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 November 30, 1995
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 No. 0-7570
Canandaigua Wine Company,
Inc.
(Exact name of registrant as specified in its charter)
Delaware 16-0716709
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
116 Buffalo Street, Canandaigua, New York 14424
- ----------------------------------------- ----------------
(Address of Principal Executive Offices) (Zip Code)
(716) 394-7900
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(Registrant's Telephone Number, Including Area Code)
The Registrant's Former Fiscal Year was September 1 through August 31.
- -------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares outstanding of each of the Registrant's classes of common
stock as of January 11, 1996 is set forth below.
Number of Shares
Class Outstanding
----- -----------
Class A Common Stock, Par Value $.01 Per Share 16,246,046
Class B Convertible Common Stock, Par Value $.01 Per Share 3,365,958
Part 1 - Financial Information
Item 1. Financial Statements
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
November 30, 1995 August 31, 1995
(Unaudited) (Audited)
(in thousands)
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 1,294 $ 4,180
Accounts receivable, net 191,671 115,448
Inventories, net 368,597 256,811
Prepaid expenses and other
current assets 24,886 25,070
----------- -------------
Total current assets 586,448 401,509
PROPERTY, PLANT AND EQUIPMENT, NET 249,370 217,505
OTHER ASSETS 263,172 166,907
----------- -------------
Total assets $ 1,098,990 $ 785,921
=========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 125,500 $ -
Current maturities of long-
term debt 44,544 29,133
Accounts payable 74,403 62,091
Accrued federal and state excise taxes 16,106 15,633
Other accrued expenses and
liabilities 77,352 67,896
----------- -------------
Total current liabilities 337,905 174,753
----------- -------------
LONG-TERM DEBT, less current maturities 337,808 198,859
----------- -------------
DEFERRED INCOME TAXES 49,827 49,827
----------- -------------
OTHER LIABILITIES 10,468 10,600
----------- -------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common Stock, $.01 par value-
Authorized, 60,000,000 shares;
Issued, 17,411,832 shares at
November 30, 1995 and 17,400,082
shares at August 31, 1995 174 174
Class B Convertible Common Stock,
$.01 par value-Authorized,
20,000,000 shares; Issued 3,991,683
shares at November 30, 1995
and 3,996,683 shares at August 31, 1995 40 40
Additional paid-in capital 220,519 219,894
Retained earnings 149,690 139,278
----------- -------------
370,423 359,386
----------- -------------
Less-Treasury stock-
Class A Common Stock, 1,165,786
shares at November 30, 1995 and
1,186,655 shares at August
31, 1995, at cost (5,234) (5,297)
Class B Convertible Common Stock,
625,725 at November 30, 1995 and
August 31, 1995, at cost (2,207) (2,207)
----------- -------------
(7,441) (7,504)
----------- -------------
Total stockholders' equity 362,982 351,882
----------- -------------
Total liabilities and stockholder's equity $1,098,990 $ 785,921
The accompanying notes to consolidated financial statements are an integral part of these balance sheets.
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Income and Retained Earnings
Three Months Ended November 30,
-------------------------------
(in thousands, except share data)
1995 1994
---- ----
(Unaudited) (Unaudited)
GROSS SALES $ 391,186 $ 317,420
Less - Excise taxes (105,601) (73,878)
----------- -------------
Net sales 285,585 243,542
COST OF PRODUCT SOLD (208,332) (174,382)
----------- -------------
Gross profit 77,253 69,160
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (50,104) (45,064)
NONRECURRING RESTRUCTURING
EXPENSES (1,748) (345)
----------- -------------
Operating income 25,401 23,751
INTEREST INCOME 110 242
INTEREST EXPENSE (8,157) (7,193)
----------- -------------
Income before provision for
federal and state income
taxes 17,354 16,800
PROVISION FOR FEDERAL AND
STATE INCOME TAXES (6,942) (6,468)
----------- -------------
NET INCOME 10,412 10,332
RETAINED EARNINGS, BEGINNING 139,278 98,258
----------- -------------
RETAINED EARNINGS, ENDING $ 149,690 $ 108,590
=========== =============
SHARE DATA :
Net income per common
and common
equivalent share:
Primary $.52 $.61
Fully Diluted $.52 $.61
Weighted average shares
outstanding:
Primary 20,103,679 16,996,099
Fully Diluted 20,103,679 16,998,036
Dividend per share None None
The accompanying notes to consolidated financial statements are an integral part of these statements.
