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, 1999 --------------- 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 ENGLAND AND WALES CANANDAIGUA LIMITED ----- NEW YORK POLYPHENOLICS, INC. 16-1546354 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) 218-2169 ---------------------------------------------------- (Registrants' telephone number, including area code) ---------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding with respect to each of the classes of common stock of Canandaigua Brands, Inc., as of September 30, 1999, 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 14,896,803 Class B Common Stock, Par Value $.01 Per Share 3,158,345 - 1 - PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ------- -------------------- CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share data) August 31, February 28, 1999 1999 ----------- ------------ (unaudited) ASSETS ------ CURRENT ASSETS: Cash and cash investments $ 4,340 $ 27,645 Accounts receivable, net 344,652 260,433 Inventories, net 602,257 508,571 Prepaid expenses and other current assets 74,206 59,090 ----------- ----------- Total current assets 1,025,455 855,739 PROPERTY, PLANT AND EQUIPMENT, net 553,442 428,803 OTHER ASSETS 801,391 509,234 ----------- ----------- Total assets $ 2,380,288 $ 1,793,776 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable $ 75,077 $ 87,728 Current maturities of long-term debt 17,844 6,005 Accounts payable 150,354 122,746 Accrued excise taxes 41,469 49,342 Other accrued expenses and liabilities 214,287 149,451 ----------- ----------- Total current liabilities 499,031 415,272 ----------- ----------- LONG-TERM DEBT, less current maturities 1,274,295 831,689 ----------- ----------- DEFERRED INCOME TAXES 110,261 88,179 ----------- ----------- OTHER LIABILITIES 27,752 23,364 ----------- ----------- COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value- Authorized, 1,000,000 shares; Issued, none at August 31, 1999, and February 28, 1999 - - Class A Common Stock, $.01 par value- Authorized, 120,000,000 shares; Issued, 18,036,328 shares at August 31, 1999, and 17,915,359 shares at February 28, 1999 180 179 Class B Convertible Common Stock, $.01 par value- Authorized, 20,000,000 shares; Issued, 3,796,524 shares at August 31, 1999, and 3,849,173 shares at February 28, 1999 38 39 Additional paid-in capital 242,324 239,912 Retained earnings 313,028 281,081 Accumulated other comprehensive income- Cumulative translation adjustment (4,907) (4,173) ----------- ----------- 550,663 517,038 ----------- ----------- Less-Treasury stock- Class A Common Stock, 3,156,004 shares at August 31, 1999, and 3,168,306 shares at (79,507) (79,559) February 28, 1999, at cost Class B Convertible Common Stock, 625,725 shares at August 31, 1999, and February 28, 1999, at cost (2,207) (2,207) ----------- ----------- (81,714) (81,766) ----------- ----------- Total stockholders' equity 468,949 435,272 ----------- ----------- Total liabilities and stockholders' equity $ 2,380,288 $ 1,793,776 =========== =========== 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, ----------------------------------- ------------------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) (unaudited) GROSS SALES $ 1,519,834 $ 880,150 $ 814,845 $ 457,281 Less - Excise taxes (368,085) (217,836) (193,265) (107,895) ------------ ------------ ------------ ------------ Net sales 1,151,749 662,314 621,580 349,386 COST OF PRODUCT SOLD (806,499) (467,017) (432,452) (246,150) ------------ ------------ ------------ ------------ Gross profit 345,250 195,297 189,128 103,236 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (235,821) (128,786) (125,320) (67,454) NONRECURRING CHARGES (5,510) - - - ------------ ------------ ------------ ------------ Operating income 103,919 66,511 63,808 35,782 INTEREST EXPENSE, net (50,675) (15,952) (28,640) (7,425) ------------ ------------ ------------ ------------ Income before income taxes 53,244 50,559 35,168 28,357 PROVISION FOR INCOME TAXES (21,297) (20,729) (14,067) (11,626) ------------ ------------ ------------ ------------ NET INCOME $ 31,947 $ 29,830 $ 21,101 $ 16,731 ============ ============ ============ ============ SHARE DATA: Earnings per common share: Basic $ 1.78 $ 1.60 $ 1.17 $ 0.90 ============ ============ ============ ============= Diluted $ 1.73 $ 1.56 $ 1.14 $ 0.88 ============ ============ ============ ============= Weighted average common shares outstanding: Basic 17,994 18,669 18,010 18,589 Diluted 18,459 19,168 18,499 19,051 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, ----------------------------------- 1999 1998 ------------ ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 31,947 $ 29,830 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 23,733 11,952 Amortization of intangible assets 10,410 5,015 Stock-based compensation expense 769 51 Amortization of discount on long-term debt 208 189 Deferred tax (benefit) provision (1,697) 900 Gain on sale of assets (1,486) (3) Change in operating assets and liabilities, net of effects from purchases of businesses: Accounts receivable, net (64,766) (11,935) Inventories, net 20,585 47,306 Prepaid expenses and other current assets (12,559) (10,867) Accounts payable 9,383 11,339 Accrued excise taxes (8,076) 4,063 Other accrued expenses and liabilities 48,417 3,213 Other assets and liabilities, net 2,230 (2,549) ----------- ----------- Total adjustments 27,151 58,674 ----------- ----------- Net cash provided by operating activities 59,098 88,504 ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of businesses, net of cash acquired (452,491) - Purchases of property, plant and equipment (30,759) (14,098) Proceeds from sale of assets 1,071 27 Purchase of joint venture minority interest - (716) ----------- ----------- Net cash used in investing activities (482,179) (14,787) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 664,080 - Exercise of employee stock options 1,194 2,154 Proceeds from employee stock purchases 601 1,284 Principal payments of long-term debt (242,529) (12,000) Net repayments of notes payable (12,676) (28,900) Payment of issuance costs of long-term debt (10,751) - Purchases of treasury stock - (36,014) ----------- ----------- Net cash provided by (used in) financing activities 399,919 (73,476) ----------- ----------- Effect of exchange rate changes on cash and cash investments (143) - ----------- ----------- NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS (23,305) 241 CASH AND CASH INVESTMENTS, beginning of period 27,645 1,232 ----------- ----------- CASH AND CASH INVESTMENTS, end of period $ 4,340 $ 1,473 =========== =========== SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Fair value of assets acquired, including cash acquired $ 554,235 $ - Liabilities assumed (99,255) - ----------- ----------- Cash paid 454,980 - Less - cash acquired (2,489) - ----------- ----------- Net cash paid for purchases of businesses $ 452,491 $ - =========== =========== The accompanying notes to consolidated financial statements are an integral part of these statements.
