<PAGE>
RULE NO. 424(b)(2)
REGISTRATION NO. 333-67037
REGISTRATION NO. 333-40571
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus Supplement is not complete and may be +
+changed. A registration statement relating to these securities has been +
+declared effective by the Securities and Exchange Commission. A final +
+Prospectus and Prospectus Supplement will be delivered to the purchasers of +
+these securities. We are not using this Prospectus Supplement or the enclosed +
+Prospectus to offer to sell these securities or to solicit offers to buy +
+these securities in any place where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 12, 1999
Prospectus Supplement
(To Prospectus dated November 19, 1998)
$200,000,000
[LOGO OF CANANDAIGUA BRANDS, INC.]
% Senior Subordinated Notes
due 2009
Maturity
. The Notes will mature on , 2009.
Interest
. Interest on the Notes will be payable on and of each year,
beginning , 1999.
. Interest will accrue from , 1999.
Redemption
. We may redeem some or all of the Notes at any time after , 2004.
. We may also redeem up to $70.0 million of the Notes using the proceeds of
certain equity offerings completed before , 2002.
. See page S-57 for the redemption prices.
Change of Control
. If we experience a change of control, we must offer to purchase the Notes.
Security and Ranking
. The Notes will not be secured by any collateral.
. The Notes will be subordinate to all of our existing and future senior debt,
rank equally with all of our existing and future senior subordinated debt,
and rank senior to all of our existing and future subordinated debt.
Guarantees
. If we fail to make payments on the Notes, our subsidiary guarantors must make
them instead. All of our direct and indirect domestic subsidiaries, as well
as certain of our foreign subsidiaries, will be guaranteeing our payments on
the Notes. These guarantees will be senior subordinated obligations of our
subsidiary guarantors.
Listing
. We do not intend to list the Notes on any securities exchange.
Use of Proceeds
. We intend to use the proceeds from the sale of the Notes together with
borrowings under our bank credit facility to refinance a $200 million term
loan currently outstanding under our bank credit facility.
------------------------
See "Risk Factors" beginning on page S-10 for a discussion of certain factors
that you should consider before investing in the Notes.
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or determined if this Prospectus Supplement or the
attached Prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Note Total
- --------------------------------------------------------------------------------
<S> <C> <C>
Public Offering Price % $
Underwriting Discount % $
Proceeds to Us (before expenses) % $
- --------------------------------------------------------------------------------
</TABLE>
Your purchase price will also include any interest that has accrued on the
Notes since , 1999.
------------------------
. The Notes will be . The Underwriters
delivered to you in named below will
global form through purchase the Notes
the book-entry from us and offer
delivery system of them to you, subject
The Depository Trust to certain
Company (with links conditions.
to Euroclear and
Cedel) on , 1999.
Chase Securities Inc.
Credit Suisse First Boston
Fleet Securities, Inc.
Schroder & Co. Inc.
Scotia Capital Markets (USA) Inc.
------------------------
The date of this Prospectus Supplement is , 1999.
<PAGE>
In making your investment decision, you should rely only on the information
contained or incorporated by reference in this Prospectus Supplement and the
Prospectus. We have not authorized anyone to provide you with any other
information. If you receive any unauthorized information, you must not rely on
it. We are offering to sell the Notes only in places where sales are
permitted.
You should not assume that the information contained in this Prospectus
Supplement is accurate as of any date other than February 12, 1999, the date
of this Prospectus Supplement.
----------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
<S> <C>
Forward-Looking Statements................................................ ii
Industry Data............................................................. ii
Summary................................................................... S-1
Risk Factors.............................................................. S-10
Use of Proceeds........................................................... S-16
Exchange Rate Information................................................. S-16
Capitalization............................................................ S-17
Selected Historical Financial Data........................................ S-18
Unaudited Pro Forma Combined Financial Data............................... S-20
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... S-29
Industry.................................................................. S-40
Business.................................................................. S-42
Management................................................................ S-53
Description of the Senior Credit Facilities............................... S-55
Description of the Notes.................................................. S-57
The Guarantors............................................................ S-87
Underwriting.............................................................. S-88
Legal Opinions............................................................ S-89
Experts................................................................... S-89
Available Information..................................................... S-89
Incorporation of Certain Documents by Reference........................... S-90
Index to Financial Statements............................................. F-1
Prospectus
About this Prospectus..................................................... ii
Where You Can Find More Information....................................... ii
Special Note Regarding Forward-Looking Statements......................... 1
Canandaigua Brands, Inc. ................................................. 1
The Guarantors............................................................ 1
Risk Factors.............................................................. 1
Use of Proceeds........................................................... 4
Dividend Policy........................................................... 4
Ratio of Earnings to Fixed Charges........................................ 4
Description of Debt Securities............................................ 4
Description of Preferred Stock............................................ 10
Description of Depositary Shares.......................................... 11
Description of Class A Common Stock....................................... 13
Plan of Distribution...................................................... 15
Legal Opinions............................................................ 16
Experts................................................................... 16
</TABLE>
i
<PAGE>
FORWARD-LOOKING STATEMENTS
This Prospectus Supplement and the Prospectus contain "forward-looking
statements" within the meaning of Section 27A of the Securities Act 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 our control. All statements other than statements of historical
facts included in this Prospectus Supplement and the Prospectus, including the
statements under "Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," and "Business," regarding our business
strategy, future operations, financial position, estimated revenues, projected
costs, prospects, plans and objectives of management, as well as information
concerning expected actions of third parties are forward-looking statements.
When used in this Prospectus Supplement and the Prospectus, the words
"anticipate," "intend," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain such identifying words. All forward-
looking statements speak only as of the date of this Prospectus Supplement.
Neither we nor the Underwriters undertakes any obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. Although we believe that the expectations reflected in
the forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to be correct. Important factors that could cause
our actual results to differ materially from our expectations ("cautionary
statements") are disclosed under "Risk Factors" and elsewhere in the
Prospectus Supplement and the Prospectus. The cautionary statements qualify
all forward-looking statements attributable to us or persons acting on our
behalf.
INDUSTRY DATA
Market share and industry data disclosed in this Prospectus Supplement have
been obtained from the following industry and government publications: The
Gomberg-Fredrikson Report; Adams Liquor Handbook; Adams Wine Handbook; Adams
Beer Handbook; Adams Media Handbook Advance; The U.S. Wine Market: Impact
Databank Review and Forecast; The U.S. Beer Market: Impact Databank Review and
Forecast; The U.S. Distilled Spirits Markets: Impact Databank Review and
Forecast; and Beer Marketer's Insights. Neither we nor the Underwriters have
independently verified these data. References to market share data are based
on unit volume.
ii
<PAGE>
SUMMARY
The following summary highlights selected information from this Prospectus
Supplement and may not contain all the information that is important to you.
This Prospectus Supplement and the Prospectus include specific terms of the
Notes we are offering, as well as information regarding our business and
detailed financial data. We encourage you to read this Prospectus Supplement
and the Prospectus in its entirety. Unless we indicate otherwise, the terms
"Company", "we", "us" and "our" refer to Canandaigua Brands, Inc. together with
its subsidiaries, including Matthew Clark plc ("Matthew Clark"). When we use
the term "Canandaigua" we refer to the Company excluding Matthew Clark. The
acquisition of Matthew Clark, together with the related financing transactions
are referred to as the "Acquisition." When used in this Prospectus Supplement
"Pro Forma" shall mean pro forma for the Acquisition and this offering.
The Company
The Company is a leading producer and marketer of branded beverage alcohol
products in the United States and the United Kingdom. We are the second largest
importer of beers, the second largest supplier of wines and the fourth largest
supplier of distilled spirits in the United States. The recent acquisition of
Matthew Clark has provided us with access to the beverage alcohol market in the
United Kingdom and Europe and has diversified our product offerings. Matthew
Clark is the leading independent beverage supplier to the on-premises trade in
the United Kingdom and also is a leading producer of its own brands of hard
cider, wine and bottled water.
Since our founding in 1945 as a producer and marketer of wine products, we
have grown through acquisitions, new product offerings and new distribution
agreements. Since 1991 we have successfully integrated numerous acquisitions
that have diversified our product portfolio and increased our market share, net
sales and cash flow. Internal growth has been driven by developing new products
and repositioning existing brands to focus on the fastest growing sectors of
the beverage alcohol industry.
Our products are marketed through branded and wholesale product offerings. We
serve our market in the United States through more than 850 wholesale
distributors, and market our products to customers for consumption both on- and
off-premises in the United Kingdom. Our product offerings include beverage
alcohol products, such as beers imported to the United States, wines, ciders
and spirits, and bottled water. We operate 20 production facilities in the
United States and the United Kingdom and purchase product from third parties.
For the twelve months ended November 30, 1998 Pro Forma net sales were $1,999
million and Pro Forma EBITDA was $242 million.
Competitive Strengths
Leading Market Positions. We are a leading marketer and producer of beverage
alcohol products in each of our major product segments. Industry data
demonstrate our strong market share and leading market positions in both the
United States and United Kingdom.
. In the United States, we are the second largest supplier of wine with a
16% market share, the second largest importer of beer with a 14% market
share and the fourth largest supplier of distilled spirits with a 9%
market share.
. In the United Kingdom, we are the second largest producer of cider with
a 35% market share and the largest producer and marketer of sparkling
bottled water with a 10% market share.
Our leading market positions increase our purchasing and distribution
leverage with our suppliers and distributors. Our broad product offerings and
nationwide network in combination with our leading market positions make us an
attractive one-stop supplier to our customers.
S-1
<PAGE>
Leading Brand Recognition. Many of our products are recognized leaders in
their respective categories in the United States and United Kingdom.
. We are the second largest marketer of imported beers in the United
States and are the distributor of five of the top 25 imported beers:
Corona Extra, Corona Light, Modelo Especial, St. Pauli Girl and
Pacifico. We enjoy an exclusive distribution agreement in 25 primarily
Western states through 2006 for Corona, the largest selling imported
beer in the United States, with provisions for automatic renewals
thereafter.
. We sell more than 140 different brands of table wines, dessert wines and
sparkling wines, including five of the top 25 wine brands in the U.S.:
Almaden, Inglenook, Paul Masson, Richards Wild Irish Rose and Taylor.
Stowells of Chelsea is the leading branded box wine and QC is the
leading fortified British wine in the United Kingdom.
. Diamond White is the leading fashion cider and Blackthorn the number two
mainstream cider brand sold in the United Kingdom.
. Monte Alban is the leading mezcal in the United States.
. Strathmore is the leading brand of sparkling bottled water in the United
Kingdom
Diversified Product Mix. Through product line extensions and acquisitions we
have diversified our product mix and improved the consistency of earnings.
. We have reduced our reliance on any one product segment.
. Our sales are evenly balanced across three divisions; Barton
Incorporated (beer and spirits), Canandaigua Wine Company, Inc. (wines
and related products) and Matthew Clark (wholesale beverages, cider,
wine and bottled water).
Proven Acquisition Track Record. We have successfully integrated newly
acquired companies with existing operations and achieved revenue growth
opportunities and cost savings in the process.
. We have demonstrated an ability to acquire brands that have been
previously in decline and then revitalize and grow these brands.
. Between 1991 and 1995, Canandaigua has successfully integrated five
major acquisitions which have led to compound annual growth rates in net
sales and EBITDA of 34% and 36%, respectively, between September 1991
and February 1998.
. Due in part to our ability to successfully integrate acquisitions and
achieve cost savings, over the past three years we have significantly
increased our average gross profit per case in the United States, with
wine increasing from $4.61 in 1996 to $5.16 in 1998, and spirits
increasing from $6.89 to $8.57 over the same period.
. The December 1998 acquisition of Matthew Clark gives the Company a
platform for further acquisitions in the U.K. and Europe. Since 1991,
Matthew Clark has completed eight major acquisitions.
Experienced and Incentivized Management Team. We have one of the most
experienced management teams in the beverage alcohol industry.
. Our executive officers have an average of 14 years with Canandaigua or
Matthew Clark and an average of 18 years in the beverage alcohol
industry.
. Richard Sands, our Chief Executive Officer and President, and Robert
Sands, our Chief Executive Officer, International and Executive Vice
President, are members of the Sands Family, which controls 64% of our
voting stock and has 26% of the outstanding equity in our company.
S-2
<PAGE>
Business Strategy
We intend to continue to enhance sales and profitability and strengthen our
position as an industry leader through the following key initiatives:
Effectively Manage Brand Portfolio. Our objective is to maximize the
profitability of our brand portfolio.
. We intend to focus our portfolio on growth segments of the beverage
alcohol market.
. We plan to adjust the price/volume relationship of certain brands on a
local basis to maximize profits without negatively affecting market
share.
. We will support existing brands through aggressive marketing and
competitive pricing.
Introduce Product Line Extensions. The success and brand name recognition of
our products give us the ability to introduce product line extensions to
generate additional growth and to gain market share.
. We are using the well-known Almaden wine name to expand our presence in
the growing box wine market in the U.S. by offering an increasing number
of blends, including proprietary red wine blends designed to increase
the size of the wine market by appealing to consumers with preferences
for lighter-tasting red wines not offered by competitors.
. We are taking advantage of the top-ranked position of the Stowells of
Chelsea boxed wine brand in the United Kingdom by introducing Stowells
of Chelsea wine in smaller bottles, encouraging consumers to try a
variety of blends.
. We plan to continue to use our successful Chi-Chi's prepared cocktails
product line to introduce new flavors designed to capitalize on changing
consumer tastes.
Capitalize on Growth Opportunities. We are focusing on a number of categories
in which either we believe that there is demonstrated growth potential in an
existing market, or we have identified market segments that are under-served by
products currently available in the market.
. We are continuing to build distribution of Arbor Mist, a line of fruit-
flavored varietal speciality wines that we introduced in June 1998. We
shipped over 1.7 million cases of Arbor Mist in its first eight months
of distribution.
. We have established Riverland Vineyards as a vehicle to develop and
launch brands in the premium wine category. The first brand, Mystic
Cliffs, was introduced in retail stores beginning in August 1998,
supported by the Company's largest consumer advertising campaign in over
ten years.
. We are increasing our advertising support for Corona Extra imported beer
to continue this brand's sales momentum.
. We have established our wholesale business in the United Kingdom as the
leading independent multiple product line supplier to the on-premises
trade.
Pursue Selective Acquisition Opportunities. Strategic acquisitions will
continue to be a major component of our growth strategy.
. We have supplemented our internal growth with six major acquisitions
since 1991, including Matthew Clark.
. Matthew Clark's established reputation within the industry and proven
track record provides us with an additional platform from which to
pursue future international acquisitions.
. We will continue to seek acquisitions that offer complementary product
lines, geographic scope and additional distribution channels.
. Potential acquisitions might include premium wine and higher margin
spirits brands.
S-3
<PAGE>
Matthew Clark Acquisition
Effective December 1, 1998, pursuant to a tender offer, we acquired control
of Matthew Clark and have since acquired 100% of its issued and outstanding
capital stock. The total purchase price, including assumption of indebtedness,
for the acquisition of the Matthew Clark shares was approximately $464 million.
Matthew Clark, founded in 1810, is a leading U.K.-based producer and
distributor of its own brands of cider, wine and bottled water. Principal
brands include Blackthorn and Gaymer's Olde English cider, Stowells of Chelsea
and QC wine and Strathmore bottled water. For the twelve months ended October
31, 1998, on a pro forma U.S. GAAP basis, Matthew Clark generated net sales and
EBITDA (excluding nonrecurring restructuring expenses of $18.3 million) of
$678.4 million and $77.3 million, respectively.
The acquisition of Matthew Clark strengthens our position in the beverage
alcohol industry by providing us with a presence in the United Kingdom and a
platform for growth in the European market. Matthew Clark is the leading
independent beverage supplier to the on-premises trade, the number one branded
boxed wine producer, the second largest cider producer, the number one producer
and distributor of fortified British wines and the number one producer of
sparkling bottled water throughout the United Kingdom. The acquisition of
Matthew Clark also offers potential benefits including distribution
opportunities to market California-produced wines and U.S.-produced spirits in
the United Kingdom, as well as the potential to market Matthew Clark products,
especially cider, in the U.S.
S-4
<PAGE>
The Offering
<TABLE>
<S> <C>
Issuer.................. Canandaigua Brands, Inc.
Securities Offered...... $200 million aggregate principal amount at maturity of
% Senior Subordinated Notes due 2009.
Maturity Date........... , 2009.
Interest Payment Dates.. and of each year, commencing , 1999.
Optional Redemption..... Canandaigua will have the right to redeem the Notes, in
whole or in part, at any time after , 2004 at the
redemption prices set forth under "Description of the
Notes--Optional Redemption," together with accrued and
unpaid interest, if any, to the date of redemption. In
addition, at any time before , 2002, Canandaigua
may redeem up to $70 million of the aggregate principal
amount of the Notes with the net cash proceeds of
certain equity offerings at a redemption price equal to
% of the principal amount to be redeemed, together
with accrued and unpaid interest, if any, to the date
of redemption, provided that at least $130 million of
the aggregate principal amount of the Notes remains
outstanding immediately after the redemption.
Change of Control....... Upon the occurrence of a "Change of Control," each
holder of the Notes will have the right to require
Canandaigua to repurchase such holder's Notes at a
price equal to 101% of the principal amount thereof,
plus accrued and unpaid interest, if any, to the date
of repurchase.
Subsidiary Guarantees... The Notes will be fully and unconditionally guaranteed
on an unsecured, senior subordinated basis by each of
Canandaigua's direct and indirect domestic and foreign
restricted subsidiaries that guarantee other
indebtedness of Canandaigua or any of its restricted
subsidiaries.
Ranking................. The Notes will be unsecured and:
. subordinate in right of payment to all existing and
future debt of Canandaigua that is deemed to be
senior indebtedness under the indenture governing the
Notes;
. equal in right of payment with any future debt of
Canandaigua that is senior subordinated indebtedness;
and
. senior in right of payment to all debt of Canandaigua
that is subordinated indebtedness.
</TABLE>
S-5
<PAGE>
<TABLE>
<S> <C>
Similarly, the guarantees of the Notes provided by
Canandaigua's direct and indirect subsidiaries will be
subordinate in right of payment to all existing and
future debt of the applicable guarantor that is deemed
to be senior indebtedness under the indenture governing
the Notes, equal in right of payment with any future
debt of the applicable guarantor that is senior
subordinated indebtedness and senior in right of
payment to all debt of the applicable guarantor that is
subordinated indebtedness.
As of November 30, 1998, on a Pro Forma basis our
outstanding debt that would have been deemed to be
senior indebtedness would have been approximately $525
million (excluding unused commitments under our senior
credit facility).
Restrictive Covenants. The Indenture relating to the Notes will contain
certain covenants, including, but not limited to,
covenants with respect to the following matters:
. limitation on indebtedness;
. limitation on restricted payments;
. limitation on transactions with affiliates;
. limitation on senior subordinated indebtedness;
. limitation on liens;
. limitation on sale of assets;
. limitation on issuances of guarantees;
. limitation on subsidiary capital stock;
. limitation on dividends and other payment
restrictions affecting subsidiaries; and
. restrictions on consolidations, mergers and the sale
of assets.
Use of Proceeds....... We estimate that the net proceeds from this offering
will be approximately $195 million. We intend to use
these proceeds, together with borrowings under the
Company's revolving credit facility, to refinance a
$200 million term loan currently outstanding under our
bank credit facilities. See "Use of Proceeds."
</TABLE>
Risk Factors
You should carefully consider all of the information set forth in this
Prospectus Supplement and in the Prospectus and, in particular, should evaluate
the specific factors under "Risk Factors" beginning on page S-10 before
purchasing the Notes.
S-6
<PAGE>
Summary Pro Forma Combined Financial Data
The Company
The following table sets forth certain unaudited summary pro forma combined
financial data of the Company for the periods ended and as of the dates
indicated as described in the Unaudited Pro Forma Combined Financial Data. The
unaudited summary pro forma combined statement of income data gives effect to
the Acquisition and the closing of this offering as if both had occurred at the
beginning of the periods indicated. The unaudited summary pro forma combined
balance sheet data give effect to the Acquisition and the offering as if they
had occurred on November 30, 1998. "Other Data" below, not directly derived
from the Unaudited Pro Forma Combined Financial Data, or the Canandaigua or
Matthew Clark historical consolidated financial statements, have been presented
to provide additional analysis. The consolidated financial statements of
Matthew Clark prepared in accordance with U.K. GAAP used in preparing the
Unaudited Pro Forma Combined Financial Data have been adjusted to present such
information in accordance with U.S. GAAP and translated into U.S. dollar
equivalent financial statements. The Summary Pro Forma Combined Financial Data
do not purport to represent what the Company's results of operations or
financial condition would have actually been had the transaction been
consummated as of such dates or to project what the Company's results of
operations or financial condition for any future period. It is important that
you read the summary historical and pro forma financial data presented below
along with "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the consolidated financial statements of Matthew Clark
and of our Company, and the unaudited pro forma financial statements of our
Company included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
Twelve Months
Year Ended Ended
February 28, 1998 November 30, 1998
----------------- -----------------
(Dollars in Millions)
<S> <C> <C>
Income Statement Data:
Net sales................................ $1,884 $1,999
Gross profit............................. 575 616
Selling, general and administrative
expenses................................ (401) (433)
Operating income......................... 174 165
Interest expense......................... (77) (77)
Income before provision for income taxes. 96 88
Net income............................... 58 53
Other Data:
EBITDA (a)............................... $ 233 $ 242
Capital expenditures..................... 83 68
Depreciation and amortization............ 53 53
Ratio of total debt to EBITDA............ -- 3.8x
Ratio of EBITDA to interest expense...... -- 3.1x
Balance Sheet Data (end of period):
Working capital.......................... -- $ 465
Total assets............................. -- 1,865
Total debt............................... -- 917
Stockholders' equity..................... -- 412
</TABLE>
- -------
(a) EBITDA is defined as net income before interest expense, income taxes,
depreciation and amortization, non-cash charges and nonrecurring
restructuring expenses. For each of the year ended February 28, 1998 and
the twelve months ended November 30, 1998 Matthew Clark had non-cash
charges of $5.9 million. In the twelve months ended November 30, 1998
Matthew Clark had nonrecurring restructuring expenses of $18.3 million.
Management believes that EBITDA is a measure commonly used by analysts and
investors to determine a company's ability to service and incur debt.
Accordingly, this information has been presented to permit a more complete
analysis. EBITDA should not be considered as a substitute for net income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of profitability or liquidity.
S-7
<PAGE>
Summary Historical Consolidated Financial Data
Canandaigua Brands, Inc.
The following table sets forth summary financial data of Canandaigua for the
six-month Transition Period ended February 29, 1996, for each of the two fiscal
years in the period ended February 28, 1998, for the nine-month periods ended
November 30, 1997 and 1998 and for the twelve month period ended November 30,
1998. The statement of income data for the six month Transition Period ended
February 29, 1996 and the two fiscal years in the period ended February 28,
1998 are derived from Canandaigua's audited historical financial statements
included elsewhere in this Prospectus Supplement. The statement of income data
for the nine-month periods ended November 30, 1997 and 1998 has been derived
from the unaudited financial statements of Canandaigua included elsewhere in
this Prospectus Supplement. The statement of income data for the twelve month
period ended November 30, 1998 have been derived from the unaudited financial
statements of Canandaigua. "Other Data" below, not directly derived from
Canandaigua's historical financial statements, have been presented to provide
additional analysis. In the opinion of management, the unaudited data includes
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the data for such periods. Interim results for the nine-month
period and twelve month period ended November 30, 1998 are not necessarily
indicative of results that can be expected in future periods. It is important
that you read the summary historical financial data presented below along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements of Canandaigua, and the
unaudited pro forma financial statements of Canandaigua included elsewhere in
this Prospectus Supplement.
<TABLE>
<CAPTION>
Six Month Nine Months
Transition Year Ended Ended Twelve
Period Ended February 28, November 30, Months Ended
February 29, ------------------ ----------------- November 30,
1996 1997 1998 1997 1998 1998
------------ -------- -------- ------- -------- ------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales.............. $ 535.0 $1,135.0 $1,212.8 $ 930.2 $1,037.9 $1,320.5
Gross profit........... 138.8 290.8 348.7 263.5 309.4 394.6
Selling, general and
administrative
expenses.............. (112.4) (209.0) (231.7) (171.8) (202.6) (262.5)
Nonrecurring
restructuring
expenses.............. (2.4) -- -- -- -- --
------- -------- -------- ------- -------- --------
Operating income....... 24.0 81.8 117.0 91.7 106.8 132.1
Interest expense, net.. (17.3) (34.0) (32.1) (23.9) (23.7) (31.9)
------- -------- -------- ------- -------- --------
Income before provision
for income taxes...... 6.7 47.8 84.9 67.8 83.1 100.2
Provision for income
taxes................. (3.4) (20.1) (34.8) (27.8) (34.1) (41.1)
------- -------- -------- ------- -------- --------
Net income............. $ 3.3 $ 27.7 $ 50.1 $ 40.0 $ 49.0 $ 59.1
======= ======== ======== ======= ======== ========
Other Data:
EBITDA (a)............. $ 40.4 $ 113.7 $ 150.2 $ 117.5 $ 132.5 $ 165.2
EBITDA margin (b)...... 7.6% 10.0% 12.4% 12.6% 12.8% 12.5%
Capital expenditures... $ 16.1 $ 31.6 $ 31.2 $ 23.2 $ 21.7 $ 29.7
</TABLE>
- --------
(a) EBITDA is defined as net income before interest expense, income taxes,
depreciation and amortization, non-cash charges and nonrecurring
restructuring expenses. Management believes that EBITDA is a measure
commonly used by analysts and investors to determine a company's ability
to service and incur debt. Accordingly, this information has been
presented to permit a more complete analysis. EBITDA should not be
considered as a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure
of profitability or liquidity.
(b) EBITDA margin is computed as EBITDA as a percentage of net sales.
S-8
<PAGE>
Summary Historical Consolidated Financial Data
Matthew Clark plc
The following table sets forth summary financial data of Matthew Clark for
each of the three fiscal years in the period ended April 30, 1998, for the six-
month periods ended October 31, 1997 and 1998 and for the twelve month period
ended October 31, 1998. The statement of income data for the three fiscal years
in the period ended April 30, 1998 are derived from Matthew Clark's audited
historical financial statements included elsewhere in this Prospectus
Supplement. The statement of income data for the six-month periods ended
October 31, 1997 and 1998 and for the twelve month period ended October 31,
1998 has been derived from the unaudited financial statements of Matthew Clark.
The Summary Historical Financial Data have been presented in accordance with
U.K. GAAP in pounds sterling. "Other Data" below, not directly derived from
Matthew Clark historical financial statements, have been presented to provide
additional analysis. In the opinion of management, the unaudited data includes
all adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the data for such periods. Interim results for the six month and
twelve month periods ended October 31, 1998 are not necessarily indicative of
results that can be expected in future periods. It is important that you read
the summary historical financial data presented below along with "Management's
Discussion and Analysis of Financial Condition and Results of Operations," the
consolidated financial statements of Matthew Clark, and the unaudited pro forma
financial statements of Matthew Clark included elsewhere in this Prospectus
Supplement.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended April 30, October 31, Twelve Months
------------------------------------------- ---------------------------- Ended
1996 1997 1998 1997 1998 October 31, 1998
------------- ------------- ------------- ------------- ------------- ----------------
(Pounds Sterling and Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Turnover............... (Pounds)450.9 (Pounds)570.7 (Pounds)553.1 (Pounds)272.9 (Pounds)271.6 (Pounds)551.8
Operating profit
(loss)................ 21.5 45.1 37.1 20.0 4.4 21.5
Profit on fixed asset
sales................. (2.0) 0.4 3.7 -- 0.6 4.3
Net interest payable
and similar charges... (2.3) (4.9) (5.0) (2.3) (2.5) (5.2)
------------- ------------- ------------- ------------- ------------- -------------
Profit (loss) on
ordinary activities
before tax............ 17.2 40.6 35.8 17.7 2.5 20.6
Tax on profit (loss) on
ordinary activities... (5.0) (12.4) (10.5) (5.1) (0.7) (6.1)
------------- ------------- ------------- ------------- ------------- -------------
Profit (loss) on
ordinary activities
after tax............. 12.2 28.2 25.3 12.6 1.8 14.5
Minority interest...... (0.1) -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Profit (loss)
attributable to
shareholders.......... (Pounds) 12.1 (Pounds) 28.2 (Pounds) 25.3 (Pounds) 12.6 (Pounds) 1.8 (Pounds) 14.5
============= ============= ============= ============= ============= =============
Other Data:
EBITDA (a)............. (Pounds) 26.6 (Pounds) 57.1 (Pounds) 54.2 (Pounds) 25.8 (Pounds) 22.0 (Pounds) 50.4
EBITDA margin (b)...... 5.9% 10.0% 9.8% 9.5% 8.1% 9.1%
Capital expenditures... (Pounds) 18.4 (Pounds) 21.3 (Pounds) 31.6 (Pounds) 18.0 (Pounds) 9.3 (Pounds) 22.9
Approximate Amounts in U.S. GAAP (in U.S. $)
Income Statement Data:
Net sales.......................................... $ 671.0 $ 332.3 $ 339.3 $ 678.4
Gross profit....................................... 224.3 110.5 105.9 219.9
Selling, general & administrative expenses......... (180.1) (85.2) (86.9) (181.9)
Non recurring restructuring expenses............... -- -- (18.3) (18.3)
------------- ------------- ------------- -------------
Operating income................................... 44.2 25.3 0.7 19.7
Interest expense................................... (8.6) (4.0) (4.2) (8.9)
------------- ------------- ------------- -------------
Income before income tax........................... 35.7 21.3 (3.5) 10.8
Provision for income tax........................... (14.8) (8.4) (1.3) (7.7)
------------- ------------- ------------- -------------
Net income......................................... $ 20.9 $ 12.9 $ (4.8) $ 3.1
============= ============= ============= =============
Other Data:
EBITDA (a)......................................... $ 69.3 $ 42.2 $ 36.6 $ 63.7
EBITDA margin (b).................................. 10.3% 12.7% 10.8% 9.4%
Capital expenditures............................... $ 52.0 $ 29.4 $ 15.4 $ 38.0
</TABLE>
- --------
(a) EBITDA is defined as net income before interest expense, income taxes,
depreciation and amortization, non-cash charges and nonrecurring
restructuring expenses. For the twelve months ended October 31, 1998, pro
forma for the acquisition adjustments, EBITDA would have been $77.3
million. See "Unaudited Pro Forma Combined Financial Data." Management
believes that EBITDA is a measure commonly used by analysts and investors
to determine a company's ability to service and incur debt. Accordingly,
this information has been presented to permit a more complete analysis.
EBITDA should not be considered as a substitute for net income or cash flow
data prepared in accordance with generally accepted accounting principles
or as a measure of profitability or liquidity.
(b) EBITDA margin is computed as EBITDA as a percentage of turnover or net
sales.
S-9
<PAGE>
RISK FACTORS
Before you buy any securities offered by this Prospectus Supplement and the
Prospectus, you should be aware that there are various risks, including those
described below and in the Prospectus. You should consider carefully these
risk factors, together with all of the other information in this Prospectus
Supplement and the Prospectus and the documents that are incorporated by
reference before you decide to acquire any securities.
This Prospectus Supplement and the Prospectus include "forward-looking
statements" within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act. These forward-looking statements include, in
particular, the statements about our plans, strategies and prospects under the
headings "Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Business." Although we believe that
our plans, intentions and expectations reflected in or suggested by such
forward-looking statements are reasonable, we cannot assure you that we will
achieve such plans, intentions or expectations. Important factors that could
cause actual results to differ materially from the forward-looking statements
we make in this Prospectus Supplement and the Prospectus are set forth below
and elsewhere in this Prospectus Supplement and the Prospectus. All forward-
looking statements attributable to us or persons acting on our behalf are
expressly qualified in their entirety by the following cautionary statements.
Our Indebtedness Could Have a Material Adverse Effect on Our Financial Health
and Our Ability to Fulfill Our Obligations under the Notes
We have incurred substantial indebtedness to finance our acquisitions,
including the Acquisition and we expect to incur substantial additional
indebtedness in the future to finance further acquisitions. As of November 30,
1998, giving pro forma effect to the Acquisition, the sale of the Notes
offered by this Prospectus Supplement and the use of the proceeds we receive
from this sale, we would have had $917.1 million of indebtedness outstanding,
which does not include $277.4 million of revolving loans we had available to
draw under our bank credit facility. See "Use of Proceeds." Our ability to
satisfy our financial obligations under our indebtedness outstanding from time
to time will depend upon our future operating performance, which is subject to
prevailing economic conditions, levels of interest rates and financial,
business and other factors, many of which are beyond our control. Therefore,
there can be no assurance that our cash flow from operations will be
sufficient to meet all of our debt service requirements and to fund our
capital expenditure requirements.
Our current and future debt service obligations and covenants could have
important consequences to you if you purchase the Notes offered by this
Prospectus Supplement. Such obligations and covenants include the following:
. Our ability to obtain financing for future working capital needs or
acquisitions or other purposes may be limited;
. A significant portion of our cash flow from operations will be dedicated
to the payment of principal and interest on our indebtedness, thereby
reducing funds available for operations;
. We are subject to restrictive covenants that could limit our ability to
conduct our business; and
. We may be more vulnerable to adverse economic conditions than less
leveraged competitors and, thus, may be limited in our ability to
withstand competitive pressures.
The restrictive covenants included in our bank credit facility, our current
indentures and the indenture under which the Notes will be issued include,
among others, those restricting additional liens, additional borrowing, the
sale of assets, the payment of dividends, transactions with affiliates, the
making of investments and certain other fundamental changes. The bank credit
facility also contains restrictions on capital expenditures and certain
financial ratio tests including current assets to current
S-10
<PAGE>
liabilities, maximum indebtedness to tangible net worth, minimum interest and
fixed charge coverage and minimum levels of tangible net worth. These
restrictions could limit our ability to conduct business. A failure to comply
with the obligations contained in the bank credit facility, our current
indentures or the indenture under which the Notes will be issued could result
in an event of default under such agreements, which could require us to
immediately repay the related debt and also debt under other agreements that
may contain cross-acceleration or cross-default provisions.
Your Right to Receive Payments on the Notes is Junior to Our Bank and Other
Unsubordinated Indebtedness; The Guarantees of Our Guarantors Are Junior to
All of Their Unsubordinated Indebtedness
According to the indenture under which the Notes will be issued the payment
of the principal, any premium and interest on the Notes and each subsidiary
guaranty of the Notes is subordinate in right of payment to the prior payment
in full of all senior indebtedness of our company or the applicable subsidiary
guarantor. Our senior indebtedness includes our obligations under, and the
subsidiary guarantors' guarantees of our obligations with respect to, our bank
credit facility.
As a result, upon any distribution to our creditors or the creditors of the
guarantors in a bankruptcy, liquidation or reorganization or similar
proceeding relating to us or the guarantors of our or their property, the
holders of senior indebtedness of our company and the guarantors will be
entitled to be paid in full in cash before any payment may be made with
respect to these Notes or the subsidiary guarantees.
In addition, all payments on the Notes and the guarantees will be blocked in
the event of a payment default on senior indebtedness and may be blocked for
certain periods of time in the event of certain nonpayment defaults on senior
indebtedness.
In the event of a bankruptcy, liquidation or reorganization or similar
proceeding relating to our company or the guarantors, holders of Notes will
participate with all other holders of subordinate indebtedness of our company
and the guarantors in the assets remaining after we and the subsidiary
guarantors have paid all of our senior indebtedness. However, because the
indenture requires that amounts otherwise payable to holders of Notes in a
bankruptcy or similar proceeding be paid to holders of senior indebtedness
instead, holders of Notes may receive less, ratably, than holders of senior
indebtedness or other nonsubordinated claims against us or any of the
Guarantors in any such proceeding. In any of these cases, we and the
subsidiary guarantors may not have sufficient funds to pay all of our
creditors and holders of Notes may receive less, ratably than the holders of
senior debt.
Assuming we had completed the Acquisition and related financing transactions
on November 30, 1998, these Notes and the subsidiary guarantees would have
been subordinated to approximately $524.8 million of senior indebtedness. We
will be permitted to borrow substantial additional indebtedness, including
senior indebtedness, in the future under the terms of the indenture under
which the Notes will be issued.
The Notes Are Unsecured; A Majority of Our Assets are Pledged to Secure Our
Bank Credit Facility
The Notes will not be secured by any of our assets. Our obligations under
our bank credit facility, however, are secured by a first priority security
interest in a majority of our assets in the United States. If the Company
becomes insolvent or is liquidated, or if payment under our bank credit
facility is accelerated, the lenders under the facility would be entitled to
exercise the remedies available to a secured lender under applicable law and
pursuant to the agreement governing such indebtedness. Accordingly, such
lenders will have a prior claim on such of our assets. In any such event,
because the Notes will not be secured by any of our assets, it is possible
that there would be no assets remaining from which claims of the holders of
the Notes could be satisfied or, if any such assets remained, such assets
might be insufficient to satisfy such claims fully.
