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 May 31, 2001
------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 001-08495
Delaware CONSTELLATION 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 98-0198402
New York Polyphenolics, Inc. 16-1546354
New York Roberts Trading Corp. 16-0865491
Netherlands Canandaigua B.V. 98-0205132
Delaware Franciscan Vineyards, Inc. 94-2602962
California Allberry, Inc. 68-0324763
California Cloud Peak Corporation 68-0324762
California M.J. Lewis Corp. 94-3065450
California Mt. Veeder Corporation 94-2862667
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
Illinois Barton Canada, Ltd. 36-4283446
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
(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
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(Address of principal executive offices) (Zip Code)
(716) 218-2169
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(Registrants' telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the 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 Constellation Brands, Inc., as of June 30, 2001, is set forth below
(all of the Registrants, other than Constellation Brands, Inc., are direct or
indirect wholly-owned subsidiaries of Constellation Brands, Inc.):
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Class A Common Stock, Par Value $.01 Per Share 35,970,244
Class B Common Stock, Par Value $.01 Per Share 6,132,795
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
May 31, February 28,
2001 2001
------------ ------------
(unaudited)
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 3,739 $ 145,672
Accounts receivable, net 374,398 314,262
Inventories, net 756,611 670,018
Prepaid expenses and other current assets 64,584 61,037
------------ ------------
Total current assets 1,199,332 1,190,989
PROPERTY, PLANT AND EQUIPMENT, net 583,070 548,614
OTHER ASSETS 957,291 772,566
------------ ------------
Total assets $ 2,739,693 $ 2,512,169
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 24,903 $ 4,184
Current maturities of long-term debt 72,996 54,176
Accounts payable 154,394 114,793
Accrued excise taxes 43,979 55,954
Other accrued expenses and liabilities 208,351 198,053
------------ ------------
Total current liabilities 504,623 427,160
------------ ------------
LONG-TERM DEBT, less current maturities 1,294,116 1,307,437
------------ ------------
DEFERRED INCOME TAXES 131,317 131,974
------------ ------------
OTHER LIABILITIES 28,690 29,330
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, none at May 31, 2001,
and February 28, 2001 - -
Class A Common Stock, $.01 par value-
Authorized, 120,000,000 shares;
Issued, 37,723,329 shares at
May 31, 2001, and 37,438,968 shares
at February 28, 2001 377 374
Class B Convertible Common Stock,
$.01 par value-
Authorized, 20,000,000 shares;
Issued, 7,384,445 shares at
May 31, 2001, and 7,402,594 shares
at February 28, 2001 74 74
Additional paid-in capital 373,530 267,655
Retained earnings 479,641 455,798
Accumulated other comprehensive loss (30,375) (26,004)
------------ ------------
823,247 697,897
------------ ------------
Less-Treasury stock-
Class A Common Stock, 1,830,600 shares at
May 31, 2001, and 6,200,600 shares at
February 28, 2001, at cost (39,967) (79,271)
Class B Convertible Common Stock, 1,251,450
shares at May 31, 2001, and
February 28, 2001, at cost (2,207) (2,207)
------------ ------------
(42,174) (81,478)
------------ ------------
Less-Unearned compensation-restricted
stock awards (126) (151)
------------ ------------
Total stockholders' equity 780,947 616,268
------------ ------------
Total liabilities and stockholders' equity $ 2,739,693 $ 2,512,169
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
- 1 -
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Three Months Ended May 31,
----------------------------------
2001 2000
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(unaudited) (unaudited)
GROSS SALES $ 835,774 $ 774,522
Less - Excise taxes (193,664) (188,942)
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Net sales 642,110 585,580
COST OF PRODUCT SOLD (440,160) (401,707)
------------- -------------
Gross profit 201,950 183,873
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (132,027) (126,409)
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Operating income 69,923 57,464
INTEREST EXPENSE, net (30,185) (27,627)
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Income before income taxes 39,738 29,837
PROVISION FOR INCOME TAXES (15,895) (11,935)
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NET INCOME $ 23,843 $ 17,902
============= =============
SHARE DATA:
Earnings per common share:
Basic $ 0.58 $ 0.49
============= =============
Diluted $ 0.56 $ 0.48
============= =============
Weighted average common shares
outstanding:
Basic 41,254 36,460
Diluted 42,526 37,196
The accompanying notes to consolidated financial statements
are an integral part of these statements.
- 2 -
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Three Months Ended May 31,
----------------------------------
2001 2000
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,843 $ 17,902
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property, plant and equipment 14,005 11,797
Amortization of intangible assets 7,920 6,549
Loss on sale of assets 920 767
Amortization of discount on long-term debt 135 116
Stock-based compensation expense 25 -
Deferred tax provision - 3,571
Change in operating assets and liabilities,
net of effects from purchases of businesses:
Accounts receivable, net (39,164) (50,394)
Inventories, net 18,800 8,747
Prepaid expenses and other current assets (3,387) 2,129
Accounts payable 21,251 10,603
Accrued excise taxes (11,706) 11,462
Other accrued expenses and liabilities 4,919 1,200
Other assets and liabilities, net (2,964) (4,478)
------------ ------------
Total adjustments 10,754 2,069
------------ ------------
Net cash provided by operating activities 34,597 19,971
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (328,783) -
Purchases of property, plant and equipment (10,838) (10,265)
Proceeds from sale of assets 368 317
------------ ------------
Net cash used in investing activities (339,253) (9,948)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from equity offering, net of fees 139,878 -
Net proceeds from (repayments of) notes payable 21,162 (16,800)
Exercise of employee stock options 4,797 1,973
Principal payments of long-term debt (1,974) (133,329)
Payment of issuance costs of long-term debt (1,014) (1,301)
Proceeds from issuance of long-term debt, net of discount - 119,400
------------ ------------
Net cash provided by (used in) financing activities 162,849 (30,057)
------------ ------------
Effect of exchange rate changes on cash and
cash investments (126) (250)
------------ ------------
NET DECREASE IN CASH AND CASH INVESTMENTS (141,933) (20,284)
CASH AND CASH INVESTMENTS, beginning of period 145,672 34,308
------------ ------------
CASH AND CASH INVESTMENTS, end of period $ 3,739 $ 14,024
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ 368,632 $ -
Liabilities assumed (39,347) -
------------ ------------
Cash paid 329,285 -
Less - cash acquired (502) -
------------ ------------
Net cash paid for purchases of businesses $ 328,783 $ -
============ ============
<FN>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
</FN>
- 3 -
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2001
1) MANAGEMENT'S REPRESENTATIONS:
The consolidated financial statements included herein have been prepared by
Constellation Brands, Inc. and its subsidiaries (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of
the Company, all adjustments necessary to present fairly the financial
information for the Company. All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted as permitted by such rules and
regulations. These consolidated financial statements and related notes should be
read in conjunction with the consolidated financial statements and related notes
included in the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 2001. Results of operations for interim periods are not necessarily
indicative of annual results.
