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, 1998 --------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------------- -------------------- COMMISSION FILE NUMBER 0-7570 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 NEW YORK CANANDAIGUA EUROPE LIMITED 16-1195581 NEW YORK ROBERTS TRADING CORP. 16-0865491 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) 300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) (716) 393-4130 ----------------------------------------------------- (Registrants' telephone number, including area code) ----------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding with respect to each of the classes of common stock of Canandaigua Brands, Inc., as of September 23, 1998, 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 14,626,510 Class B Common Stock, Par Value $.01 Per Share 3,248,187 - 1 - PART I - FINANCIAL INFORMATION Item 1. Financial Statements. CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
August 31, 1998 February 28, 1998 --------------- ----------------- (unaudited) ASSETS ------ CURRENT ASSETS: Cash and cash investments $ 1,473 $ 1,232 Accounts receivable, net 154,550 142,615 Inventories, net 345,972 394,028 Prepaid expenses and other current assets 37,550 26,463 ----------- ----------- Total current assets 539,545 564,338 PROPERTY, PLANT AND EQUIPMENT, net 246,157 244,035 OTHER ASSETS 262,004 264,786 ----------- ----------- Total assets $ 1,047,706 $ 1,073,159 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable $ 63,000 $ 91,900 Current maturities of long-term debt 24,118 24,118 Accounts payable 65,624 52,055 Accrued Federal and state excise taxes 21,561 17,498 Other accrued expenses and liabilities 101,569 97,763 ----------- ----------- Total current liabilities 275,872 283,334 ----------- ----------- LONG-TERM DEBT, less current maturities 297,407 309,218 ----------- ----------- DEFERRED INCOME TAXES 59,237 59,237 ----------- ----------- OTHER LIABILITIES 5,445 6,206 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value- Authorized, 1,000,000 shares; Issued, none at August 31, 1998, and February 28, 1998 -- -- Class A Common Stock, $.01 par value- Authorized, 120,000,000 shares; Issued, 17,802,475 shares at August 31, 1998, and 17,604,784 shares at February 28, 1998 178 176 Class B Convertible Common Stock, $.01 par value- Authorized, 20,000,000 shares; Issued, 3,873,912 shares at August 31, 1998, and 3,956,183 shares at February 28, 1998 39 40 Additional paid-in capital 234,992 231,687 Retained earnings 249,733 220,346 ----------- ----------- 484,942 452,249 ----------- ----------- Less-Treasury stock- Class A Common Stock, 3,029,505 shares at August 31, 1998, and 2,199,320 shares at February 28, 1998, at cost (72,990) (34,878) Class B Convertible Common Stock, 625,725 shares at August 31, 1998, and February 28, 1998, at cost (2,207) (2,207) ----------- ----------- (75,197) (37,085) ----------- ----------- Total stockholders' equity 409,745 415,164 ----------- ----------- Total liabilities and stockholders' equity $ 1,047,706 $ 1,073,159 =========== =========== The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
- 2 - CANANDAIGUA 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, ----------------------------------- ------------------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- (unaudited) (unaudited) (unaudited) (unaudited) GROSS SALES $ 880,150 $ 820,326 $ 457,281 $ 409,288 Less - Excise taxes (217,836) (212,791) (107,895) (107,764) --------- --------- --------- --------- Net sales 662,314 607,535 349,386 301,524 COST OF PRODUCT SOLD (467,767) (442,044) (247,775) (216,765) --------- --------- --------- --------- Gross profit 194,547 165,491 101,611 84,759 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (128,786) (111,483) (67,454) (56,258) --------- --------- --------- --------- Operating income 65,761 54,008 34,157 28,501 INTEREST EXPENSE, net (15,952) (16,024) (7,425) (7,545) --------- --------- --------- --------- Income before provision for Federal and state income taxes 49,809 37,984 26,732 20,956 PROVISION FOR FEDERAL AND STATE INCOME TAXES (20,422) (15,573) (10,960) (8,591) --------- --------- --------- --------- NET INCOME $ 29,387 $ 22,411 $ 15,772 $ 12,365 ========= ========= ========= ========= SHARE DATA: Earnings per common share: Basic $ 1.57 $ 1.20 $ 0.85 $ 0.67 ========= ========= ========= ========= Diluted $ 1.53 $ 1.18 $ 0.83 $ 0.65 ========= ========= ========= ========= Weighted average common shares outstanding: Basic 18,669 18,665 18,589 18,559 Diluted 19,168 19,002 19,051 18,962 The accompanying notes to consolidated financial statements are an integral part of these statements.
- 3 - CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
