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, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 001-08495
CONSTELLATION BRANDS, INC.
--------------------------
(Exact name of registrant specified in its charter)
Delaware 16-0716709
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450
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(Address of principal executive offices) (Zip Code)
(716) 218-2169
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
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 with respect to each of the classes of common
stock of Constellation Brands, Inc., as of October 8, 2001, is set forth
below:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Class A Common Stock, Par Value $.01 Per Share 37,291,021
Class B Common Stock, Par Value $.01 Per Share 6,074,445
- 1 -
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
August 31, February 28,
2001 2001
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(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 6,768 $ 145,672
Accounts receivable, net 406,929 314,262
Inventories, net 769,117 670,018
Prepaid expenses and other current assets 70,987 61,037
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Total current assets 1,253,801 1,190,989
PROPERTY, PLANT AND EQUIPMENT, net 560,452 548,614
OTHER ASSETS 1,092,458 772,566
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Total assets $ 2,906,711 $ 2,512,169
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LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 88,991 $ 4,184
Current maturities of long-term debt 75,854 54,176
Accounts payable 149,481 114,793
Accrued excise taxes 45,496 55,954
Other accrued expenses and liabilities 256,953 198,053
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Total current liabilities 616,775 427,160
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LONG-TERM DEBT, less current maturities 1,284,120 1,307,437
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DEFERRED INCOME TAXES 132,521 131,974
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OTHER LIABILITIES 33,238 29,330
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, none at August 31, 2001,
and February 28, 2001 - -
Class A Common Stock, $.01 par value-
Authorized, 120,000,000 shares;
Issued, 38,703,208 shares at
August 31, 2001, and 37,438,968
shares at February 28, 2001 387 374
Class B Convertible Common Stock,
$.01 par value-
Authorized, 20,000,000 shares;
Issued, 7,325,895 shares at
August 31, 2001, and 7,402,594 shares
at February 28, 2001 73 74
Additional paid-in capital 394,464 267,655
Retained earnings 515,575 455,798
Accumulated other comprehensive loss (28,853) (26,004)
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881,646 697,897
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Less-Treasury stock-
Class A Common Stock, 1,801,717 shares
at August 31, 2001, and 6,200,600 shares
at February 28, 2001, at cost (39,282) (79,271)
Class B Convertible Common Stock, 1,251,450
shares at August 31, 2001, and
February 28, 2001, at cost (2,207) (2,207)
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(41,489) (81,478)
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Less-Unearned compensation-restricted
stock awards (100) (151)
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Total stockholders' equity 840,057 616,268
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Total liabilities and stockholders' equity $ 2,906,711 $ 2,512,169
=========== ============
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,
----------------------------------- -------------------------------------
2001 2000 2001 2000
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
GROSS SALES $ 1,787,002 $ 1,603,190 $ 951,228 $ 828,668
Less - Excise taxes (403,362) (380,120) (209,698) (191,178)
-------------- -------------- -------------- --------------
Net sales 1,383,640 1,223,070 741,530 637,490
COST OF PRODUCT SOLD (944,014) (838,558) (503,854) (436,851)
-------------- -------------- -------------- --------------
Gross profit 439,626 384,512 237,676 200,639
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (280,702) (256,344) (148,675) (129,935)
-------------- -------------- -------------- --------------
Operating income 158,924 128,168 89,001 70,704
INTEREST EXPENSE, net (59,159) (54,814) (28,974) (27,187)
EQUITY IN LOSS OF JOINT VENTURE (137) - (137) -
-------------- -------------- -------------- --------------
Income before income taxes 99,628 73,354 59,890 43,517
PROVISION FOR INCOME TAXES (39,851) (29,342) (23,956) (17,407)
-------------- -------------- -------------- --------------
NET INCOME $ 59,777 $ 44,012 $ 35,934 $ 26,110
============== ============== ============== ==============
SHARE DATA:
Earnings per common share:
Basic $ 1.43 $ 1.20 $ 0.85 $ 0.71
============== ============== ============== ==============
Diluted $ 1.39 $ 1.18 $ 0.82 $ 0.70
============== ============== ============== ==============
Weighted average common shares outstanding:
Basic 41,834 36,530 42,414 36,600
Diluted 43,126 37,243 43,932 37,328
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,
-----------------------------------
2001 2000
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(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59,777 $ 44,012
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 27,290 23,240
Amortization of intangible assets 15,971 12,825
Loss on sale of assets 1,680 1,513
Amortization of discount on long-term debt 275 241
Equity in loss of joint venture 137 -
Stock-based compensation expense 51 -
Change in operating assets and liabilities,
net of effects from purchases of businesses:
Accounts receivable, net (64,236) (77,926)
Inventories, net 27,533 4,575
Prepaid expenses and other current assets (8,711) (10,177)
Accounts payable 13,467 20,655
Accrued excise taxes (10,561) 14,286
Other accrued expenses and liabilities 47,942 48,542
Other assets and liabilities, net (4,633) (3,813)
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Total adjustments 46,205 33,961
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Net cash provided by operating activities 105,982 77,973
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (471,971) -
Purchases of property, plant and equipment (28,795) (25,249)
Investment in joint venture (5,500) -
Proceeds from sale of assets 35,391 912
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Net cash used in investing activities (470,875) (24,337)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equity offering, net of fees 139,522 -
Net proceeds from notes payable 85,727 18,212
Exercise of employee stock options 26,392 3,178
Proceeds from employee stock purchases 842 761
Principal payments of long-term debt (25,221) (220,509)
Payment of issuance costs of long-term debt (1,186) (1,547)
Proceeds from issuance of long-term debt, net of discount - 119,400
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Net cash provided by (used in) financing activities 226,076 (80,505)
------------ ------------
Effect of exchange rate changes on cash and cash investments (87) (3,289)
------------ ------------
NET DECREASE IN CASH AND CASH INVESTMENTS (138,904) (30,158)
CASH AND CASH INVESTMENTS, beginning of period 145,672 34,308
------------ ------------
CASH AND CASH INVESTMENTS, end of period $ 6,768 $ 4,150
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ 537,821 $ -
Liabilities assumed (60,108) -
------------ ------------
Cash paid 477,713 -
Less - cash acquired (5,742) -
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Net cash paid for purchases of businesses $ 471,971 $ -
============ ============
Property, plant and equipment contributed to joint venture $ 30,020 $ -
============ ============
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, 2001
1) MANAGEMENT'S REPRESENTATIONS:
The 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 28, 2001. Results of operations for interim periods are not necessarily
indicative of annual results.
Certain August 31, 2000, balances have been reclassified to conform to
current year presentation.
2) ACCOUNTING CHANGES:
Effective March 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended, which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133 requires that the Company recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The adoption of SFAS No. 133 did not have a material impact on the Company's
consolidated financial position, results of operations, or cash flows. The
Company is exposed to market risk associated with changes in foreign currency
exchange rates. The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company periodically
enters into derivative transactions solely to manage the volatility and to
reduce the financial impact relating to this risk.
The Company uses foreign currency exchange hedging agreements to reduce the
risk of foreign currency exchange rate fluctuations resulting primarily from
contracts to purchase inventory items that are denominated in various foreign
currencies. As these derivative contracts are designated to hedge the exposure
to variable cash flows of a forecasted transaction, the contracts are classified
as cash flow hedges. As such, the effective portion of the change in the fair
value of the derivatives is recorded each period in the balance sheet in
accumulated other comprehensive income/loss ("AOCI"), and is reclassified into
the statement of income, primarily as a component of cost of goods sold, in the
same period during which the hedged transaction affects earnings. The currency
forward exchange contracts used generally have maturity terms of twelve months
or less. The Company expects the entire balance in AOCI related to cash flow
hedges to be reclassified to the statement of income within the next twelve
months. The Company formally documents all relationships between hedging
instruments and hedged items in accordance with SFAS No. 133 requirements.
The Company has exposure to foreign currency risk, primarily in the United
Kingdom, as a result of having international subsidiaries. The Company uses
local currency borrowings to hedge its earnings and cash flow exposure to
adverse changes in foreign currency exchange rates. Such borrowings are
designated as a hedge of the foreign currency exposure of the net investment in
the foreign operation. Accordingly, the effective portion of the foreign
currency gain or loss on the hedging debt instrument is reported in AOCI as part
of the foreign currency translation adjustments. For the six months and three
- 5 -
months ended August 31, 2001, net losses of $1.6 million and $6.9 million,
respectively, are included in foreign currency translation adjustments within
AOCI.