S-11
<PAGE>
Our Ability to Make Payments on the Notes Depends on Our Ability to Receive
Dividends from Our Subsidiaries. Some of Our Non-U.S. Subsidiaries Are Not
Guarantors of the Notes
We are a holding company and conduct almost all of our operations through
our subsidiaries. As of November 30, 1998 approximately 79% of our tangible
assets were held by our subsidiaries. The capital stock of our subsidiaries
represents substantially all the assets of the holding company. Accordingly,
we are dependent on the cash flows of our subsidiaries to meet our
obligations, including the payment of the principal and interest on the Notes.
The Notes will be guaranteed, jointly and severally, by each of the
Company's direct and indirect subsidiaries that guarantee other debt of the
Company or a restricted subsidiary. The Notes will not be guaranteed by the
Company's direct or indirect foreign subsidiaries unless such subsidiaries
also guarantee other indebtedness of Canandaigua or any of its restricted
subsidiaries. As a result, holders of the Notes will not have a direct claim
on assets of foreign subsidiaries who do not guarantee the Notes (including,
but not limited to the assets of Matthew Clark). For the twelve month period
ended November 30, 1998, $678.4 million of the Company's net sales (on a pro
forma basis to give effect to the Acquisition) were from operations of Matthew
Clark, which is not a Guarantor of the Notes, and $1,320 million from
operations of the Guarantors. To the extent any Guarantee were to be voided as
a fraudulent conveyance or held unenforceable for any other reason, holders of
the Notes would cease to have any claim in respect of such Guarantor and would
be creditors solely of the Company and any Guarantor whose Guarantee was not
voided or held unenforceable. In such event, the claims of the holders of the
Notes against the issuer of an invalid Guarantee would be subject to the prior
payment of all liabilities of such Guarantor. There can be no assurance that,
after providing for all prior claims, there would be sufficient assets to
satisfy the claims of the holders of the Notes relating to any voided
Guarantee.
Based upon financial and other information currently available to it, the
Company believes that the Notes and the Guarantees are being incurred for
proper purposes and in good faith and that the Company and each Guarantor is
solvent and will continue to be solvent after issuing the Notes or its
Guarantee, as the case may be, will have sufficient capital for carrying on
its business after such issuance and will be able to pay its debts as they
mature. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Financial Liquidity and Capital Resources of the
Company," "Description of the Senior Credit Facilities" and "Description of
Notes."
We May Not Be Able to, or Have Sufficient Funds to Purchase the Notes in the
Event of a Change of Control
Upon the occurrence of certain specific kinds of change of control events,
we will be required to make an offer to repurchase the Notes at 101% of their
principal amount plus accrued interest. However, it is possible that we will
not have sufficient funds at the time of the change of control to make the
required repurchase of Notes or that restrictions in our senior secured credit
facility will not allow such repurchases. Even if we did have sufficient funds
to carry out such a repurchase, the financial effect of the repurchase could
cause us to default on our other indebtedness. See "Description of Notes--
Change of Control."
An Active Trading Market for the Notes May Not Develop and the Market Price of
the Notes May Be Lower Than the Offering Price
The Notes are a new issue of securities, and there is currently no
established trading market for the Notes. In addition, we do not intend to
apply for the Notes to be listed on any securities exchange or to arrange for
the Notes to be quoted on any quotation system. The Underwriters have advised
us that they intend to make a market in the Notes, but they are not obligated
to do so. The Underwriters may discontinue any market making in the Notes at
any time in their sole discretion. Accordingly, we cannot assure you that a
liquid trading market will develop for the Notes, that you will be able to
sell your Notes at a particular time or that the prices that you receive when
you sell will be favorable.
S-12
<PAGE>
Our Business Could Be Adversely Affected by a General Decline in the
Consumption of Products We Sell
In the United States, the overall per capita consumption of beverage alcohol
products by adults (ages 21 and over) has declined substantially over the past
twenty years. These declines have been caused by a variety of factors
including:
. increased concern about the health consequences of consuming beverage
alcohol products and about drinking and driving;
. a trend toward a healthier diet including lighter, lower-calorie
beverages such as diet soft drinks, juices and sparkling water products;
. the increased activity of anti-alcohol consumer groups;
. an increase in the minimum drinking age from 18 to 21 in various states;
and
. increased federal and state excise taxes.
Our Acquisition Strategy May Not Be Successful
Our recent acquisition of Matthew Clark is the latest in a series of
acquisitions we have completed since 1991. We anticipate that we may, from
time to time, acquire additional businesses, assets or securities of companies
which we believe would provide a strategic fit with our business. Any other
acquired business will need to be integrated with our existing operations.
There can be no assurance that we will effectively assimilate the business or
product offerings of acquired companies (including Matthew Clark) into our
business or product offerings. Any acquisitions also will be accompanied by
risks such as potential exposure to unknown liabilities of acquired companies,
the difficulty and expense of integrating the operations and personnel of the
acquired companies, the potential disruption to our business, the diversion of
management time and attention, the impairment of relationships with and the
possible loss of key employees and customers of the acquired business, the
incurrence of amortization expenses if any acquisition is accounted for as a
purchase. Our failure to adequately manage the risks associated with any
acquisitions could have a material adverse effect on our financial condition
or results of operations.
Increases in Excise Taxes and Governmental Restrictions Could Have a Material
Adverse Effect on Our Business
In the United States, the federal government and individual states impose
excise taxes on beverage alcohol products in varying amounts which have been
subject to change. Increases in excise taxes on beverage alcohol products, if
enacted, could materially and adversely affect our financial condition or
results of operations. In addition, the beverage alcohol products industry is
subject to extensive regulation by state and federal agencies. The federal
Bureau of Alcohol, Tobacco and Firearms and the various state liquor
authorities regulate such matters as licensing requirements, trade and pricing
practices, permitted and required labeling, advertising and relations with
wholesalers and retailers. In recent years, federal and state regulators have
required warning labels and signage. In the United Kingdom, Matthew Clark
carries on its excise trade under a Customs and Excise License. Licenses are
required for all premises where wine is produced. Matthew Clark holds a
license to act as an excise warehouse operator and registrations have been
secured for the production of cider and bottled water. New or revised
regulations or increased licensing fees and requirements could have a material
adverse effect on our financial condition or results of operations.
We Rely on the Performance of Wholesale Distributors for the Success of Our
Business
In the United States, we sell our products principally to wholesalers for
resale to retail outlets including grocery stores, package liquor stores, club
and discount stores and restaurants. The replacement or poor performance of
our major wholesalers or our inability to collect accounts receivable from our
major wholesalers could materially and adversely affect our results of
operations
S-13
<PAGE>
and financial condition. Distribution channels for beverage alcohol products
have been characterized in recent years by rapid change, including
consolidations of certain wholesalers. In addition, wholesalers and retailers
of our products offer products which compete directly with our products for
retail shelf space and consumer purchases. Accordingly, there is a risk that
these wholesalers or retailers may give higher priority to products of our
competitors. In the future, our wholesalers and retailers may not continue to
purchase our products or provide our products with adequate levels of
promotional support.
The Termination or Nonrenewal of Imported Beer Distribution Agreements Could
Have a Material Adverse Effect on Our Business
All of our imported beer products are marketed and sold pursuant to
exclusive distribution agreements (limited, in some instances to specified
territories) with the suppliers of these products which are subject to renewal
from time to time. Our exclusive agreement to distribute Corona and its other
Mexican beer brands in 25 primarily Western states expires in December 2006
and, subject to compliance with certain performance criteria and the other
terms of the agreement, will be automatically renewed for additional terms of
five years. Our agreement for the importation of St. Pauli Girl expires in
June 2003. Our Tsingtao agreement expires in December 1999 and, subject to
compliance with certain performance criteria and other terms of the agreement,
will be automatically renewed until December 2002. Prior to their expiration,
these agreements may be terminated if we fail to meet certain performance
criteria and, in the case of the Mexican beer brands, the supplier does not
consent to certain key management changes, which consent may not be
unreasonably withheld. We believe that we are currently in compliance with all
of our material imported beer distribution agreements. From time to time we
have failed, and may in the future fail, to satisfy certain performance
criteria in our distribution agreements. It is possible that our beer
distribution agreements may not be renewed or may be terminated prior to
expiration.
We Generally Do Not Have Long-Term Supply Contracts and We Are Subject to
Substantial Price Fluctuations for Grapes and Grape-Related Materials; We Have
a Limited Group of Suppliers of Glass Bottles
Our business is heavily dependent upon raw materials, such as grapes, grape
juice concentrate, grains, alcohol from third-party suppliers, tequila from
Mexico and packaging materials. We could experience raw material supply,
production or shipment difficulties which could adversely affect our ability
to supply goods to our customers. We are also directly affected by increases
in the costs of such raw materials. In the recent past we have experienced
dramatic increases in the costs of grapes. Although we believe we have
adequate sources of grape supplies, in the event demand for certain wine
products exceeds expectations, we could experience shortages. In addition, one
of our largest components of cost of goods sold is that of glass bottles,
which has only a small number of producers. The inability of any of our glass
bottle suppliers to satisfy our requirements could adversely affect our
business. See "Business--Sources and Availability of Raw Materials."
Competition Could Have a Material Adverse Effect on Our Business
We are in a highly competitive industry and the dollar amount, and unit
volume, of our sales could be negatively affected by our inability to maintain
or increase prices, changes in geographic or product mix, a general decline in
beverage alcohol consumption or the decision of our wholesale customers,
retailers or consumers to purchase competitive products instead of our
products. Wholesaler, retailer and consumer purchasing decisions are
influenced by, among other things, the perceived absolute or relative overall
value of our 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, our products. We could also experience higher than
expected
S-14
<PAGE>
selling, general and administrative expenses if we find it necessary to
increase the number of our personnel or our advertising or promotional
expenditures to maintain our competitive position or for other reasons.
We Are Controlled by the Sands Family
Our outstanding capital stock consists of Class A Common Stock and Class B
Common Stock. Holders of Class A Common Stock are entitled to one vote per
share and are entitled, as a class, to elect one fourth of the members of the
Board of Directors. Holders of Class B Common Stock are entitled to ten votes
per share and are entitled, as a class, to elect the remaining directors. As
of January 31, 1999, the family of Marvin Sands, our founder and Chairman of
the Board, beneficially owned approximately 13% of the outstanding shares of
Class A Common Stock (exclusive of shares of Class A Common Stock issuable
pursuant to the conversion feature of the Class B Common Stock owned by the
Sands family) and approximately 88% of the outstanding shares of Class B
Common Stock. On all matters other than the election of directors, the Sands
family has the ability to vote approximately 64% of the votes entitled to be
cast by holders of our outstanding capital stock, voting as a single class.
Consequently, we are essentially controlled by the Sands family and they would
generally have sufficient voting power to determine the outcome of any
corporate transaction or other matter submitted to our stockholders for
approval.
We Have Key Employees Whose Absence Could Materially Adversely Affect Our
Business
Our success depends in part on a few key management employees. These key
management employees are Marvin Sands, the Chairman of the Board, Richard
Sands, the President and Chief Executive Officer, and Robert Sands, Chief
Executive Officer, International, Executive Vice President and General
Counsel. If, for any reason, such key personnel do not continue to be active
in our management, operations could be adversely affected.
S-15
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the Notes offered hereby are estimated to
be approximately $195.2 million (after deducting the Underwriter's discount
and estimated offering fees and expenses payable by the Company). The net
proceeds from the sale of the Notes together with borrowings under the
Company's bank credit facility will be used to refinance the Tranche II Term
Loan in the amount of $200 million outstanding under the Company's bank credit
facility. Such term loan currently bears interest at 7.5% and matures in June
2000. The proceeds of the Tranche II Term Loan were used to fund a portion of
the Acquisition.
EXCHANGE RATE INFORMATION
The following table sets forth certain exchange rates based on the noon
buying rate in New York City for cable transfers as certified for customs
purposes by the Federal Reserve Bank of New York (the "US$ Noon Buying Rate").
Such rates are set forth as United States dollars per pounds sterling and are
the inverse of rates quoted by the Federal Reserve Bank of New York for pounds
sterling per US$1.00. On February 12, 1999, the inverse of the US$ Noon Buying
Rate was (Pounds)1.00 equals US$1.63.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
High................................................... 1.64 1.62 1.71 1.69 1.72
Low.................................................... 1.46 1.53 1.51 1.60 1.61
Average rate during the period(a)...................... 1.54 1.58 1.56 1.64 1.66
Rate at period end..................................... 1.57 1.55 1.71 1.64 1.66
</TABLE>
- --------
(a) The average of the inverse of the US$ Noon Buying Rate on the last
business day of each month during the applicable period.
S-16
<PAGE>
CAPITALIZATION
The following table sets forth (1) the actual, unaudited capitalization of
Canandaigua as of November 30, 1998 and (2) the adjusted capitalization of the
Company to give pro forma effect to the Acquisition and this offering as if
they had been consummated as of November 30, 1998. See "Use of Proceeds." This
table should be read in conjunction with the unaudited Pro Forma Consolidated
Balance Sheet as of November 30, 1998, and the related notes thereto and the
separate historical financial statements and related notes thereto of
Canandaigua and Matthew Clark, all included elsewhere in this Prospectus
Supplement.
<TABLE>
<CAPTION>
As of
November 30, 1998
-----------------------
Actual Pro Forma
------ ---------
(Dollars in Millions)
<S> <C> <C>
Long term debt (including current maturities):
Revolving credit facility (a)........................ $114.5 $ 22.6
Term loan facility................................... 122.0 500.0
8 3/4% Senior Subordinated Notes due 2003 ........... 192.4 192.4
Notes offered hereby................................. -- 200.0
Other ............................................... 1.1 2.1
------ --------
Total debt......................................... 430.0 917.1
Stockholders' equity................................... 423.6 412.0
------ --------
Total capitalization............................... $853.6 $1,329.1
====== ========
</TABLE>
- --------
(a) Pro forma amount reflects borrowings under the Company's $300 million
revolving credit facility.
S-17
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Canandaigua Brands, Inc.
The following table sets forth selected financial data of Canandaigua for
each of the three fiscal years in the period ended August 31, 1995, for the
six month Transition Period ended February 29, 1996, for each of the two
fiscal years in the period ended February 28, 1998 that are derived from the
Company's audited historical financial statements. The selected financial data
of Canandaigua for each of the nine months ended November 30, 1998 and 1997,
and for the twelve months ended November 30, 1998 have been derived from the
unaudited financial statements of the Company. "Other Data" below, not
directly derived from the Canandaigua historical consolidated financial
statements, have been presented to provide additional analysis. In the opinion
of management, the unaudited data include all adjustments (consisting only of
normal recurring adjustments necessary to present fairly the data for such
periods). Results for the nine month period ended November 30, 1997 and 1998
and for the twelve months ended November 30, 1998 are not necessarily
indicative of results that can be expected in future periods). The selected
financial data below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Historical Results of Operations of the Company," "Summary Historical
Financial Data--Canandaigua Brands, Inc." and the historical financial
statements and notes thereto included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
Six Month Nine Months Twelve
Year Ended Transition Year Ended Ended Months
August 31, Period Ended February 28, November 30, Ended
---------------------- February 29, ------------------ ----------------- November 30,
1993 1994 1995 1996 1997 1998 1997 1998 1998
------ ------ ------ ------------ -------- -------- ------- -------- ------------
(Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net sales.............. $306.3 $629.6 $906.5 $ 535.0 $1,135.0 $1,212.8 $ 930.2 $1,037.9 $1,320.5
Gross profit........... 91.4 182.4 252.7 138.8 290.8 348.7 263.5 309.4 394.6
Selling, general and
administrative
expenses.............. (60.0) (121.4) (159.2) (112.4) (209.0) (231.7) (171.8) (202.6) (262.5)
Nonrecurring
restructuring
expenses.............. -- (24.0) (2.2) (2.4) -- -- -- -- --
------ ------ ------ ------- -------- -------- ------- -------- --------
Operating income....... 31.4 37.0 91.3 24.0 81.8 117.0 91.7 106.8 132.1
Interest expense, net.. (6.1) (18.1) (24.6) (17.3) (34.0) (32.1) (23.9) (23.7) (31.9)
------ ------ ------ ------- -------- -------- ------- -------- --------
Income before provision
for income taxes...... 25.3 18.9 66.7 6.7 47.8 84.9 67.8 83.1 100.2
Provision for income
taxes................. (9.7) (7.2) (25.7) (3.4) (20.1) (34.8) (27.8) (34.1) (41.1)
------ ------ ------ ------- -------- -------- ------- -------- --------
Net income............. $ 15.6 $ 11.7 $ 41.0 $ 3.3 $ 27.7 $ 50.1 $ 40.0 $ 49.0 $ 59.1
====== ====== ====== ======= ======== ======== ======= ======== ========
Other Data:
EBITDA (a)............. $ 40.1 $ 74.8 $114.2 $ 40.4 $ 113.7 $ 150.2 $ 117.5 $ 132.5 $ 165.2
EBITDA margin (b)...... 13.1% 11.9% 12.6% 7.6% 10.0% 12.4% 12.6% 12.8% 12.5%
Capital expenditures... $ 6.9 $ 7.9 $ 37.1 $ 16.1 $ 31.6 $ 31.2 $ 23.2 $ 21.7 $ 29.7
Ratio of earnings to
fixed charges (c)..... 4.4x 2.0x 3.4x 1.4x 2.3x 3.4x 3.6x 4.0x 3.7x
Balance Sheet Data (end
of period):
Working capital........ $147.3 $215.8 $226.8 $ 218.1 $ 254.4 $ 281.0 $ 241.0 $ 271.5 $ 271.5
Total assets........... 355.2 826.6 785.9 1,054.6 1,020.9 1,073.2 1,131.5 1,167.2 1,167.2
Total debt............. 129.1 339.1 228.0 479.7 436.4 425.2 476.4 430.0 430.0
Stockholders' equity... 126.1 204.2 351.9 356.5 364.7 415.2 398.7 423.6 423.6
</TABLE>
- -------
(a) EBITDA is defined as net income before interest expense, income taxes,
depreciation and amortization, non-cash charges and nonrecurring
restructuring expenses. Management believes that EBITDA is a measure
commonly used by analysts and investors to determine a company's ability
to service and incur debt. Accordingly, this information has been
presented to permit a more complete analysis. EBITDA should not be
considered as a substitute for net income or cash flow data prepared in
accordance with generally accepted accounting principles or as a measure
of profitability or liquidity.
(b) EBITDA margin is computed as EBITDA as a percentage of net sales.
(c) For purposes of calculating the ratio of earnings to fixed charges,
"earnings" represents income before provision for income tax plus fixed
charges. "Fixed charges" consist of interest expense and capitalized,
amortization of debt issuance costs, amortization of discount on debt, and
the portion of rental expense which management believes is representative
of the interest component of lease expense.
S-18
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Matthew Clark plc
The following table sets forth selected financial data of Matthew Clark for
the five years in the period ended April 30, 1998, for the six months ended
October 31, 1998 and 1997, and for the twelve months ended October 31, 1998.
The statement of income and balance sheet data for the five years in the
period ended April 30, 1998 are derived from Matthew Clark's audited
historical financial statements. The statement of income data for the six
month periods ended October 31, 1996 and 1997 have been derived from the
unaudited financial statements of Matthew Clark. "Other Data" below, not
directly derived from the historical financial statements of Matthew Clark,
have been presented to provide additional analysis. In the opinion of
management, the unaudited data include all adjustments (consisting only of
normal recurring adjustments necessary to present fairly the data for such
periods. Interim results for the six month period ended October 31, 1998 are
not necessarily indicative of results that can be expected in future periods.
The selected financial data below should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Historical Results of Operations--Matthew Clark plc," "Summary
Historical Financial Data--Matthew Clark plc" and the historical financial
statements and notes thereto included elsewhere in this Prospectus Supplement.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended April 30, October 31,
-------------------------------------------------------------------------- ----------------------------
1994 1995 1996 1997 1998 1997 1998
------------- ------------- ------------- ------------- ------------- ------------- -------------
(Pounds Sterling and Dollars in Millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement
Data:
Turnover........ (Pounds)173.7 (Pounds)299.3 (Pounds)450.9 (Pounds)570.7 (Pounds)553.1 (Pounds)272.9 (Pounds)271.6
Operating profit
(loss)......... 10.7 4.7 21.5 45.1 37.1 20.0 4.4
Profit on fixed
asset sales.... -- (15.1) (2.0) 0.4 3.7 -- 0.6
Net interest
payable and
similar
charges........ (0.4) (0.9) (2.3) (4.9) (5.0) (2.3) (2.5)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Profit (loss) on
ordinary
activities
before tax..... 10.3 (11.4) 17.2 40.6 35.8 17.7 2.5
Tax on profit
(loss) on
ordinary
activities..... (3.3) 1.7 (5.0) (12.4) (10.5) (5.1) (0.7)
------------- ------------- ------------- ------------- ------------- ------------- -------------
Profit (loss) on
ordinary
activities
after tax...... 7.0 (9.7) 12.2 28.2 25.3 12.6 1.8
Minority
interest....... (0.9) (0.4) (0.1) -- -- -- --
------------- ------------- ------------- ------------- ------------- ------------- -------------
Profit (loss)
attributable to
shareholders... (Pounds) 6.1 (Pounds)(10.1) (Pounds) 12.1 (Pounds) 28.2 (Pounds) 25.3 (Pounds) 12.6 (Pounds) 1.8
============= ============= ============= ============= ============= ============= =============
Other Data:
EBITDA (a)...... (Pounds) 12.8 (Pounds) (7.0) (Pounds) 26.6 (Pounds) 57.1 (Pounds) 54.2 (Pounds) 25.8 (Pounds) 22.0
EBITDA margin
(b)............ 7.4% (2.3)% 5.9% 10.0% 9.8% 9.5% 8.1%
Capital
expenditures... (Pounds) 6.5 (Pounds) 11.7 (Pounds) 18.4 (Pounds) 21.3 (Pounds) 31.6 (Pounds) 18.0 (Pounds) 9.3
Balance Sheet
Data (end of
period):
Working capital. (Pounds) 16.4 (Pounds) 10.4 (Pounds)(26.7) (Pounds)(29.6) (Pounds) 44.4 (Pounds) 56.1 (Pounds) 49.7
Total assets.... 99.2 193.1 299.4 287.1 284.4 316.4 280.0
Total debt...... 0.6 21.4 56.7 56.6 60.8 85.2 60.9
<CAPTION>
Twelve Months
Ended
October 31,
1998
--------------
<S> <C> <C>
Income Statement
Data:
Turnover........ (Pounds)551.8
Operating profit
(loss)......... 21.5
Profit on fixed
asset sales.... 4.3
Net interest
payable and
similar
charges........ (5.2)
--------------
Profit (loss) on
ordinary
activities
before tax..... 20.6
Tax on profit
(loss) on
ordinary
activities..... (6.1)
--------------
Profit (loss) on
ordinary
activities
after tax...... 14.5
Minority
interest....... --
--------------
Profit (loss)
attributable to
shareholders... (Pounds) 14.5
==============
Other Data:
EBITDA (a)...... (Pounds) 50.4
EBITDA margin
(b)............ 9.1%
Capital
expenditures... (Pounds) 22.9
Balance Sheet
Data (end of
period):
Working capital. (Pounds) 49.7
Total assets.... 280.0
Total debt...... 60.9
Approximate Amounts in U.S. GAAP (in U.S. $)
Income Statement
Data:
Net sales............................................................... $ 671.0 $ 332.3 $ 339.3
Gross profit............................................................ 224.3 110.5 105.9
Selling, general and administration expense............................. (180.1) (85.2) (86.9)
Nonrecurring restructuring expenses..................................... -- -- (18.3)
------------- ------------- -------------
Operating income........................................................ 44.2 25.3 0.7
Interest expense........................................................ (8.6) (4.0) (4.2)
------------- ------------- -------------
Income before income tax................................................ 35.7 21.3 (3.5)
Provision for income tax................................................ (14.8) (8.4) (1.3)
------------- ------------- -------------
Net income.............................................................. $ 20.9 $ 12.9 $ (4.8)
============= ============= =============
Other Data:
EBITDA (a).............................................................. $ 69.3 $ 42.2 $ 36.6
EBITDA margin (b)....................................................... 10.3% 12.7% 10.8%
Capital expenditures.................................................... $ 52.0 $ 29.4 $ 15.4
Twelve Months
Ended
October 31,
1998
----------------
Income Statement Data:
Net sales....................................................... $ 678.4
Gross profit.................................................... 219.9
Selling, general and administration expense..................... (181.9)
Nonrecurring restructuring expenses............................. (18.3)
-------------
Operating income................................................ 19.7
Interest expense................................................ (8.9)
-------------
Income before income tax........................................ 10.8
Provision for income tax........................................ (7.7)
-------------
Net income...................................................... $ 3.1
=============
Other Data:
EBITDA (a)...................................................... $ 63.7
EBITDA margin (b)............................................... 9.4%
Capital expenditu$res........................................... $ 38.0
</TABLE>
- -------
(a) EBITDA is defined as net income before interest expense, income taxes,
depreciation and amortization and nonrecurring restructuring expenses.
Management believes that EBITDA is a measure commonly used by analysts and
investors to determine a company's ability to service and incur debt.
Accordingly, this information has been presented to permit a more complete
analysis. EBITDA should not be considered as a substitute for net income
or cash flow data prepared in accordance with generally accepted
accounting principles or as a measure of profitability or liquidity.
(b) EBITDA margin is computed as EBITDA as a percentage of turnover or net
sales.
S-19
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following Unaudited Pro Forma Combined Financial Data of the Company are
based on, and should be read in conjunction with, the audited and unaudited
Consolidated Financial Statements of Canandaigua and Matthew Clark and the
notes thereto included elsewhere in this Prospectus Supplement, and have been
adjusted to give pro forma effect of (1) the Acquisition and (2) this offering
(the "Offering") and the application of the proceeds thereof.
The Unaudited Pro Forma Combined Statements of income for the twelve-month
periods ended February 28, 1998 and November 30, 1998 and the nine month
periods ended November 30, 1998 give effect to the Acquisition and the
Offering as if such transactions had occurred at the beginning of each period
presented. The Unaudited Pro Forma Condensed Combined Balance Sheet as of
November 30, 1998 gives effect to the Acquisition and Offering and use of
proceeds therefrom as if such transactions had occurred on such date. The pro
forma adjustments are based upon available information and certain assumptions
that the Company believes are reasonable. Other data included on the pro forma
statements of income have been presented to provide additional analysis. The
Acquisition has been accounted for using the purchase method of accounting.
Allocations of the purchase price have been determined based upon preliminary
information and estimates of fair value and are subject to change. Differences
between amounts included herein and the final allocations are not expected to
have a material effect on the Unaudited Pro Forma Combined Financial Data. The
consolidated financial statements of Matthew Clark prepared in accordance with
U.K. GAAP used in preparing the Unaudited Pro Forma Combined Financial Data
have been adjusted to present such information in accordance with U.S. GAAP
and translated into U.S. dollar equivalent financial statements. The Unaudited
Pro Forma Condensed Combined Balance Sheet data for Matthew Clark has been
translated into U.S. dollar equivalent amounts using the exchange rate in
effect at November 30, 1998. The Unaudited Pro Forma Combined Statements of
Income data for Matthew Clark have been translated into U.S. dollar equivalent
amounts using the weighted average exchange rate for the respective periods.
For further information regarding the effect, if any, of the difference
between U.K. GAAP and U.S. GAAP, see Note 26 of Matthew Clark's Consolidated
Financial Statements included elsewhere in this Prospectus Supplement. The
Unaudited Pro Forma Combined Financial Data do not purport to represent what
the Company's results of operations would have been if such events had
occurred at the dates indicated, nor do such statements purport to project the
results of the Company's operations for any future period. Pro forma financial
information we present for Canandaigua and Matthew Clark combined for the
twelve and nine months ended November 30, 1998 consists of historical actual
information of Canandaigua for the twelve and nine months ended November 30,
1998 and historical actual information of Matthew Clark for the twelve and
nine months ended October 31, 1998. Pro forma financial information we present
for Canandaigua and Matthew Clark combined for the fiscal year ended February
28, 1998 consists of historical information of Canandaigua for the fiscal year
ended February 28, 1998 and of Matthew Clark for the fiscal year ended April
30, 1998.
S-20
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of November 30, 1998
<TABLE>
<CAPTION>
Pro Forma for
Pro Forma the Acquisition
Matthew Acquisition for the Offering and the
Canandaigua Clark Adjustments Acquisition Adjustments Offering
----------- ---------- ----------- ----------- ----------- ---------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Assets
------
Current Assets:
Cash and cash
investments.......... $ 2,141 $ 12,130 $ -- $ 14,271 $ -- $ 14,271
Accounts receivable,
net.................. 173,760 137,196 -- 310,956 -- 310,956
Inventories, net...... 441,048 94,533 -- 535,581 -- 535,581
Prepaid expenses and
other current assets. 42,373 22,113 -- 64,486 -- 64,486
---------- ---------- --------- ---------- -------- ----------
Total current
assets............. 659,322 265,972 -- 925,294 -- 925,294
Property, Plant and
Equipment, net......... 247,499 151,589 13,609 (a) 412,697 -- 412,697
Other Assets............ 260,412 585,476 (320,910)(a) 522,604 4,775 (g) 527,379
1,010 (b)
(3,384)(c)
---------- ---------- --------- ---------- -------- ----------
Total assets........ $1,167,233 $1,003,037 $(309,675) $1,860,595 $ 4,775 $1,865,370
========== ========== ========= ========== ======== ==========
Liabilities and
Stockholders' Equity
--------------------
Current Liabilities:
Notes payable......... $ 114,500 $ -- $ (96,393)(d) $ 18,107 $ 4,500 (g) $ 22,607
Current maturities of
long-term debt....... 24,118 1,038 (24,000)(d) 1,156 -- 1,156
Accounts payable...... 71,379 92,685 8,919 (b) 172,983 275 (g) 173,258
Accrued excise taxes.. 24,632 14,273 -- 38,905 -- 38,905
Other accrued expenses
and liabilities...... 153,233 74,671 5,058 (b) 224,913 -- 224,913
(8,049)(c)
---------- ---------- --------- ---------- -------- ----------
Total current
liabilities........ 387,862 182,667 (114,465) 456,064 4,775 460,839
Long-term Debt, less
current maturities..... 291,386 102,008 499,992 (d) 893,386 200,000 (h) 893,386
(200,000)(h)
Deferred Income Taxes... 59,337 (8) 18,946 (e) 78,275 -- 78,275
Other Liabilities....... 5,018 15,807 -- 20,825 -- 20,825
---------- ---------- --------- ---------- -------- ----------
Total Liabilities... 743,603 300,474 404,473 1,448,550 4,775 1,453,325
Stockholders' Equity.... 423,630 702,563 (702,563)(f) 412,045 -- 412,045
(11,585)(c)
---------- ---------- --------- ---------- -------- ----------
Total Liabilities
and Stockholders'
Equity............. $1,167,233 $1,003,037 $(309,675) $1,860,595 $ 4,775 $1,865,370
========== ========== ========= ========== ======== ==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Balance Sheet
S-21
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(a) Reflects the estimated purchase accounting adjustments for the
Acquisition based upon a preliminary appraisal of the assets and liabilities
assumed. For purchase accounting, Matthew Clark assets have been recorded at
estimated fair market value subject to adjustments based upon the results of
an independent appraisal. The estimated amounts recorded for assets and
liabilities acquired from Matthew Clark are not expected to differ materially
from the final assigned values. Purchase accounting adjustments were recorded
to increase property, plant and equipment by $13,609, to increase the recorded
value of tradenames and other intangible assets acquired by $54,604 and to
reduce the recorded excess of purchase cost over fair market value of assets
acquired by $375,514. These adjustments are required to record these assets at
their estimated fair market values.
The calculation of excess purchase cost over fair value of net assets
acquired is as follows:
<TABLE>
<S> <C>
Cash paid....................................................... $362,339
Financing costs................................................. 1,010
Direct acquisition costs........................................ 8,919
--------
372,268
Liabilities assumed............................................. 5,058
--------
Total purchase cost............................................. 377,326
Net book value of Matthew Clark................................. (702,563)
Write-down of acquired goodwill................................. 532,946
Increase in appraised net assets................................ (68,213)
Finance costs capitalized....................................... (1,010)
Deferred taxes provided......................................... 18,946
--------
Excess of purchase cost over fair value of assets acquired and
liabilities assumed............................................ $157,432
========
</TABLE>
(b) Reflects the liability for direct acquisition costs of $8,919 and
assumed liabilities of $5,058. Capitalized financing costs of $1,010 were
funded through the bank credit facility.
(c) Represents the write-off of the direct financing costs of $16,250 for
the Offering and $3,384 of remaining net book value of the Company's
previously existing credit agreement, tax effected at the Company's historical
rate of 41%.
(d) To reflect the Acquisition financing, refinancing of the Company's
Revolving Credit Facility (notes payable) and Term Loans and refinancing of
Matthew Clark's long-term debt as set out below:
<TABLE>
<S> <C>
Repayment of notes payable................................... $(114,500)
Repayment of Term Loans--current portion..................... (24,000)
Repayment of Term Loans--long term........................... (98,000)
Purchase of Matthew Clark shares............................. (362,339)
Payment of financing costs................................... (17,260)
Repayment of Matthew Clark debt.............................. (102,008)
New Term Loan borrowings..................................... 700,000
New Revolver Loan borrowings................................. 18,107
---------
$ --
=========
</TABLE>
(e) Represents deferred taxes of $18,946 provided on a step-up in basis on
appraised net assets.
(f) Reflects the elimination of Matthew Clark's shareholders' equity.
(g) Represents the bank fees and other expenses associated with the
Offering.
(h) Represents the refinancing of the existing Tranche II Term Loan with the
proceeds from the Offering.
S-22
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Year Ended February 28, 1998
<TABLE>
<CAPTION>
Pro Forma for
Pro Forma the Acquisition
Matthew Acquisition for the Offering and the
Canandaigua Clark Adjustments Acquisition Adjustments Offering
----------- --------- ----------- ----------- ----------- ---------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Gross sales............. $1,632,357 $ 910,070 $ -- $ 2,542,427 $ -- $ 2,542,427
Less--Excise taxes.... (419,569) (239,045) -- 658,614 -- (658,614)
---------- --------- --------- ----------- ------- -----------
Net sales........... 1,212,788 671,025 -- 1,883,813 -- 1,883,813
Cost of product sold.... (864,053) (446,688) 1,474 (a) (1,309,268) -- (1,309,268)
---------- --------- --------- ----------- ------- -----------
Gross profit........ 348,735 224,336 1,474 574,545 -- 574,545
Selling, general and
administrative
expenses............... (231,680) (180,106) 1,723 (a) (400,111) (478)(g) (400,589)
8,801 (b)
1,151 (c)
---------- --------- --------- ----------- ------- -----------
Operating income.... 117,055 44,230 13,149 174,434 (478) 173,956
Interest expense, net... (32,189) (8,575) (35,366)(d) (76,130) (1,250)(h) (77,380)
---------- --------- --------- ----------- ------- -----------
Income before
provision for
income taxes....... 84,866 35,655 (22,217) 98,304 (1,728) 96,576
Provision for income
taxes.................. (34,795) (14,781) 10,254 (e) (39,322) 691 (e) (38,631)
---------- --------- --------- ----------- ------- -----------
Net income.............. $ 50,071 $ 20,874 $ (11,963)(f) $ 58,982 $(1,037) $ 57,945
========== ========= ========= =========== ======= ===========
Share Data:
Earnings per common
share:
Basic................. $ 2.68 -- -- -- -- $ 3.10
========== ===========
Diluted............... $ 2.62 -- -- -- -- $ 3.03
========== ===========
Weighted average common
shares outstanding:
Basic................. 18,672 -- -- -- -- 18,672
Diluted............... 19,105 -- -- -- -- 19,105
Other Data:
EBITDA................ -- -- -- -- -- $ 232,809
===========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Income
S-23
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE YEAR
ENDED FEBRUARY 28, 1998
(a) Reflects the adjusted depreciation expense related to the acquired
property, plant and equipment of Mathew Clark on the assumption that the
Acquisition had taken place on March 1, 1997. These assets have been restated
at their estimated fair market values and depreciated using the Company's
depreciation methods over the remaining useful lives of the assets. The
decrease in depreciation expense of $3,197, as compared to that recorded by
Matthew Clark, was allocated to cost of product sold and selling, general and
administrative expenses as indicated.
