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 31,1997
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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 to
---------------- ----------------
COMMISSION FILE NUMBER 0-7570
DELAWARE CANANDAIGUA BRANDS, INC. 16-0716709
AND ITS SUBSIDIARIES:
NEW YORK BATAVIA WINE CELLARS, INC. 16-1222994
NEW YORK CANANDAIGUA WINE COMPANY, INC. 16-1462887
DELAWARE BARTON INCORPORATED 36-3500366
DELAWARE BARTON BRANDS, LTD. 36-3185921
MARYLAND BARTON BEERS, LTD. 36-2855879
CONNECTICUT BARTON BRANDS OF CALIFORNIA, INC. 06-1048198
GEORGIA BARTON BRANDS OF GEORGIA, INC. 58-1215938
NEW YORK BARTON DISTILLERS IMPORT CORP. 13-1794441
DELAWARE BARTON FINANCIAL CORPORATION 51-0311795
WISCONSIN STEVENS POINT BEVERAGE CO. 39-0638900
ILLINOIS MONARCH IMPORT COMPANY 36-3539106
GEORGIA THE VIKING DISTILLERY, INC. 58-2183528
(State or other (Exact name of registrant as (I.R.S. Employer
jurisdiction of specified in its charter) Identification No.)
incorporation or
organization)
235 NORTH BLOOMFIELD ROAD, CANANDAIGUA, NEW YORK 14424
---------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(716) 393-4130
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(Registrant's telephone number including area code)
THE FORMER NAME OF CANANDAIGUA BRANDS, INC. WAS CANANDAIGUA WINE COMPANY, INC.
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THE FORMER NAME OF CANANDAIGUA WINE COMPANY, INC. (A SUBSIDIARY) WAS
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CANANDAIGUA WEST, INC.
----------------------
(Former name, if changed since last report)
116 BUFFALO STREET, CANANDAIGUA, NEW YORK 14424
-----------------------------------------------
(Former address, if changed since last report)
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares outstanding with respect to each of the classes of common
stock of Canandaigua Brands, Inc., as of September 26, 1997, is set forth below
(all of the Registrants, other than Canandaigua Brands, Inc., are direct or
indirect wholly-owned subsidiaries of Canandaigua Brands, Inc.):
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Class A Common Stock, Par Value $.01 Per Share 15,325,024
Class B Common Stock, Par Value $.01 Per Share 3,330,458
Page 1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
August 31, 1997 February 28, 1997
--------------- -----------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 4,278 $ 10,010
Accounts receivable, net 160,885 142,592
Inventories, net 334,756 326,626
Prepaid expenses and other current assets 20,562 21,787
----------- -----------
Total current assets 520,481 501,015
PROPERTY, PLANT AND EQUIPMENT, net 246,712 249,552
OTHER ASSETS 265,757 270,334
----------- -----------
Total assets $ 1,032,950 $ 1,020,901
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 29,200 $ 57,000
Current maturities of long-term debt 40,119 40,467
Accounts payable 120,511 63,492
Accrued Federal and state excise taxes 19,727 17,058
Other accrued expenses and liabilities 73,713 68,556
----------- -----------
Total current liabilities 283,270 246,573
----------- -----------
LONG-TERM DEBT, less current maturities 298,995 338,884
----------- -----------
DEFERRED INCOME TAXES 62,695 61,395
----------- -----------
OTHER LIABILITIES 8,577 9,316
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common Stock, $.01 par value-
Authorized, 60,000,000 shares;
Issued, 17,515,029 shares at August 31, 1997,
and 17,462,332 shares at February 28, 1997 175 174
Class B Convertible Common Stock, $.01 par value-
Authorized, 20,000,000 shares;
Issued, 3,956,183 shares at August 31, 1997, and
February 28, 1997 40 40
Additional paid-in capital 223,806 222,336
Retained earnings 192,686 170,275
----------- -----------
416,707 392,825
----------- -----------
Less-Treasury stock-
Class A Common Stock, 2,267,119 shares at
August 31, 1997, and 1,915,468 shares at
February 28, 1997, at cost (35,087) (25,885)
Class B Convertible Common Stock, 625,725 shares
at August 31, 1997, and February 28, 1997, at cost (2,207) (2,207)
----------- -----------
(37,294) (28,092)
----------- -----------
Total stockholders' equity 379,413 364,733
----------- -----------
Total liabilities and stockholders' equity $ 1,032,950 $ 1,020,901
=========== ===========
