<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended August 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ____________________
COMMISSION FILE NUMBER 0-7570
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
(Registrant's telephone number including area code)
NONE
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark 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
--- ---
The number of shares outstanding of each of the Registrant's classes of common
stock, as of October 9, 1996, is set forth below:
CLASS NUMBER OF SHARES OUTSTANDING
Class A Common Stock, Par Value $.01 Per Share 16,315,386
Class B Common Stock, Par Value $.01 Per Share 3,330,458
<PAGE>
Part 1 - Financial Information
<TABLE>
Item 1. Financial Statements
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<CAPTION>
August 31, 1996 February 29,1996
--------------- ----------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash investments $ 2,030 $ 3,339
Accounts receivable, net 152,343 142,471
Inventories, net 328,505 341,838
Prepaid expenses and other current assets 18,665 30,372
----------- -----------
Total current assets 501,543 518,020
PROPERTY, PLANT AND EQUIPMENT, NET 254,500 250,638
OTHER ASSETS 282,148 285,922
----------- -----------
Total assets $ 1,038,191 $ 1,054,580
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable $ 62,000 $ 111,300
Current maturities of long-term debt 40,766 40,797
Accounts payable 103,299 59,730
Accrued Federal and state excise taxes 21,544 19,699
Other accrued expenses and liabilities 75,086 68,440
----------- -----------
Total current liabilities 302,695 299,966
----------- -----------
LONG-TERM DEBT, less current maturities 307,204 327,616
----------- -----------
DEFERRED INCOME TAXES 58,194 58,194
----------- -----------
OTHER LIABILITIES 4,927 12,298
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A Common Stock, $.01 par value-
Authorized, 60,000,000 shares;
Issued, 17,458,582 shares at August 31, 1996, and
17,423,082 shares at February 29, 1996 174 174
Class B Convertible Common Stock, $.01 par value-
Authorized, 20,000,000 shares;
Issued 3,956,183 shares at August 31, 1996, and
3,991,683 shares at February 29, 1996 40 40
Additional paid-in capital 221,728 221,133
Retained earnings 156,042 142,600
----------- -----------
377,984 363,947
----------- -----------
Less-Treasury stock-
Class A Common Stock, 1,320,446 shares at
August 31, 1996, and 1,165,786 shares at
February 29, 1996, at cost (10,606) (5,234)
Class B Convertible Common Stock, 625,725 shares
at August 31, 1996, and February 29, 1996, at cost (2,207) (2,207)
----------- -----------
(12,813) (7,441)
----------- -----------
Total stockholders' equity 365,171 356,506
----------- -----------
Total liabilities and stockholders' equity $ 1,038,191 $ 1,054,580
=========== ===========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.
</TABLE>
<PAGE>
<TABLE>
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except share data)
<CAPTION>
For the Six Months Ended August 31, For the Three Months Ended August 31,
----------------------------------- -------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
GROSS SALES $ 754,866 $ 592,769 $ 378,037 $ 297,355
Less - Excise taxes (199,155) (140,710) (98,819) (68,066)
------------ ------------ ------------ ------------
Net sales 555,711 452,059 279,218 229,289
COST OF PRODUCT SOLD (412,969) (326,117) (209,383) (166,609)
------------ ------------ ------------ ------------
Gross profit 142,742 125,942 69,835 62,680
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (102,870) (79,271) (52,927) (40,437)
NONRECURRING RESTRUCTURING EXPENSES -- (1,553) -- (585)
------------ ------------ ------------ ------------
Operating income 39,872 45,118 16,908 21,658
INTEREST EXPENSE, net (16,803) (11,460) (8,008) (5,297)
------------ ------------ ------------ ------------
Income before provision for Federal
and state income taxes 23,069 33,658 8,900 16,361
PROVISION FOR FEDERAL AND
STATE INCOME TAXES (9,627) (12,958) (3,959) (6,298)
------------ ------------ ------------ ------------
NET INCOME $ 13,442 $ 20,700 $ 4,941 $ 10,063
============ ============ ============ ============
SHARE DATA:
Net income per common and common
equivalent share:
Primary $ .68 $ 1.03 $ .25 $ .50
============ ============ ============ ============
Fully diluted $ .68 $ 1.03 $ .25 $ .50
============ ============ ============ ============
Weighted average common shares outstanding:
Primary 19,794,740 20,002,568 19,653,489 20,039,531
Fully diluted 19,794,740 20,081,014 19,653,489 20,095,864
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements.
</TABLE>
<PAGE>
<TABLE>
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<CAPTION>
For the Six Months Ended August 31,
-----------------------------------
1996 1995
---- ----
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,442 $ 20,700
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation of property, plant and equipment 12,424 5,782
Amortization of intangible assets 4,870 2,279
Loss (gain) on sale of property, plant and equipment 201 (33)
Deferred tax provision -- 19,175
Restructuring charges - fixed asset write-down -- (2,050)
Change in assets and liabilities:
Accounts receivable, net (9,872) 5,806
Inventories, net 13,333 60,311
Prepaid expenses 5,109 (6,963)
Accounts payable 43,569 16,653
Accrued Federal and state excise taxes 1,845 (7,932)
Other accrued expenses and liabilities 13,351 (20,822)
Other (8,466) (11,558)
-------- --------
Total adjustments 76,364 60,648
-------- --------
Net cash provided by operating activities 89,806 81,348
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net of minor disposals (21,795) (25,779)
Proceeds from sale of property, plant and equipment 5,200 1,336
-------- --------
Net cash used in investing activities (16,595) (24,443)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of notes payable, short-term borrowings (49,300) (7,000)
Principal payments of long-term debt (20,443) (50,432)
Purchases of treasury stock (5,434) --
Proceeds from employee stock purchases 657 633
Exercise of employee stock options -- 984
-------- --------
Net cash used in financing activities (74,520) (55,815)
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS (1,309) 1,090
CASH AND CASH INVESTMENTS, beginning of period 3,339 3,090
-------- --------
CASH AND CASH INVESTMENTS, end of period $ 2,030 $ 4,180
======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Accrued Earn-Out Amounts $ -- $ 10,000
======== ========
<FN>
The accompanying notes to consolidated financial statements are an integral part
of these statements
</TABLE>
<PAGE>
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1996
1) MANAGEMENT'S REPRESENTATIONS:
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the Securities and Exchange Commission applicable to quarterly reporting on Form
10-Q and reflect, in the opinion of the Company, all adjustments necessary to
present the financial information for Canandaigua 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 Transition Report on Form 10-K, for the transition
period from September 1, 1995, to February 29, 1996.