3) ACQUISITIONS:
On October 27, 2000, the Company purchased all of the issued Ordinary
Shares and Preference Shares of Forth Wines Limited ("Forth Wines"). The
purchase price was $4.5 million and was accounted for using the purchase method;
accordingly, the acquired net assets were recorded at fair market value at the
date of acquisition. The excess of the purchase price over the fair market value
of the net assets acquired (goodwill), $2.2 million, is being amortized on a
straight-line basis over 40 years. The results of operations of Forth Wines are
reported in the Matthew Clark segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The preliminary purchase
price of the Turner Road Vintners Assets, including assumption of indebtedness
of $9.4 million, was $289.8 million. The purchase price is subject to final
closing adjustments which the Company does not expect to be material. The
acquisition was financed by the proceeds from the sale of the February 2001
Senior Notes and revolving loan borrowings under the senior credit facility. The
Turner Road Vintners Assets acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair market value
at the date of acquisition, subject to final appraisal. The excess of the
purchase price over the estimated fair market value of the net assets acquired
(goodwill), $181.0 million, is being amortized on a straight-line basis over 40
years. The results of operations of the Turner Road Vintners Assets are reported
in the Canandaigua Wine segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. The preliminary purchase price of the Corus
Assets, including assumption of indebtedness of $3.0 million, was $51.9 million
plus an earn-out over six years based on the performance of the brands. The
purchase price is subject to final closing adjustments which the Company does
not expect to be material. In connection with the transaction, the Company also
entered into long-term grape supply agreements with affiliates of Corus Brands,
Inc. covering more than 1,000 acres of Washington and Idaho vineyards. The
acquisition was financed with revolving loan borrowings under the senior credit
facility. The Corus Assets acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair market value
at the date of acquisition, subject to final appraisal. The excess of the
purchase price over the estimated fair market value of the net assets acquired
(goodwill), $10.0 million, is being amortized on a straight-line basis over 40
years. The results of operations of the Corus Assets are reported in the
Canandaigua Wine segment and have been included in the Consolidated Statements
of Income since the date of acquisition.
- 6 -
On July 2, 2001, the Company purchased all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"). Ravenswood produces, markets and
sells super-premium and ultra-premuim California wine, primarily under the
Ravenswood brand name. The preliminary purchase price of Ravenswood, including
assumption of indebtedness of $2.9 million, was $151.3 million. The purchase
price is subject to final closing adjustments which the Company does not expect
to be material. The purchase price was financed with revolving loan borrowings
under the senior credit facility. The Ravenswood acquisition was accounted for
using the purchase method; accordingly, the acquired net assets were recorded at
fair market value at the date of acquisition, subject to final appraisal. The
excess of the purchase price over the estimated fair market value of the net
assets acquired (goodwill), $122.6 million, will not be amortized and will be
tested for impairment at least annually. The Ravenswood acquisition was in line
with the Company's strategy of further penetrating the higher gross profit
margin super-premium and ultra-premium wine categories. The results of
operations of Ravenswood are reported in the Franciscan segment and have been
included in the Consolidated Statements of Income since the date of acquisition.
The unaudited pro forma results of operations for the six months and three
months ended August 31, 2001 (shown in the table below), reflect total
nonrecurring charges of $11.7 million ($0.16 per share on a diluted basis)
related to transaction costs, primarily for the acceleration of vesting of stock
options, which were incurred by Ravenswood prior to the acquisition.
The following table sets forth the unaudited pro forma results of
operations of the Company for the six months and three months ended August 31,
2001 and 2000. The unaudited pro forma results of operations for the six months
ended August 31, 2001 and 2000, and the three months ended August 31, 2000, give
effect to the acquisitions of the Turner Road Vintners Assets and Corus Assets
as if they occurred on March 1, 2000. The unaudited pro forma results of
operations for the six months and three months ended August 31, 2001 and 2000,
give effect to the acquisition of Ravenswood as if it occurred on March 1, 2000.
The unaudited pro forma results of operations for the six months and three
months ended August 31, 2000, do not give pro forma effect to the acquisition of
Forth Wines as if it occurred on March 1, 2000, as it is not significant. 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 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 For the Three Months
Ended August 31, Ended August 31,
----------------------------- ----------------------------
2001 2000 2001 2000
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(in thousands, except per share data)
Net sales $ 1,398,999 $ 1,353,774 $ 746,015 $ 701,424
Income before income taxes $ 84,768 $ 61,520 $ 47,696 $ 36,629
Net income $ 50,861 $ 36,911 $ 28,618 $ 21,977
Earnings per common share:
Basic $ 1.22 $ 1.01 $ 0.67 $ 0.60
============ ============ ============ ============
Diluted $ 1.18 $ 0.99 $ 0.65 $ 0.59
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 41,834 36,530 42,414 36,600
Diluted 43,126 37,243 43,932 37,328
- 7 -
4) 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 28,
2001 2001
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(in thousands)
Raw materials and supplies $ 37,796 $ 28,007
In-process inventories 453,414 450,650
Finished case goods 277,907 191,361
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$ 769,117 $ 670,018
============ ============
5) OTHER ASSETS:
The major components of other assets are as follows:
August 31, February 28,
2001 2001
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(in thousands)
Goodwill $ 745,744 $ 447,813
Trademarks 246,941 247,139
Distribution rights and agency
license agreements 87,052 87,052
Other 112,157 73,935
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1,191,895 855,939
Less - Accumulated amortization (99,437) (83,373)
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$ 1,092,458 $ 772,566
============ ============
6) INVESTMENT IN JOINT VENTURE:
On July 31, 2001, the Company and BRL Hardy Limited completed the formation
of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the
Company and BRL Hardy Limited, the second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports, the fastest growing wine
segment in the United States. PWP has exclusive distribution rights in the
United States and the Caribbean to seven brands - Banrock Station, Hardys,
Leasingham, Barossa Valley Estate and Chateau Reynella from Australia; Nobilo
from New Zealand; and La Baume from France. The joint venture also owns
Farallon, a premium California coastal wine. In addition, PWP owns the Riverland
Vineyards winery and controls 1,400 acres of vineyards, all located in Monterey
County, California.
The Company contributed to PWP assets with a carrying amount of $30.0
million plus $5.5 million of cash. The Company sold assets with a carrying
amount of $31.2 million to BRL Hardy (USA) Inc. ("Hardy") and received $34.9
million in cash. Hardy contributed these assets plus $5.5 million of cash to
PWP. As of August 31, 2001, the Company's investment balance, which is accounted
for under the equity method, was $31.6 million and is included on the
Consolidated Balance Sheets in other assets. The carrying amount of the
investment is less than the Company's equity in the underlying net assets of PWP
by $8.7 million. This amount is included in earnings as the assets are used by
PWP. The Company and PWP are parties to the following agreements: administrative
and selling services agreement; crushing, wine production, bottling, storage,
and related services agreement; inventory supply agreement; sublease and
assumption agreements pertaining to certain vineyards, which agreements include
a market value adjustment provision; and a market value adjustment agreement
relating to a certain vineyard lease held by PWP. As of August 31, 2001, amounts
related to the above agreements were not material.
- 8 -
7) OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
August 31, February 28,
2001 2001
------------ ------------
(in thousands)
Accrued advertising and promotions $ 52,671 $ 44,501
Accrued income taxes payable 39,230 21,122
Accrued grape purchases 36,009 -
Accrued salaries and commissions 21,916 24,589
Accrued interest 14,988 28,542
Other 92,139 79,299
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$ 256,953 $ 198,053
============ ============
8) BORROWINGS:
In July 2001, the Company exchanged $200.0 million aggregate principal
amount of 8% Series B Senior Notes due February 2008 (the "February 2001 Series
B Senior Notes") for all of the February 2001 Senior Notes. The terms of the
February 2001 Series B Senior Notes are identical in all material respects to
the February 2001 Senior Notes.
9) STOCKHOLDERS' EQUITY:
Equity offering -
---------------
During March 2001, the Company completed a public offering of 4,370,000
shares of its Class A Common Stock resulting in net proceeds to the Company,
after deducting underwriting discounts and expenses, of $139.5 million. The net
proceeds were used to repay revolving loan borrowings under the senior credit
facility of which a portion was incurred to partially finance the acquisition of
the Turner Road Vintners Assets.
Employee stock purchase plan -
----------------------------
The Company has a stock purchase plan under which 500,000 shares of the
Company's Class A Common Stock may be issued to eligible employees and directors
of the Company's United Kingdom subsidiaries. In connection with the Company's
May 2001 two-for-one stock split, the Company has submitted to the Inland
Revenue, for its approval, a revised plan to increase the number of shares
available under the plan to 1,000,000. Under the terms of the plan, participants
may purchase shares of the Company's Class A Common Stock through payroll
deductions. The purchase price may be no less than 80% of the closing price of
the stock on the day the purchase price is fixed by the committee administering
the plan. As of August 31, 2001, no shares have been issued.
10) 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.
- 9 -
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,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(in thousands, except per share data)
Income applicable to common shares $ 59,777 $ 44,012 $ 35,934 $ 26,110
========== ========== ========== ==========
Weighted average common shares
outstanding - basic 41,834 36,530 42,414 36,600
Stock options 1,292 713 1,518 728
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 43,126 37,243 43,932 37,328
========== ========== ========== ==========
EARNINGS PER COMMON SHARE - BASIC $ 1.43 $ 1.20 $ 0.85 $ 0.71
========== ========== ========== ==========
EARNINGS PER COMMON SHARE - DILUTED $ 1.39 $ 1.18 $ 0.82 $ 0.70
========== ========== ========== ==========
Stock options to purchase 0.1 million and 1.7 million shares of Class A
Common Stock at a weighted average price per share of $42.68 and $26.14 were
outstanding during the six months and three months ended August 31, 2001 and
2000, 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.
