------- ---------- Weighted average common shares outstanding - diluted 18,621 18,459 18,664 18,499 ========== ========== ========== ========== EARNINGS PER COMMON SHARE - BASIC $ 2.41 $ 1.78 $ 1.43 $ 1.17 ========== ========== ========== ========== EARNINGS PER COMMON SHARE - DILUTED $ 2.36 $ 1.73 $ 1.40 $ 1.14 ========== ========== ========== ==========
Stock options to purchase 1.7 million and 0.4 million shares of Class A Common Stock at a weighted average price of $52.28 and $52.05 were outstanding during the six months ended August 31, 2000 and 1999, respectively, but were not included in the computation of the diluted earnings per common share because the stock options' exercise price was greater than the average market price of the Class A Common Stock for the respective periods. Stock options to purchase 1.7 million and 8 thousand shares of Class A Common Stock at a weighted average price of $52.28 and $54.83 were outstanding during the three months ended August 31, 2000 and 1999, respectively, but were not included in the computation of the diluted earnings per common share because the stock options' exercise price was greater than the average market price of the Class A Common Stock for the respective periods. 6) SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS: The following table presents summarized financial information for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company's senior notes and senior subordinated notes (the "Subsidiary Guarantors") and the combined subsidiaries of the Company which are not Subsidiary Guarantors, primarily Matthew Clark (the "Subsidiary Nonguarantors"). The Subsidiary Guarantors are wholly owned and the guarantees are full, unconditional, joint and several - 7 - obligations of each of the Subsidiary Guarantors. Separate financial statements for the Subsidiary Guarantors of the Company are not presented because the Company has determined that such financial statements would not be material to investors. The Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company, other than Matthew Clark, the Company's Canadian subsidiary and certain other subsidiaries which individually, and in the aggregate, are inconsequential. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.
Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ------------ ------------ ------------- ------------ ------------ (in thousands) Balance Sheet Data: August 31, 2000 - --------------- Current assets $ 96,069 $ 652,962 $ 282,485 $ - $ 1,031,516 Noncurrent assets $ 911,499 $ 1,232,441 $ 446,253 $ (1,281,650) $ 1,308,543 Current liabilities $ 201,362 $ 121,698 $ 173,226 $ - $ 496,286 Noncurrent liabilities $ 1,138,369 $ 107,524 $ 47,845 $ - $ 1,293,738 February 29, 2000 - ----------------- Current assets $ 105,864 $ 611,646 $ 278,487 $ - $ 995,997 Noncurrent assets $ 913,026 $ 1,232,132 $ 489,286 $ (1,281,650) $ 1,352,794 Current liabilities $ 150,507 $ 134,677 $ 153,033 $ - $ 438,217 Noncurrent liabilities $ 1,230,139 $ 97,410 $ 62,185 $ - $ 1,389,734 Income Statement Data: For the Six Months - ------------------ Ended August 31, 2000 - --------------------- Net sales $ 268,630 $ 726,599 $ 371,243 $ (143,402) $ 1,223,070 Gross profit $ 78,102 $ 197,291 $ 109,119 $ - $ 384,512 (Loss) income before income taxes $ (10,274) $ 54,826 $ 28,802 $ - $ 73,354 Net (loss) income $ (6,164) $ 31,014 $ 19,162 $ - $ 44,012 For the Six Months - ------------------ Ended August 31, 1999 - --------------------- Net sales $ 276,053 $ 694,858 $ 356,468 $ (175,630) $ 1,151,749 Gross profit $ 89,328 $ 153,379 $ 102,543 $ - $ 345,250 Income before income taxes $ 6,592 $ 26,624 $ 20,028 $ - $ 53,244 Net income $ 3,955 $ 15,974 $ 12,018 $ - $ 31,947 For the Three Months - --------------------- Ended August 31, 2000 - --------------------- Net sales $ 133,912 $ 382,358 $ 192,485 $ (71,265) $ 637,490 Gross profit $ 37,682 $ 103,990 $ 58,967 $ - $ 200,639 (Loss) income before income taxes $ (5,733) $ 31,640 $ 17,610 $ - $ 43,517 Net (loss) income $ (3,439) $ 17,102 $ 12,447 $ - $ 26,110 For the Three Months - -------------------- Ended August 31, 1999 - --------------------- Net sales $ 121,430 $ 395,639 $ 188,258 $ (83,747) $ 621,580 Gross profit $ 49,898 $ 83,504 $ 55,726 $ - $ 189,128 Income before income taxes $ 11,616 $ 11,086 $ 12,466 $ - $ 35,168 Net income $ 6,969 $ 6,652 $ 7,480 $ - $ 21,101
- 8 - 7) BUSINESS SEGMENT INFORMATION: The Company reports its operating results in five segments: Canandaigua Wine (branded popularly-priced wine and brandy, and other, primarily grape juice concentrate); Barton (primarily beer and spirits); Matthew Clark (branded wine, cider and bottled water, and wholesale wine, cider, spirits, beer and soft drinks); Franciscan (primarily branded super-premium and ultra-premium wine) and Corporate Operations and Other (primarily corporate related items). Segment selection was based upon internal organizational structure, the way in which these operations are managed and their performance evaluated by management and the Company's Board of Directors, the availability of separate financial results, and materiality considerations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating profits of the respective business units. Segment information is as follows:
For the Six Months For the Three Months Ended August 31, Ended August 31, --------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (in thousands) Canandaigua Wine: - ----------------- Net sales: Branded: External customers $ 290,706 $ 292,182 $ 147,376 $ 149,540 Intersegment 3,132 2,989 1,896 1,239 ------------ ------------ ----------- ----------- Total Branded 293,838 295,171 149,272 150,779 ------------ ------------ ----------- ----------- Other: External customers 28,243 38,579 14,060 19,449 Intersegment 8,355 37 4,726 - ------------ ------------ ----------- ----------- Total Other 36,598 38,616 18,786 19,449 ------------ ------------ ----------- ----------- Net sales $ 330,436 $ 333,787 $ 168,058 $ 170,228 Operating profit $ 18,396 $ 16,019 $ 10,415 $ 10,412 Long-lived assets $ 189,758 $ 194,114 $ 189,758 $ 194,114 Total assets $ 593,560 $ 597,832 $ 593,560 $ 597,832 Capital expenditures $ 7,665 $ 12,708 $ 5,020 $ 7,070 Depreciation and amortization $ 11,734 $ 11,649 $ 5,866 $ 6,113 Barton: - ------- Net sales: Beer $ 375,293 $ 323,806 $ 212,159 $ 177,195 Spirits 145,107 127,149 72,561 73,010 ------------ ------------ ----------- ----------- Net sales $ 520,400 $ 450,955 $ 284,720 $ 250,205 Operating profit $ 89,448 $ 73,459 $ 50,613 $ 41,962 Long-lived assets $ 78,271 $ 76,849 $ 78,271 $ 76,849 Total assets $ 749,585 $ 714,677 $ 749,585 $ 714,677 Capital expenditures $ 2,986 $ 2,668 $ 1,650 $ 1,752 Depreciation and amortization $ 7,904 $ 6,398 $ 3,949 $ 3,237 Matthew Clark: - -------------- Net sales: Branded: External customers $ 145,486 $ 155,254 $ 75,892 $ 80,879 Intersegment 497 - 476 - ------------ ------------ ----------- ----------- Total Branded 145,983 155,254 76,368 80,879 Wholesale 193,233 194,753 93,310 102,331 ------------ ------------ ----------- ----------- Net sales $ 339,216 $ 350,007 $ 169,678 $ 183,210 Operating profit $ 22,596 $ 19,310 $ 12,222 $ 11,980 Long-lived assets $ 141,830 $ 170,703 $ 141,830 $ 170,703 Total assets $ 599,396 $ 678,498 $ 599,396 $ 678,498 Capital expenditures $ 6,101 $ 11,115 $ 3,692 $ 6,459 Depreciation and amortization $ 10,037 $ 12,816 $ 4,824 $ 8,390 - 9 - For the Six Months For the Three Months Ended August 31, Ended August 31, --------------------------- ---------------------------- 2000 1999 2000 1999 ------------ ------------ ------------ ------------ Franciscan: - ----------- Net sales: External customers $ 43,144 $ 17,137 $ 21,359 $ 17,137 Intersegment 138 - 34 - ------------ ------------ ----------- ----------- Net sales $ 43,282 $ 17,137 $ 21,393 $ 17,137 Operating profit $ 9,658 $ 1,571 $ 4,242 $ 1,571 Long-lived assets $ 114,230 $ 94,716 $ 114,230 $ 94,716 Total assets $ 369,087 $ 352,790 $ 369,087 $ 352,790 Capital expenditures $ 8,333 $ 3,720 $ 4,553 $ 3,720 Depreciation and amortization $ 4,530 $ 1,809 $ 2,138 $ 1,809 Corporate Operations and Other: - ------------------------------- Net sales $ 1,859 $ 2,889 $ 774 $ 2,004 Operating loss $ (11,930) $ (6,440) $ (6,788) $ (2,117) Long-lived assets $ 5,980 $ 17,060 $ 5,980 $ 17,060 Total assets $ 28,431 $ 36,491 $ 28,431 $ 36,491 Capital expenditures $ 164 $ 548 $ 69 $ 437 Depreciation and amortization $ 1,860 $ 1,471 $ 942 $ 831 Intersegment eliminations: - -------------------------- Net sales $ (12,123) $ (3,026) $ (7,133) $ (1,204) Consolidated: - ------------- Net sales $ 1,223,070 $ 1,151,749 $ 637,490 $ 621,580 Operating profit $ 128,168 $ 103,919 $ 70,704 $ 63,808 Long-lived assets $ 530,069 $ 553,442 $ 530,069 $ 553,442 Total assets $ 2,340,059 $ 2,380,288 $ 2,340,059 $ 2,380,288 Capital expenditures $ 25,249 $ 30,759 $ 14,984 $ 19,438 Depreciation and amortization $ 36,065 $ 34,143 $ 17,719 $ 20,380
8) COMPREHENSIVE INCOME: Comprehensive income consists of net income and foreign currency translation adjustments for the six months and three months ended August 31, 2000 and 1999. The reconciliation of net income to comprehensive income is as follows:
For the Six Months For the Three Months Ended August 31, Ended August 31, ---------------------------- ------------------------------ 2000 1999 2000 1999 ------------ ------------ ------------ ------------ (in thousands) Net income $ 44,012 $ 31,947 $ 26,110 $ 21,101 Other comprehensive income: Cumulative translation adjustment (19,113) (734) (7,847) (1,584) ------------ ------------ ------------ ------------ Total comprehensive income $ 24,899 $ 31,213 $ 18,263 $ 19,517 ============ ============ ============ ============
9) ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires that every derivative be recorded as either an asset or liability in the balance sheet and measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset - 10 - related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 ("SFAS No. 137"), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 delays the effective date of SFAS No. 133 for one year. With the issuance of SFAS No. 137, the Company is required to adopt SFAS No. 133 on a prospective basis for interim periods and fiscal years beginning March 1, 2001. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138 ("SFAS No. 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133." SFAS No. 138 amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. The Company is required to adopt SFAS No. 138 concurrently with SFAS No. 133. The Company believes the effect of the adoption of these statements on its financial statements will not be material based on the Company's current risk management strategies. - 11 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- ----------------------------------------------------------------------- OF OPERATIONS ------------- INTRODUCTION - ------------ The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for the three months ended August 31, 2000 ("Second Quarter 2001"), compared to the three months ended August 31, 1999 ("Second Quarter 2000"), and for the six months ended August 31, 2000 ("Six Months 2001"), compared to the six months ended August 31, 1999 ("Six Months 2000"), and (ii) financial liquidity and capital resources for Six Months 2001. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included herein and in the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2000 ("Fiscal 2000"). The Company operates primarily in the beverage alcohol industry in North America and the United Kingdom. The Company reports its operating results in five segments: Canandaigua Wine (branded popularly-priced wine and brandy, and other, primarily grape juice concentrate); Barton (primarily beer and spirits); Matthew Clark (branded wine, cider and bottled water, and wholesale wine, cider, spirits, beer and soft drinks); Franciscan (primarily branded super-premium and ultra-premium wine); and Corporate Operations and Other (primarily corporate related items). ACQUISITIONS IN FISCAL 2000 On April 9, 1999, in an asset acquisition, the Company acquired several well-known Canadian whisky brands, including Black Velvet, production facilities located in Alberta and Quebec, Canada, case goods and bulk whisky inventories and other related assets from affiliates of Diageo plc (collectively, the "Black Velvet Assets"). In connection with the transaction, the Company also entered into multi-year agreements with affiliates of Diageo plc to provide packaging and distilling services for various brands retained by the Diageo plc affiliates. The results of operations from the Black Velvet Assets are reported in the Barton segment and have been included in the consolidated results of operations of the Company since the date of acquisition. On June 4, 1999, the Company purchased all of the outstanding capital stock of Franciscan Vineyards, Inc. ("Franciscan Estates") and, in related transactions, purchased vineyards, equipment and other vineyard related assets located in Northern California (collectively, the "Franciscan Acquisition"). Also on June 4, 1999, the Company purchased all of the outstanding capital stock of Simi Winery, Inc. ("Simi"). (The acquisition of the capital stock of Simi is hereafter referred to as the "Simi Acquisition".) The Simi Acquisition included the Simi winery, equipment, vineyards, inventory and worldwide ownership of the Simi brand name. The results of operations from the Franciscan and Simi Acquisitions (collectively, "Franciscan") are reported together in the Franciscan segment and have been included in the consolidated results of operations of the Company since the date of acquisition. On February 29, 2000, Simi was merged into Franciscan Estates. - 12 - RESULTS OF OPERATIONS - --------------------- SECOND QUARTER 2001 COMPARED TO SECOND QUARTER 2000 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Second Quarter 2001 and Second Quarter 2000. Second Quarter 2001 Compared to Second Quarter 2000 --------------------------------------------------- Net Sales --------------------------------------------------- %Increase/ 2001 2000 (Decrease) ---------- ---------- ---------- Canandaigua Wine: Branded: External customers $ 147,376 $ 149,540 (1.4)% Intersegment 1,896 1,239 53.0 % ---------- ---------- Total Branded 149,272 150,779 (1.0)% ---------- ---------- Other: External customers 14,060 19,449 (27.7)% Intersegment 4,726 - N/A ---------- ---------- Total Other 18,786 19,449 (3.4)% ---------- ---------- Canandaigua Wine net sales $ 168,058 $ 170,228 (1.3)% ---------- ---------- Barton: Beer $ 212,159 $ 177,195 19.7 % Spirits 72,561 73,010 (0.6)% ---------- ---------- Barton net sales $ 284,720 $ 250,205 13.8 % ---------- ---------- Matthew Clark: Branded: External customers $ 75,892 $ 80,879 (6.2)% Intersegment 476 - N/A ---------- ---------- Total Branded 76,368 80,879 (5.6)% Wholesale 93,310 102,331 (8.8)% ---------- ---------- Matthew Clark net sales $ 169,678 $ 183,210 (7.4)% ---------- ---------- Franciscan: External customers $ 21,359 $ 17,137 24.6 % Intersegment 34 - N/A ---------- ---------- Franciscan net sales $ 21,393 $ 17,137 24.8 % ---------- ---------- Corporate Operations and Other $ 774 $ 2,004 (61.4)% ---------- ---------- Intersegment eliminations $ (7,133) $ (1,204) 492.4 % ---------- ---------- Consolidated Net Sales $ 637,490 $ 621,580 2.6 % ========== ========== Net sales for Second Quarter 2001 increased to $637.5 million from $621.6 million for Second Quarter 2000, an increase of $15.9 million, or 2.6%. - 13 - Canandaigua Wine ---------------- Net sales for Canandaigua Wine for Second Quarter 2001 decreased to $168.1 million from $170.2 million for Second Quarter 2000, a decrease of $2.2 million, or (1.3)%. The decline resulted primarily from a decrease in grape juice concentrate sales and a decrease in international sales. Barton ------ Net sales for Barton for Second Quarter 2001 increased to $284.7 million from $250.2 million for Second Quarter 2000, an increase of $34.5 million, or 13.8%. This increase resulted primarily from volume growth and selling price increases in the Mexican beer portfolio. Spirits sales decreased slightly due to the loss of contract production sales. Excluding contract production, spirits sales increased 4.8%, primarily as a result of price increases on tequila products. Matthew Clark ------------- Net sales for Matthew Clark for Second Quarter 2001 decreased to $169.7 million from $183.2 million for Second Quarter 2000, a decrease