2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Certain August 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 93% at August 31,
1996, and 94% at February 29, 1996. Replacement cost of the inventories
determined on a FIFO basis is approximately $333,266,000, and $332,849,000, at
August 31, 1996, and February 29, 1996, respectively. The net realizable value
of the Company's inventories is in excess of $328,505,000, and $341,838,000, at
August 31, 1996, and February 29, 1996, respectively.
Elements of cost include materials, labor and overhead and consist of
the following:
August 31, February 29,
1996 1996
---- ----
(IN THOUSANDS)
Raw materials and supplies $ 25,802 $ 24,197
Wines and distilled spirits in process 217,754 254,956
Finished case goods 84,949 62,685
-------- --------
$328,505 $341,838
======== ========
If the FIFO method of inventory valuation had been used, reported net
income would have been $8.0 million, or $.41 per share, higher for the six
months ended August 31, 1996; and reported net income would have been $1.9
million, or $.09 per share, lower for the six months ended August 31, 1995.
<PAGE>
4) OTHER LIABILITIES:
The major components of other liabilities are as follows:
August 31, February 29,
1996 1996
---- ----
(IN THOUSANDS)
Accrued loss on noncancelable grape contracts $ 1,171 $ 8,937
Other 3,756 3,361
----- -----
$ 4,927 $ 12,298
===== ======
5) ACQUISITIONS:
The following table sets forth the unaudited pro forma consolidated results
of operations of the Company for the six months ended August 31, 1996 and 1995.
The six month unaudited pro forma consolidated results of operations for the
period ended August 31, 1995, gives effect to the UDG Acquisition as if it
occurred on March 1, 1995. 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 unaudited pro forma consolidated
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 consolidated results of operations do not
purport to represent what the Company's consolidated results of operations would
actually have been if the UDG Acquisition in fact had occurred on such date or
to project the Company's consolidated results of operations at any future date
or for any future period.
For the Six Months Ended August 31,
-----------------------------------
1996 1995
---- ----
(IN THOUSANDS, EXCEPT SHARE DATA)
Net sales $ 555,711 $ 493,572
Income before provision for Federal and
state income taxes $ 23,069 $ 37,141
Net income $ 13,442 $ 22,842
Share data:
Net income per common and common
equivalent share:
Primary $ .68 $ 1.14
Fully diluted $ .68 $ 1.14
Weighted average common shares outstanding:
Primary 19,794,740 20,002,568
Fully diluted 19,794,740 20,081,014
<PAGE>
6) BORROWINGS:
Borrowings consist of the following at August 31, 1996:
<TABLE>
<CAPTION>
Current Long-term Total
------- --------- -----
<S> <C> <C> <C>
(IN THOUSANDS)
Notes Payable:
Senior Credit Facility:
Revolving Credit Loans $ 62,000 $ -- $ 62,000
======== ======== ========
Long-term Debt:
Senior Credit Facility:
Term loan, variable rate, aggregate proceeds of
$246,000, due in installments through August 2001 $ 40,000 $176,000 $216,000
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 648 -- 648
Industrial Development Agencies:
7.5% 1980 issue, original proceeds $2,370, due
in annual installments of $118 through fiscal 2000 118 237 355
Other Long-term Debt:
Loans payable - 5.0% secured by cash surrender
value of officers' life insurance policies -- 967 967
-------- -------- --------
$ 40,766 $307,204 $347,970
======== ======== ========
</TABLE>
7) SUBSEQUENT EVENT:
Vintners Holdback -
On September 26, 1996, the Company reached a final settlement with the
company formerly known as Vintners International Company, Inc. and its lenders
on the disputed final closing net asset statement. As a result, the Company will
record a purchase price reduction for the Vintners Acquisition, which will
reduce recorded goodwill by approximately $5.9 million.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE INFORMATION IN THIS ITEM 2 CONTAINS FORWARD-LOOKING STATEMENTS. THE COMPANY
DESIRES TO TAKE ADVANTAGE OF THE "SAFE HARBOR" WHICH IS AFFORDED SUCH STATEMENTS
UNDER THE PRIVATE SECURITIES LITIGATION AND REFORM ACT OF 1995 WHEN THEY ARE
ACCOMPANIED BY MEANINGFUL CAUTIONARY STATEMENTS IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE IN THE
FORWARD-LOOKING STATEMENTS. SUCH CAUTIONARY STATEMENTS ARE SET FORTH UNDER THE
HEADING "IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS" BELOW IN
THIS ITEM 2.
RESULTS OF OPERATIONS OF THE COMPANY
The Company's results of operations over recent years have been
significantly impacted by acquisitions. As previously reported, on September 1,
1995, the Company acquired certain distilled spirits brands and related assets
from United Distillers Glenmore, Inc., and certain of its North American
affiliates (collectively, "UDG"); and, in addition, this 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"). 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 bank credit facility.