Certain May 31, 2000, balances have been reclassified to conform to current
year presentation.
2) ACCOUNTING CHANGES:
Effective March 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended, which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133 requires that the Company recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The adoption of SFAS No. 133 did not have a material impact on the Company's
consolidated financial position, results of operations, or cash flows. The
Company is exposed to market risk associated with changes in foreign currency
exchange rates. The Company has limited involvement with derivative financial
instruments and does not use them for trading purposes. The Company periodically
enters into derivative transactions solely to manage the volatility and to
reduce the financial impact relating to this risk.
The Company uses foreign currency exchange hedging agreements to reduce the
risk of foreign currency exchange rate fluctuations resulting primarily from
contracts to purchase inventory items that are denominated in various foreign
currencies. As these derivative contracts are designated to hedge the exposure
to variable cash flows of a forecasted transaction, the contracts are classified
as cash flow hedges. As such, the effective portion of the change in the fair
value of the derivatives is recorded each period in the balance sheet in
accumulated other comprehensive income/loss ("AOCI"), and is reclassified into
the statement of income, primarily as a component of cost of goods sold, in the
same period during which the hedged transaction affects earnings. The currency
forward exchange contracts used generally have maturity terms of twelve months
or less. The Company expects the entire balance in AOCI related to cash flow
hedges to be reclassified to the statement of income within the next twelve
months. The Company formally documents all relationships between hedging
instruments and hedged items in accordance with SFAS No. 133 requirements.
The Company has exposure to foreign currency risk, primarily in the United
Kingdom, as a result of having international subsidiaries. The Company uses
local currency borrowings to hedge its earnings and cash flow exposure to
adverse changes in foreign currency exchange rates. Such borrowings are
designated as a hedge of the foreign currency exposure of the net investment in
the foreign operation. Accordingly, the effective portion of the foreign
currency gain or loss on the hedging debt instrument is reported in AOCI as part
of the foreign currency translation adjustments. For the three months ended
- 4 -
May 31, 2001, $5.3 million of net gain is included in foreign currency
translation adjustments within AOCI.
3) ACQUISITIONS:
On October 27, 2000, the Company purchased all of the issued Ordinary
Shares and Preference Shares of Forth Wines Limited ("Forth Wines"). The
purchase price was $4.5 million and was accounted for using the purchase method;
accordingly, the acquired net assets were recorded at fair market value at the
date of acquisition. The excess of the purchase price over the fair market value
of the net assets acquired (goodwill), $2.2 million, is being amortized on a
straight-line basis over 40 years. The results of operations of Forth Wines are
reported in the Matthew Clark segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The preliminary purchase
price of the Turner Road Vintners Assets, including assumption of indebtedness
of $9.4 million, was $289.7 million. The purchase price is subject to final
closing adjustments which the Company does not expect to be material. The
acquisition was financed by the proceeds from the sale of the February 2001
Senior Notes and revolving loan borrowings under the senior credit facility. The
Turner Road Vintners Assets acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair market value
at the date of acquisition, subject to final appraisal. The excess of the
purchase price over the estimated fair market value of the net assets acquired
(goodwill), $180.6 million, is being amortized on a straight-line basis over 40
years. The results of operations of the Turner Road Vintners Assets are reported
in the Canandaigua Wine segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. The preliminary purchase price of the Corus
Assets, including assumption of indebtedness (net of cash acquired) of $3.1
million, was $52.0 million plus an earn-out over six years based on the
performance of the brands. The purchase price is subject to final closing
adjustments which the Company does not expect to be material. In connection with
the transaction, the Company also entered into long-term grape supply agreements
with affiliates of Corus Brands, Inc. covering more than 1,000 acres of
Washington and Idaho vineyards. The acquisition was financed with revolving loan
borrowings under the senior credit facility. The Corus Assets acquisition was
accounted for using the purchase method; accordingly, the acquired net assets
were recorded at fair market value at the date of acquisition, subject to final
appraisal. The excess of the purchase price over the estimated fair market value
of the net assets acquired (goodwill), $11.9 million, is being amortized on a
straight-line basis over 40 years. The results of operations of the Corus Assets
are reported in the Canandaigua Wine segment and have been included in the
Consolidated Statements of Income since the date of acquisition.
The following table sets forth the unaudited pro forma results of
operations of the Company for the three months ended May 31, 2001 and 2000. The
unaudited pro forma results of operations for the three months ended May 31,
2001 and 2000, gives effect to the acquisitions of the Turner Road Vintners
Assets and Corus Assets as if they occurred on March 1, 2000. The unaudited pro
forma results of operations for the three months ended May 31, 2000, do not give
pro forma effect to the acquisition of Forth Wines as if it occurred on March 1,
2000, as it is not significant. The unaudited pro forma results of operations
are presented after giving effect to certain adjustments for depreciation,
amortization of goodwill, interest expense on the acquisition financing and
related income tax effects. The unaudited pro
- 5 -
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 Three Months
Ended May 31,
--------------------------
2001 2000
---------- ----------
(in thousands, except per share data)
Net sales $ 644,074 $ 644,505
Income before income taxes $ 38,932 $ 26,593
Net income $ 23,359 $ 15,956
Earnings per common share:
Basic $ 0.57 $ 0.44
========== ==========
Diluted $ 0.55 $ 0.43
========== ==========
Weighted average common shares outstanding:
Basic 41,254 36,460
Diluted 42,526 37,196
4) INVENTORIES:
Inventories are stated at the lower of cost (computed in accordance with
the first-in, first-out method) or market. Elements of cost include materials,
labor and overhead and consist of the following:
May 31, February 28,
2001 2001
------------ ------------
(in thousands)
Raw materials and supplies $ 32,260 $ 28,007
In-process inventories 465,848 450,650
Finished case goods 258,503 191,361
------------ ------------
$ 756,611 $ 670,018
============ ============
5) OTHER ASSETS:
The major components of other assets are as follows:
May 31, February 28,
2001 2001
------------ ------------
(in thousands)
Goodwill $ 637,890 $ 447,813
Trademarks 245,932 247,139
Distribution rights and agency
license agreements 87,052 87,052
Other 77,434 73,935
------------ ------------
1,048,308 855,939
Less - Accumulated amortization (91,017) (83,373)
------------ ------------
$ 957,291 $ 772,566
============ ============
- 6 -
6) STOCKHOLDERS' EQUITY:
During March 2001, the Company completed a public offering of 4,370,000
shares of its Class A Common Stock resulting in net proceeds to the Company,
after deducting underwriting discounts and expenses, of $139.9 million. The net
proceeds were used to repay revolving loan borrowings under the senior credit
facility of which a portion was incurred to partially finance the acquisition of
the Turner Road Vintners Assets.