For the Six Months Ended August 31, ----------------------------------- 1998 1997 ----------- ----------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 29,387 $ 22,411 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 11,952 12,625 Amortization of intangible assets 5,015 4,699 Deferred tax provision 900 4,900 Amortization of discount on long-term debt 189 172 Stock-based compensation expense 51 350 Gain on sale of property, plant and equipment (3) (883) Change in operating assets and liabilities: Accounts receivable, net (11,935) (17,518) Inventories, net 48,056 (8,131) Prepaid expenses and other current assets (10,867) 1,285 Accounts payable 11,339 57,408 Accrued Federal and state excise taxes 4,063 2,669 Other accrued expenses and liabilities 2,906 1,584 Other assets and liabilities, net (2,549) (717) -------- -------- Total adjustments 59,117 58,443 -------- -------- Net cash provided by operating activities 88,504 80,854 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (14,098) (18,213) Purchase of joint venture minority interest (716) -- Proceeds from sale of property, plant and equipment 27 8,512 -------- -------- Net cash used in investing activities (14,787) (9,701) -------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Purchases of treasury stock (36,014) (9,233) Net repayments of notes payable (28,900) (27,800) Principal payments of long-term debt (12,000) (40,409) Exercise of employee stock options 2,154 741 Proceeds from employee stock purchases 1,284 204 Payment of issuance costs of long-term debt -- (388) -------- -------- Net cash used in financing activities (73,476) (76,885) -------- -------- NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS 241 (5,732) CASH AND CASH INVESTMENTS, beginning of period 1,232 10,010 -------- -------- CASH AND CASH INVESTMENTS, end of period $ 1,473 $ 4,278 ======== ======== The accompanying notes to consolidated financial statements are an integral part of these statements.
- 4 - CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1998 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 fairly 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, 1998. 2) 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, 1998 1998 ---------- ------------ (in thousands) Raw materials and supplies $ 14,395 $ 14,439 Wine and distilled spirits in process 231,442 304,037 Finished case goods 118,280 92,948 ---------- ---------- 364,117 411,424 Less - LIFO reserve (18,145) (17,396) ---------- ---------- $ 345,972 $ 394,028 ========== ========== 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 $0.4 million, or $0.02 per share on a diluted basis, higher for the six months ended August 31, 1998, and reported net income would have been $1.7 million, or $0.09 per share on a diluted basis, higher for the six months ended August 31, 1997. - 5 - 3) BORROWINGS: BANK CREDIT AGREEMENT - In June 1998, the bank credit agreement was amended to, among other things, eliminate the requirement that the Company reduce the outstanding balance of the revolving loan facility to less than $60,000,000 for thirty consecutive days during the six months ending each August 31. In July 1998, the revolving loan facility under the bank credit agreement was increased by $100.0 million to $285.0 million. 4) RETIREMENT SAVINGS AND PROFIT SHARING RETIREMENT PLAN: Effective March 1, 1998, the Company's existing retirement savings and profit sharing retirement plans and the Barton profit sharing and 401(k) plan were merged into the Canandaigua Brands, Inc. 401(k) and Profit Sharing Plan (the Plan). The Plan covers substantially all employees, excluding those employees covered by collective bargaining agreements. The 401(k) portion of the Plan permits eligible employees to defer a portion of their compensation (as defined in the Plan) on a pretax basis. Participants may defer up to 10% of their compensation for the year, subject to limitations of the Plan. The Company makes a matching contribution of 50% of the first 6% of compensation a participant defers. The amount of the Company's contribution under the profit sharing portion of the Plan is in such discretionary amount as the Board of Directors may annually determine, subject to limitations of the Plan. 5) STOCKHOLDERS' EQUITY: STOCK REPURCHASE AUTHORIZATION - In June 1998, the Company's Board of Directors authorized the repurchase of up to $100,000,000 of its Class A Common Stock and Class B Convertible Common Stock. The Company may finance such purchases, which will become treasury shares, through cash generated from operations or through the bank credit agreement. INCREASE IN NUMBER OF AUTHORIZED SHARES OF CLASS A COMMON STOCK - In July 1998, the stockholders of the Company approved an increase in the number of authorized shares of Class A Common Stock from 60,000,000 shares to 120,000,000 shares, thereby increasing the aggregate number of authorized shares of the Company to 141,000,000 shares. 