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:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
August 31, August 31,
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of product sold 75.0 72.7 74.3 72.1
Gross profit 25.0 27.3 25.7 27.9
Selling, general and administrative expenses 18.9 17.6 18.6 17.6
Nonrecurring restructuring expenses 0.0 0.3 0.0 0.3
Operating income 6.1 9.4 7.1 10.0
Interest expense, net 2.9 2.3 3.0 2.5
Income before provision for income taxes 3.2 7.1 4.1 7.5
Provision for Federal and state income taxes 1.4 2.7 1.7 2.9
Net income 1.8% 4.4% 2.4% 4.6%
</TABLE>
<PAGE>
THREE MONTHS ENDED AUGUST 31, 1996 ("SECOND QUARTER 1997"), COMPARED TO THREE
MONTHS ENDED AUGUST 31, 1995 ("AUGUST 1995 QUARTER")
NET SALES
Net Sales for the Company's Second Quarter 1997 increased to $279.2 million
from $229.3 million for the August 1995 Quarter, an increase of $49.9 million,
or approximately 21.8%. This increase resulted primarily from (i) $26.7 million
of additional imported beer sales, primarily Mexican beers; (ii) the inclusion
of $24.7 million of net sales of products and services from the UDG Acquisition;
and (iii) $4.3 million of increased net sales of branded wine products resulting
from selling price increases implemented between October 1995 and May 1996.
These increases were partially offset by $5.8 million of lower sales of spirits
brands other than the brands from the UDG Acquisition, grape juice concentrate
and other nonbranded products.
FOR PURPOSES OF COMPUTING THE NET SALES AND UNIT VOLUME COMPARATIVE DATA
FOR THE TABLE BELOW AND FOR THE REMAINDER OF THE DISCUSSION OF NET SALES, SALES
OF PRODUCTS ACQUIRED IN THE UDG ACQUISITION HAVE BEEN INCLUDED FOR THE AUGUST
1995 QUARTER, 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 products, beer and spirits
brands sold by the Company for Second Quarter 1997 and the August 1995 Quarter:
<TABLE>
Three Months Ended August 31, 1996, Compared to Three Months Ended August 31, 1995
----------------------------------------------------------------------------------
<CAPTION>
Net Sales Unit Volume
------------------------------- ------------------------------
%Inc/ %Inc/
1996 1995 (Dec) 1996 1995 (Dec)
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Branded Beverage
Alcohol Products (1) $251,903 $220,168 14.4 % 15,778 13,934 13.2 %
Branded Wine Products $116,746 $112,397 3.9 % 6,195 6,533 (5.2)%
Non-varietal Table Wines $ 49,853 $ 50,699 (1.7)% 3,061 3,277 (6.6)%
Varietal Table Wines $ 37,762 $ 29,378 28.5 % 1,559 1,379 13.1 %
Dessert Wines $ 15,272 $ 17,485 (12.7)% 962 1,188 (19.0)%
Sparkling Wines $ 13,859 $ 14,835 (6.6)% 613 689 (11.0)%
Beer $ 90,457 $ 63,783 41.8 % 7,227 5,148 40.4 %
Spirits $ 44,700 $ 44,158 1.2 % 2,356 2,241 5.1 %
<FN>
(1) The sum of net sales and unit volume amounts from the categories may not
equal total Branded Beverage Alcohol Products because miscellaneous items
affecting net sales and unit volume may be included in total Branded
Beverage Alcohol Products but not reflected in the category information.
</TABLE>
<PAGE>
Net sales and unit volume of the Company's branded beverage alcohol
products for Second Quarter 1997 increased 14.4% and 13.2%, respectively, as
compared to the August 1995 Quarter. The net sales increase resulted from higher
imported beer sales and price increases on most of the Company's branded wine
products, particularly varietal table wine brands. Unit volume increases were
largely the result of increased sales of the Company's imported beer brands,
particularly its Mexican beers. The Company's varietal table wine and distilled
spirits unit volumes also increased in Second Quarter 1997, while its dessert
wine, non-varietal table wine and sparkling wine volumes declined as compared to
the August 1995 Quarter.
Net sales of the Company's branded wine products increased $4.3 million, or
3.9%, for Second Quarter 1997 as compared to the August 1995 Quarter. Unit
volume of the Company's branded wine products declined by 5.2%. The $4.3 million
increase in net sales resulted from selling price increases which the Company
implemented between October 1995 and May 1996, partially offset by the decline
in unit volume of these products. The Company believes that the decline in unit
volume resulted from the Company's selling price increases, industry trends
related to certain categories and the timing of shipments of some sparkling and
dessert wine products in the August 1995 Quarter.
Net sales and unit volume of the Company's non-varietal table wine products
declined by 1.7% and 6.6%, respectively, for Second Quarter 1997 as compared to
the August 1995 Quarter. The Company believes that these declines reflect the
impact of the Company's selling price increases and other competitive pressures.
Net sales and unit volume of the Company's varietal table wine brands
increased by 28.5% and 13.1%, respectively, as compared to the August 1995
Quarter. Net sales growth outpaced unit volume growth principally due to selling
price increases. Net sales and unit volume of the Company's varietal wine
products such as chardonnay, cabernet sauvignon and merlot, which represent more
than half of the Company's varietal wine volume, increased substantially and at
a rate which more than offset lower white zinfandel unit volume in Second
Quarter 1997 as compared to the August 1995 Quarter.
Net sales and unit volume of the Company's dessert wine products declined
by 12.7% and 19.0%, respectively, during Second Quarter 1997. The Company
believes that these results reflect the continuing trend of consumer preferences
away from the dessert wine category, as well as the timing of shipments in the
August 1995 Quarter relative to the subsequent quarter.
Net sales and unit volume of the Company's sparkling wine products declined
by 6.6% and 11.0%, respectively, during Second Quarter 1997 as compared to the
August 1995 Quarter. The Company believes that this decline largely reflects the
timing of shipments in the August 1995 Quarter relative to the subsequent
quarter.
Net sales and unit volume of the Company's beer products increased by 41.8%
and 40.4%, respectively, in Second Quarter 1997. Net sales and volume increases
were largely due to the Company's Mexican beer brands, particularly Corona,
Modelo Especial and Pacifico, which continued the strong growth they have
experienced in previous quarters. The Company
<PAGE>
believes that the growth in its Mexican beers is related to the growth of the
Hispanic population in the Company's distribution areas, the continued
popularity of imported beers in general and the narrowing price gap between
imported beers and domestic beers. The Company does not believe that the high
growth rate in its imported beer business will be sustainable.