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 Three Months
Ended May 31,
------------------------------
2001 2000
------------ ------------
(in thousands, except per share data)
Income applicable to common shares $ 23,843 $ 17,902
============ ============
Weighted average common shares
outstanding - basic 41,254 36,460
Stock options 1,272 736
------------ ------------
Weighted average common shares
outstanding - diluted 42,526 37,196
============ ============
EARNINGS PER COMMON SHARE - BASIC $ 0.58 $ 0.49
============ ============
EARNINGS PER COMMON SHARE - DILUTED $ 0.56 $ 0.48
============ ============
Stock options to purchase 1.4 million and 3.2 million shares of Class A
Common Stock at a weighted average price per share of $35.49 and $26.03 were
outstanding during the three months ended May 31, 2001 and 2000, respectively,
but were not included in the computation of the diluted earnings per common
share because the stock options' exercise price was greater than the average
market price of the Class A Common Stock for the respective periods.
8) CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets of the Company as of May 31, 2001 and 2000, and the condensed
consolidating statements of income and cash flows for the three months ended May
31, 2001 and 2000, for the Company, the parent company, the combined
subsidiaries of the Company which guarantee the Company's senior notes and
senior subordinated 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. The accounting policies of the parent company, the Subsidiary
Guarantors and the Subsidiary Nonguarantors are the same as those described
- 7 -
for the Company in the Summary of Significant Accounting Policies in Note 1 to
the Company's consolidated financial statements included in the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2001. There are no
restrictions on the ability of the Subsidiary Guarantors to transfer funds to
the Company in the form of cash dividends, loans or advances.
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at May 31, 2001
- ---------------
Current assets:
Cash and cash investments $ - $ 3,569 $ 170 $ - $ 3,739
Accounts receivable, net 58,083 80,330 235,985 - 374,398
Inventories, net 31,983 598,781 125,905 (58) 756,611
Prepaid expenses and other
current assets 5,615 37,107 21,862 - 64,584
Intercompany (payable) receivable (66,389) 124,835 (58,446) - -
----------- ------------ ------------- ------------ ------------
Total current assets 29,292 844,622 325,476 (58) 1,199,332
Property, plant and equipment, net 30,038 361,568 191,464 - 583,070
Investments in subsidiaries 2,182,342 531,771 - (2,714,113) -
Other assets 88,868 624,356 244,067 - 957,291
----------- ------------ ------------- ------------ ------------
Total assets $ 2,330,540 $ 2,362,317 $ 761,007 $ (2,714,171) $ 2,739,693
=========== ============ ============= ============ ============
Current liabilities:
Notes payable $ 20,000 $ - $ 4,903 $ - $ 24,903
Current maturities of long-term debt 67,044 1,379 4,573 - 72,996
Accounts payable and other liabilities 110,508 72,169 180,068 - 362,745
Accrued excise taxes 4,858 22,196 16,925 - 43,979
----------- ------------ ------------- ------------ ------------
Total current liabilities 202,410 95,744 206,469 - 504,623
Long-term debt, less current maturities 1,281,793 11,855 468 - 1,294,116
Deferred income taxes 33,232 69,330 28,755 - 131,317
Other liabilities 467 4,111 24,112 - 28,690
Stockholders' equity:
Class A and class B common stock 451 6,434 64,867 (71,301) 451
Additional paid-in capital 373,530 1,071,627 436,466 (1,508,093) 373,530
Retained earnings 479,699 1,104,281 30,438 (1,134,777) 479,641
Accumulated other comprehensive
income (loss) 1,258 (1,065) (30,568) - (30,375)
Treasury stock and other (42,300) - - - (42,300)
----------- ------------ ------------- ------------ ------------
Total stockholders' equity 812,638 2,181,277 501,203 (2,714,171) 780,947
----------- ------------ ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 2,330,540 $ 2,362,317 $ 761,007 $ (2,714,171) $ 2,739,693
=========== ============ ============= ============ ============
Condensed Consolidating Balance Sheet
- -------------------------------------
at February 28, 2001
- --------------------
Current assets:
Cash and cash investments $ 142,104 $ 3,239 $ 329 $ - $ 145,672
Accounts receivable, net 80,299 116,784 117,179 - 314,262
Inventories, net 31,845 515,274 122,965 (66) 670,018
Prepaid expenses and other
current assets 6,551 33,565 20,921 - 61,037
Intercompany (payable) receivable (61,783) 54,169 7,614 - -
----------- ------------ ------------- ------------ ------------
Total current assets 199,016 723,031 269,008 (66) 1,190,989
Property, plant and equipment, net 30,554 320,143 197,917 - 548,614
Investments in subsidiaries 1,835,088 525,442 - (2,360,530) -
Other assets 87,764 434,782 250,020 - 772,566
----------- ------------ ------------- ------------ ------------
Total assets $ 2,152,422 $ 2,003,398 $ 716,945 $ (2,360,596) $ 2,512,169
=========== ============ ============= ============ ============
- 8 -
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
(in thousands)
Current liabilities:
Notes payable $ - $ - $ 4,184 $ - $ 4,184
Current maturities of long-term debt 49,218 70 4,888 - 54,176
Accounts payable and other liabilities 111,388 58,448 143,010 - 312,846
Accrued excise taxes 9,411 35,474 11,069 - 55,954
----------- ------------ ------------- ------------ ------------
Total current liabilities 170,017 93,992 163,151 427,160
Long-term debt, less current maturities 1,305,302 758 1,377 - 1,307,437
Deferred income taxes 33,232 71,619 27,123 - 131,974
Other liabilities 437 2,953 25,940 - 29,330
Stockholders' equity:
Class A and class B common stock 448 6,434 64,867 (71,301) 448
Additional paid-in capital 267,655 742,343 436,466 (1,178,809) 267,655
Retained earnings 455,864 1,086,311 24,109 (1,110,486) 455,798
Accumulated other comprehensive
income (loss) 1,096 (1,012) (26,088) - (26,004)
Treasury stock and other (81,629) - - - (81,629)
----------- ------------ ------------- ------------ ------------
Total stockholders' equity 643,434 1,834,076 499,354 (2,360,596) 616,268
----------- ------------ ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 2,152,422 $ 2,003,398 $ 716,945 $ (2,360,596) $ 2,512,169
=========== ============ ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended May 31, 2001
- ---------------------------------------
Gross sales $ 194,126 $ 452,541 $ 256,425 $ (67,318) $ 835,774
Less - excise taxes (30,388) (102,215) (61,061) - (193,664)
----------- ------------ ------------- ------------ ------------