6) EARNINGS PER COMMON SHARE: The Company adopted the provisions of Statement of Financial Accounting Standards No. 128, "Earnings Per Share," (SFAS No. 128) effective February 28, 1998. Basic earnings per common share excludes the effect of common stock equivalents and is 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 reflects 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 assumes the exercise of stock options using the treasury stock method and assumes the conversion of convertible - 6 - securities, if any, using the "if converted" method. Historical earnings per common share have been restated to conform with the provisions of SFAS No. 128. 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, ------------------ -------------------- 1998 1997 1998 1997 ------- ------- ------- ------- (in thousands, except per share data) Income applicable to common shares $29,387 $22,411 $15,772 $12,365 ======= ======= ======= ======= Weighted average common shares outstanding - basic 18,669 18,665 18,589 18,559 Stock options 499 337 462 403 ------- ------- ------- ------- Weighted average common shares outstanding - diluted 19,168 19,002 19,051 18,962 ======= ======= ======= ======= EARNINGS PER COMMON SHARE - BASIC $ 1.57 $ 1.20 $ 0.85 $ 0.67 ======= ======= ======= ======= EARNINGS PER COMMON SHARE - DILUTED $ 1.53 $ 1.18 $ 0.83 $ 0.65 ======= ======= ======= ======= 7) 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 nonguarantor 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; however, except for limited amounts, 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, 1998 1998 ---------- ------------ (in thousands) Balance Sheet Data: Current assets $440,223 $460,618 Noncurrent assets $394,917 $395,225 Current liabilities $121,729 $102,207 Noncurrent liabilities $ 62,010 $ 61,784 - 7 - For the Six Months For the Three Months Ended August 31, Ended August 31, -------------------- -------------------- 1998 1997 1998 1997 -------- -------- -------- -------- (in thousands) Income Statement Data: Net sales $552,352 $514,338 $289,774 $253,064 Gross profit $122,885 $106,425 $ 64,673 $ 53,093 Income before provision for Federal and state income taxes $ 50,451 $ 41,448 $ 27,406 $ 20,233 Net income $ 29,766 $ 24,768 $ 16,221 $ 12,103 8) ACCOUNTING PRONOUNCEMENT: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires that every derivative be recorded as either an asset or liability in the balance sheet measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company is required to adopt SFAS No. 133 on a prospective basis for interim periods and fiscal years beginning March 1, 2000. The Company believes the effect of adoption on its financial statements will not be material. 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, 1998 ("Second Quarter 1999"), compared to the three months ended August 31, 1997 ("Second Quarter 1998"), and for the six months ended August 31, 1998 ("Six Months 1999"), compared to the six months ended August 31, 1997 ("Six Months 1998"), and (ii) financial liquidity and capital resources for Six Months 1999. 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, 1998. The Company is a leading producer and marketer of beverage alcohol brands. The Company is principally a producer and supplier of wine and an importer and producer of beer and distilled spirits in the United States. The Company's beverage alcohol brands are marketed in three general categories: wine, beer and distilled spirits. - 8 - RESULTS OF OPERATIONS - --------------------- SECOND QUARTER 1999 COMPARED TO SECOND QUARTER 1998 NET SALES The following table sets forth the net sales (in thousands of dollars) and unit volume (in thousands of cases), if applicable, for branded beverage alcohol products and other products and services sold by the Company for Second Quarter 1999 and Second Quarter 1998. Second Quarter 1999 Compared to Second Quarter 1998 ------------------------------------------------------------------- Net Sales Unit Volume --------------------------------- ----------------------------- %Increase/ %Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) -------- -------- ---------- ------ ------ ---------- Wine $132,064 $122,099 8.2% 6,654 6,442 3.3% Beer 141,133 108,383 30.2% 11,177 8,691 28.6% Spirits 50,183 51,372 (2.3%) 2,488 2,575 (3.4%) Other (a) 26,006 19,670 32.2% N/A N/A N/A -------- -------- ----- ------ ------ ----- $349,386 $301,524 15.9% 20,319 17,708 14.7% ======== ======== ===== ====== ====== ===== (a) Other consists primarily of nonbranded 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 1999 increased to $349.4 million from $301.5 million for Second Quarter 1998, an increase of $47.9 million, or 15.9%. This increase resulted primarily from (i) $32.8 million of additional beer sales, largely Mexican beers, (ii) $10.0 million of additional wine sales, resulting primarily from the introduction of