Net sales and unit volume of the Company's distilled spirits brands
increased by 1.2% and 5.1%, respectively, for Second Quarter 1997 as compared to
the August 1995 Quarter. Excluding the impact of the UDG Acquisition, spirits
net sales and unit volume declined by 2.8% each in the quarter. Net sales and
unit volume of the spirits brands acquired in the UDG Acquisition increased by
6.3% and 16.3%, respectively, in the quarter. The increase in unit volume sales
of these brands over and above the increase in net sales generally reflects
lower pricing of these brands to be more in line with the pricing strategy of
the rest of the Company's spirits portfolio. In total, the Company's distilled
spirits unit volume growth exceeds the industry growth rate.
GROSS PROFIT
The Company's gross profit increased to $69.8 million in Second Quarter
1997 from $62.7 million in the August 1995 Quarter, an increase of $7.1 million.
The change in gross profit resulted primarily from (i) approximately $10.2
million of gross profit from sales generated from the business acquired from
UDG; (ii) approximately $6.6 million of additional gross profit from increases
in beer sales; (iii) approximately $5.0 million of lower gross profits due
primarily to lower volume of branded wine products, and lower grape juice
concentrate and other nonbranded sales as compared to the August 1995 Quarter;
and (iv) approximately $4.7 million of lower gross profit primarily due to
increased cost of product sold, particularly higher grape costs in the fall 1996
harvest, and additional costs resulting from inefficiencies in the production of
wine and grape juice concentrate, particularly at the Company's newly
consolidated West Coast operations. These costs were partially offset by
additional net sales resulting primarily from selling price increases of the
Company's branded wine and grape juice concentrate products and a partial
reduction of certain grape contract loss reserves established in connection with
the 1993 Vintners Acquisition. The reduction in these reserves corresponds to
the increase in grape costs relative to the contract pricing and the termination
of certain unfavorable contracts. The Company's increased production costs
stemmed from low bulk conversion rates and bottling inefficiencies. The Company
also experienced high imported concentrate and bulk freight costs. The Company
has instituted a series of steps to address these matters including a
reengineering effort to redesign more effectively its work processes,
organizational structure and information systems.
Gross profit as a percentage of net sales was 25.0% for Second Quarter 1997
as compared to 27.3% in the August 1995 Quarter. The decline in the gross profit
margin was largely due to higher costs, particularly grape costs, of wine and
grape juice concentrate products, partially offset by increased selling prices
on most of the Company's branded wine and grape juice concentrate products. The
Company has experienced significant increases in its cost of grapes in both the
1995 and 1996 harvests. The Company believes that these increases in grape costs
were due to an imbalance in supply and demand in the varieties which the Company
purchases.
<PAGE>
However, selling price increases in effect during the Second Quarter 1997, on an
annualized basis, more than offset higher costs from the fall 1995 harvest.
For comparison purposes to companies using the first-in, first-out method
of accounting for inventory valuation ("FIFO") only, the Company's Second
Quarter 1997 results reflect a reduction in gross profit of approximately $7.9
million due to the Company's last-in, first-out method of accounting for
inventory valuation ("LIFO"), based on the Company's current estimate of a $27.5
million LIFO adjustment for the 1997 fiscal year. The Company previously
estimated that gross profit for the 1997 fiscal year would be negatively
impacted as a result of LIFO by $23.5 million. The LIFO estimate for the 1997
fiscal year will be revised, as appropriate, through the end of the fiscal year.
For comparison purposes, the Company's August 1995 Quarter results reflected an
addition to gross profit of approximately $0.4 million due to LIFO.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for Second Quarter 1997 were
$52.9 million, an increase of $12.5 million as compared to the August 1995
Quarter. Of this amount, $5.1 million related to the UDG Acquisition; $4.4
million was due to selling, advertising and promotion expenses associated with
increased unit volume exclusive of sales related to the UDG Acquisition; and
$3.0 million was due to increased personnel and other related expenses to expand
the Company's management capabilities.
INTEREST EXPENSE, NET
Net interest expense totaled $8.0 million in Second Quarter 1997, an
increase of $2.7 million as compared to the August 1995 Quarter, primarily due
to additional interest expense from the UDG Acquisition financing.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The Company's effective tax rate for Second Quarter 1997 increased to 44.5%
from 38.5% for the August 1995 Quarter due to a higher effective tax rate in
California caused by statutory limitations on the Company's ability to utilize
certain deductions.
NET INCOME
As a result of the foregoing, net income for Second Quarter 1997 was $4.9
million, a decrease of $5.1 million as compared to the August 1995 Quarter.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Second Quarter
1997 was $33.5 million using the FIFO method and $25.6 million using the LIFO
method. EBITDA should not be construed as an
<PAGE>
alternative to operating income or net cash flow from operating activities and
should not be construed as an indication of operating performance or as a
measure of liquidity.
SIX MONTHS ENDED AUGUST 31, 1996 ("SIX MONTHS 1997"), COMPARED TO SIX MONTHS
ENDED AUGUST 31, 1995 ("AUGUST 1995 SIX MONTHS")
NET SALES
Net Sales for the Company's Six Months 1997 increased to $555.7 million
from $452.1 million for the August 1995 Six Months, an increase of $103.6
million, or approximately 22.9%. This increase resulted primarily from (i) the
inclusion of $49.0 million of net sales of products and services from the UDG
Acquisition; (ii) $39.3 million of additional imported beer sales, primarily
Mexican beers; (iii) $9.2 million of increased net sales of branded wine
products resulting from selling price increases implemented between October 1995
and May 1996; and (iv) $6.1 million of higher sales of grape juice concentrate
and other nonbranded products.