- 4 - CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AUGUST 31, 1999 1) MANAGEMENT'S REPRESENTATIONS: The condensed consolidated financial statements included herein have been prepared by Canandaigua Brands, Inc. and its subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1999. 2) ACQUISITIONS: On April 9, 1999, in an asset acquisition, the Company acquired several well-known Canadian whisky brands, including Black Velvet, production facilities located in Alberta and Quebec, Canada, case goods and bulk whisky inventories and other related assets from affiliates of Diageo plc (the "Black Velvet Acquisition"). In connection with the transaction, the Company also entered into multi-year agreements with Diageo to provide packaging and distilling services for various brands retained by Diageo. The purchase price was approximately $185.5 million and was financed by the proceeds from the sale of the "Senior Subordinated Notes" (as defined in Note 6). The Black Velvet Acquisition was accounted for using the purchase method; accordingly, the acquired assets were recorded at fair market value at the date of acquisition. The excess of the purchase price over the estimated fair market value of the net assets acquired (goodwill), $30.1 million, is being amortized on a straight-line basis over 40 years. The results of operations of the Black Velvet Acquisition have been included in the Consolidated Statements of Income since the date of acquisition. On June 4, 1999, the Company purchased all of the outstanding capital stock of Franciscan Vineyards, Inc. and related transactions purchased vineyards, a winery, equipment and other vineyard related assets located in Northern California (collectively, the "Franciscan Acquisition"). The purchase price was approximately $212.0 million cash plus assumed debt, net of cash acquired, of approximately $30.8 million. The purchase price was financed by additional term loan borrowings under the bank credit agreement. Also, on June 4, 1999, the Company acquired all of the outstanding capital stock of Simi Winery, Inc. (the "Simi Acquisition"). The cash purchase price was approximately $57.5 million and was financed by revolving loan borrowings under the bank credit agreement. The purchases were accounted for using the purchase method; accordingly, the acquired assets were recorded at fair market value at the date of acquisition. The excess of the purchase price over the estimated fair market value of the net assets acquired (goodwill) for the Franciscan Acquisition and the Simi Acquisition, $72.0 million and $6.9 million, respectively, is being amortized on a straight-line basis over 40 years. The Franciscan and Simi operations are managed together as a separate business segment of the Company ("Franciscan"). The results of operations of Franciscan have been included in the Consolidated Statements of Income since the date of acquisition. The unaudited pro forma results of operations for the six months ended August 31, 1999 (shown in the table below), reflect total nonrecurring charges of $12.4 million ($0.40 per share on a diluted basis) related to transaction costs, primarily for exercise of stock options, which were incurred by Franciscan Vineyards, Inc. prior to the acquisition. - 5 - The following table sets forth the unaudited pro forma results of operations of the Company for the six months ended August 31, 1999 and 1998, which gives effect to the acquisition of Matthew Clark plc ("Matthew Clark"), the Black Velvet Acquisition and Franciscan as if they occurred on March 1, 1998. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of goodwill, interest expense on the acquisition financing and related income tax effects. The unaudited pro forma results of operations are based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations do not purport to present what the Company's results of operations would actually have been if the aforementioned transactions had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company's financial position or results of operations at any future date or for any future period. For the Six Months Ended August 31, ----------------------------------- 1999 1998 --------------- --------------- (in thousands, except per share data) Net sales $ 1,179,113 $ 1,062,563 Income before income taxes $ 37,711 $ 55,300 Net income $ 22,627 $ 32,626 Earnings per common share: Basic $ 1.26 $ 1.75 =============== =============== Diluted $ 1.23 $ 1.70 =============== =============== Weighted average common shares outstanding: Basic 17,994 18,669 Diluted 18,459 19,168 3) INVENTORIES: Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following: August 31, February 28, 1999 1999 --------------- --------------- (in thousands) Raw materials and supplies $ 37,523 $ 32,388 Wine and distilled spirits in process 362,514 344,175 Finished case goods 202,220 132,008 --------------- --------------- $ 602,257 $ 508,571 =============== =============== - 6 - 4) OTHER ASSETS: The major components of other assets are as follows: August 31, February 28, 1999 1999 --------------- --------------- (in thousands) Goodwill $ 421,079 $ 311,908 Trademarks 270,243 102,183 Distribution rights and agency license agreements 87,052 76,894 Other 68,274 53,779 --------------- --------------- 846,648 544,764 Less - Accumulated amortization (45,257) (35,530) --------------- --------------- $ 801,391 $ 509,234 =============== =============== 5) OTHER ACCRUED EXPENSES AND LIABILITIES: The major components of other accrued expenses and liabilities are as follows: August 31, February 28, 1999 1999 --------------- --------------- (in thousands) Accrued advertising and promotions $ 53,830 $ 38,604 Accrued income taxes payable 28,765 9,347 Accrued interest 12,814 11,384 Accrued salaries and commissions 10,980 15,584 Other 107,898 74,532 --------------- -------------- $ 214,287 $ 149,451 =============== ============== 6) BORROWINGS: On March 4, 1999, the Company issued $200.0 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated Notes"). The net proceeds of the offering (approximately $195.0 million) were used to fund the Black Velvet Acquisition and to pay the fees and expenses related thereto with the remainder of the net proceeds used for general corporate purposes. Interest on the Senior Subordinated Notes is payable semiannually on March 1 and September 1 of each year, beginning September 1, 1999. The Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 2004. The Company may also redeem up to $70.0 million of the Senior Subordinated Notes using the proceeds of certain equity offerings completed before March 1, 2002. The Senior Subordinated 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 Senior Subordinated Notes are guaranteed, on a senior subordinated basis, by certain of the Company's significant operating subsidiaries. On August 4, 1999, the Company issued $200.0 million aggregate principal amount of 8 5/8% Senior Notes due August 2006 ("Senior Notes"). The net proceeds of the offering (approximately $196.0 million) was used to repay a portion of the Company's borrowings under its bank credit agreement. Interest on the Senior Notes is payable semiannually on February 1 and August 1 of each year, beginning - 7 - February 1, 2000. The Senior Notes are redeemable at the option of the Company, in whole or in part, at any time. The Senior Notes are unsecured senior obligations and rank equally in right of payment to all existing and future unsecured senior indebtedness of the Company. The Senior Notes are guaranteed, on a senior basis, by certain of the Company's significant operating subsidiaries. 7) EARNINGS PER COMMON SHARE: Basic earnings per common share exclude the effect of common stock equivalents and are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period for Class A Common Stock and Class B Convertible Common Stock. Diluted earnings per common share reflect the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per common share assume the exercise of stock options using the treasury stock method and assume the conversion of convertible securities, if any, using the "if converted" method. The computation of basic and diluted earnings per common share is as follows:
For the Six Months For the Three Months Ended August 31, Ended August 31, ------------------------ ------------------------- 1999 1998 1999 1998 ---------- ---------- ---------- ---------- (in thousands, except per share data) Income applicable to common shares $ 31,947 $ 29,830 $ 21,101 $ 16,731 ========== ========== ========== ========== Weighted average common shares outstanding - basic 17,994 18,669 18,010 18,589 Stock options 465 499 489 462 ----------- ---------- ---------- ---------- Weighted average common shares outstanding - diluted 18,459 19,168 18,499 19,051 =========== ========== ========== ========== EARNINGS PER COMMON SHARE - BASIC $ 1.78 $ 1.60 $ 1.17 $ 0.90 =========== ========== ========== ========== EARNINGS PER COMMON SHARE - DILUTED $ 1.73 $ 1.56 $ 1.14 $ 0.88 =========== ========== ========== ==========