Net sales 163,738 350,326 195,364 (67,318) 642,110
Cost of product sold (112,487) (248,875) (146,124) 67,326 (440,160)
----------- ------------ ------------- ------------ ------------
Gross profit 51,251 101,451 49,240 8 201,950
Selling, general and administrative
expenses (41,696) (52,230) (38,101) - (132,027)
----------- ------------ ------------- ------------ ------------
Operating income 9,555 49,221 11,139 8 69,923
Interest expense, net (5,365) (23,539) (1,281) - (30,185)
Equity earnings in subsidiary 17,970 6,329 - (24,299) -
----------- ------------ ------------- ------------ ------------
Income before income taxes 22,160 32,011 9,858 (24,291) 39,738
Benefit from (provision for) income taxes 1,675 (14,041) (3,529) - (15,895)
----------- ------------ ------------- ------------ ------------
Net income $ 23,835 $ 17,970 $ 6,329 $ (24,291) $ 23,843
=========== ============ ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended May 31, 2000
- ---------------------------------------
Gross sales $ 168,387 $ 443,183 $ 241,003 $ (78,051) $ 774,522
Less - excise taxes (30,974) (102,410) (55,558) - (188,942)
----------- ------------ ------------- ------------ ------------
Net sales 137,413 340,773 185,445 (78,051) 585,580
Cost of product sold (100,738) (245,819) (133,186) 78,036 (401,707)
----------- ------------ ------------- ------------ ------------
Gross profit 36,675 94,954 52,259 (15) 183,873
Selling, general and administrative
expenses (38,393) (50,112) (37,904) - (126,409)
----------- ------------ ------------- ------------ ------------
Operating income (1,718) 44,842 14,355 (15) 57,464
Interest expense, net (6,194) (20,272) (1,161) - (27,627)
Equity earnings in subsidiary 22,664 8,688 - (31,352) -
----------- ------------ ------------- ------------ ------------
Income before income taxes 14,752 33,258 13,194 (31,367) 29,837
Benefit from (provision for) income taxes 3,165 (10,594) (4,506) - (11,935)
----------- ------------ ------------- ------------ ------------
Net income $ 17,917 $ 22,664 $ 8,688 $ (31,367) $ 17,902
=========== ============ ============= ============ ============
- 9 -
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Three Months Ended May 31, 2001
- ---------------------------------------
Net cash provided by operating
activities $ 30,101 $ 1,758 $ 2,738 $ - $ 34,597
Cash flows from investing activities:
Purchases of businesses, net of
cash acquired (329,284) 501 - - (328,783)
Purchases of property, plant and
equipment (985) (6,881) (2,972) - (10,838)
Other - 224 144 - 368
----------- ------------ ------------- ------------ ------------
Net cash used in investing activities (330,269) (6,156) (2,828) - (339,253)
----------- ------------ ------------- ------------ ------------
Cash flows from financing activities:
Proceeds from equity offering, net
of fees 139,878 - - - 139,878
Net proceeds from notes payable 20,000 - 1,162 21,162
Exercise of employee stock options 4,797 - - - 4,797
Principal payments of long-term debt (599) (315) (1,060) - (1,974)
Payment of issuance costs of
long-term debt (1,014) - - - (1,014)
----------- ------------ ------------- ------------ ------------
Net cash provided by (used in)
financing activities 163,062 (315) 102 - 162,849
----------- ------------ ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments (4,998) 5,043 (171) - (126)
----------- ------------ ------------- ------------ ------------
Net (decrease) increase in cash
and cash investments (142,104) 330 (159) - (141,933)
Cash and cash investments, beginning
of period 142,104 3,239 329 - 145,672
----------- ------------ ------------- ------------ ------------
Cash and cash investments, end of
period $ - $ 3,569 $ 170 $ - $ 3,739
=========== ============ ============= ============ ============
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Three Months Ended May 31, 2000
- ---------------------------------------
Net cash provided by (used in)
operating activities $ 45,866 $ (9,465) $ (16,430) $ - $ 19,971
Cash flows from investing activities:
Purchases of property, plant and
equipment (753) (6,335) (3,177) - (10,265)
Other - 79 238 - 317
----------- ------------ ------------- ------------ ------------
Net cash used in investing activities (753) (6,256) (2,939) - (9,948)
----------- ------------ ------------- ------------ ------------
Cash flows from financing activities:
Principal payments of long-term debt (132,950) (16) (363) - (133,329)
Net repayments of notes payable (16,800) - - - (16,800)
Payment of issuance costs of
long-term debt (1,301) - - - (1,301)
Proceeds from issuance of long-term
debt, net of discount 119,400 - - - 119,400
Exercise of employee stock options 1,973 - - - 1,973
----------- ------------ ------------- ------------ ------------
Net cash used in financing activities (29,678) (16) (363) - (30,057)
----------- ------------ ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments (15,416) 16,236 (1,070) - (250)
----------- ------------ ------------- ------------ ------------
- 10 -
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ ------------- ------------ ------------
(in thousands)
Net increase (decrease) in cash
and cash investments 19 499 (20,802) - (20,284)
Cash and cash investments, beginning
of period - 231 34,077 - 34,308
----------- ------------ ------------- ------------ ------------
Cash and cash investments, end of
period $ 19 $ 730 $ 13,275 $ - $ 14,024
=========== ============ ============= ============ ============
9) BUSINESS SEGMENT INFORMATION:
The Company reports its operating results in five segments: Canandaigua
Wine (branded popular and premium wine and brandy, and other, primarily grape
juice concentrate); Barton (primarily beer and distilled spirits); Matthew Clark
(branded wine, cider and bottled water, and wholesale wine, cider, distilled
spirits, beer and soft drinks); Franciscan (primarily branded super-premium and
ultra-premium wine) and Corporate Operations and Other (primarily corporate
related items). Segment selection was based upon internal organizational
structure, the way in which these operations are managed and their performance
evaluated by management and the Company's Board of Directors, the availability
of separate financial results, and materiality considerations. The accounting
policies of the segments are the same as those described for the Company in the
Summary of Significant Accounting Policies in Note 1 to the Company's
consolidated financial statements included in the Company's Annual Report on
Form 10-K for the fiscal year ended February 28, 2001. The Company evaluates
performance based on operating income of the respective business units.