FOR PURPOSES OF COMPUTING THE NET SALES AND UNIT VOLUME COMPARATIVE DATA
FOR THE TABLE BELOW AND FOR THE REMAINDER OF THE DISCUSSION OF NET SALES, SALES
OF PRODUCTS ACQUIRED IN THE UDG ACQUISITION HAVE BEEN INCLUDED IN THE ENTIRE
PERIOD FOR THE AUGUST 1995 SIX MONTHS, 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 products, beer and spirits
brands sold by the Company for Six Months 1997 and the August 1995 Six Months:
<TABLE>
Six Months Ended August 31, 1996, Compared to Six Months Ended August 31, 1995
------------------------------------------------------------------------------
<CAPTION>
Net Sales Unit Volume
---------------------------- ---------------------------
%Inc/ %Inc/
1996 1995 (Dec) 1996 1995 (Dec)
---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
Branded Beverage
Alcohol Products (1) $493,939 $443,435 11.4 % 30,697 28,075 9.3 %
Branded Wine Products $240,404 $231,180 4.0 % 12,867 13,450 (4.3)%
Non-varietal Table Wines $104,549 $105,394 (0.8)% 6,463 6,878 (6.0)%
Varietal Table Wines $ 77,025 $ 64,630 19.2 % 3,195 3,029 5.5 %
Dessert Wines $ 32,744 $ 34,984 (6.4)% 2,055 2,338 (12.1)%
Sparkling Wines $ 26,086 $ 26,172 (0.3)% 1,154 1,205 (4.2)%
Beer $163,314 $124,028 31.7 % 13,072 10,028 30.4 %
Spirits $ 90,222 $ 87,583 3.0 % 4,759 4,575 4.0 %
<FN>
(1) The sum of net sales and unit volume amounts from the categories may not
equal total Branded Beverage Alcohol Products because miscellaneous items
affecting net sales and unit volume may be included in total Branded
Beverage Alcohol Products but not reflected in the category information.
</TABLE>
<PAGE>
Net sales and unit volume of the Company's branded beverage alcohol
products for Six Months 1997 increased 11.4% and 9.3%, respectively, as compared
to the August 1995 Six Months. The net sales increases resulted from higher
imported beer sales, price increases on most of the Company's branded wine
products, particularly varietal table wine brands, and increased sales of the
Company's spirits brands. Unit volume increases were led by substantial growth
in the Company's imported beer brands and increases in its varietal table wine
and spirits brands, partially offset by declines in unit volume of non-varietal
table wines, dessert wines and sparkling wines.
Net sales of the Company's branded wine products increased $9.2 million, or
4.0%, for Six Months 1997 as compared to the August 1995 Six Months due to the
Company's selling price increases, despite unit volume declines of 4.3%. The
Company believes that the unit volume decrease resulted from the Company's
selling price increases, as well as industry trends related to certain
categories and the timing of shipments of some sparkling and dessert wine
products in the August 1995 Six Months.
Net sales and unit volume of the Company's non-varietal table wine products
declined by 0.8% and 6.0%, respectively, for Six Months 1997 as compared to the
August 1995 Six Months. The Company believes that the decline in unit volume
reflects the impact of the Company's selling price increases and other
competitive pressures.
Net sales and unit volume of the Company's varietal table wine brands
increased by 19.2% and 5.5%, respectively. Net sales increased at a greater rate
than unit volume due to price increases instituted during the six months ended
February 29, 1996, and the three months ended May 31, 1996. Net sales and unit
volume of the Company's varietal wine products such as chardonnay, cabernet
sauvignon and merlot, which represent more than half of the Company's varietal
wine volume, increased substantially in Six Months 1997. While white zinfandel
unit volume declined in Six Months 1997, net sales for white zinfandel increased
modestly.
Net sales and unit volume of the Company's dessert wine products decreased
by 6.4% and 12.1%, respectively, during Six Months 1997. The Company believes
that, although the decline in unit volume was somewhat mitigated by selling
price increases, these results reflect the continuing trend of consumer
preferences away from the dessert wine category, as well as the timing of
shipments in the August 1995 Six Months relative to subsequent periods.
Net sales and unit volume of the Company's sparkling wine brands declined
0.3% and 4.2%, respectively, during Six Months 1997 as compared to the August
1995 Six Months. The Company believes that the decline in unit volume is
consistent with industry trends and is also partially related to the timing of
sparkling wine shipments in the August 1995 Six Months relative to subsequent
periods.
Net sales and unit volume of the Company's beer brands increased 31.7% and
30.4%, respectively, during Six Months 1997. Net sales and volume increases were
largely due to the Company's Mexican beer brands, particularly Corona, Modelo
Especial and Pacifico, which
<PAGE>
continued strong growth trends. The Company believes that the growth in its
Mexican beers is related to the growth of the Hispanic population in the
Company's distribution areas, the continued popularity of imported beers in
general and the narrowing price gap between imported beers and domestic beers.
The Company does not believe that the high growth rate in its imported beer
business will be sustainable.
Net sales and unit volume of the Company's distilled spirits brands
increased by 3.0% and 4.0%, respectively, in Six Months 1997 as compared to the
August 1995 Six Months. Excluding the impact of the UDG Acquisition, spirits net
sales and unit volume increased by 7.2% and 2.2%, respectively, during Six
Months 1997, reflecting strong brandy sales and increases in tequila and
liqueurs and the introduction of a number of new products. Net sales and unit
volume of the brands acquired in the UDG Acquisition decreased by 1.7% and
increased by 6.4%, respectively, in Six Months 1997, reflecting the impact of
downward selling price adjustments for these brands to be more in line with the
pricing strategy of the rest of the Company's spirits portfolio.
GROSS PROFIT
The Company's gross profit increased to $142.7 million in Six Months 1997
from $125.9 million in the August 1995 Six Months, an increase of $16.8 million,
or 13.3%. This change in gross profit resulted primarily from (i) approximately
$20.5 million of gross profit from sales generated from the business acquired
from UDG; (ii) approximately $12.4 million of additional gross profit from
increases in beer sales; (iii) approximately $10.0 million of lower gross profit
primarily due to increased costs of product sold, particularly higher grape
costs in the fall 1996 harvest and additional costs resulting from
inefficiencies in the production of wine and grape juice concentrate,
particularly at the Company's newly consolidated West Coast operations,
partially offset by additional net sales resulting primarily from selling price
increases of the Company's branded wine and grape juice concentrate products and
a partial reduction of certain grape contract loss reserves established in
connection with the 1993 Vintners Acquisition, which reduction corresponds to
the increase in grape costs relative to the contract pricing and the termination
of certain unfavorable contracts; and (iv) approximately $6.1 million of lower
gross profits due to lower volume of branded wine products and decreased sales
of other nonbranded products. The Company's increased production costs stemmed
from low bulk conversion rates and bottling inefficiencies. The Company also
experienced high imported concentrate and bulk freight costs. The Company has
instituted a series of steps to address these matters, including a reengineering
effort to redesign more effectively its work processes, organizational structure
and information systems.