of $13.5 million, or (7.4)%. This decrease resulted primarily from an adverse foreign currency impact of $10.3 million and a decrease in draft cider sales, partially offset by growth in wine and packaged cider. Franciscan ---------- Net sales for Franciscan for Second Quarter 2001 increased to $21.4 million from $17.1 million for Second Quarter 2000, an increase of $4.3 million, or 24.8%. This increase resulted primarily from selling price increases and volume growth. GROSS PROFIT The Company's gross profit increased to $200.6 million for Second Quarter 2001 from $189.1 million for Second Quarter 2000, an increase of $11.5 million, or 6.1%. The dollar increase in gross profit was primarily related to the volume growth and selling price increases in the Company's imported beer business and the Franciscan fine wine portfolio. As a percent of net sales, gross profit increased to 31.5% for Second Quarter 2001 from 30.4% in Second Quarter 2000, resulting primarily from price increases in the Company's imported beer business and the Franciscan fine wine portfolio. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $129.9 million for Second Quarter 2001 from $125.3 million for Second Quarter 2000, an increase of $4.6 million, or 3.7%. The dollar increase in selling, general and administrative expenses resulted primarily from an increase in expenses in Corporate Operations. Selling, general and administrative expenses as a percent of net sales increased to 20.4% for Second Quarter 2001 as compared to 20.2% for Second Quarter 2000. The increase in percent of net sales resulted primarily from the increase in expenses in Corporate Operations. - 14 - OPERATING INCOME The following table sets forth the operating profit/(loss) (in thousands of dollars) by operating segment of the Company for Second Quarter 2001 and Second Quarter 2000. Second Quarter 2001 Compared to Second Quarter 2000 --------------------------------------------------- Operating Profit/(Loss) --------------------------------------------------- 2001 2000 %Increase ---------- ---------- --------- Canandaigua Wine $ 10,415 $ 10,412 0.0% Barton 50,613 41,962 20.6% Matthew Clark 12,222 11,980 2.0% Franciscan 4,242 1,571 170.0% Corporate Operations and Other (6,788) (2,117) 220.6% ---------- ---------- Consolidated Operating Profit $ 70,704 $ 63,808 10.8% ========== ========== As a result of the above factors, consolidated operating income increased to $70.7 million for Second Quarter 2001 from $63.8 million for Second Quarter 2000, an increase of $6.9 million, or 10.8%. INTEREST EXPENSE, NET Net interest expense decreased to $27.2 million for Second Quarter 2001 from $28.6 million for Second Quarter 2000, a decrease of $1.5 million, or (5.1)%. The decrease resulted primarily from a decrease in average borrowings which was partially offset by an increase in the average interest rate. NET INCOME As a result of the above factors, net income increased to $26.1 million for Second Quarter 2001 from $21.1 million for Second Quarter 2000, an increase of $5.0 million, or 23.7%. For financial analysis purposes only, the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") for Second Quarter 2001 were $88.4 million, an increase of $4.2 million over EBITDA of $84.2 million for Second Quarter 2000. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity. - 15 - SIX MONTHS 2001 COMPARED TO SIX MONTHS 2000 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Six Months 2001 and Six Months 2000. Six Months 2001 Compared to Six Months 2000 ------------------------------------------- Net Sales ------------------------------------------- % Increase/ 2001 2000 (Decrease) ---------- ---------- ----------- Canandaigua Wine: Branded: External customers $ 290,706 $ 292,182 (0.5)% Intersegment 3,132 2,989 4.8 % ---------- ---------- Total Branded 293,838 295,171 (0.5)% ---------- ---------- Other: External customers 28,243 38,579 (26.8)% Intersegment 8,355 37 22,481.1 % ---------- ---------- Total Other 36,598 38,616 (5.2)% ---------- ---------- Canandaigua Wine net sales $ 330,436 $ 333,787 (1.0)% ---------- ---------- Barton: Beer $ 375,293 $ 323,806 15.9 % Spirits 145,107 127,149 14.1 % ---------- ---------- Barton net sales $ 520,400 $ 450,955 15.4 % ---------- ---------- Matthew Clark: Branded: External customers $ 145,486 $ 155,254 (6.3)% Intersegment 497 - N/A ---------- ---------- Total Branded 145,983 155,254 (6.0)% Wholesale 193,233 194,753 (0.8)% ---------- ---------- Matthew Clark net sales $ 339,216 $ 350,007 (3.1)% ---------- ---------- Franciscan: External customers $ 43,144 $ 17,137 151.8 % Intersegment 138 - N/A ---------- ---------- Franciscan net sales $ 43,282 $ 17,137 152.6 % ---------- ---------- Corporate Operations and Other $ 1,859 $ 2,889 (35.7)% ---------- ---------- Intersegment eliminations $ (12,123) $ (3,026) 300.6 % ---------- ---------- Consolidated Net Sales $1,223,070 $1,151,749 6.2 % ========== ========== Net sales for Six Months 2001 increased to $1,223.1 million from $1,151.7 million for Six Months 2000, an increase of $71.3 million, or 6.2%. Canandaigua Wine ---------------- Net sales for Canandaigua Wine for Six Months 2001 decreased to $330.4 million from $333.8 million for Six Months 2000, a decrease of $3.4 million, or (1.0)%. The decline resulted primarily from a decrease in grape juice concentrate sales, while branded wine sales were virtually unchanged against the comparable period last year. - 16 - Barton ------ Net sales for Barton for Six Months 2001 increased