new wine brands and (iii) $6.3 million of additional nonbranded sales, primarily grape juice concentrate sales. Unit volume for branded beverage alcohol products for Second Quarter 1999 increased 14.7% as compared to Second Quarter 1998. The unit volume increase was the result of the increased sales of the Company's beer brands, primarily Mexican beer, and the introduction of new wine brands. Notwithstanding an overall increase in net sales and unit volume of its wine brands primarily due to the introduction of new products, the Company has experienced a decline in many of its other wine brands. The Company is addressing this through implementation of various programs, such as addressing noncompetitive consumer prices of its wine products on a market-by-market basis as well as increasing its promotional activities where appropriate. GROSS PROFIT The Company's gross profit increased to $101.6 million for Second Quarter 1999 from $84.8 million for Second Quarter 1998, an increase of $16.8 million, or 19.9%. As a percent of net sales, gross profit increased to 29.1% for Second Quarter 1999 from 28.1% for Second Quarter 1998. The dollar increase in gross profit resulted primarily from additional beer unit volume, introduction of new wine brands and unit cost improvements in wine and spirits brands. 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 - 9 - valuation ("FIFO") only, gross profit reflected a reduction of $1.6 million and $0.6 million in Second Quarter 1999 and Second Quarter 1998, respectively, due to the Company's LIFO accounting method. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $67.5 million for Second Quarter 1999 from $56.3 million for Second Quarter 1998, an increase of $11.2 million, or 19.9%. The dollar increase in selling, general and administrative expenses resulted principally from higher advertising costs associated with the introduction of new wine brands and increased beer sales, and higher promotion costs related to the growth in beer sales as well as programs implemented to improve the Company's wine sales. Selling, general and administrative expenses as a percent of net sales increased to 19.3% for Second Quarter 1999 as compared to 18.7% for Second Quarter 1998. The increase in percent of net sales resulted primarily from advertising costs associated with the introduction of new wine brands and promotion costs related to programs implemented to improve the Company's wine sales. NET INCOME As a result of the above factors, net income increased to $15.8 million for Second Quarter 1999 from $12.4 million for Second Quarter 1998, an increase of $3.4 million, or 27.6%. For financial analysis purposes only, the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") for Second Quarter 1999 were $42.6 million, an increase of $5.6 million over EBITDA of $37.0 million for Second Quarter 1998. 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. SIX MONTHS 1999 COMPARED TO SIX MONTHS 1998 NET SALES The following table sets forth the net sales (in thousands of dollars) and unit volume (in thousands of cases), if applicable, for branded beverage alcohol products and other products and services sold by the Company for Six Months 1999 and Six Months 1998. Six Months 1999 Compared to Six Months 1998 ------------------------------------------------------------------- Net Sales Unit Volume --------------------------------- ----------------------------- %Increase/ %Increase/ 1999 1998 (Decrease) 1999 1998 (Decrease) -------- -------- ---------- ------ ------ ---------- Wine $250,852 $247,538 1.3% 12,794 13,162 (2.8%) Beer 259,929 205,996 26.2% 20,644 16,439 25.6% Spirits 102,013 101,734 0.3% 5,094 5,124 (0.6%) Other (a) 49,520 52,267 (5.3%) N/A N/A N/A -------- -------- ----- ------ ------ ----- $662,314 $607,535 9.0% 38,532 34,725 11.0% ======== ======== ===== ====== ====== ===== (a) Other consists primarily of nonbranded concentrate sales, contract bottling and other production services and bulk product sales, none of which are sold in case quantities. - 10 - Net sales for Six Months 1999 increased to $662.3 million from $607.5 million for Six Months 1998, an increase of $54.8 million, or 9.0%. This increase resulted primarily from (i) $53.9 million of additional beer sales, largely Mexican beers, and (ii) $3.3 million of additional wine sales, resulting primarily from the introduction of new wine brands. Unit volume for branded beverage alcohol products for Six Months 1999 increased 11.0% as compared to Six Months 1998. The unit volume increase was the result of the increased sales of the Company's beer brands, primarily Mexican beer. GROSS PROFIT The Company's gross profit increased to $194.5 million for Six Months 1999 from $165.5 million for Six Months 1998, an increase of $29.1 million, or 17.6%. As a percent of net sales, gross profit increased to 29.4% for Six Months 1999 from 27.2% for Six Months 1998. The dollar increase in gross profit resulted primarily from additional beer unit volume, unit cost improvements in wine and spirits brands, introduction of new wine brands and higher average selling prices related to wine sales. 