8) STOCK INCENTIVE PLANS: At the Company's Annual Meeting of Stockholders held on July 20, 1999, stockholders approved the amendment to the Company's Long-Term Stock Incentive Plan to increase the aggregate number of shares of the Class A Stock available for awards under the plan from 4,000,000 shares to 7,000,000 shares. 9) SUMMARIZED FINANCIAL INFORMATION - SUBSIDIARY GUARANTORS: The following table presents summarized financial information for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company's senior subordinated notes and senior notes ("Subsidiary Guarantors") and the combined subsidiaries of the Company which are not Subsidiary Guarantors, primarily Matthew Clark ("Subsidiary Nonguarantors"). The Subsidiary Guarantors are wholly owned and the guarantees are full, unconditional, joint and several obligations of each of the Subsidiary Guarantors. Separate financial statements for the Subsidiary Guarantors of the Company are not presented because the Company has determined that such financial statements would not be material to investors. The Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company, other than Matthew Clark, the Company's Canadian subsidiary, and certain other subsidiaries which individually, and in the aggregate, are inconsequential. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances. - 8 -
Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ------------ ------------ ------------- ------------ ------------ (in thousands) Balance Sheet Data: August 31, 1999 - --------------- Current assets $ 109,222 $ 610,468 $ 305,765 $ - $ 1,025,455 Noncurrent assets $ 922,563 $ 1,254,587 $ 458,473 $ (1,280,790) $ 1,354,833 Current liabilities $ 181,854 $ 29,961 $ 287,216 $ - $ 499,031 Noncurrent liabilities $ 1,267,132 $ 95,768 $ 49,408 $ - $ 1,412,308 February 28, 1999 - ----------------- Current assets $ 114,243 $ 532,028 $ 209,468 $ - $ 855,739 Noncurrent assets $ 646,133 $ 396,125 $ 421,867 $ (526,088) $ 938,037 Current liabilities $ 157,648 $ 126,803 $ 130,821 $ - $ 415,272 Noncurrent liabilities $ 815,421 $ 73,178 $ 54,633 $ - $ 943,232 Income Statement Data: For the Six Months - ------------------ Ended August 31, 1999 - --------------------- Net sales $ 276,053 $ 694,858 $ 356,468 $ (175,630) $ 1,151,749 Gross profit $ 89,328 $ 153,379 $ 102,543 $ - $ 345,250 Income before income taxes $ 6,592 $ 26,624 $ 20,028 $ - $ 53,244 Net income $ 3,955 $ 15,974 $ 12,018 $ - $ 31,947 For the Six Months - ------------------ Ended August 31, 1998 - --------------------- Net sales $ 248,590 $ 552,352 $ 1,093 $ (139,721) $ 662,314 Gross profit $ 71,268 $ 123,635 $ 394 $ - $ 195,297 (Loss) income before income taxes $ (511) $ 51,359 $ (289) $ - $ 50,559 Net (loss) income $ (302) $ 30,302 $ (170) $ - $ 29,830 For the Three Months - -------------------- Ended August 31, 1999 - --------------------- Net sales $ 121,430 $ 395,639 $ 188,258 $ (83,747) $ 621,580 Gross profit $ 49,898 $ 83,504 $ 55,726 $ - $ 189,128 Income before income taxes $ 11,616 $ 11,086 $ 12,466 $ - $ 35,168 Net income $ 6,969 $ 6,652 $ 7,480 $ - $ 21,101 - 9 - Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ------------ ------------ ------------- ------------ ------------ (in thousands) For the Three Months - -------------------- Ended August 31, 1998 - --------------------- Net sales $ 137,438 $ 289,774 $ 271 $ (78,097) $ 349,386 Gross profit $ 36,878 $ 66,298 $ 60 $ - $ 103,236 (Loss) income before income taxes $ (404) $ 29,177 $ (416) $ - $ 28,357 Net (loss) income $ (238) $ 17,266 $ (297) $ - $ 16,731
10) BUSINESS SEGMENT INFORMATION: The Company reports its operating results in five segments: Canandaigua Wine (branded popularly-priced wine and brandy, and other, primarily grape juice concentrate); Barton (primarily beer and spirits); Matthew Clark (branded wine, cider and bottled water, and wholesale wine, cider, spirits, beer and soft drinks); Franciscan (primarily branded super-premium and ultra-premium wine) and Corporate Operations and Other (primarily corporate related items). Segment selection was based upon internal organizational structure, the way in which these operations are managed and their performance evaluated by management and the Company's Board of Directors, the availability of separate financial results, and materiality considerations. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on operating profits of the respective business units. Segment information is as follows:
For the Six Months For the Three Months Ended August 31, Ended August 31, --------------------------- --------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (in thousands) Canandaigua Wine: - ----------------- Net sales: Branded: External customers $ 292,182 $ 267,343 $ 149,540 $ 140,545 Intersegment 2,989 - 1,239 - ----------- ----------- ----------- ----------- Total Branded 295,171 267,343 150,779 140,545 ----------- ----------- ----------- ----------- Other: External customers 38,579 39,350 19,449 20,211 Intersegment 37 - - - ----------- ----------- ----------- ----------- Total Other 38,616 39,350 19,449 20,211 ----------- ----------- ----------- ----------- Net sales $ 333,787 $ 306,693 $ 170,228 $ 160,756 Operating profit $ 16,019 $ 17,661 $ 10,412 $ 10,221 Long-lived assets $ 194,114 $ 187,329 $ 194,114 $ 187,329 Total assets $ 597,832 $ 562,397 $ 597,832 $ 562,397 Capital expenditures $ 12,708 $ 11,418 $ 7,070 $ 6,582 Depreciation and amortization $ 11,649 $ 10,716 $ 6,113 $ 5,125 - 10 - For the Six Months For the Three Months Ended August 31, Ended August 31, --------------------------- --------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (in thousands) Barton: - ------- Net sales: Beer $ 323,806 $ 259,929 $ 177,195 $ 141,133 Spirits 127,149 94,599 73,010 47,227 ----------- ----------- ----------- ----------- Net sales $ 450,955 $ 354,528 $ 250,205 $ 188,360 Operating profit $ 73,459 $ 54,620 $ 41,962 $ 28,832 Long-lived assets $ 76,849 $ 51,008 $ 76,849 $ 51,008 Total assets $ 714,677 $ 484,607 $ 714,677 $ 484,607 Capital expenditures $ 2,668 $ 1,688 $ 1,752 $ 928 Depreciation and amortization $ 6,398 $ 5,392 $ 3,237 $ 2,700 Matthew Clark: - -------------- Net sales: Branded $ 155,254 $ - $ 80,879 $ - Wholesale 194,753 - 102,331 - ----------- ----------- ----------- ----------- Net sales $ 350,007 $ - $ 183,210 $ - Operating profit $ 19,310 $ - $ 11,980 $ - Long-lived assets $ 170,703 $ - $ 170,703 $ - Total assets $ 678,498 $ - $ 678,498 $ - Capital expenditures $ 11,115 $ - $ 6,459 $ - Depreciation and amortization $ 12,816 $ - $ 8,390 $ - Franciscan: - ----------- Net sales $ 17,137 $ - $ 17,137 $ - Operating profit $ 1,571 $ - $ 1,571 $ - Long-lived assets $ 94,716 $ - $ 94,716 $ - Total assets $ 352,790 $ - $ 352,790 $ - Capital expenditures $ 3,720 $ - $ 3,720 $ - Depreciation and amortization $ 1,809 $ - $ 1,809 $ - Corporate Operations and Other: - ------------------------------- Net sales $ 2,889 $ 1,093 $ 2,004 $ 270 Operating loss $ (6,440) $ (5,770) $ (2,117) $ (3,271) Long-lived assets $ 17,060 $ 7,820 $ 17,060 $ 7,820 Total assets $ 36,491 $ 18,847 $ 36,491 $ 18,847 Capital expenditures $ 548 $ 992 $ 437 $ 960 Depreciation and amortization $ 1,471 $ 859 $ 831 $ 634 - 11 - For the Six Months For the Three Months Ended August 31, Ended August 31, --------------------------- --------------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ----------- (in thousands) Intersegment eliminations: - -------------------------- Net sales $ (3,026) $ - $ (1,204) $ - Consolidated: - ------------- Net sales $ 1,151,749 $ 662,314 $ 621,580 $ 349,386 Operating profit $ 103,919 $ 66,511 $ 63,808 $ 35,782 Long-lived assets $ 553,442 $ 246,157 $ 553,442 $ 246,157 Total assets $ 2,380,288 $ 1,065,851 $ 2,380,288 $ 1,065,851 Capital expenditures $ 30,759 $ 14,098 $ 19,438 $ 8,470 Depreciation and amortization $ 34,143 $ 16,967 $ 20,380 $ 8,459
11) COMPREHENSIVE INCOME: Comprehensive income consists of net income and foreign currency translation adjustments for the six month and three month periods ended August 31, 1999. For the six month and three month periods ended August 31, 1998, comprehensive income consisted of net income, exclusively. The reconciliation of net income to comprehensive net income is as follows:
For the Six Months For the Three Months Ended August 31, Ended August 31, --------------------------- --------------------------- 1999 1998 1999 1998 ------------ ------------ ------------ ------------ (in thousands) Net income $ 31,947 $ 29,830 $ 21,101 $ 16,731 Other comprehensive income: Cumulative translation adjustment ( 734) - ( 1,584) - ------------ ------------ ------------ ------------ Total comprehensive income $ 31,213 $ 29,830 $ 19,517 $ 16,731 ============ ============ ============ ============