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Three Months Ended November 30,
(in thousands)
1995 1994
------- --------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,412 $ 10,332
Adjustments to reconcile net income to net
cash provided by (used in) operating activities:
Depreciation of property, plant and equipment 5,229 5,061
Amortization of intangible assets 2,105 1,505
Deferred tax provision - 5
Gain on sale of property, plant and equipment (6) -
Change in assets and liabilities, net of effects
from purchase of businesses:
Accounts receivable, net (76,223) (40,612)
Inventories, net (95,771) (50,170)
Prepaid expenses 568 6,442
Accounts payable 12,311 (7,993)
Accrued federal and state excise taxes 473 (948)
Other accrued expenses and liabilities 16,301 14,466
Other (137) (863)
--------- ---------
Total adjustments (135,150) (73,107)
--------- ---------
Net cash used in operating activities (124,738) (62,775)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property,
plant and equipment 58 -
Purchases of property, plant and equipment,
net of minor disposals (6,974) (5,754)
Payment of accrued earn-out amounts (10,000) -
--------- ---------
Net cash used in investing activities (16,916) (5,754)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of notes payable, short-term borrowings 125,500 77,100
Repayment of notes payable - (47,000)
Repayment of notes payable from equity
offering proceeds - (22,100)
Principal payments of long-term debt (640) (402)
Proceeds of Term Loan, long-term debt 13,219 47,000
Repayment of Term Loan from equity
offering proceeds, long-term debt - (82,000)
Proceeds from equity offering, net - 103,313
Proceeds from employee stock purchases 659 -
Exercise of employee stock options 30 -
--------- ---------
Net cash provided by financing activities 138,768 75,911
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS (2,886) 7,382
CASH AND CASH INVESTMENTS, beginning of period 4,180 1,495
--------- ---------
CASH AND CASH INVESTMENTS, end of period $ 1,294 $ 8,877
========= =========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired $ 144,936 $ -
Liabilities assumed 3,155 -
--------- ---------
Cash paid 141,781 -
Less - Amounts borrowed 141,781 -
--------- ---------
Net cash paid for acquisition $ - $ -
========= =========
The accompanying notes to consolidated financial statements are an integral part of these statements.
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
November 30, 1995
1) MANAGEMENT REPRESENTATIONS:
The condensed consolidated financial statements included herein have
been prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission applicable to quarterly
reporting on Form 10-Q and reflect, in the opinion of the Company, all
adjustments necessary to present the financial information for Canandaigua Wine
Company, 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 August 31, 1995.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Year end change:
On January 11, 1996, the Company changed its fiscal year end from the
twelve month period ending August 31 to the twelve month period ending on the
last day of February. The accompanying consolidated financial statements for the
three month period ended November 30, 1995, are based on the newly adopted
fiscal year.
The consolidated financial statements for the three month period ended
November 30, 1994, are based on the Company's old fiscal year end, August 31,
1995.
Other:
Certain fiscal 1995 balances have been reclassified to conform with
current year presentation.
3) INVENTORIES:
Inventories are valued at the lower of cost (computed in accordance
with the last-in, first-out (LIFO) or first-in, first-out (FIFO) methods) or
market. The percentage of inventories valued using the LIFO method is 94%, 94%,
and 96% at November 30, 1995, August 31, 1995, and November 30, 1994,
respectively. Replacement cost of the inventories determined on a FIFO basis
approximated $355,509,000, $240,895,000 and $339,629,000 at November 30, 1995,
August 31, 1995, and November 30, 1994, respectively. At November 30, 1995,
August 31, 1995, and November 30, 1994, the net realizable value of the
Company's inventories was in excess of $368,597,000, $256,811,000, and
$351,223,000, respectively.
Elements of cost include materials, labor and overhead and consist of
the following:
November 30, August 31, November 30,
1995 1995 1994
---- ---- ----
(in thousands)
Raw materials and supplies $ 19,195 $ 19,753 $ 33,723
Wines and distilled spirits in process 276,614 174,399 257,431
Finished case goods 72,788 62,659 60,069
$ 368,597 $ 256,811 $ 351,223
4) PROPERTY, PLANT AND EQUIPMENT:
The major components of the property, plant and equipment are as follows:
November 30, August 31,
1995 1995
---- ----
(in thousands)
Land $ 16,322 $ 15,257
Buildings and improvements 77,323 65,084
Machinery and equipment 217,257 197,266
Motor vehicles 5,242 5,204
Construction in progress 17,831 12,171
333,975 294,982
Less - Accumulated depreciation (84,605) (77,477)
$ 249,370 $ 217,505
5) OTHER ASSETS:
The major components of other assets are as follows:
November 30, August 31,
1995 1995
---- ----
(in thousands)
Goodwill $ 135,604 $ 70,141
Distribution rights, agency license
agreements and trademarks 115,426 83,536
Other 23,559 23,187
274,589 176,864
Less - Accumulated amortization (11,417) (9,957)
$ 263,172 $ 166,907
6) OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of accrued expenses and
liabilities are as follows:
November 30, August 31,
1995 1995
---- ----
(in thousands)
Accrued Earn-out Amounts $ - $ 10,000
Accrued loss on noncancelable grape
contracts 8,900 10,862
Other 68,452 47,034
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$ 77,352 $ 67,896
7) OTHER LIABILITIES:
The major components of other liabilities are as follows:
November 30, August 31,
1995 1995
---- ----
(in thousands)
Accrued loss on noncancelable grape
contracts $ 7,374 $ 7,374
Other 3,094 3,226
$ 10,468 $ 10,600
8) ACQUISITIONS:
The following table sets forth unaudited pro forma consolidated results
of operations of the Company for the three months ended November 30, 1995, and
1994. The three month unaudited pro forma consolidated results of operations for
the period ended November 30, 1994, gives effect to the UDG Acquisition as if it
occurred on September 1, 1994. The unaudited pro forma consolidated 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 pro forma consolidated results of
operations do not purport to represent what the Company's financial position or
results of operations would actually have been if the UDG Acquisition in fact
had occurred on such date or at the beginning of the period indicated or to
project the Company's financial position or the results of operations at any
future date or for any future period.