11) COMPREHENSIVE INCOME:
Comprehensive income consists of net income, foreign currency translation
adjustments and net unrealized gains on derivative instruments for the six
months and three months ended August 31, 2001 and 2000. 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,
------------------------ ------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(in thousands)
Net income $ 59,777 $ 44,012 $ 35,934 $ 26,110
Other comprehensive income, net of tax:
Foreign currency translation adjustments (2,882) (19,113) 1,432 (7,847)
Cash flow hedges:
Net derivative gains, net of tax effect of $109 and
$30, respectively 219 - 47 -
Reclassification adjustments, net of tax effect of
$85 and $18, respectively (186) - 43 -
---------- ---------- ---------- ----------
Net cash flow hedges 33 - 90 -
---------- ---------- ---------- ----------
Total comprehensive income $ 56,928 $ 24,899 $ 37,456 $ 18,263
========== ========== ========== ==========
Accumulated other comprehensive loss includes the following components:
For the Six Months Ended August 31, 2001
------------------------------------------------------------
Foreign Net Accumulated
Currency Unrealized Other
Translation Gains on Comprehensive
Adjustments Derivatives Loss
---------------- ---------------- ----------------
Beginning balance, February 28, 2001 $ (26,004) $ - $ (26,004)
Current-period change (2,882) 33 (2,849)
---------------- ---------------- ----------------
Ending balance, August 31, 2001 $ (28,886) $ 33 $ (28,853)
================ ================ ================
- 10 -
12) CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets as of August 31, 2001 and 2000, and the condensed consolidating
statements of income and cash flows for the six months and three months ended
August 31, 2001 and 2000, for the parent company, the combined subsidiaries of
the Company which guarantee the Company's senior notes and senior subordinated
notes ("Subsidiary Guarantors"), the combined subsidiaries of the Company which
are not Subsidiary Guarantors, primarily Matthew Clark ("Subsidiary
Nonguarantors"), and the consolidated Company. The Subsidiary Guarantors are
wholly owned and the guarantees are full, unconditional, joint and several
obligations of each of the Subsidiary Guarantors. The accounting policies of the
parent company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are
the same as those described for the Company in the Summary of Significant
Accounting Policies in Note 1 to the Company's consolidated financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 2001. 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)
Condensed Consolidating Balance Sheet
-------------------------------------
at August 31, 2001
------------------
Current assets:
Cash and cash investments $ 109 $ 6,557 $ 102 $ - $ 6,768
Accounts receivable, net 72,101 166,763 168,065 - 406,929
Inventories, net 24,889 616,081 128,232 (85) 769,117
Prepaid expenses and other
current assets 4,914 46,162 19,911 - 70,987
Intercompany (payable) receivable (151,827) 145,762 6,065 - -
----------- ------------ ------------ ------------ ------------
Total current assets (49,814) 981,325 322,375 (85) 1,253,801
Property, plant and equipment, net 29,650 339,256 191,546 - 560,452
Investments in subsidiaries 2,333,485 516,727 - (2,850,212) -
Other assets 88,137 756,307 248,014 - 1,092,458
----------- ------------ ------------ ------------ ------------
Total assets $ 2,401,458 $ 2,593,615 $ 761,935 $ (2,850,297) $ 2,906,711
=========== ============ ============ ============ ============
Current liabilities:
Notes payable $ 83,000 $ - $ 5,991 $ - $ 88,991
Current maturities of long-term debt 69,335 1,906 4,613 - 75,854
Accounts payable and other liabilities 67,242 145,732 193,460 - 406,434
Accrued excise taxes 7,392 20,925 17,179 - 45,496
----------- ------------ ------------ ------------ ------------
Total current liabilities 226,969 168,563 221,243 - 616,775
Long-term debt, less current maturities 1,270,290 13,454 376 - 1,284,120
Deferred income taxes 33,233 70,260 29,028 - 132,521
Other liabilities 473 9,383 23,382 - 33,238
Stockholders' equity:
Class A and class B common stock 460 6,434 64,867 (71,301) 460
Additional paid-in capital 394,464 1,220,056 436,466 (1,656,522) 394,464
Retained earnings 515,660 1,106,995 15,394 (1,122,474) 515,575
Accumulated other comprehensive
income (loss) 1,498 (1,530) (28,821) - (28,853)
Treasury stock and other (41,589) - - - (41,589)
----------- ------------ ------------ ------------ ------------
Total stockholders' equity 870,493 2,331,955 487,906 (2,850,297) 840,057
----------- ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $ 2,401,458 $ 2,593,615 $ 761,935 $ (2,850,297) $ 2,906,711
=========== ============ ============ ============ ============
- 11 -
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Balance Sheet
-------------------------------------
at February 28, 2001
--------------------
Current assets:
Cash and cash investments $ 142,104 $ 3,239 $ 329 $ - $ 145,672
Accounts receivable, net 80,299 116,784 117,179 - 314,262
Inventories, net 31,845 515,274 122,965 (66) 670,018
Prepaid expenses and other
current assets 6,551 33,565 20,921 - 61,037
Intercompany (payable) receivable (61,783) 54,169 7,614 - -
----------- ------------ ------------ ------------ ------------
Total current assets 199,016 723,031 269,008 (66) 1,190,989
Property, plant and equipment, net 30,554 320,143 197,917 - 548,614
Investments in subsidiaries 1,835,088 525,442 - (2,360,530) -
Other assets 87,764 434,782 250,020 - 772,566
----------- ------------ ------------ ------------ ------------
Total assets $ 2,152,422 $ 2,003,398 $ 716,945 $ (2,360,596) $ 2,512,169
=========== ============ ============ ============ ============
Current liabilities:
Notes payable $ - $ - $ 4,184 $ - $ 4,184
Current maturities of long-term debt 49,218 70 4,888 - 54,176
Accounts payable and other liabilities 111,388 58,448 143,010 - 312,846
Accrued excise taxes 9,411 35,474 11,069 - 55,954
----------- ------------ ------------ ------------ ------------
Total current liabilities 170,017 93,992 163,151 427,160
Long-term debt, less current maturities 1,305,302 758 1,377 - 1,307,437
Deferred income taxes 33,232 71,619 27,123 - 131,974
Other liabilities 437 2,953 25,940 - 29,330
Stockholders' equity:
Class A and class B common stock 448 6,434 64,867 (71,301) 448
Additional paid-in capital 267,655 742,343 436,466 (1,178,809) 267,655
Retained earnings 455,864 1,086,311 24,109 (1,110,486) 455,798
Accumulated other comprehensive
income (loss) 1,096 (1,012) (26,088) - (26,004)
Treasury stock and other (81,629) - - - (81,629)
----------- ------------ ------------ ------------ ------------
Total stockholders' equity 643,434 1,834,076 499,354 (2,360,596) 616,268
----------- ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $ 2,152,422 $ 2,003,398 $ 716,945 $ (2,360,596) $ 2,512,169
=========== ============ ============ ============ ============
Condensed Consolidating Statement of Income
-------------------------------------------
for the Six Months Ended August 31, 2001
----------------------------------------
Gross sales $ 425,396 $ 1,024,384 $ 531,023 $ (193,801) $ 1,787,002
Less - excise taxes (67,947) (210,939) (124,476) - (403,362)
----------- ------------ ------------ ------------ ------------
Net sales 357,449 813,445 406,547 (193,801) 1,383,640
Cost of product sold (201,913) (638,755) (297,128) 193,782 (944,014)
----------- ------------ ------------ ------------ ------------
Gross profit 155,536 174,690 109,419 (19) 439,626
Selling, general and administrative
expenses (82,428) (89,415) (108,859) - (280,702)
----------- ------------ ------------ ------------ ------------
Operating income 73,108 85,275 560 (19) 158,924
Interest expense, net (7,922) (49,173) (2,064) - (59,159)
Equity in earnings (loss) of
subsidiary/joint venture 20,684 (8,852) - (11,969) (137)
----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 85,870 27,250 (1,504) (11,988) 99,628
Provision for income taxes (26,074) (6,566) (7,211) - (39,851)
----------- ------------ ------------ ------------ ------------
Net income (loss) $ 59,796 $ 20,684 $ (8,715) $ (11,988) $ 59,777
=========== ============ ============ ============ ============
- 12 -
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Income
-------------------------------------------
for the Six Months Ended August 31, 2000
----------------------------------------
Gross sales $ 343,806 $ 932,316 $ 482,594 $ (155,526) $ 1,603,190
Less - excise taxes (62,838) (205,931) (111,351) - (380,120)
----------- ------------ ------------ ------------ ------------
Net sales 280,968 726,385 371,243 (155,526) 1,223,070
Cost of product sold (209,632) (522,232) (262,124) 155,430 (838,558)
----------- ------------ ------------ ------------ ------------
Gross profit 71,336 204,153 109,119 (96) 384,512
Selling, general and administrative
expenses (75,658) (77,068) (103,618) - (256,344)
----------- ------------ ------------ ------------ ------------
Operating (loss) income (4,322) 127,085 5,501 (96) 128,168
Interest expense, net (13,163) (39,341) (2,310) - (54,814)
Equity in earnings (loss) of subsidiary 54,599 (6,303) - (48,296) -
----------- ------------ ------------ ------------ ------------
Income before income taxes 37,114 81,441 3,191 (48,392) 73,354
Benefit from (provision for) income taxes 6,994 (26,842) (9,494) - (29,342)
----------- ------------ ------------ ------------ ------------
Net income (loss) $ 44,108 $ 54,599 $ (6,303) $ (48,392) $ 44,012
=========== ============ ============ ============ ============
Condensed Consolidating Statement of Income
-------------------------------------------
for the Three Months Ended August 31, 2001
------------------------------------------
Gross sales $ 231,270 $ 571,843 $ 274,598 $ (126,483) $ 951,228
Less - excise taxes (37,559) (108,724) (63,415) - (209,698)
----------- ------------ ------------ ------------ ------------
Net sales 193,711 463,119 211,183 (126,483) 741,530
Cost of product sold (89,426) (389,880) (151,004) 126,456 (503,854)
----------- ------------ ------------ ------------ ------------
Gross profit 104,285 73,239 60,179 (27) 237,676
Selling, general and administrative
expenses (40,732) (37,185) (70,758) - (148,675)
----------- ------------ ------------ ------------ ------------