12) ACCOUNTING PRONOUNCEMENTS: In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires that every derivative be recorded as either an asset or liability in the balance sheet and measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 ("SFAS No. 137"), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 delays the - 12 - effective date of SFAS No. 133 for one year. With the issuance of SFAS No. 137, the Company is required to adopt SFAS No. 133 on a prospective basis for interim periods and fiscal years beginning March 1, 2001. The Company believes the effect of the adoption on its financial statements will not be material based on the Company's current risk management strategies. 13) SUBSEQUENT EVENT: 2000 CREDIT AGREEMENT - On October 6, 1999, the Company, certain of its principal operating subsidiaries and a syndicate of banks (the "Syndicate Banks"), for which The Chase Manhattan Bank acts as administrative agent, entered into a new senior credit agreement (the "2000 Credit Agreement"). The 2000 Credit Agreement includes both U.S. dollar and British pound sterling commitments of the Syndicate Banks of up to, in the aggregate, the equivalent of $1.0 billion (subject to increase as therein provided to $1.2 billion). Proceeds of the 2000 Credit Agreement were used to repay all outstanding principal and accrued interest on all loans under the Company's prior bank credit agreement, and are available to fund permitted acquisitions and ongoing working capital needs of the Company and its subsidiaries. The 2000 Credit Agreement provides for a $380.0 million Tranche I Term Loan facility due in December 2004, a $320.0 million Tranche II Term Loan facility available for borrowing in British pound sterling due in December 2004, and a $300.0 million Revolving Credit facility (including letters of credit up to a maximum of $20.0 million) which expires in December 2004. The Tranche I Term Loan facility requires quarterly repayments, starting at $12.0 million in March 2000 and increasing thereafter annually with final payments of $23.0 million in each quarter in 2004. The Tranche II Term Loan facility requires quarterly repayments of $1.6 million for each quarter in 2000, $3.2 million for each quarter in 2001 and 2002, $4.0 million for each quarter in 2003 and $68.0 million in each quarter in 2004 (all such repayments shall be in British pound sterling and the foregoing amounts reflect the U.S. dollar equivalents at closing on October 6, 1999). There are certain mandatory term loan prepayments, including those based on sale of assets and issuance of debt and equity, in each case subject to baskets, exceptions and thresholds which are generally more favorable to the Company than those contained in its prior bank credit agreement. The rate of interest payable, at the Company's option, is a function of the London interbank offering rate (LIBOR) plus a margin, federal funds rate plus a margin, or the prime rate plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as defined in the 2000 Credit Agreement) and, with respect to LIBOR borrowings, ranges between 0.75% and 1.25% for Revolving Credit loans and 1.00% and 1.75% for Term Loans. The initial margin for all loans was set at the highest level at closing and is subject to reduction after November 30, 1999, depending on the Company's Debt Ratio. In addition to interest, the Company pays a facility fee on the Revolving Credit commitments, initially at 0.50% per annum and subject to reduction after November 30, 1999, to 0.25%, depending on the Company's Debt Ratio. Certain of the Company's principal operating subsidiaries have guaranteed the Company's obligations under the 2000 Credit Agreement. In addition, subject to certain limitations applicable to inactive subsidiaries and to some of the Company's foreign subsidiaries, all of the capital stock of each operating wholly-owned subsidiary (other than the subsidiaries of Matthew Clark) has been pledged to the Syndicate Banks as security for the obligations under the 2000 Credit Agreement. The Company and its subsidiaries are subject to customary secured lending covenants including those restricting additional liens, incurring additional indebtedness, the sale of assets, the payment of dividends, transactions with affiliates and the making of certain investments, in each case subject to - 13 - baskets, exceptions and thresholds which are generally more favorable to the Company than those contained in its prior bank credit agreement. The primary financial covenants require the maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed charges ratio and an interest coverage ratio. Among the most restrictive covenants contained in the 2000 Credit Agreement is the requirement to maintain a fixed charges ratio of not less than 1.0 at the last day of each fiscal quarter for the most recent four quarters. - 14 - 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, 1999 ("Second Quarter 2000"), compared to the three months ended August 31, 1998 ("Second Quarter 1999"), and for the six months ended August 31, 1999 ("Six Months 2000"), compared to the six months ended August 31, 1998 ("Six Months 1999"), and (ii) financial liquidity and capital resources for Six Months 2000. 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, 1999. The Company operates primarily in the beverage alcohol industry in the United States and the United Kingdom. The Company reports its operating results in five segments: Canandaigua Wine (branded popularly-priced wine and brandy, and other, primarily grape juice concentrate); Barton (primarily beer and spirits); Matthew Clark (branded wine, cider and bottled water, and wholesale wine, cider, spirits, beer and soft drinks); Franciscan (primarily branded super-premium and ultra-premium wine); and Corporate Operations and Other (primarily corporate related items). RECENT ACQUISITIONS On December 1, 1998, the Company acquired control of Matthew Clark plc ("Matthew Clark") and has since acquired all of Matthew Clark's outstanding shares (the "Matthew Clark Acquisition"). Prior to the Matthew Clark Acquisition, the Company was principally a producer and supplier of wine and an importer and producer of beer and distilled spirits in the United States. The Matthew Clark Acquisition established the Company as a leading British producer of cider, wine and bottled water and as a leading beverage alcohol wholesaler in the United Kingdom. The results of operations of Matthew Clark have been included in the consolidated results of operations of the Company since the date of acquisition, December 1, 1998. On April 9, 1999, in an asset acquisition, the Company acquired several well-known Canadian whisky brands, including Black Velvet, production facilities located in Alberta and Quebec, Canada, case goods and bulk whisky inventories and other related assets from affiliates of Diageo plc (collectively, the "Black Velvet Acquisition"). In connection with the transaction, the Company also entered into multi-year agreements with Diageo to provide packaging and distilling services for various brands retained by Diageo. The results of operations from the Black Velvet Acquisition are reported in the Barton segment and have been included in the consolidated results of operations of the Company since the date of acquisition. On June 4, 1999, the Company purchased all of the outstanding capital stock of Franciscan Vineyards, Inc. and in related transactions purchased vineyards, a winery, equipment and other vineyard related assets located in Northern California (collectively, the "Franciscan Acquisition"). Also on June 4, 1999, the Company purchased all of the outstanding capital stock of Simi Winery, Inc. ("Simi"). (The acquisition of the capital stock of Simi is hereafter referred to as the "Simi Acquisition".) The Simi Acquisition includes the Simi winery, equipment, vineyards and inventory. The results of operations from the Franciscan and Simi Acquisitions (collectively, "Franciscan") are reported together in the Franciscan segment and have been included in the consolidated results of operations of the Company since the date of acquisition. - 15 - The Matthew Clark, Black Velvet and Franciscan Acquisitions are significant and the Company expects them to have a material impact on the Company's future results of operations. RESULTS OF OPERATIONS - --------------------- SECOND QUARTER 2000 COMPARED TO SECOND QUARTER 1999 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Second Quarter 2000 and Second Quarter 1999. Second Quarter 2000 Compared to Second Quarter 1999 --------------------------------------------------- Net Sales --------------------------------------------------- %Increase/ 2000 1999 (Decrease) --------- --------- ---------- Canandaigua Wine: Branded: External customers $ 149,540 $ 140,545 6.4 % Intersegment 1,239 -- N/A --------- --------- Total Branded 150,779 140,545 7.3 % --------- --------- Other: External customers 19,449 20,211 (3.8)% Intersegment -- -- N/A --------- --------- Total Other 19,449 20,211 (3.8)% --------- --------- Canandaigua Wine net sales $ 170,228 $ 160,756 5.9 % --------- --------- Barton: Beer $ 177,195 $ 141,133 25.6 % Spirits 73,010 47,227 54.6 % --------- --------- Barton net sales $ 250,205 $ 188,360 32.8 % --------- --------- Matthew Clark: Branded $ 80,879 $ -- N/A Wholesale 102,331 -- N/A --------- --------- Matthew Clark net sales $ 183,210 $ -- N/A --------- --------- Franciscan $ 17,137 $ -- N/A --------- --------- Corporate Operations and Other $ 2,004 $ 270 642.2 % --------- --------- Intersegment eliminations $ (1,204) $ -- N/A --------- --------- Consolidated Net Sales $ 621,580 $ 349,386 77.9 % ========= ========= Net sales for Second Quarter 2000 increased to $621.6 million from $349.4 million for Second Quarter 1999, an increase of $272.2 million, or 77.9%. CANANDAIGUA WINE Net sales for Canandaigua Wine for Second Quarter 2000 increased to $170.2 million from $160.8 million for Second Quarter 1999, an increase of $9.5 million, or 5.9%. This increase resulted primarily from (i) an increase in sales of Arbor Mist and Almaden box wine, (ii) an increase in the - 16 - Company's bulk wine sales and (iii) growth in the Company's international business. These increases were partially offset by declines in certain other brands and in the Company's grape juice concentrate business. BARTON Net sales for Barton for Second Quarter 2000 increased to $250.2 million from $188.4 million for Second Quarter 1999, an increase