November 30, November 30,
1995 1994
---- ----
(in thousands, except share data)
Net sales $ 285,585 $ 276,520
Income before taxes $ 17,354 $ 22,435
Net income $ 10,412 $ 13,798
Share data:
Net income per common share:
Primary $.52 $.81
Fully diluted $.52 $.81
Weighted average shares outstanding:
Primary 20,103,679 16,996,099
Fully diluted 20,103,679 16,998,036
9) BORROWINGS:
Borrowings consist of the following at November 30, 1995:
Current Long-term Total
======= ========= =====
(in thousands)
Notes Payable:
Senior Credit Facility:
Revolving Credit Loans $ 125,500 $ - $ 125,500
=========== ========= ===========
Long-term Debt:
Senior Credit Facility:
Term loan, variable rate, original proceeds
$246,000, due in installments through August 2001 $ 40,000 $ 206,000 $ 246,000
Senior Subordinated Notes:
8.75% redeemable after December 15, 1998, due 2003 - 130,000 130,000
Capitalized Lease Agreements:
Capitalized facility and equipment leases at
interest rates ranging from 8.9% to 11.5%,
due in monthly installments through fiscal 1998 651 485 1,136
Industrial Development Agencies:
7.5% 1980 issue, original proceeds $2,370, due
in annual installments of $118 through fiscal 2000 118 356 474
Other Long-term Debt:
Loans payable - 5% secured by cash surrender
value of officers' life insurance policies - 967 967
Notes payable at prime, due September 1996 3,775 - 3,775
---------- --------- ----------
$ 44,544 $ 337,808 $ 382,352
=========== ========= ===========
10) RESTRUCTURING PLAN:
The Company provided for costs to restructure the operations of its
California wineries (the Restructuring Plan) in the fourth quarter of fiscal
1994. Under the Restructuring Plan, all bottling operations at the Central
Cellars winery in Lodi, California and substantially all of the branded wine
bottling operations at the Monterey Cellars winery in Gonzales, California were
moved to the Mission Bell winery located in Madera, California. The Monterey
Cellars winery will continue to be used as a crushing, winemaking and contract
bottling facility. The Central Cellars winery was closed in the fourth quarter
of fiscal 1995, and is expected to be sold. In the three months ended November
30, 1995, the expenses incurred in connection with the Restructuring Plan
reduced income before taxes and net income by approximately $1,748,000 and
$1,049,000, respectively, or $.05 per share on a fully diluted basis. These
charges primarily represent incremental, nonrecurring expenses of $3,326,000
incurred for overtime and freight expenses resulting from inefficiencies related
to the Restructuring Plan, offset by a reduction in the accrual for
restructuring expenses of $1,578,000, primarily for severance and facility
holding and closure costs. The Company expended approximately $2,395,000 during
the three months ended November 30, 1995, for capital expenditures to expand
storage capacity. During the three months ended November 30, 1995, an additional
9 jobs were eliminated under the Restructuring Plan, bringing the total jobs
eliminated to 170. As of November 30, 1995 and August 31, 1995, the Company had
accrued approximately $1,530,000 and $4,251,000, respectively, relating to the
Restructuring Plan.
Item 2. Management's Discussion and Analysis of Financial Condition
- ------- -----------------------------------------------------------
and Results of Operations
-------------------------
Results of Operations of the Company
On January 11, 1996, the Company changed its fiscal year end from the
twelve month period ending August 31 to the twelve month period ending the last
day of February. The Company believes that this change creates a better planning
cycle by allowing the Company to take into account new costs from the fall grape
harvest, other inventory costs, summer sales of imported beer products and
holiday shipments of all of the Company's products in its fiscal year planning
process. The accompanying consolidated financial statements for the three month
period ended November 30, 1995, are based on the newly adopted fiscal year.
Accordingly, the quarterly results reflect the effect of seasonal factors
primarily related to the timing of advertising expenditures and inventory levels
during the six months ending February 29, 1996.
On September 1, 1995, the Company acquired from United Distillers
Glenmore, Inc. and certain of its North American affiliates (collectively,
"UDG") the Mr. Boston, Canadian LTD, Skol, Old Thompson, Kentucky Tavern,
Glenmore and di Amore distilled spirits brands; the rights to the Fleischmann's
and Chi-Chi's distilled spirits brands under long term license agreements; the
U.S. rights to the Inver House, Schenley and El Toro distilled spirits brands;
related inventories and other assets; and two production facilities located in
Owensboro, Kentucky, and Albany, Georgia; and, in addition, the transaction
included multiyear agreements under which UDG will supply the Company with bulk
whisky and the Company will supply UDG with services including continued
packaging of various UDG brands not acquired by the Company (the "UDG
Acquisition"). Also, in addition to the assets acquired in the transaction, at
closing, the Company purchased from UDG certain brandy inventories and packaging
supplies related to the contract production arrangements with UDG. The Company
financed the UDG Acquisition through an amendment to its then-existing bank
credit facility, primarily through an increase in the term loan facility under
that credit facility. (See "Financial Liquidity and Capital Resources" below in
this Item 2). The UDG Acquisition is significant to the Company and will have a
material impact on the Company's future results of operations. The UDG
Acquisition has significantly strengthened the Company's position in the United
States distilled spirits industry. The Company believes that, as a result of the
UDG Acquisition, its distilled spirits market share in the United States has
doubled to approximately 8%. The UDG Acquisition also gave the Company a
significantly larger presence in the cordial and liqueur categories, which are
more profitable than most other distilled spirits categories.