Operating income (loss) 63,553 36,054 (10,579) (27) 89,001
Interest expense, net (2,557) (25,634) (783) - (28,974)
Equity in earnings (loss) of
subsidiary/joint venture 2,714 (15,181) - 12,330 (137)
----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 63,710 (4,761) (11,362) 12,303 59,890
(Provision for) benefit from
income taxes (27,749) 7,475 (3,682) - (23,956)
----------- ------------ ------------ ------------ ------------
Net income (loss) $ 35,961 $ 2,714 $ (15,044) $ 12,303 $ 35,934
=========== ============ ============ ============ ============
Condensed Consolidating Statement of Income
-------------------------------------------
for the Three Months Ended August 31, 2000
------------------------------------------
Gross sales $ 175,419 $ 489,133 $ 241,591 $ (77,475) $ 828,668
Less - excise taxes (31,864) (103,521) (55,793) - (191,178)
----------- ------------ ------------ ------------ ------------
Net sales 143,555 385,612 185,798 (77,475) 637,490
Cost of product sold (108,894) (276,413) (128,938) 77,394 (436,851)
----------- ------------ ------------ ------------ ------------
Gross profit 34,661 109,199 56,860 (81) 200,639
Selling, general and administrative
expenses (37,265) (26,956) (65,714) - (129,935)
----------- ------------ ------------ ------------ ------------
Operating (loss) income (2,604) 82,243 (8,854) (81) 70,704
Interest expense, net (6,969) (19,069) (1,149) - (27,187)
Equity in earnings (loss) of subsidiary 31,935 (14,991) - (16,944) -
----------- ------------ ------------ ------------ ------------
Income (loss) before income taxes 22,362 48,183 (10,003) (17,025) 43,517
Benefit from (provision for) income taxes 3,829 (16,248) (4,988) - (17,407)
----------- ------------ ------------ ------------ ------------
Net income (loss) $ 26,191 $ 31,935 $ (14,991) $ (17,025) $ 26,110
=========== ============ ============ ============ ============
- 13 -
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Cash Flows
-----------------------------------------------
for the Six Months Ended August 31, 2001
----------------------------------------
Net cash provided by (used in)
operating activities $ 103,790 $ (2,450) $ 4,642 $ - $ 105,982
Cash flows from investing activities:
Purchases of businesses, net of
cash acquired (477,713) 5,742 - - (471,971)
Purchases of property, plant and
equipment (2,099) (20,080) (6,616) - (28,795)
Investment in joint venture - (5,500) - - (5,500)
Proceeds from sale of assets - 35,143 248 - 35,391
----------- ------------ ------------ ------------ ------------
Net cash (used in) provided by
investing activities (479,812) 15,305 (6,368) - (470,875)
----------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from equity offering, net
of fees 139,522 - - - 139,522
Net proceeds from notes payable 83,000 - 2,727 - 85,727
Exercise of employee stock options 26,392 - - - 26,392
Proceeds from employee stock
purchases 842 - - - 842
Principal payments of long-term debt (16,802) (7,677) (742) - (25,221)
Payment of issuance costs of
long-term debt (1,186) - - - (1,186)
----------- ------------ ------------ ------------ ------------
Net cash provided by (used in)
financing activities 231,768 (7,677) 1,985 - 226,076
----------- ------------ ------------ ------------ ------------
Effect of exchange rate changes on
cash and cash investments 2,259 (1,860) (486) - (87)
----------- ------------ ------------ ------------ ------------
Net (decrease) increase in cash
and cash investments (141,995) 3,318 (227) - (138,904)
Cash and cash investments, beginning
of period 142,104 3,239 329 - 145,672
----------- ------------ ------------ ------------ ------------
Cash and cash investments, end of
period $ 109 $ 6,557 $ 102 $ - $ 6,768
=========== ============ ============ ============ ============
- 14 -
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Cash Flows
-----------------------------------------------
for the Six Months Ended August 31, 2000
----------------------------------------
Net cash provided by (used in)
operating activities $ 109,544 $ (8,206) $ (23,365) $ - $ 77,973
Cash flows from investing activities:
Purchases of property, plant and
equipment (2,544) (14,613) (8,092) - (25,249)
Other 120 135 657 - 912
----------- ------------ ------------ ------------ ------------
Net cash used in investing activities (2,424) (14,478) (7,435) - (24,337)
----------- ------------ ------------ ------------ ------------
Cash flows from financing activities:
Principal payments of long-term debt (220,274) (31) (204) - (220,509)
Payment of issuance costs of
long-term debt (1,547) - - - (1,547)
Proceeds from issuance of long-term
debt, net of discount 119,400 - - - 119,400
Net proceeds from notes payable 16,500 - 1,712 - 18,212
Exercise of employee stock options 3,178 - - - 3,178
Proceeds from employee stock
purchases 761 - - - 761
----------- ------------ ------------ ------------ ------------
Net cash (used in) provided by
financing activities (81,982) (31) 1,508 - (80,505)
----------- ------------ ------------ ------------ ------------
Effect of exchange rate changes on
cash and cash investments (25,138) 24,359 (2,510) - (3,289)
----------- ------------ ------------ ------------ ------------
Net increase (decrease) in cash
and cash investments - 1,644 (31,802) - (30,158)
Cash and cash investments, beginning
of period - 231 34,077 - 34,308
----------- ------------ ------------ ------------ ------------
Cash and cash investments, end of
period $ - $ 1,875 $ 2,275 $ - $ 4,150
=========== ============ ============ ============ ============
13) BUSINESS SEGMENT INFORMATION:
The Company reports its operating results in five segments: Canandaigua
Wine (branded popular and premium wine and brandy, and other, primarily grape
juice concentrate and bulk wine); Barton (primarily beer and distilled spirits);
Matthew Clark (branded wine, cider and bottled water, and wholesale wine, cider,
distilled 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 for the
Company in the Summary of Significant Accounting Policies in Note 1 to the
Company's consolidated financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2001. The Company
evaluates performance based on operating income of the respective business
units.
- 15 -
Segment information is as follows:
For the Six Months For the Three Months
Ended August 31, Ended August 31,
----------------------------- ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(in thousands)
Canandaigua Wine:
-----------------
Net sales:
Branded:
External customers $ 363,030 $ 290,706 $ 196,949 $ 147,376
Intersegment 4,644 3,132 2,899 1,896
------------ ------------ ------------ ------------
Total Branded 367,674 293,838 199,848 149,272
------------ ------------ ------------ ------------
Other:
External customers 27,383 30,102 13,834 14,834
Intersegment 7,856 8,355 4,167 4,726
------------ ------------ ------------ ------------
Total Other 35,239 38,457 18,001 19,560
------------ ------------ ------------ ------------
Net sales $ 402,913 $ 332,295 $ 217,849 $ 168,832
Operating income $ 39,329 $ 18,200 $ 23,934 $ 10,382
Long-lived assets $ 186,694 $ 191,956 $ 186,694 $ 191,956
Total assets $ 940,926 $ 599,292 $ 940,926 $ 599,292
Capital expenditures $ 6,077 $ 7,757 $ 4,588 $ 5,048
Depreciation and amortization $ 16,159 $ 11,881 $ 8,043 $ 5,940
Barton:
-------
Net sales:
Beer $ 412,171 $ 375,293 $ 229,186 $ 212,159
Spirits 143,831 145,107 72,514 72,561
------------ ------------ ------------ ------------
Net sales $ 556,002 $ 520,400 $ 301,700 $ 284,720
Operating income $ 95,412 $ 89,448 $ 51,361 $ 50,613
Long-lived assets $ 79,612 $ 78,271 $ 79,612 $ 78,271
Total assets $ 736,343 $ 749,585 $ 736,343 $ 749,585
Capital expenditures $ 6,736 $ 2,986 $ 3,812 $ 1,650
Depreciation and amortization $ 9,150 $ 7,904 $ 4,388 $ 3,949
Matthew Clark:
--------------
Net sales:
Branded:
External customers $ 144,663 $ 145,486 $ 77,782 $ 75,892
Intersegment 481 497 379 476
------------ ------------ ------------ ------------
Total Branded 145,144 145,983 78,161 76,368
Wholesale 234,475 193,233 119,469 93,310
------------ ------------ ------------ ------------
Net sales $ 379,619 $ 339,216 $ 197,630 $ 169,678
Operating income $ 22,285 $ 22,596 $ 13,968 $ 12,222
Long-lived assets $ 142,055 $ 141,830 $ 142,055 $ 141,830
Total assets $ 629,582 $ 599,396 $ 629,582 $ 599,396
Capital expenditures $ 4,039 $ 6,101 $ 2,009 $ 3,692
Depreciation and amortization $ 9,419 $ 10,037 $ 4,746 $ 4,824
Franciscan:
-----------
Net sales:
External customers $ 58,087 $ 43,144 $ 31,796 $ 21,359
Intersegment 254 138 152 34
------------ ------------ ------------ ------------
Net sales $ 58,341 $ 43,282 $ 31,948 $ 21,393
Operating income $ 15,146 $ 9,658 $ 8,098 $ 4,242
Long-lived assets $ 147,535 $ 114,230 $ 147,535 $ 114,230
Total assets $ 575,280 $ 369,087 $ 575,280 $ 369,087
Capital expenditures $ 11,298 $ 8,333 $ 7,329 $ 4,553
Depreciation and amortization $ 6,236 $ 4,530 $ 3,013 $ 2,138
- 16 -
For the Six Months For the Three Months
Ended August 31, Ended August 31,
----------------------------- ------------------------------
2001 2000 2001 2000
------------ ------------ ------------ ------------
(in thousands)
Corporate Operations and Other:
-------------------------------
Net sales $ - $ - $ - $ -
Operating loss $ (13,248) $ (11,734) $ (8,360) $ (6,755)
Long-lived assets $ 4,556 $ 3,782 $ 4,556 $ 3,782
Total assets $ 24,580 $ 22,699 $ 24,580 $ 22,699
Capital expenditures $ 645 $ 72 $ 219 $ 41
Depreciation and amortization $ 2,297 $ 1,713 $ 1,146 $ 868
Intersegment eliminations:
--------------------------
Net sales $ (13,235) $ (12,123) $ (7,597) $ (7,133)
Consolidated:
Net sales $ 1,383,640 $ 1,223,070 $ 741,530 $ 637,490
Operating income $ 158,924 $ 128,168 $ 89,001 $ 70,704
Long-lived assets $ 560,452 $ 530,069 $ 560,452 $ 530,069
Total assets $ 2,906,711 $ 2,340,059 $ 2,906,711 $ 2,340,059
Capital expenditures $ 28,795 $ 25,249 $ 17,957 $ 14,984
Depreciation and amortization $ 43,261 $ 36,065 $ 21,336 $ 17,719
14) ACCOUNTING PRONOUNCEMENTS:
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-14 ("EITF No. 00-14"), "Accounting for Certain Sales Incentives," which was
subsequently amended in April 2001. EITF No. 00-14 addresses the recognition,
measurement and income statement classification of certain sales incentives.