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
Page 2
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
For the Six Months Ended August 31, For the Three Months Ended August 31,
----------------------------------- -------------------------------------
1997 1996 1997 1996
----------- ----------- ----------- -----------
(unaudited) (unaudited) (unaudited) (unaudited)
GROSS SALES $ 820,326 $ 754,866 $ 409,288 $ 378,037
Less - Excise taxes (212,791) (199,155) (107,764) (98,819)
---------- ---------- ---------- ----------
Net sales 607,535 555,711 301,524 279,218
COST OF PRODUCT SOLD (442,044) (412,969) (216,765) (209,383)
---------- ---------- ---------- ----------
Gross profit 165,491 142,742 84,759 69,835
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (111,483) (102,870) (56,258) (52,927)
---------- ---------- ---------- ----------
Operating income 54,008 39,872 28,501 16,908
INTEREST EXPENSE, net (16,024) (16,803) (7,545) (8,008)
---------- ---------- ---------- ----------
Income before provision for Federal
and state income taxes 37,984 23,069 20,956 8,900
PROVISION FOR FEDERAL AND
STATE INCOME TAXES (15,573) (9,627) (8,591) (3,959)
---------- ---------- ---------- ----------
NET INCOME $ 22,411 $ 13,442 $ 12,365 $ 4,941
========== ========== ========== ==========
SHARE DATA:
Net income per common and common
equivalent share:
Primary $ 1.17 $ 0.68 $ 0.64 $ 0.25
========== ========== ========== ==========
Fully diluted $ 1.15 $ 0.68 $ 0.64 $ 0.25
========== ========== ========== ==========
Weighted average common and common
equivalent shares outstanding:
Primary 19,235,529 19,794,740 19,241,969 19,653,489
Fully diluted 19,416,282 19,794,740 19,317,865 19,653,489
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 3
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ended August 31,
-----------------------------------
1997 1996
----------- -----------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 22,411 $ 13,442
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property, plant and equipment 12,625 12,424
Deferred tax provision 4,900 -
Amortization of intangible assets 4,699 4,857
Stock option expense 350 13
Amortization of discount on long-term debt 172 -
(Gain) loss on sale of property, plant and equipment (883) 201
Change in operating assets and liabilities:
Accounts receivable, net (17,518) (9,872)
Inventories, net (8,131) 13,333
Prepaid expenses and other current assets 1,285 5,109
Accounts payable 57,408 43,569
Accrued Federal and state excise taxes 2,669 1,845
Other accrued expenses and liabilities 1,584 13,351
Other (717) (8,466)
---------- ----------
Total adjustments 58,443 76,364
---------- ----------
Net cash provided by operating activities 80,854 89,806
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net of minor disposals (18,213) (21,795)
Proceeds from sale of property, plant and equipment 8,512 5,200
---------- ----------
Net cash used in investing activities (9,701) (16,595)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (40,409) (20,443)
Net repayments of notes payable (27,800) (49,300)
Purchases of treasury stock (9,233) (5,434)
Payment of issuance costs of long-term debt (388) -
Exercise of employee stock options 741 -
Proceeds from employee stock purchases 204 657
---------- ----------
Net cash used in financing activities (76,885) (74,520)
---------- ----------
NET DECREASE IN CASH AND CASH INVESTMENTS (5,732) (1,309)
CASH AND CASH INVESTMENTS, beginning of period 10,010 3,339
---------- ----------
CASH AND CASH INVESTMENTS, end of period $ 4,278 $ 2,030
========== ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
Page 4
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
1) MANAGEMENT'S REPRESENTATIONS:
The condensed consolidated financial statements included herein have been
prepared by 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 the financial information for Canandaigua Brands, Inc. and its
subsidiaries. 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, 1997.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Certain August 1996 balances have been reclassified to conform with current
year presentation.
3) INVENTORIES:
Inventories are valued at the lower of cost (computed in accordance with
the last-in, first-out (LIFO) or first-in, first-out (FIFO) methods) or market.