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 $0.7 million and $2.9 million in Six Months 1999 and Six Months 1998, respectively, due to the Company's LIFO accounting method. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $128.8 million for Six Months 1999 from $111.5 million for Six Months 1998, an increase of $17.3 million, or 15.5%. The dollar increase in selling, general and administrative expenses resulted principally from higher advertising costs associated with the Company's wine sales, primarily the introduction of new wine brands, and increased beer sales, and higher promotion costs related to both programs implemented to improve the Company's wine sales and the growth in beer sales. Selling, general and administrative expenses as a percent of net sales increased to 19.4% for Six Months 1999 as compared to 18.4% for Six Months 1998. The increase in percent of net sales resulted primarily from advertising costs associated with the introduction of new wine brands and promotion costs related to programs implemented to improve the Company's wine sales. NET INCOME As a result of the above factors, net income increased to $29.4 million for Six Months 1999 from $22.4 million for Six Months 1998, an increase of $7.0 million, or 31.1%. For financial analysis purposes only, the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") for Six Months 1999 were $82.7 million, an increase of $11.4 million over EBITDA of $71.3 million for Six Months 1998. 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. - 11 - FINANCIAL LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------- GENERAL The Company's principal use of cash in its operating activities is for purchasing and carrying inventories. The Company's primary source of liquidity has historically been cash flow from operations, except during the annual fall grape harvests when the Company has relied on short-term borrowings. The annual grape crush normally begins in August and runs through October. The Company generally begins purchasing grapes in August with payments for such grapes beginning to come due in September. The Company's short-term borrowings to support such purchases generally reach their highest levels in November or December. Historically, the Company has used cash flow from operating activities to repay its short-term borrowings. The Company will continue to use its short-term borrowings to support its working capital requirements. The Company believes that cash provided by operating activities and its financing activities, primarily short-term borrowings, will provide adequate resources to satisfy its working capital, liquidity and anticipated capital expenditure requirements for both its short-term and long-term capital needs. SIX MONTHS 1999 CASH FLOWS OPERATING ACTIVITIES Net cash provided by operating activities for Six Months 1999 was $88.5 million, which resulted from $47.5 million in net income adjusted for noncash items, plus $41.0 million representing the net change in operating assets and liabilities. The net change in operating assets and liabilities resulted primarily from a $48.1 million decrease in inventory levels. INVESTING ACTIVITIES AND FINANCING ACTIVITIES Net cash used in investing activities for Six Months 1999 was $14.8 million, which resulted primarily from $14.1 million of capital expenditures, including $4.4 million for vineyards. Net cash used in financing activities for Six Months 1999 was $73.5 million, which resulted primarily from repurchases of $36.0 million of the Company's Class A Common Stock, net repayments of $28.9 million of revolving loan borrowings under the Company's bank credit agreement and principal payments of $12.0 million of long-term debt. During June 1998, the Company's Board of Directors authorized the repurchase of up to $100.0 million of its Class A Common Stock and Class B Common Stock. The repurchase of shares of common stock will be accomplished, from time to time, depending upon market conditions, through open market or privately negotiated transactions. The Company may finance such repurchases through cash generated from operations or through the bank credit agreement. In July 1998, the revolving loan facility under the bank credit agreement was increased by $100.0 million to $285.0 million in order to increase its flexibility to make such purchases . The repurchased shares will become treasury shares and may be used for general corporate purposes. As of September 28, 1998, the Company had purchased 1,018,836 shares of Class A Common Stock at an aggregate cost of $44.9 million, or at an average