The following table sets forth, for the periods indicated, certain
items in the Company's consolidated statements of income expressed as a
percentage of net sales:
Three Months Ended
November 30,
1995 1994
---- ----
Net sales............................................ 100.0% 100.0%
Cost of product sold................................. 72.9 71.6
------ ------
Gross profit....................................... 27.1 28.4
Selling, general and administrative expenses......... 17.6 18.5
Nonrecurring restructuring expenses.................. 0.6 0.1
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Operating income..................................... 8.9 9.8
Interest expense, net................................ 2.8 2.9
------- -------
Income before provision for income taxes........... 6.1 6.9
Provision for federal and state income taxes......... 2.5 2.7
------- -------
Net income 3.6% 4.2%
======= =======
Three Months Ended November 30, 1995 ("First Quarter 1996") Compared to Three
Months Ended November 30, 1994 ("First Quarter 1995")
Net Sales
Net sales for the Company's First Quarter 1996 increased to $285.6
million from $243.5 million for First Quarter 1995, an increase of $42.1
million, or approximately 17%. This increase resulted primarily from (i) the
inclusion of $28.0 million of net sales of products and services from the UDG
Acquisition; (ii) $10.5 million of additional net sales of the Company's
imported beer brands; and (iii) $7.4 million of increased net sales of the
Company's branded wine products; partially offset by (iv) lower grape juice
concentrate sales due to the timing of shipments.
For purposes of computing the net sales and unit volume comparative
data below, sales of products acquired in the UDG Acquisition have been included
in the entire period for First Quarter 1996 and included for the same period
during First Quarter 1995, which was prior to the UDG Acquisition.
The table below sets forth the net sales (in thousands of dollars) and
unit volumes (in thousands of cases) for the branded beverage alcohol products,
branded wine products, each category of branded wine product, beer and spirits
brands sold by the Company for First Quarter 1996 and First Quarter 1995:
First Quarter 1996 Compared to First Quarter 1995
Net Sales Unit Volume
--------- -----------
% Increase % Increase
1996 1995 (Decrease) 1996 1995 (Decrease)
--------- --------- --------- ------- -------- -----------
Branded Beverage
Alcohol Products $ 254,077 $ 246,507 3.1% 15,347 14,800 3.7%
Branded Wine Products $ 145,916 $ 138,530 5.3% 8,036 7,815 2.8%
Non-varietal Wines $ 63,864 $ 61,765 3.4% 4,023 4,057 (0.8)%
Varietal Wines $ 39,998 $ 33,487 19.4% 1,900 1,564 21.5%
Sparkling Wines $ 26,903 $ 26,389 1.9% 1,160 1,127 2.9%
Dessert Wines $ 15,150 $ 16,889 (10.3)% 954 1,066 (10.5)%
Beer $ 61,486 $ 50,985 20.6% 4,957 4,127 20.1%
Spirits (1) $ 46,761 $ 57,047 (18.0)% 2,353 2,844 (17.3)%
(1) The spirits category includes for both years presented a number of the
Company's brandy products which were previously only included under the Branded
Beverage Alcohol Products category.
Net sales and unit volume of the Company's branded beverage alcohol
products for First Quarter 1996 increased 3.1% and 3.7%, respectively, as
compared to First Quarter 1995. These increases were primarily due to increased
net sales and unit volume of the Company's imported beer brands and varietal
table wine brands.
Net sales of the Company's branded wine products increased $7.4
million, or 5.3%, for First Quarter 1996 as compared to First Quarter 1995. Unit
volume of the Company's branded wine products increased 221,000 cases, or 2.8%.
Of the $7.4 million increase in net sales, (i) $3.9 million was due to increased
shipments, primarily of the Company's varietal table wines and sparkling wines,
partially offset by lower shipments of dessert wines and non-varietal table
wines; and (ii) $3.5 million was due to higher average selling prices per case
due to a combination of price increases and a change in the product mix in favor
of higher-priced categories. The Company believes that the increase in sales of
its branded wine products was substantially due to the fulfillment of a backlog
of orders at the end of fiscal 1995 caused by production and shipping delays
associated with the relocation of West Coast bottling operations to the
Company's Mission Bell winery under the Restructuring Plan. The Company believes
that the backlog of unfilled orders from August 1995 was substantially
eliminated in First Quarter 1996.
Net sales and unit volume of the Company's non-varietal table wine
brands for First Quarter 1996 increased by 3.4% and decreased by 0.8%,
respectively, as compared to First Quarter 1995. Net sales increased due to
higher average selling prices on most of the Company's non-varietal table wine
brands. The Company began a program of price increases on many of its
non-varietal wine table brands in October 1995. The Company believes that the
volume decline is consistent with a general change in consumer preferences from
non-varietal table wines to varietal table wines and, in addition, may reflect
the impact of the Company's First Quarter 1996 price increases.
Net sales and unit volume of the Company's varietal table wine brands
for First Quarter 1996 increased 19.4% and 21.5%, respectively, as compared to
First Quarter 1995. Although the Company has begun to implement price increases
on most of its varietal table wine brands in response to grape cost increases
and to phase out introductory pricing on varietal wine line extensions for most
of the Company's California wine brands in the latter part of fiscal 1995,
average pricing has not returned to First Quarter 1995 levels.
Net sales and unit volume of the Company's sparkling wine brands
increased by 1.9% and 2.9%, respectively, in First Quarter 1996 as compared to
First Quarter 1995.
Net sales and unit volume of the Company's dessert wine brands
decreased by 10.3% and 10.5%, respectively, in First Quarter 1996 as compared to
First Quarter 1995, reflecting the continuing general decline in consumption of
dessert wines.
Net sales and unit volume of the Company's beer brands for First
Quarter 1996 increased by 20.6% and 20.1%, respectively, as compared to First
Quarter 1995. These increases were largely due to continued sales growth of
Corona and the Company's other Mexican beer brands.