Substantially all of the inventories are valued using the LIFO method. Elements
of cost include materials, labor and overhead and consist of the following:
August 31, February 28,
1997 1997
----------- -----------
(in thousands)
Raw materials and supplies $ 12,657 $ 14,191
Wines and distilled spirits in process 246,672 262,289
Finished case goods 100,748 72,526
----------- -----------
360,077 349,006
Less - LIFO reserve (25,321) (22,380)
----------- -----------
$ 334,756 $ 326,626
=========== ===========
Information related to the FIFO method of inventory valuation may be useful
in comparing operating results to those companies not using the LIFO method of
inventory valuation. If the FIFO method had been used, reported net income would
have been $1.7 million, or $0.09 per share on a fully diluted basis, higher for
the six months ended August 31, 1997, and reported net income would have been
$8.0 million, or $0.41 per share on a fully diluted basis, higher for the six
months ended August 31, 1996.
Page 5
4) NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE:
Net income per common and common equivalent share is based on the weighted
average number of common and dilutive common equivalent shares outstanding
during each period. Dilutive common equivalent shares consist of stock options.
5) STOCK INCENTIVE PLANS:
At the Company's Annual Meeting of Stockholders held on July 22, 1997,
stockholders approved the amendment and restatement of the Company's Stock
Option and Stock Appreciation Right Plan as the Long-Term Stock Incentive Plan
and the adoption of the Company's Incentive Stock Option Plan.
Under the Long-Term Stock Incentive Plan, non-qualified stock options,
stock appreciation rights, restricted stock and other stock-based awards may be
granted to employees, officers and directors of the Company. Grants, in the
aggregate, may not exceed 4,000,000 shares of the Company's Class A Common
Stock.
Under the Incentive Stock Option Plan, incentive stock options may be
granted to employees, including officers, of the Company. Grants, in the
aggregate, may not exceed 1,000,000 shares of the Company's Class A Common
Stock. The exercise price of any incentive stock option may not be less than the
fair market value of the shares on the date of grant.
6) SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS:
The subsidiary guarantors are wholly owned and the guarantees are full,
unconditional, joint and several obligations of each of the subsidiary
guarantors. Summarized financial information for the subsidiary guarantors is
set forth below. Separate financial statements for the subsidiary guarantors of
the Company are not presented because the Company has determined that such
financial statements would not be material to investors. The subsidiary
guarantors comprise all of the direct and indirect subsidiaries of the Company,
other than the non-guarantor subsidiaries which individually, and in the
aggregate, are inconsequential. There are no restrictions on the ability of the
subsidiary guarantors to transfer funds to the Company in the form of cash
dividends or loan repayments. The subsidiary guarantors may not loan funds to
the Company.
The following table presents summarized financial information for
subsidiary guarantors in connection with all of the Company's 8.75% Senior
Subordinated Notes:
August 31, February 28,
1997 1997
---------- -----------
(in thousands)
Balance Sheet Data:
Current assets $ 423,854 $ 401,870
Noncurrent assets $ 395,735 $ 403,068
Current liabilities $ 148,833 $ 100,009
Noncurrent liabilities $ 64,701 $ 65,300
Page 6
For the Six Months Ended For the Three Months Ended
August 31, August 31,
------------------------ --------------------------
1997 1996 1997 1996
(in thousands) -------- -------- -------- --------
Income Statement Data:
Net sales $514,338 $471,868 $253,064 $241,183
Gross profit $106,425 $ 94,422 $ 53,093 $ 48,867
Income before provision for Federal
and state income taxes $ 41,448 $ 34,112 $ 20,233 $ 18,302
Net income $ 24,768 $ 20,223 $ 12,103 $ 10,660
7) ACCOUNTING PRONOUNCEMENTS:
In February 1997, Statement of Financial Accounting Standards No. 128,
"Earnings per Share," (SFAS No. 128) and Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure," (SFAS
No. 129) were issued. SFAS No. 128 requires the Company to present basic and
diluted earnings per share in the financial statements. The Company is required
to adopt SFAS No. 128 for the year ending February 28, 1998, and restate
previously reported earnings per share. Early adoption is not permitted. The
Company believes the effect of adoption will not be material. SFAS No. 129
consolidates specific existing disclosure requirements and establishes standards
for disclosing information about an entity's capital structure. The Company is
required to adopt SFAS No. 129 for the year ending February 28, 1998. The
Company believes the effect of adoption will not be material.
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," (SFAS No. 131) were issued. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements. The Company is required to adopt SFAS No.