Gross profit as a percentage of net sales was 25.7% for Six Months 1997 as
compared to 27.9% in the August 1995 Six Months. The decline in the gross profit
margin was largely due to higher costs, particularly grape costs, of wine and
grape juice concentrate products, partially offset by increased selling prices
on most of the Company's branded wine and grape juice concentrate products. The
Company has experienced significant increases in its cost of grapes in both the
1995 and the 1996 harvests. The Company believes that these increases in grape
costs were due to an imbalance in supply and demand in the varieties which the
Company purchases.
<PAGE>
However, selling price increases in effect during Six Months 1997, on an
annualized basis, more than offset higher costs from the fall 1995 harvest.
For comparison purposes to companies using the first-in, first-out method
of accounting for inventory valuation ("FIFO") only, the Company's Six Months
1997 results reflect a reduction in gross profit of approximately $13.8 million
due to the Company's last-in, first-out method of accounting for inventory
valuation ("LIFO"), based on the Company's current estimate of a $27.5 million
LIFO adjustment for the 1997 fiscal year. The Company previously estimated that
gross profit for the 1997 fiscal year would be negatively impacted as a result
of LIFO by $23.5 million. The LIFO estimate for the 1997 fiscal year will be
revised, as appropriate, through the end of the fiscal year. The Company's
August 1995 Six Months gross profit reflected an addition of approximately $3.1
million due to LIFO.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for Six Months 1997 were
$102.9 million, an increase of $23.6 million as compared to the August 1995 Six
Months. Of this amount, $10.5 million related to the UDG Acquisition; $7.5
million was due to increased personnel and other related expenses to expand the
Company's management capabilities; and $5.6 million was due to additional
selling, advertising and promotion expenses associated with increased unit
volume exclusive of sales related to the UDG Acquisition.
INTEREST EXPENSE, NET
Net interest expense totalled $16.8 million in Six Months 1997, an increase
of $5.3 million as compared to the August 1995 Six Months, primarily due to
additional interest expense from the UDG Acquisition financing.
PROVISION FOR FEDERAL AND STATE INCOME TAXES
The Company's effective tax rate for Six Months 1997 increased to 41.7%
from 38.5% for the August 1995 Six Months due to a higher effective tax rate in
California caused by statutory limitations on the Company's ability to utilize
certain deductions.
NET INCOME
As a result of the foregoing, net income for Six Months 1997 was $13.4
million, a decrease of $7.3 million as compared to the August 1995 Six Months.
For financial analysis purposes only, the Company's EBITDA for the Six
Months 1997 was $70.9 million using the FIFO method and $57.2 million using the
LIFO method. EBITDA should not be construed as an alternative to operating
income or net cash flow from operating activities and should not be construed as
an indication of operating performance or as a measure of liquidity.
<PAGE>
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 - SIX MONTHS 1997
OPERATING ACTIVITIES
Net cash provided by operating activities in Six Months 1997 was $89.8
million. The net cash provided by operating activities for Six Months 1997
resulted principally from a net increase in current liabilities (primarily a
$43.6 million increase in accounts payable as a result of purchases associated
with the 1996 grape harvest), net income adjusted for noncash items plus a net
decrease in current assets (primarily a $13.3 million net decrease in
inventories).
INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Net cash used in investing activities in Six Months 1997 was $16.6 million,
resulting primarily from $21.8 million of capital expenditures, offset in part
by proceeds from the sale of property, plant and equipment of $5.2 million,
resulting principally from the May 1996 sale of the Company's Central Cellars
winery, located in Lodi, California.
Net cash used in financing activities in Six Months 1997 was $74.5 million,
resulting principally from net repayments of $49.3 million of revolving loan
borrowings under the Company's bank credit facility, principal payments of $20.4
million of long-term debt and repurchases of $5.4 million of the Company's Class
A Common Stock.
As of August 31, 1996, under its bank credit facility, the Company had
outstanding term loans of $216.0 million bearing interest at 6.6%, $62.0 million
of revolving loans bearing interest at 6.7%, $8.1 million of revolving letters
of credit and $13.7 million under the Barton Letter of Credit. As of August 31,
1996, under the bank credit facility, $114.9 million of revolving loans were
available to be drawn by the Company.
During January 1996, the Company's Board of Directors authorized the
repurchase of up to $30.0 million of the Company's Class A Common Stock and
Class B Common Stock. The repurchase of shares of common stock will be
accomplished, from time to time, depending upon
<PAGE>
market conditions, through open market or privately negotiated transactions. The
Company may finance such repurchases through cash generated from operations or
through its bank credit facility. The repurchased shares will become treasury
shares and may be used for general corporate purposes. As of October 11, 1996,
the Company had repurchased 175,000 shares of Class A Common Stock at an
aggregate cost of $5.4 million.
THE COMPANY'S BANK CREDIT FACILITY
As of October 8, 1996, under its bank credit facility, the Company had
outstanding term loans of $206.0 million bearing interest at 6.5% with quarterly
principal payments of $10.0 million and a final payment of $16.0 million in
August 2001, outstanding revolving loans of $109.0 million bearing interest at
6.3%, undrawn revolving letters of credit of $9.6 million, the Barton Letter of
Credit of $13.7 million and $66.4 million available to be drawn in revolving
loans.