Net sales and unit volume of the Company's distilled spirits brands
declined by 18.0% and 17.3%, respectively, in First Quarter 1996 as compared to
First Quarter 1995. Excluding the impact of the UDG Acquisition, net sales and
unit volume of the Company's distilled spirits brands grew by 5.4% and 5.3%,
respectively, in First Quarter 1996, led by higher brandy, tequila, vodka and
liqueur sales, offset by lower whiskey, gin and mezcal sales. Sales of the
brands acquired in the UDG Acquisition were substantially lower than in First
Quarter 1995, accounting for lower overall spirits sales. The Company believes
that UDG shipped a disproportionate amount of its annual volume in the period
corresponding to the Company's First Quarter 1995, relative to the Company's
historical shipment experience.
Gross Profit
The Company's gross profit increased to $77.3 million in First Quarter
1996 from $69.2 million in First Quarter 1995. The UDG Acquisition contributed
$10.0 million to gross profits in First Quarter 1996, and additional imported
beer volume accounted for $3.2 million of increased gross profits. These
increases were partially offset by lower gross profits in the Company's branded
wine business and a change in the mix of sales toward lower-margin products.
Gross profit as a percentage of net sales decreased to 27.1% for First
Quarter 1996 from 28.4% in First Quarter 1995. The gross profit percentage was
positively affected by the UDG Acquisition, as gross profit as a percentage of
net sales on the business acquired from UDG was substantially higher than the
average for the Company in First Quarter 1996. Excluding the UDG Acquisition,
the Company's gross margin declined by 2.3% due to higher raw material costs
and, in particular, higher grape costs in the 1995 harvest and, to a lesser
extent, a change in category mix.
The Company uses the LIFO method of inventory valuation, which has
resulted in the realization of higher costs in First Quarter 1996. The Company
has initiated a program of price increases on certain products during First
Quarter 1996 in some of its markets and plans price increases on certain
products in Second Quarter 1996 in the remainder of its markets. The higher
costs of products sold have not been, nor does the Company expect the higher
costs to be, fully absorbed by these price increases during these periods. The
Company plans to increase its prices further on certain products in the first
quarter of its new fiscal year. The Company sells its products in a highly
competitive environment; therefore, there can be no assurance that the Company
will not have to lower prices in the future to maintain its competitive
position, nor is there assurance that the price increases the Company has
implemented or contemplates will fully absorb the higher cost of products sold.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $50.1 million in
First Quarter 1996, an increase of $5.0 million, or 11.2%, as compared to First
Quarter 1995. The increase was driven by advertising, promotion and selling
expenses related to the brands acquired in the UDG Acquisition, partially offset
by lower seasonal advertising expenses related to the change in the Company's
fiscal year.
Selling, general and administrative expenses as a percent of net sales
declined to 17.6% in First Quarter 1996 from 18.5% in First Quarter 1995, as
general and administrative efficiencies related to economies of scale and lower
seasonal advertising expenses related to the change in the Company's fiscal year
were partially offset by higher advertising and promotion as a percent of net
sales of the brands acquired in the UDG Acquisition.
Nonrecurring Restructuring Expenses
In First Quarter 1996, the Company incurred net restructuring charges
of $1.7 million, which represents $3.3 million of incremental, nonrecurring
expenses such as overtime and freight expense related to production and shipment
delays associated with the Restructuring Plan, offset by a reduction of $1.6
million in accrued liabilities associated with the Restructuring Plan to take
into account lower than expected expenses for severance and facility holding and
closure costs.
Interest Expense, Net
Net interest expense increased $1.1 million to $8.0 million in First
Quarter 1996 as compared to First Quarter 1995. The increase resulted from
borrowings related to the UDG Acquisition, partially offset by reductions in the
Company's Term Loan and Revolving Credit Loans using proceeds of the Company's
November 18, 1994, public equity offering.
Net Income
Net income increased to $10.4 million in First Quarter 1996 from $10.3
million in First Quarter 1995, an increase of $0.1 million, or 0.8%. The
increase in net income was due to pretax operating income of $4.4 million from
the UDG Acquisition, partially offset by an increase in pretax nonrecurring
restructuring charges of $1.4 million, additional pretax cost of product sold
and selling, general and administrative expenses of $1.3 million, and an
increase in pretax interest expense of $1.1 million. In addition, the Company's
effective income tax rate increased to 40.0% in First Quarter 1996 from 38.5% in
First Quarter 1995 due to changes in its mix of business in a number of states.
Financial Liquidity and Capital Resources
General
The Company's principal use of cash in its operating activities is for
purchasing and carrying inventory of raw materials, inventories in process and
finished goods. 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.
Cash Flows - First Quarter 1996
Operating Activities
Net cash used in operating activities in First Quarter 1996 was $124.7
million. The net cash used in operating activities for First Quarter 1996
resulted principally from an increase in current assets, offset in part by
higher current liabilities and net income adjusted for noncash items. The
increase in current assets resulted principally from a $95.8 million increase in
inventories as a result of the purchase of grapes from the 1995 harvest and a
$76.2 million increase in accounts receivable primarily due to higher seasonal
sales and sales of products and services from the UDG Acquisition. Current
liabilities increased principally due to higher grape purchases, accrued income
taxes, and accruals for promotion and advertising related to higher seasonal
sales.
Investing Activities and Financing Activities
Net cash used in investing activities in First Quarter 1996 was $16.9
million, resulting primarily from a $10.0 million Earn-Out payment (as defined
below) and $7.0 million of capital expenditures. Included in the capital
expenditures is $2.4 million associated with the Restructuring Plan.