130 for interim periods and fiscal years beginning March 1, 1998.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company believes the effect of adoption
will not be material. SFAS No. 131 establishes standards for reporting
information about operating segments in annual financial statements and requires
reporting of selected information in interim financial statements. The Company
is required to adopt SFAS No. 131 for fiscal years beginning March 1, 1998, and
for interim periods beginning March 1, 1999. Restatement of comparative
information for earlier years is required in the initial year of adoption and
comparative information for interim periods in the initial year of adoption is
to be reported for interim periods in the second year of application. The
Company has not yet determined the impact of SFAS No. 131 on its financial
statements.
Page 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
- ------------
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the three
months ended August 31, 1997 ("Second Quarter 1998"), compared to the three
months ended August 31, 1996 ("Second Quarter 1997"), and for the six months
ended August 31, 1997 ("Six Months 1998"), compared to the six months ended
August 31, 1996 ("Six Months 1997"), and (ii) financial liquidity and capital
resources for the six months ended August 31, 1997. 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, 1997.
The Company operates primarily in the beverage alcohol industry. The
Company is principally a producer and supplier of wines and an importer and
producer of beers and distilled spirits. The Company's branded products and its
other products and services are marketed by three operating divisions:
Canandaigua Wine Company, Barton Beers and Barton Brands.
RESULTS OF OPERATIONS
- ---------------------
SECOND QUARTER 1998 COMPARED TO SECOND QUARTER 1997
NET SALES
The following table sets forth the net sales (in thousands of dollars) and
unit volumes (in thousands of cases), if applicable, for branded beverage
alcohol products and other products and services sold by the Company for Second
Quarter 1998 and Second Quarter 1997.
Second Quarter 1998 Compared to Second Quarter 1997
---------------------------------------------------------------------
Net Sales Unit Volume
---------------------------------- -----------------------------
Branded Beverage %Increase/ %Increase/
Alcohol Products: 1998 1997 (Decrease) 1998 1997 (Decrease)
--------- --------- ---------- ------ ------ ----------
Wine $ 122,099 $ 116,746 4.6% 6,442 6,195 4.0%
Beer 108,383 90,457 19.8% 8,691 7,227 20.3%
Spirits 51,372 44,700 14.9% 2,575 2,356 9.3%
Other (a) 19,670 27,315 (28.0%) N/A N/A N/A
--------- --------- ----- ------ ------ -----
$ 301,524 $ 279,218 8.0% 17,708 15,778 12.2%
========= ========= ===== ====== ====== =====
(a) Other consists primarily of non-branded concentrate sales, contract
bottling and other production services and bulk product sales, none of
which are sold in case quantities.
Net sales for Second Quarter 1998 increased to $301.5 million from $279.2
million for Second Quarter 1997, an increase of $22.3 million, or 8.0%. This
increase resulted primarily from (i) $17.9 million of additional beer sales,
largely Mexican beers, (ii) $6.7 million of additional spirits sales and (iii)
$6.4 million of additional table wine sales. These increases were partially
offset by lower sales of grape juice concentrate and sparkling wines. Unit
volume for branded beverage alcohol products for Second Quarter 1998 increased
12.2% as compared to Second Quarter 1997. The unit volume increase was largely
the result of increased sales of the Company's Mexican beer brands and its
spirits brands. The unit volume increase in wine was primarily the result of
increased sales of the Company's table wine brands.
Page 8
GROSS PROFIT
The Company's gross profit increased to $84.8 million for Second Quarter
1998 from $69.8 million for Second Quarter 1997, an increase of $14.9 million,
or 21.4%. As a percent of net sales, gross profit increased to 28.1% for Second
Quarter 1998 from 25.0% for Second Quarter 1997. The dollar increase in gross
profit resulted primarily from higher gross profit from branded wine sales
related to cost structure improvements, pricing initiatives and additional sales
volume, increased sales of beer and higher gross profit from spirits brands
related to higher selling prices and increased volume.
In general, the preferred method of accounting for inventory valuation is
the last-in, first-out method ("LIFO") because, in most circumstances, it
results in a better matching of costs and revenues. For comparison purposes to
companies using the first-in, first-out method of accounting for inventory
valuation ("FIFO") only, gross profit reflected a reduction of $0.6 million and
$7.9 million in Second Quarter 1998 and Second Quarter 1997, respectively, due
to the Company's LIFO accounting method. The Company's gross profit for Second
Quarter 1998 reflects the cumulative effect of revised cost estimates, including
more favorable grape costs than had been estimated in first quarter 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $56.3 million for
Second Quarter 1998 from $52.9 million for Second Quarter 1997, an increase of
$3.3 million, or 6.3%. Selling, general and administrative expenses as a percent
of net sales decreased to 18.7% for Second Quarter 1998 as compared to 19.0% for
Second Quarter 1997. The dollar increase in selling, general and administrative
expenses resulted principally from selling and other expenses related to the
Company's increased sales volume and overall growth.