Segment information is as follows:
For the Three Months
Ended May 31,
-------------------------------
2001 2000
----------- -----------
(in thousands)
Canandaigua Wine:
- -----------------
Net sales:
Branded:
External customers $ 166,081 $ 143,330
Intersegment 1,745 1,236
----------- -----------
Total Branded 167,826 144,566
----------- -----------
Other:
External customers 13,549 15,268
Intersegment 3,689 3,629
----------- -----------
Total Other 17,238 18,897
----------- -----------
Net sales $ 185,064 $ 163,463
Operating income $ 15,395 $ 7,818
Long-lived assets $ 230,260 $ 192,337
Total assets $ 966,466 $ 596,543
Capital expenditures $ 1,489 $ 2,645
Depreciation and amortization $ 8,116 $ 5,868
- 11 -
For the Three Months
Ended May 31,
-------------------------------
2001 2000
----------- -----------
(in thousands)
Barton:
- -------
Net sales:
Beer $ 182,985 $ 163,134
Spirits 71,317 72,546
----------- -----------
Net sales $ 254,302 $ 235,680
Operating income $ 44,051 $ 38,835
Long-lived assets $ 78,136 $ 77,956
Total assets $ 734,345 $ 716,633
Capital expenditures $ 2,924 $ 1,336
Depreciation and amortization $ 4,762 $ 3,955
Matthew Clark:
- --------------
Net sales:
Branded:
External customers $ 66,881 $ 69,594
Intersegment 102 21
----------- -----------
Total Branded 66,983 69,615
Wholesale 115,006 99,923
----------- -----------
Net sales $ 181,989 $ 169,538
Operating income $ 8,317 $ 10,374
Long-lived assets $ 140,710 $ 148,103
Total assets $ 622,334 $ 629,030
Capital expenditures $ 2,030 $ 2,409
Depreciation and amortization $ 4,673 $ 5,213
Franciscan:
- -----------
Net sales:
External customers $ 26,291 $ 21,785
Intersegment 102 104
----------- -----------
Net sales $ 26,393 $ 21,889
Operating income $ 7,048 $ 5,416
Long-lived assets $ 129,499 $ 108,694
Total assets $ 396,209 $ 361,036
Capital expenditures $ 3,969 $ 3,780
Depreciation and amortization $ 3,223 $ 2,392
Corporate Operations and Other:
- -------------------------------
Net sales $ - $ -
Operating loss $ (4,888) $ (4,979)
Long-lived assets $ 4,465 $ 3,901
Total assets $ 20,339 $ 23,858
Capital expenditures $ 426 $ 95
Depreciation and amortization $ 1,151 $ 918
Intersegment eliminations:
- --------------------------
Net sales $ (5,638) $ (4,990)
Consolidated:
- -------------
Net sales $ 642,110 $ 585,580
Operating income $ 69,923 $ 57,464
Long-lived assets $ 583,070 $ 530,991
Total assets $ 2,739,693 $ 2,327,100
Capital expenditures $ 10,838 $ 10,265
Depreciation and amortization $ 21,925 $ 18,346
- 12 -
10) COMPREHENSIVE INCOME:
Comprehensive income consists of net income, foreign currency translation
adjustments and net unrealized losses on derivative instruments for the three
months ended May 31, 2001 and 2000. The reconciliation of net income to
comprehensive income is as follows:
For the Three Months
Ended May 31,
------------------------
2001 2000
---------- ----------
(in thousands)
Net income $ 23,843 $ 17,902
Other comprehensive income, net of tax:
Foreign currency translation adjustments (4,314) (11,266)
Cash flow hedges:
Net derivative gains, net of tax
effect of $79 172 -
Reclassification adjustments, net of
tax effect of $103 (229) -
---------- ----------
Net cash flow hedges (57) -
---------- ----------
Total comprehensive income $ 19,472 $ 6,636
========== ==========
Accumulated other comprehensive loss includes the following components:
For the Three Months Ended May 31, 2001
--------------------------------------------------
Foreign Net Accumulated
Currency Unrealized Other
Translation Losses on Comprehensive
Adjustments Derivatives Loss
------------ ------------- -------------
Beginning balance,
February 28, 2001 $ (26,004) $ - $ (26,004)
Current-period change (4,314) (57) (4,371)
------------ ------------- -------------
Ending balance,
May 31, 2001 $ (30,318) $ (57) $ (30,375)
============ ============= =============
11) ACCOUNTING PRONOUNCEMENTS:
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-14 ("EITF No. 00-14"), "Accounting for Certain Sales Incentives," which was
subsequently amended in April 2001. EITF No. 00-14 addresses the recognition,
measurement and income statement classification of certain sales incentives.
EITF No. 00-14 requires that sales incentives, including coupons, rebate offers,
and free product offers, given concurrently with a single exchange transaction
be recognized when incurred and reported as a reduction of revenue. The Company
currently reports these costs in selling, general and administrative expenses.
The Company is required to adopt EITF No. 00-14 in its financial statements
beginning March 1, 2002. Upon adoption of EITF No. 00-14, financial statements
for prior periods presented for comparative purposes are to be reclassified to
comply with the requirements of EITF No. 00-14. The Company believes the impact
of EITF No. 00-14 on its financial statements will result in a material
reclassification that will decrease previously reported net sales and decrease
previously reported selling, general and administrative expenses, but will have
no effect on operating income or net income. The Company has not yet determined
the amount of the reclassification.
12) SUBSEQUENT EVENT:
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"). The preliminary purchase price of
Ravenswood, including assumption of indebtedness (net of cash acquired) of $3.2
million, was $151.2 million. The purchase price is subject to final closing
adjustments which the Company does not expect to be material. The Ravenswood
acquisition will be accounted for using the purchase method; accordingly, the
acquired net assets will be
- 13 -
recorded at fair market value at the date of acquisition based upon an appraisal
of the net assets. The acquisition was financed with revolving loan borrowings
under the senior credit facility. The Company will manage Ravenswood through its
Franciscan segment.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
INTRODUCTION
- ------------
The Company is a leader in the production and marketing of beverage alcohol
brands in North America and the United Kingdom, and a leading independent drinks
wholesaler in the United Kingdom. As the second largest supplier of wine, the
second largest importer of beer and the fourth largest supplier of distilled
spirits, the Company is the largest single-source supplier of these products in
the United States. In the United Kingdom, the Company is a leading marketer of
wine and the second largest producer and marketer of cider.
The Company reports its operating results in five segments: Canandaigua
Wine (branded popular and premium wine and brandy, and other, primarily grape
juice concentrate); Barton (primarily beer and distilled spirits); Matthew Clark
(branded wine, cider, and bottled water, and wholesale wine, cider, distilled
spirits, beer and soft drinks); Franciscan (primarily branded super-premium and
ultra-premium wine); and Corporate Operations and Other (primarily corporate
related items).
On April 10, 2001, the Board of Directors of the Company approved a
two-for-one stock split of both the Company's Class A Common Stock and Class B
Common Stock, which was distributed in the form of a stock dividend on May 14,
2001, to stockholders of record on April 30, 2001. Pursuant to the terms of the
stock dividend, each holder of Class A Common Stock received one additional
share of Class A stock for each share of Class A stock held, and each holder of
Class B Common Stock received one additional share of Class B stock for each
share of Class B stock held. All share and per share amounts in this Quarterly
Report on Form 10-Q are adjusted to give effect to the common stock split.
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the three
months ended May 31, 2001 ("First Quarter 2002"), compared to the three months
ended May 31, 2000 ("First Quarter 2001"), and (ii) financial liquidity and
capital resources for First Quarter 2002. This discussion and analysis should be
read in conjunction with the Company's consolidated financial statements and
notes thereto included herein and in the Company's Annual Report on Form 10-K
for the fiscal year ended February 28, 2001 ("Fiscal 2001").