cost of $44.05 per share. - 12 - DEBT Total debt outstanding as of August 31, 1998, amounted to $384.5 million, a decrease of $40.7 million from February 28, 1998, resulting primarily from the net repayments of revolving loan borrowings and principal payments of long-term debt. The ratio of total debt to total capitalization decreased to 48.4% as of August 31, 1998, from 50.6% as of February 28, 1998. As of August 31, 1998, under its bank credit agreement, the Company had outstanding term loans of $128.0 million bearing interest at 6.3%, $63.0 million of revolving loans bearing interest at 6.3%, undrawn revolving letters of credit of $8.4 million, and $213.6 million in revolving loans available to be drawn. During June 1998, the bank credit agreement was amended to, among other things, eliminate the requirement that the Company reduce the outstanding balance of the revolving loan facility to less than $60,000,000 for thirty consecutive days during the six months ending each August 31. As of August 31, 1998, the Company had outstanding $195.0 million aggregate principal amount of 8 3/4% Senior Subordinated Notes due December 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. ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives) and for hedging activities. SFAS No. 133 requires that every derivative be recorded as either an asset or liability in the balance sheet measured at its fair value. SFAS No. 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. The Company is required to adopt SFAS No. 133 on a prospective basis for interim periods and fiscal years beginning March 1, 2000. The Company believes the effect of adoption on its financial statements will not be material. YEAR 2000 ISSUE The Company has in place detailed programs to address Year 2000 readiness in its internal systems and with its key customers and suppliers. The Year 2000 issue is the result of computer logic that was written using two digits rather than four to define the applicable year. Any computer logic that processes date-sensitive information may recognize the date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. Pursuant to the Company's readiness programs, all major categories of information technology systems and non-information technology systems (i.e., equipment with embedded microprocessors) in use by the Company, including manufacturing, sales, financial and human resources, are being inventoried and assessed. In addition, plans are being developed for the required systems modifications or replacements. With respect to its information technology systems, the Company has completed the - 13 - entire assessment phase and approximately 50% of the remediation phase. With respect to its non-information technology systems, the Company has completed approximately 80% of the assessment phase and approximately 40% of the remediation phase. Selected areas, both internal and external, will be tested to assure the integrity of the Company's remediation programs. The testing is expected to be completed by September 1999. The Company plans to have all internal mission-critical information technology and non-information technology systems Year 2000 compliant by September 1999. The Company is also communicating with its major customers, suppliers and financial institutions to assess the potential impact on the Company's operations if those third parties fail to become Year 2000 compliant in a timely manner. While this process is not yet complete, based upon responses to date, it appears that many of those customers and suppliers have only indicated that they have in place Year 2000 readiness programs, without specifically confirming that they will be Year 2000 compliant in a timely manner. Risk assessment, readiness evaluation, action plans and contingency plans related to the Company's significant customers and suppliers are expected to be completed by September 1999. The Company's key financial institutions have been surveyed and it is the Company's understanding that they are or will be Year 2000 compliant on or before December 31, 1999. The costs incurred to date related to its Year 2000 activities have not been material to the Company, and, based upon current estimates, the Company does not believe that the total cost of its Year 2000 readiness programs will have a material adverse impact on the Company's results of operations or financial condition. The Company's readiness programs also include the development of contingency plans to protect its business and operations from Year 2000-related interruptions. These plans should be complete by September 1999 and, by way of examples, will include back-up procedures, identification of alternate suppliers, where possible, and increases in safety inventory levels. Based upon the Company's current assessment of its non-information technology systems, the Company does not