INTEREST EXPENSE, NET
Net interest expense decreased to $7.5 million for Second Quarter 1998 from
$8.0 million for Second Quarter 1997, a decrease of $0.5 million, or 5.8%. The
decrease was primarily due to a decrease in the Company's average borrowings
which was partially offset by an increase in the average interest rate.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The Company's effective tax rate for Second Quarter 1998 decreased to 41.0%
from 44.5% for Second Quarter 1997 as Second Quarter 1997 reflected the
cumulative impact of a higher effective tax rate in California caused by
statutory limitations on the Company's ability to utilize certain deductions.
NET INCOME
As a result of the above factors, net income increased to $12.4 million for
Second Quarter 1998 from $4.9 million for Second Quarter 1997, an increase of
$7.4 million, or 150.3%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Second Quarter
1998 was $37.0 million, an increase of $11.4 million over EBITDA of $25.6
million for Second Quarter 1997. 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.
Page 9
SIX MONTHS 1998 COMPARED TO SIX MONTHS 1997
NET SALES
The following table sets forth the net sales (in thousands of dollars) and
unit volumes (in thousands of cases), if applicable, for branded beverage
alcohol products and other products and services sold by the Company for Six
Months 1998 and Six Months 1997.
Six Months 1998 Compared to Six Months 1997
------------------------------------------------------------------------
Net Sales Unit Volume
---------------------------------- -------------------------------
Branded Beverage %Increase/ %Increase/
Alcohol Products: 1998 1997 (Decrease) 1998 1997 (Decrease)
--------- --------- ---------- ------ ------ ----------
Wine $ 247,538 $ 240,404 3.0% 13,162 12,866 2.3%
Beer 205,996 163,314 26.1% 16,439 13,072 25.8%
Spirits 101,734 90,222 12.8% 5,124 4,759 7.7%
Other (a) 52,267 61,771 (15.4%) N/A N/A N/A
--------- --------- ----- ------ ------ -----
$ 607,535 $ 555,711 9.3% 34,725 30,697 13.1%
========= ========= ===== ====== ====== =====
(a) Other consists primarily of non-branded concentrate sales, contract
bottling and other production services and bulk product sales, none of
which are sold in case quantities.
Net sales for Six Months 1998 increased to $607.5 million from $555.7
million for Six Months 1997, an increase of $51.8 million, or 9.3%. This
increase resulted primarily from (i) $42.7 million of additional beer sales,
largely Mexican beers, (ii) $11.5 million of additional spirits sales and (iii)
$10.7 million of additional table wine sales. These increases were partially
offset by lower sales of grape juice concentrate, sparkling wines and dessert
wines. Unit volume for branded beverage alcohol products for Six Months 1998
increased 13.1% as compared to Six Months 1997. The unit volume increase was
largely the result of increased sales of the Company's Mexican beer brands and
its spirits brands. The increase in table wine brands unit volume was partially
offset by a decrease in unit volume of dessert wine brands and sparkling wine
brands.
GROSS PROFIT
The Company's gross profit increased to $165.5 million for Six Months 1998
from $142.7 million for Six Months 1997, an increase of $22.7 million, or 15.9%.
As a percent of net sales, gross profit increased to 27.2% for Six Months 1998
from 25.7% for Six Months 1997. The dollar increase in gross profit resulted
primarily from increased sales of beer, higher gross profit from spirits brands
related to higher selling prices and increased volume, and higher gross profit
from branded wine and grape juice concentrate sales related to pricing
initiatives and cost structure improvements, partially offset by higher grape
costs.
In general, the preferred method of accounting for inventory valuation is
the last-in, first-out method ("LIFO") because, in most circumstances, it
results in a better matching of costs and revenues. For comparison purposes to
companies using the first-in, first-out method of accounting for inventory
valuation ("FIFO") only, gross profit reflected a reduction of $2.9 million and
$13.8 million in Six Months 1998 and Six Months 1997, respectively, due to the
Company's LIFO accounting method.