of $61.8 million, or 32.8%. This increase resulted primarily from an increase in sales of imported beer brands led by Barton's Mexican portfolio as well as from $24.7 million of sales of products and services acquired in the Black Velvet Acquisition, which was completed in April 1999. MATTHEW CLARK Net sales for Matthew Clark for Second Quarter 2000 were $183.2 million. FRANCISCAN Net sales for Franciscan for Second Quarter 2000 since the date of acquisition, June 4, 1999, were $17.1 million. GROSS PROFIT The Company's gross profit increased to $189.1 million for Second Quarter 2000 from $103.2 million for Second Quarter 1999, an increase of $85.9 million, or 83.2%. The dollar increase in gross profit was primarily related to sales from the Matthew Clark, Black Velvet, Franciscan and Simi Acquisitions, all completed after Second Quarter 1999, as well as increased Barton beer sales. As a percent of net sales, gross profit increased to 30.4% for Second Quarter 2000 from 29.5% in Second Quarter 1999, resulting primarily from sales of higher-margin spirits and super-premium and ultra-premium wine acquired in the Black Velvet and Franciscan and Simi Acquisitions, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $125.3 million for Second Quarter 2000 from $67.5 million for Second Quarter 1999, an increase of $57.9 million, or 85.8%. The dollar increase in selling, general and administrative expenses resulted primarily from the addition of the Matthew Clark and Franciscan businesses and expenses related to the brands acquired in the Black Velvet Acquisition. The Company also increased its marketing and promotional costs to generate additional sales volume, particularly of Barton beer brands. Selling, general and administrative expenses as a percent of net sales increased to 20.2% for First Quarter 2000 as compared to 19.3% for First Quarter 1999. The increase in percent of net sales resulted primarily from the Matthew Clark, Franciscan and Simi Acquisitions, as Matthew Clark and Franciscan's selling, general and administrative expenses as a percent of net sales is typically at the high end of the range of the Company's operating segments' percentages. - 17 - OPERATING INCOME The following table sets forth the operating profit/(loss) (in thousands of dollars) by operating segment of the Company for Second Quarter 2000 and Second Quarter 1999. Second Quarter 2000 Compared to Second Quarter 1999 --------------------------------------------------- Operating Profit/(Loss) --------------------------------------------------- %Increase/ 2000 1999 (Decrease) -------- -------- ---------- Canandaigua Wine $ 10,412 $ 10,221 1.9 % Barton 41,962 28,832 45.5 % Matthew Clark 11,980 -- N/A Franciscan 1,571 -- N/A Corporate Operations and Other (2,117) (3,271) (35.3)% -------- -------- Consolidated Operating Profit $ 63,808 $ 35,782 78.3 % ======== ======== As a result of the above factors, consolidated operating income increased to $63.8 million for Second Quarter 2000 from $35.8 million for Second Quarter 1999, an increase of $28.0 million, or 78.3%. INTEREST EXPENSE, NET Net interest expense increased to $28.6 million for Second Quarter 2000 from $7.4 million for Second Quarter 1999, an increase of $21.2 million or 285.7%. The increase resulted primarily from additional interest expense associated with the borrowings related to the Matthew Clark, Black Velvet, Franciscan and Simi Acquisitions. NET INCOME As a result of the above factors, net income increased to $21.1 million for Second Quarter 2000 from $16.7 million for Second Quarter 1999, an increase of $4.4 million, or 26.1%. For financial analysis purposes only, the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") for Second Quarter 2000 were $84.2 million, an increase of $39.9 million over EBITDA of $44.2 million for Second Quarter 1999. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity. - 18 - SIX MONTHS 2000 COMPARED TO SIX MONTHS 1999 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Six Months 2000 and Six Months 1999. Six Months 2000 Compared to Six Months 1999 ------------------------------------------- Net Sales ------------------------------------------- %Increase/ 2000 1999 (Decrease) ----------- --------- ---------- Canandaigua Wine: Branded: External customers $ 292,182 $ 267,343 9.3 % Intersegment 2,989 -- N/A ----------- --------- Total Branded 295,171 267,343 10.4 % ----------- --------- Other: External customers 38,579 39,350 (2.0)% Intersegment 37 -- N/A ----------- --------- Total Other 38,616 39,350 (1.9)% ----------- --------- Canandaigua Wine net sales $ 333,787 $ 306,693 8.8 % ----------- --------- Barton: Beer $ 323,806 $ 259,929 24.6 % Spirits 127,149 94,599 34.4 % ----------- --------- Barton net sales $ 450,955 $ 354,528 27.2 % ----------- --------- Matthew Clark: Branded $ 155,254 $ -- N/A Wholesale 194,753 -- N/A ----------- --------- Matthew Clark net sales $ 350,007 $ -- N/A ----------- --------- Franciscan $ 17,137 $ -- N/A ----------- --------- Corporate Operations and Other $ 2,889 $ 1,093 164.3 % ----------- --------- Intersegment eliminations $ (3,026) $ -- N/A ----------- --------- Consolidated Net Sales $ 1,151,749 $ 662,314 73.9 % =========== ========= Net sales for Six Months 2000 increased to $1,151.7 million from $662.3 million for Six Months 1999, an increase of $489.4 million, or 73.9%. CANANDAIGUA WINE Net sales for Canandaigua Wine for Six Months 2000 increased to $333.8 million from $306.7 million for Six Months 1999, an increase of $27.1 million, or 8.8%. This increase resulted primarily from (i) an increase in sales of Arbor Mist, which was introduced in Second Quarter 1999, (ii) an increase in Almaden box wine sales, (iii) an increase in the Company's bulk wine sales, and (iv) growth in the Company's international business. These increases were partially offset by declines in certain other brands and in the Company's grape juice concentrate business. - 19 - BARTON Net sales for Barton for Six Months 2000 increased to $451.0 million from $354.5 million for Six Months 1999, an increase of $96.4 million, or 27.2%. This increase resulted primarily from an increase in sales of imported beer brands led by Barton's Mexican portfolio as well as from $31.9 million of sales of products and services acquired in the Black Velvet Acquisition, which was completed in April 1999. MATTHEW CLARK Net sales for Matthew Clark for Six Months 2000 were $350.0 million. FRANCISCAN Net sales for Franciscan for Six Months 2000 since the date of acquisition, June 4, 1999, were $17.1 million. GROSS PROFIT The Company's gross profit increased to $345.3 million for Six Months 2000 from $195.3 million for Six Months 1999, an increase of $150.0 million, or 76.8%. The dollar increase in gross profit was primarily related to sales from the Matthew Clark, Black Velvet, Franciscan and Simi Acquisitions, all completed after Six Months 1999, as well as increased Barton beer and Canandaigua Wine wine sales. As a percent of net sales, gross profit increased to 30.0% for Six Months 2000 from 29.5% for Six Months 1999, resulting primarily from sales of higher-margin spirits and super-premium and ultra-premium wine acquired in the Black Velvet and Franciscan and Simi Acquisitions, respectively. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $235.8 million for Six Months 2000 from $128.8 million for Six Months 1999, an increase of $107.0 million, or 83.1%. The dollar increase in selling, general and administrative expenses resulted primarily from the addition of the Matthew Clark and Franciscan businesses and expenses related to the brands acquired in the Black Velvet Acquisition. The Company also increased its marketing and promotional costs to generate additional sales volume, particularly of certain Canandaigua Wine brands and Barton beer brands. Selling, general and administrative expenses as a percent of net sales increased to 20.5% for Six Months 2000 as compared to 19.4% for Six Months 1999. The increase in percent of net sales resulted primarily from (i) Canandaigua Wine's investment in brand building and efforts to increase market share and (ii) the Matthew Clark, Franciscan and Simi Acquisitions, as Matthew Clark and Franciscan's selling, general and administrative expenses as a percent of net sales is typically at the high end of the range of the Company's operating segments' percentages. NONRECURRING CHARGES The Company incurred nonrecurring charges of $5.5 million in Six Months 2000 related to the closure of a production facility within the Matthew Clark operating segment in the United Kingdom and to a management reorganization within the Canandaigua Wine operating segment. No such charges were incurred in Six Months 1999. - 20 - OPERATING INCOME The following table sets forth the operating profit/(loss) (in thousands of dollars) by operating segment of the Company for Six Months 2000 and Six Months 1999. Six Months 2000 Compared to Six Months 1999 ------------------------------------------- Operating Profit/(Loss) ------------------------------------------- %Increase/ 2000 1999 (Decrease) --------- -------- ---------- Canandaigua Wine $ 16,019 $ 17,661 (9.3)% Barton 73,459 54,620 34.5 % Matthew Clark 19,310 -- N/A Franciscan 1,571 -- N/A Corporate Operations and Other (6,440) (5,770) 11.6 % --------- -------- Consolidated Operating Profit $ 103,919 $ 66,511 56.2 % ========= ======== As a result of the above factors, consolidated operating income increased to $103.9 million for Six Months 2000 from $66.5 million for Six Months 1999, an increase of $37.4 million, or 56.2%. Operating income for the Canandaigua Wine operating segment was down $1.6 million, or 9.3%, due to the nonrecurring charge of $2.6 million related to the segment's management reorganization, as well as additional marketing expenses associated with new product introductions. Exclusive of the nonrecurring charge, operating income increased by 5.2% to $18.6 million in Six Months 2000. Operating income for the Matthew Clark operating segment, excluding nonrecurring charges of $2.9 million, was $22.3 million. INTEREST EXPENSE, NET Net interest expense increased to $50.7 million for Six Months 2000 from $16.0 million for Six Months 1999, an increase of $34.7 million or 217.7%. The increase resulted primarily from additional interest expense associated with the borrowings related to the Matthew Clark, Black Velvet, Franciscan and Simi Acquisitions. NET INCOME As a result of the above factors, net income increased to $31.9 million for Six Months 2000 from $29.8 million for Six Months 1999, an increase of $2.1 million, or 7.1%. For financial analysis purposes only, the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") for Six Months 2000 were $138.1 million, an increase of $54.6 million over EBITDA of $83.5 million for Six Months 1999. 