(b) Reflects a decrease in amortization expense of intangible assets of
$8,801 based upon their appraised values, using the straight-line method and
estimated useful lives, predominately 40 years.
(c) Reflects the amortization expense of deferred financing costs of $168
over the term of the bank credit facility used to finance the Acquisition (72
months) using the effective interest method, net of $1,319 of amortization
expense recorded under the Company's previously existing credit agreement.
(d) Reflects the additional interest expense incurred on the debt to finance
the Acquisition and the incremental interest expense on the Company's and
Matthew Clark's existing borrowings, resulting from the higher interest rate
in the bank credit facility. The overall effective interest rate was 8.8% per
annum.
(e) Reflects the tax effect of the pro forma adjustments and the
repatriation of profits, excluding the impact of nondeductible items,
primarily goodwill, using an effective tax rate of 40%.
(f) Does not reflect the extraordinary treatment for the after tax write-off
of $11.6 million ($0.61 per diluted share), representing the net book value of
bank fees resulting from the extinguishment of debt remaining under the
Company's previously existing credit agreement, tax effected at the Company's
historical rate of 41%.
(g) Represents the amortization expense related to the Offering of $4,775
over the term of the notes.
(h) Represents a change in interest expense relating to the Offering.
S-24
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Nine Month Period Ended November 30, 1998
<TABLE>
<CAPTION>
Pro Forma for
Matthew Acquisition Pro Forma for Offering the Acquisition
Canandaigua Clark(a) Adjustments the Acquisition Adjustments and the Offering
----------- -------- ----------- --------------- ----------- ----------------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Gross sales............. $1,374,183 $661,151 $ -- $2,035,334 $ -- $ 2,035,334
Less--Excise taxes..... (336,283) (167,945) -- (504,228) -- (504,228)
---------- -------- ------- ---------- ------ -----------
Net sales............ 1,037,900 493,206 -- 1,531,106 -- 1,531,106
Cost of product sold.... (728,526) (337,108) 1,404 (b) (1,064,230) -- (1,064,230)
---------- -------- ------- ---------- ------ -----------
Gross profit......... 309,374 156,098 1,404 466,876 -- 466,876
Selling, general and
administrative
expenses............... (202,561) (128,384) 1,846 (b) (321,476) (358)(h) (321,834)
6,672 (c)
951 (d)
Nonrecurring
restructuring expense.. -- (18,271) -- (18,271) -- (18,271)
---------- -------- ------- ---------- ------ -----------
Operating income..... 106,813 9,443 10,873 127,129 (358) 126,771
Interest expense, net... (23,700) (6,471) (26,627)(e) (56,798) (937)(i) (57,735)
---------- -------- ------- ---------- ------ -----------
Income before
provision for income
taxes............... 83,113 2,972 (15,754) 70,331 (1,295)(f) 69,036
Provision for income
taxes.................. (34,076) (4,205) 10,149 (f) (28,132) 518 (f) (27,614)
---------- -------- ------- ---------- ------ -----------
Net income.............. $ 49,037 $ (1,233) $(5,605)(g) $ 42,199 $ (777) $ 41,422
========== ======== ======= ========== ====== ===========
Share Data:
Earnings per common
share:
Basic................... $2.66 -- -- -- -- $ 2.25
========== ===========
Diluted................. $2.60 -- -- -- -- $ 2.19
========== ===========
Weighted average common shares
outstanding:
Basic ................. 18,412 -- -- -- -- 18,412
Diluted................ 18,881 -- -- -- -- 18,881
Other Data:
EBITDA................. -- -- -- -- -- $ 189,776
===========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Income
S-25
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE NINE
MONTHS ENDED NOVEMBER 30, 1998
(a) The financial statements of Matthew Clark for the nine month period were
derived by adding the three month period ended April 30, 1998, to Matthew
Clark's six month period ended October 31, 1998. The three month period ended
April 30, 1998, was also included in the 1998 Pro Forma Statement of Income.
Net sales and net income for the duplicated three months is $153,858 and
$3,555, respectively.
(b) Reflects the adjusted depreciation expense related to the acquired
property, plant and equipment of Matthew Clark on the assumption that the
Acquisition had taken place on March 1, 1998. These assets have been restated
at their estimated fair market values and depreciated using the Company's
depreciation methods over the remaining useful lives of the assets. The
decrease in depreciation expense of $3,250, as compared to that recorded by
Matthew Clark, was allocated to cost of product sold and selling, general and
administrative expenses as indicated.
(c) Reflects a decrease in amortization expense of intangible assets of
$6,672 based upon their appraised values, using the straight-line method and
estimated useful lives, predominately 40 years.
(d) Reflects the amortization expense of deferred financing costs of $126
over the term of the bank credit facility used to finance the Acquisition (72
months) using the effective interest method, net of $1,077 of amortization
expense recorded under the Company's previously existing credit agreement.
(e) Reflects the additional interest expense incurred on the debt to finance
the Acquisition and the incremental interest expense on the Company's and
Matthew Clark's existing borrowings, resulting from the higher interest rate
in the bank credit facility. The overall effective interest rate was 8.8% per
annum.
(f) Reflects the tax effect of the pro forma adjustments and the
repatriation of profits, excluding the impact of nondeductible items,
primarily goodwill, using an effective tax rate of 40%.
(g) Does not reflect the extraordinary treatment for the after tax write-off
of $11.6 million ($0.61 per diluted share), representing the net book value of
bank fees resulting from the extinguishment of debt remaining under the
Company's previously existing credit agreement, tax effected at the Company's
historical rate of 41%.
(h) Represents the amortization expense related to the Offering of $4,775
over the term of the notes.
(i) Represents a change in interest expense relating to the Offering.
S-26
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME
Twelve Month Period Ended November 30, 1998
<TABLE>
<CAPTION>
Pro Forma
for the
Pro Forma Acquisition
Matthew Pro Forma for the Offering and the
Canandaigua Clark(a) Adjustments Acquisition Adjustments Offering
----------- --------- ----------- ----------- ----------- -----------
(In Thousands, Except Per Share Data)
<S> <C> <C> <C> <C> <C> <C>
Gross sales............. $1,754,168 $ 915,200 $ -- $ 2,669,368 $ -- $2,669,368
Less--Excise taxes..... (433,718) (236,835) -- (670,553) -- (670,553)
---------- --------- -------- ----------- ------- ----------
Net sales............ 1,320,450 678,365 -- 1,998,815 -- 1,998,815
Cost of product sold.... (925,832) (458,493) 1,569(b) (1,382,756) -- (1,382,756)
---------- --------- -------- ----------- ------- ----------
Gross profit......... 394,618 219,872 1,569 616,059 -- 616,059
Selling, general and
administrative
expenses............... (262,469) (181,923) 1,880(b) (432,342) (478)(h) (432,820)
8,903(c)
1,267(d)
Nonrecurring
restructuring expenses. -- (18,280) -- (18,280) -- (18,280)
---------- --------- -------- ----------- ------- ----------
Operating income..... 132,149 19,669 13,619 165,437 (478) 164,959
Interest expense, net... (32,004) (8,893) (35,246)(e) (76,143) (1,250)(i) (77,393)
---------- --------- -------- ----------- ------- ----------
Income before
provision for income
taxes............... 100,145 10,776 (21,627) 89,294 (1,728) 87,566
Provision for income
taxes.................. (41,059) (7,645) 12,986 (f) (35,718) 691 (f) (35,027)
---------- --------- -------- ----------- ------- ----------
Net income.............. $ 59,086 $ 3,131 $ (8,641)(g) $ 53,576 $(1,037) $ 52,539
========== ========= ======== =========== ======= ==========
Share Data:
Earnings per common
share:
Basic................... $ 3.21 -- -- -- -- $ 2.84
========== ==========
Diluted................. $ 3.13 -- -- -- -- $ 2.77
========== ==========
Weighted average common
shares outstanding:
Basic.................. 18,412 -- -- -- -- 18,484
Diluted................ 18,881 -- -- -- -- 18,967
Other Data:
EBITDA................. -- -- -- -- -- $ 242,042
==========
</TABLE>
See Notes to Unaudited Pro Forma Combined Statement of Income
S-27
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME FOR THE TWELVE
MONTHS ENDED NOVEMBER 30, 1998
(a) The financial statements of Matthew Clark for the twelve month period
were derived by adding the six month period ended April 30, 1998 to Matthew
Clark's six month period ended October 31, 1998. The six month period ended
April 30, 1998 was also included in the 1998 Pro Forma Statement of Income.
Net sales and Net income for the duplicated six months is $339,017 and $7,919,
respectively.
(b) Reflects the adjusted depreciation expense related to the acquired
property, plant and equipment of Matthew Clark on the assumption that the
Acquisition had taken place on December 1, 1997. These assets have been
restated at their estimated fair market values and depreciated using the
Company's depreciation methods over the remaining useful lives of the assets.
The decrease in depreciation expense of $3,449, as compared to that recorded
by Matthew Clark, was allocated to cost of product sold and selling, general
and administrative expenses as indicated.
(c) Reflects a decrease in amortization expense of intangible assets of
$8,903 based upon their appraised values, using the straight-line method and
estimated useful lives, predominately 40 years.
(d) Reflects the amortization expense of deferred financing costs of $168
over the term of the bank credit facility used to finance the Acquisition (72
months) using the effective interest method, net of $1,435 of amortization
expense recorded under the Company's previously existing credit agreement.
(e) Reflects the additional interest expense incurred on the debt to finance
the Acquisition and the incremental interest expense on the Company's and
Matthew Clark's existing borrowings, resulting from the higher interest rate
in the bank credit facility. The overall effective interest rate was 8.8% per
annum.
(f) Reflects the tax effect of the pro forma adjustments and the
repatriation of profits, excluding the impact of nondeductible items,
primarily goodwill, using an effective tax rate of 40%.
(g) Does not reflect the extraordinary treatment for the after tax write-off
of $11.6 million ($0.61 per diluted share), representing the net book value of
bank fees resulting from the extinguishment of debt remaining under the
Company's previously existing credit agreement, tax effected at the Company's
historical rate of 41%.
(h) Represents the amortization expense related to the Offering of $4,775
over the term of the notes.
(i) Represents a change in interest expense relating to the Offering.
S-28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of the historical results of
operations and financial condition of Canandaigua and Matthew Clark cover
periods before completion of the Acquisition. Accordingly, the discussion and
analysis of such historical periods does not reflect the significant impact
that the Acquisition will have on the Company. See "Unaudited Pro Forma
Combined Financial Data." This discussion and analysis should be read in
conjunction with historical consolidated financial statements of Canandigua
and Matthew Clark and the related respective notes thereto included elsewhere
in this Prospectus Supplement.
Historical Results of Operations of Canandaigua
Canandaigua operates primarily in the beverage alcohol industry. Canandaigua
is principally a producer and supplier of wine and an importer and producer of
beer and distilled spirits in the United States. Canandigua's beverage alcohol
brands are marketed in three general categories: wine, beer and distilled
spirits.
Nine Months 1999 Compared to Nine Months 1998
Net Sales
The following table sets forth the net sales (in thousands of dollars) and
unit volume (in thousands of cases), if applicable, for branded beverage
alcohol products and other products and services sold by Canandaigua for the
nine months ended November 30, 1998 ("Nine Months 1999") and the nine months
ended November 30, 1997 ("Nine Months 1998").
<TABLE>
<CAPTION>
Nine Months 1999 Compared to Nine Months 1998
-------------------------------------------------------
(in Thousands)
Net Sales Unit Volume
Branded ------------------------------ ------------------------
Beverage Alcohol %Increase/
Products: 1999 1998 (Decrease) 1999 1998 % Increase
- ---------------- ---------- -------- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Wine.......................... $ 420,726 $400,891 4.9% 21,340 20,961 1.8%
Beer.......................... 388,739 298,601 30.2% 30,906 23,796 29.9%
Spirits....................... 157,485 153,093 2.9% 7,677 7,644 0.4%
Other(a)...................... 70,950 77,653 (8.6%) N/A N/A N/A
---------- -------- ---- ------ ------ ----
$1,037,900 $930,238 11.6% 59,923 52,401 14.4%
========== ======== ==== ====== ====== ====
</TABLE>
- --------
(a) Other consists primarily of nonbranded concentrate sales, contract
bottling and other production services and bulk product sales, none of
which are sold in case quantities.
Net sales for Nine Months 1999 increased to $1,037.9 million from $930.2
million for Nine Months 1998, an increase of $107.7 million, or 11.6%. This
increase resulted primarily from (1) $90.1 million of additional beer sales,
largely Mexican beers, and (2) $19.8 million of additional wine sales,
resulting primarily from the introduction of new wine brands. Unit volume for
branded beverage alcohol products for Nine Months 1999 increased 14.4% as
compared to Nine Months 1998. The unit volume increase was primarily the
result of the increased sales of Canandaigua's beer brands, mostly Mexican
beer.
Gross Profit
Canandaigua's gross profit increased to $309.4 million for Nine Months 1999
from $263.5 million for Nine Months 1998, an increase of $45.9 million, or
17.4%. As a percent of net sales, gross profit increased to 29.8% for Nine
Months 1999 from 28.3% for Nine Months 1998. The dollar increase in
S-29
<PAGE>
gross profit resulted primarily from additional beer unit volume, introduction
of new wine brands, higher average selling prices related to wine sales and
unit cost improvements in wine and spirits brands.
In general, the preferred method of accounting for inventory valuation is
the last-in, first-out method ("LIFO") because, in most circumstances, it
results in a better matching of costs and revenues. For comparison purposes to
companies using the first-in, first-out method of accounting for inventory
valuation ("FIFO") only, gross profit reflected a reduction of $1.6 million
and $1.1 million in Nine Months 1999 and Nine Months 1998, respectively, due
to Canandaigua's LIFO accounting method.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $202.6 million for
Nine Months 1999 from $171.8 million for Nine Months 1998, an increase of
$30.8 million, or 17.9%. The dollar increase in selling, general and
administrative expenses resulted principally from higher advertising costs
associated with Canandaigua's wine sales, primarily the introduction of new
wine brands, and increased beer sales, and higher promotion costs related to
both programs implemented to improve Canandaigua's wine sales and the growth
in beer sales. Selling, general and administrative expenses as a percent of
net sales increased to 19.5% for Nine Months 1999 as compared to 18.5% for
Nine Months 1998. The increase in percent of net sales resulted primarily from
advertising costs associated with the introduction of new wine brands and
promotion costs related to programs implemented to improve Canandaigua's wine
sales.
Net Income
As a result of the above factors, net income increased to $49.0 million for
Nine Months 1999 from $40.0 million for Nine Months 1998, an increase of $9.0
million, or 22.5%.
For financial analysis purposes only, Canandaigua's earnings before
interest, taxes, depreciation and amortization ("EBITDA") were $132.5 million,
an increase of $15.0 million over EBITDA of $117.5 million for Nine Months
1998. EBITDA should not be construed as an alternative to operating income or
net cash flow from operating activities and should not be construed as an
indication of operating performance or as a measure of liquidity.
Fiscal 1998 Compared to Fiscal 1997
Net Sales
The following table sets forth the net sales (in thousands of dollars) and
unit volume (in thousands of cases), if applicable, for branded beverage
alcohol products and other products and services sold by Canandaigua for the
fiscal year ended February 28, 1998 ("Fiscal 1998") and the fiscal year ended
February 28, 1997 ("Fiscal 1997").
<TABLE>
<CAPTION>
Fiscal 1998 Compared to Fiscal 1997
---------------------------------------------------------
(in Thousands)
Net Sales Unit Volume
Branded -------------------------------- ------------------------
Beverage Alcohol %Increase/
Products: 1998 1997 (Decrease) 1998 1997 % Increase
- ---------------- ---------- ---------- ---------- ------ ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Wine.......................... 533,257 512,510 4.0% 27,793 27,393 1.5%
Beer.......................... 376,607 298,925 26.0% 30,016 23,848 25.9%
Spirits....................... 200,276 183,843 8.9% 9,930 9,390 5.8%
Other(a)...................... 102,648 139,735 (26.5%) N/A N/A N/A
---------- ---------- ----- ------ ------ ----
$1,212,788 $1,135,013 6.9% 67,739 60,631 11.7%
========== ========== ===== ====== ====== ====
</TABLE>
- --------
(a) Other consists primarily of nonbranded concentrate sales, contract
bottling and other production services and bulk product sales, none of
which are sold in case quantities.
S-30
<PAGE>
Net sales for Fiscal 1998 increased to $1,212.8 million from $1,135.0
million for Fiscal 1997, an increase of $77.8 million, or 6.9%. This increase
resulted primarily from (1) $77.7 million of additional beer sales, largely
Mexican beer, (2) $22.5 million of additional table wine sales and (3) $16.4
million of additional spirits sales. These increases were partially offset by
lower sales of grape juice concentrate, bulk wine and other branded wine
products. Although table wine sales have increased, Canandaigua has
experienced a market share decline of its wine products during Fiscal 1998, a
trend which has continued into fiscal 1999. Canandaigua is implementing
various programs to address the decline, such as addressing noncompetitive
consumer prices of its wine products on a market-by-market basis as well as
increasing its promotional activities where appropriate.
Gross Profit
Canandaigua's gross profit increased to $348.7 million for Fiscal 1998 from
$290.8 million for Fiscal 1997, an increase of $57.9 million, or 19.9%. As a
percent of net sales, gross profit increased to 28.8% for Fiscal 1998 from
25.6% for Fiscal 1997. The dollar increase in gross profit resulted primarily
from increased beer sales, higher average selling prices and cost structure
improvements related to branded wine sales, higher average selling prices in
excess of cost increases related to grape juice concentrate sales and higher
average selling prices and increased volume related to branded spirits sales.
These increases were partially offset by lower sales volume of grape juice
concentrate and bulk wine.
In general, the preferred method of accounting for inventory valuation is
LIFO because, in most circumstances, it results in a better matching of costs
and revenues. For comparison purposes to companies using FIFO for inventory
valuation only, gross profit reflected an addition of $5.0 million in Fiscal
1998 and a reduction of $31.4 million in Fiscal 1997 due to Canandaigua's LIFO
accounting method.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $231.7 million for
Fiscal 1998 from $209.0 million for Fiscal 1997, an increase of $22.7 million,
or 10.9%. The dollar increase in selling, general and administrative expenses
resulted principally from marketing and selling costs associated with
Canandaigua's increased branded sales volume, and a one-time charge for
separation costs related to an organizational change within Canandaigua.
Selling, general and administrative expenses as a percent of net sales
increased to 19.1% for Fiscal 1998 as compared to 18.4% for Fiscal 1997. The
increase in percent of net sales resulted from the one-time charge for
separation costs related to an organizational change within Canandaigua and
from a change in the sales mix driven by an increase in net sales of branded
products, which have a higher percent of marketing and selling cost relative
to sales, partially offset by a decrease in net sales of nonbranded products,
which have relatively little associated marketing and selling costs.
Interest Expense, Net
Net interest expense decreased to $32.2 million for Fiscal 1998 from $34.1
million for Fiscal 1997, a decrease of $1.9 million, or 5.5%. The decrease was
primarily due to a decrease in Canandaigua's average borrowings which was
partially offset by an increase in the average interest rate.
Provision For Federal And State Income Taxes
Canandaigua's effective tax rate for Fiscal 1998 decreased to 41.0% from
42.1% for Fiscal 1997 as Fiscal 1997 reflected a higher effective tax rate in
California caused by statutory limitations on Canandaigua's ability to utilize
certain deductions.
S-31
<PAGE>
Net Income
As a result of the above factors, net income increased to $50.1 million for
Fiscal 1998 from $27.7 million for Fiscal 1997, an increase of $22.4 million,
or 80.9%.
For financial analysis purposes only, Canandaigua's EBITDA for Fiscal 1998
were $150.2 million, an increase of $36.5 million over EBITDA of $113.7
million for Fiscal 1997. 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.
Fiscal 1997 Compared to Transition Fiscal 1996
Net Sales
Net sales for Fiscal 1997 increased to $1,135.0 million from $987.1 million
for the period from March 1, 1995 to February 29, 1996 ("Transition Fiscal
1996"), an increase of $147.9 million, or 15.0%. This increase resulted from
(1) $59.1 million of additional imported beer sales, primarily Mexican beer;
(2) the inclusion of $49.0 million of net sales of products and services from
the UDG Acquisition during the period from March 1, 1996, through August 31,
1996; (3) $22.7 million of higher sales of grape juice concentrate; (4) $19.4
million of increased net sales of Canandaigua's varietal table wine products
(wine named for the grape that comprises the principal component of the wine)
resulting from selling price increases implemented between October 1995 and
May 1996, as well as additional unit volume; and (5) $5.8 million of
additional sales of spirits brands; partially offset by $5.2 million of
decreased sales of Canandaigua's nonvarietal table wine brands (wine named
after the European regions where similar types of wine were originally
produced (e.g., burgundy), niche products and proprietary brands) and a
decrease of $2.9 million in sales of other products and services.
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
spirits acquired in the UDG Acquisition have been included for the period from
March 1, 1995, through August 31, 1995, which was prior to the UDG
Acquisition.
The following table sets forth the net sales (in thousands of dollars) and
unit volume (in thousands of cases), if applicable, for branded beverage
alcohol products and other products and services sold by Canandaigua for
Fiscal 1997 and Transition Fiscal 1996.
<TABLE>
<CAPTION>
Fiscal 1997 Compared to Transition Fiscal 1996
---------------------------------------------------------
(in Thousands)
Net Sales Unit Volume
Branded ------------------------------- -------------------------
Beverage Alcohol % Increase/
Products: 1997 1996 %Increase 1997 1996 (Decrease)
- ---------------- ---------- ---------- --------- ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C>
Wine.................... 512,510 499,962 2.5% 27,393 28,232 (3.0%)
Beer.................... 298,925 239,786 24.7% 23,848 19,344 23.3%
Spirits(a).............. 183,843 178,803 2.8% 9,390 9,223 1.8%
Other(b)................ 139,735 110,047 27.0% N/A N/A N/A
---------- ---------- ---- ------ ------ ----
$1,135,013 $1,028,598 10.3% 60,631 56,799 6.7%
========== ========== ==== ====== ====== ====
</TABLE>
- --------
(a) For comparison purposes only, net sales of $41,514 and unit volume of
2,001 cases of distilled spirits brands acquired in the September 1, 1995,
UDG Acquisition have been included in the table for the twelve months
ended February 29, 1996. These amounts represent net sales and unit volume
of those brands for the period March 1, 1995, through August 31, 1995,
which was prior to the UDG Acquisition.
(b) Other consists primarily of nonbranded concentrate sales, contract
bottling and other production services and bulk product sales, none of
which are sold in case quantities.
S-32
<PAGE>
Net sales and unit volume for Fiscal 1997 increased 10.3% and 6.7%,
respectively, as compared to Transition Fiscal 1996. The net sales increase
resulted from higher imported beer sales, higher sales of grape juice
concentrate, price increases on most of Canandaigua's branded wine products,
particularly varietal table wine brands, and increased sales of Canandaigua's
spirits brands. Unit volume increases were led by substantial growth in
Canandaigua's imported beer brands and increases in its varietal table wine
and spirits brands, partially offset by declines in unit volume of nonvarietal
table wine, dessert wine and sparkling wine. Excluding the impact of the UDG
Acquisition, net sales and unit volume increased by 10.7% and 7.1%,
respectively. Net sales of the brands acquired in the UDG Acquisition
decreased by 1.2% and unit volume increased by 2.5% in Fiscal 1997. Net sales
declines reflected the impact of downward selling price adjustments to bring
these brands more in line with the pricing strategy of the rest of the
Company's spirits portfolio.
Gross Profit
Canandaigua's gross profit increased to $290.8 million in Fiscal 1997 from
$264.8 million in Transition Fiscal 1996, an increase of $26.1 million, or
9.8%. This change in gross profit resulted primarily from (1) $20.5 million of
gross profit from sales generated during the period from March 1, 1996,
through August 31, 1996, from the business acquired from UDG; (2) $19.0
million of additional gross profit from increased beer sales; and (3) $13.4
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 at Canandaigua's Mission Bell winery in California, partially
offset by additional net sales resulting primarily from selling price
increases of Canandaigua's branded wine and grape juice concentrate products
and a reduction of certain long-term grape contracts to reflect current market
prices and the renegotiation of certain unfavorable contracts. Canandaigua's
increased production costs stemmed from low bulk wine conversion rates and
bottling inefficiencies. Canandaigua also experienced high imported
concentrate and bulk freight costs. Canandaigua has instituted a series of
steps to address these matters, including a reengineering effort to redesign
its work processes, organizational structure and information systems.
Gross profit as a percentage of net sales was 25.6% for Fiscal 1997 as
compared to 26.8% in Transition Fiscal 1996. 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 Canandaigua's branded wine and grape juice concentrate products.
Canandaigua has experienced significant increases in its cost of grapes in
both the 1995 and 1996 harvests. Canandaigua believes that these increases in
grape costs were due to an imbalance in supply and demand in the varieties
which Canandaigua purchases.
In general, the preferred method of accounting for inventory valuation is
LIFO because, in most circumstances, it results in a better matching of costs
and revenues. For comparison purposes to companies using FIFO for inventory
valuation only, gross profit reflected a reduction of $31.4 million and $3.9
million in Fiscal 1997 and Transition Fiscal 1996, respectively, due to
Canandaigua's LIFO accounting method.
Selling, General And Administrative Expenses
Selling, general and administrative expenses for Fiscal 1997 were $209.0
million, an increase of $17.3 million as compared to Transition Fiscal 1996.
Of this amount, $13.5 million was due primarily to increased personnel and
related expenses stemming from the Company's reengineering efforts, including
the continued strengthening of the Company's management, and other expenses
consistent with the Company's growth; and $11.3 million related to the UDG
Acquisition. These items were offset primarily by one-time costs incurred in
advertising and promotion expenses in Transition Fiscal 1996 due to the change
in Canandaigua's fiscal year-end.
S-33
<PAGE>
Nonrecurring Restructuring Expenses
Transition Fiscal 1996 included $4.0 million of nonrecurring restructuring
expenses.
Interest Expense, Net
Net interest expense totaled $34.1 million in Fiscal 1997, an increase of
$5.3 million as compared to Transition Fiscal 1996, 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 Fiscal 1997 was 42.1% as compared to
40.5% for Transition Fiscal 1996 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 above factors, net income for Fiscal 1997 was $27.7
million, an increase of $3.7 million as compared to Transition Fiscal 1996.
For financial analysis purposes only, the Company's EBITDA for Fiscal 1997
were $113.7 million, an increase of $22.6 million over EBITDA of $91.1 million
in Transition Fiscal 1996. 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.
Historical Results of Operations of Matthew Clark
Matthew Clark is a leading United Kingdom-based producer and distributor of
beverage alcohol. Matthew Clark is the leading independent beverage supplier
to the on-premises trade, the number one branded boxed wine distributor, the
second largest cider producer, the number one branded distributor of fortified
British wines and the number one producer of sparkling bottled water within
the United Kingdom.
Six Months Ended October 31, 1998 Compared to Six Months Ended October 31,
1997
Turnover
Turnover for the six months ended October 31, 1998 decreased by 0.5% to
(Pounds)271.6 million from (Pounds)272.9 million for the six months ended
October 31, 1997. The decrease in turnover was principally due to the
discontinuation of premium beer sales as of April 30, 1998 resulting in a
(Pounds)10.0 million decrease, partially offset by (i) a (Pounds)5.1 million
increase in sales of wines and water, resulting from an increase in sales of
Stowells of Chelsea wines and Strathmore bottled water and (ii) an increase of
(Pounds)12.4 million in wholesale turnover resulting from increased investment
in sales personnel and operational capacity.
Operating Profit
Excluding an exceptional charge of (Pounds)11.0 million related to the
rationalization of production facilities, operating profit for the six months
ended October 31, 1998 decreased by 23% to (Pounds)15.4 million from
(Pounds)20.0 million for the six months ended October 31, 1997. The decrease
was primarily attributable to (i) an increase in advertising and promotion
expense of (Pounds)5.0 million, principally for cider brands, and (ii) an
increase in selling, general and administrative expenses reflecting the hiring
of additional sales personnel in the wholesale division. The decrease was
partially offset by an increase in operating profit of the wholesale division
resulting from higher turnover.
S-34
<PAGE>
Fiscal Year Ended April 30, 1998 Compared to Fiscal Year Ended April 30, 1997
Turnover
Turnover for the fiscal year ended April 30, 1998 decreased by 3.1% to
(Pounds)553.1 million from (Pounds)570.7 million for the fiscal year ended
April 30, 1997. The decrease was primarily attributable to a general decline
in the cider market coupled with the loss of certain cider distributors, in
addition to a decline in demand for fortified wines and other light British
wines. The decrease in turnover was partially offset by a 13% or (Pounds)5.5
million increase in the turnover of the Stowells of Chelsea branded wine. The
decrease was further offset by an increase of 4.7% or (Pounds)10.1 million in
wholesale turnover.
Operating Profit
Operating profit for the fiscal year ended April 30, 1998 decreased by 17.7%
to (Pounds)37.1 million from (Pounds)45.1 million for the fiscal year ended
April 30, 1997. The decrease was primarily attributable to a decline in sales
and increased advertising expenses related to cider brands. The decrease was
partially offset by an increase in operating profit in the wholesale division
relating to higher turnover.
Fiscal Year Ended April 30, 1997 Compared to Fiscal Year Ended April 30, 1996
Turnover
Turnover for the fiscal year ended April 30, 1997 increased by 27% to
(Pounds)570.7 million from (Pounds)450.9 million for the fiscal year ended
April 30, 1996. The increase was primarily attributable to the acquisitions of
Taunton Cider, Griersons and Dunn & Moore, each completed during the second
half of the prior fiscal year, and each of which was included in turnover for
the full twelve months of fiscal 1997. The inclusion of a full twelve months
of Taunton's turnover accounted for 23% of the increase in turnover in the
brands division.
Operating Profit
Excluding an exceptional charge of (Pounds)22.4 million related to the
reorganization of the company's newly acquired businesses and of the wholesale
business, operating profit for the fiscal year ended April 30, 1997 increased
by 2.7% to (Pounds)45.1 million from (Pounds)43.9 million for the fiscal year
ended April 30, 1996. The increase was primarily attributable to increased
operating profit at the wholesale division due to a larger sales force which
increased turnover and lowered costs through a reduction in the number of
depots operated. The increase was partially offset by a (Pounds)3.1 million
decrease in cider sales due to a 13% decline in the volume of cider sales.
Financial Liquidity and Capital Resources of the Company
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.
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Nine Months 1999 Cash Flows
Operating Activities
Net cash provided by operating activities for Nine Months 1999 was $59.3
million, which resulted from $72.3 million in net income adjusted for noncash
items, less $12.9 million representing the net change in operating assets and
liabilities. The net change in operating assets and liabilities resulted
primarily from seasonal increases in inventories and accounts receivable,
partially offset by an increase in liabilities for grapes purchased.
Investing Activities and Financing Activities
Net cash used in investing activities for Nine Months 1999 was $22.3
million, which resulted primarily from $21.7 million of capital expenditures,
including $6.1 million for vineyards.
Net cash used in financing activities for Nine Months 1999 was $36.1
million, which resulted primarily from repurchases of $44.9 million of
Canandaigua's Class A Common Stock, principal payments of $18.1 million of
long-term debt, partially offset by additional borrowings of $22.6 million of
notes payable.
During June 1998, Canandaigua's Board of Directors authorized the repurchase
of up to $100.0 million of its Class A Common Stock and Class B Common Stock.
The repurchase of shares of common stock will be accomplished, from time to
time, depending upon market conditions, through open market or privately
negotiated transactions. Canandaigua may finance such repurchases through cash
generated from operations or through the bank credit agreement. In July 1998,
the revolving loan facility under the bank credit agreement was increased by
$100.0 million to $285.0 million in order to increase its flexibility to make
such purchases. As of December 21, 1998, Canandaigua had purchased 1,018,836
shares of Class A Common Stock at an aggregate cost of $44.9 million, or at an
average cost of $44.05 per share.
Debt
Total debt outstanding as of November 30, 1998, amounted to $430.0 million,
an increase of $4.8 million from February 28, 1998, resulting primarily from
the net proceeds from revolving loan borrowings, partially offset by principal
payments of long-term debt. The ratio of total debt to total capitalization
decreased to 50.4% as of November 30, 1998, from 50.6% as of February 28,
1998.
As of November 30, 1998, under its bank credit agreement, Canandaigua had
outstanding term loans of $122.0 million bearing interest at 6.0%, $114.5
million of revolving loans bearing interest at 5.7%, undrawn revolving letters
of credit of $7.8 million, and $162.7 million in revolving loans available to
be drawn. During June 1998, the bank credit agreement was amended to, among
other things, eliminate the requirement that Canandaigua reduce the
outstanding balance of the revolving loan facility to less than $60.0 million
for thirty consecutive days during the six months ending each August 31.
As of November 30, 1998, Canandaigua had outstanding $195.0 million
aggregate principal amount of 8 3/4% Senior Subordinated Notes due December
2003. The notes are unsecured and subordinated to the prior payment in full of
all senior indebtedness of Canandaigua, which includes the bank credit
agreement. The notes are guaranteed, on a senior subordinated basis, by
substantially all of Canandaigua's operating subsidiaries.
On December 14, 1998, Canandaigua, its principal operating subsidiaries
(other than Matthew Clark and its subsidiaries), and the Syndicate Banks, for
which The Chase Manhattan Bank acts as administrative agent, entered into a
credit agreement, effective as of November 2, 1998 (the "1998
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Credit Agreement"). The 1998 Credit Agreement includes both US Dollar and
Pound Sterling commitments of the Syndicate Banks of up to, in the aggregate,
the equivalent of $1.0 billion (subject to increase as therein provided to
$1.2 billion) with the proceeds available for repayment of all outstanding
principal and accrued interest on all loans under Canandaigua's bank credit
agreement dated as of December 19, 1997, payment of the purchase price for the
Matthew Clark shares, repayment of Matthew Clark's credit facilities, funding
of permitted acquisitions, payment of transaction expenses and ongoing working
capital needs of the Company. See "Description of the Senior Credit
Facilities."
The 1998 Credit Agreement provides for a $350.0 million Tranche I Term Loan
facility due in December 2004, a $200.0 million Tranche II Term Loan facility
due in June 2000, a $150.0 million Tranche III Term Loan facility due in
December 2005, and a $300.0 million Revolving Credit facility (including
letters of credit up to a maximum of $20.0 million) which expires in December
2004. Portions of the Tranche I Term Loan facility and the Revolving Credit
facility are available for borrowing in Pounds Sterling.
Capital Expenditures
During Fiscal 1998, Canandaigua spent $31.2 million for capital
expenditures, including $11.5 million related to vineyards. Matthew Clark
spent $52 million for capital expenditures in the fiscal year ended April 30,
1998. During fiscal 1999 Canandaigua will spend approximately $25.0 million
for capital expenditures, exclusive of vineyards. Capital expenditures for the
Company for fiscal 2000 are expected to be approximately $55.0 million. In
addition, the Company continues to consider the purchase, lease and
development of vineyards. See "Business--Sources and Availability of Raw
Materials". The Company may incur additional expenditures for vineyards if
opportunities become available. Management reviews the capital expenditure
program periodically and modifies it as required to meet current business.
Commitments
Canandaigua has agreements with suppliers to purchase various spirits and
blends of which certain agreements are denominated in British pounds sterling.
The future obligations under these agreements, based upon exchange rates at
February 28, 1998, aggregate approximately $23.4 million to $40.9 million for
contracts expiring through December 2005.
At February 28, 1998, Canandaigua had no open currency forward contracts.
Canandaigua's use of such contracts is limited to the management of currency
rate risks related to purchases denominated in a foreign currency. As of
October 31, 1998, Matthew Clark had approximately $9.5 million in outstanding
currency exchange contracts. The Company's strategy is to enter into currency
exchange contracts that are matched to specific purchases and not to enter
into any speculative contracts.
Effects Of Inflation and Changing Prices
Canandaigua's results of operations and financial condition have not been
significantly affected by inflation and changing prices other than grape
costs. Canandaigua has discussed the impact of increases in grape prices above
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations." Canandaigua has been able, subject to normal competitive
conditions, to pass along rising costs through increased selling prices.
Accounting Pronouncement
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes
accounting and reporting standards for derivative instruments,
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including certain derivative instruments embedded in other contracts,
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires that every derivative be recorded as either an asset or liability
in the balance sheet measured at its fair value. SFAS No. 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. Special accounting for
qualifying hedges allows a derivative's gains and losses to offset related
results on the hedged item in the income statement, and requires that a
company formally document, designate and assess the effectiveness of
transactions that receive hedge accounting. Canandaigua is required to adopt
SFAS No. 133 on a prospective basis for interim periods and fiscal years
beginning March 1, 2000. Canandaigua believes the effect of adoption on its
financial statements will not be material.