Page 10
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $111.5 million
for Six Months 1998 from $102.9 million for Six Months 1997, an increase of $8.6
million, or 8.4%. Selling, general and administrative expenses as a percent of
net sales decreased to 18.4% for Six Months 1998 as compared to 18.5% for Six
Months 1997. The dollar increase in selling, general and administrative expenses
resulted principally from selling and other expenses related to the Company's
increased sales volume and overall growth.
INTEREST EXPENSE, NET
Net interest expense decreased to $16.0 million for Six Months 1998 from
$16.8 million for Six Months 1997, a decrease of $0.8 million, or 4.8%. The
decrease was primarily due to a decrease in the Company's average borrowings
which was partially offset by an increase in the average interest rate.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The Company's effective tax rate for Six Months 1998 decreased to 41.0%
from 41.7% for Six Months 1997 as Six Months 1997 reflected a higher effective
tax rate in California caused by statutory limitations on the Company's ability
to utilize certain deductions.
NET INCOME
As a result of the above factors, net income increased to $22.4 million for
Six Months 1998 from $13.4 million for Six Months 1997, an increase of $9.0
million, or 66.7%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Six Months 1998
was $71.3 million, an increase of $14.2 million over EBITDA of $57.2 million for
Six Months 1997. 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 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.
Page 11
SIX MONTHS 1998 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Six Months 1998 was $80.9
million which resulted primarily from an increase of $61.7 million in operating
liabilities plus a net increase of $44.3 million in net income adjusted for
noncash items, partially offset by a net increase of $24.4 million in operating
assets. The increase of $61.7 million in operating liabilities was primarily due
to a $57.4 million increase in accounts payable primarily due to the purchase of
grapes associated with the 1997 harvest. The net increase of $24.4 million in
operating assets resulted principally from a $17.5 million increase in accounts
receivable primarily due to increased beer and spirits sales and an $8.1 million
net increase in inventory levels.
INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Net cash used in investing activities for Six Months 1998 was $9.7 million
which resulted from $18.2 million of capital expenditures, including $7.2
million for vineyards, partially offset by proceeds from the sale of property,
plant and equipment of $8.5 million.
Net cash used in financing activities for Six Months 1998 was $76.9 million
which resulted primarily from principal payments of $40.4 million of long-term
debt, net repayments of $27.8 million of revolving loan borrowings under the
Company's bank credit agreement and repurchase of $9.2 million of the Company's
Class A Common Stock.
During January 1996, the Company's Board of Directors authorized the
repurchase of up to $30.0 million of its Class A Common Stock and Class B Common
Stock (the "Repurchase Program"). During May 1997, the Company completed the
Repurchase Program with the repurchase of 362,100 shares of its Class A Common
Stock at a cost of $9.2 million. With respect to the Repurchase Program, the
Company repurchased a total of 1,149,550 shares of Class A Common Stock at an
aggregate cost of $30.0 million, or at an average cost of $26.10 per share.
DEBT
Total debt outstanding as of August 31, 1997, amounted to $368.3 million, a
decrease of $68.0 million from February 28, 1997, resulting primarily from
principal payments of long-term debt and the net repayments of revolving loan
borrowings. The ratio of total debt to total capitalization decreased to 49.3%
as of August 31, 1997, from 54.5% as of February 28, 1997.
As of August 31, 1997, under its bank credit agreement, the Company had
outstanding term loans of $146.0 million bearing interest at 6.5%, $29.2 million
of revolving loans bearing interest at 7.3%, undrawn revolving letters of credit
of $8.1 million and $147.7 million available to be drawn in revolving loans.
As of August 31, 1997, the Company had outstanding $195.0 million aggregate
principal amount of 8 3/4% Senior Subordinated Notes due 2003. The notes are
unsecured and subordinated to the prior payment in full of all senior
indebtedness of the Company, which includes the bank credit agreement. The notes
are guaranteed, on a senior subordinated basis, by substantially all of the
Company's operating subsidiaries.