EITF No. 00-14 requires that sales incentives, including coupons, rebate offers,
and free product offers, given concurrently with a single exchange transaction
be recognized when incurred and reported as a reduction of revenue. In addition,
in April 2001, the EITF issued EITF Issue No. 00-25 ("EITF No. 00-25"), "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 00-25 addresses the income statement classification
of certain consideration, other than directly addressed in EITF No. 00-14, from
a vendor to an entity that purchases the vendor's products for resale. EITF No.
00-25 requires that certain consideration from a vendor to a reseller of the
vendor's products be reported as a reduction of revenue. The Company currently
reports costs that fall under both EITF No. 00-14 and EITF No. 00-25 as selling,
general and administrative expenses. The Company is required to adopt EITF No.
00-14 and EITF No. 00-25 in its financial statements beginning March 1, 2002.
Upon adoption of EITF No. 00-14 and EITF No. 00-25, financial statements for
prior periods presented for comparative purposes are to be reclassified to
comply with the requirements of EITF No. 00-14 and EITF No. 00-25. The Company
believes the impact of EITF No. 00-14 and EITF No. 00-25 on its financial
statements will result in a material reclassification that will decrease
previously reported net sales and decrease previously reported selling, general
and administrative expenses, but will have no effect on operating income or net
income. The Company has not yet determined the amount of the reclassification.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 addresses financial accounting and reporting for
business combinations requiring all business combinations to be accounted for
using one method, the purchase method. In addition, SFAS No. 141 supersedes
Accounting Principles Board Opinion No. 16, "Business Combinations." SFAS No.
141 is effective immediately for all business combinations initiated after June
30, 2001, as well as for all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later. The Company
is required to adopt SFAS No. 141 for all business combinations for which the
- 17 -
acquisition date was before July 1, 2001, for fiscal years beginning March 1,
2002. The adoption of the applicable provisions of SFAS No. 141 have not had a
material impact on the Company's financial statements. The Company believes that
the adoption of the remaining provisions of SFAS No. 141 will not have a
material impact on its financial statements.
In July 2001, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed at least annually for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives. The Company is required to apply the provisions of SFAS No.
142 for all goodwill and intangible assets acquired prior to July 1, 2001, for
fiscal years beginning March 1, 2002. For goodwill and intangible assets
acquired after June 30, 2001, these assets will be subject immediately to the
nonamortization and amortization provisions of SFAS No. 142. The Company is
currently assessing the financial impact of SFAS No. 142 on its financial
statements.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company is required to adopt
SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently
assessing the financial impact of SFAS No. 143 on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The Company is
required to adopt SFAS No. 144 for fiscal years beginning March 1, 2002. The
Company is currently assessing the financial impact of SFAS No. 144 on its
financial statements.
15) SUBSEQUENT EVENTS:
Acquisition by PWP -
------------------
On October 1, 2001, the Company announced that PWP entered into a
definitive agreement to acquire certain assets of Blackstone Winery, including
the Blackstone brand and the Codera wine business in Sonoma County ("the
Blackstone Assets"). The purchase price for the Blackstone Assets is
approximately $140 million and will be financed equally by the Company and
Hardy. The transaction is subject to satisfaction of customary closing
conditions and is expected to close on October 16, 2001. The Company cannot
guarantee, however, that this transaction will be completed upon the agreed upon
terms, or at all. The Company intends to use revolving loan borrowings under its
senior credit facility to fund the Company's portion of the transaction.
- 18 -
Equity Offering -
---------------
During October 2001, the Company sold 322,500 shares of its Class A Common
Stock in connection with a public offering of Class A Common Stock by
stockholders of the Company. The net proceeds to the Company, after deducting
underwriting discounts, of $12.1 million were used to repay borrowings under the
senior credit facility.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
INTRODUCTION
------------
The Company is a leader in the production and marketing of beverage alcohol
brands in North America and the United Kingdom, and a leading independent drinks
wholesaler in the United Kingdom. As the second largest supplier of wine, the
second largest importer of beer and the fourth largest supplier of distilled
spirits, the Company is the largest single-source supplier of these products in
the United States. In the United Kingdom, the Company is a leading marketer of
wine and the second largest producer and marketer of cider.
The Company reports its operating results in five segments: Canandaigua
Wine (branded popular and premium wine and brandy, and other, primarily grape
juice concentrate and bulk wine); Barton (primarily beer and distilled spirits);
Matthew Clark (branded wine, cider and bottled water, and wholesale wine, cider,
distilled spirits, beer and soft drinks); Franciscan (primarily branded
super-premium and ultra-premium wine); and Corporate Operations and Other
(primarily corporate related items).
On April 10, 2001, the Board of Directors of the Company approved a
two-for-one stock split of both the Company's Class A Common Stock and Class B
Common Stock, which was distributed in the form of a stock dividend on May 14,
2001, to stockholders of record on April 30, 2001. Pursuant to the terms of the
stock dividend, each holder of Class A Common Stock received one additional
share of Class A stock for each share of Class A stock held, and each holder of
Class B Common Stock received one additional share of Class B stock for each
share of Class B stock held. All share and per share amounts in this Quarterly
Report on Form 10-Q reflect the common stock split.
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, 2001 ("Second Quarter 2002"), compared to the three
months ended August 31, 2000 ("Second Quarter 2001"), and for the six months
ended August 31, 2001 ("Six Months 2002"), compared to the six months ended
August 31, 2000 ("Six Months 2001"), and (ii) financial liquidity and capital
resources for Six Months 2002. 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 28, 2001 ("Fiscal 2001").
ACQUISITIONS IN FISCAL 2002 AND FISCAL 2001
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"), a leading premium wine producer based
in Sonoma, California. Ravenswood produces, markets and sells super-premium and
ultra-premium California wine primarily under the Ravenswood brand name. The
vast majority of the wine Ravenswood produces and sells is red wine, including
the number one super-premium Zinfandel in the United States. The results of
operations of Ravenswood are reported in the Franciscan segment and have been
included in the consolidated results of operations of the Company since the date
of acquisition.
- 19 -
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. In connection with the transaction, the Company
also entered into long-term grape supply agreements with affiliates of Corus
Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards.
The results of operations of the Corus Assets are reported in the Canandaigua
Wine segment and have been included in the consolidated results of operations of
the Company since the date of acquisition.
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The results of operations of
the Turner Road Vintners Assets are reported in the Canandaigua Wine segment and
have been included in the consolidated results of operations of the Company
since the date of acquisition. The acquisition of the Turner Road Vintners
Assets is significant and the Company expects it to have a material impact on
the Company's future results of operations.
On October 27, 2000, the Company purchased all of the issued Ordinary
Shares and Preference Shares of Forth Wines Limited ("Forth Wines"). The results
of operations of Forth Wines are reported in the Matthew Clark segment and have
been included in the consolidated results of operations of the Company since the
date of acquisition.