Net cash provided by financing activities in First Quarter 1996 was
$138.8 million, resulting primarily from $125.5 million of Revolving Loan
borrowings under the Company's Credit Facility (as defined below) to fund higher
net seasonal working capital requirements and $13.2 million of increased Term
Loan facility borrowings used to fund the purchase of inventories, excess
borrowings, transaction costs and bank fees in connection with the UDG
Acquisition. The total increase in the Company's Term Loan facility was $155.0
million which included the $13.2 million and $141.8 million used to finance the
UDG Acquisition.
As of November 30, 1995, under its Credit Facility, the Company had
outstanding Term Loans of $246.0 million bearing interest at 6.6%, $125.5
million of Revolving Loans bearing interest at 6.8%, $4.3 million of Revolving
Letters of Credit and $25.0 million under the Barton Letter of Credit. As of
November 30, 1995, under the Credit Facility, $55.2 million of Revolving Loans
were available to be drawn by the Company.
On January 11, 1996, the Company's Board of Directors authorized the
repurchase of up to $30 million of its Class A 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 Credit Facility. The repurchased shares will
become treasury shares and may be used for general corporate purposes.
The Company's Credit Facility
On September 1, 1995, the Company and a syndicate of 20 banks (the
"Syndicate Banks"), entered into a Third Amended and Restated Credit Agreement
(the "Credit Facility"). The Credit Facility provides for (i) a $246 million
Term Loan facility due in August 2001, (ii) a $185 million Revolving Loan
facility which expires in June 2001 and (iii) the existing $25 million standby
irrevocable Barton Letter of Credit, which expires in December 1996.
The Revolving Loans and the Term Loan at the Company's option, can be
either a base rate loan or a Eurodollar rate loan. In addition, the Revolving
Loans can be a money market loan. A base rate loan bears interest at the rate
per annum equal to the higher of (1) the federal funds rate for such day plus
1/2 of 1%, or (2) the Chase prime commercial lending rate. A Eurodollar rate
loan bears interest at LIBOR plus a margin of .75%. The interest rate margin for
Eurodollar rate loans may be decreased by up to .25% or increased by up to .5%
depending on the Company's debt coverage ratio (as defined in the Credit
Facility). The interest rate on a money market loan is determined by a
competitive bid process among the Syndicate Banks.
Quarterly principal payments of $10.0 million commenced on December 15,
1995, with a final payment of $16.0 million in August 2001. The Company may
prepay the principal of the Term Loans and the Revolving Loans at its
discretion.
As of December 20, 1995, the Credit Facility was amended to permit the
use of Revolving Loans to purchase up to $30.0 million of the Company's common
stock. As of January 10, 1996, the Credit Facility was amended to accommodate
the change in the Company's fiscal year end.
Payments to Former Barton Stockholders
Pursuant to the Barton Acquisition, the Company is obligated to make
payments of up to an aggregate amount of $57.3 million to the former Barton
stockholders (the "Barton Stockholders") which payments are payable over a
three-year period ending November 29, 1996 (the "Earn-Out"). As of November 30,
1995, aggregate payments of $42.3 million were made as a result of satisfaction
of certain performance goals and the achievement of targets for earnings before
interest and taxes. The final remaining payment is contingent upon Barton
achieving certain targets for earnings before interest and taxes in the twelve
months ending August 31, 1996, and is to be made in an amount up to $15.0
million by November 29, 1996. Such payment obligations are fully secured by the
Company's standby irrevocable letter of credit under the Credit Facility (i.e.,
the Barton Letter of Credit) and are subject to acceleration in certain events.
All Earn-Out payments will be accounted for as additional purchase price for the
Barton Acquisition when the contingencies have been satisfied and will be
allocated based upon the fair market value of the underlying assets. As a
result, as the Earn-Out payments are made, depreciation and amortization expense
will increase in the future over the remaining useful lives of these assets.
Restructuring Plan
As a result of the Restructuring Plan, the Company incurred an after-tax
restructuring charge in First Quarter 1996 of approximately $1.0 million, or
$.05 per share on a fully diluted basis. These charges primarily represent
incremental, nonrecurring expenses incurred for overtime and freight expenses
resulting from inefficiencies related to the Restructuring Plan, offset by a
reduction in the accrual for restructuring expenses primarily for severance and
facility holding and closure costs. During First Quarter 1996, the Company
expended approximately $2.4 million for capital expenditures associated with the
Restructuring Plan.
Other
The Company engages in operations at its facilities for the purpose of
disposing of waste and by-products generated in its production process. These
operations include the treatment of waste water to comply with regulatory
requirements prior to disposal in public facilities or upon property owned by
the Company or others and do not constitute a material part of the Company's
overall cost of product sold. Expenditures for the purpose of maintaining or
improving the Company's waste water treatment facilities have not constituted a
material part of the Company's maintenance or capital expenditures over the last
three fiscal years and the Company does not expect to incur any such material
expenditures during its 1996 transition period. During the last three fiscal
years, the Company has not incurred, nor does it expect to incur in its 1996
transition period, any material expenditures related to remediation of
previously contaminated sites or other nonrecurring environmental matters.