Year 2000 Issue
The Company has in place detailed programs to address Year 2000 readiness in
its internal systems and with its key customers and suppliers. The Year 2000
issue is the result of computer logic that was written using two digits rather
than four to define the applicable year. Any computer logic that processes
date-sensitive information may recognize the date using "00" as the year 1900
rather than the year 2000, which could result in miscalculations or system
failures.
Pursuant to the Company's readiness programs, all major categories of
information technology systems and non-information technology systems (i.e.,
equipment with embedded microprocessors) in use by the Company, including
manufacturing, sales, financial and human resources, are being inventoried and
assessed. In addition, plans are being developed for the required systems
modifications or replacements. With respect to its information technology
systems, the Company has completed the entire assessment phase and
approximately 60% of the remediation phase. With respect to its non-
information technology systems, the Company has completed approximately 90% of
the assessment phase and approximately 55% of the remediation phase. Selected
areas, both internal and external, will be tested to assure the integrity of
the Company's remediation programs. The testing is expected to be completed by
September 1999. The Company plans to have all internal mission-critical
information technology and non-information technology systems Year 2000
compliant by September 1999.
The Company is also communicating with its major customers, suppliers and
financial institutions to assess the potential impact on the Company's
operations if those third parties fail to become Year 2000 compliant in a
timely manner. While this process is not yet complete, based upon responses to
date, it appears that many of those customers and suppliers have only
indicated that they have in place Year 2000 readiness programs, without
specifically confirming that they will be Year 2000 compliant in a timely
manner. Risk assessment, readiness evaluation, action plans and contingency
plans related to the Company's significant customers and suppliers are
expected to be completed by September 1999. The Company's key financial
institutions have been surveyed and it is the Company's understanding that
they are or will be Year 2000 compliant on or before December 31, 1999.
The costs incurred to date related to its Year 2000 activities have not been
material to the Company, and, based upon current estimates, the Company does
not believe that the total cost of its Year 2000 readiness programs will have
a material adverse impact on the Company's results of operations or financial
condition.
The Company's readiness programs also include the development of contingency
plans to protect its business and operations from Year 2000-related
interruptions. These plans should be complete by September 1999 and, by way of
examples, will include back-up procedures, identification of alternate
suppliers, where possible, and increases in inventory levels. Based upon the
Company's current assessment of its non-information technology systems, the
Company does not believe it necessary to
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develop an extensive contingency plan for those systems. There can be no
assurances, however, that any of the Company's contingency plans will be
sufficient to handle all problems or issues which may arise.
The Company believes that it is taking reasonable steps to identify and
address those matters that could cause serious interruptions in its business
and operations due to Year 2000 issues. However, delays in the implementation
of new systems, a failure to fully identify all Year 2000 dependencies in the
Company's systems and in the systems of its suppliers, customers and financial
institutions, a failure of such third parties to adequately address their
respective Year 2000 issues, or a failure of a contingency plan could have a
material adverse effect on the Company's business, financial condition and
results of operations. For example, the Company would experience a material
adverse impact on its business if significant suppliers of beer, glass or
telecommunications systems fail to timely provide the Company with necessary
inventories or services due to Year 2000 systems failures.
The statements set forth herein concerning Year 2000 issues which are not
historical facts are forward-looking statements that involve risks and
uncertainties that could cause actual results to differ materially from those
in the forward-looking statements. In particular, the costs associated with
the Company's Year 2000 programs and the time-frame in which the Company plans
to complete Year 2000 modifications are based upon management's best
estimates. These estimates were derived from internal assessments and
assumptions of future events. These estimates may be adversely affected by the
continued availability of personnel and system resources, and by the failure
of significant third parties to properly address Year 2000 issues. Therefore,
there can be no guarantee that any estimates, or other forward-looking
statements will be achieved, and actual results could differ significantly
from those contemplated.
Euro Conversion Issues
Effective January 1, 1999, 11 of the 15 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 significant adverse material effect on the
Company's business and operations.
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INDUSTRY
Global
The global beverage alcohol market consists of a relatively small number of
major brand producers and marketers, and a very large group of often
nonbranded products that are produced and consumed in selected regions. The
business is extremely fragmented. Beverage alcohol consumption has increased
slightly in recent years, providing growth opportunities for marketers with
established brands and good distribution capabilities. This has led to
consolidation in the beverage alcohol industry as providers attempt to gain a
size advantage in the fragmented market. It is expected that further mergers
or alliances will follow as other competitors try to increase their brand
portfolio and distribution strength.
United States
The beverage alcohol industry in the United States consists of suppliers,
wholesalers and retailers. Over the past five years there has been increasing
consolidation at the supplier, wholesaler and, in certain markets, retailer
tiers of the beverage alcohol industry. As a result, it has become
advantageous for certain suppliers to expand their portfolio of brands through
acquisitions and internal development in order to take advantage of economies
of scale and to increase their importance to a more limited number of
wholesalers and, in certain markets, retailers. During the 1990s, the overall
per capita consumption of beverage alcohol products in the United States has
declined slightly; however, consumption of table wine, in particular varietal
table wine, and imported beer has increased during the period.
The following table sets forth the industry unit volume for shipments of
beverage alcohol products in the three product lines in which the Company
participates in the United States. Data shown is for the five years ended
December 31, 1997:
<TABLE>
<CAPTION>
Industry Data 1997 1996 1995 1994 1993
------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Wine (a)(b)..................................... 213.7 208.9 197.5 193.0 188.6
Imported Beer (c)............................... 194.9 171.8 156.0 144.5 127.4
Distilled Spirits (b)........................... 138.7 138.8 137.3 140.0 144.2
</TABLE>
- --------
(a) Includes domestic and imported table, sparkling and dessert wine, wine
coolers and vermouth.
(b) Units are in millions of 9-liter case equivalents (2.378 gallons per
case).
(c) Units are in millions of 2.25 gallon cases.
Wine. From 1993 to 1997, shipments of wine in the United States increased at
an average compound annual growth rate of 3%. In 1997, wine shipments
increased by 2% when compared to 1996, led by increased shipments of table
wine (wine containing 14% or less alcohol by volume). Table wine accounted for
88% of the total United States wine market in 1997. The Company believes the
increase in the table wine consumption may be due in part to published
reports, over recent years, from a number of sources, citing the health
benefits of moderate wine consumption.
Imported Beer. Shipments of imported beer have increased at an average
compound annual growth rate of 11% from 1993 to 1997. Shipments of Mexican
beer in 1997 increased 34% over 1996 as compared to an increase of 13% for the
entire imported beer category. Shipments of imported beer as a percentage of
the United States beer market increased 7.4% in 1997 from 6.6% in 1996.
Imported beer, along with microbrews and super-premium priced domestic beer,
is generally priced above the leading domestic premium brands.
Distilled Spirits. Although shipments of distilled spirits in the United
States declined at an average compound annual growth rate of 1% from 1993 to
1997, certain types of distilled spirits, such as vodka, rum, tequila and
brandy have increased. In 1997, shipments of distilled spirits declined by
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0.5% from 1996. The Company believes shipments of certain types of distilled
spirits may have been negatively affected by concerns about drinking and
driving and a shift in consumer preference toward lower alcohol or lighter
tasting products like imported beer and varietal table wine, sales of which
have grown substantially during the period from 1993 to 1997.
United Kingdom
Total beverage alcohol sales in the United Kingdom for 1997 were estimated
to be approximately (Pounds)24.6 billion. Since 1976, beverage alcohol sales
have grown at a compound annual growth rate of 0.3%. The U.K. beverage alcohol
market can be separated into two distribution channels: on-premises and off-
premises. On-premises distribution channels include hotels, restaurants, pubs,
wine bars and clubs. Off-premises distribution channels include multiple
grocers, convenience retail, cash & carry and wholesalers. Of the total
beverage alcohol sales in the United Kingdom, approximately (Pounds)17.3
billion came from the on-premises market and approximately (Pounds)7.3 billion
came from the off-premises market.
The overall beverage market in the United Kingdom has been virtually flat in
real terms. Cider and wine have recently won share in the beverage alcohol
market at the expense of beer and spirits.
Cider. The cider market is segmented into two categories: fashion and
mainstream ciders. Fashion ciders compete primarily against premium lagers,
flavored beverage alcohol products known as "alcopops," spirit mixed drinks
and other high alcohol long drinks, and not against other ciders. This cider
segment is especially popular among the 18 to 24 age groups, and requires
extensive advertising and promotional campaigns. Retailers and distributors
are often able to command higher price points for fashion ciders compared to
mainstream brands, due to the perceived image and quality with the consumer.
The mainstream cider market appears to be on a long-term growth trend,
facing only the second downturn in approximately 25 years. Reduced marketing
by cider producers and distributors has resulted in lower growth rates during
the past few years. Since 1983, cider sales have grown at a compound annual
growth rate of approximately 4%.
Wine. Since 1978, the U.K. wine market has experienced a compounded annual
growth rate of approximately 4%. The wine market can be separated into three
different categories: (1) table wines, which are sold under brand names to the
on- and off-premises markets and include the boxed wine category; (2)
fortified British wines, which are primarily sold to the off-premises market;
and (3) light wines, which are primarily sold to the off-premises market.
Wholesale. The overall beverage alcohol wholesale market in the United
Kingdom is more than (Pounds)10.2 billion in size, with approximately 137,000
on-premises outlets located throughout the region. Brewers and wholesalers
provide a variety of beer, wine, cider, spirits and other beverages where
purchasing decisions are driven by price, quality and customer service.
Brewers dominate the supply of beer to all on-premises customer segments as
they are able to offer the outlets lower prices and larger volume
distributions.
Bottled Water. The total U.K. bottled water market rose by 13% in 1997 to
895 million liters. This represents an annual consumption per capita of just
18 liters, compared with an average 100 liters per capita in the rest of
Europe.
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BUSINESS
Canandaigua Brands, Inc. is a leading producer and marketer of branded
beverage alcohol products in the United States and the United Kingdom.
According to available industry data, the Company ranks as the second largest
supplier of wine, the second largest importer of beer and the fourth largest
supplier of distilled spirits in the United States. The acquisition of Matthew
Clark has established the Company as a leading beverage alcohol wholesaler in
the United Kingdom and as a leading British producer of hard cider, wine and
bottled water. The Company's best selling brands in North America and the
United Kingdom include:
. Wine: Inglenook, Almaden, Paul Masson, Arbor Mist, Manischewitz, Taylor,
Marcus James, Estate Cellars, Vina Santa Carolina, Dunnewood, Mystic
Cliffs, Cook's, Richards Wild Irish Rose and Stowells of Chelsea
. Beer: Corona Extra, Corona Light, St. Pauli Girl, Modelo Especial,
Pacifico, Tsingtao, Negra Modelo, Peroni, Double Diamond, Point and
Tetley's English Ale
. Distilled Spirits: Fleischmann's, Barton, Paul Masson Grande Amber, Mr.
Boston, Canadian LTD, Ten High, Montezuma, Inver House, Chi-Chi's
Prepared Cocktails and Monte Alban
. Cider: Blackthorn, Diamond White, K, and Gaymer's Olde English
. Bottled Water: Strathmore
The Company, which was founded in 1945, has aggressively pursued growth in
recent years through acquisitions, brand development and new distribution
agreements. The acquisition of Matthew Clark continued a series of strategic
acquisitions made by the Company since 1991 by which it has diversified its
offerings and increased its annual net sales. The Company has also achieved
internal growth by developing new products and repositioning existing brands
to focus on growing sectors of the beverage alcohol industry. The Company
increased net sales from $177 million in fiscal 1991 to $1,213 million for
fiscal 1998, and, including the results of Matthew Clark, to $1,999 million
for the twelve months ended November 30, 1998.
The Company markets and sells branded products to more than 850 wholesale
distributors in the United States. The Company is also the United Kingdom's
leading independent beverage supplier to the on-premises trade, distributing
its own branded products and those of other companies to more than 17,000 on-
premises establishments in the United Kingdom. The Company operates 20
production facilities in the United States and the United Kingdom and
purchases product for resale from other producers.
Competitive Strengths
According to industry data, in 1997 the Company had a 16% share of the
market for domestic wines, a 14% share of the imported beer market and a 9%
share of the distilled spirits market in the United States. In the United
Kingdom, the Company had a 35% share of the market for cider and a 10% share
of the market for bottled sparkling water. The Stowells of Chelsea boxed wine
brand has a 63% and a 41% market share in the on-premises and off-premises
branded segments, respectively.
Many of the Company's brands are leaders in their respective categories in
the United States, including Corona Extra, the largest selling imported beer
brand; Almaden and Inglenook, the fifth and seventh largest selling table wine
brands; Richards Wild Irish Rose, the largest selling dessert wine brand;
Cook's champagne, the second largest selling sparkling wine brand;
Fleischmann's, the fourth largest blended whiskey and fourth largest
domestically bottled gin; Montezuma, the second largest selling tequila brand;
and Monte Alban, the largest selling mezcal brand. In the United Kingdom,
Blackthorn is the second largest selling on-premises draft cider, and Gaymer's
Olde English is the second largest cider brand in the take-home market.
Strathmore is the leading brand of sparkling bottled water in the United
Kingdom, and Stowells of Chelsea is the leading brand of boxed wine.
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Through product line extensions and acquisitions the Company has diversified
its product mix and improved profitability by reducing reliance on any one
product category and stressing growing categories of imported beers and
varietal wines. The Company's portfolio of beers imported into the United
States is growing at a compound annual growth rate of 25% versus 10% for the
overall imported beer industry from 1994 through 1997. The Company's spirits
portfolio experienced a 6% growth rate in fiscal 1998 versus a flat rate for
the overall spirits industry. In addition, the Company has successfully
revitalized acquired brands previously in decline, increasing average gross
profit per case. For example, in the United States the average gross profit
per case of wine increased from $4.61 to $5.16 during the three years ending
with fiscal 1998, and the average per case of spirits increased from $6.89 to
$8.57 over the same period.
The Company has one of the most experienced management teams in the beverage
alcohol industry. The executive officers of the Company have an average of 14
years with Canandaigua Brands or Matthew Clark and an average of 18 years in
the beverage alcohol industry.
The Matthew Clark Acquisition
Effective December 1, 1998, the Company acquired control of Matthew Clark
which has grown substantially in the 1990s through a series of strategic
acquisitions, including Grants of St. James in 1993, the Gaymer Group in 1994
and Taunton Cider Co. in 1995. These acquisitions served to solidify Matthew
Clark's position within its key markets and contributed to an increase in net
sales to approximately $671 million for fiscal 1998. Matthew Clark has
developed a number of leading market positions, including positions as the
leading independent beverage supplier to the on-premises trade, the number one
producer of branded boxed wine, the number one branded producer of fortified
British wines, the number one branded bottler of sparkling water and the
number two producer of cider.
Matthew Clark's brands and production business includes the manufacture and
distribution of Matthew Clark-branded products and the contract manufacturing
of the products of other companies. Matthew Clark's branded business is
comprised of five general categories: cider, light wines and perry, fortified
British wines, table wines and bottled water. Its leading brands include the
prominent Blackthorn and Gaymer's Olde English cider brands, Stowells of
Chelsea (the United Kingdom's most recognized table wine brand), Strathmore
(the United Kingdom's leading sparkling bottled water brand), and a number of
other cider, light wine, fortified British wine, and table wine brands. Its
leading brands include:
. Cider: Blackthorn, Diamond White, K, Gaymer's Olde English
. Wines: Country Manor, Concorde, Rougemont, QC, Stone's, Stowells of
Chelsea
. Bottled Water: Strathmore
Matthew Clark's wholesale business involves the distribution of third party-
produced beverages, as well as Matthew Clark's own branded products,
throughout the United Kingdom. Matthew Clark has more than 17,000 on-premises
accounts to which it distributes beverage alcohol and soft drinks.
The Company believes that its acquisition of Matthew Clark will provide the
Company with substantial opportunities for growth due to current trends and
ongoing fundamental changes in the British beverage alcohol industry and
Mathew Clark's competitive strengths.
Major British brewers are focusing upon their core activities of beer making
and distribution, having retrenched from the vertical integration previously
achieved through brewer owned pubs (i.e., tied houses). The Company believes
this increase in wholesale distribution provides independent wholesalers such
as Matthew Clark with growth potential exceeding that of the underlying
beverage alcohol industry. According to industry data, per capita wine
consumption in the United Kingdom has increased more than 25% from 1988
through 1997. Industry analysts forecast this growth to continue at an annual
rate of approximately 6% per annum for the foreseeable future. The boxed wine
category
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continues to outperform the overall wine market, with Matthew Clark's Stowells
of Chelsea maintaining a leading share in the branded boxed wine segment. The
U.K. cider market has grown at a compounded annual growth rate of
approximately 4% since 1983 according to industry data, despite a recent
downturn attributed generally to under-investment in advertising by the major
cider producers and distributors, competition from alternative beverage
alcohol products (which appear to have peaked) and duty increases. The Company
believes that renewed advertising and marketing investment by Matthew Clark
and other producers will bring the segment's performance in line with
historical growth rates.
Matthew Clark is a leader in each of the markets in which it competes.
Matthew Clark is the leading independent beverage supplier to the on-premises
trade and is strategically positioned with a broad range of products,
extensive product knowledge and a one-stop shop approach. Matthew Clark is one
of only three independent wholesalers that has a national network equipped
with systems to facilitate order placement, invoicing and inventory
management. Within the British wine market, Matthew Clark's Stowells of
Chelsea is the leading boxed wine brand with market share of 63% and 41% in
the on-premises and off-premises markets, respectively. In recent years, the
Stowells of Chelsea brand has grown at a greater rate than the overall market,
a trend the Company expects to continue. Matthew Clark also maintains more
than a 20% market share in fortified British wines through its QC and Stone's
brand names. Matthew Clark is currently the second largest producer of cider
in the United Kingdom with more than 34% of the market. It sells its products
under its Blackthorn, Gaymer's Olde English and Diamond White brand names.
Matthew Clark is the number one producer and marketer of sparkling water in
the United Kingdom. Sparkling water volume, of which Matthew Clark maintains a
10% share, currently accounts for approximately 30% of the total bottled water
market.
Prior Acquisitions
The Company made a series of significant acquisitions between 1991 and 1995,
commencing with the acquisition of the Cook's, Cribari, Dunnewood and other
wine brands and related wine production facilities in 1991. In 1993, the
Company diversified into the imported beer and distilled spirits categories by
acquiring Barton Incorporated, through which the Company acquired distribution
rights with respect to Corona, St. Pauli Girl, and other imported beer brands,
and the Barton, Ten High, Montezuma, and other distilled spirits brands. Also
in 1993, the Company acquired the Paul Masson, Taylor California Cellars and
other wine brands and related production facilities. In 1994, the Company
acquired Almaden, Inglenook and other brands, a grape juice concentrate
business and related facilities. In 1995, the Company acquired the Mr. Boston,
Canadian LTD, Skol, Old Thompson, Kentucky Tavern, Glenmore and di Amore
distilled spirits brands; the rights to the Fleischmann's and Chi-Chi's
distilled spirits brands under long-term license agreements; the U.S. rights
to the Inver House, Schenley and El Toro distilled spirits brands; and related
production facilities and assets.
Through these acquisitions, the Company has become more competitive by
diversifying its portfolio, developing strong market positions in the growing
beverage alcohol product categories of varietal table wine (wine named for the
grape that comprises the principal component of the wine) and imported beer;
strengthening its relationship with wholesalers; expanding its distribution
and enhancing its production capabilities; and acquiring additional
management, operational, marketing and research and development expertise.
Business Strategy
The Company's business strategy is to increase sales and profitability
through disciplined management of its existing product portfolio and
aggressive pursuit of internal and external growth opportunities. Elements of
this strategy include effectively managing its brand portfolio, the
introduction of product line extensions and pursuing attractive acquisition
opportunities.
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The Company seeks to maximize the profitability of its brand portfolio by
focusing on segments growing at a faster pace than the industry average. For
example, the Company's portfolio of beers imported into the United States have
grown at a three-year compound annual growth rate of 26% through 1997 compared
to 10% for the overall imported beer industry. The spirits portfolio
experienced a 6% growth rate in 1998 versus a flat rate for the overall
domestic spirits industry. The Company actively manages the price/volume
relationship of certain brands on a local basis to maximize profits without
negatively affecting market share, as well as supporting existing brands
through aggressive marketing.
The Company believes that brand name recognition of its principal products
enables the Company to introduce product line extensions to generate
additional growth and to gain market share. In accordance with this strategy
the Company is using the well-known Almaden wine name to expand the Company's
presence in the growing box wine market in the United States by offering an
increasing number of blends, including proprietary red wine blends designed to
increase the size of the wine market by appealing to consumers with
preferences for lighter-tasting red wines. The Company is leveraging the top-
ranked position of the Stowells of Chelsea boxed wine brand in the U.K. by
introducing Stowells of Chelsea wine in smaller bottles, encouraging consumers
to try a variety of blends. Also,the Company intends to continue to use the
Chi-Chi's prepared cocktails product line to introduce new flavors designed to
capitalize in changing consumer tastes.
The Company is focusing on a number of categories in which there is
demonstrated growth potential in an existing market, or where the Company has
identified market segments that it believes are under-served by products
currently available in the market. The Company continues to build distribution
of Arbor Mist, a line of fruit-flavored varietal wines that the Company
introduced in June 1998. The Company shipped more than 1.7 million cases of
Arbor Mist in its first eight months. The Company has established Riverland
Vineyards as a vehicle to develop and launch brands in the premium wine
category. The first brand, Mystic Cliffs, was introduced in retail stores
beginning in August 1998. The Company is increasing advertising support for
Corona Extra imported beer to continue the brand's sales momentum. The Company
has established its wholesale business in the U.K. as the leading independent
beverage supplier to the on-premises trade.
The Company expects that strategic acquisitions will continue to be a major
component of its growth strategy. In addition to the six major acquisitions,
including Mathew Clark, completed by Canandaigua since 1991, Matthew Clark has
completed eight acquisitions of its own. This combination of experience and
expertise, along with an established reputation for success in business
combinations within the industry, gives the Company a solid platform from
which to pursue future acquisitions. The Company expects to continue to seek
acquisitions that offer complementary product lines, geographic scope and
additional distribution channels. Potential acquisitions the Company might
consider include premium wine assets and higher margin spirits brands.
Product Lines
The Company produces, packages, markets and imports beverage alcohol and
related products in five principal product lines: wine (primarily table wine),
beer (primarily imported beer), distilled spirits, cider, and other products.
The Company is the second largest supplier of wine in the United States and
the largest supplier of wine in the United Kingdom. The Company sells table
wines, dessert wines, sparkling wines, light wines and fortified British
wines.
Most of the Company's wines are marketed in the popularly-priced segments of
the market. The Company has an increasing share both in the United States and
in the United Kingdom in the growing boxed wine segment of the market with its
Almaden and Stowells of Chelsea brands. Sales of the Company's table wines,
which make up most of its unit volume, have generally increased in the
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periods shown, more than offsetting the lack of growth in the Company's sales
of dessert wines, fortified wines and light British wines. Varietal wine sales
have increased in conjunction with the Company's introduction of additional
varietal wine products and a general change in consumer preference from
nonvarietal wines to varietal wines.
The Company is the second largest marketer of imported beer in the United
States. The Company distributes five of the top 25 imported beer brands in the
United States: Corona Extra, Modelo Especial, Corona Light, St. Pauli Girl and
Pacifico. The Company's other imported beer brands include Negra Modelo from
Mexico, Tsingtao from China, Peroni from Italy and Double Diamond and Tetley's
English Ale from the United Kingdom. The Company also operates the Stevens
Point Brewery, a regional brewer located in Wisconsin, which produces Point
Special, among other brands. See "--Trademarks and Distribution Agreements."
Net sales and unit volume of the Company's beer brands have grown since
1995, primarily as a result of the increased sales of Corona and the Company's
other Mexican beer brands. Net sales and unit volume increased 26% for the
twelve-month period ended February 28, 1998 compared to the twelve-month
period ended February 28, 1997. This sales growth helped Corona Extra become
the number one imported beer nationwide.
The Company is the fourth largest supplier of distilled spirits in the
United States. The Company produces, bottles, imports and markets a
diversified line of quality distilled spirits, and also exports distilled
spirits to approximately 20 countries from the United States. The Company's
principal distilled spirits brands include Fleischmann's, Barton, Paul Masson
Grande Amber, Mr. Boston, Canadian LTD, Ten High, Montezuma, Inver House, Chi-
Chi's prepared cocktails and Monte Alban. Substantially all of the Company's
spirits unit volume consists of products marketed in the price value segment.
For Fiscal 1998, net sales and unit volume of distilled spirits brands sold
by the Company increased 9% and 5%, respectively, compared to Fiscal 1997.
Unit volume of vodka, tequila, brandy, bourbon whiskey and Canadian whisky
have increased while blended whiskey, Scotch whisky and gin have experienced
decreases in unit volume.
The Company is the second leading producer and marketer of cider in the
United Kingdom, with over 35% of the market. The Company distributes its cider
brands to both the on-premises and off-premises markets and these brands
compete in both the mainstream and fashion brand categories. The Company
generates approximately 65% of its cider sales from the off-premises sector.
Mainstream cider brands compete mainly with other cider brands and mainstream
lagers. Fashion cider brands compete with fashion lager brands and a myriad of
other bottled beverage alcohol.
The Company's leading mainstream cider brands include Blackthorn and
Gaymer's Olde English. Blackthorn is the number two mainstream cider brand and
maintains approximately a 30% share in the on-premises draft category.
Gaymer's Olde English is the UK's second largest cider brand in the take-home
market. The Company's leading premium cider brands include Diamond White and
K. Management has recently relaunched these premium brands and has instituted
a competitive advertising campaign to increase share. Diamond White, with an
alcohol volume of 8.4%, is the Company's leading premium cider brand sold in
the on-premises packaged market. Other cider brands include Autumn Gold, Ice
Dragon, Addlestones, Special Vat, Cidermaster and Old Somerset.
The Company's cider sales declined in fiscal 1998, reflecting an overall
market decline and losses of distribution in the previous year. Sales improved
in the second half of the fiscal year as a result of market price adjustments
and increased marketing support.
The Company is the premier independent distributor in the beverage alcohol
market in the United Kingdom and has one of the largest customer bases in the
United Kingdom, with more than 17,000
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on-premises accounts. The Company is a one-stop shop independent wholesaler
with a broad and strong portfolio of branded wines, spirits, ciders, beers and
soft drinks. The Company's wholesaling business involves the distribution of
beverage alcohol and soft drinks. These products are primarily produced by
third parties, and to a certain extent these products include the Company's
cider and wine branded products.
The Company's wholesale business sells predominately to on-premises
customers. The Company's branded products are sold to both on-premises and
off-premises customers. Some of these branded products are distributed to on-
premises customers through the Company's wholesale business. On-premises
distribution channels include hotels, restaurants, pubs, wine bars and clubs.
The off-premises distribution channels include grocers, convenience retail,
cash & carry and wholesalers.
With approximately 137,000 on-premises outlets located throughout the United
Kingdom, the Company has historically focused its distribution efforts towards
on-premises beverage alcohol retail outlets generally unaffiliated with the
major U.K. brewers. This segment is approximately $3.5 billion in size with
more than 72,000 outlets that are comprised of hotels, restaurants, bars and
clubs. This highly fragmented category, in which customer service and a broad
product range play important roles in customer preference, is also less
strategic to the major brewers since these outlets tend to order in smaller
volumes.
With the major brewers having retrenched into core activities of brewing and
distribution, opportunities have been created for independent wholesalers such
as the Company. The major brewers have been divesting tenanted pubs to focus
on their managed estate pubs. Therefore, outlets formerly affiliated with
brewers for the supply of all types of beverages are becoming more accessible
to wholesalers, especially for products other than beer. Wholesalers are
ideally suited to meet the needs of independent beverage alcohol
establishments, while brewers are increasingly focused on large volume sales
of beer to major customers, including to pubs that they own.
Management believes the Company is well positioned to enter these previously
inaccessible outlets that will now result in an increase in the Company's
target market size from $2.7 billion to $7.8 billion. The Company is
strategically positioned to exploit the increased size of its addressable
market with its broad product range, extensive product knowledge and a one-
stop shop approach. The Company is one of only three independent wholesalers
that have a national network with systems that facilitate order placement,
invoicing and inventory management. The Company has twelve distribution
centers located throughout the United Kingdom that provide for timely and
efficient deliveries to its customers.
Other Products And Related Services: The Company produces and markets
Strathmore bottled water in the United Kingdom, the leading bottled sparkling
water brand in the country. As a related part of its U.S. wine business, the
Company is one of the leading grape juice concentrate producers in the United
States. Grape juice concentrate competes with other domestically produced and
imported fruit-based concentrates. The Company's other wine-related products
and services include bulk wine; grape juice; St. Regis, a leading nonalcoholic
line of wine in the United States; cooking wine; and wine for the production
of vinegar. The Company also sells distilled spirits in bulk and provides
contract production and bottling services for third parties. The Company also
believes that the volume of its purchases provides it with favorable pricing
from manufacturers.
Marketing and Distribution
United States. The Company's products are distributed and sold throughout
the United States through over 850 wholesalers, as well as through state
alcoholic beverage control agencies. The Company employs a full-time, in-house
marketing, sales and customer service organization of
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approximately 415 people to develop and service its sales to wholesalers and
state agencies. The Company's sales force is organized into a beer division, a
spirits division and a wine division. The Company believes that the
organization of its sales force into separate divisions positions it to
maintain a high degree of focus on each of its principal product categories.
The Company's marketing strategy places primary emphasis upon promotional
programs directed at its broad national distribution network, and to the
retailers served by that network. The Company has extensive marketing programs
for its brands including promotional programs on both a national basis and
regional basis in accordance with the strength of the brands, point-of-sale
materials, consumer media advertising, event sponsorship, market research,
trade advertising and public relations.
During the Company's 1999 fiscal year, the Company increased its advertising
expenditures to put more emphasis on consumer advertising for certain wine
brands, including newly introduced brands, and for its imported beer brands,
primarily Mexican brands. In addition, promotional spending for the Company's
wine brands increased to address competitive factors.
United Kingdom. The Company's branded products are distributed throughout
the United Kingdom. Once the products are packaged at one of the three
production facilities, shipments are then made to the Company's national
distribution center for branded products. From there, all branded products are
then distributed to either the on-premises or off-premises markets with some
of the sales to on-premises customers made through the Company's wholesale
business.
The Company employs a full-time, in-house marketing and sales organization
of approximately 50 people that target off-premises customers for the
Company's branded products. This team has recently relaunched the Blackthorn
and Diamond White brands as well as introduced new products including Autumn
Gold and Stone's Cream Liqueur. The Company's top ten off-premises customers
represent approximately 67% of the total off-premises sales.
The Company employs a full-time, in-house branded products marketing and
sales organization of approximately 270 people that service specifically the
on-premises market in the United Kingdom. The potential on-premises market for
the Company consists of more than 137,000 customers nationwide for both the
wholesale and branded products businesses. The Company's branded products
sales force targets all 137,000 customers, exclusive of 23,000 pubs owned and
managed by brewers. The Company's wholesale business primarily targets on-
premises beverage alcohol retail outlets generally unaffiliated with the major
U.K. brewers. The Company's branded products business generated approximately
(Pounds)102 million in gross sales to on-premises customers for the period
ended April 30, 1998.
Trademarks and Distribution Agreements
The Company's products are sold under a number of trademarks, most of which
are owned by the Company.
The Company also produces and sells wine and distilled spirits products
under exclusive license or distribution agreements. Significant agreements
include (1) a long-term license agreement with Nabisco Brands Company (which
expires in 2008 and automatically renews for successive additional 20-year
terms unless canceled by the Company) for the Fleischmann's spirits brands;
(2) a long-term license agreement with Hiram Walker & Sons, Inc. (which
expires in 2116) for the Ten High, Crystal Palace, Northern Light and Imperial
Spirits brands; and (3) a long-term license agreement with the B. Manischewitz
Company (which expires in 2042) for the Manischewitz brand of kosher wines.
The Company also has other less significant license and distribution
agreements related to the sale of wine and distilled spirits with terms of
various durations.
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All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products.
These agreements have terms that vary and prohibit the Company from importing
other beer from the same country. The Company's agreement to distribute Corona
and its other Mexican beer brands exclusively throughout 25 primarily Western
states expires in December 2006 and, subject to compliance with certain
performance criteria, continued retention of certain Company personnel and
other terms under the agreement, will be automatically renewed for additional
terms of five years. The Company's agreement for the importation of St. Pauli
Girl expires in 2003, subject to compliance with certain performance criteria.
The Company's agreement for the exclusive importation of Tsingtao throughout
the entire United States expires in December 1999 and, subject to compliance
with certain performance criteria and other terms under the agreement, will be
automatically renewed until December 2002. Prior to their expiration, these
agreements may be terminated if the Company fails to meet certain performance
criteria. The Company believes it is currently in compliance with its material
imported beer distribution agreements. From time to time, the Company has
failed, and may in the future fail, to satisfy certain performance criteria in
its distribution agreements. Although there can be no assurance that its beer
distribution agreements will be renewed, given the Company's long-term
relationships with its suppliers, the Company expects that such agreements
will be renewed prior to their expiration and does not believe that these
agreements will be terminated.
The Company owns the trademarks for most of the brands that it acquired in
the Acquisition. The Company has a series of distribution agreements and
supply agreements in the United Kingdom related to the sale of its products
with varying terms and durations.
Competition
The beverage alcohol industry is highly competitive. The Company competes on
the basis of quality, price, brand recognition and distribution. The Company's
beverage alcohol products compete with other alcoholic and nonalcoholic
beverages for consumer purchases, as well as shelf space in retail stores and
marketing focus by the Company's wholesalers. The Company competes with
numerous multinational producers and distributors of beverage alcohol
products, many of which have significantly greater resources than the Company.
In the United States, the Company's principal competitors include E & J Gallo
Winery and The Wine Group in the wine category; Heineken USA, Molson Breweries
USA, Labatt's USA and Guinness Import Company in the imported beer category;
and Jim Beam Brands and Heaven Hill Distilleries, Inc. in the distilled
spirits category. In the United Kingdom, the Company's principal competitors
include Halwood Vinters in the wine category; H.P. Balmer in the cider
category; and Buxton Water, Highland Spring and Perrier in the sparkling
bottled water category. In connection with its wholesale business, the Company
distributes the branded wines of third parties that compete directly against
its own wine brands.
Production
In the United States, the Company's wine is produced from several varieties
of wine grapes grown principally in California and New York. The grapes are
crushed at the Company's wineries and stored as wine, grape juice or
concentrate. Such grape products may be made into wine for sale under the
Company's brand names, sold to other companies for resale under their own
labels, or shipped to customers in the form of juice, juice concentrate,
unfinished wine, high-proof grape spirits or brandy. Most of the Company's
wine is bottled and sold within 18 months after the grape crush. The Company's
inventories of wine, grape juice and concentrate are usually at their highest
levels in November and December, immediately after the crush of each year's
grape harvest, and are substantially reduced prior to the subsequent year's
crush.
The bourbon whiskeys, domestic blended whiskeys and light whiskeys marketed
by the Company are primarily produced and aged by the Company at its
distillery in Bardstown, Kentucky, though it may
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from time to time supplement its inventories through purchases from other
distillers. At its Albany, Georgia, facility, the Company produces all of the
neutral grain spirits and whiskeys used by it in the production of vodka, gin
and blended whiskey sold by it to customers in the state of Georgia. The
Company's requirements of Canadian and Scotch whiskies, and tequila, mezcal,
and the neutral grain spirits used by it in the production of gin and vodka
for sale outside of Georgia, and other spirits products, are purchased from
various suppliers.
The Company operates four facilities in the United Kingdom that produce,
bottle and package cider, wine and water. To produce Stowells of Chelsea,
wines are imported in bulk from various countries such as Chile, Argentina,
South Africa, and Australia, which are then packaged at the Company's facility
at Bristol and distributed to the on-premises and off-premises market under
the Stowells of Chelsea brand name. The Strathmore brand of bottled water,
which is available in still, sparkling, and flavored varieties, is bottled and
sourced in the Royal Burgh of Forfar, Scotland. Cider production is being
consolidated at the Company's facility at Shepton Mallet, where apples of many
different varieties are purchased from primarily U.K. growers, crushed, and
the juice is fermented into cider.
Sources and Availability of Raw Materials
The principal components in the production of the Company's branded beverage
alcohol products are packaging materials, primarily glass; grapes; and other
agricultural products, such as grain.