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. - 21 - 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 2000 CASH FLOWS OPERATING ACTIVITIES Net cash provided by operating activities for Six Months 2000 was $59.1 million, which resulted from $63.9 million in net income adjusted for noncash items, less $4.8 million representing the net change in the Company's operating assets and liabilities. The net change in operating assets and liabilities resulted primarily from a seasonal increase in accounts receivable, partially offset by increases in accrued income taxes, accrued advertising and promotion expenses and accrued grape purchases. INVESTING ACTIVITIES AND FINANCING ACTIVITIES Net cash used in investing activities for Six Months 2000 was $482.2 million, which resulted primarily from net cash paid of $452.5 million for the Black Velvet, Franciscan and Simi Acquisitions and $30.8 million of capital expenditures, including $4.1 million for vineyards. Net cash provided by financing activities for Six Months 2000 was $399.9 million, which resulted primarily from proceeds of $664.1 million from issuance of long-term debt, including $400.0 million incurred in connection with the Black Velvet and Franciscan Acquisitions and $200.0 million incurred to repay amounts outstanding under the bank credit agreement. This amount was partially offset by principal payments of $242.5 million of long-term debt, repayment of $12.7 million of net revolving loan borrowings, and payment of $10.8 million of long-term debt issuance costs. DEBT Total debt outstanding as of August 31, 1999, amounted to $1,367.2 million, an increase of $441.8 million from February 28, 1999. The ratio of total debt to total capitalization increased to 74.5% as of August 31, 1999, from 68.0% as of February 28, 1999. - 22 - THE COMPANY'S CREDIT AGREEMENT During June 1999, the Company financed the purchase price for the Franciscan Acquisition through additional term loan borrowings under the bank credit agreement. The Company financed the purchase price for the Simi Acquisition with revolving loan borrowings under the bank credit agreement. During August 1999 as discussed below, a portion of the Company's borrowings under its bank credit agreement were repaid with the net proceeds of its senior notes offering. As of August 31, 1999, under its bank credit agreement, the Company had outstanding term loans of $690.7 million bearing interest at 7.8%, $75.0 million of revolving loans bearing interest at 7.9%, undrawn revolving letters of credit of $10.4 million, and $214.6 million in revolving loans available to be drawn. On October 6, 1999, the Company, certain of its principal operating subsidiaries, and a syndicate of banks (the "Syndicate Banks"), for which The Chase Manhattan Bank acts as administrative agent, entered into a new senior credit agreement (the "2000 Credit Agreement"). The 2000 Credit Agreement includes both U.S. dollar and British pound sterling commitments of the Syndicate Banks of up to, in the aggregate, the equivalent of $1.0 billion (subject to increase as therein provided to $1.2 billion). Proceeds of the 2000 Credit Agreement were used to repay all outstanding principal and accrued interest on all loans under the Company's prior bank credit agreement, and are available to fund permitted acquisitions and ongoing working capital needs of the Company and its subsidiaries. The 2000 Credit Agreement provides for a $380.0 million Tranche I Term Loan facility due in December 2004, a $320.0 million Tranche II Term Loan facility available for borrowing in British pound sterling due in December 2004, and a $300.0 million Revolving Credit facility (including letters of credit up to a maximum of $20.0 million) which expires in December 2004. The Tranche I Term Loan facility requires quarterly repayments, starting at $12.0 million in March 2000 and increasing thereafter annually with final payments of $23.0 million in each quarter in 2004. The Tranche II Term Loan facility requires quarterly repayments of $1.6 million for each quarter in 2000, $3.2 million for each quarter in 2001 and 2002, $4.0 million for each quarter in 2003 and $68.0 million in each quarter in 2004 (all such repayments shall be in British pound sterling and the foregoing amounts reflect the U.S. dollar equivalents at closing on October 6, 1999). There are certain mandatory term loan prepayments, including those based on sale of assets and issuance of debt and equity, in each case subject to baskets, exceptions and thresholds which are generally more favorable to the Company than those contained in its prior bank credit agreement. The rate of interest payable, at the Company's option, is a function of the London interbank offering rate (LIBOR) plus a margin, federal funds rate plus a margin, or the prime rate plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as defined in the 2000 Credit Agreement) and, with respect to LIBOR borrowings, ranges between 0.75% and 1.25% for Revolving Credit loans and 1.00% and 1.75% for Term Loans. The initial margin for all loans was set at the highest level at closing and is subject to reduction after November 30, 1999, depending on the Company's Debt Ratio. In addition to interest, the Company pays a facility fee on the Revolving Credit commitments, initially at 0.50% per annum and subject to reduction after November 30, 1999, to 0.25%, depending on the Company's Debt Ratio. Certain of the Company's principal operating subsidiaries have guaranteed the Company's obligations under the 2000 Credit Agreement. In addition, subject to certain limitations applicable to - 23 - inactive subsidiaries and to some of the Company's foreign subsidiaries, all of the capital stock of each operating wholly-owned subsidiary (other than the subsidiaries of Matthew Clark) has been pledged to the Syndicate Banks as security for the obligations under the 2000 Credit Agreement. The Company and its subsidiaries are subject to customary secured lending covenants including those restricting additional liens, incurring additional indebtedness, the sale of assets, the payment of dividends, transactions with affiliates and the making of certain investments, in each case subject to baskets, exceptions and thresholds which are generally more favorable to the Company than those contained in its prior bank credit agreement. The primary financial covenants require the maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed charges ratio and an interest coverage ratio. Among the most restrictive covenants contained in the 2000 Credit Agreement is the requirement to maintain a fixed charges ratio of not less than 1.0 at the last day of each fiscal quarter for the most recent four quarters. As of October 14, 1999, under the 2000 Credit Agreement, the Company had outstanding term loans of $700.0 million bearing interest at 7.9%, $69.0 million of revolving loans bearing interest at 7.4%, undrawn revolving letters of credit of $10.4 million, and $220.6 million in revolving loans available to be drawn. SENIOR NOTES On August 4, 1999, the Company issued $200.0 million aggregate principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior Notes"). The net proceeds of the offering (approximately $196.0 million) was used to repay a portion of the Company's borrowings under its bank credit agreement. Interest on the Senior Notes is payable semiannually on February 1 and August 1 of each year, beginning February 1, 2000. The Senior Notes are redeemable at the option of the Company, in whole or in part, at any time. The Senior Notes are unsecured senior obligations and rank equally in right of payment to all existing and future unsecured senior indebtedness of the Company. The Senior Notes are guaranteed, on a senior basis, by certain of the Company's significant operating subsidiaries. SENIOR SUBORDINATED NOTES As of August 31, 1999, the Company had outstanding $195.0 million aggregate principal amount of 8 3/4% Senior Subordinated Notes due December 2003 (the "Notes"). The Notes are currently