ACQUISITIONS IN FISCAL 2002 AND FISCAL 2001
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"), a leading premium wine producer based
in Sonoma, California. Ravenswood produces, markets and sells super-premium and
ultra-premium California wine primarily under the Ravenswood brand name. The
vast majority of the wine Ravenswood produces and sells is red wine, including
the number one super-premium Zinfandel in the United States. The Company will
manage Ravenswood through its Franciscan segment. The Ravenswood acquisition is
in line with the Company's strategy of further penetrating the faster growing,
higher gross profit margin super-premium and ultra-premium wine categories.
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus
- 14 -
Assets"). In this acquisition, the Company acquired several well-known premium
wine brands primarily sold in the northwestern United States, including Covey
Run, Columbia, Ste. Chapelle and Alice White. In connection with the
transaction, the Company also entered into long-term grape supply agreements
with affiliates of Corus Brands, Inc. covering more than 1,000 acres of
Washington and Idaho vineyards. The results of operations of the Corus Assets
are reported in the Canandaigua Wine segment and have been included in the
consolidated results of operations of the Company since the date of acquisition.
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The results of operations of
the Turner Road Vintners Assets are reported in the Canandaigua Wine segment and
have been included in the consolidated results of operations of the Company
since the date of acquisition. The acquisition of the Turner Road Vintners
Assets is significant and the Company expects it to have a material impact on
the Company's future results of operations.
On October 27, 2000, the Company purchased all of the issued Ordinary
Shares and Preference Shares of Forth Wines Limited ("Forth Wines"). The results
of operations of Forth Wines are reported in the Matthew Clark segment and have
been included in the consolidated results of operations of the Company since the
date of acquisition.
RESULTS OF OPERATIONS
- ---------------------
FIRST QUARTER 2002 COMPARED TO FIRST QUARTER 2001
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for First Quarter 2002 and First Quarter 2001.
First Quarter 2002 Compared to First Quarter 2001
-------------------------------------------------
Net Sales
-------------------------------------------------
%Increase/
2002 2001 (Decrease)
---------- ---------- ----------
Canandaigua Wine:
Branded:
External customers $ 166,081 $ 143,330 15.9 %
Intersegment 1,745 1,236 41.2 %
---------- ----------
Total Branded 167,826 144,566 16.1 %
---------- ----------
Other:
External customers 13,549 15,268 (11.3)%
Intersegment 3,689 3,629 1.7 %
---------- ----------
Total Other 17,238 18,897 (8.8)%
---------- ----------
Canandaigua Wine net sales $ 185,064 $ 163,463 13.2 %
---------- ----------
Barton:
Beer $ 182,985 $ 163,134 12.2 %
Spirits 71,317 72,546 (1.7)%
---------- ----------
Barton net sales $ 254,302 $ 235,680 7.9 %
---------- ----------
- 15 -
First Quarter 2002 Compared to First Quarter 2001
-------------------------------------------------
Net Sales
-------------------------------------------------
%Increase/
2002 2001 (Decrease)
---------- ---------- ----------
Matthew Clark:
Branded:
External customers $ 66,881 $ 69,594 (3.9)%
Intersegment 102 21 385.7 %
---------- ----------
Total Branded 66,983 69,615 (3.8)%
Wholesale 115,006 99,923 15.1 %
---------- ----------
Matthew Clark net sales $ 181,989 $ 169,538 7.3 %
---------- ----------
Franciscan:
External customers $ 26,291 $ 21,785 20.7 %
Intersegment 102 104 (1.9)%
---------- ----------
Franciscan net sales $ 26,393 $ 21,889 20.6 %
---------- ----------
Corporate Operations and Other $ - $ - N/A
---------- ----------
Intersegment eliminations $ (5,638) $ (4,990) 13.0 %
---------- ----------
Consolidated Net Sales $ 642,110 $ 585,580 9.7 %
========== ==========
Net sales for First Quarter 2002 increased to $642.1 million from $585.6
million for First Quarter 2001, an increase of $56.5 million, or 9.7%.
Canandaigua Wine
----------------
Net sales for Canandaigua Wine for First Quarter 2002 increased to $185.1
million from $163.5 million for First Quarter 2001, an increase of $21.6
million, or 13.2%. This increase resulted primarily from $36.9 million of sales
of the newly acquired brands from the Turner Road Vintners Assets and Corus
Assets acquisitions ("the Acquisitions"), both completed in March 2001. This
increase was partially offset by declines in (i) other wine brands due to the
timing of seasonal programming for First Quarter 2002 versus First Quarter 2001
and (ii) in the Company's grape juice concentrate business.
Barton
------
Net sales for Barton for First Quarter 2002 increased to $254.3 million
from $235.7 million for First Quarter 2001, an increase of $18.6 million, or
7.9%. This increase resulted primarily from a 12.2% increase in imported beer
sales, led by volume growth in the Mexican beer portfolio. This increase was
partially offset by a slight decrease in spirits sales as a result of lower net
selling prices from the implementation of a net pricing strategy in the third
quarter of Fiscal 2001, which also resulted in lower promotion costs.
Matthew Clark
-------------
Net sales for Matthew Clark for First Quarter 2002 increased to $182.0
million from $169.5 million for First Quarter 2001, an increase of $12.5
million, or 7.3%. Excluding an adverse foreign currency impact of $14.6 million,
net sales increased $27.1 million, or 16.0%, on a local currency basis. This
local currency basis increase resulted primarily from a 24.8% increase in
wholesale sales, with the majority of this growth coming from organic sales.
Additionally, branded sales increased 4.2% with an increase in wine sales being
partially offset by a decrease in cider sales.
- 16 -
Franciscan
----------
Net sales for Franciscan for First Quarter 2002 increased to $26.4 million
from $21.9 million for First Quarter 2001, an increase of $4.5 million, or
20.6%. This increase resulted primarily from volume growth, particularly in
Veramonte, Estancia, Franciscan and Simi.
GROSS PROFIT
The Company's gross profit increased to $202.0 million for First Quarter
2002 from $183.9 million for First Quarter 2001, an increase of $18.1 million,
or 9.8%. The dollar increase in gross profit resulted primarily from sales of
the newly acquired brands from the Acquisitions, volume growth in the Company's
Mexican beer portfolio and volume growth in the Franciscan fine wine portfolio.
These increases were partially offset by a decrease in Canandaigua Wine's other
wine sales and an adverse foreign currency impact. As a percent of net sales,
gross profit remained virtually unchanged at 31.5% for First Quarter 2002 versus
31.4% for First Quarter 2001.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $132.0 million
for First Quarter 2002 from $126.4 million for First Quarter 2001, an increase
of $5.6 million, or 4.4%. The dollar increase in selling, general and
administrative expenses resulted primarily from advertising and promotion costs
associated with the brands acquired in the Acquisitions. Selling, general and
administrative expenses as a percent of net sales decreased to 20.6% for First
Quarter 2002 as compared to 21.6% for First Quarter 2001 as (i) a decrease in
Barton spirits advertising and promotion costs was greater than the decrease in
Barton spirits net sales and (ii) the percent increase in Matthew Clark
wholesale sales was greater than the percent increase in selling, general and
administrative expenses.