JOINT VENTURE
On July 31, 2001, the Company and BRL Hardy Limited completed the formation
of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the
Company and BRL Hardy Limited, the second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports, the fastest growing wine
segment in the United States. PWP has exclusive distribution rights in the
United States and the Caribbean to seven brands - Banrock Station, Hardys,
Leasingham, Barossa Valley Estate and Chateau Reynella from Australia; Nobilo
from New Zealand; and La Baume from France. The joint venture also owns
Farallon, a premium California coastal wine. In addition, PWP owns the Riverland
Vineyards winery and controls 1,400 acres of vineyards, all located in Monterey
County, California. The investment in PWP is accounted for using the equity
method; accordingly, the results of operations of PWP since July 31, 2001, have
been included in the equity in loss of joint venture line in the Consolidated
Statements of Income of the Company.
- 20 -
RESULTS OF OPERATIONS
---------------------
SECOND QUARTER 2002 COMPARED TO SECOND QUARTER 2001
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Second Quarter 2002 and Second Quarter
2001.
Second Quarter 2002 Compared to Second Quarter 2001
---------------------------------------------------
Net Sales
---------------------------------------------------
%Increase/
2002 2001 (Decrease)
------------ ------------ ----------
Canandaigua Wine:
Branded:
External customers $ 196,949 $ 147,376 33.6 %
Intersegment 2,899 1,896 52.9 %
------------ ------------
Total Branded 199,848 149,272 33.9 %
------------ ------------
Other:
External customers 13,834 14,834 (6.7)%
Intersegment 4,167 4,726 (11.8)%
------------ ------------
Total Other 18,001 19,560 (8.0)%
------------ ------------
Canandaigua Wine net sales $ 217,849 $ 168,832 29.0 %
------------ ------------
Barton:
Beer $ 229,186 $ 212,159 8.0 %
Spirits 72,514 72,561 (0.1)%
------------ ------------
Barton net sales $ 301,700 $ 284,720 6.0 %
------------ ------------
Matthew Clark:
Branded:
External customers $ 77,782 $ 75,892 2.5 %
Intersegment 379 476 (20.4)%
------------ ------------
Total Branded 78,161 76,368 2.3 %
Wholesale 119,469 93,310 28.0 %
------------ ------------
Matthew Clark net sales $ 197,630 $ 169,678 16.5 %
------------ ------------
Franciscan:
External customers $ 31,796 $ 21,359 48.9 %
Intersegment 152 34 347.1 %
------------ ------------
Franciscan net sales $ 31,948 $ 21,393 49.3 %
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Intersegment eliminations $ (7,597) $ (7,133) 6.5 %
------------ ------------
Consolidated Net Sales $ 741,530 $ 637,490 16.3 %
============ ============
Net sales for Second Quarter 2002 increased to $741.5 million from $637.5
million for Second Quarter 2001, an increase of $104.0 million, or 16.3%.
Canandaigua Wine
----------------
Net sales for Canandaigua Wine for Second Quarter 2002 increased to $217.8
million from $168.8 million for Second Quarter 2001, an increase of $49.0
million, or 29.0%. This increase resulted primarily from $46.7 million of sales
of the newly acquired brands from the Turner Road Vintners Assets and Corus
Assets acquisitions ("the March Acquisitions"), both completed in March 2001.
- 21 -
Barton
------
Net sales for Barton for Second Quarter 2002 increased to $301.7 million
from $284.7 million for Second Quarter 2001, an increase of $17.0 million, or
6.0%. This increase resulted primarily from an 8.0% increase in imported beer
sales, led by volume growth in the Mexican beer portfolio. Spirits sales
decreased slightly as a 3.9% growth in volume was more than offset by lower net
selling prices from the implementation of a net pricing strategy in the third
quarter of Fiscal 2001, which also resulted in lower promotion costs.
Matthew Clark
-------------
Net sales for Matthew Clark for Second Quarter 2002 increased to $197.6
million from $169.7 million for Second Quarter 2001, an increase of $28.0
million, or 16.5%. Excluding an adverse foreign currency impact of $11.2
million, net sales increased $39.1 million, or 23.1%. This local currency basis
increase resulted primarily from a 35.5% increase in wholesale sales, with the
majority of this growth coming from organic sales. Additionally, branded sales
increased 8.3% with an increase in wine sales being partially offset by a
decrease in cider sales.
Franciscan
----------
Net sales for Franciscan for Second Quarter 2002 increased to $31.9 million
from $21.4 million for Second Quarter 2001, an increase of $10.6 million, or
49.3%. This increase resulted from $5.4 million of sales of the newly acquired
brands from the Ravenswood acquisition, completed in July 2001, and organic
sales growth primarily due to volume increases in the Estancia, Veramonte and
Franciscan brands.
GROSS PROFIT
The Company's gross profit increased to $237.7 million for Second Quarter
2002 from $200.6 million for Second Quarter 2001, an increase of $37.0 million,
or 18.5%. The dollar increase in gross profit resulted primarily from sales of
the newly acquired brands from the March Acquisitions and the Ravenswood
acquisition, volume growth in the Barton Mexican beer portfolio, volume growth
in the Matthew Clark branded wine business and wholesale business, and volume
growth in the Franciscan fine wine portfolio. These increases were partially
offset by an adverse foreign currency impact. As a percent of net sales, gross
profit improved to 32.1% for Second Quarter 2002 versus 31.5% for Second Quarter
2001. The increase in gross profit margin resulted primarily from sales of
higher-margin wine brands acquired in the March Acquisitions and the Ravenswood
acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $148.7 million
for Second Quarter 2002 from $129.9 million for Second Quarter 2001, an increase
of $18.7 million, or 14.4%. The dollar increase in selling, general and
administrative expenses resulted primarily from advertising and promotion costs
associated with the brands acquired in the March Acquisitions and the Ravenswood
acquisition, as well as increases related to volume growth in the Matthew Clark
branded wine business and wholesale business, the Franciscan fine wine portfolio
and the Barton Mexican beer portfolio. Selling, general and administrative
expenses as a percent of net sales decreased to 20.0% for Second Quarter 2002 as
compared to 20.4% for Second Quarter 2001 as a decrease in Barton spirits
advertising and promotion
- 22 -
costs was greater than the decrease in Barton spirits net sales and the percent
increase in Matthew Clark wholesale sales was greater than the percent increase
in selling, general and administrative expenses.
OPERATING INCOME
The following table sets forth the operating income/(loss) (in thousands of
dollars) by operating segment of the Company for Second Quarter 2002 and Second
Quarter 2001.
Second Quarter 2002 Compared to Second Quarter 2001
---------------------------------------------------
Operating Income/(Loss)
---------------------------------------------------
2002 2001 %Increase
---------- ---------- ---------
Canandaigua Wine $ 23,934 $ 10,382 130.5%
Barton 51,361 50,613 1.5%
Matthew Clark 13,968 12,222 14.3%
Franciscan 8,098 4,242 90.9%
Corporate Operations and Other (8,360) (6,755) 23.8%
---------- ----------
Consolidated Operating Income $ 89,001 $ 70,704 25.9%
========== ==========
As a result of the above factors, consolidated operating income increased
to $89.0 million for Second Quarter 2002 from $70.7 million for Second Quarter
2001, an increase of $18.3 million, or 25.9%.
INTEREST EXPENSE, NET
Net interest expense increased to $29.0 million for Second Quarter 2002
from $27.2 million for Second Quarter 2001, an increase of $1.8 million, or
6.6%. The increase resulted primarily from an increase in average borrowings
primarily due to the financing of the March Acquisitions and the Ravenswood
acquisition, partially offset by a slight decrease in the average interest rate.
NET INCOME
As a result of the above factors, net income increased to $35.9 million for
Second Quarter 2002 from $26.1 million for Second Quarter 2001, an increase of
$9.8 million, or 37.6%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Second Quarter
2002 were $110.3 million, an increase of $21.9 million over EBITDA of $88.4
million for Second Quarter 2001. 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.
- 23 -
SIX MONTHS 2002 COMPARED TO SIX MONTHS 2001
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Six Months 2002 and Six Months 2001.
Six Months 2002 Compared to Six Months 2001
-------------------------------------------
Net Sales
-------------------------------------------
%Increase/
2002 2001 (Decrease)
------------ ------------ -----------
Canandaigua Wine:
Branded:
External customers $ 363,030 $ 290,706 24.9 %
Intersegment 4,644 3,132 48.3 %
------------ ------------
Total Branded 367,674 293,838 25.1 %
------------ ------------
Other:
External customers 27,383 30,102 (9.0)%
Intersegment 7,856 8,355 (6.0)%
------------ ------------
Total Other 35,239 38,457 (8.4)%
------------ ------------
Canandaigua Wine net sales $ 402,913 $ 332,295 21.3 %
------------ ------------
Barton:
Beer $ 412,171 $ 375,293 9.8 %
Spirits 143,831 145,107 (0.9)%
------------ ------------
Barton net sales $ 556,002 $ 520,400 6.8 %
------------ ------------
Matthew Clark:
Branded:
External customers $ 144,663 $ 145,486 (0.6)%
Intersegment 481 497 (3.2)%
------------ ------------
Total Branded 145,144 145,983 (0.6)%
Wholesale 234,475 193,233 21.3 %
------------ ------------
Matthew Clark net sales $ 379,619 $ 339,216 11.9 %
------------ ------------
Franciscan:
External customers $ 58,087 $ 43,144 34.6 %
Intersegment 254 138 84.1 %
------------ ------------
Franciscan net sales $ 58,341 $ 43,282 34.8 %
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Intersegment eliminations $ (13,235) $ (12,123) 9.2 %
------------ ------------
Consolidated Net Sales $ 1,383,640 $ 1,223,070 13.1 %
============ ============
Net sales for Six Months 2002 increased to $1,383.6 million from $1,223.1
million for Six Months 2001, an increase of $160.6 million, or 13.1%.