The Company believes that cash provided by operating activities will
provide sufficient funds to meet all of its anticipated short and long-term debt
service and capital expenditure requirements. The Company is not aware of any
potential impairment to its liquidity and believes that the Revolving Loans
available under the Credit Facility and cash provided by operating activities
will provide adequate resources to satisfy its working capital, liquidity and
anticipated capital expenditure requirements for at least the next four fiscal
quarters.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its subsidiaries are subject to litigation from time to
time in the ordinary course of business. Although the amount of any liability
with respect to such litigation cannot be determined, in the opinion of
management, such liability will not have a material adverse effect on the
Company's financial condition or results of operations.
In connection with an investigation in the State of New Jersey into
regulatory trade practices in the beverage alcohol industry, one employee of the
Company was arrested in March 1994 and another employee subsequently came under
investigation in connection with providing "free goods" to retailers in
violation of New Jersey beverage alcohol laws. A proposed consent order has been
received from the appropriate regulatory agency by the Company which would, when
finalized, fully resolve the matter without any material effect on the Company.
On November 13, 1995, a purported stockholder of the Company filed a
class action in the United States District Court for the Southern District of
New York, Ventry, et al. v. Canandaigua Wine Company, Inc., et al. (the "Ventry
Class Action"). On November 16, 1995, another purported stockholder of the
Company filed a class action in the United States District Court for the
Southern District of New York, Brickell Partners, et al. v. Canandaigua Wine
Company, Inc., et al. (the "Brickell Class Action"). On December 6, 1995, a
third purported stockholder of the Company filed a class action in the United
States District Court for the Southern District of New York, Babich, et al. v.
Canandaigua Wine Company, Inc. et al. (and this class action together with the
Brickell Class Action and the Ventry Class Action, the "Class Actions".) The
defendants in the Class Actions are the Company, Richard Sands and Lynn K.
Fetterman. The Class Actions have been consolidated and a consolidated complaint
is due to be filed on January 16, 1996. The Class Actions assert violations of
Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder and seek to recover damages in an unspecified amount which allegedly
the class members sustained by purchasing the Company's common stock at
artificially inflated prices. The complaints in the Class Actions allege that
the Company's public documents and statements were materially incomplete and, as
a result, misleading.
The Class Actions were filed after the Company announced its results
of operations for the year ended August 31, 1995, on November 9, 1995. These
results were below the expectations of analysts and on November 10, 1995, the
price of the Company's Class A common stock fell approximately 38% and the price
of the Company's Class B common stock fell approximately 30%.
The Company believes that the Class Actions are without merit and
intends to vigorously defend the Class Actions.
Item 5. Other Information
Change in Fiscal Year
On January 11, 1996, the Registrant's Board of Directors determined to
change the Registrant's fiscal year. The Registrant's new fiscal year will be
March 1 to the last day of February. The Registrant's report covering the
transition period of September 1, 1995 to February 29, 1996 will be filed on
Form 10-K.
Item 6. Exhibits and Reports on Form 8-K
(a) See Index to Exhibits located on Page of this Report.
(b) The following Reports on Form 8-K were filed with the
Securities and Exchange Commission during the quarter ended
November 30, 1995.
1. Form 8-K dated August 29, 1995. This Form 8-K reported information
under Item 2 (Acquisition or Disposition of Assets), Item 5 (Other
Events) and Item 7 (Financial Statements, Pro Forma Financial
Information and Exhibits).
2. Form 8-K/A Amendment No. 1 to Form 8-K dated August 29, 1995. This Form
8-K/A reported information under Item 7 (Financial Statements, Pro
Forma Financial Information and Exhibits). The following financial
statements were filed with this Form 8-K/A:
The United Distillers Glenmore, Inc. Statement of Assets and
Liabilities Related to the Product Lines Acquired by the
Company through its wholly-owned subsidiary, Barton
Incorporated, as of September 1, 1995 and the related
Statements of Identified Income and Expenses of the Product
Lines Acquired for each of the three years in the period ended
December 31, 1994 and the report of Price Waterhouse LLP,
independent auditors, thereon, together with the notes
thereto;
The unaudited Interim Financial Statements of Product Lines
Acquired by the Company through its wholly-owned subsidiary,
Barton Incorporated, for the eight months ended August 31,
1995 and 1994, together with the notes thereto; and
The pro forma condensed consolidated balance sheet (unaudited)
as of May 31, 1995 and the pro forma condensed consolidated
statement of income (unaudited) for the nine months ended May
31, 1995 and the pro forma condensed consolidated statement of
income (unaudited) for the year ended August 31, 1994, and the
notes thereto.
3. Form 8-K dated October 31, 1995. This Form 8-K reported information
under Item 5 (Other Events) and included the Company's Condensed
Consolidated Statement of Income for (i) the three months ended August
31, 1995 (unaudited), (ii) the three months ended August 31, 1994
(unaudited), (iii) the fiscal year ended August 31, 1995, and (iv) the
fiscal year ended August 31, 1994.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CANANDAIGUA WINE COMPANY, INC.
Dated: January 16, 1996 By: /s/ Richard Sands
----------------------------
Richard Sands, President and
Chief Executive Officer
Dated: January 16, 1996 By: /s/ Lynn K. Fetterman
----------------------------
Lynn K. Fetterman, Senior
Vice President and Chief
Financial Office
(Principal Financial Officer
and Principal Accounting
Officer)
INDEX TO EXHIBITS
(2) Plan of acquisition, reorganization, arrangement, liquidation
or succession.
2.1 Asset Purchase Agreement dated August 2, 1991 between the Registrant
and Guild Wineries and Distilleries, as assigned to an acquiring
subsidiary (filed as Exhibit 2(a) to the Registrant's Report on Form
8-K dated October 1, 1991 and incorporated herein by reference).