The Company utilizes glass and PET bottles and other materials, such as
caps, corks, capsules, labels and cardboard cartons, in the bottling and
packaging of its products. Glass bottle costs are one of the largest
components of the Company's cost of product sold. The glass bottle industry is
highly concentrated with only a small number of producers. The Company has
traditionally obtained, and continues to obtain, its glass requirements from a
limited number of producers. The Company has not experienced difficulty in
satisfying its requirements with respect to any of the foregoing and considers
its sources of supply to be adequate. However, the inability of any of the
Company's glass bottle suppliers to satisfy the Company's requirements could
adversely affect the Company's operations.
Most of the Company's annual grape requirements are satisfied by purchases
from each year's harvest, which normally begins in August and runs through
October. Costs per ton for grapes in the fall 1995 and fall 1996 grape
harvests escalated dramatically. Costs per ton for grapes in the fall 1997 and
fall 1998 grape harvests decreased slightly as compared to the previous years'
grape harvests. The Company believes that it has adequate sources of grape
supplies to meet its sales expectations. However, in the event demand for
certain wine products exceeds expectations, the Company could experience
shortages.
The Company purchases grapes from over 700 independent growers, principally
in the San Joaquin Valley and Monterey regions of California and in New York
State. The Company enters into written purchase agreements with a majority of
these growers on a year-to-year basis. The Company currently owns or leases
under various arrangements approximately 4,200 acres of vineyards, either
fully bearing or under development, in California and New York. This acreage
supplies only a small percentage of the Company's total needs. The Company
continues to consider the purchase or lease of additional vineyards, and
additional land for vineyard plantings, to supplement its grape supply.
The distilled spirits manufactured by the Company require various
agricultural products, neutral grain spirits and bulk spirits. The Company
fulfills its requirements through purchases from various sources, through
contractual arrangements and through purchases on the open market. The Company
believes that adequate supplies of the aforementioned products are available
at the present time.
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Government Regulation
The Company's operations in the United States are subject to extensive
federal and state regulation. These regulations cover, among other matters,
sales promotion, advertising and public relations, labeling and packaging,
changes in officers or directors, ownership or control, distribution methods
and relationships, and requirements regarding brand registration and the
posting of prices and price changes. All of the Company's facilities are also
subject to federal, state and local environmental laws and regulations and the
Company is required to obtain permits and licenses to operate its facilities.
In the United Kingdom, the Company has secured a Customs and Excise License
to carry on its excise trade. Licenses are required for all premises where
wine is produced. The Company holds a license to act as an excise warehouse
operator. Registrations have been secured for the production of cider and
bottled water. Formal approval of product labeling is not required.
The Company believes that it is in compliance in all material respects with
all applicable governmental laws and regulations and that the cost of
administration and compliance with such laws and regulations does not have,
and is not expected to have, a material adverse impact on the Company's
financial condition or results of operations.
Employees
The Company had approximately 2,500 full-time employees in the United States
at the end of Fiscal 1998 and Fiscal 1997. As of February 28, 1998,
approximately 1,030 employees were covered by collective bargaining
agreements. Additional workers may be employed by the Company during the grape
crushing season. The Company considers its employee relations generally to be
good. The Company had approximately 1,800 full-time employees in the United
Kingdom at the end of its fiscal year 1998. As of April 30, 1998,
approximately 400 of the U.K. employees were covered by collective bargaining
agreements. Additional workers may be employed during the peak season.
Employee relations are generally considered to be good.
Properties
United States. The Company currently operates ten wineries, two distilling
plants, one of which includes bottling operations, three bottling plants and a
brewery, most of which include warehousing and distribution facilities on the
premises. All of these facilities are owned by the Company other than a winery
in Batavia, New York and a bottling plant in Carson, California, each of which
is leased. The Company considers its principal facilities to be the Mission
Bell winery in Madera, California; the Canandaigua, New York winery; the
Monterey Cellars winery in Gonzales, California; the distilling and bottling
facility located in Bardstown, Kentucky; and the bottling facility located in
Owensboro, Kentucky.
In New York, the Company operates three wineries located in Canandaigua,
Naples and Batavia. The Company currently operates seven winery facilities in
California. The Mission Bell winery is a crushing, wine production, bottling
and distribution facility and a grape juice concentrate production facility.
The Monterey Cellars winery is a crushing, wine production and bottling
facility. The other wineries operated in California are located in Escalon,
Madera, Fresno and Ukiah. The Company currently owns or leases under various
arrangements approximately 4,200 acres of vineyards, either fully bearing or
under development, in California and New York.
The Company operates five facilities that produce, bottle and store
distilled spirits. It owns a distilling, bottling and storage facility in
Bardstown, Kentucky, and a distilling and storage facility in Albany, Georgia,
and operates bottling plants in Atlanta, Georgia; Owensboro, Kentucky; and
Carson,
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California. The Carson plant is operated through an arrangement involving an
ongoing management contract and a recently expired sublease, which is in the
process of being renewed. The Carson plant receives distilled spirits in bulk
from Bardstown and outside vendors, which it bottles and distributes. The
Company also performs contract bottling at the Carson plant. The Bardstown
facility distills, bottles and warehouses distilled spirits products for the
Company's account and on a contractual basis for other participants in the
industry. The Owensboro facility bottles and warehouses distilled spirits
products for the Company's account and performs contract bottling. The
Company's Atlanta, Georgia facility bottles, for itself and on a contract
basis, and its Albany, Georgia facility distills, for its own account, vodka,
gin and blended whiskeys.
The Company owns a brewery in Stevens Point, Wisconsin, where it produces
and bottles Point beer and brews and packages on a contract basis for a
variety of brewing and other food and beverage industry members.
The Company maintains its corporate headquarters in offices leased in
Fairport, New York, and maintains its wine division headquarters in offices
owned in Canandaigua, New York, where it also leases additional office space.
The Company also leases office space in Chicago, Illinois for its Barton
headquarters.
The Company believes that all of its facilities are in good condition and
working order and have adequate capacity to meet its needs for the foreseeable
future.
United Kingdom. The Company currently operates four facilities that produce,
bottle and package cider, wine and water. These principal facilities are
located in Shepton Mallot, Taunton, Bristol and Strathmore and produced more
than 32 million cases of product during fiscal year 1998. By the end of May
1999, the Company expects to complete the consolidation of Taunton into its
Shepton Mallet facility. In February 1998, the Company began the first
deliveries from its National Distribution Centre located in Avonmouth. To
support its wholesaling business, the Company operates thirteen distribution
centers located throughout the United Kingdom. Recent consolidations have
resulted in a reduction from 26 locations.
The Company believes that all of its facilities are in good condition and
working order and have adequate capacity to meet its needs for the foreseeable
future.
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.
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MANAGEMENT
The following table sets forth information with respect to the current
executive officers and directors of the Company:
<TABLE>
<CAPTION>
Name Age Office Held
---- --- -----------
<S> <C> <C>
Marvin Sands............ 75 Chairman of the Board
Richard Sands........... 47 President, Chief Executive Officer and Director
Robert Sands............ 40 Chief Executive Officer, International, Executive Vice President,
General Counsel and Director
Peter Aikens............ 60 President and Chief Executive Officer of Matthew Clark
Daniel C. Barnett....... 49 President and Chief Executive Officer of Canandaigua Wine
Company, Inc.
Alexander L. Berk....... 48 President and Chief Executive Officer of Barton Incorporated
Thomas S. Summer........ 44 Senior Vice President and Chief Financial Officer
George Bresler.......... 74 Director
James A. Locke, III..... 57 Director
Thomas C. McDermott..... 62 Director
Bertram E. Silk......... 67 Director
Paul L. Smith........... 63 Director
</TABLE>
Marvin Sands is the founder of the Company, which is the successor to a
business he started in 1945. He has been a director of the Company and its
predecessor since 1946 and was Chief Executive Officer until October 1993.
Marvin Sands is the father of Richard Sands and Robert Sands.
Richard Sands, Ph.D., has been employed by the Company in various capacities
since 1979. He was elected Executive Vice President and a director in 1982,
became President and Chief Operating Officer in May 1986 and was elected Chief
Executive Officer in October 1993. He is a son of Marvin Sands and the brother
of Robert Sands.
Robert Sands was appointed Chief Executive Officer, International in
December 1998 and was appointed Executive Vice President and General Counsel
in October 1993. He was elected a director of the Company in January 1990 and
served as Vice President and General Counsel from June 1990 through October
1993. From June 1986 until his appointment as Vice President and General
Counsel, Mr. Sands was employed by the Company as General Counsel. He is a son
of Marvin Sands and the brother of Richard Sands.
Peter Aikens serves as President and Chief Executive Officer of Matthew
Clark. In this capacity, Mr. Aikens is in charge of the Company's Matthew
Clark division and the Company's business in the United Kingdom, and has been
since the consummation of the Acquisition in December 1998. He has been with
Matthew Clark since May 1990 and has been in brewing and the drinks industry
for most of his career.
Daniel C. Barnett serves as President and Chief Executive Officer of
Canandaigua Wine Company, Inc., a wholly-owned subsidiary of the Company. In
this capacity, Mr. Barnett is in charge of the Company's wine division, and
has been since he joined the Company in November 1995. From July 1994 to
October 1995, Mr. Barnett served as President and Chief Executive Officer of
Koala Springs International, a juice beverage company. Prior to that, from
April 1991 to June 1994, Mr. Barnett was Vice President and General Manager of
Nestle USA's beverage businesses. From October 1988 to April 1991, he was
President of Weyerhauser's baby diaper division.
Alexander L. Berk serves as President and Chief Executive Officer of Barton
Incorporated, a wholly-owned subsidiary of the Company. In this capacity, Mr.
Berk is in charge of the Company's beer and spirits divisions. Mr. Berk served
as President and Chief Operating Officer of Barton from 1990
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until 1998. From 1988 to 1990, Mr. Berk was the President and Chief Executive
Officer of Schenley Industries and previously served in various other
positions with Schenley since 1971. Mr. Berk served during an interim period
of 1974 to 1978 as the Vice President and Director of Marketing for
Schieffelin & Co., Inc., an importer of wine and spirits.
Thomas S. Summer joined the Company during April l997 as Senior Vice
President and Chief Financial Officer. From November 1991 to April 1997, Mr.
Summer served as Vice President, Treasurer of Cardinal Health, Inc., a large
national health care services company, where he was responsible for directing
financing strategies and treasury matters. Prior to that, from November 1987
to November 1991, Mr. Summer held several positions in corporate finance and
international treasury with PepsiCo, Inc.
George Bresler has been engaged in the practice of law since 1957. From
August 1987 through July 1992, Mr. Bresler was a member of the law firm of
Bresler and Bab, New York, New York. Since 1992, Mr. Bresler has been a member
of the law firm of Rosner Bresler Goodman & Unterman, LLP, and its predecessor
firm, in New York, New York. Mr. Bresler provides legal services to the
Company.
James A. Locke, III has been a partner in the law firm of Nixon, Hargrave,
Devans and Doyle LLP, Rochester, New York, the Company's principal outside
counsel, since January 1, 1996. For twenty years prior to joining Nixon,
Hargrave, Mr. Locke was a partner in the law firm of Harter, Secrest and
Emery, Rochester, New York.
Thomas C. McDermott has been a proprietor of Forbes Products, LLC, a custom
vinyl business products company, since January 1998. From 1994 to 1997, Mr.
McDermott was President and Chief Executive Officer of Goulds Pumps,
Incorporated, a centrifugal pumps company for industrial, domestic and
agricultural markets, where he also was Chairman from 1995 to 1997. From 1986
to 1993, he was President and Chief Operating Officer of Bausch & Lomb
Incorporated, a contact lens, lens-care and eyewear products company. Mr.
McDermott also serves on the Board of Directors of Thomas & Betts Corporation.
Bertram E. Silk is currently a Senior Vice President of Canandaigua Wine
Company, Inc., a wholly-owned subsidiary of the Company, and is responsible
for industry relations with respect to labor unions in California, as well as
for various trade association and international beverage alcohol industry
matters. Mr. Silk has been employed by the Company since 1965 and has held
various positions and responsibilities. Immediately prior to holding his
current responsibilities, he was in charge of the Company's grape grower
relations in California, and from 1989 to August 1994, Mr. Silk was in charge
of the Company's California grape juice concentrate business.
Paul L. Smith is currently retired from Eastman Kodak Company. For thirty-
five years prior to his retirement in 1993, Mr. Smith was employed in various
positions at Eastman Kodak Company, the last of which was from 1983 to 1993,
when he served as Senior Vice President and Chief Financial Officer. Also,
from 1983 to 1993, Mr. Smith served on the Board of Directors of Eastman Kodak
Company. Mr. Smith also currently serves on the Board of Directors of Home
Properties of New York, Inc. and Performance Technologies, Incorporated.
Beneficial Ownership of Management
As of January 31, 1999, the directors and executive officers of the Company
listed above as a group beneficially owned (including shares owned by family
members as to which certain of these individuals disclaim beneficial
ownership) approximately 13% of the outstanding shares of Class A Common Stock
(exclusive of shares of Class A Common Stock issuable pursuant to the
conversion feature of the Class B Common Stock beneficially owned by officers
and directors) and approximately 88% of the outstanding shares of Class B
Common Stock.
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DESCRIPTION OF THE SENIOR CREDIT FACILITIES
On December 14, 1998, the Company, its principal operating subsidiaries
(other than Matthew Clark and its subsidiaries), and a syndicate of banks (the
"Syndicate Banks"), for which The Chase Manhattan Bank ("Chase") acts as
administrative agent, entered into a First Amended and Restated Credit
Agreement (the "1998 Credit Agreement"), effective as of November 2, 1998,
which amended and restated in its entirety the credit agreement entered into
by the Company, such subsidiaries, and Chase on November 2, 1998. The Company
is the borrower under the 1998 Credit Agreement and its principal operating
subsidiaries (other than Matthew Clark and its subsidiaries) are joint and
several guarantors of the Company's obligations thereunder. The 1998 Credit
Agreement includes both U.S. Dollar and Pound Sterling commitments of the
Syndicate Banks of up to, in the aggregate, the equivalent of $1.0 billion
(subject to increase as therein provided to $1.2 billion) with the proceeds
available for repayment of all outstanding principal and accrued interest on
all loans under the Company's bank credit agreement dated as of December 19,
1997, payment of the purchase price for the Matthew Clark shares, repayment of
Matthew Clark's credit facilities, funding of permitted acquisitions, payment
of transaction expenses and ongoing working capital needs of the Company and
its subsidiaries.
The 1998 Credit Agreement is secured by (i) first priority pledges of 100%
of the capital stock of Canandaigua Limited, Canandaigua B.V., and the
Company's direct and indirect domestic subsidiaries, (ii) first priority
pledges of 65% of the capital stock of B.B. Servicios, S.A. de C.V.,
Canandaigua World Sales Limited, and Matthew Clark, and (iii) first priority
security interests in all accounts receivable, inventory, patents, trademarks,
equipment and other personal and real property of the Company, Canandaigua
Limited, Canandaigua B.V. and such domestic subsidiaries (subject to certain
exceptions).
The 1998 Credit Agreement provides for a $350.0 million Tranche I Term Loan
facility due in December 2004, a $200.0 million Tranche II Term Loan facility
due in June 2000, a $150.0 million Tranche III Term Loan facility due in
December 2005, and a $300.0 million Revolving Credit facility (including
letters of credit up to a maximum of approximately $20.0 million and swingline
loans up to a maximum of $30.0 million) which expires in December 2004.
Portions of the Tranche I Term Loan facility and the Revolving Credit facility
are available for borrowing in Pounds Sterling.
The obligations of the Syndicate Banks to make Revolving Credit loans to the
Company (other than certain Revolving Credit loans made to finance the
acquisition of Matthew Clark) or of Chase to issue letters of credit are
subject to the satisfaction of certain customary conditions, including but not
limited to (i) the absence of a default or event of default under the 1998
Credit Agreement and (ii) all representations and warranties being true and
correct.
The Tranche I Term Loan facility requires quarterly repayments, starting at
approximately $6.265 million in December 1999, increasing annually thereafter
and with a balloon payment at maturity of approximately $110.0 million. The
Tranche II Term Loan facility requires no principal payments prior to stated
maturity. The Tranche III Term Loan facility requires quarterly repayments,
starting at $0.375 million in December 1999 and increasing to approximately
$17.95 million in March 2004. The Company may optionally prepay the terms
loans and revolving loans from time to time in whole or in part, without
premium or penalty. In addition, there are certain mandatory term loan
prepayments, including those based on excess cash flow, sale of assets, the
occurrence of casualty events, issuance of debt (including the Notes) or
equity, change of control requiring a redemption of subordinated debt, and
fluctuations in the U.S. Dollar/Pound Sterling exchange rate, in each case
subject to certain baskets, thresholds, and other exceptions.
The rate of interest payable, at the Company's option, is a function of the
London interbank offered rate ("LIBOR") plus a margin, the federal funds rate
plus a margin, or the prime rate plus a margin;
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the Company also has the option to request competitive bids on Revolving
Credit borrowings. The margin is adjustable quarterly based upon the ratio of
the Company's consolidated average debt to consolidated operating cash flow
(such ratio is defined in the 1998 Credit Agreement as the "Debt Ratio"). The
initial margin on LIBOR borrowings ranges between 1.75% and 2.50% and, after
the later to occur of November 30, 1999 and the payment in full of the Tranche
II Term Loan facility, may be reduced to between 1.125% and 1.50%, depending
on the Company's Debt Ratio. Conversely, if the Debt Ratio of the Company
should increase, the margin would be adjusted upwards to up to between 2.0%
and 2.75% for LIBOR-based borrowings. In addition to interest, the Company
pays a facility fee on the Revolving Credit commitments (whether used or
unused) and a commitment fee on the unused Term Loan commitments, at either
0.50% per annum or 0.375% per annum, depending on the Company's Debt Ratio.
The Company is also required to pay fees with respect to any letters of credit
issued pursuant to the 1998 Credit Agreement; such letter of credit fees
include (i) a participation fee payable to the Syndicate Banks on the average
daily amount of outstanding letters of credit and unreimbursed letter of
credit drawings, equal to the applicable margin for LIBOR-based borrowings,
and (ii) a fronting fee payable to Chase of 0.125% per annum on the average
daily amount of outstanding letters of credit issued by Chase. The Company is
required to pay default interest on all amounts that are not paid when due at
a rate equal to (A) in the case of any overdue principal of any loan, 2% above
the interest rate otherwise applicable to such loan, and (B) in the case of
any other amount, 2% above the rate applicable to prime rate-based loans.
The Company and its subsidiaries are subject to customary secured lending
covenants including, but not limited to, those restricting additional liens,
the incurrence of additional indebtedness, the sale of assets, mergers and
consolidations, the payment of dividends, transactions with affiliates, the
purchase or redemption of subordinated debt (including the Notes), and the
making of certain acquisitions and investments. The primary financial
covenants require the maintenance of a debt coverage ratio, a senior debt
coverage ratio, a fixed charges ratio and an interest coverage ratio. The
fixed charges ratio is required to be at least 1.0 to 1 as at the last day of
each fiscal quarter for the most recent four quarters.
The 1998 Credit Agreement contains customary events of default, including,
but not limited to, (a) the non-payment of principal when due, (b) the non-
payment of interest, fees, or other amounts within five business days after
the same is due and payable, (c) default by the Company or any subsidiary in
the observance or performance of certain agreements and covenants contained in
the 1998 Credit Agreement or other documents related thereto; (d) material
inaccuracy of any representation or warranty made by the Company or any
subsidiary in connection with the 1998 Credit Agreement or other documents
related thereto; (e) cross-default to material indebtedness of the Company or
any of its subsidiaries; (f) one or more judgments against the Company or any
subsidiary in excess of $15.0 million (regardless of insurance coverage) that
remains undischarged (unless a stay of execution has been procured) for 45
days; (g) the occurrence of certain events respecting pension plans; (h) a
reasonable basis shall exist for the assertion against the Company or any
subsidiary of material claims or liabilities respecting hazardous materials;
(i) Marvin Sands or members of his immediate family shall cease to own or
otherwise control common stock of the Company which in the aggregate
represents voting power to elect at least 50% (in number of votes) of the
board of directors of the Company; and (j) certain bankruptcy-related events.
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DESCRIPTION OF THE NOTES
The Notes constitute a series of debt securities (which are more fully
described in the accompanying Prospectus) to be issued under an Indenture (the
"Indenture") to be dated as of February , 1999, between the Company, the
Guarantors and Harris Trust and Savings Bank, as trustee (the "Trustee"),
copies of which are available to prospective purchasers of the Notes upon
request. The Indenture is more fully described in the accompanying Prospectus.
The following summary of the material provisions of the Indenture does not
purport to be complete, and where reference is made to particular provisions
of the Indenture, such provisions, including the definitions of certain terms,
are qualified in their entirety by reference to all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act of 1939, as amended. The following description of the terms of the Notes
supplements the description of the general terms and provisions of the Debt
Securities set forth in the accompanying Prospectus. If these descriptions are
inconsistent, then the description in this Prospectus Supplement shall govern.
For definitions of certain capitalized terms used in the following summary,
see "Certain Definitions."
General
The Notes will mature on , 2009 and will be unsecured senior
subordinated obligations of the Company. Each Note will bear interest at the
rate set forth on the cover page hereof from , 1999 or from the most
recent interest payment date to which interest has been paid, payable semi-
annually on and in each year (each, an "Interest Payment Date") ,
commencing , 1999, to the Person in whose name the Note (or any
predecessor Note) is registered at the close of business on the or
next preceding such interest payment date.
Payment of the Notes is guaranteed by the Guarantors on a senior
subordinated basis. The Guarantors are comprised of all of the direct and
indirect Domestic Restricted Subsidiaries of the Company and direct and
indirect Foreign Restricted Subsidiaries that guarantee Other Indebtedness.
The Guarantors have also guaranteed all obligations of the Company under the
Credit Agreement. No holder of any other Indebtedness of the Company will have
the benefit of any guarantees which the holders of the Notes do not have.
Principal of, premium, if any, and interest on the Notes will be payable,
and the Notes will be exchangeable and transferable, at the office or agency
of the Company in the City of New York maintained for such purposes (which
initially will be the Trustee); provided, however, that payment of interest
may be made at the option of the Company by check mailed to the Person
entitled thereto as shown on the security register. The Notes will be issued
only in fully registered form without coupons, in denominations of $1,000 and
any integral multiple thereof. No service charge will be made for any
registration of transfer, exchange or redemption of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith.
Optional Redemption
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after , 2004, at the redemption prices (expressed
as percentages of the principal amount) set forth below plus accrued and
unpaid interest, if any, to the redemption date (subject to the right of
Holders of record on the relevant record dates to receive interest due on the
relevant Interest Payment Date), if redeemed during the 12-month period
beginning of the years indicated below:
<TABLE>
<CAPTION>
Redemption
Year Price
---- ----------
<S> <C>
2004........................................................... %
2005........................................................... %
2006........................................................... %
2007 and thereafter............................................ 100.000%
</TABLE>
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In addition, at any time and from time to time on or prior to , 2002,
the Company may redeem in the aggregate up to 35% of the originally issued
aggregate principal amount of the Notes with the net cash proceeds of one or
more Public Equity Offerings by the Company at a redemption price in cash
equal to % of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of redemption (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
Interest Payment Date); provided, however, that at least 65% of the originally
issued aggregate principal amount of the Notes must remain outstanding
immediately after giving effect to each such redemption (excluding any Notes
held by the Company or any of its Affiliates). Notice of any such redemption
must be given within 60 days after the date of the closing of the relevant
Public Equity Offering of the Company.
In the event that less than all of the Notes are to be redeemed at any time
pursuant to an optional redemption, selection of such Notes for redemption
will be made by the Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not then listed on a national securities exchange, on a
pro rata basis, by lot or by such method as the Trustee shall deem fair and
appropriate; provided, however, that no Notes of a principal amount of $1,000
or less shall be redeemed in part; provided, further, however, that if a
partial redemption is made with the net cash proceeds of a Public Equity
Offering by the Company, selection of the Notes or portions thereof for
redemption shall be made by the Trustee only on a pro rata basis or on as
nearly a pro rata basis as is practicable (subject to the procedures of The
Depository Trust Company), unless such method is otherwise prohibited. Notice
of redemption shall be mailed by first-class mail at least 30 but not more
than 60 days before the redemption date to each Holder of Notes to be redeemed
at its registered address. If any Note is to be redeemed in part only, the
notice of redemption that relates to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in a principal amount
equal to the unredeemed portion thereof will be issued in the name of the
Holder thereof upon cancellation of the original Note. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption as long as the Company has deposited with the paying
agent for the Notes funds in satisfaction of the applicable redemption price
pursuant to the Indenture.
Sinking Fund
The Notes will not be entitled to the benefit of any sinking fund.
Subordination of the Notes
The payment of the principal of, premium, if any, and interest on the Notes
is subordinated in right of payment, to the extent and in the manner provided
in the Indenture, to the prior payment in full in cash of all Senior
Indebtedness.
Upon any payment or distribution of assets or securities of the Company of
any kind or character, whether in cash, property or securities (excluding any
payment or distribution of Permitted Junior Securities and excluding any
payment from the trust described under "Legal Defeasance and Covenant
Defeasance" and "Satisfaction and Discharge" (a "Defeasance Trust Payment")),
upon any dissolution or winding-up or total liquidation or reorganization of
the Company, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings, all Senior Indebtedness shall first be paid
in full in cash before the Holders of the Notes or the Trustee on behalf of
such Holders shall be entitled to receive any payment by the Company of the
principal of, premium, if any, or interest on the Notes, or any payment by the
Company to acquire any of the Notes for cash, property or securities, or any
distribution by the Company with respect to the Notes of any cash, property or
securities (excluding any payment or distribution of Permitted Junior
Securities and excluding any Defeasance Trust Payment). Before any payment may
be made by, or on behalf of, the
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Company of the principal of, premium, if any, or interest on the Notes upon
any such dissolution or winding-up or total liquidation or reorganization, any
payment or distribution of assets or securities of the Company of any kind or
character, whether in cash, property or securities (excluding any payment or
distribution of Permitted Junior Securities and excluding any Defeasance Trust
Payment), to which the Holders of the Notes or the Trustee on their behalf
would be entitled, but for the subordination provisions of the Indenture,
shall be made by the Company or by any receiver, trustee in bankruptcy,
liquidation trustee, agent or other Person making such payment or
distribution, directly to the holders of the Senior Indebtedness (pro rata to
such holders on the basis of the respective amounts of Senior Indebtedness
held by such holders) or their representatives or to the trustee or trustees
or agent or agents under any agreement or indenture pursuant to which any of
such Senior Indebtedness may have been issued, as their respective interests
may appear, to the extent necessary to pay all such Senior Indebtedness in
full in cash after giving effect to any prior or concurrent payment,
distribution or provision therefor to or for the holders of such Senior
Indebtedness.
No direct or indirect payment (excluding any payment or distribution of
Permitted Junior Securities and excluding any Defeasance Trust Payment) by or
on behalf of the Company of principal of, premium, if any, or interest on the
Notes, whether pursuant to the terms of the Notes, upon acceleration, pursuant
to an offer to purchase or otherwise, will be made if, at the time of such
payment, there exists a default in the payment of all or any portion of the
obligations on any Designated Senior Indebtedness, whether at maturity, on
account of mandatory redemption or prepayment, acceleration or otherwise, and
such default shall not have been cured or waived or the benefits of this
sentence waived by or on behalf of the holders of such Designated Senior
Indebtedness. In addition, during the continuance of any non-payment event of
default with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may be immediately accelerated, and upon receipt by the
Trustee of written notice (a "Payment Blockage Notice") from the holder or
holders of such Designated Senior Indebtedness or the trustee or agent acting
on behalf of the holders of such Designated Senior Indebtedness, then, unless
and until such event of default has been cured or waived or has ceased to
exist or such Designated Senior Indebtedness has been discharged or repaid in
full in cash or the benefits of these provisions have been waived by the
holders of such Designated Senior Indebtedness, no direct or indirect payment
(excluding any payment or distribution of Permitted Junior Securities and
excluding any Defeasance Trust Payment) will be made by or on behalf of the
Company of principal of, premium, if any, or interest on the Notes, to such
Holders, during a period (a "Payment Blockage Period") commencing on the date
of receipt of such notice by the Trustee and ending 179 days thereafter.
Notwithstanding anything in the subordination provisions of the Indenture or
the Notes to the contrary, (x) in no event will a Payment Blockage Period
extend beyond 179 days from the date the Payment Blockage Notice in respect
thereof was given, (y) there shall be a period of at least 181 consecutive
days in each 360-day period when no Payment Blockage Period is in effect and
(z) not more than one Payment Blockage Period may be commenced with respect to
the Notes during any period of 360 consecutive days. No event of default that
existed or was continuing on the date of commencement of any Payment Blockage
Period with respect to the Designated Senior Indebtedness initiating such
Payment Blockage Period (to the extent the holder of Designated Senior
Indebtedness, or trustee or agent, giving notice commencing such Payment
Blockage Period had knowledge of such existing or continuing event of default)
may be, or be made, the basis for the commencement of any other Payment
Blockage Period by the holder or holders of such Designated Senior
Indebtedness or the trustee or agent acting on behalf of such Designated
Senior Indebtedness, whether or not within a period of 360 consecutive days,
unless such event of default has been cured or waived for a period of not less
than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
Notes by reason of the provisions of the Indenture described under this
"Subordination of the Notes" heading will not be construed as preventing the
occurrence of any Event of Default in respect of the Notes. See "Events of
Default" below.
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By reason of the subordination provisions described above, in the event of
insolvency of the Company, funds which would otherwise be payable to Holders
of the Notes will be paid to the holders of Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full in cash, and the Company may
be unable to meet fully its obligations with respect to the Notes.
At the time of the issuance of the Notes, the Credit Agreement is expected
to be the only material outstanding Senior Indebtedness. Subject to the
restrictions set forth in the Indenture, in the future the Company may issue
additional Senior Indebtedness.
Guarantees of the Notes
The Indenture will provide that each of the Guarantors will unconditionally
guarantee on a joint and several basis (the "Guarantees") all of the Company's
obligations under the Notes, including its obligations to pay principal,
premium, if any, and interest with respect to the Notes. The Guarantees will
be general unsecured obligations of the Guarantors. The obligations of each
Guarantor under its Guarantee will be subordinated and junior in right of
payment to the prior payment in full of all existing and future Senior
Guarantor Indebtedness of such Guarantor to substantially the same extent as
the Notes are subordinated to all existing and future Senior Indebtedness of
the Company. The Guarantors have also guaranteed all obligations of the
Company under the Credit Agreement, and each Guarantor has granted a security
interest in all or substantially all of its assets to secure the obligations
under the Credit Agreement. The obligations of each Guarantor are limited to
the maximum amount which, after giving effect to all other contingent and
fixed liabilities of such Guarantor (including any Senior Indebtedness
Incurred after the Issue Date) and after giving effect to any collections from
or payments made by or on behalf of any other Guarantor in respect of the
obligations of such other Guarantor under its Guarantee or pursuant to its
contribution obligations under the Indenture, will result in the obligations
of such Guarantor under its Guarantee not constituting a fraudulent conveyance
or fraudulent transfer under Federal or state law. Each Guarantor that makes a
payment or distribution under a Guarantee shall be entitled to a contribution
from each other Guarantor in a pro rata amount, based on the net assets of
each Guarantor determined in accordance with GAAP.
The Company shall cause each Restricted Subsidiary issuing a Guarantee after
the Issue Date to execute and deliver to the Trustee a supplemental indenture
in form reasonably satisfactory to the Trustee pursuant to which such
Restricted Subsidiary shall become a party to the Indenture and thereby
unconditionally guarantee all of the Company's Obligations under the Notes and
the Indenture on the terms set forth therein. Thereafter, such Restricted
Subsidiary shall (unless released in accordance with the terms of the
Indenture) be a Guarantor for all purposes of the Indenture.
The Indenture will provide that if the Notes are defeased in accordance with
the terms of the Indenture, or if, subject to the requirements of the first
paragraph under "Consolidation, Merger, Sale of Assets" all or substantially
all of the assets of any Guarantor or all of the Capital Stock of any
Guarantor are sold (including by issuance or otherwise) by the Company in a
transaction constituting an Asset Sale, and if (x) the Net Cash Proceeds from
such Asset Sale are used in accordance with the covenant described under
"Certain Covenants--Limitation on Sale of Assets" or (y) the Company delivers
to the Trustee an Officers' Certificate to the effect that the Net Cash
Proceeds from such Asset Sale shall be used in accordance with the covenant
described under "Certain Covenants-Limitation on Asset Sales" and within the
time limits specified by such covenant, then such Guarantor or the Guarantors,
as the case may be (in the event of a defeasance of the Notes or a sale or
other disposition of all of the Capital Stock of such Guarantor) or the
corporation acquiring such assets (in the event of a sale or other disposition
of all or substantially all of the assets of such Guarantor) shall be released
and discharged of its Guarantee obligations in respect of the Indenture and
the Notes.
Any Guarantor that is designated an Unrestricted Subsidiary pursuant to and
in accordance with "Certain Covenants--Designation of Unrestricted
Subsidiaries" below shall upon such Designation be released and discharged of
its Guarantee obligations in respect of the Indenture and the Notes and
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any Unrestricted Subsidiary whose Designation is revoked pursuant to "Certain
Covenants--Designation of Unrestricted Subsidiaries" below will be required to
become a Guarantor in accordance with the procedure described in the third
preceding paragraph.
As of November 30, 1998, on a pro forma basis after giving effect to this
offering and the Acquisition the aggregate amount of outstanding Senior
Indebtedness would have been approximately $525 million, the aggregate amount
of outstanding Pari Passu Indebtedness would have been approximately $195
million and the aggregate amount of outstanding Senior Guarantor Indebtedness
would have been approximately $524 million (including $522 million of
outstanding indebtedness representing guarantees of Senior Indebtedness). See
"Risk Factors--Your Right to Receive Payments on the Notes is Junior to our
Bank and other Unsubordinated Indebtedness; The Guarantees of our Guarantors
are Junior to all of their Unsubordinated Indebtedness; The Notes are
Unsecured. All of our Assets are Pledged to Secure our Bank Credit Facility"
and "Capitalization."
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Indebtedness.
(a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (including any Acquired Indebtedness),
except that the Company and any Guarantor may Incur Indebtedness (including
any Acquired Indebtedness) and any Restricted Subsidiary that is not a
Guarantor may Incur Acquired Indebtedness if, in each case, the Consolidated
Fixed Charge Coverage Ratio for the Company for the four full fiscal quarters
immediately preceding the Incurrence of such Indebtedness taken as one period
(and after giving pro forma effect to (i) the Incurrence of such Indebtedness
and (if applicable) the application of the net proceeds therefrom, including
to refinance other Indebtedness, as if such Indebtedness was Incurred, and the
application of such proceeds occurred, at the beginning of such four-quarter
period; (ii) the Incurrence, repayment or retirement of any other Indebtedness
by the Company and its Restricted Subsidiaries since the first day of such
four-quarter period as if such Indebtedness was Incurred, repaid or retired at
the beginning of such four-quarter period (except that, in making such
computation, the amount of Indebtedness under any revolving credit facility
shall be computed based upon the average daily balance of such Indebtedness
during such four-quarter period); (iii) in the case of Acquired Indebtedness,
the related acquisition as if such acquisition occurred at the beginning of
such four quarter period; and (iv) any acquisition or disposition by the
Company and its Restricted Subsidiaries of any company or any business or any
assets out of the ordinary course of business, whether by merger, stock
purchase or sale or asset purchase or sale, or any related repayment of
Indebtedness, in each case since the first day of such four-quarter period,
assuming such acquisition or disposition had been consummated on the first day
of such four-quarter period) is equal to at least 2.00:1.00.