SENIOR SUBORDINATED NOTES
As of August 31, 1996, the Company had outstanding $130.0 million of its
8.75% Senior Subordinated Notes due 2003 (the "Notes"). The Company is currently
contemplating the issuance of additional senior subordinated indebtedness in an
amount sufficient to generate at least $50.0 million in net proceeds (the
"Offering"). The Company intends to use the net proceeds from the Offering to
repay amounts outstanding under the Company's bank credit facility, including
revolving loans. The Company will continue to use the revolving loans to support
its working capital requirements. In addition, assuming consummation of the
Offering, the Company intends to use the revolving loans to complete its
previously announced stock repurchase program. There can be no assurance that
this Offering will be consummated. Such additional senior subordinated
indebtedness offered will not be registered under the Securities Act of 1933, as
amended, or any state securities laws, and may not be offered or sold in the
United States or any state thereof absent registration or an applicable
exemption from registration requirements.
OTHER
The Company's cash requirements have increased during the past twelve
months due to increased grape costs, operating inefficiencies at the Company's
West Coast wine operations and increased working capital needs from the
Company's expanded business. The Company believes that the revolving loans
available under its bank credit facility, its financing activities, including
issuance of the additional senior subordinated notes, 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.
<PAGE>
PROJECTED RESULTS
On September 5, 1996, the Company reduced its estimated net income per
share for its fiscal year ending February 28, 1997 to a new range of $1.10 to
$1.40 from a range of $2.30 to $2.50. For financial analysis purposes only, the
Company estimates that its EBITDA on a LIFO basis for the fiscal year ending
February 28, 1997 will be in the range of $102.5 million to $117.5 million.
EBITDA should not be construed as an alternative to operating income or net cash
flow from operating activites and should not be construed as an indication of
operating performance or as a measure of liquidity.
The Company revised its estimated net income per share for the current
fiscal year as a result of below expectation performance of the Company's wine
division, offset in part by better than expected performance of the Company's
beer and spirits division, Barton. The Company believes its wine division
performance will be negatively impacted by (i) increased cost of product sold
relating to increased grape costs from the 1996 harvest which the Company does
not expect to offset through selling price increases in fiscal 1997; (ii)
inefficiencies in its wine division operations; and (iii) decreased unit volume
of its branded wine products.
These projected results are based on certain assumptions, including:
(i) the Company's unit volume sales of branded wine products will continue
to decrease at approximately the same rate as they decreased during
the Six Months 1997;
(ii) increases in the Company's costs will not result in a LIFO adjustment
materially in excess of the current estimate of $27.5 million for
fiscal 1997;
(iii)the Company will continue to experience wine production operating
inefficiencies, although at lower levels as compared to the Six Months
1997;
(iv) the Company's beer and spirits division will continue to experience
strong growth;
(v) the Company will not materially change its selling prices, on an
overall basis, as compared to current levels at the end of the Six
Months 1997; and
(vi) the Company's promotional levels will continue at comparable rates to
the Six Months 1997.
The projected results set forth above have not been examined by Arthur
Andersen LLP, the Company's independent public accountants, and they assume no
responsibility for such projected results.
<PAGE>
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The Company makes forward-looking statements from time to time and desires
to take advantage of the "safe harbor" which is afforded such statements under
the Private Securities Litigation Reform Act of 1995 when they are accompanied
by meaningful cautionary statements identifying important factors that could
cause actual results to differ materially from those in the forward-looking
statements.
The statements contained in the foregoing "Management's Discussion and
Analysis of Financial Condition and Results of Operations," including under
"Projected Results" and elsewhere in this Quarterly Report on Form 10-Q which
are not historical facts are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
set forth in the forward-looking statements. Any projections of future results
of operations, and in particular, (i) the Company's estimated net income per
share for the fiscal year ending February 28, 1997, and (ii) the Company's
estimated cash flows as measured by EBITDA for the fiscal year ending February
28, 1997, should not be construed in any manner as a guarantee that such results
will in fact occur. There can be no assurance that any forward-looking statement
will be realized or that actual results will not be significantly higher or
lower than set forth in such forward-looking statement. In addition to the risks
and uncertainties of ordinary business operations, the forward-looking
statements of the Company contained in this Quarterly Report on Form 10-Q are
also subject to the following risks and uncertainties:
The Company believes that its future results of operations are inherently
difficult to predict due to the Company's use of the LIFO method of
accounting for inventory valuation, particularly as it relates to the
Company's purchase of grapes from the 1996 fall harvest. In particular, the
Company found it necessary to revise its estimate of the impact of LIFO in
the first quarter and second quarter of the current fiscal year versus its
previous estimates. There are no assurances that the Company may not have
to revise this estimate further.
The Company could experience worse than expected production inefficiencies
or other raw material supply, production or shipment difficulties which
could adversely affect (i) its ability to supply goods to its customers and
(ii) the willingness of its wholesale or retail customers to purchase the
Company's products. The Company could also experience higher than expected
increases in its cost of product sold as a result of inefficiencies or if
raw materials such as grapes, concentrate or packaging materials are in
short supply or if the Company experiences increased overhead costs. The
Company believes that further production inefficiencies and higher than
expected other costs related to such matters as loss rates, imported
concentrate costs, freight costs and yields will negatively impact its
results.
Manufacturing economies related to such matters as bottling line speeds and
warehousing capabilities could fail to develop when planned. The Company
believes that worse than expected bottling line and warehouse efficiencies
will negatively impact its results.
<PAGE>
The Company is in a highly competitive environment and its dollar sales and
unit volume could be negatively affected by its inability to maintain or
increase prices, changes in geographic or product mix, a general decline in
beverage alcohol consumption or the decision of its wholesale customers,
retailers or consumers to purchase competitive products instead of the
Company's products. The Company believes its branded wine unit volume has
been negatively impacted by the effect price increases have had on its
competitive positioning. This could limit the Company's ability to increase
the selling prices of its branded wine products further to offset
anticipated higher costs in its fiscal year ending February 28, 1997, and
could require selling price decreases of its branded wine products in the
future to maintain volume. Wholesaler, retailer and consumer purchasing
decisions are influenced by, among other things, the perceived absolute or
relative overall value of the Company's products, including their quality
or pricing, compared to competitive products. Unit volume and dollar sales
could also be affected by pricing, purchasing, financing, operational,
advertising or promotional decisions made by wholesalers and retailers
which could affect their supply of, or consumer demand for, the Company's
products. The Company has also experienced a substantial increase in its
sales of its imported beer products, particularly its Mexican brands. The
Company does not believe that the high growth rate in its imported beer
business will be sustainable.