Canandaigua Wine
----------------
Net sales for Canandaigua Wine for Six Months 2002 increased to $402.9
million from $332.3 million for Six Months 2001, an increase of $70.6 million,
or 21.3%. This increase resulted primarily from $83.6 million of sales of the
newly acquired brands from the March Acquisitions. This increase was partially
offset by declines in other wine brands due to the timing of seasonal
programming for the first quarter of Fiscal 2002 versus the first quarter of
Fiscal 2001 and Canandaigua Wine's grape juice concentrate business.
- 24 -
Barton
------
Net sales for Barton for Six Months 2002 increased to $556.0 million from
$520.4 million for Six Months 2001, an increase of $35.6 million, or 6.8%. This
increase resulted primarily from a 9.8% increase in imported beer sales, led by
volume growth in the Mexican beer portfolio. This increase was partially offset
by a slight decrease in spirits sales as a result of lower net selling prices
from the implementation of a net pricing strategy in the third quarter of Fiscal
2001 offset by spirits sales volume increases.
Matthew Clark
-------------
Net sales for Matthew Clark for Six Months 2002 increased to $379.6 million
from $339.2 million for Six Months 2001, an increase of $40.4 million, or 11.9%.
Excluding an adverse foreign currency impact of $25.8 million, net sales
increased $66.2 million, or 19.9%. This local currency basis increase resulted
primarily from a 30.1% increase in wholesale sales, with the majority of this
growth coming from organic sales. Additionally, branded sales increased 6.4%
with an increase in wine sales being partially offset by a decrease in cider and
drinks sales.
Franciscan
----------
Net sales for Franciscan for Six Months 2002 increased to $58.3 million
from $43.3 million for Six Months 2001, an increase of $15.1 million, or 34.8%.
This increase resulted from $5.4 million of sales of the newly acquired brands
from the Ravenswood acquisition and sales growth primarily due to volume
increases in the Estancia, Veramonte, and Franciscan brands.
GROSS PROFIT
The Company's gross profit increased to $439.6 million for Six Months 2002
from $384.5 million for Six Months 2001, an increase of $55.1 million, or 14.3%.
The dollar increase in gross profit resulted primarily from sales of the newly
acquired brands from the March Acquisitions and the Ravenswood acquisition,
volume growth in the Barton Mexican beer portfolio, volume growth in the
Franciscan fine wine portfolio and volume growth in the Matthew Clark wholesale
business and branded wine business. These increases were partially offset by a
decrease in Barton's spirits sales, an adverse foreign currency impact, a
decrease in Canandaigua Wine's organic wine sales and a volume decrease in
Matthew Clark's cider sales. As a percent of net sales, gross profit improved
slightly to 31.8% for Six Months 2002 versus 31.4% for Six Months 2001. The
increase in gross profit margin resulted primarily from sales of higher-margin
wine brands acquired in the March Acquisitions and the Ravenswood acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $280.7 million
for Six Months 2002 from $256.3 million for Six Months 2001, an increase of
$24.4 million, or 9.5%. The dollar increase in selling, general and
administrative expenses resulted primarily from advertising and promotion costs
associated with the brands acquired in the March Acquisitions and the Ravenswood
acquisition. Selling, general and administrative expenses as a percent of net
sales decreased to 20.3% for Six Months 2002 as compared to 21.0% for Six Months
2001 as a decrease in Barton spirits advertising and promotion costs was greater
than the decrease in Barton spirits net sales and the percent increase in
Matthew Clark wholesale sales was greater than the percent increase in selling,
general and administrative expenses.
- 25 -
OPERATING INCOME
The following table sets forth the operating income/(loss) (in thousands of
dollars) by operating segment of the Company for Six Months 2002 and Six Months
2001.
Six Months 2002 Compared to Six Months 2001
-------------------------------------------
Operating Income/(Loss)
-------------------------------------------
%Increase/
2002 2001 (Decrease)
---------- ---------- ----------
Canandaigua Wine $ 39,329 $ 18,200 116.1 %
Barton 95,412 89,448 6.7 %
Matthew Clark 22,285 22,596 (1.4)%
Franciscan 15,146 9,658 56.8 %
Corporate Operations and Other (13,248) (11,734) 12.9 %
---------- ----------
Consolidated Operating Income $ 158,924 $ 128,168 24.0 %
========== ==========
As a result of the above factors, consolidated operating income increased
to $158.9 million for Six Months 2002 from $128.2 million for Six Months 2001,
an increase of $30.8 million, or 24.0%.
INTEREST EXPENSE, NET
Net interest expense increased to $59.2 million for Six Months 2002 from
$54.8 million for Six Months 2001, an increase of $4.3 million, or 7.9%. The
increase resulted primarily from an increase in average borrowings primarily due
to the financing of the March Acquisitions and the Ravenswood acquisition,
partially offset by a slight decrease in the average interest rate.
NET INCOME
As a result of the above factors, net income increased to $59.8 million for
Six Months 2002 from $44.0 million for Six Months 2001, an increase of $15.8
million, or 35.8%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Six Months 2002
were $202.2 million, an increase of $38.0 million over EBITDA of $164.2 million
for Six Months 2001. 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.
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
- 26 -
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 2002 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Six Months 2002 was $106.0
million, which resulted from $105.2 million in net income adjusted for noncash
items, plus $0.8 million representing the net change in the Company's operating
assets and liabilities. The net change in operating assets and liabilities
resulted primarily from increases in accrued grape purchases and accrued income
taxes, and a decrease in inventories, offset by a seasonal increase in accounts
receivable and a decrease in accrued interest.
INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Net cash used in investing activities for Six Months 2002 was $470.9
million, which resulted primarily from net cash paid of $472.0 million for the
March Acquisitions and the Ravenswood acquisition and $28.8 million of capital
expenditures, partially offset by $35.4 million of proceeds from the sale of
assets.
Net cash provided by financing activities for Six Months 2002 was $226.1
million, which resulted primarily from net proceeds of $139.5 million from the
equity offering, proceeds of $85.7 million from net revolving loan borrowings
under the senior credit facility, and proceeds of $26.4 million from exercise of
employee stock options. These amounts were partially offset by principal
payments of long-term debt of $25.2 million.
DEBT
Total debt outstanding as of August 31, 2001, amounted to $1,449.0 million,
an increase of $83.2 million from February 28, 2001. The ratio of total debt to
total capitalization decreased to 63.3% as of August 31, 2001, from 68.9% as of
February 28, 2001.
SENIOR CREDIT FACILITY
As of August 31, 2001, under its senior credit facility, the Company had
outstanding term loans of $321.1 million bearing a weighted average interest
rate of 5.7%, $83.0 million of revolving loans bearing a weighted average
interest rate of 6.6%, undrawn revolving letters of credit of $19.1 million, and
$197.9 million in revolving loans available to be drawn.
SENIOR NOTES
As of August 31, 2001, 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.
As of August 31, 2001, the Company had outstanding (pound)1.0 million ($1.5
million) aggregate principal amount of 8 1/2% Series B Senior Notes due November
2009 (the "Sterling Series B Senior Notes"). In addition, the Company had
outstanding (pound)154.0 million ($223.4 million, net of $0.5 million
- 27 -
unamortized discount) aggregate principal amount of 8 1/2% Series C Senior Notes
due November 2009 (the "Sterling Series C Senior Notes") as of August 31, 2001.
The Sterling Series B Senior Notes and Sterling Series C Senior Notes are
currently redeemable, in whole or in part, at the option of the Company.
In July 2001, the Company exchanged $200.0 million aggregate principal
amount of 8% Series B Senior Notes due February 2008 (the "February 2001 Series
B Senior Notes") for all of the February 2001 Senior Notes. The terms of the
February 2001 Series B Senior Notes are identical in all material respects to
the February 2001 Senior Notes. The February 2001 Series B Senior Notes are
currently redeemable, in whole or in part, at the option of the Company. As of
August 31, 2001, the Company had outstanding $200.0 million aggregate principal
amount of February 2001 Series B Senior Notes.
SENIOR SUBORDINATED NOTES
As of August 31, 2001, the Company had outstanding $195.0 million ($193.7
million, net of $1.3 million unamortized discount) 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, 2001, 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.
EQUITY OFFERING
During March 2001, the Company completed a public offering of 4,370,000
shares of its Class A Common Stock resulting in net proceeds to the Company,
after deducting underwriting discounts and expenses, of $139.5 million. The net
proceeds were used to repay revolving loan borrowings under the senior credit
facility of which a portion was incurred to partially finance the acquisition of
the Turner Road Vintners Assets.
During October 2001, the Company sold 322,500 shares of its Class A Common
Stock in connection with a public offering of Class A Common Stock by
stockholders of the Company. The net proceeds to the Company, after deducting
underwriting discounts, of $12.1 million were used to repay borrowings under the
senior credit facility.
ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-14 ("EITF No. 00-14"), "Accounting for Certain Sales Incentives," which was
subsequently amended in April 2001. EITF No. 00-14 addresses the recognition,
measurement and income statement classification of certain sales incentives.