OPERATING INCOME
The following table sets forth the operating income/(loss) (in thousands of
dollars) by operating segment of the Company for First Quarter 2002 and First
Quarter 2001.
First Quarter 2002 Compared to First Quarter 2001
-------------------------------------------------
Operating Income/(Loss)
-------------------------------------------------
%Increase/
2002 2001 (Decrease)
-------- -------- ----------
Canandaigua Wine $ 15,395 $ 7,818 96.9 %
Barton 44,051 38,835 13.4 %
Matthew Clark 8,317 10,374 (19.8)%
Franciscan 7,048 5,416 30.1 %
Corporate Operations and Other (4,888) (4,979) (1.8)%
-------- --------
Consolidated Operating Income $ 69,923 $ 57,464 21.7 %
======== ========
As a result of the above factors, consolidated operating income increased
to $69.9 million for First Quarter 2002 from $57.5 million for First Quarter
2001, an increase of $12.5 million, or 21.7%.
INTEREST EXPENSE, NET
Net interest expense increased to $30.2 million for First Quarter 2002 from
$27.6 million for First Quarter 2001, an increase of $2.6 million, or 9.3%. The
increase resulted primarily from an increase in
- 17 -
average borrowings primarily due to the financing of the Acquisitions, partially
offset by a slight decrease in the average interest rate.
NET INCOME
As a result of the above factors, net income increased to $23.8 million for
First Quarter 2002 from $17.9 million for First Quarter 2001, an increase of
$5.9 million, or 33.2%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for First Quarter 2002
were $91.8 million, an increase of $16.0 million over EBITDA of $75.8 million
for First Quarter 2001. EBITDA should not be construed as an alternative to
operating income or net cash flow from operating activities and should not be
construed as an indication of operating performance or as a measure of
liquidity.
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.
FIRST QUARTER 2002 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for First Quarter 2002 was $34.6
million, which resulted from $46.8 million in net income adjusted for noncash
items, less $12.3 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 and a
decrease in accrued excise taxes, partially offset by an increase in accounts
payable and a decrease in inventories.
INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Net cash used in investing activities for First Quarter 2002 was $339.3
million, which resulted primarily from net cash paid of $328.8 million for the
Acquisitions and $10.8 million of capital expenditures.
- 18 -
Net cash provided by financing activities for First Quarter 2002 was $162.8
million resulting primarily from net proceeds of $139.9 million from the equity
offering and proceeds from $21.2 million of net revolving loan borrowings under
the senior credit facility.
DEBT
Total debt outstanding as of May 31, 2001, amounted to $1,392.0 million, an
increase of $26.2 million from February 28, 2001. The ratio of total debt to
total capitalization decreased to 64.1% as of May 31, 2001, from 68.9% as of
February 28, 2001.
SENIOR CREDIT FACILITY
As of May 31, 2001, under its senior credit facility, the Company had
outstanding term loans of $336.0 million bearing a weighted average interest
rate of 8.1%, $20.0 million of revolving loans bearing a weighted average
interest rate of 5.6%, undrawn revolving letters of credit of $11.9 million, and
$268.1 million in revolving loans available to be drawn.
SENIOR NOTES
As of May 31, 2001, the Company had outstanding $200.0 million aggregate
principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior Notes").
The Senior Notes are currently redeemable, in whole or in part, at the option of
the Company.
As of May 31, 2001, the Company had outstanding (pound)1.0 million ($1.4
million) aggregate principal amount of 8 1/2% Series B Senior Notes due November
2009 (the "Sterling Series B Senior Notes"). In addition, the Company had
outstanding (pound)154.0 million ($217.9 million, net of $0.5 million
unamortized discount) aggregate principal amount of 8 1/2% Series C Senior Notes
due November 2009 (the "Sterling Series C Senior Notes") as of May 31, 2001. The
Sterling Series B Senior Notes and Sterling Series C Senior Notes are currently
redeemable, in whole or in part, at the option of the Company.
Also, as of May 31, 2001, the Company had outstanding $200.0 million
aggregate principal amount of 8% Senior Notes due February 2008 (the "February
2001 Senior Notes"). The February 2001 Senior Notes are currently redeemable, in
whole or in part, at the option of the Company.
SENIOR SUBORDINATED NOTES
As of May 31, 2001, the Company had outstanding $195.0 million ($193.5
million, net of $1.5 million unamortized discount) aggregate principal amount of
8 3/4% Senior Subordinated Notes due December 2003 (the "Original Notes"). The
Original Notes are currently redeemable, in whole or in part, at the option of
the Company.
Also, as of May 31, 2001, the Company had outstanding $200.0 million
aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009
(the "Senior Subordinated Notes"). The Senior Subordinated Notes are redeemable
at the option of the Company, in whole or in part, at any time on or after March
1, 2004. The Company may also redeem up to $70.0 million of the Senior
Subordinated Notes using the proceeds of certain equity offerings completed
before March 1, 2002.
- 19 -
EQUITY OFFERING
During March 2001, the Company completed a public offering of 4,370,000
shares of its Class A Common Stock resulting in net proceeds to the Company,
after deducting underwriting discounts and expenses, of $139.9 million. The net
proceeds were used to repay revolving loan borrowings under the senior credit
facility of which a portion was incurred to partially finance the acquisition of
the Turner Road Vintners Assets.
ACCOUNTING PRONOUNCEMENTS
In May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No.
00-14 ("EITF No. 00-14"), "Accounting for Certain Sales Incentives," which was
subsequently amended in April 2001. EITF No. 00-14 addresses the recognition,
measurement and income statement classification of certain sales incentives.
EITF No. 00-14 requires that sales incentives, including coupons, rebate offers,
and free product offers, given concurrently with a single exchange transaction
be recognized when incurred and reported as a reduction of revenue. The Company
currently reports these costs in selling, general and administrative expenses.
The Company is required to adopt EITF No. 00-14 in its financial statements
beginning March 1, 2002. Upon adoption of EITF No. 00-14, financial statements
for prior periods presented for comparative purposes are to be reclassified to
comply with the requirements of EITF No. 00-14. The Company believes the impact
of EITF No. 00-14 on its financial statements will result in a material
reclassification that will decrease previously reported net sales and decrease
previously reported selling, general and administrative expenses, but will have
no effect on operating income or net income. The Company has not yet determined
the amount of the reclassification.