(b) The foregoing limitation will not apply to the incurrence of any of the
following (collectively "Permitted Indebtedness"):
(i) Indebtedness of the Company and any Restricted Subsidiary under the
Credit Agreement in an aggregate principal amount at any one time
outstanding not to exceed an amount equal to the greater of (x) $1.0
billion, minus the amount of any repayment of such Indebtedness under the
Credit Agreement pursuant to "Limitation on Sale of Assets" below and (y)
the Borrowing Base;
(ii) Indebtedness of the Company pursuant to the Notes and other
Indebtedness outstanding on the Issue Date (other than Indebtedness under
the Credit Agreement);
(iii) Indebtedness of any Guarantor pursuant to a Guarantee;
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(iv) Indebtedness of the Company owing to a Restricted Subsidiary;
provided that any Indebtedness of the Company owing to a Restricted
Subsidiary that is not a Guarantor is made pursuant to an intercompany note
in the form attached to the Indenture and is subordinated in right of
payment from and after such time as the Notes shall become due and payable
(whether at Stated Maturity, acceleration or otherwise) to the payment and
performance of the Company's obligations under the Notes; provided, further
that any disposition, pledge or transfer of any such Indebtedness to a
Person (other than a disposition, pledge or transfer to a Restricted
Subsidiary or a pledge to or for the benefit of the lenders under the
Credit Agreement) shall be deemed to be an incurrence of such Indebtedness
by the obligor not permitted by this clause (iv);
(v) Indebtedness of a Restricted Subsidiary owing to the Company or a
Wholly Owned Restricted Subsidiary; provided that, with respect to
Indebtedness owing to a Wholly Owned Restricted Subsidiary that is not a
Guarantor, (x) any such Indebtedness is made pursuant to an intercompany
note in the form attached to the Indenture and (y) any such Indebtedness
shall be subordinated in right of payment from and after such time as the
obligations under the Guarantee by such Wholly Owned Restricted Subsidiary
shall become due and payable to the payment and performance of such Wholly
Owned Restricted Subsidiary's obligations under its Guarantee; provided,
further that (a) any disposition, pledge or transfer of any such
Indebtedness to a Person (other than a disposition, pledge or transfer to
the Company or a Restricted Subsidiary or a pledge to or for the benefit of
the lenders under the Credit Agreement) shall be deemed to be an incurrence
of such Indebtedness by the obligor not permitted by this clause (v), and
(b) any transaction pursuant to which any Restricted Subsidiary, which has
Indebtedness owing to the Company or any other Restricted Subsidiary,
ceases to be a Restricted Subsidiary shall be deemed to be the incurrence
of Indebtedness by such Restricted Subsidiary that is not permitted by this
clause (v);
(vi) guarantees of any Restricted Subsidiary made in accordance with the
provisions of "Certain Covenants--Limitation on Guarantees by Restricted
Subsidiaries";
(vii) Hedging Obligations of the Company or any Guarantor entered into in
the ordinary course of business (and not for speculative purposes) designed
to protect against fluctuations in: (x) interest rates in respect of
Indebtedness of the Company or any of its Restricted Subsidiaries, as long
as such obligations at the time incurred do not exceed the aggregate
principal amount of such Indebtedness then outstanding or in good faith
anticipated to be outstanding within 90 days of such Incurrence, (y)
currencies or (z) commodities;
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (ii) and (iii) of this definition of "Permitted
Indebtedness," including any successive refinancings so long as the
aggregate principal amount of Indebtedness represented thereby is not
increased by such refinancing plus the lesser of (1) the stated amount of
any premium, interest or other payment required to be paid in connection
with such a refinancing pursuant to the terms of the Indebtedness being
refinanced or (2) the amount of premium, interest or other payment actually
paid at such time to refinance the Indebtedness, plus, in either case, the
amount of expenses of the Company incurred in connection with such
refinancing and, in the case of Pari Passu Indebtedness or Subordinated
Indebtedness, such refinancing does not reduce the Average Life to Stated
Maturity or the Stated Maturity of such Indebtedness; and
(ix) Indebtedness, in addition to that described in clauses (i) through
(viii) of this definition of "Permitted Indebtedness," and any renewals,
extensions, substitutions, refinancings or replacements of such
Indebtedness, not to exceed $75.0 million outstanding at any one time in
the aggregate.
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Limitation on Restricted Payments. (a) The Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly:
(i) declare or pay any dividend on, or make any distribution to holders
of, any shares of the Company's Capital Stock (other than dividends or
distributions payable solely in shares of its Qualified Capital Stock or in
options, warrants or other rights to acquire such Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value, directly
or indirectly, any shares of the Capital Stock of the Company or any
Affiliate thereof (other than any Wholly Owned Restricted Subsidiary of the
Company) or options, warrants or other rights to acquire such Capital
Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution on any Capital Stock of
any Restricted Subsidiary to any Person (other than the Company or any of
its Restricted Subsidiaries) or purchase, redeem or otherwise acquire or
retire for value any Capital Stock of any Restricted Subsidiary held by any
Person (other than the Company or any of its Wholly Owned Restricted
Subsidiaries);
(v) Incur, create or assume any guarantee of Indebtedness of any
Affiliate (other than a Wholly Owned Restricted Subsidiary of the Company);
or
(vi) make any Investment in any Person (other than any Permitted
Investments)
(any of the foregoing payments described in clauses (i) through (vi), other
than any such action that is a Permitted Payment, collectively, "Restricted
Payments") unless after giving effect to the proposed Restricted Payment (the
amount of any such Restricted Payment, if other than cash, as determined by
the Board of Directors of the Company, whose determination shall be conclusive
and evidenced by a board resolution), (1) no Default or Event of Default shall
have occurred and be continuing and such Restricted Payment shall not be an
event which is, or after notice or lapse of time or both, would be, an "event
of default" under the terms of any Indebtedness of the Company or its
Subsidiaries; (2) immediately before and immediately after giving effect to
such transaction on a pro forma basis, the Company could Incur $1.00 of
additional Indebtedness (other than Permitted Indebtedness) under the
provisions described under "Limitation on Indebtedness"; and (3) the aggregate
amount of all such Restricted Payments declared or made after the date of the
Indenture does not exceed the sum of:
(A) 50% of the aggregate cumulative Consolidated Net Income of the
Company accrued on a cumulative basis during the period beginning on the
first day of the Company's fiscal quarter commencing prior to the date of
the Indenture and ending on the last day of the Company's last fiscal
quarter ending prior to the date of the Restricted Payment (or, if such
aggregate cumulative Consolidated Net Income shall be a loss, minus 100% of
such loss); plus
(B) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Subsidiaries) of its shares of Qualified Capital Stock or any options,
warrants or rights to purchase such shares of Qualified Capital Stock of
the Company (except, in each case, to the extent such proceeds are used to
purchase, redeem or otherwise retire Capital Stock or Subordinated
Indebtedness as set forth below); plus
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options or warrants to purchase shares of Qualified Capital
Stock of the Company; plus
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from debt securities or Redeemable Capital Stock
that have been converted into or exchanged for Qualified Capital Stock of
the Company to the extent such debt securities or
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Redeemable Capital Stock are originally sold for cash plus the aggregate
Net Cash Proceeds received by the Company at the time of such conversion or
exchange; plus
(E) in the event the Company or any Restricted Subsidiary makes an
Investment in a Person that, as a result of or in connection with such
Investment becomes a Restricted Subsidiary, an amount equal to the
Company's or any Restricted Subsidiary's existing Investment in such Person
that was previously treated as a Restricted Payment; plus
(F) so long as the Designation thereof was treated as a Restricted
Payment made after the Issue Date, with respect to any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after the
Issue Date in accordance with "Designation of Unrestricted Subsidiaries",
an amount equal to the Company's Investment in such Unrestricted Subsidiary
(provided that such amount shall not in any case exceed the Designation
Amount with respect to such Restricted Subsidiary upon its Designation);
plus
(G) $50.0 million; minus
(H) the Designation Amount (measured as of the date of Designation) with
respect to any Subsidiary of the Company which has been designated as an
Unrestricted Subsidiary after the Issue Date in accordance with the
covenant "Designation of Unrestricted Subsidiaries."
(b) Notwithstanding the foregoing, and in the case of clauses (ii), (iii)
and (iv) below, so long as there is no Default or Event of Default continuing,
the foregoing provisions shall not prohibit the following actions (clauses (i)
through (iv) being referred to as a "Permitted Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment would be
permitted by the provisions of paragraph (a) of this Section and such
payment shall be deemed to have been paid on such date of declaration for
purposes of the calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement of
any shares of any class of Capital Stock of the Company in exchange for
(including any such exchange pursuant to the exercise of a conversion right
or privilege or in which cash is paid in lieu of the issuance of fractional
shares or scrip), or out of the Net Cash Proceeds of, a substantially
concurrent issue and sale for cash (other than to a Subsidiary) of other
shares of Qualified Capital Stock of the Company; provided that the Net
Cash Proceeds from the issuance of such shares of Qualified Capital Stock
are excluded from clause (3)(B) of paragraph (a) of this Section;
(iii) any repurchase, redemption, defeasance, retirement, refinancing or
acquisition for value or payment of principal of any Subordinated
Indebtedness in exchange for, or out of the Net Cash Proceeds of, a
substantially concurrent issuance and sale for cash (other than to any
Subsidiary of the Company) of any Qualified Capital Stock of the Company,
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (3)(B) of paragraph (a) of
this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing or
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing")
through the issuance of new Subordinated Indebtedness of the Company,
provided that any such new Subordinated Indebtedness (1) shall be in a
principal amount that does not exceed the principal amount so refinanced
(or, if such Subordinated Indebtedness provides for an amount less than the
principal amount thereof to be due and payable upon a declaration or
acceleration thereof, then such lesser amount as of the date of
determination), plus the lesser of (x) the stated amount of any premium,
interest or other payment required to be paid in connection with such a
refinancing pursuant to the terms of the Indebtedness being refinanced or
(y) the amount of premium, interest or other payment actually paid at such
time to refinance the Indebtedness, plus, in either case, the amount of
expenses of the Company Incurred in connection with such refinancing; (2)
has an Average Life to Stated Maturity greater than the
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remaining Average Life to Stated Maturity of the Notes; (3) has a Stated
Maturity for its final scheduled principal payment later than the Stated
Maturity for the final scheduled principal payment of the Notes; and (4) is
expressly subordinated in right of payment to the Notes at least to the
same extent as the Indebtedness to be refinanced.
Limitation on Transactions with Affiliates. The Company will not, and will
not permit any of its Restricted Subsidiaries to, directly or indirectly,
enter into or suffer to exist any transaction or series of related
transactions (including, without limitation, the sale, purchase, exchange or
lease of assets, property or services) with any Affiliate of the Company
(other than the Company or a Wholly Owned Restricted Subsidiary) unless (i)
such transaction or series of transactions is in writing on terms that are no
less favorable to the Company or such Restricted Subsidiary, as the case may
be, than would be available in a comparable transaction in arm's-length
dealings with an unrelated third party, (ii) with respect to any transaction
or series of transactions involving aggregate payments in excess of $10.0
million, the Company delivers an officers' certificate to the Trustee
certifying that such transaction or series of related transactions complies
with clause (i) above and such transaction or series of related transactions
has been approved by the Board of Directors of the Company, and (iii) with
respect to a transaction or series of related transactions involving aggregate
value in excess of $25.0 million, the Company delivers to the Trustee an
opinion of an independent investment banking firm of national standing stating
that the transaction or series of transactions is fair to the Company or such
Restricted Subsidiary; provided, however, that this provision shall not apply
to any transaction with an officer or director of the Company entered into in
the ordinary course of business (including compensation or employee benefit
arrangements with any officer or director of the Company).
Limitation on Senior Subordinated Indebtedness. The Company will not, and
will not permit any Guarantor to, directly or indirectly, create, Incur,
issue, assume, guarantee or otherwise in any manner become directly or
indirectly liable for or with respect to or otherwise permit to exist any
Indebtedness that is subordinate in right of payment to any Indebtedness of
the Company or such Guarantor, as the case may be, unless such Indebtedness is
also pari passu with the Notes or the Guarantee of such Guarantor or
subordinate in right of payment to the Notes or such Guarantee to at least the
same extent as the Notes or such Guarantee are subordinate in right of payment
to Senior Indebtedness or Senior Guarantor Indebtedness, as the case may be,
as set forth in the Indenture.
Limitation on Liens. The Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, Incur, affirm or
suffer to exist any Lien of any kind upon any of its property or assets
(including any intercompany notes), owned at the date of the Indenture or
acquired after the date of the Indenture, or any income or profits therefrom,
except if the Notes (or a Guarantee, in the case of Liens of a Guarantor) are
directly secured equally and ratably with (or prior to in the case of Liens
with respect to Subordinated Indebtedness or Indebtedness of a Guarantor
subordinated in right of payment to any Guarantee) the obligation or liability
secured by such Lien, excluding, however, from the operation of the foregoing
any of the following:
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of
any court, so long as such Lien is adequately bonded and any appropriate
legal proceedings which may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired; (2) taxes not yet delinquent or which are being contested in good
faith; (3) security for payment of workers' compensation or other
insurance; (4) good faith deposits in connection with tenders, leases, or
contracts (other than contracts for the payment of money); (5) zoning
restrictions, easements, licenses, reservations, provisions, covenants,
conditions, waivers, restrictions on the use of property or minor
irregularities of title (and with respect to leasehold interests,
mortgages, obligations, liens and other encumbrances incurred, created,
assumed or permitted to exist and arising by, through or under a landlord
or owner of the leased property, with or without consent of
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the lessee), none of which materially impairs the use of any parcel of
property material to the operation of the business of the Company or any
Restricted Subsidiary or the value of such property for the purpose of such
business; (6) deposits to secure public or statutory obligations, or in
lieu of surety or appeal bonds; (7) certain surveys, exceptions, title
defects, encumbrances, easements, reservations of, or rights of others for,
rights of way, sewers, electric lines, telegraph or telephone lines and
other similar purposes or zoning or other restrictions as to the use of
real property not interfering with the ordinary conduct of the business of
the Company or any of its Restricted Subsidiaries; (8) operation of law in
favor of mechanics, materialmen, laborers, employees or suppliers, incurred
in the ordinary course of business for sums which are not yet delinquent or
are being contested in good faith by negotiations or by appropriate
proceedings which suspend the collection thereof; or (9) standard
custodial, bailee or depository arrangements (including (x) in respect of
deposit accounts with banks and other financial institutions and (y)
standard customer agreements in respect of accounts for the purchase and
sale of securities and other property with brokerage firms or other types
of financial institutions;
(c) any Lien now or hereafter existing on property of the Company or any
Guarantor securing Senior Indebtedness or Senior Guarantor Indebtedness, in
each case which Indebtedness is permitted under the provisions of "Certain
Covenants--Limitation on Indebtedness" and provided that the provisions
described under "Certain Covenants--Limitation on Guarantees of Restricted
Subsidiaries" are complied with;
(d) any Lien securing Acquired Indebtedness created prior to (and not
created in connection with, or in contemplation of) the incurrence of such
Indebtedness by the Company or any Restricted Subsidiary, in each case
which Indebtedness is permitted under the provisions of "Certain
Covenants--Limitation on Indebtedness"; provided that any such Lien only
extends to the assets that were subject to such lien securing such Acquired
Indebtedness prior to the related transaction by the Company or its
Restricted Subsidiaries; and
(e) any extension, renewal, refinancing or replacement, in whole or in
part, of any Lien described in the foregoing clauses (a) through (d) so
long as the amount of security is not increased thereby.
Limitation on Sale of Assets. (a) The Company will not, and will not permit
any of its Restricted Subsidiaries to, directly or indirectly, consummate an
Asset Sale (other than an Asset Swap permitted by clause (g) below) unless (i)
at least 75% of the proceeds from such Asset Sale are received in cash;
provided, however that the amount of (A) any liabilities (as shown on the
Company's or such Restricted Subsidiary's most recent balance sheet or the
notes thereto) of the Company or any Restricted Subsidiary that are assumed by
the transferee in such Asset Sale and from which the Company or such
Restricted Subsidiary is released and (B) any notes or other obligations
received by the Company or any such Restricted Subsidiary from such transferee
that are immediately converted by the Company or such Restricted Subsidiary
into cash, shall be deemed cash for purposes of this covenant, and (ii) the
Company or such Restricted Subsidiary receives consideration at the time of
such Asset Sale at least equal to the Fair Market Value of the shares or
assets sold (other than in the case of an involuntary Asset Sale, as
determined by the Board of Directors of the Company and evidenced in a board
resolution).
(b) If all or a portion of the Net Cash Proceeds of any Asset Sale are not
required to be applied to repay permanently any Senior Indebtedness or Senior
Guarantor Indebtedness then outstanding as required by the terms thereof, or
the Company determines not to apply such Net Cash Proceeds to the permanent
prepayment of such Senior Indebtedness or Senior Guarantor Indebtedness or if
no such Senior Indebtedness or Senior Guarantor Indebtedness is then
outstanding, then the Company may within 12 months of the Asset Sale, invest
the Net Cash Proceeds in other properties and assets that (as determined by
the Board of Directors of the Company) replace the properties and assets that
were the subject of the Asset Sale or in properties and assets that will be
used in the businesses of
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the Company or its Restricted Subsidiaries as existing at such time or
reasonably related thereto. The amount of such Net Cash Proceeds neither used
to permanently repay or prepay Senior Indebtedness or Senior Guarantor
Indebtedness nor used or invested as set forth in this paragraph constitutes
"Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals $10,000,000 or more,
the Company shall apply the Excess Proceeds to the repayment of the Notes and
any Pari Passu Indebtedness required to be repurchased under the instrument
governing such Pari Passu Indebtedness as follows: (a) the Company shall make
an offer to purchase (an "Offer") from all holders of the Notes in accordance
with the procedures set forth in the Indenture in the maximum principal amount
(expressed as a multiple of $1,000) of Notes that may be purchased out of an
amount (the "Note Amount") equal to the product of such Excess Proceeds
multiplied by a fraction, the numerator of which is the outstanding principal
amount of the Notes, and the denominator of which is the sum of the
outstanding principal amount of the Notes and such Pari Passu Indebtedness
(subject to proration in the event such amount is less than the aggregate
Offered Price (as defined) of all Notes tendered) and (b) to the extent
required by such Pari Passu Indebtedness to permanently reduce the principal
amount of such Pari Passu Indebtedness, the Company shall make an offer to
purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari
Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess
of the Excess Proceeds over the Note Amount; provided that in no event shall
the Pari Passu Debt Amount exceed the principal amount of such Pari Passu
Indebtedness plus the amount of any premium required to be paid to repurchase
such Pari Passu Indebtedness. The offer price shall be payable in cash in an
amount equal to 100% of the principal amount of the Notes plus accrued and
unpaid interest, if any, to the date (the "Offer Date") such Offer is
consummated (the "Offered Price"), in accordance with the procedures set forth
in the Indenture. To the extent that the aggregate Offered Price of the Notes
tendered pursuant to the Offer is less than the Note Amount relating thereto
or the aggregate amount of Pari Passu Indebtedness that is purchased is less
than the Pari Passu Debt Amount (the amount of such shortfall, if any,
constituting a "Deficiency"), the Company shall use such Deficiency in the
business of the Company and its Restricted Subsidiaries. Upon completion of
the purchase of all the Notes tendered pursuant to an Offer and the purchase
of the Pari Passu Indebtedness pursuant to a Pari Passu Offer, the amount of
Excess Proceeds, if any, shall be reset at zero.
(d) If the Company becomes obligated to make an Offer pursuant to clause (c)
above, the Notes shall be purchased by the Company, at the option of the
holder thereof, in whole or in part in integral multiples of $1,000, on a date
that is not earlier than 45 days and not later than 60 days from the date the
notice is given to holders, or such later date as may be necessary for the
Company to comply with the requirements under the Exchange Act, subject to
proration in the event the Note Amount is less than the aggregate Offered
Price of all Notes tendered.
(e) The Company shall comply with the applicable tender offer rules,
including Rule 14e-1 under the Exchange Act, and any other applicable
securities laws or regulations in connection with an Offer.
(f) The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under (i) Indebtedness as in effect on the date of the Indenture as
such Indebtedness may be refinanced from time to time, provided that such
restrictions are no less favorable to the Holders of Notes than those existing
on the date of the Indenture or (ii) any Senior Indebtedness and any Senior
Guarantor Indebtedness) that would materially impair the ability of the
Company to make an Offer to purchase the Notes or, if such Offer is made, to
pay for the Notes tendered for purchase.
(g) The Company will not, and will not permit any Restricted Subsidiary, to
engage in any Asset Swaps, unless: (i) at the time of entering into such Asset
Swap, and immediately after giving effect to such Asset Swap, no Default or
Event of Default shall have occurred and be continuing or would occur
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as a consequence thereof; (ii) in the event such Asset Swap involves an
aggregate amount in excess of $10.0 million, the terms of such Asset Swap have
been approved by a majority of the members of the board of directors of the
Company which determination shall include a determination that the Fair Market
Value of the assets being received in such swap are at least equal to the Fair
Market Value of the assets being swapped and (iii) in the event such Asset
Swap involves an aggregate amount in excess of $20.0 million, the Company has
also received a written opinion from an independent investment banking firm of
nationally recognized standing that such Asset Swap is fair to the Company or
such Restricted Subsidiary, as the case may be, from a financial point of
view.
Limitation on Guarantees by Restricted Subsidiaries. The Indenture will
provide that in the event the Company (i) organizes or acquires any Domestic
Restricted Subsidiary after the Issue Date that is not a Guarantor or (ii)
causes or permits any Foreign Restricted Subsidiary that is not a Guarantor
to, directly or indirectly, guarantee the payment of any Indebtedness ("Other
Indebtedness") of the Company, any Domestic Restricted Subsidiary or any
Foreign Restricted Subsidiary that is a Guarantor then, in each case the
Company shall cause such Restricted Subsidiary to simultaneously execute and
deliver a supplemental indenture to the Indenture pursuant to which it will
become a Guarantor under the Indenture; provided, however, that in the event a
Domestic Restricted Subsidiary is acquired in a transaction in which a merger
agreement is entered into, such Domestic Restricted Subsidiary shall not be
required to execute and deliver such supplemental indenture until the
consummation of the merger contemplated by any such merger agreement;
provided, further, that if such Other Indebtedness is (i) Indebtedness that is
ranked pari passu in right of payment with the Notes or the Guarantees of such
Restricted Subsidiary, as the case may be, the Guarantee of such Restricted
Subsidiary shall be pari passu in right of payment with the guarantee of the
Other Indebtedness; or (ii) Subordinated Indebtedness, the Guarantee of such
Restricted Subsidiary shall be senior in right of payment to the guarantee of
the Other Indebtedness (which guarantee of such Subordinated Indebtedness
shall provide that such guarantee is subordinated to the Guarantees of such
Subsidiary to the same extent and in the same manner as the Other Indebtedness
is subordinated to the Notes or the Guarantee of such Restricted Subsidiary,
as the case may be). The Guarantee of a Guarantor shall be released upon the
sale or transfer of all or substantially all of the assets or all of the
Capital Stock of such Guarantor; provided, that, either (i) such sale or
transfer complies with the provisions set forth in "Certain Covenants--
Limitation on Sale of Assets" or (ii) such sale or transfer need not comply
with the provisions set forth in "Certain Covenants--Limitation on Sale of
Assets" because the Capital Stock so sold or transferred does not constitute
an "Asset Sale" by operation of the provisions of clause (y) of the last
sentence of the definition of Asset Sale.
Purchase of Notes Upon a Change of Control. If a Change of Control shall
occur at any time, then each holder of Notes shall have the right to require
that the Company purchase such holder's Notes in whole or in part in integral
multiples of $1,000, at a purchase price (the "Change of Control Purchase
Price") in cash in an amount equal to 101% of the principal amount of such
Notes, plus accrued and unpaid interest, if any, to the date of purchase (the
"Change of Control Purchase Date"), pursuant to the offer described below (the
"Change of Control Offer") and the other procedures set forth in the
Indenture.
Within 15 days following any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each
holder of Notes by first-class mail, postage prepaid, at his address appearing
in the security register, stating, among other things, the purchase price and
that the purchase date shall be a Business Day no earlier than 30 days nor
later than 60 days from the date such notice is mailed, or such later date as
is necessary to comply with requirements under the Exchange Act; that any Note
not tendered will continue to accrue interest; that, unless the Company
defaults in the payment of the purchase price, any Notes accepted for payment
pursuant to the Change of Control Offer shall cease to accrue interest after
the Change of Control Purchase Date; and certain other procedures that a
holder of Notes must follow to accept a Change of Control Offer or to withdraw
such acceptance.
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If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes that might be delivered by holders of the
Notes seeking to accept the Change of Control Offer. The Credit Facility
prohibits the purchase of the Notes by the Company prior to full repayment of
indebtedness under the Credit Facility and, upon a Change of Control, all
amounts outstanding under the Credit Facility become due and payable. There
can be no assurance that in the event of a Change in Control the Company will
be able to obtain the necessary consents from the lenders under the Credit
Facility to consummate a Change of Control Offer. The failure of the Company
to make or consummate the Change of Control Offer or pay the Change of Control
Purchase Price when due will result in an Event of Default and will give the
Trustee and the holders of the Notes the rights described under "Events of
Default."
The definition of "Change of Control" in the Indenture is defined to mean
the occurrence of any of the following events: (i) any "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act), other
than Permitted Holders, is or becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have beneficial ownership of all shares that such Person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time), directly or indirectly, of more than 30% of the voting
power of the total outstanding Voting Stock of the Company voting as one
class, provided that the Permitted Holders "beneficially own" (as so defined)
a percentage of Voting Stock having a lesser percentage of the voting power
than such other Person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the
Board of Directors of the Company; (ii) during any period of two consecutive
years, individuals who at the beginning of such period constituted the Board
of Directors of the Company (together with any new directors whose election to
such Board or whose nomination for election by the shareholders of the
Company, was approved by a vote of 66 2/3% of the directors then still in
office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason to constitute a majority of such Board of Directors then in office;
(iii) the Company consolidates with or merges with or into any Person or
conveys, transfers or leases all or substantially all of its assets to any
Person, or any corporation consolidates with or merges into or with the
Company, in any such event pursuant to a transaction in which the outstanding
Voting Stock of the Company is changed into or exchanged for cash, securities
or other property, other than any such transaction where the outstanding
Voting Stock of the Company is not changed or exchanged at all (except to the
extent necessary to reflect a change in the jurisdiction of incorporation of
the Company) or where (A) the outstanding Voting Stock of the Company is
changed into or exchanged for (x) Voting Stock of the surviving corporation
which is not Redeemable Capital Stock or (y) cash, securities and other
property (other than Capital Stock of the surviving corporation) in an amount
which could be paid by the Company as a Restricted Payment in accordance with
"Limitation on Restricted Payments" (and such amount shall be treated as a
Restricted Payment subject to the provisions in the Indenture described under
"Limitation on Restricted Payments") and (B) no "person" or "group" other than
Permitted Holders owns immediately after such transaction, directly or
indirectly, more than the greater of (1) 30% of the voting power of the total
outstanding Voting Stock of the surviving corporation voting as one class and
(2) the percentage of such voting power of the surviving corporation held,
directly or indirectly, by Permitted Holders immediately after such
transaction; or (iv) the Company is liquidated or dissolved or adopts a plan
of liquidation or dissolution other than in a transaction which complies with
the provisions described under "Consolidation, Merger, Sale of Assets."
"Permitted Holders" means as of the date of determination (i) Marvin Sands,
Richard Sands and Robert Sands; (ii) family members or the relatives of the
Persons described in clause (i); (iii) any trusts created for the benefit of
the Persons described in clauses (i), (ii) or (iv) or any trust for the
benefit of any such trust; or (iv) in the event of the incompetence or death
of any of the persons described in
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clauses (i) and (ii), such Person's estate, executor, administrator, committee
or other personal representative or beneficiaries, in each case who at any
particular date shall beneficially own or have the right to acquire, directly
or indirectly, Capital Stock of the Company.
The term "all or substantially all" as used in the definition of "Change of
Control" has not been interpreted under New York law (which is the governing
law of the Indenture) to represent a specific quantitative test. As a
consequence, in the event the holders of the Notes elected to exercise their
rights under the Indenture and the Company elected to contest such election,
there could be no assurance as to how a court interpreting New York law would
interpret the phrase.
The definition of "Change of Control" is limited in scope. As a result the
provisions of the Indenture will not afford holders of Notes the right to
require the Company to purchase the Notes in the event of a highly leveraged
transaction or certain transactions with the Company's management or its
affiliates, including a reorganization, restructuring, merger or similar
transaction (including, in certain circumstances, an acquisition of the
Company by management or its affiliates) involving the Company that may
adversely affect holders of the Notes, if such transaction is not a
transaction defined as a Change of Control. A transaction involving the
Company's management or its affiliates, or a transaction involving a
recapitalization of the Company, will result in a Change of Control if it is
the type of transaction specified by such definition.
The existence of a holder's right to require the Company to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
The Company will not, and will not permit any Subsidiary to, create or
permit to exist or become effective any restriction (other than restrictions
existing under Indebtedness as in effect on the date of the Indenture) that
would materially impair the ability of the Company to make a Change of Control
Offer to purchase the Notes or, if such Change of Control Offer is made, to
pay for the Notes tendered for purchase.
Limitation on Restricted Subsidiary Capital Stock. The Company will not
permit any Restricted Subsidiary of the Company to issue any Capital Stock,
except for (i) Capital Stock issued to and held by the Company or a Wholly
Owned Restricted Subsidiary, (ii) Capital Stock issued by a Person prior to
the time (A) such Person becomes a Restricted Subsidiary, (B) such Person
merges with or into a Restricted Subsidiary or (C) a Restricted Subsidiary
merges with or into such Person; provided that such Capital Stock was not
issued or incurred by such Person in anticipation of the type of transaction
contemplated by subclauses (A), (B) or (C), and (iii) Capital Stock issued or
sold by a Restricted Subsidiary, where immediately after giving effect to such
issuance or sale, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary.
Limitation on Dividends and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer
to exist or become effective any encumbrance or restriction on the ability of
any Restricted Subsidiary of the Company to (i) pay dividends or make any
other distribution on its Capital Stock, (ii) pay any Indebtedness owed to the
Company or a Restricted Subsidiary of the Company, (iii) make any Investment
in the Company or a Restricted Subsidiary of the Company or (iv) transfer any
of its properties or assets to the Company or any Restricted Subsidiary,
except (a) any encumbrance or restriction pursuant to an agreement in effect
on the date of the Indenture; (b) any encumbrance or restriction, with respect
to a Restricted Subsidiary that is not a Restricted Subsidiary
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of the Company on the date of the Indenture, in existence at the time such
Person becomes a Restricted Subsidiary of the Company and, in the case of
clauses (a) and (b), not incurred in connection with, or in contemplation of,
such Person becoming a Restricted Subsidiary; (c) any encumbrance or
restriction existing under any agreement that extends, renews, refinances or
replaces the agreements containing the encumbrances or restrictions in the
foregoing clauses (a) and (b), or in this clause (c); provided that the terms
and conditions of any such encumbrances or restrictions are not materially
less favorable to the holders of the Notes than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced (except that an encumbrance or restriction that is not more
restrictive than those set forth in the Indenture shall in any event be
permitted); and (d) any encumbrance or restriction created pursuant to an
asset sale agreement, stock sale agreement or similar instrument pursuant to
which an Asset Sale permitted under "Limitation on Sale of Assets" is to be
consummated, so long as such restriction or encumbrance shall be effective
only for a period from the execution and delivery of such agreement or
instrument through a termination date not later than 270 days after such
execution and delivery.
Designation of Unrestricted Subsidiaries. The Company may designate after
the Issue Date any Subsidiary of the Company as an "Unrestricted Subsidiary"
under the Indenture (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of or after giving effect to such Designation;
(ii) at the time of and after giving effect to such Designation, the
Company could Incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the Consolidated Fixed Change Coverage Ratio of the
first paragraph of "Limitation on Indebtedness"; and
(iii) the Company would be permitted to make an Investment (other than a
Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to paragraph (a) of "Limitation
on Restricted Payments" above in an amount (the "Designation Amount") equal
to the amount of the Company's Investment in such Subsidiary on such date.
Neither the Company nor any Restricted Subsidiary shall at any time (x)
provide credit support for, subject any of its property or assets (other than
the Capital Stock of any Unrestricted Subsidiary) to the satisfaction of, or
guarantee, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness) or (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary. For purposes of the foregoing, the Designation of a Subsidiary of
the Company as an Unrestricted Subsidiary shall be deemed to include the
Designation of all of the Subsidiaries of such Subsidiary.
The Company may revoke any Designation of a Subsidiary as an Unrestricted
Subsidiary (a "Revocation") only if:
(i) no Default or Event of Default shall have occurred and be continuing
at the time of and after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at
such time, have been permitted to be Incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
Provision of Financial Statements. Whether or not the Company is subject to
Section 13(a) or 15(d) of the Exchange Act, the Company will, to the extent
permitted under the Exchange Act, file with the Commission the annual reports,
quarterly reports and other documents which the Company would
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have been required to file with the Commission pursuant to such Sections 13(a)
or 15(d) if the Company were so subject, such documents to be filed with the
Commission on or prior to the respective dates (the "Required Filing Dates")
by which the Company would have been required so to file such documents if the
Company were so subject. The Company will also in any event (x) within 15 days
of each Required Filing Date (i) transmit by mail to all Holders, as their
names and addresses appear in the security register, without cost to such
Holders and (ii) file with the Trustee copies of the annual reports, quarterly
reports and other documents which the Company would have been required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act if
the Company were subject to such Sections and (y) if filing such documents by
the Company with the Commission is not permitted under the Exchange Act,
promptly upon written request and payment of the reasonable cost of
duplication and delivery, supply copies of such documents to any prospective
Holder at the Company's cost.
Additional Covenants. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in the City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
and partnership existence; (v) payment of taxes and other claims; (vi)
maintenance of properties; and (vii) maintenance of insurance.
Consolidation, Merger, Sale of Assets
The Company shall not, in a single transaction or through a series of
related transactions, consolidate with or merge with or into any other Person
or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of its properties and assets as an entirety to any Person or
group of affiliated Persons, or permit any of its Restricted Subsidiaries to
enter into any such transaction or transactions if such transaction or
transactions, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or disposal of all or substantially all of the
properties and assets of the Company and its Restricted Subsidiaries on a
Consolidated basis to any other Person or group of affiliated Persons, unless
at the time and after giving effect thereto: (i) either (a) the Company shall
be the continuing corporation or (b) the Person (if other than the Company)
formed by such consolidation or into which the Company is merged or the Person
which acquires by sale, assignment, conveyance, transfer, lease or disposition
of all or substantially all of the properties and assets of the Company and
its Restricted Subsidiaries on a Consolidated basis (the "Surviving Entity")
shall be a corporation duly organized and validly existing under the laws of
the United States of America, any state thereof or the District of Columbia
and such Person assumes, by a supplemental indenture in a form reasonably
satisfactory to the Trustee, all the obligations of the Company under the
Notes and the Indenture, and the Indenture shall remain in full force and
effect; (ii) immediately before and immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction on a pro
forma basis, the Consolidated Net Worth of the Company (or the Surviving
Entity if the Company is not the continuing obligor under the Indenture) is
equal to or greater than the Consolidated Net Worth of the Company immediately
prior to such transaction; (iv) immediately before and immediately after
giving effect to such transaction on a pro forma basis (on the assumption that
the transaction occurred on the first day of the four-quarter period
immediately prior to the consummation of such transaction with the appropriate
adjustments with respect to the transaction being included in such pro forma
calculation), the Company (or the Surviving Entity if the Company is not the
continuing obligor under the Indenture) could incur $1.00 of additional
Indebtedness under the provisions of "Certain Covenants--Limitation on
Indebtedness" (other than Permitted Indebtedness); (v) each Guarantor, if any,
unless it is the other party to the transactions described above, shall have
by supplemental indenture confirmed that its Guarantee shall apply to such
Person's obligations under the Indenture and the Notes; (vi) if any of the
property or assets of the Company or any of its Restricted Subsidiaries would
thereupon become subject to any Lien, the provisions of "Certain Covenants--
Limitation on Liens" are complied with; and
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(vii) the Company or the Surviving Entity shall have delivered, or caused to
be delivered, to the Trustee, in form and substance reasonably satisfactory to
the Trustee, an officers' certificate and an opinion of counsel, each to the
effect that such consolidation, merger, transfer, sale, assignment,
conveyance, lease or other transaction and the supplemental indenture in
respect thereto comply with the Indenture and that all conditions precedent
herein provided for relating to such transaction have been complied with.