EITF No. 00-14 requires that sales incentives, including coupons, rebate offers,
and free product offers, given concurrently with a single exchange transaction
be recognized when incurred and reported as a reduction of revenue. In addition,
in April 2001, the EITF issued EITF Issue No. 00-25 ("EITF No. 00-25"), "Vendor
Income Statement Characterization of Consideration Paid to a Reseller of the
Vendor's Products." EITF No. 00-25 addresses the income statement classification
of certain consideration, other than directly addressed in EITF No. 00-14, from
a vendor to an entity that purchases the vendor's products for resale. EITF No.
00-25 requires that certain consideration from a vendor to a reseller of the
vendor's products be reported as a reduction of revenue. The Company currently
reports
- 28 -
costs that fall under both EITF No. 00-14 and EITF No. 00-25 as selling, general
and administrative expenses. The Company is required to adopt EITF No. 00-14 and
EITF No. 00-25 in its financial statements beginning March 1, 2002. Upon
adoption of EITF No. 00-14 and EITF No. 00-25, financial statements for prior
periods presented for comparative purposes are to be reclassified to comply with
the requirements of EITF No. 00-14 and EITF No. 00-25. The Company believes the
impact of EITF No. 00-14 and EITF No. 00-25 on its financial statements will
result in a material reclassification that will decrease previously reported net
sales and decrease previously reported selling, general and administrative
expenses, but will have no effect on operating income or net income. The Company
has not yet determined the amount of the reclassification.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 addresses financial accounting and reporting for
business combinations requiring all business combinations to be accounted for
using one method, the purchase method. In addition, SFAS No. 141 supersedes
Accounting Principles Board Opinion No. 16, "Business Combinations." SFAS No.
141 is effective immediately for all business combinations initiated after June
30, 2001, as well as for all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later. The Company
is required to adopt SFAS No. 141 for all business combinations for which the
acquisition date was before July 1, 2001, for fiscal years beginning March 1,
2002. The adoption of the applicable provisions of SFAS No. 141 have not had a
material impact on the Company's financial statements. The Company believes that
the adoption of the remaining provisions of SFAS No. 141 will not have a
material impact on its financial statements.
In July 2001, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed at least annually for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives. The Company is required to apply the provisions of SFAS No.
142 for all goodwill and intangible assets acquired prior to July 1, 2001, for
fiscal years beginning March 1, 2002. For goodwill and intangible assets
acquired after June 30, 2001, these assets will be subject immediately to the
nonamortization and amortization provisions of SFAS No. 142. The Company is
currently assessing the financial impact of SFAS No. 142 on its financial
statements.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company is required to adopt
SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently
assessing the financial impact of SFAS No. 143 on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The Company is
required to adopt SFAS
- 29 -
No. 144 for fiscal years beginning March 1, 2002. The Company is currently
assessing the financial impact of SFAS No. 144 on its financial statements.
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.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause actual results to differ materially from
those set forth in, or implied by, such forward-looking statements. All
statements other than statements of historical facts included in this Quarterly
Report on Form 10-Q, including statements regarding the Company's future
financial position and prospects, are forward-looking statements. All
forward-looking statements speak only as of the date of this Quarterly Report on
Form 10-Q. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. For risk factors associated with the Company and its
business, which factors could cause actual results to differ materially from
those set forth in, or implied by, the Company's forward-looking statements,
reference should be made to the Company's filings with the Securities and
Exchange Commission, including its Annual Report on Form 10-K for the fiscal
year ended February 28, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- ----------------------------------------------------------
Information about market risks for the six months ended August 31, 2001,
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 28, 2001.
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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. held on
July 17, 2001 (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, 2002.
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 31,305,359 83,656
Paul L. Smith 31,305,259 83,756
Directors Elected By the Holders of Class B Stock:
--------------------------------------------------
Nominee For Withheld
-------------------- ---------- --------
George Bresler 60,680,120 5,400
Jeananne K. Hauswald 60,679,560 5,960
James A. Locke, III 60,680,040 5,480
Richard Sands 60,680,070 5,450
Robert Sands 60,673,380 12,140
II. The selection of Arthur Andersen LLP was ratified with the following
votes:
For: 91,788,340
Against: 278,534
Abstain: 7,661
Broker Nonvotes: N/A
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
------- --------------------------------
(a) See Index to Exhibits located on Page 33 of this Report.
(b) The following Reports on Form 8-K were filed with the Securities
and Exchange Commission during the quarter ended August 31,
2001:
(i) Form 8-K dated June 19, 2001. This Form 8-K reported
information under Item 5.
(ii) Form 8-K dated June 28, 2001. This Form 8-K reported
information under Item 5 and included (i) the Company's
Condensed Consolidated Balance Sheets as of May 31, 2001
and February 28, 2001; and (ii) the Company's Condensed
Consolidated Statements of Income for the three months
ended May 31, 2001 and May 31, 2000.
(iii) Form 8-K dated July 2, 2001. This Form 8-K reported
information under Item 5.
(iv) Form 8-K dated August 23, 2001. This Form 8-K reported
information under Item 5 and Item 7. The following
financial statements of Ravenswood Winery, Inc. were
filed with the Form 8-K:
The Ravenswood Winery, Inc. Balance Sheet at June
30, 2000 and 1999, and the related Statements of
Income, Shareholders' Equity and Cash Flows for
the fiscal years ended June 30, 2000, 1999 and
1998, and the report of Odenberg, Ullakko,
Muranishi & Co. LLP, independent accountants,
thereon, together with the notes thereto.
The Ravenswood Winery, Inc. Balance Sheet at March
31, 2001 (unaudited) and June 30, 2000, and the
related unaudited Statements of Income and Cash
Flows for the three months ended March 31, 2001
and 2000, and for the nine months ended March 31,
2001 and 2000, together with the notes thereto.
- 32 -
SIGNATURES
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.
CONSTELLATION BRANDS, INC.
Dated: October 15, 2001 By: /s/ Thomas F. Howe
--------------------------------------
Thomas F. Howe, Senior Vice President,
Controller
Dated: October 15, 2001 By: /s/ Thomas S. Summer
--------------------------------------
Thomas S. Summer, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
- 33 -
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 (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).
2.4 Purchase Agreement dated as of January 30, 2001, by and among Sebastiani
Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine
Company, Inc. (a wholly-owned subsidiary of the Company) (filed as
Exhibit 2.5 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 2001 and incorporated herein by reference).
2.5 Agreement and Plan of Merger by and among the Company, VVV Acquisition
Corp. and Ravenswood Winery, Inc. dated as of April 10, 2001 (filed as
Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 2001 and incorporated herein by reference).
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2000 and incorporated herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 2000 and
incorporated herein by reference).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Seventh Supplemental Indenture, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and The Chase Manhattan Bank, as
Trustee (supplementing the Indenture dated December 27, 1993) (filed
herewith).
4.2 Fifth Supplemental Indenture, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor to Harris Trust and Savings Bank), as Trustee (supplementing
the Indenture dated October 29, 1996) (filed herewith).
4.3 Supplemental Indenture No. 6, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor trustee to Harris Trust and Savings Bank and The Bank of New
York, as applicable), as Trustee (supplementing the Indenture dated
February 25, 1999) (filed as Exhibit 4.6 to the Company's Registration
Statement on Form S-3
- 34 -
(Pre-effective Amendment No. 1) (Registration No. 333-63480) and
incorporated herein by reference).
4.4 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor to Harris Trust and Savings Bank), as Trustee (supplementing
the Indenture dated November 17, 1999) (filed herewith).
4.5 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor to Harris Trust and Savings Bank), as Trustee (supplementing
the Indenture dated February 21, 2001) (filed as Exhibit 4.7 to the
Company's Pre-effective Amendment No. 1 to its Registration Statement on
Form S-3 (Registration No. 333-63480) and incorporated herein by
reference).
4.6 Guarantee Assumption Agreement, dated as of July 2, 2001, by Ravenswood
Winery, Inc., in favor of The Chase Manhattan Bank, as administrative
agent, pursuant to the Credit Agreement dated as of October 6, 1999, as
amended (filed herewith).
4.7 Amendment No. 3 to the Credit Agreement, dated as of September 7, 2001
between the Company, certain principal subsidiaries, and The Chase
Manhattan Bank, as administrative agent for certain banks (filed
herewith).
(10) MATERIAL CONTRACTS.
10.1 Guarantee Assumption Agreement, dated as of July 2, 2001, by Ravenswood
Winery, Inc., in favor of The Chase Manhattan Bank, as administrative
agent, pursuant to the Credit Agreement dated as of October 6, 1999, as
amended (filed herewith as Exhibit 4.6).
10.2 Amendment No. 3 to the Credit Agreement, dated as of September 7, 2001
between the Company, certain principal subsidiaries, and The Chase
Manhattan Bank, as administrative agent for certain banks (filed
herewith as Exhibit 4.7).
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
11.1 Computation of per share earnings (filed herewith).
(15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION.
Not applicable.
(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.
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(23) CONSENTS OF EXPERTS AND COUNSEL.
Not applicable.
(24) POWER OF ATTORNEY.
Not applicable.
(99) ADDITIONAL EXHIBITS.
99.1 1989 Employee Stock Purchase Plan (Restated June 27, 2001) (filed
herewith).
99.2 Underwriting Agreement dated March 8, 2001 by and among the Company and
Salomon Smith Barney Inc., for itself and certain other Underwriters
named therein (filed herewith so as to be incorporated by reference into
Registration Statement No. 333-91587).