to $520.4 million from $451.0 million for Six Months 2000, an increase of $69.4 million, or 15.4%. This increase resulted primarily from volume growth and selling price increases in the Mexican beer portfolio as well as from the inclusion of $11.3 million of incremental net sales during the first quarter of fiscal 2001 from the Canadian whisky brands acquired as part of the Black Velvet Assets acquisition, which was completed in April 1999. Matthew Clark ------------- Net sales for Matthew Clark for Six Months 2001 decreased to $339.2 million from $350.0 million for Six Months 2000, a decrease of $10.8 million, or (3.1)%. This decrease resulted primarily from an adverse foreign currency impact of $16.8 million and a decrease in draft cider sales, partially offset by growth in wine, packaged cider and wholesale sales. Franciscan ---------- Net sales for Franciscan for Six Months 2001 increased to $43.3 million from $17.1 million for Six Months 2000, an increase of $26.1 million, or 152.6%. As the acquisition of Franciscan was completed in June 1999, this increase resulted primarily from the inclusion of $21.9 million of net sales from the first quarter of fiscal 2001 and from selling price increases and volume growth during Second Quarter 2001. GROSS PROFIT The Company's gross profit increased to $384.5 million for Six Months 2001 from $345.3 million for Six Months 2000, an increase of $39.3 million, or 11.4%. The dollar increase in gross profit was primarily related to sales from the acquisitions of the Black Velvet Assets (completed in April 1999) and Franciscan (completed in June 1999), as well as increased beer sales. As a percent of net sales, gross profit increased to 31.4% for Six Months 2001 from 30.0% in Six Months 2000, resulting primarily from sales of higher-margin spirits and super-premium and ultra-premium wine acquired in the acquisitions of the Black Velvet Assets and Franciscan, respectively, and from improved margins resulting from price increases in the Company's imported beer business and the Franciscan fine wine portfolio. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $256.3 million for Six Months 2001 from $235.8 million for Six Months 2000, an increase of $20.5 million, or 8.7%. The dollar increase in selling, general and administrative expenses resulted primarily from the inclusion of the Franciscan business and expenses related to the brands acquired in the Black Velvet Assets acquisition for a full six months in fiscal 2001, and an increase in expenses in Corporate Operations. Selling, general and administrative expenses as a percent of net sales increased to 21.0% for Six Months 2001 as compared to 20.5% for Six Months 2000. The increase in percent of net sales resulted primarily from the acquisition of Franciscan, as Franciscan's selling, general and administrative expenses as a percent of net sales are typically at the high end of the range of the Company's operating segments' percentages, and from the increase in expenses in Corporate Operations. - 17 - NONRECURRING CHARGES The Company incurred nonrecurring charges of $5.5 million in Six Months 2000 related to the closure of a cider production facility within the Matthew Clark operating segment in the United Kingdom ($2.9 million) and to a management reorganization within the Canandaigua Wine operating segment ($2.6 million). No such charges were incurred in Six Months 2001. OPERATING INCOME The following table sets forth the operating profit/(loss) (in thousands of dollars) by operating segment of the Company for Six Months 2001 and Six Months 2000. Six Months 2001 Compared to Six Months 2000 ------------------------------------------- Operating Profit/(Loss) ------------------------------------------- 2001 2000 %Increase ----------- ---------- --------- Canandaigua Wine $ 18,396 $ 16,019 14.8% Barton 89,448 73,459 21.8% Matthew Clark 22,596 19,310 17.0% Franciscan 9,658 1,571 514.8% Corporate Operations and Other (11,930) (6,440) 85.2% ----------- ---------- Consolidated Operating Profit $ 128,168 $ 103,919 23.3% =========== ========== As a result of the above factors, consolidated operating income increased to $128.2 million for Six Months 2001 from $103.9 million for Six Months 2000, an increase of $24.2 million, or 23.3%. Exclusive of the aforementioned $2.6 million in nonrecurring charges, operating income for the Canandaigua Wine operating segment decreased 1.0% in Six Months 2001 from $18.6 million in Six Months 2000. Operating income for the Matthew Clark operating segment, excluding the aforementioned nonrecurring charges of $2.9 million, increased 1.5% in the Six Months 2001 from $22.3 million in the Six Months 2000. INTEREST EXPENSE, NET Net interest expense increased to $54.8 million for Six Months 2001 from $50.7 million for Six Months 2000, an increase of $4.1 million, or 8.2%. The increase resulted primarily from additional interest expense associated with borrowings related to the acquisition of Franciscan. NET INCOME As a result of the above factors, net income increased to $44.0 million for Six Months 2001 from $31.9 million for Six Months 2000, an increase of $12.1 million, or 37.8%. For financial analysis purposes only, the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") for Six Months 2001 were $164.2 million, an increase of $26.2 million over EBITDA of $138.1 million for Six Months 2000. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity. - 18 - FINANCIAL LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------- GENERAL The Company's principal use of cash in its operating activities is for purchasing and carrying inventories. The Company's primary source of liquidity has historically been cash flow from operations, except during the annual fall grape harvests when the Company has relied on short-term borrowings. The annual grape crush normally begins in August and runs through October. The Company generally begins purchasing grapes in August with payments for such grapes beginning to come due in September. The Company's short-term borrowings to support such purchases generally reach their highest levels in November or December. Historically, the Company has used cash flow from operating activities to repay its short-term borrowings. The Company will continue to use its short-term borrowings to support its working capital requirements. The Company believes that cash provided by operating activities and its financing activities, primarily short-term borrowings, will provide adequate resources to satisfy its working capital, liquidity and anticipated capital expenditure requirements for both its short-term and long-term capital needs. SIX MONTHS 2001 CASH FLOWS OPERATING ACTIVITIES Net cash provided by operating activities for Six Months 2001 was $78.0 million, which resulted from $81.8 million in net income adjusted for noncash items, less $3.9 million representing the net change in the Company's operating assets and liabilities. The net change in operating assets and liabilities resulted primarily from an increase in accounts receivable as a result of a seasonal increase in sales, partially offset by increases in accrued grape purchases, accounts payable, accrued advertising and promotion expenses, accrued income taxes and accrued excise taxes. INVESTING ACTIVITIES AND FINANCING ACTIVITIES Net cash used in investing activities for Six Months 2001 was $24.3 million, which resulted primarily from capital expenditures of $25.2 million. Net cash used in financing activities for Six Months 2001 was $80.5 million resulting primarily from principal payments of long-term debt of $220.5 million, which included $25.5 million of scheduled and required principal payments and $75.0 million of principal prepayments. This amount was partially offset by net proceeds of $118.2 million from the issuance of (pound)80.0 million of 8 1/2% Sterling Series C Senior Notes used to repay a portion of the Company's British pound sterling borrowings under its senior credit facility and proceeds from $16.5 million of net revolving loan borrowings. DEBT Total debt outstanding as of August 31, 2000, amounted to $1,209.1 million, a decrease of $108.9 million from February 29, 2000. The ratio of total debt to total capitalization decreased to 68.7% as of August 31, 2000, from 71.7% as of February 29, 2000. - 19 - SENIOR CREDIT FACILITY As of August 31, 2000, under its senior credit facility, the Company had outstanding term loans of $338.2 million bearing a weighted average interest rate of 8.4%, $43.3 million of revolving loans bearing a weighted average interest rate of 7.9%, undrawn revolving letters of credit of $11.9 million, and $244.8 million in revolving loans available to be drawn. SENIOR NOTES As of August 31, 2000, the Company had outstanding $200.0 million aggregate principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior Notes"). The Senior Notes are currently redeemable, in whole or in part, at the option of the Company. In March 2000, the Company exchanged (pound)75.0 million aggregate principal amount of 8 1/2% Series B Senior Notes due in November 2009 (the "Sterling Series B Senior Notes") for the Sterling Senior Notes. The terms of the Sterling Series B Senior Notes are identical in all material respects to the Sterling Senior Notes. In May 2000, the Company issued (pound)80.0 million (approximately $120.0 million) aggregate principal amount of 8 1/2% Series C Senior Notes due November 2009 at an issuance price of (pound)79.6 million (approximately $119.4 million, net of $0.6 million unamortized discount, with an effective rate of 8.6%) (the "Sterling Series C Senior Notes"). The net proceeds of the offering ((pound)78.8 million, or approximately $118.2 million) were used to repay a portion of the Company's British pound sterling borrowings under its senior credit facility. Interest on the Sterling Series C Senior Notes is payable semiannually on May 15 and November 15 of each year, beginning on November 15, 2000. The Sterling Series C Senior Notes are redeemable at the option of the Company, in whole or in part, at any time. The Sterling Series C Senior Notes are unsecured senior obligations and rank equally in right of payment to all existing and future unsecured senior indebtedness of the Company. The Sterling Series C Senior Notes are guaranteed, on a senior basis, by certain of the Company's significant operating subsidiaries. SENIOR SUBORDINATED NOTES As of August 31, 2000, the Company had outstanding $195.0 million aggregate principal amount of 8 3/4% Senior Subordinated Notes due December 2003 (the "Original Notes"). The Original Notes are currently redeemable, in whole or in part, at the option of the Company. Also, as of August 31, 2000, the Company had outstanding $200.0 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009 (the "Senior Subordinated Notes"). The Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 2004. The Company may also redeem up to $70.0 million of the Senior Subordinated Notes using the proceeds of certain equity offerings completed before March 1, 2002. - 20 - ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires that every derivative be recorded as either an asset or liability in the balance sheet and measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 ("SFAS No. 137"), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 delays the effective date of SFAS No. 133 for one year. With the issuance of SFAS No. 137, the Company is required to adopt SFAS No. 133 on a prospective basis for interim periods and fiscal years beginning March 1, 2001. In June 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 138 ("SFAS No. 