Each Guarantor shall not, and the Company will not permit a Guarantor to, in
a single transaction or through a series of related transactions merge or
consolidate with or into any other corporation (other than the Company or any
other Guarantor) or other entity, or sell, assign, convey, transfer, lease or
otherwise dispose of all or substantially all of its properties and assets on
a consolidated basis to any entity (other than the Company or any other
Guarantor) unless at the time and after giving effect thereto: (i) either (1)
such Guarantor shall be the continuing corporation or partnership or (2) the
entity (if other than such Guarantor) formed by such consolidation or into
which such Guarantor is merged or the entity which acquires by sale,
assignment, conveyance, transfer, lease or disposition the properties and
assets of such Guarantor shall be a corporation duly organized and validly
existing under the Laws of the United States, any state thereof or the
District of Columbia and shall expressly assume by a supplemental indenture,
executed and delivered to the Trustee, in a form reasonably satisfactory to
the Trustee, all the obligations of such Guarantor under its Guarantee and the
Indenture; (ii) immediately before and immediately after giving effect to such
transaction, no Default or Event of Default shall have occurred and be
continuing; and (iii) such Guarantor shall have delivered to the Trustee an
officers' certificate and an opinion of counsel in form and substance
reasonably satisfactory to the Trustee, each stating that such consolidation,
merger, sale, assignment, conveyance, transfer, lease or disposition and such
supplemental indenture comply with the Indenture, and thereafter all
obligations of the predecessor shall terminate. The provisions of this
paragraph shall not apply to any transaction (including any Asset Sale made in
accordance with "Certain Covenants--Limitation on Sale of Assets") with
respect to any Guarantor (i) if the Guarantee of such Guarantor is released
in connection with such transaction in accordance with the last sentence of
"Certain Covenants--Limitation on Guarantees by Restricted Subsidiaries" or
(ii) if such transaction need not comply with the provisions set forth in
"Certain Covenants--Limitation on Sale of Assets" because the properties or
assets so sold, assigned, conveyed, transferred, leased or otherwise disposed
of do not constitute an "Asset Sale" by operation of the provisions of clause
(y) of the last sentence of the definition of Asset Sale.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraphs
in which the Company or any Guarantor is not the continuing corporation, the
successor Person formed or remaining shall succeed to, and be substituted for,
and may exercise every right and power of, the Company or such Guarantor, as
the case may be, and the Company or such Guarantor, as the case may be, would
be discharged from all obligations and covenants under the Indenture and the
Notes.
Events of Default
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest on any Note
when it becomes due and payable, and such default shall continue for a
period of 30 days;
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note at its Maturity (upon acceleration, optional
or mandatory redemption, required repurchase or otherwise);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture
(other than a default in the performance,
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or breach, of a covenant or agreement which is specifically dealt with in
clauses (i) or (ii) or in clauses (b), (c) and (d) of this clause (iii))
and such default or breach shall continue for a period of 30 days after
written notice has been given, by certified mail, (x) to the Company by the
Trustee
or (y) to the Company and the Trustee by the holders of at least 25% in
aggregate principal amount of the outstanding Notes, specifying such
default or breach and requiring it to be remedied and stating that such
notice is a "Notice of Default" under the Indenture; (b) there shall be a
default in the performance or breach of the provisions described in
"Consolidation, Merger, Sale of Assets"; (c) the Company shall have failed
to make or consummate an Offer in accordance with the provisions of
"Certain Covenants--Limitation on Sale of Assets," or (d) the Company shall
have failed to make or consummate a Change of Control Offer in accordance
with the provisions of "Certain Covenants--Purchase of Notes Upon a Change
of Control;"
(iv) one or more defaults shall have occurred under any agreements,
indentures or instruments under which the Company, any Guarantor or any
Subsidiary then has outstanding Indebtedness in excess of $10,000,000 in
the aggregate and, if not already matured at its final maturity in
accordance with its terms, such Indebtedness shall have been accelerated;
(v) any Guarantee shall for any reason cease to be, or be asserted in
writing by any Guarantor or the Company not to be, in full force and effect
and enforceable in accordance with its terms, except to the extent
contemplated by the Indenture and any such Guarantee;
(vi) one or more judgments, orders or decrees for the payment of money in
excess of $15,000,000, either individually or in the aggregate (net of
amounts covered by insurance, bond, surety or similar instrument), shall be
entered against the Company, any Guarantor, any Subsidiary or any of their
respective properties and shall not be discharged and either (a) any
creditor shall have commenced an enforcement proceeding upon such judgment,
order or decree or (b) there shall have been a period of 60 consecutive
days during which a stay of enforcement of such judgment or order, by
reason of an appeal or otherwise, shall not be in effect;
(vii) any holder or holders of at least $10,000,000 in aggregate
principal amount of Indebtedness of the Company, any Guarantor or any
Subsidiary after a default under such Indebtedness shall notify the Trustee
of the intended sale or disposition of any assets of the Company, any
Guarantor or any Subsidiary that have been pledged to or for the benefit of
such holder or holders to secure such Indebtedness or shall commence
proceedings, or take any action (including by way of set-off), to retain in
satisfaction of such Indebtedness or to collect on, seize, dispose of or
apply in satisfaction of Indebtedness, assets of the Company, any Guarantor
or any Subsidiary (including funds on deposit or held pursuant to lock-box
and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company,
any Guarantor or any Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law or (b) a decree or order adjudging the
Company, any Guarantor or any Subsidiary bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment or composition of or in respect of
the Company, any Guarantor or any Subsidiary under any applicable federal
or state law, or appointing a custodian, receiver, liquidator, assignee,
trustee, sequestrator (or other similar official) of the Company, any
Guarantor or any Subsidiary or of any substantial part of their respective
properties, or ordering the winding up or liquidation of their affairs, and
any such decree or order for relief shall continue to be in effect, or any
such other decree or order shall be unstayed and in effect, for a period of
60 consecutive days; or
(ix) (a) the Company, any Guarantor or any Subsidiary commences a
voluntary case or proceeding under any applicable Bankruptcy Law or any
other case or proceeding to be adjudicated bankrupt or insolvent; (b) the
Company, any Guarantor or any Subsidiary consents to the entry of a decree
or order for relief in respect of the Company, any Guarantor or such
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Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or to the commencement of any bankruptcy or insolvency case
or proceeding against it; (c) the Company, any Guarantor or any Subsidiary
files a petition or answer or consent seeking reorganization or
relief under any applicable federal or state law; (d) the Company, any
Guarantor or any Subsidiary (x) consents to the filing of such petition or
the appointment of, or taking possession by, a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar official of the
Company, any Guarantor or such Subsidiary or of any substantial part of
their respective properties, (y) makes an assignment for the benefit of
creditors or (z) admits in writing its inability to pay its debts generally
as they become due; or (e) the Company, any Guarantor or any Subsidiary
takes any corporate action in furtherance of any such actions in this
paragraph (ix).
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing, the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then
outstanding may, and the Trustee at the request of such Holders shall, declare
all unpaid principal of, premium, if any, and accrued interest on all the
Notes to be due and payable immediately, by a notice in writing to the Company
(and to the Trustee if given by the Holders of the Notes); provided that so
long as the Credit Agreement is in effect, such declaration shall not become
effective until the earlier of (a) five business days after receipt of such
notice of acceleration from the Holders or the Trustee by the agent under the
Credit Agreement or (b) acceleration of the Indebtedness under the Credit
Agreement. Thereupon such principal shall become immediately due and payable,
and the Trustee may, at its discretion, proceed to protect and enforce the
rights of the holders of Notes by appropriate judicial proceeding. If an Event
of Default specified in clause (viii) or (ix) of the prior paragraph occurs
and is continuing, then all the Notes shall ipso facto become and be
immediately due and payable, in an amount equal to the principal amount of the
Notes, together with accrued and unpaid interest, if any, to the date the
Notes become due and payable, without any declaration or other act on the part
of the Trustee or any Holder. The Trustee or, if notice of acceleration is
given by the Holders, the Holders shall give notice to the agent under the
Credit Agreement of any such acceleration.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the holders of a
majority in aggregate principal amount of Notes outstanding, by written notice
to the Company and the Trustee, may rescind and annul such declaration and its
consequences if: (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, (ii) all overdue interest on
all Notes, and (iii) to the extent that payment of such interest is lawful,
interest upon overdue interest at the rate borne by the Notes; (b) all Events
of Default, other than the nonpayment of principal of the Notes which have
become due solely by such declaration of acceleration, have been cured or
waived; and (c) the rescission will not conflict with any judgment or decree.
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the holders of all the Notes waive any past
defaults under the Indenture and its consequences, except a default in the
payment of the principal of, premium, if any, or interest on any Note, or in
respect of a covenant or provision which under the Indenture cannot be
modified or amended without the consent of the holder of each Note
outstanding.
The Company is also required to notify the Trustee within five business days
of the occurrence of any Default.
The Trust Indenture Act of 1939 contains limitations on the rights of the
Trustee, should it become a creditor of the Company or any Guarantor, to
obtain payment of claims in certain cases or to realize
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on certain property received by it in respect of any such claims, as security
or otherwise. The Trustee is permitted to engage in other transactions;
provided that if it acquires any conflicting interest it must eliminate such
conflict upon the occurrence of an Event of Default or else resign.
Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have its
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Company shall be deemed to
have paid and discharged the entire indebtedness represented by the
outstanding Notes, except for: (i) the rights of holders of the Notes to
receive payments in respect of the principal of, premium, if any, and interest
on the Notes when such payments are due; (ii) the Company's obligations with
respect to the Notes concerning issuing temporary Notes, registration of
Notes, mutilated, destroyed, lost or stolen Notes and the maintenance of an
office or agency for payments; (iii) the rights, powers, trust duties and
immunities of the Trustee and the Company's obligations in connection
therewith; and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have the
obligations of the Company released with respect to certain covenants that are
described in the Indenture ("Covenant Defeasance") and thereafter any omission
to comply with such obligations shall not constitute a Default or Event of
Default with respect to the Notes. In the event Covenant Defeasance occurs,
certain events (not including non-payment, bankruptcy, receivership,
reorganization and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes cash in U.S. dollars, non-callable U.S. government
obligations, or a combination thereof, in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
Notes on the stated date for payment thereof or on the applicable redemption
date, as the case may be; (ii) in the case of Legal Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) since the date of the Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the holders of the
Notes will not recognize income, gain or loss for federal income tax purposes
as a result of such Legal Defeasance and will be subject to federal income tax
on the same amounts, in the same manner and at the same times as would have
been the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the Trustee an
opinion of counsel in the United States reasonably acceptable to the Trustee
confirming that the holders of the Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other that a Default
or Event of Default with respect to the Indenture resulting from the
Incurrence of Indebtedness, all or a portion of which will be used to defease
the Notes concurrently with such Incurrence); (v) such Legal Defeasance or
Covenant Defeasance shall not result in a breach or violation of, or
constitute a default under, the Indenture or any other material agreement or
instrument to which the Company or any of its Subsidiaries is a party or by
which the Company or any of its Subsidiaries is bound; (vi) the Company shall
have delivered to the Trustee an officers' certificate stating that the
deposit was not made by the Company with the intent of preferring the holders
of the Notes over any other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding any other creditors of the
Company or others; (vii) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of
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counsel, each stating that all conditions precedent provided for or relating
to the Legal Defeasance or the Covenant Defeasance have been complied with;
(viii) the Company shall have delivered to the Trustee an opinion of counsel
to the effect that (A) the trust funds will not be subject to any rights of
holders of Indebtedness of the Company other than the Notes and (B) assuming
no intervening bankruptcy of the Company between the date of deposit and the
91st day following the deposit and that no Holder of the Notes is an insider
of the Company, after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; and (ix)
certain other customary conditions precedent specified in the Indenture are
satisfied.
Satisfaction and Discharge
The Indenture shall cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes, as expressly
provided for in the Indenture) as to all outstanding Notes when (a) either (i)
all the Notes theretofore authenticated and delivered (except lost, stolen or
destroyed Notes which have been replaced or paid) canceled or have been
delivered to the Trustee for cancellation or (ii) all Notes not theretofore
delivered to the Trustee canceled or for cancellation (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within one
year, or (z) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of the Company, and
the Company or any Guarantor has irrevocably deposited or caused to be
deposited with the Trustee funds in an amount sufficient to pay and discharge
the entire indebtedness on the Notes not theretofore delivered to the Trustee
canceled or for cancellation, including principal of, premium, if any, and
accrued interest at such Stated Maturity or redemption date; (b) the Company
or any Guarantor has paid or caused to be paid all other sums payable under
the Indenture by the Company or any Guarantor; and (c) the Company has
delivered to the Trustee an officers' certificate and an opinion of counsel
each stating that (i) all conditions precedent under the Indenture relating to
the satisfaction and discharge of the Indenture have been complied with and
(ii) such satisfaction and discharge will not result in a breach or violation
of, or constitute a default under, the Indenture or any other material
agreement or instrument to which the Company or any Guarantor is a party or by
which the Company or any Guarantor is bound.
Modifications and Amendments
Modifications and amendments of the Indenture may be made by the Company,
each Guarantor, if any, and the Trustee with the consent of the Holders of not
less than a majority in aggregate outstanding principal amount of the Notes;
provided, however, that no such modification or amendment may, without the
consent of the holder of each outstanding Note affected thereby: (i) change
the Stated Maturity of the principal of, or any installment of interest on,
any Note or reduce the principal amount thereof or the rate of interest
thereon or any premium payable upon the redemption thereof, or change the coin
or currency in which the principal of any Note or any premium or the interest
thereon is payable, or impair the right to institute suit for the enforcement
of any such payment on or after the Stated Maturity thereof; (ii) amend,
change or modify the obligation of the Company to make and consummate an Offer
with respect to any Asset Sale or Asset Sales in accordance with "Certain
Covenants--Limitation on Sale of Assets" or the obligation of the Company to
make and consummate a Change of Control Offer in the event of a Change of
Control in accordance with "Certain Covenants--Purchase of Notes Upon a Change
of Control," including amending, changing or modifying any definitions with
respect thereto; (iii) reduce the percentage in principal amount of
outstanding Notes, the consent of whose holders is required for any such
supplemental indenture, or the consent of whose holders is required for any
waiver; (iv) modify any of the provisions relating to supplemental indentures
requiring the consent of holders or relating to the waiver of past defaults or
relating to the waiver of certain covenants, except to increase the percentage
of outstanding Notes required for such actions
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or to provide that certain other provisions of the Indenture cannot be
modified or waived without the consent of the holder of each Note affected
thereby; (v) except as otherwise permitted under "Consolidation, Merger, Sale
of Assets," consent to the assignment or transfer by the Company or any
Guarantor of any of its rights and obligations under the Indenture; or (vi)
amend or modify any of the provisions of the Indenture relating to the
subordination of the Notes or any Guarantee in any manner adverse to the
holders of the Notes or any Guarantee.
The holders of not less than a majority in aggregate principal amount of the
Notes outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture.
Governing Law
The Indenture, the Notes and the Guarantees will be governed by, and
construed in accordance with the laws of the State of New York, without giving
effect to the conflicts of law principles thereof.
Same-Day Settlement and Payment
Settlement for the Notes will be made in same day funds. All payments of
principal and interest will be made by the Company in same day funds. The
Notes will trade in the Same-Day Funds Settlement System of The Depository
Trust Company (the "Depositary" or "DTC") until maturity, and secondary market
trading activity for the Notes will therefore settle in same day funds.
Certain Definitions
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Restricted Subsidiary or (ii) assumed in connection
with the acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition. Acquired Indebtedness
shall be deemed to be incurred on the date of the related acquisition of
assets from any Person or the date the acquired Person becomes a Restricted
Subsidiary.
"Affiliate" means, with respect to any specified Person: (i) any other
Person directly or indirectly controlling or controlled by or under direct or
indirect common control with such specified Person; (ii) any other Person that
owns, directly or indirectly, 5% or more of such Person's Capital Stock or any
officer or director of any such Person or other Person or, with respect to any
natural Person, any person having a relationship with such Person by blood,
marriage or adoption not more remote than first cousin; or (iii) any other
Person 10% or more of the voting Capital Stock of which are beneficially owned
or held directly or indirectly by such specified Person. For the purposes of
this definition, "control" when used with respect to any specified Person
means the power to direct the management and policies of such Person directly
or indirectly, whether through ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
Sale and Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Restricted Subsidiary; (ii) all or substantially all of the
properties and assets of any division or line of business of the Company or
its Restricted Subsidiaries; or (iii) any other properties or assets of the
Company or any Restricted Subsidiary, other than in the ordinary course of
business. For the purposes of this definition, the term "Asset Sale" shall not
include (x) any transfer of properties and assets (A) that is governed by the
first paragraph under "Consolidation, Merger, Sale of Assets" or (B) that is
of the Company to any Restricted Subsidiary, or of any Subsidiary to the
Company or any Subsidiary in accordance with the terms of the Indenture or (y)
transfers of properties and assets in any given fiscal year with an aggregate
Fair Market Value of less than $3,000,000.
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"Asset Swap" means the execution of a definitive agreement, subject only to
customary closing conditions, that the Company in good faith believes will be
satisfied, for a substantially concurrent purchase and sale, or exchange, of
Productive Assets between the Company or any of its Restricted Subsidiaries
and another Person or group of affiliated Persons; it being understood that an
Asset Swap may include a cash equalization payment made in connection
therewith provided that such cash payment, if received by the Company or its
Subsidiaries, shall be deemed to be proceeds received from an Asset Sale and
applied in accordance with "Certain Covenants--Limitation on Sale of Assets"
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the
sum of the products of (a) the number of years from the date of determination
to the date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment by
(ii) the sum of all such principal payments.
"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States Federal or State law relating to
bankruptcy, insolvency, receivership, winding-up, liquidation, reorganization
or relief of debtors or any amendment to, succession to or change in any such
law.
"Borrowing Base" means the sum of (i) 85% of accounts receivable of the
Company and its Subsidiaries and (ii) 50% of the net book value of the
inventory of the Company and its Subsidiaries, in each case, as determined on
a consolidated basis in accordance with GAAP.
"Capital Lease Obligation" means any obligations of the Company and its
Restricted Subsidiaries on a Consolidated basis under any capital lease of
real or personal property which, in accordance with GAAP, has been recorded as
a capitalized lease obligation.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of such Person's
capital stock.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Company" means Canandaigua Brands, Inc., a corporation incorporated under
the laws of Delaware, until a successor Person shall have become such pursuant
to the applicable provisions of the Indenture, and thereafter "Company" shall
mean such successor Person.
"Consolidated Fixed Charge Coverage Ratio" of the Company means, for any
period, the ratio of (a) the sum of Consolidated Net Income (Loss),
Consolidated Interest Expense, Consolidated Income Tax Expense and
Consolidated Non-cash Charges deducted in computing Consolidated Net Income
(Loss) in each case, for such period, of the Company and its Restricted
Subsidiaries on a Consolidated basis, all determined in accordance with GAAP
to (b) the sum of Consolidated Interest Expense for such period and cash and
non-cash dividends paid on any Preferred Stock of the Company and its
Restricted Subsidiaries during such period; provided that (i) in making such
computation, the Consolidated Interest Expense attributable to interest on any
Indebtedness computed on a pro forma basis and (A) bearing a floating interest
rate, shall be computed as if the rate in effect on the date of computation
had been the applicable rate for the entire period and (B) which was not
outstanding during the period for which the computation is being made but
which bears, at the option of the Company, a fixed or floating rate of
interest, shall be computed by applying at the option of the Company, either
the fixed or floating rate and (ii) in making such computation, the
Consolidated
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Interest Expense of the Company attributable to interest on any Indebtedness
under a revolving credit facility computed on a pro forma basis shall be
computed based upon the average daily balance of such Indebtedness during the
applicable period.
"Consolidated Income Tax Expense" means for any period, as applied to the
Company, the provision for federal, state, local and foreign income taxes of
the Company and its Consolidated Restricted Subsidiaries for such period as
determined in accordance with GAAP on a Consolidated basis.
"Consolidated Interest Expense" of the Company means, without duplication,
for any period, the sum of (a) the interest expense of the Company and its
Consolidated Restricted Subsidiaries for such period, on a Consolidated basis,
including, without limitation, (i) amortization of debt discount, (ii) the net
cost under interest rate contracts (including amortization of discounts),
(iii) the interest portion of any deferred payment obligation and (iv) accrued
interest, plus (b) (i) the interest component of the Capital Lease Obligations
paid, accrued and/or scheduled to be paid or accrued by the Company during
such period and (ii) all capitalized interest of the Company and its
Consolidated Restricted Subsidiaries, in each case as determined in accordance
with GAAP on a Consolidated basis. Whenever pro forma effect is to be given to
an acquisition or disposition of assets for the purpose of calculating the
Consolidated Fixed Charge Coverage Ratio, the amount of Consolidated Interest
Expense associated with any Indebtedness Incurred in connection with such
acquisition or disposition of assets, shall be calculated on a pro forma basis
in accordance with Regulation S-X under the Securities Act, as in effect on
the date of such calculation.
"Consolidated Net Income (Loss)" of the Company means, for any period, the
Consolidated net income (or loss) of the Company and its Consolidated
Restricted Subsidiaries for such period as determined in accordance with GAAP
on a Consolidated basis, adjusted, to the extent included in calculating such
net income (loss), by excluding, without duplication: (i) all extraordinary
gains or losses (less all fees and expenses relating thereto); (ii) the
portion of net income (or loss) of the Company and its Consolidated Restricted
Subsidiaries allocable to minority interests in unconsolidated Persons to the
extent that cash dividends or distributions have not actually been received by
the Company or one of its Consolidated Restricted Subsidiaries; (iii) net
income (or loss) of any Person combined with the Company or any of its
Restricted Subsidiaries on a "pooling of interests" basis attributable to any
period prior to the date of combination; (iv) any gain or loss, net of taxes,
realized upon the termination of any employee pension benefit plan; (v) net
gains (but not losses) (less all fees and expenses relating thereto) in
respect of dispositions of assets other than in the ordinary course of
business; or (vi) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time permitted, directly or
indirectly, by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulations
applicable to that Restricted Subsidiary or its stockholders. Whenever pro
forma effect is to be given to an acquisition or disposition of assets for the
purpose of calculating the Consolidated Fixed Charge Coverage Ratio, the
amount of income or earnings related to such assets shall be calculated on a
pro forma basis in accordance with Regulation S-X under the Securities Act, as
in effect on the date of such calculation.
"Consolidated Net Tangible Assets" means with respect to any Person, as of
any date of determination, the book value of such Persons total assets, less
goodwill, deferred financing costs and other intangibles and less accumulated
amortization, shown on the most recent balance sheet of such Person,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Worth" of any Person means the Consolidated stockholders'
equity (excluding Redeemable Capital Stock) of such Person and its
subsidiaries, as determined in accordance with GAAP on a Consolidated basis.
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"Consolidated Non-cash Charges" of the Company means, for any period, the
aggregate depreciation, amortization and other non-cash charges of the Company
and its Consolidated Restricted Subsidiaries for such period, as determined in
accordance with GAAP (excluding any non-cash charge which requires an accrual
or reserve for cash charges for any future period).
"Consolidation" means, with respect to any Person, the consolidation of the
accounts of such Person and each of its subsidiaries if and to the extent the
accounts of such Person and each of its subsidiaries would normally be
consolidated with those of such Person, all in accordance with GAAP. The term
"Consolidated" shall have a similar meaning.
"Credit Agreement" means the First Amended and Restated Credit Agreement,
dated as of November 2, 1998, between the Company, the Subsidiaries of the
Company identified on the signature pages thereof, the lenders named therein
and The Chase Manhattan Bank, as administrative agent, including any
deferrals, renewals, extensions, replacements, refinancings or refundings
thereof or amendments, modifications or supplements thereto and any agreements
therefor (including any of the foregoing that increase the principal amount of
Indebtedness or the commitments to lend thereunder and have been made in
compliance with the provisions of "Certain Covenants--Limitation on
Indebtedness"; provided that, for purposes of the definition of "Permitted
Indebtedness," no such increase may result in principal amount of Indebtedness
of the Company under the Credit Agreement exceeding the amount permitted by
subparagraph (b)(1) of "Certain Covenants--Limitation on Indebtedness"),
whether by or with the same or any other lender, creditor, group of lenders or
group of creditors, and including related notes, guarantees and note
agreements and other instruments and agreements executed in connection
therewith.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) any Indebtedness outstanding
under the Credit Agreement and (ii) any other Senior Indebtedness which, at
the time of determination has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least
$50,000,000 if the instrument governing such other Senior Indebtedness
expressly states that such Indebtedness is "Designated Senior Indebtedness"
for purposes of the Indenture.
"Designation" has the meaning set forth under "Certain Covenants--
Designation of Unrestricted Subsidiaries."
"Designation Amounts" has the meaning set forth under "Certain Covenants--
Designation of Unrestricted Subsidiaries."
"Domestic Restricted Subsidiary" means a Restricted Subsidiary of the
Company organized under the laws of the United States or any political
subdivision thereof or the operations of which are located substantially
inside the United States.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Existing Notes" means the Company's outstanding 8 3/4% Senior Subordinated
Notes due 2003.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's-length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy.
"Foreign Restricted Subsidiary" means a Restricted Subsidiary of the Company
not organized under the laws of the United States or any political subdivision
thereof and the operations of which are located substantially outside of the
United States.
"GAAP" or "Generally Accepted Accounting Principles" means generally
accepted accounting principles in the United States, consistently applied,
which are in effect on the date of the Indenture.
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"Guarantee" means the guarantee by each Guarantor of the Company's Indenture
Obligations pursuant to a guarantee given in accordance with the Indenture,
including the Guarantees by the Guarantors and any Guarantee delivered
pursuant to provisions of "Certain Covenants--Limitation on Guarantees of
Restricted Subsidiaries.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person referred to in the definition of Indebtedness contained in
this Section guaranteed directly or indirectly in any manner by such Person,
or in effect guaranteed directly or indirectly by such Person through an
agreement (i) to pay or purchase such Indebtedness or to advance or supply
funds for the payment or purchase of such Indebtedness, (ii) to purchase, sell
or lease (as lessee or lessor) property, or to purchase or sell services,
primarily for the purpose of enabling the debtor to make payment of such
Indebtedness or to assure the holder of such Indebtedness against loss, (iii)
to supply funds to, or in any other manner invest in, the debtor (including
any agreement to pay for property or services without requiring that such
property be received or such services be rendered), (iv) to maintain working
capital or equity capital of the debtor, or otherwise to maintain the net
worth, solvency or other financial condition of the debtor or (v) otherwise to
assure a creditor against loss; provided that the term "guarantee" shall not
include endorsements for collection or deposit, in either case in the ordinary
course of business.
"Guarantor" means the Subsidiaries listed on the signature pages of the
Indenture as guarantors and each other Subsidiary, formed, created or acquired
after the Issue Date, required to become a Guarantor after the Issue Date,
pursuant to "Limitation on Guarantees by Restricted Subsidiaries."
"Hedging Agreement" means, with respect to any Person, all interest rate
swap or similar agreements or foreign currency or commodity hedge, exchange or
similar agreements of such Person.
"Hedging Obligations" means, with respect to any Person, the Obligations of
such Person under Hedging Agreements.
"Holders" mean the registered holders of the Notes.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to
GAAP or otherwise, of any such Indebtedness or other obligation on the balance
sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall have
meanings correlative to the foregoing). Indebtedness of any Acquired Person or
any of its Subsidiaries existing at the time such Acquired Person becomes a
Subsidiary (or is merged into or consolidated with the Company or any
Subsidiary), whether or not such Indebtedness was Incurred in connection with,
as a result of, or in contemplation of, such Acquired Person becoming a
Subsidiary (or being merged into or consolidated with the Company or any
Subsidiary), shall be deemed Incurred at the time any such Acquired Person
becomes a Subsidiary or merges into or consolidates with the Company or any
Subsidiary.
"Indebtedness" means, with respect to any Person, without duplication: (i)
all indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services, excluding any trade payables and other
accrued current liabilities arising in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such Person in connection with any letters of credit issued under letter of
credit facilities, acceptance facilities or other similar facilities and in
connection with any agreement to purchase, redeem, exchange, convert or
otherwise acquire for value any Capital Stock of such Person, or any warrants,
rights or options to acquire such Capital Stock, now or hereafter outstanding,
(ii) all obligations of such Person evidenced by bonds, notes, debentures or
other similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (even if the
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rights and remedies of the seller or lender under such agreement in the event
of default are limited to repossession or sale of such property), but
excluding trade payables arising in the ordinary course of business, (iv) all
Hedging Obligations of such Person, (v) all Capital Lease Obligations of such
Person, (vi) all Indebtedness referred to in clauses (i) through (v) above of
other Persons and all dividends of other Persons, the payment of which is
secured by (or for which the holder of such Indebtedness has an existing
right, contingent or otherwise, to be secured by) any Lien, upon or with
respect to property (including, without limitation, accounts and contract
rights) owned by such Person, even though such Person has not assumed or
become liable for the payment of such Indebtedness, (vii) all Guaranteed Debt
of such Person, (viii) all Redeemable Capital Stock valued at the greater of
its voluntary or involuntary maximum fixed repurchase price plus accrued and
unpaid dividends, and (ix) any amendment, supplement, modification, deferral,
renewal, extension, refunding or refinancing of any liability of the types
referred to in clauses (i) through (viii) above. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does
not have a fixed repurchase price shall be calculated in accordance with the
terms of such Redeemable Capital Stock as if such Redeemable Capital Stock
were purchased on any date on which Indebtedness shall be required to be
determined pursuant to the Indenture, and if such price is based upon, or
measured by, the Fair Market Value of such Redeemable Capital Stock, such Fair
Market Value to be determined in good faith by the board of directors of the
issuer of such Redeemable Capital Stock.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Notes, including any Guarantor, to
pay principal of, premium, if any, and interest when due and payable, and all
other amounts due or to become due under or in connection with the Indenture,
the Notes and the performance of all other obligations to the Trustee and the
Holders under the Indenture and the Notes, according to the terms thereof.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"Investments" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others
or any payment for property or services for the account or use of others), or
any purchase, acquisition or ownership by such Person of any Capital Stock,
bonds, notes, debentures or other securities issued or owned by, any other
Person and all other items that would be classified as investments on a
balance sheet prepared in accordance with GAAP.
"Issue Date" means the original issue date of the Notes.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation or other encumbrance upon or with
respect to any property of any kind, real or personal, movable or immovable,
now owned or hereafter acquired.
"Maturity" when used with respect to any Note means the date on which the
principal of such Note becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect
of Excess Proceeds, Change of Control, call for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof in the form of cash or Temporary Cash Investments
including payments in respect of deferred payment obligations when received in
the form of, or stock or other assets when disposed for, cash or Temporary
Cash Investments (except to the extent that such obligations are financed or
sold with recourse to the Company or any Restricted Subsidiary) net of (i)
brokerage commissions and other actual fees and expenses (including fees and
expenses of counsel and investment bankers) related to
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such Asset Sale, (ii) provisions for all taxes payable as a result of such
Asset Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties the subject of such Asset
Sale, (iv) amounts required to be paid to any Person (other than the Company
or any Restricted Subsidiary) owning a beneficial interest in the assets
subject to the Asset Sale and (v) appropriate amounts to be provided by the
Company or any Restricted Subsidiary, as the case may be, as a reserve, in
accordance with GAAP, against any liabilities associated with such Asset Sale
and retained by the Company or any Restricted Subsidiary, as the case may be,
after such Asset Sale, including, without limitation, pension and other post-
employment benefit liabilities, liabilities related to environmental matters
and liabilities under any indemnification obligations associated with such
Asset Sale, all as reflected in an officers' certificate delivered to the
Trustee and (b) with respect to any issuance or sale of Capital Stock or
options, warrants or rights to purchase Capital Stock, or debt securities or
Capital Stock that have been converted into or exchanged for Capital Stock, as
referred to under "Certain Covenants Limitation on Restricted Payments," the
proceeds of such issuance or sale in the form of cash or Temporary Cash
Investments, including payments in respect of deferred payment obligations
when received in the form of, or stock or other assets when disposed for, cash
or Temporary Cash Investments (except to the extent that such obligations are
financed or sold with recourse to the Company or any Restricted Subsidiary),
net of attorneys' fees, accountants' fees and brokerage, consultation,
underwriting and other fees and expenses actually incurred in connection with
such issuance or sale and net of taxes paid or payable as a result thereof.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Other Indebtedness" has the meaning set forth under "Certain Covenants--
Limitation on Guarantees by Restricted Subsidiaries."
"Pari Passu Indebtedness" means any Indebtedness of the Company or a
Guarantor that is pari passu in right of payment to the Notes or a Guarantee,
as the case may be.
"Permitted Investment" means (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, becomes a Wholly Owned
Subsidiary; (ii) Indebtedness of the Company or a Subsidiary described under
clauses (iv) and (v) of the definition of "Permitted Indebtedness"; (iii)
Temporary Cash Investments; (iv) Investments acquired by the Company or any
Subsidiary in connection with an Asset Sale permitted under "Certain
Covenants-Limitation on Sale of Assets" to the extent such Investments are
non-cash proceeds as permitted under such covenant; (v) guarantees of
Indebtedness otherwise permitted by the Indenture; (vi) Investments in
existence on the date of the Indenture; and (vii) Investments in joint
ventures in an aggregate amount not to exceed at any one time the greater of
(x) $50.0 million and (y) 5.0% of Consolidated Net Tangible Assets.
"Permitted Junior Securities" means any securities of the Company or any
successor corporation provided for by a plan of reorganization or readjustment
that are (i) equity securities without special covenants or (ii) debt
securities expressly subordinated in right of payment to all Senior
Indebtedness that may at the time be outstanding, to substantially the same
extent as, or to a greater extent than, the Notes are subordinated as provided
in the Indenture, in any event pursuant to a court order so providing and as
to which (a) the rate of interest on such securities shall not exceed the
effective rate of interest on the Notes on the date of the Indenture, (b) such
securities shall not be entitled to the benefits of covenants or defaults
materially more beneficial to the holders of such securities than those in
effect with respect to the Notes on the date of the Indenture and (c) such
securities shall not provide for amortization (including sinking fund and
mandatory prepayment provisions) commencing prior to the date six months
following the final scheduled maturity date of the Senior Indebtedness (as
modified by the plan of reorganization or readjustment pursuant to which such
securities are issued).
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"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political
subdivisions thereof.
"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding against such Person
in accordance with and at the contract rate (including, without limitation,
any rate applicable upon default) specified in the agreement or instrument
creating, evidencing or governing such Indebtedness, whether or not, pursuant
to applicable law or otherwise, the claim for such interest is allowed as a
claim in such Insolvency or Liquidation Proceeding.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred stock whether now outstanding, or issued after the date of
the Issue Date, and including, without limitation, all classes and series of
preferred or preference stock.
"Productive Assets" means assets of a kind used or usable by the Company and
its Restricted Subsidiaries in their respective businesses (including without
limitation, contracts, leases, licenses, or other agreements of value to the
Company or any of its Restricted Subsidiaries), provided, however, that
productive assets to be acquired by the Company or any Restricted Subsidiary
shall be, in the good faith judgment of management of the Company or such
Restricted Subsidiary, assets which are reasonably related, ancillary or
complementary to the business of the Company and its Restricted Subsidiaries
as conducted on the Issue Date.
"Public Equity Offering" means, with respect to the Company, an underwritten
public offering of Qualified Capital Stock of the Company pursuant to an
effective registration statement filed under the Securities Act (excluding
registration statements filed on Form S-8).
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable
or otherwise, is or upon the happening of an event (other than as a result of
a change of control provision substantially similar to that contained in
"Certain Covenants--Purchase of Notes Upon a Change of Control") or passage of
time would be, required to be redeemed prior to any Stated Maturity of the
principal of the Notes or is redeemable at the option of the holder thereof at
any time prior to any such Stated Maturity, or is convertible into or
exchangeable for debt securities at any time prior to any such Stated Maturity
at the option of the holder thereof.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a resolution of
the Board of Directors of the Company delivered to the Trustee, as an
Unrestricted Subsidiary pursuant to "Certain Covenants--Designation of
Unrestricted Subsidiaries" above. Any such designation may be revoked by a
resolution of the Board of Directors of the Company delivered to the Trustee,
subject to the provisions of such covenant.
"Sale and Leaseback Transaction" means any transaction or series of related
transactions pursuant to which the Company or a Subsidiary sells or transfers
any property or asset in connection with the leasing, or the resale against
installment payments, of such property or asset to the seller or transferor.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Guarantor Indebtedness" means, at any date: (a) all Obligations of
the Guarantors under the Credit Agreement; provided, however, that any
Indebtedness under any refinancing, refunding or
S-85
<PAGE>
replacement of the Credit Agreement shall not constitute Senior Guarantor
Indebtedness to the extent that the Indebtedness thereunder is by its express
terms subordinate to any other Indebtedness of any Guarantors; (b) all Hedging
Obligations of the Guarantors; (c) all Obligations of the Guarantors under
stand-by letters of credit; and (d) all other Indebtedness of the Guarantors
for borrowed money, including principal, premium, if any, and interest
(including Post-Petition Interest) on such Indebtedness, unless the instrument
under which such Indebtedness of the Guarantors for money borrowed is Incurred
expressly provides that such Indebtedness for money borrowed is not senior or
superior in right of payment to the Notes, and all renewals, extensions,
modifications, amendments or refinancings thereof. Notwithstanding the
foregoing, Senior Guarantor Indebtedness shall not include (a) to the extent
that it may constitute Indebtedness, any Obligation for Federal, state, local
or other taxes; (b) any Indebtedness among or between the Guarantors and any
Subsidiary of the Guarantors or any Affiliate of the Guarantors or any of such
Affiliate's Subsidiaries, unless and for so long as such Indebtedness has been
pledged to secure obligations under or in respect of Senior Guarantor
Indebtedness; (c) to the extent that it may constitute Indebtedness, any
Obligation in respect of any trade payable Incurred for the purchase of goods
or materials, or for services obtained, in the ordinary course of business;
(d) that portion of any Indebtedness that is Incurred in violation of the
Indenture; (e) Indebtedness evidenced by the Notes; (f) Indebtedness of the
Guarantors that is expressly subordinate or junior in right of payment to any
other Indebtedness of the Guarantors; (g) to the extent that it may constitute
Indebtedness, any obligation owing under leases (other than Capital Lease
Obligations) or management agreements; (h) any obligation that by operation of
law is subordinate to any general unsecured obligations of the Guarantors; (i)
Indebtedness represented by the Existing Notes; (j) Indebtedness incurred by
Guarantors as part of the purchase price of the acquisition of assets or a
business; and (k) Indebtedness of the Guarantors to the extent such
Indebtedness is owed to and held by any Federal, state, local or other
governmental authority.