believe it necessary to develop an extensive contingency plan for those systems. There can be no assurances, however, that any of the Company's contingency plans will be sufficient to handle all problems or issues which may arise. The Company believes that it is taking reasonable steps to identify and address those matters that could cause serious interruptions in its business and operations due to Year 2000 issues. However, delays in the implementation of new systems, a failure to fully identify all Year 2000 dependencies in the Company's systems and in the systems of its suppliers, customers and financial institutions, a failure of such third parties to adequately address their respective Year 2000 issues, or a failure of a contingency plan could have a material adverse effect on the Company's business, financial condition and results of operations. For example, the Company would experience a material adverse impact on its business if significant suppliers of beer, glass or telecommunications systems fail to timely provide the Company with necessary inventories or services due to Year 2000 systems failures. The statements set forth herein concerning Year 2000 issues which are not historical facts are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. In particular, the costs associated with the Company's Year 2000 programs and the time-frame in which the Company plans to complete Year 2000 modifications are based upon management's best estimates. These estimates were derived from internal assessments and assumptions of future events. These estimates may be adversely affected by the continued availability of personnel and system resources, and by the failure of significant third parties to properly address Year 2000 issues. Therefore, there can be no guarantee that any estimates, or other - 14 - forward-looking statements will be achieved, and actual results could differ significantly from those contemplated. 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., held on July 21, 1998 (the "Annual Meeting"), the holders of the Company'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 the Company'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 and restate the Company's Restated Certificate of Incorporation, as presently amended, to incorporate a prior amendment and to increase the number of authorized shares of the Class A Common Stock of the Company from 60,000,000 to 120,000,000, thereby increasing the aggregate number of authorized shares of the Company to 141,000,000. (ii) 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, 1999. 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 13,248,797 128,410 Paul L. Smith 13,249,427 127,780 - 15 - Directors Elected By the Holders of Class B Stock: -------------------------------------------------- Nominee For Withheld ------- --- -------- George Bresler 31,515,390 10,540 James A. Locke, III 31,516,410 9,520 Marvin Sands 31,516,410 9,520 Richard Sands 31,511,310 14,620 Robert Sands 31,511,310 14,620 Bertram E. Silk 31,516,410 9,520 II. The proposal to amend and restate the Company's Restated Certificate of Incorporation, as amended, was approved with the following votes: For: 43,046,325 Against: 1,804,141 Abstain: 52,671 Broker Nonvotes: 0 III. The selection of Arthur Andersen LLP was ratified with the following votes: For: 44,799,615 Against: 11,230 Abstain: 92,292 Broker Nonvotes: 0 ITEM 5. OTHER INFORMATION. Any notice of a proposal that is submitted outside the processes of Rule 14a-8 promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), and which a stockholder intends to bring forth at the Company's 1999 Annual Meeting of Stockholders will be untimely for purposes of Rule 14a-4 of the Act, if received by the Company after February 16, 1999. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) See Index to Exhibits located on Page 20 of this Report. (b) No Reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended August 31, 1998. - 16 - 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 28, 1998 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Vice President, Corporate Reporting and Controller Dated: September 28, 1998 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 28, 1998 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Controller Dated: September 28, 1998 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) CANANDAIGUA WINE COMPANY, INC. Dated: September 28, 1998 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Controller Dated: September 28, 1998 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) - 17 - CANANDAIGUA EUROPE LIMITED Dated: September 28, 1998 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Controller Dated: September 28, 1998 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) ROBERTS TRADING CORP. Dated: September 28, 1998 By: /s/ Thomas F. Howe ------------------------------------ Thomas F. Howe, Controller Dated: September 28, 1998 By: /s/ Thomas S. Summer ------------------------------------ Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) BARTON INCORPORATED Dated: September 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President and Chief Executive Officer Dated: September 28, 1998 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 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, Executive Vice President Dated: September 28, 1998 By: /s/ Raymond E. Powers ------------------------------------ Raymond E. Powers, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) - 18 - BARTON BEERS, LTD. Dated: September 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, Executive Vice President Dated: September 28, 1998 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 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: September 28, 1998 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 GEORGIA, INC. Dated: September 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: September 28, 1998 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 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: September 28, 1998 By: /s/ Raymond E. Powers ------------------------------------ Raymond E. Powers, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) - 19 - BARTON FINANCIAL CORPORATION Dated: September 28, 1998 By: /s/ Raymond E. Powers ------------------------------------ Raymond E. Powers, President and Secretary Dated: September 28, 1998 By: /s/ Charles T. Schlau ------------------------------------ Charles T. Schlau, Treasurer (Principal Financial Officer and Principal Accounting Officer) STEVENS POINT BEVERAGE CO. Dated: September 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, Executive Vice President Dated: September 28, 1998 By: /s/ Raymond E. Powers ------------------------------------ Raymond E. Powers, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) MONARCH IMPORT COMPANY Dated: September 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: September 28, 1998 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 28, 1998 By: /s/ Alexander L. Berk ------------------------------------ Alexander L. Berk, President Dated: September 28, 1998 By: /s/ Raymond E. Powers ------------------------------------ Raymond E. Powers, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) - 20 - INDEX TO EXHIBITS (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. Not applicable. (3) ARTICLES OF INCORPORATION AND BY-LAWS. 3.1 Restated Certificate of Incorporation of the Company (filed herewith). 3.2 Amended and Restated By-Laws of the Company (filed herewith). (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. 4.1 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). 4.2 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). 4.3 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). 4.4 Third Supplemental Indenture, dated as of December 19, 1997, among the Company, Canandaigua Europe Limited, Roberts Trading Corp. and The Chase Manhattan Bank (filed as Exhibit 4.4 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1998 and incorporated herein by reference). 4.5 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). 4.6 First Supplemental Indenture, dated as of December 19, 1997, among the Company, Canandaigua Europe Limited, Roberts Trading Corp. and Harris Trust and Savings Bank (filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1998 and incorporated herein by reference). 4.7 Credit Agreement between the Company, its principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent, dated as of December 19, 1997 (filed as Exhibit 4.7 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1998 and incorporated herein by reference). - 21 - 4.8 Amendment No. 1 to Credit Agreement, dated as of June 19, 1998, between the Company, its principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent (filed herewith). 4.9 Tranche II Revolving Agreement (Series A), dated as of July 15, 1998, between the Company, its principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent (including identification of the omitted annex thereto) (filed herewith). (10) MATERIAL CONTRACTS. 10.1 Amendment No. 1 to Credit Agreement, dated as of June 19, 1998, between the Company, its principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent (incorporated by reference to Exhibit 4.8, filed herewith). 10.2 Tranche II Revolving Agreement (Series A), dated as of July 15, 1998, between the Company, its principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent (including identification of the omitted annex thereto) (incorporated by reference to Exhibit 4.9, 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. - 22 - (27) FINANCIAL DATA SCHEDULE. Financial Data Schedule (filed herewith). (99) ADDITIONAL EXHIBITS. Not applicable.