redeemable, in whole or in part, at the option of the Company. On March 4, 1999, the Company issued $200.0 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009 (the "Senior Subordinated Notes"). The net proceeds of the offering (approximately $195.0 million) were used to fund the Black Velvet Acquisition and to pay the fees and expenses related thereto with the remainder of the net proceeds used for general corporate purposes. Interest on the Senior Subordinated Notes is payable semiannually on March 1 and September 1 of each year, beginning September 1, 1999. The Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 2004. The Company may also redeem up to $70.0 million of the Senior Subordinated Notes using the proceeds of certain equity offerings completed before March 1, 2002. The Senior Subordinated 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 Senior Subordinated Notes are guaranteed, on a senior subordinated basis, by certain of the Company's significant operating subsidiaries. - 24 - ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives), and for hedging activities. SFAS No. 133 requires that every derivative be recorded as either an asset or liability in the balance sheet and measured at its fair value. SFAS No. 133 also requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative's gains and losses to offset related results on the hedged item in the income statement, and requires that a company formally document, designate and assess the effectiveness of transactions that receive hedge accounting. In June 1999, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 137 ("SFAS No. 137"), "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133." SFAS No. 137 delays the effective date of SFAS No. 133 for one year. With the issuance of SFAS No. 137, the Company is required to adopt SFAS No. 133 on a prospective basis for interim periods and fiscal years beginning March 1, 2001. The Company believes the effect of adoption on its financial statements will not be material based on the Company's current risk management strategies. 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, have been inventoried and assessed. In addition, plans have been developed for the required systems modifications or replacements. With respect to its information technology systems, the Company has completed both the assessment and remediation phases. With respect to its non-information technology systems, the Company has completed the entire assessment phase and approximately 97% of the remediation phase. Final testing in selected areas, both internal and external, has confirmed the integrity of the Company's remediation programs. The Company's internal mission-critical information technology and non-information technology systems are Year 2000 compliant. The Company has communicated 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. 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 have been virtually completed. The Company's key financial institutions have been surveyed and it is the Company's understanding that they are Year 2000 compliant. - 25 - 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 financial condition, results of operations or cash flows. 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 are expected to be completed by October 31, 1999, and, by way of examples, will include back-up procedures, identification of alternate suppliers, where possible, and increases in 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, results of operations or cash flows. For example, the Company would experience a material adverse impact on its business if significant suppliers of beer, glass or other raw materials, or utility 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 forward-looking statements will be achieved, and actual results could differ significantly from those contemplated. EURO CONVERSION ISSUES Effective January 1, 1999, eleven of the fifteen member countries of the European Union (the "Participating Countries") established fixed conversion rates between their existing sovereign currencies and the euro. For three years after the introduction of the euro, the Participating Countries can perform financial transactions in either the euro or their original local currencies. This will result in a fixed exchange rate among the Participating Countries, whereas the euro (and the Participating Countries' currency in tandem) will continue to float freely against the U.S. dollar and other currencies of the non-participating countries. The Company does not believe that the effects of the conversion will have a material adverse effect on the Company's business and operations. - 26 - ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- Information about market risks for the six months ended August 31, 1999, does not differ materially from that discussed under Item 7A in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1999. 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 20, 1999 (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 approve Amendment Number 6 to the Company's 1989 Employee Stock Purchase Plan. (This Amendment grants the committee administering the plan the authority to designate the subsidiaries of the Company whose employees are eligible to participate in the plan.) (ii) Proposal to approve Amendment Number Two to the Company's Long-Term Stock Incentive Plan. (This Amendment increases the aggregate number of shares of the Class A Common Stock available for awards under the plan from 4,000,000 shares to 7,000,000 shares.) (iii) Proposal to ratify the selection of Arthur Andersen LLP, Certified Public Accountants, as the Company's independent auditors for the fiscal year ending February 29, 2000. 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 12,616,998 91,925 Paul L. Smith 12,617,056 91,867 - 27 - Directors Elected By the Holders of Class B Stock: -------------------------------------------------- Nominee For Withheld ------------------- ---------- -------- George Bresler 30,958,690 60,000 James A. Locke, III 30,960,190 58,500 Marvin Sands 30,960,190 58,500 Richard Sands 30,955,090 63,600 Robert Sands 30,955,090 63,600 II. The proposal to approve Amendment Number 6 to the Company's 1989 Employee Stock Purchase Plan was approved with the following votes: For: 42,506,828 Against: 1,115,603 Abstain: 49,272 Broker Nonvotes: 55,910 III. The proposal to approve Amendment Number Two to the Company's Long-Term Stock Incentive Plan was approved with the following votes: For: 33,170,879 Against: 7,609,424 Abstain: 53,944 Broker Nonvotes: 2,893,366 IV. The selection of Arthur Andersen LLP was ratified with the following votes: For: 43,662,767 Against: 6,487 Abstain: 58,359 Broker Nonvotes: 0 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- (a) See Index to Exhibits located on Page 34 of this Report. (b) The following Reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended August 31, 1999: (i) Form 8-K/A dated April 9, 1999. This Form 8-K reported information under Item 7 (Financial Statements and Exhibits). The following financial statements were filed with this Form 8-K/A: - 28 - The Diageo Inc. Statement of Assets and Liabilities Related to the Product Lines Sold to Canandaigua Brands, Inc. as of April 9, 1999, and the Statement of Identified Income and Expenses Related to the Product Lines Sold to Canandaigua Brands, Inc. for the year ended December 31, 1998, and the report of KPMG LLP, independent auditors, thereon, together with the notes thereto. The pro forma condensed combined balance sheet (unaudited) as of February 28, 1999, and the pro forma condensed combined statement of income (unaudited) for the year ended February 28, 1999, and the notes thereto. (ii) Form 8-K dated June 4, 1999. This Form 8-K reported information under Item 2 (Acquisition or Disposition of Assets) and Item 7 (Financial Statements and Exhibits). (iii) Form 8-K dated June 8, 1999. This Form 8-K reported information under Item 5 (Other Events). (iv) Form 8-K dated June 23, 1999. This Form 8-K reported information under Item 5 (Other Events) and included (i) the Company's Condensed Consolidated Balance Sheets as of May 31, 1999 and February 28, 1999; and (ii) the Company's Condensed Consolidated Statements of Income for the three months ended May 31, 1999 (unaudited) and May 31, 1998 (unaudited). (v) Form 8-K dated July 28, 1999. This Form 8-K reported information under Item 7 (Financial Statements and Exhibits). - 29 - 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: October 15, 1999 By: /s/ Thomas F. Howe ------------------ Thomas F. Howe, Vice President, Corporate Reporting and Controller Dated: October 15, 1999 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: October 15, 1999 By: /s/ Thomas F. Howe ------------------ Thomas F. Howe, Controller Dated: October 15, 1999 By: /s/ Thomas S. Summer -------------------------- Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) CANANDAIGUA WINE COMPANY, INC. Dated: October 15, 1999 By: /s/ Thomas F. Howe ------------------ Thomas F. Howe, Controller Dated: October 15, 1999 By: /s/ Thomas S. Summer -------------------------- Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) - 30 - CANANDAIGUA EUROPE LIMITED Dated: October 15, 1999 By: /s/ Thomas F. Howe ------------------ Thomas F. Howe, Controller Dated: October 15, 1999 By: /s/ Thomas S. Summer -------------------------- Thomas S. Summer, Treasurer (Principal Financial Officer and Principal Accounting Officer) CANANDAIGUA LIMITED Dated: October 15, 1999 By: /s/ Thomas F. Howe ------------------ Thomas F. Howe, Authorized Officer Dated: October 15, 1999 By: /s/ Thomas S. Summer -------------------------- Thomas S. Summer, Finance Director (Principal Financial Officer and Principal Accounting Officer) POLYPHENOLICS, INC. Dated: October 15, 1999 By: /s/ Thomas F. Howe ------------------ Thomas F. Howe, Vice President and Controller Dated: October 15, 1999 By: /s/ Thomas S. Summer -------------------------- Thomas S. Summer, Vice President and Treasurer (Principal Financial Officer and Principal Accounting Officer) ROBERTS TRADING CORP. Dated: October 15, 1999 By: /s/ Thomas F. Howe ------------------ Thomas F. Howe, Controller Dated: October 15, 1999 By: /s/ Thomas S. Summer -------------------------- Thomas S. Summer, President and Treasurer (Principal Financial Officer and Principal Accounting Officer) - 31 - BARTON INCORPORATED Dated: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, President and Chief Executive Officer Dated: October 15, 1999 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: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, Executive Vice President Dated: October 15, 1999 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: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, Executive Vice President Dated: October 15, 1999 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: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, President Dated: October 15, 1999 By: /s/ Raymond E. Powers --------------------- Raymond E. Powers, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) - 32 - BARTON BRANDS OF GEORGIA, INC. Dated: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, President Dated: October 15, 1999 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: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, President Dated: October 15, 1999 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: October 15, 1999 By: /s/ Raymond E. Powers --------------------- Raymond E. Powers, President and Secretary Dated: October 15, 1999 By: /s/ Charles T. Schlau --------------------- Charles T. Schlau, Treasurer (Principal Financial Officer and Principal Accounting Officer) STEVENS POINT BEVERAGE CO. Dated: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, Executive Vice President Dated: October 15, 1999 By: /s/ Raymond E. Powers --------------------- Raymond E. Powers, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) - 33 - MONARCH IMPORT COMPANY Dated: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, President Dated: October 15, 1999 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: October 15, 1999 By: /s/ Alexander L. Berk --------------------- Alexander L. Berk, President Dated: October 15, 1999 By: /s/ Raymond E. Powers --------------------- Raymond E. Powers, Executive Vice President, Treasurer and Assistant Secretary (Principal Financial Officer and Principal Accounting Officer) - 34 - INDEX TO EXHIBITS (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.1 Asset Purchase Agreement dated as of February 21, 1999 by and among Diageo Inc., UDV Canada Inc., United Distillers Canada Inc. and the Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated April 9, 1999 and incorporated herein by reference). 2.2 Stock Purchase Agreement, dated April 21, 1999, between Franciscan Vineyards, Inc., Agustin Huneeus, Agustin Francisco Huneeus, Jean-Michel Valette, Heidrun Eckes-Chantre Und Kinder Beteiligungsverwaltung II, GbR, Peter Eugen Eckes Und Kinder Beteiligungsverwaltung II, GbR, Harald Eckes-Chantre, Christina Eckes-Chantre, Petra Eckes-Chantre and Canandaigua Brands, Inc. (filed as Exhibit 2.1 on the Company's Current Report on Form 8-K dated June 4, 1999 and incorporated herein by reference). 2.3 Stock Purchase Agreement by and between Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the Company) and Moet Hennessy, Inc. dated April 1, 1999 (including a list briefly identifying the contents of all omitted schedules thereto) (filed as exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated herein by reference). (3) ARTICLES OF INCORPORATION AND BY-LAWS. 3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1998 and incorporated herein by reference). 3.2 Amended and Restated By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1998 and incorporated herein by reference). (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), as Trustee (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. (a subsidiary of the Company now known as Canandaigua Wine Company, Inc.) and The Chase Manhattan Bank (as successor to Chemical Bank), as Trustee (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), as Trustee (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). - 35 - 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, as Trustee (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 Fourth Supplemental Indenture, dated as of October 2, 1998, among the Company, Polyphenolics, Inc. and The Chase Manhattan Bank, as Trustee (filed as Exhibit 4.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 1998 and incorporated herein by reference). 4.6 Fifth Supplemental Indenture, dated as of December 11, 1998, among the Company, Canandaigua B.V., Canandaigua Limited and The Chase Manhattan Bank, as Trustee (filed as Exhibit 4.6 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1999 and incorporated herein by reference). 4.7 Sixth Supplemental Indenture, dated as of July 28, 1999, among the Company, Barton Canada, Ltd., Simi Winery, Inc., Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and The Chase Manhattan Bank, as Trustee (filed herewith). 4.8 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, as Trustee (filed as Exhibit 4.2 to the Company's Registration Statement on Form S-4 (Registration No. 333-17673) and incorporated herein by reference). 4.9 First Supplemental Indenture, dated as of December 19, 1997, among the Company, Canandaigua Europe Limited, Roberts Trading Corp. and Harris Trust and Savings Bank, as Trustee (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). 4.10 Second Supplemental Indenture, dated as of October 2, 1998, among the Company, Polyphenolics, Inc. and Harris Trust and Savings Bank, as Trustee (filed as Exhibit 4.8 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 1998 and incorporated herein by reference). 4.11 Third Supplemental Indenture, dated as of December 11, 1998, among the Company, Canandaigua B.V., Canandaigua Limited and Harris Trust and Savings Bank, as Trustee (filed as Exhibit 4.10 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 1999 and incorporated herein by reference). 4.12 Fourth Supplemental Indenture, dated as of July 28, 1999, among the Company, Barton Canada, Ltd., Simi Winery, Inc., Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and Harris Trust and Savings Bank, as Trustee (filed herewith). 4.13 First Amended and Restated Credit Agreement, dated as of November 2, 1998, between the Company, certain principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated December 1, 1998 and incorporated herein by reference). - 36 - 4.14 Second Amended and Restated Credit Agreement, dated as of May 12, 1999, between the Company, certain principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K dated June 4, 1999 and incorporated herein by reference). 4.15 Incremental Facility Loan Agreement, dated as of May 27, 1999, between the Company, certain principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent (filed as Exhibit 4.3 to the Company's Current Report on Form 8-K dated June 4, 1999 and incorporated herein by reference). 4.16 Amendment No. 1 to the Second Amended and Restated Credit Agreement, dated as of August 4, 1999, between the Company, certain principal operating subsidiaries, and certain banks for which The Chase Manhattan Bank acts as Administrative Agent (filed herewith). 4.17 Indenture with respect to 8 1/2% Senior Subordinated Notes due 2009, dated as of February 25, 1999, among the Company, as issuer, certain principal operating subsidiaries, as Guarantors, and Harris Trust and Savings Bank, as Trustee (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated February 25, 1999 and incorporated herein by reference). 4.18 Supplemental Indenture No. 1, dated as of February 25, 1999, by and among the Company, as Issuer, its principal operating subsidiaries, as Guarantors, and Harris Trust and Savings Bank, as Trustee (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K dated February 25, 1999 and incorporated herein by reference). 4.19 Supplemental Indenture No. 2, dated as of August 4, 1999, by and among the Company, as Issuer, its principal operating subsidiaries, as Guarantors, and Harris Trust and Savings Bank, as Trustee (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 28, 1999 and incorporated herein by reference). 4.20 Supplemental Indenture No. 3, dated as of August 6, 1999, by and among the Company, Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc., Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and Harris Trust and Savings Bank, as Trustee (filed herewith). (10) MATERIAL CONTRACTS. Amendment Number Two to the Company's Long-Term Stock Incentive Plan (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. - 37 - (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.