EURO CONVERSION ISSUES
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union (the "Participating Countries") established fixed conversion
rates between their existing sovereign currencies and the euro. For three years
after the introduction of the euro, the Participating Countries can perform
financial transactions in either the euro or their original local currencies.
This will result in a fixed exchange rate among the Participating Countries,
whereas the euro (and the Participating Countries' currency in tandem) will
continue to float freely against the U.S. dollar and other currencies of the
non-participating countries. The Company does not believe that the effects of
the conversion will have a material adverse effect on the Company's business and
operations.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause actual results to differ materially from
those set forth in, or implied by, such forward-looking statements. All
statements other than statements of historical facts included in this Quarterly
Report on Form 10-Q, including statements regarding the Company's future
financial position and prospects, are forward-looking statements. All
forward-looking statements speak only as of the date of this Quarterly Report on
Form 10-Q. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. For risk factors associated with the Company and its
business, which factors could cause actual results to differ materially from
those set forth in, or implied by, the Company's forward-looking statements,
reference should be made to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 2001.
- 20 -
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
Information about market risks for the three months ended May 31, 2001,
does not differ materially from that discussed under Item 7A in the Company's
Annual Report on Form 10-K for the fiscal year ended February 28, 2001.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) See Index to Exhibits located on Page 28 of this Report.
(b) The following Reports on Form 8-K were filed with the Securities and
Exchange Commission during the quarter ended May 31, 2001:
(i) Form 8-K dated March 6, 2001. This Form 8-K reported information
under Item 5 (Other Events).
(ii) Form 8-K dated March 14, 2001. This Form 8-K reported information
under Item 5 (Other Events).
(iii)Form 8-K dated April 10, 2001. This Form 8-K reported
information under Item 5 (Other Events).
(iv) Form 8-K dated April 12, 2001. This Form 8-K reported information
under Item 5 (Other Events) and included (i) the Company's
Consolidated Balance Sheets as of February 28, 2001 and February
29, 2000; (ii) the Company's Condensed Consolidated Statements of
Income for the three months ended February 28, 2001 and February
29, 2000; and (iii) the Company's Condensed Consolidated
Statements of Income for the twelve months ended February 28,
2001 and February 29, 2000.
- 21 -
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.
CONSTELLATION BRANDS, INC.
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Vice President,
Corporate Reporting and Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
SUBSIDIARIES
BATAVIA WINE CELLARS, INC.
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
CANANDAIGUA WINE COMPANY, INC.
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
- 22 -
CANANDAIGUA EUROPE LIMITED
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
CANANDAIGUA LIMITED
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Authorized Officer
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Finance Director
(Principal Financial Officer and
Principal Accounting Officer)
POLYPHENOLICS, INC.
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Vice President and
Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
ROBERTS TRADING CORP.
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, President
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
- 23 -
CANANDAIGUA B.V.
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Chief Financial
Officer (On behalf of the Registrant
and as Principal Financial Officer
and Principal Accounting Officer)
FRANCISCAN VINEYARDS, INC.
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Vice President and
Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
ALLBERRY, INC.
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Vice President and
Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
CLOUD PEAK CORPORATION
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Vice President and
Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
- 24 -
M.J. LEWIS CORP.
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Vice President and
Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
MT. VEEDER CORPORATION
Dated: July 16, 2001 By:/s/ Thomas F. Howe
-------------------------------------
Thomas F. Howe, Vice President and
Controller
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
and Treasurer (Principal Financial
Officer and Principal Accounting
Officer)
BARTON INCORPORATED
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, President and
Chief Executive Officer
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
BARTON BRANDS, LTD.
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, Executive Vice
President
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
- 25 -
BARTON BEERS, LTD.
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, Executive Vice
President
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
BARTON BRANDS OF CALIFORNIA, INC.
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, President
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
BARTON BRANDS OF GEORGIA, INC.
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, President
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
BARTON CANADA, LTD.
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, President
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
- 26 -
BARTON DISTILLERS IMPORT CORP.
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, President
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
BARTON FINANCIAL CORPORATION
Dated: July 16, 2001 By:/s/ Troy J. Christensen
-------------------------------------
Troy J. Christensen, President and
Secretary
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
STEVENS POINT BEVERAGE CO.
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, Executive Vice
President
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
MONARCH IMPORT COMPANY
Dated: July 16, 2001 By:/s/ Alexander L. Berk
-------------------------------------
Alexander L. Berk, President
Dated: July 16, 2001 By:/s/ Thomas S. Summer
-------------------------------------
Thomas S. Summer, Vice President
(Principal Financial Officer and
Principal Accounting Officer)
- 27 -
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 Asset Purchase Agreement dated as of February 21, 1999 by and among
Diageo Inc., UDV Canada Inc., United Distillers Canada Inc. and the
Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K
dated April 9, 1999 and incorporated herein by reference).
2.2 Stock Purchase Agreement, dated April 21, 1999, between Franciscan
Vineyards, Inc., Agustin Huneeus, Agustin Francisco Huneeus, Jean-Michel
Valette, Heidrun Eckes-Chantre Und Kinder Beteiligungsverwaltung II,
GbR, Peter Eugen Eckes Und Kinder Beteiligungsverwaltung II, GbR, Harald
Eckes-Chantre, Christina Eckes-Chantre, Petra Eckes-Chantre and the
Company (filed as Exhibit 2.1 on the Company's Current Report on Form
8-K dated June 4, 1999 and incorporated herein by reference).
2.3 Stock Purchase Agreement by and between Canandaigua Wine Company, Inc.
(a wholly-owned subsidiary of the Company) and Moet Hennessy, Inc. dated
April 1, 1999 (filed as Exhibit 2.3 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated
herein by reference).
2.4 Purchase Agreement dated as of January 30, 2001, by and among Sebastiani
Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine
Company, Inc. (a wholly-owned subsidiary of the Company) (filed as
Exhibit 2.5 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 2001 and incorporated herein by reference).
2.5 Agreement and Plan of Merger by and among Constellation Brands, Inc.,
VVV Acquisition Corp. and Ravenswood Winery, Inc. dated as of April 10,
2001 (including a list briefly identifying the contents of all omitted
schedules thereto) (filed herewith). The Company will furnish
supplementally to the Commission, upon request, a copy of any omitted
schedule.
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2000 and incorporated herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 2000 and
incorporated herein by reference).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Amendment No. 2 to the Credit Agreement, dated as of May 16, 2001
between the Company, certain principal subsidiaries, and The Chase
Manhattan Bank, as administrative agent for certain banks (filed
herewith).
(10) MATERIAL CONTRACTS.
10.1 Amendment No. 2 to the Credit Agreement, dated as of May 16, 2001
between the Company, certain principal subsidiaries, and The Chase
Manhattan Bank, as administrative agent for certain banks (filed
herewith as Exhibit 4.1).
- 28 -
(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.
(99) ADDITIONAL EXHIBITS.
Not applicable.
- 29 -