The Company could experience higher than expected selling, general and
administrative expenses if it finds it necessary to increase its number of
personnel or its advertising or promotional expenditures to maintain its
competitive position or for other reasons.
The Company is currently undergoing a reengineering effort involving the
evaluation of its business processes and organizational structure and could
make changes in its business in response to this effort which are not
currently contemplated.
The Company could experience difficulties or delays in the development,
production, testing and marketing of new products.
The Company could experience changes in its ability to obtain or hedge
against foreign currency, foreign exchange rates and fluctuations in those
rates. The Company could also be affected by nationalizations or unstable
governments or legal systems or intergovernmental disputes. These currency,
economic and political uncertainties may affect the Company's results,
especially to the extent these matters, or the decisions, policies or
economic strength of the Company's suppliers, affect the Company's Mexican,
German, Chinese and other imported beer products.
<PAGE>
The forward-looking statements contained herein are based on estimates
which the Company believes are reasonable. This means that the Company's
actual results could differ materially from such estimates as a result of
being negatively affected as described above or otherwise or positively
affected.
<PAGE>
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.
As previously reported in the Company's Quarterly Report on Form 10-Q for
the quarterly period ended May 31, 1996, 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 was 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 the class members allegedly 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. To that end, on April 8, 1996, the
Company filed a motion to dismiss the consolidated complaint. That motion is
fully briefed and oral argument was held on September 25, 1996. The Company is
awaiting decision by the Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) See Index to Exhibits located within this Report.
(b) No Current Report on Form 8-K was filed by the Company with the
Securities and Exchange Commission during the quarter ended August 31,
1996.
<PAGE>
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: October 11, 1996 By: /s/ Richard Sands
------------------
Richard Sands, President and
Chief Executive Officer
Dated: October 11, 1996 By: /s/ Lynn K. Fetterman
---------------------
Lynn K. Fetterman, Senior Vice President
and Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
<PAGE>
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
Not applicable.
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
3.1 Restated Certificate of Incorporation of the Registrant (filed as Exhibit
3.1 to the Registrant's Transition Report on Form 10-K for the transition
period from September 1, 1995 to February 29, 1996 and incorporated herein
by reference).
3.2 Amended and Restated By-laws of the Registrant (filed as Exhibit 3.2 to the
Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 1995 and incorporated herein by reference).
(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).
<PAGE>
(10) MATERIAL CONTRACTS.
Not applicable.
(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.
<TABLE>
EXHIBIT 11
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
COMPUTATION OF NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
(in thousands, except per share data)
(unaudited)
<CAPTION>
For the Six Months Ended August 31,
-----------------------------------
1996 1995
---- ----
Fully Fully
Net income per common and common equivalent share: Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income available to common and common equivalent
shares $ 13,442 $ 13,442 $ 20,700 $ 20,700
Adjustments - - - -
Net income available to common and common equivalent ------- ------- ------- -------
shares $ 13,442 $ 13,442 $ 20,700 $ 20,700
======= ======= ======= =======
Shares:
Weighted average common shares outstanding 19,553 19,553 19,550 19,550
Adjustments:
(1) Assumed exercise of incentive stock options 204 204 285 313
(2) Assumed exercise of stock options 38 38 168 218
Weighted average common and common equivalent shares ------- ------- ------- -------
outstanding 19,795 19,795 20,003 20,081
======= ======= ======= =======
Net income per common and common equivalent share $ .68 $ .68 $ 1.03 $ 1.03
======= ======= ======= =======
<CAPTION>
For the Three Months Ended August 31,
-------------------------------------
1996 1995
---- ----
Fully Fully
Net income per common and common equivalent share: Primary Diluted Primary Diluted
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net income available to common and common equivalent
shares $ 4,941 $ 4,941 $ 10,063 $ 10,063
Adjustments - - - -
Net income available to common and common equivalent ------- ------- ------- -------
shares $ 4,941 $ 4,941 $ 10,063 $ 10,063
======= ======= ======= =======
Shares:
Weighted average common shares outstanding 19,477 19,477 19,567 19,567
Adjustments:
(1) Assumed exercise of incentive stock options 152 152 291 311
(2) Assumed exercise of stock options 24 24 182 218
Weighted average common and common equivalent shares ------- ------- ------- -------
outstanding 19,653 19,653 20,040 20,096
======= ======= ======= =======
Net income per common and common equivalent share $ .25 $ .25 $ .50 $ .50
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's August 31, 1996 Form 10-Q and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<CIK> 0000016918
<NAME> CANANDAIGUA WINE COMPANY, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> FEB-28-1997
<PERIOD-END> AUG-31-1996
<CASH> 2,030
<SECURITIES> 0
<RECEIVABLES> 152,343
<ALLOWANCES> 0
<INVENTORY> 328,505
<CURRENT-ASSETS> 501,543
<PP&E> 353,699
<DEPRECIATION> 99,199
<TOTAL-ASSETS> 1,038,191
<CURRENT-LIABILITIES> 302,695
<BONDS> 307,204
0
0
<COMMON> 214
<OTHER-SE> 364,957
<TOTAL-LIABILITY-AND-EQUITY> 1,038,191
<SALES> 555,711
<TOTAL-REVENUES> 555,711
<CGS> 412,969
<TOTAL-COSTS> 515,839
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,803
<INCOME-PRETAX> 23,069
<INCOME-TAX> 9,627
<INCOME-CONTINUING> 13,442
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,442
<EPS-PRIMARY> .68
<EPS-DILUTED> .68
</TABLE>