2.2 Stock Purchase Agreement dated April 27, 1993 among the Registrant,
Barton Incorporated and the stockholders of Barton Incorporated,
Amendment No. 1 to Stock Purchase Agreement dated May 3, 1993, and
Amendment No. 2 to Stock Purchase Agreement dated June 29, 1993 (filed
as Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated
June 29, 1993 and incorporated herein by reference).
2.3 Asset Sale Agreement dated September 14, 1993 between the Registrant
and Vintners International Company, Inc. (filed as Exhibit 2(a) to the
Registrant's Current Report on Form 8-K dated October 15, 1993 and
incorporated herein by reference).
2.4 Amendment dated as of October 14, 1993 to Asset Sale Agreement dated as
of September 14, 1993 by and between Vintners International Company,
Inc. and the Registrant (filed as Exhibit 2(b) to the Registrant's
Current Report on Form 8-K dated October 15, 1993 and incorporated
herein by reference).
2.5 Amendment No. 2 dated as of January 18, 1994 to Asset Sale Agreement
dated as of September 14, 1993 by and between Vintners International
Company, Inc. and the Registrant (filed as Exhibit 2.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
February 28, 1994 and incorporated herein by reference).
2.6 Asset Purchase Agreement dated August 3, 1994 between the Registrant
and Heublein, Inc. (filed as Exhibit 2(a) to the Registrant's Current
Report on Form 8-K dated August 5, 1994 and incorporated herein by
reference).
2.7 Amendment dated November 8, 1994 to Asset Purchase Agreement between
Heublein, Inc. and Registrant (filed as Exhibit 2.2 to the Registrant's
Registration Statement on Form S-3 (Amendment No. 2) (Registration No.
33-55997) filed with the Securities and Exchange Commission on November
8, 1994 and incorporated herein by reference).
2.8 Amendment dated November 18, 1994 to Asset Purchase Agreement between
Heublein, Inc. and the Registrant (filed as Exhibit 2.8 to the
Registrant's Annual Report on Form 10-K for the fiscal year ended
August 31, 1994 and incorporated herein by reference).
2.9 Amendment dated November 30, 1994 to Asset Purchase Agreement between
Heublein, Inc. and the Registrant (filed as Exhibit 2.9 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 1994 and incorporated herein by reference).
2.10 Asset Purchase Agreement among Barton Incorporated (a wholly-owned
subsidiary of the Registrant), United Distillers Glenmore, Inc.,
Schenley Industries Inc., Medley Distilling Company, United Distillers
Manufacturing, Inc., and The Viking Distillery, Inc., dated August 29,
1995 (filed as Exhibit 2(a) to the Registrant's Current Report on Form
8-K, dated August 29, 1995 and incorporated herein by reference).
(3) Articles of Incorporation and By-Laws
3.1 Restated Certificate of Incorporation of the Registrant (filed as
Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1993 and incorporated herein by
reference).
3.2 Amended and Restated By-laws of the Registrant (filed herewith).
(4) Instruments defining the rights of security holders, including
indentures.
4.1 Specimen of Certificate of Class A Common Stock of the Company (filed
as Exhibit 1.1 to the Registrant's Registration Statement on Form 8-A,
dated April 28, 1992 and incorporated herein by reference).
4.2 Specimen of Certificate of Class B Common Stock of the Company (filed
as Exhibit 1.2 to the Registrant's Registration Statement on Form 8-A,
dated April 28, 1992 and incorporated herein by reference).
4.3 Indenture dated as of December 27, 1993 among the Registrant, its
Subsidiaries and Chemical Bank (filed as Exhibit 4.1 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 1993 and incorporated herein by reference).
4.4 First Supplemental Indenture dated as of August 3, 1994 among the
Registrant, Canandaigua West, Inc. and Chemical Bank (filed as Exhibit
4.5 to the Registrant's Registration Statement on Form S-8
(Registration No. 33-56557) and incorporated herein by reference).
4.5 Second Supplemental Indenture dated August 25, 1995, among the
Registrant, V Acquisition Corp. (a subsidiary of the Registrant now
known as The Viking Distillery, Inc.) and Chemical Bank (filed as
Exhibit 4.5 to the Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1995 and incorporated herein by
reference).
(10) Material Contracts
10.1 Amendment No. 1, dated as of December 20, 1995, to Third Amended and
Restated Credit Agreement between the Registrant, its principal
operating subsidiaries, and certain banks for which The Chase Manhattan
Bank (National Association) acts as Administrative Agent (filed
herewith).
10.2 Amendment No. 2, dated as of January 10, 1996, to Third Amended and
Restated Credit Agreement between the Registrant, its principal
operating subsidiaries, and certain banks for which The Chase Manhattan
Bank (National Association) acts as Administrative Agent (filed
herewith).
10.3 Letter agreement, addressing compensation, between the Registrant and
Lynn Fetterman, dated March 22, 1990 (filed herewith).
(11) Statement re computation of per share earnings.
Computation of per share earnings (filed herewith).
(15) Letter re unaudited interim financial information.
Not applicable.
(18) Letter re change in accounting principles.
Not applicable.
(19) Report furnished to security holders.
Not applicable.
(22) Published report regarding matters submitted to a vote of security
holders.
Not applicable.
(23) Consents of experts and counsel.
Not applicable.
(24) Power of Attorney.
Not applicable.
(27) Financial Data Schedule.
Financial Data Schedule (filed herewith).
(99) Additional Exhibits.
Not applicable.