Page 12
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
At the Annual Meeting of Stockholders of Canandaigua Brands, Inc. (f/k/a
Canandaigua Wine Company, Inc.) ("Canandaigua"), held on July 22, 1997 (the
"Annual Meeting"), the holders of Canandaigua's Class A Common Stock (the "Class
A Stock"), voting as a separate class, elected management's slate of director
nominees designated to be elected by the holders of the Class A Stock, and the
holders of Canandaigua's Class B Common Stock (the "Class B Stock"), voting as a
separate class, elected management'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
following proposals:
(i) Proposal to amend Canandaigua's Restated Certificate of Incorporation
to change the name of the Company from "Canandaigua Wine Company,
Inc." to "Canandaigua Brands, Inc.";
(ii) Proposal to approve the amendment and restatement of the Stock Option
and Stock Appreciation Right Plan as the Long-Term Stock Incentive
Plan;
(iii)Proposal to approve the Incentive Stock Option Plan;
(iv) Proposal to approve the Annual Management Incentive Plan; and
(v) Proposal to ratify the selection of Arthur Andersen LLP, Certified
Public Accountants, as Canandaigua's independent auditors for the
fiscal year ending February 28, 1998.
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 Canandaigua
are as follows:
Directors Elected By the Holders of Class A Stock:
--------------------------------------------------
For all nominees: 12,433,531
* Instructed: 466,671
Withheld from all nominees: 821,079
(* Number of votes withheld from a specified nominee as opposed
to withheld from all nominees.)
Page 13
The tabulation with respect to each nominee is as follows:
George Bresler:
For: 12,433,531; Withheld: 1,287,750
James A. Locke, III:
For: 12,900,202; Withheld: 821,079
Directors Elected By the Holders of Class B Stock:
--------------------------------------------------
For all nominees: 32,274,990
* Instructed: 2,000
Withheld from all nominees: 350,930
(* Number of votes withheld from specified nominees as opposed
to withheld from all nominees.)
The tabulation with respect to each nominee is as follows:
Marvin Sands:
For: 32,274,990; Withheld: 352,930
Richard Sands:
For: 32,274,990; Withheld: 352,930
Robert Sands:
For: 32,274,990; Withheld: 352,930
Bertram E. Silk:
For: 32,276,990; Withheld: 350,930
II. The results of the voting with respect to the proposal to amend
Canandaigua's Restated Certificate of Incorporation to change the name
of the Company from Canandaigua Wine Company, Inc. to Canandaigua
Brands, Inc. are as follows:
For: 46,278,093
Against: 52,031
Abstain: 19,077
Broker Nonvotes: 0
III. The results of the voting with respect to the proposal to approve the
amendment and restatement of the Stock Option and Stock Appreciation
Right Plan as the Long-Term Stock Incentive Plan are as follows:
For: 33,189,896
Against: 7,817,261
Abstain: 85,208
Broker Nonvotes: 5,256,836
Page 14
IV. The results of the voting with respect to the proposal to approve the
Incentive Stock Option Plan are as follows:
For: 33,857,121
Against: 7,139,505
Abstain: 95,739
Broker Nonvotes: 5,256,836
V. The results of the voting with respect to the proposal to approve the
Annual Management Incentive Plan are as follows:
For: 41,889,541
Against: 393,170
Abstain: 92,524
Broker Nonvotes: 3,973,966
VI. The results of the voting with respect to 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,
1998 are as follows:
For: 46,217,353
Against: 57,424
Abstain: 74,424
Broker Nonvotes: 0
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Index to Exhibits located on Page 19 of this Report.
(b) The following Report on Form 8-K was filed with the Securities
and Exchange Commission during the quarter ended August 31, 1997:
Form 8-K dated August 28, 1997. This Form 8-K reported
information under Item 5 (Other Events).
Page 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, each
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CANANDAIGUA BRANDS, INC.
Dated: September 29, 1997 By: /s/ Thomas F. Howe
----------------------------------
Thomas F. Howe, Vice President,
Corporate Reporting and Controller
Dated: September 29, 1997 By: /s/ Thomas S. Summer
----------------------------------
Thomas S. Summer, Senior Vice
President and Chief Financial
Officer
(Principal Financial Officer and
Principal Accounting Officer)
SUBSIDIARIES
BATAVIA WINE CELLARS, INC.
Dated: September 29, 1997 By: /s/ Thomas F. Howe
----------------------------------
Thomas F. Howe, Controller
Dated: September 29, 1997 By: /s/ Thomas S. Summer
----------------------------------
Thomas S. Summer, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
CANANDAIGUA WINE COMPANY, INC.