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities--an amendment of FASB Statement No. 133." SFAS No. 138 amends the accounting and reporting standards of SFAS No. 133 for certain derivative instruments and certain hedging activities. The Company is required to adopt SFAS No. 138 concurrently with SFAS No. 133. The Company believes the effect of the adoption of these statements on its financial statements will not be material based on the Company's current risk management strategies. EURO CONVERSION ISSUES Effective January 1, 1999, eleven of the fifteen member countries of the European Union (the "Participating Countries") established fixed conversion rates between their existing sovereign currencies and the euro. For three years after the introduction of the euro, the Participating Countries can perform financial transactions in either the euro or their original local currencies. This will result in a fixed exchange rate among the Participating Countries, whereas the euro (and the Participating Countries' currency in tandem) will continue to float freely against the U.S. dollar and other currencies of the non-participating countries. The Company does not believe that the effects of the conversion will have a material adverse effect on the Company's business and operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- Information about market risks for the six months ended August 31, 2000, does not differ materially from that discussed under Item 7A in the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2000. - 21 - PART II - OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------- --------------------------------------------------- At the Annual Meeting of Stockholders of Constellation Brands, Inc. (f/k/a Canandaigua Brands, Inc.) held on July 18, 2000 (the "Annual Meeting"), the holders of the Company's Class A Common Stock (the "Class A Stock"), voting as a separate class, elected the Company's slate of director nominees designated to be elected by the holders of the Class A Stock, and the holders of the Company's Class B Common Stock (the "Class B Stock"), voting as a separate class, elected the Company's slate of director nominees designated to be elected by the holders of the Class B Stock. In addition, at the Annual Meeting, the holders of Class A Stock and the holders of Class B Stock, voting together as a single class, voted upon the proposal to ratify the selection of Arthur Andersen LLP, Certified Public Accountants, as the Company's independent auditors for the fiscal year ending February 28, 2001. Set forth below is the number of votes cast for, against or withheld, as well as the number of abstentions and broker nonvotes, as applicable, as to each of the foregoing matters. I. The results of the voting for the election of Directors of the Company are as follows: Directors Elected By the Holders of Class A Stock: -------------------------------------------------- Nominee For Withheld ------------------- ---------- -------- Thomas C. McDermott 11,253,547 471,002 Paul L. Smith 11,255,184 469,365 Directors Elected By the Holders of Class B Stock: -------------------------------------------------- Nominee For Withheld -------------------- ---------- -------- George Bresler 30,552,860 3,980 Jeananne K. Hauswald 30,552,590 4,250 James A. Locke, III 30,554,590 2,250 Richard Sands 30,554,590 2,250 Robert Sands 30,552,920 3,920 II. The selection of Arthur Andersen LLP was ratified with the following votes: For: 42,133,632 Against: 88,537 Abstain: 59,220 Broker Nonvotes: 0 - 22 - ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- (a) See Index to Exhibits located on Page 29 of this Report. (b) The following Report on Form 8-K was filed with the Securities and Exchange Commission during the quarter ended August 31, 2000: Form 8-K dated June 22, 2000. This Form 8-K reported information under Item 5 (Other Events) and included (i) the Company's Condensed Consolidated Balance Sheets as of May 31, 2000 (unaudited) and February 29, 2000 (audited); and (ii) the Company's Condensed Consolidated Statements of Income for the three months ended May 31, 2000 (unaudited) and May 31, 1999 (unaudited). - 23 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, each Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSTELLATION BRANDS, INC. Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Vice President, Corporate Reporting and Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Executive Vice President Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) SUBSIDIARIES BATAVIA WINE CELLARS, INC. Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) CANANDAIGUA WINE COMPANY, INC. Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) - 24 - CANANDAIGUA EUROPE LIMITED Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) CANANDAIGUA LIMITED Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Authorized Officer Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Finance Director (Principal Financial Officer and Principal Accounting Officer) POLYPHENOLICS, INC. Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Vice President and Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) ROBERTS TRADING CORP. Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, President and Treasurer (Principal Financial Officer and Principal Accounting Officer) - 25 - CANANDAIGUA B.V. Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer and Principal Accounting Officer) FRANCISCAN VINEYARDS, INC. Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Vice President and Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) ALLBERRY, INC. Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Vice President and Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) CLOUD PEAK CORPORATION Dated: October 13, 2000 By: /s/ Thomas F. Howe ---------------------------------- Thomas F. Howe, Vice President and Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) - 26 - M.J. LEWIS CORP. Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Vice President and Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) MT. VEEDER CORPORATION Dated: October 13, 2000 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Vice President and Controller Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) BARTON INCORPORATED Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President and Chief Executive Officer Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) BARTON BRANDS, LTD. Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, Executive Vice President Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) - 27 - BARTON BEERS, LTD. Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, Executive Vice President Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) BARTON BRANDS OF CALIFORNIA, INC. Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) BARTON BRANDS OF GEORGIA, INC. Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) BARTON CANADA, LTD. Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) - 28 - BARTON DISTILLERS IMPORT CORP. Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) BARTON FINANCIAL CORPORATION Dated: October 13, 2000 By: /s/ Troy J. Christensen ------------------------------------ Troy J. Christensen, President and Secretary Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) STEVENS POINT BEVERAGE CO. Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, Executive Vice President Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) MONARCH IMPORT COMPANY Dated: October 13, 2000 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: October 13, 2000 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Vice President (Principal Financial Officer and Principal Accounting Officer) - 29 - INDEX TO EXHIBITS (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.1 Asset Purchase Agreement dated as of February 21, 1999 by and among Diageo Inc., UDV Canada Inc., United Distillers Canada Inc. and the Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated April 9, 1999 and incorporated herein by reference). 2.2 Stock Purchase Agreement, dated April 21, 1999, between Franciscan Vineyards, Inc., Agustin Huneeus, Agustin Francisco Huneeus, Jean-Michel Valette, Heidrun Eckes-Chantre Und Kinder Beteiligungsverwaltung II, GbR, Peter Eugen Eckes Und Kinder Beteiligungsverwaltung II, GbR, Harald Eckes-Chantre, Christina Eckes-Chantre, Petra Eckes-Chantre and the Company (filed as Exhibit 2.1 on the Company's Current Report on Form 8-K dated June 4, 1999 and incorporated herein by reference). 2.3 Stock Purchase Agreement by and between Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the Company) and Moet Hennessy, Inc. dated April 1, 1999 (including a list briefly identifying the contents of all omitted schedules thereto) (filed as Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated herein by reference). (3) ARTICLES OF INCORPORATION AND BY-LAWS. 3.1 Restated Certificate of Incorporation of the Company (filed herewith). 3.2 By-Laws of the Company (filed herewith; filed for the purpose of reflecting the Company's new name, Constellation Brands, Inc., in the title of the By-Laws). (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. 4.1 Supplemental Indenture No. 5, dated as of September 14, 2000 by and among the Company, as Issuer, its principal operating subsidiaries, as Guarantors, and The Bank of New York, as Trustee (filed herewith). (10) MATERIAL CONTRACTS. 10.1 Amendment Number Three to the Company's Long-Term Stock Incentive Plan (filed herewith). 10.2 Amendment Number Two to the Company's Incentive Stock Option Plan (filed herewith). 10.3 Supplemental Indenture No. 5, dated as of September 14, 2000 by and among the Company, as Issuer, its principal operating subsidiaries, as Guarantors, and The Bank of New York, as Trustee (filed as Exhibit 4.1 hereto). (11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS. Computation of per share earnings (filed herewith). (15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION. Not applicable. - 30 - (18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES. Not applicable. (19) REPORT FURNISHED TO SECURITY HOLDERS. Not applicable. (22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS. Not applicable. (23) CONSENTS OF EXPERTS AND COUNSEL. Not applicable. (24) POWER OF ATTORNEY. Not applicable. (27) FINANCIAL DATA SCHEDULE. Financial Data Schedule (filed herewith). (99) ADDITIONAL EXHIBITS. Not applicable.