Dated: September 29, 1997 By: /s/ Thomas F. Howe
----------------------------------
Thomas F. Howe, Controller
Dated: September 29, 1997 By: /s/ Thomas S. Summer
----------------------------------
Thomas S. Summer, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
Page 16
BARTON INCORPORATED
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, President and
Chief Operating Officer
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
BARTON BRANDS, LTD.
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, Executive Vice
President
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
BARTON BEERS, LTD.
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, Executive Vice
President
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
BARTON BRANDS OF CALIFORNIA, INC.
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, Executive Vice
President
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
Page 17
BARTON BRANDS OF GEORGIA, INC.
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, Executive Vice
President
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
BARTON DISTILLERS IMPORT CORP.
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, Executive Vice
President
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
BARTON FINANCIAL CORPORATION
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, President and
Secretary
Dated: September 29, 1997 By: /s/ Charles T. Schlau
----------------------------------
Charles T. Schlau, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
STEVENS POINT BEVERAGE CO.
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, Executive Vice
President
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
Page 18
MONARCH IMPORT COMPANY
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, Executive Vice
President
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
THE VIKING DISTILLERY, INC.
Dated: September 29, 1997 By: /s/ Alexander L. Berk
----------------------------------
Alexander L. Berk, Executive Vice
President
Dated: September 29, 1997 By: /s/ Raymond E. Powers
----------------------------------
Raymond E. Powers, Executive Vice
President, Treasurer and Assistant
Secretary
(Principal Financial Officer and
Principal Accounting Officer)
Page 19
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
Not applicable.
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
3.1(a) Certificate of Amendment of the Certificate of Incorporation of
Canandaigua Wine Company, Inc. (now known as Canandaigua Brands, Inc.,
hereinafter in this Index to Exhibits, the "Company") (filed herewith).
3.1(b) Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Transition Report on Form 10-K for the Transition
Period from September 1, 1995 to February 29, 1996 and incorporated herein
by reference).
3.2 Amended and Restated By-Laws of the Company (filed herewith; filed for the
purpose of reflecting the Company's new name, Canandaigua Brands, Inc., in
the title of the By-Laws).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES.
4.1 Specimen of Certificate of Class A Common Stock of the Company (filed as
Exhibit 1.1 to the Company's Registration Statement on Form 8-A dated April
28, 1992 and incorporated herein by reference).
4.2 Specimen of Certificate of Class B Common Stock of the Company (filed as
Exhibit 1.2 to the Company's Registration Statement on Form 8-A dated April
28, 1992 and incorporated herein by reference).
4.3 Indenture dated as of December 27, 1993 among the Company, its Subsidiaries
and The Chase Manhattan Bank (as successor to Chemical Bank) (filed as
Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 1993 and incorporated herein by reference).
4.4 First Supplemental Indenture dated as of August 3, 1994 among the Company,
Canandaigua West, Inc. and The Chase Manhattan Bank (as successor to
Chemical Bank) (filed as Exhibit 4.5 to the Company's Registration
Statement on Form S-8 (Registration No. 33-56557) and incorporated herein
by reference).
4.5 Second Supplemental Indenture dated August 25, 1995, among the Company, V
Acquisition Corp. (a subsidiary of the Company now known as The Viking
Distillery, Inc.) and The Chase Manhattan Bank (as successor to Chemical
Bank ) (filed as Exhibit 4.5 to the Company's Annual Report on Form 10-K
for the fiscal year ended August 31, 1995 and incorporated herein by
reference).
4.6 Indenture with respect to the 8 3/4% Series C Senior Subordinated Notes Due
2003 dated as of October 29, 1996 among the Company, its Subsidiaries and
Harris Trust and Savings Bank (filed as Exhibit 4.2 to the Company's
Registration Statement on Form S-4 (Registration No. 333-17673) and
incorporated herein by reference).
Page 20
(10) MATERIAL CONTRACTS.
10.1 Amendment Number One to the Long-Term Stock Incentive Plan of the Company
(filed herewith).
10.2 Incentive Stock Option Plan of the Company (filed herewith).
10.3 Amendment Number One to the Incentive Stock Option Plan of the Company
(filed herewith).
10.4 Annual Management Incentive Plan of the Company (filed herewith).
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
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.
(23) CONSENTS OF EXPERTS AND COUNSEL.
Not applicable.
(24) POWER OF ATTORNEY.
Not applicable.
(27) FINANCIAL DATA SCHEDULE.
Financial Data Schedule (filed herewith).
(99) ADDITIONAL EXHIBITS.
Not applicable.