"Senior Indebtedness" means, at any date, (a) all Obligations of the Company
under the Credit Agreement; provided, however, that any Indebtedness under any
refinancing, refunding or replacement of the Credit Agreement shall not
constitute Senior Indebtedness to the extent that the Indebtedness thereunder
is by its express terms subordinate to any other Indebtedness of the Company;
(b) all Hedging Obligations of the Company; (c) all Obligations of the Company
under stand-by letters of credit; and (d) all other Indebtedness of the
Company for borrowed money, including principal, premium, if any, and interest
(including Post-Petition Interest) on such Indebtedness, unless the instrument
under which such Indebtedness of the Company for money borrowed is Incurred
expressly provides that such Indebtedness for money borrowed is not senior or
superior in right of payment to the Notes, and all renewals, extensions,
modifications, amendments or refinancings thereof. Notwithstanding the
foregoing, Senior Indebtedness shall not include: (a) to the extent that it
may constitute Indebtedness, any Obligation for Federal, state, local or other
taxes; (b) any Indebtedness among or between the Company and any Subsidiary of
the Company or any Affiliate of the Company or any of such Affiliate's
Subsidiaries, unless and for so long as such Indebtedness has been pledged to
secure obligations under or in respect of Senior Indebtedness; (c) to the
extent that it may constitute Indebtedness, any Obligation in respect of any
trade payable Incurred for the purchase of goods or materials, or for services
obtained, in the ordinary course of business; (d) that portion of any
Indebtedness that is Incurred in violation of the Indenture; (e) Indebtedness
evidenced by the Notes; (f) Indebtedness of the Company that is expressly
subordinate or junior in right of payment to any other Indebtedness of the
Company; (g) to the extent that it may constitute Indebtedness, any obligation
owing under leases (other than Capital Lease Obligations) or management
agreements; (h) any obligation that by operation of law is subordinate to any
general unsecured obligations of the Company; (i) Indebtedness represented by
the Existing Notes; (j) Indebtedness incurred by the Company as part of the
purchase price of the acquisition of assets or a business; and (k)
Indebtedness of the Company to the extent such Indebtedness is owed to and
held by any Federal, state, local or other governmental authority.
S-86
<PAGE>
"Stated Maturity" when used with respect to any Indebtedness or any
installment of interest thereon, means the dates specified in such
Indebtedness as the fixed date on which the principal of such Indebtedness or
such installment of interest is due and payable.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Notes, the Existing Notes or a
Guarantee, as the case may be.
"Subsidiary" means any Person a majority of the equity ownership or the
Voting Stock of which is at the time owned, directly or indirectly, by the
Company or by one or more other Subsidiaries, or by the Company and one or
more other Subsidiaries.
"Temporary Cash Investments" means: (i) any evidence of Indebtedness of a
Person, other than the Company or its Subsidiaries, maturing not more than one
year after the date of acquisition, issued by the United States of America, or
an instrumentality or agency thereof and guaranteed fully as to principal,
premium, if any, and interest by the United States of America, (ii) any
certificate of deposit, maturing not more than one year after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital
and surplus and undivided profits of not less than $500,000,000, whose debt
has a rating, at the time as of which any investment therein is made, of "P-1"
(or higher) according to Moody's Investors Service, Inc. ("Moody's") or any
successor rating agency or "A-1" (or higher) according to Standard and Poor's
Corporation ("S&P") or any successor rating agency, (iii) commercial paper,
maturing not more than one year after the date of acquisition, issued by a
corporation (other than an Affiliate or Subsidiary of the Company) organized
and existing under the laws of the United States of America with a rating, at
the time as of which any investment therein is made, of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P and (iv) any money
market deposit accounts issued or offered by a domestic commercial bank having
capital and surplus in excess of $500,000,000.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to "Certain Covenants--Designation of Unrestricted Subsidiaries"
above. Any such designation may be revoked by a resolution of the Board of
Directors of the Company delivered to the Trustee, subject to the provisions
of such covenant.
"Voting Stock" means stock of the class or classes pursuant to which the
holders thereof have the general voting power under ordinary circumstances to
elect at least a majority of the board of directors, managers or trustees of a
corporation (irrespective of whether or not at the time stock of any other
class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all the
Capital Stock of which (other than directors' qualifying shares and up to 5%
of the issued and outstanding Capital Stock which may be owned by executive
officers of such Subsidiary) is owned by the Company or another Wholly Owned
Restricted Subsidiary.
THE GUARANTORS
The initial Guarantors of the Notes are the following subsidiaries of the
Company: Batavia Wine Cellars, Inc., Barton Incorporated, Barton Brands, Ltd.,
Barton Beers, Ltd., Barton Brands of California, Inc., Barton Brands of
Georgia, Inc., Barton Distillers Import Corp., Barton Financial Corporation,
Stevens Point Beverage Co., Canandaigua Limited, Monarch Import Company,
Canandaigua Wine Company, Inc., The Viking Distillery, Inc., Canandaigua
Europe Limited, Roberts Trading Corp., and Canandaigua Limited and
Polyphenolics, Inc. The Company has agreed that within 120 days of
consummation of the Offering, Canandaigua B.V. will also become a guarantor.
Matthew Clark is not expected to be a Guarantor.
S-87
<PAGE>
UNDERWRITING
We, the Guarantors and the Underwriters have entered into an Underwriting
Agreement relating to the offering and sale of the Notes (the "Underwriting
Agreement"). In the Underwriting Agreement, we have agreed to sell each
Underwriter, and each Underwriter has agreed to purchase from us, the
principal amount of Notes that appears opposite its name in the table below:
<TABLE>
<CAPTION>
Principal
Underwriter Amount
----------- ------------
<S> <C>
Chase Securities Inc. ......................................... $
Credit Suisse First Boston Corporation.........................
Fleet Securities, Inc. ........................................
Schroder & Co. Inc. ...........................................
Scotia Capital Markets (USA) Inc. .............................
Total........................................................
------------
$200,000,000
============
</TABLE>
The obligations of the Underwriters under the Underwriting Agreement,
including their agreement to purchase Notes from us, are several and not
joint. Those obligations are also subject to certain conditions in the
Underwriting Agreement being satisfied. The Underwriters have agreed to
purchase all of the Notes if any of them are purchased.
The Underwriters have advised us that they propose to offer the Notes to the
public at the public offering price that appears on the cover page of this
Prospectus Supplement. The Underwriters may offer the Notes to selected
dealers at the public offering price minus a selling concession of up to %
of the principal amount. In addition, the Underwriters may allow, and those
selected dealers may reallow, a selling concession of up to % of the
principal amount to certain other dealers. After the initial public offering,
the Underwriters may change the public offering price and any other selling
terms.
In the Underwriting Agreement, we have agreed that:
. we will pay our expenses related to the Offering, which we estimate will
be $275,000;
. we will not offer to sell any of our debt securities (other than the
Notes) for a period of 180 days after the date of this Prospectus
Supplement without the prior consent of Chase Securities Inc.; and
. we will indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act.
The Notes are a new issue of securities, and there is currently no
established trading market for the Notes. In addition, we do not intend to
apply for the Notes to be listed on any securities exchange or to arrange for
the Notes to be quoted on any quotation system. The Underwriters have advised
us that they intend to make a market in the Notes, but they are not obligated
to do so. The Underwriters may discontinue any market making in the Notes at
any time in their sole discretion. Accordingly, we cannot assure you that a
liquid trading market will develop for the notes, that you will be able to
sell your Notes at a particular time or that the prices that you receive when
you sell will be favorable.
The Underwriters have informed us that they do not intend to confirm sales
to any accounts over which they exercise discretionary authority.
In connection with the offering of the Notes, the Underwriters may engage in
overallotment, stabilizing transactions and syndicate covering transactions in
accordance with Regulation M under the Securities Exchange Act of 1934, as
amended. Overallotment involves sales in excess of the offering size, which
creates a short position for the Underwriters. Stabilizing transactions
involve bids to purchase the Notes in the open market for the purpose of
pegging, fixing or maintaining the price of
S-88
<PAGE>
the Notes. Syndicate covering transactions involve purchases of the Notes in
the open market after the distribution has been completed in order to cover
short positions. Stabilizing transactions and syndicate covering transactions
may cause the price of the Notes to be higher than it would otherwise be in
the absence of those transactions. If the Underwriters engage in stabilizing
or syndicate covering transactions, they may discontinue them at any time.
As described below, affiliates of Chase Securities Inc., Credit Suisse First
Boston Corporation, Fleet Securities, Inc. and Scotia Capital Markets (USA)
Inc. will, in the aggregate, receive more than 10% of the proceeds from the
sale of the Notes. Accordingly, this offering is being conducted pursuant to
Rule 2710(c)(8) of the Rules of Conduct of the National Association of
Securities Dealers, Inc. In accordance with this provision, Schroder & Co.
Inc. is acting as "qualified independent underwriter," and the yield at which
the Notes are issued will be not lower than that recommended by Schroder &
Co., Inc. in compliance with the requirements of Rule 2720(c)(3) of the NASD
Conduct Rules. In connection with this offering, Schroder & Co. Inc. has
performed due diligence investigations and reviewed and participated in the
preparation of this prospectus.
Certain of the Underwriters and their affiliates perform various investment
banking, commercial banking and financial advisory services for us from time
to time. The Chase Manhattan Bank ("Chase"), an affiliate of Chase Securities
Inc., Credit Suisse First Boston, New York branch, an affiliate of Credit
Suisse First Boston Corporation, Fleet Securities, Inc., an affiliate of Fleet
National Bank, and Scotia Capital Markets (USA) Inc., an affiliate of the Bank
of Nova Scotia, are all lenders under our bank credit facility. Each of these
lenders will receive its proportionate share of our repayment of amounts
outstanding under the bank credit facility from the proceeds of this offering.
In addition, Chase acts as administrative agent under our bank credit facility
and as trustee under the indenture governing our 8 3/4% senior subordinated
notes due 2003.
LEGAL OPINIONS
The validity of the Notes offered hereby will be passed upon for the Company
by McDermott, Will & Emery. Certain legal matters in connection with the
Offering will be passed upon for the Underwriters by Cahill Gordon & Reindel
(a partnership including a professional corporation), New York, New York.
EXPERTS
The financial statements of Canandaigua Brands, Inc. and subsidiaries
included in or incorporated by reference into this Prospectus Supplement, to
the extent and for the periods indicated in their reports, have been audited
by Arthur Andersen LLP, independent public accountants, and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.
AVAILABLE INFORMATION
The Company is required to file reports and other information with the
Commission pursuant to the information requirements of the Exchange Act. The
Company intends to furnish the holders of the Notes with annual reports
containing consolidated financial statements audited by independent certified
public accounts following the end of each fiscal year and with quarterly
reports containing unaudited information for each of the first three quarters
of each fiscal year following the end of such quarter.
The Company's filings with the Commission may be inspected without charge at
the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, registration statements and certain other filings made
with the Commission through its Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") system are publicly available through the Commission's
site on the Internet's World Wide Web, located at http://www.sec.gov.
S-89
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act are incorporated herein by reference:
(1) the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1998;
(2) the Company's Quarterly Reports on Form 10-Q for the quarterly
periods ended May 31, 1998, August 31, 1998 and November 30, 1998; and
(3) the Company's Current Reports on Form 8-K dated November 3, 1998,
November 25, 1998, December 1, 1998 (as amended by Form 8-K/A filed on
February 12, 1999) and December 2, 1998.
All reports and other documents filed with the Commission by the Company
pursuant to Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent
to the date of this Prospectus Supplement and prior to the termination of the
offering relating to this Prospectus Supplement shall be deemed to be
incorporated by reference into this Prospectus Supplement and to be a part
hereof from the date of filing of such documents. Any statement incorporated
or deemed to be incorporated by reference herein shall be deemed to be
modified, replaced, or superseded for purposes of this Prospectus Supplement
to the extent that a statement contained herein or in any other subsequently
filed document that also is or is deemed to be incorporated by reference
herein modifies or supersedes such statement. Any such statement so modified
or superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this Prospectus Supplement.
The Company will provide without charge to each person to whom a copy of
this Prospectus Supplement is delivered, upon the written or oral request of
such person, a copy of any or all of the documents incorporated by reference
herein (other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into the information that this
Prospectus Supplement incorporates). Requests should be directed to
Canandaigua Brands, Inc., Attention: David Sorce, Secretary, 300 WillowBrook
Office Park, Fairport, New York 14450; telephone number 716-393-4130.
S-90
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CANANDAIGUA BRANDS, INC.
Report of Independent Public Accountants................................ F-2
Consolidated Balance Sheets as of November 30, 1998 (unaudited),
February 28, 1998, and February 28, 1997............................... F-3
Consolidated Statements of Income for the nine months ended November 30,
1998 (unaudited) and November 30, 1997 (unaudited), for the years ended
February 28, 1998 and 1997, for the six months ended February 29, 1996,
and February 28, 1995 (unaudited), and for the year ended August 31,
1995................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the nine
months ended November 30, 1998 (unaudited), for the years ended
February 28, 1998 and 1997, for the six months ended February 29, 1996,
and for the year ended August 31, 1995................................. F-5
Consolidated Statements of Cash Flows for the nine months ended November
30, 1998 (unaudited) and November 30, 1997 (unaudited), for the years
ended February 28, 1998 and 1997, for the six months ended February 29,
1996, and February 28, 1995 (unaudited), and for the year ended August
31, 1995............................................................... F-6
Notes to Consolidated Financial Statements.............................. F-8
MATTHEW CLARK PLC
Independent Auditor's Report............................................ F-32
Consolidated Balance Sheets as of April 30, 1998 and 1997............... F-33
Consolidated Profit and Loss Accounts for the years ended April 30,
1998, 1997, and 1996................................................... F-34
Consolidated Cash Flow Statements for the years ended April 30, 1998,
1997, and 1996......................................................... F-35
Notes to the Accounts................................................... F-36
Consolidated Balance Sheets as of October 31, 1998 (unaudited) and
October 31, 1997 (unaudited)........................................... F-54
Consolidated Profit and Loss Accounts for the six months ended
October 31, 1998 (unaudited) and October 31, 1997 (unaudited).......... F-55
Consolidated Cash Flow Statements for the six months ended October 31,
1998 (unaudited) and October 31, 1997 (unaudited)...................... F-56
Notes to the Accounts................................................... F-57
</TABLE>
F-1
<PAGE>
Report of Independent Public Accountants
To Canandaigua Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Canandaigua
Brands, Inc. (a Delaware corporation) and subsidiaries as of February 28, 1998
and 1997, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years ended February 28, 1998 and
1997, the six months ended February 29, 1996, and the year ended August 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Canandaigua Brands, Inc. and
subsidiaries as of February 28, 1998 and 1997, and the results of their
operations and their cash flows for the years ended February 28, 1998 and
1997, the six months ended February 29, 1996, and the year ended August 31,
1995, in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Rochester, New York,
April 8, 1998
F-2
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
November 30, February 28, February 28,
1998 1998 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
------
CURRENT ASSETS:
Cash and cash investments............. $ 2,141 $ 1,232 $ 10,010
Accounts receivable, net.............. 173,760 142,615 142,592
Inventories, net...................... 441,048 394,028 326,626
Prepaid expenses and other current
assets............................... 42,373 26,463 21,787
---------- ---------- ----------
Total current assets................ 659,322 564,338 501,015
PROPERTY, PLANT AND EQUIPMENT, net...... 247,499 244,035 249,552
OTHER ASSETS............................ 260,412 264,786 270,334
---------- ---------- ----------
Total assets........................ $1,167,233 $1,073,159 $1,020,901
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable......................... $ 114,500 $ 91,900 $ 57,000
Current maturities of long-term debt.. 24,118 24,118 40,467
Accounts payable...................... 71,379 52,055 55,892
Accrued federal and state excise
taxes................................ 24,632 17,498 17,058
Other accrued expenses and
liabilities.......................... 153,233 97,763 76,156
---------- ---------- ----------
Total current liabilities........... 387,862 283,334 246,573
---------- ---------- ----------
LONG-TERM DEBT, less current maturities. 291,386 309,218 338,884
---------- ---------- ----------
DEFERRED INCOME TAXES................... 59,337 59,237 61,395
---------- ---------- ----------
OTHER LIABILITIES....................... 5,018 6,206 9,316
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value -
Authorized, 1,000,000 shares;
Issued, none at November 30, 1998,
February 28, 1998 and February 28,
1997................................. -- -- --
Class A Common Stock, $.01 par value -
Authorized, 120,000,000 shares;
Issued, 17,859,769 shares at November
30, 1998, 17,604,784 shares at
February 28, 1998, and 17,462,332 at
February 28, 1997.................... 178 176 174
Class B Convertible Common Stock, $.01
par value - Authorized, 20,000,000
shares; Issued, 3,850,748 shares at
November 30, 1998, and 3,956,183
shares at February 28, 1998 and
February 28, 1997.................... 39 40 40
Additional paid-in capital............ 235,860 231,687 222,336
Retained earnings..................... 269,383 220,346 170,275
---------- ---------- ----------
505,460 452,249 392,825
---------- ---------- ----------
Less-Treasury stock-
Class A Common Stock, 3,183,605 shares
at November 30, 1998, 2,199,320
shares at February 28, 1998, and
1,915,468 shares at February 28,
1997, at cost........................ (79,623) (34,878) (25,885)
Class B Convertible Common Stock,
625,725 shares at November 30, 1998,
February 28, 1998, and February 28,
1997, at cost........................ (2,207) (2,207) (2,207)
---------- ---------- ----------
(81,830) (37,085) (28,092)
---------- ---------- ----------
Total stockholders' equity.......... 423,630 415,164 364,733
---------- ---------- ----------
Total liabilities and stockholders'
equity............................. $1,167,233 $1,073,159 $1,020,901
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-3
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
<TABLE>
<CAPTION>
For the Nine Months For the Years Ended For the Six Months Ended For the Year
Ended November 30, February 28, February 29, February 28, Ended
------------------------ ---------------------- ------------ ------------- August 31,
1998 1997 1998 1997 1996 1995 1995
----------- ----------- ---------- ---------- ------------ ------------- ------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
GROSS SALES............. $1,374,183 $1,252,372 $1,632,357 $1,534,452 $ 738,415 $ 592,305 $1,185,074
Less--Excise taxes..... (336,283) (322,134) (419,569) (399,439) (203,391) (137,820) (278,530)
---------- ---------- ---------- ---------- --------- --------- ----------
Net sales............ 1,037,900 930,238 1,212,788 1,135,013 535,024 454,485 906,544
COST OF PRODUCT SOLD.... (728,526) (666,747) (864,053) (844,181) (396,208) (327,694) (653,811)
---------- ---------- ---------- ---------- --------- --------- ----------
Gross profit........... 309,374 263,491 348,735 290,832 138,816 126,791 252,733
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... (202,561) (171,772) (231,680) (208,991) (112,411) (79,925) (159,196)
NONRECURRING
RESTRUCTURING EXPENSES. -- -- -- -- (2,404) (685) (2,238)
---------- ---------- ---------- ---------- --------- --------- ----------
Operating income....... 106,813 91,719 117,055 81,841 24,001 46,181 91,299
INTEREST EXPENSE, net... (23,700) (23,885) (32,189) (34,050) (17,298) (13,141) (24,601)
---------- ---------- ---------- ---------- --------- --------- ----------
Income before provision
for federal and state
income taxes.......... 83,113 67,834 84,866 47,791 6,703 33,040 66,698
PROVISION FOR FEDERAL
AND STATE INCOME TAXES. (34,076) (27,812) (34,795) (20,116) (3,381) (12,720) (25,678)
---------- ---------- ---------- ---------- --------- --------- ----------
NET INCOME.............. $ 49,037 $ 40,022 $ 50,071 $ 27,675 $ 3,322 $ 20,320 $ 41,020
========== ========== ========== ========== ========= ========= ==========
SHARE DATA:
Earnings per common
share:
Basic.................. $2.66 $2.14 $2.68 $1.43 $0.17 $1.13 $2.18
===== ===== ===== ===== ===== ===== =====
Diluted................ $2.60 $2.10 $2.62 $1.42 $0.17 $1.12 $2.16
===== ===== ===== ===== ===== ===== =====
Weighted average common
shares outstanding:
Basic.................. 18,412 18,663 18,672 19,333 19,611 17,989 18,776
Diluted................ 18,881 19,054 19,105 19,521 19,807 18,179 19,005
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-4
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
--------------- Paid-in Retained Treasury Restricted
Class A Class B Capital Earnings Stock Stock Total
------- ------- ---------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, August 31,
1994................... $138 $40 $113,348 $ 98,258 $ (7,591) $ -- $204,193
Conversion of 19,093
Class B Convertible
Common shares to Class
A Common shares........ -- -- -- -- -- -- --
Issuance of 3,000,000
Class A Common shares.. 30 -- 90,353 -- -- -- 90,383
Exercise of 432,067
Class A stock options
related to the Vintners
Acquisition............ 5 -- 13,013 -- -- -- 13,018
Employee stock purchases
of 28,641 treasury
shares................. -- -- 546 -- 87 -- 633
Exercise of 114,075
Class A stock options.. 1 -- 1,324 -- -- -- 1,325
Tax benefit on stock
options exercised...... -- -- 1,251 -- -- -- 1,251
Tax benefit on
disposition of employee
stock purchases........ -- -- 59 -- -- -- 59
Net income for fiscal
1995................... -- -- -- 41,020 -- -- 41,020
---- --- -------- -------- -------- ------- --------
BALANCE, August 31,
1995................... 174 40 219,894 139,278 (7,504) -- 351,882
Conversion of 5,000
Class B Convertible
Common shares to Class
A Common shares........ -- -- -- -- -- -- --
Exercise of 18,000 Class
A stock options........ -- -- 238 -- -- -- 238
Employee stock purchases
of 20,869 treasury
shares................. -- -- 593 -- 63 -- 656
Issuance of 10,000 Class
A stock options........ -- -- 134 -- -- -- 134
Tax benefit on stock
options exercised...... -- -- 198 -- -- -- 198
Tax benefit on
disposition of employee
stock purchases........ -- -- 76 -- -- -- 76
Net income for
Transition Period...... -- -- -- 3,322 -- -- 3,322
---- --- -------- -------- -------- ------- --------
BALANCE, February 29,
1996................... 174 40 221,133 142,600 (7,441) -- 356,506
Conversion of 35,500
Class B Convertible
Common shares to Class
A Common shares........ -- -- -- -- -- -- --
Exercise of 3,750 Class
A stock options........ -- -- 17 -- -- -- 17
Employee stock purchases
of 37,768 treasury
shares................. -- -- 884 -- 114 -- 998
Repurchase of 787,450
Class A Common Shares.. -- -- -- -- (20,765) -- (20,765)
Acceleration of 18,500
Class A stock options.. -- -- 248 -- -- -- 248
Tax benefit on stock
options exercised...... -- -- 27 -- -- -- 27
Tax benefit on
disposition of employee
stock purchases........ -- -- 27 -- -- -- 27
Net income for fiscal
1997................... -- -- -- 27,675 -- -- 27,675
---- --- -------- -------- -------- ------- --------
BALANCE, February 28,
1997................... 174 40 222,336 170,275 (28,092) -- 364,733
Exercise of 117,452
Class A stock options.. 2 -- 1,799 -- -- -- 1,801
Employee stock purchases
of 78,248 treasury
shares................. -- -- 1,016 -- 240 -- 1,256
Repurchase of 362,100
Class A Common shares.. -- -- -- -- (9,233) -- (9,233)
Acceleration of 142,437
Class A stock options.. -- -- 3,625 -- -- -- 3,625
Issuance of 25,000
restricted Class A
Common shares.......... -- -- 1,144 -- -- (1,144) --
Amortization of unearned
restricted stock
compensation........... -- -- -- -- -- 267 267
Accelerated amortization
of unearned restricted
stock compensation..... -- -- 200 -- -- 877 1,077
Tax benefit on stock
options exercised...... -- -- 1,382 -- -- -- 1,382
Tax benefit on
disposition of employee
stock purchases........ -- -- 185 -- -- -- 185
Net income for fiscal
1998................... -- -- -- 50,071 -- -- 50,071
---- --- -------- -------- -------- ------- --------
BALANCE, February 28,
1998................... 176 40 231,687 220,346 (37,085) -- 415,164
Conversion of 105,435
Class B Convertible
Common shares to Class
A Common shares
(unaudited)............ 1 (1) -- -- -- -- --
Exercise of 149,550
Class A stock options
(unaudited)............ 1 -- 3,021 -- -- -- 3,022
Employee stock purchases
of 34,551 treasury
shares (unaudited)..... -- -- 1,152 -- 133 -- 1,285
Repurchase of 1,018,836
Class A Common shares
(unaudited)............ -- -- -- -- (44,878) -- (44,878)
Net income for the nine
months ended
November 30, 1998
(unaudited)............ -- -- -- 49,037 -- -- 49,037
---- --- -------- -------- -------- ------- --------
BALANCE, November 30,
1998 (unaudited)....... $178 $39 $235,860 $269,383 $(81,830) $ -- $423,630
==== === ======== ======== ======== ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these balance sheets.
F-5
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Nine For the For the Six
Months Ended Years Ended Months Ended For the
----------------------- ------------------ ------------------------- Year Ended
November 30, February 28, February 29, February 28, August 31,
1998 1997 1998 1997 1996 1995 1995
----------- ----------- -------- -------- ------------ ------------ ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES
Net Income............. $ 49,037 $ 40,022 $ 50,071 $ 27,675 $ 3,322 $ 20,320 $ 41,020
Adjustments to reconcile
net income to net cash
provided by (used in)
operating activities:
Depreciation of
property, plant and
equipment............. 18,166 18,806 23,847 22,359 9,521 9,786 15,568
Amortization of
intangible assets..... 7,523 6,987 9,314 9,480 4,437 2,865 5,144
Deferred tax (benefit)
provision............. (2,800) 6,900 6,319 5,769 1,991 57 19,232
Stock-based
compensation expense.. 76 529 1,747 275 -- -- --
Amortization of
discount on long-term
debt.................. 287 261 352 112 -- -- --
(Gain) loss on sale of
property, plant and
equipment............. (16) (3,036) (3,001) (3,371) 81 -- (33)
Restructuring charges--
fixed asset write-
down.................. -- -- -- -- 275 -- (2,050)
Change in operating
assets and
liabilities:
Accounts receivable,
net.................. (31,143) (42,192) 749 3,523 (27,008) 1,586 7,392
Inventories, net...... (47,019) (91,008) (65,644) 16,232 (70,172) (18,783) 41,528
Prepaid expenses and
other current assets. (15,690) 2,552 (4,354) 3,271 (2,350) 3,079 (3,884)
Accounts payable...... 19,324 6,896 (3,288) (431) (2,362) (30,068) (13,415)
Accrued federal and
state excise taxes... 7,134 3,161 440 (2,641) 4,066 6,907 (1,025)
Other accrued expense
and liabilities...... 58,369 21,649 14,655 24,617 (8,564) (28,175) (20,784)
Other assets and
liabilities, net..... (3,917) (1,043) (2,452) 898 1,930 (3,817) (15,375)
-------- -------- -------- -------- -------- -------- --------
Total adjustments..... 10,294 (69,538) (21,316) 80,093 (88,155) (56,563) 32,298
-------- -------- -------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities........... 59,331 (29,516) 28,755 107,768 (84,833) (36,243) 73,318
-------- -------- -------- -------- -------- -------- --------
CASH FLOW FROM
INVESTING ACTIVITIES:
Purchases of property,
plant and equipment,
net of minor
disposals............. (21,660) (23,206) (31,203) (31,649) (16,077) (11,342) (37,121)
Purchase of joint
venture minority
interest.............. (716) -- -- -- -- -- --
Proceeds from sale of
property, plant and
equipment............. 45 12,547 12,552 9,174 555 -- 1,336
Payment of accrued
earn-out amounts...... -- -- -- (13,848) (11,307) -- (28,300)
-------- -------- -------- -------- -------- -------- --------
Net cash used in
investing activities. (22,331) (10,659) (18,651) (36,323) (26,829) (11,342) (64,085)
-------- -------- -------- -------- -------- -------- --------
(continued on next page)
</TABLE>
F-6
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(in thousands)
<TABLE>
<CAPTION>
For the Nine For the For the Six
Months Ended Years Ended Months Ended For the
----------------------- ------------------- ------------------------- Year Ended
November 30, February 28, February 29, February 28, August 31,
1998 1997 1998 1997 1996 1995 1995
----------- ----------- --------- -------- ------------ ------------ ----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM
FINANCING ACTIVITIES:
Principal payments of
long-term debt........ $(18,119) $(64,193) $(186,367) $(50,842) $ (14,579) $(89,474) $(139,906)
Purchases of treasury
stock................. (44,878) (9,233) (9,233) (20,765) -- -- --
Payment of issuance
costs of long-term
debt.................. -- (561) (1,214) (1,550) -- -- --
Proceeds from issuance
of long-term debt, net
of discount........... -- -- 140,000 61,668 13,220 47,000 47,000
Net proceeds from
(repayment of) notes
payable............... 22,600 104,000 34,900 (54,300) 111,300 (12,000) (19,000)
Exercise of employee
stock options......... 3,021 1,194 1,776 17 224 341 1,325
Proceeds from employee
stock purchases....... 1,285 1,256 1,256 998 656 -- 633
Proceeds from equity
offering, net......... -- -- -- -- -- 103,313 103,400
-------- -------- --------- -------- --------- -------- ---------
Net cash (used in)
provided by financing
activities........... (36,091) 32,463 (18,882) (64,774) 110,821 49,180 (6,548)
-------- -------- --------- -------- --------- -------- ---------
NET INCREASE (DECREASE)
IN CASH AND CASH
INVESTMENTS............ 909 (7,712) (8,778) 6,671 (841) 1,595 2,685
CASH AND CASH
INVESTMENTS, beginning
of period.............. 1,232 10,010 10,010 3,339 4,180 1,495 1,495
-------- -------- --------- -------- --------- -------- ---------
CASH AND CASH
INVESTMENTS, end of
period................. $ 2,141 $ 2,298 $ 1,232 $ 10,010 $ 3,339 $ 3,090 $ 4,180
======== ======== ========= ======== ========= ======== =========
SUPPLEMENTAL DISCLOSURES
OF CASH FLOW
INFORMATION:
Cash paid during the
period for:
Interest............... $ 20,156 $ 20,819 $ 33,394 $ 32,615 $ 14,720 $ 14,068 $ 25,082
======== ======== ========= ======== ========= ======== =========
Income taxes........... $ 24,771 $ 19,692 $ 32,164 $ 4,411 $ 3,612 $ 9,454 $ 11,709
======== ======== ========= ======== ========= ======== =========
SUPPLEMENTAL DISCLOSURES
OF NONCASH INVESTING
AND FINANCING
ACTIVITIES:
Fair value of assets
acquired, including
cash acquired......... $ -- $ -- $ -- $ -- $ 144,927 $ -- $ --
Liabilities assumed.... -- -- -- -- (3,147) -- --
-------- -------- --------- -------- --------- -------- ---------
Cash paid.............. -- -- -- -- 141,780 -- --
Less--Amounts borrowed. -- -- -- -- (141,780) -- --
-------- -------- --------- -------- --------- -------- ---------
Net cash paid for
acquisition.......... $ -- $ -- $ -- $ -- $ -- $ -- $ --
======== ======== ========= ======== ========= ======== =========
Goodwill reduction on
settlement of disputed
final closing net
current asset statement
for Vintners
Acquisition............ $ -- $ -- $ -- $ 5,894 $ -- $ -- $ --
======== ======== ========= ======== ========= ======== =========
Accrued earn-out
amounts............... $ -- $ -- $ -- $ -- $ 15,155 $ -- $ 10,000
======== ======== ========= ======== ========= ======== =========
</TABLE>
The accompanying notes to consolidated financial statements are an integral
part of these statements.
F-7
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of business--
Canandaigua Brands, Inc. (formerly Canandaigua Wine Company, Inc.), and its
subsidiaries (the Company) operate primarily in the beverage alcohol industry.
The Company is principally a producer and supplier of wine and an importer and
producer of beer and distilled spirits in the United States. It maintains a
portfolio of over 130 national and regional brands of beverage alcohol which
are distributed by over 850 wholesalers throughout the United States and
selected international markets. Its beverage alcohol brands are marketed in
three general categories: wine, beer and distilled spirits.
Year-end change--
The Company changed its fiscal year end from August 31 to the last day of
February. The period from September 1, 1995, through February 29, 1996, is
hereinafter referred to as the "Transition Period."
Principles of consolidation--
The consolidated financial statements of the Company include the accounts of
Canandaigua Brands, Inc., and all of its subsidiaries. All intercompany
accounts and transactions have been eliminated.
Unaudited financial statements--
The consolidated financial statements as of November 30, 1998 and for the
nine-month periods ended November 30, 1998 and November 30, 1997, and the six
month period ended February 28, 1995, have been prepared by the Company,
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission applicable to interim reporting and reflect, in the
opinion of the Company, all adjustments necessary to present fairly the
financial information for Canandaigua Brands, Inc., and its subsidiaries. All
such adjustments are of a normal recurring nature.
Management's use of estimates and judgment--
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash investments--
Cash investments consist of highly liquid investments with an original
maturity when purchased of three months or less and are stated at cost, which
approximates market value. The amounts at November 30, 1998 (unaudited),
February 28, 1998, and February 28, 1997, are not material.
Fair value of financial instruments--
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments,"
the Company calculates the fair value of financial instruments using quoted
market prices whenever available. When quoted market prices are
F-8
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
not available, the Company uses standard pricing models for various types of
financial instruments (such as forwards, options, swaps, etc.) which take into
account the present value of estimated future cash flows. The methods and
assumptions used to estimate the fair value of financial instruments are
summarized as follows:
Accounts receivable: The carrying amount approximates fair value due to the
short maturity of these instruments, the creditworthiness of the customers and
the large number of customers constituting the accounts receivable balance.
Notes payable: These instruments are variable interest rate bearing notes
for which the carrying value approximates the fair value.
Long-term debt: The carrying value of the debt facilities with short-term
variable interest rates approximates the fair value. The fair value of the
fixed rate debt was estimated by discounting cash flows using interest rates
currently available for debt with similar terms and maturities.
Foreign exchange hedging agreements: The fair value of currency forward
contracts is estimated based on quoted market prices.
Interest rate hedging agreements: The fair value of interest rate hedging
instruments is the estimated amount that the Company would receive or be
required to pay to terminate the derivative agreements at year end. The fair
value includes consideration of current interest rates and the
creditworthiness of the counterparties to the agreements.
Letters of credit: At November 30, 1998, February 28, 1998, and February 28,
1997, the Company had letters of credit outstanding totaling approximately
$7,825,000 (unaudited) $3,865,000 and $8,622,000, respectively, which
guarantee payment for certain obligations. The Company recognizes expense on
these obligations as incurred and no material losses are anticipated.
The carrying amount and estimated fair value of the Company's financial
instruments are summarized as follows:
<TABLE>
<CAPTION>
February 28, 1998 February 28, 1997
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(in thousands)
<S> <C> <C> <C> <C>
Liabilities:
Notes payable............................ $ 91,900 $ 91,900 $ 57,000 $ 57,000
Long-term debt, including current
portion................................. $333,336 $340,934 $379,351 $374,628
Derivative Instruments:
Foreign exchange hedging agreements:
Currency forward contracts............. $ -- $ -- $ 374 $ 407
Interest rate hedging agreements:
Interest rate cap agreement.............. $ -- $ -- $ -- $ --
Interest rate collar agreement........... $ -- $ -- $ -- $ --
</TABLE>
F-9
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Interest rate futures and currency forward contracts--
From time to time, the Company enters into interest rate futures and a
variety of currency forward contracts in the management of interest rate risk
and foreign currency transaction exposure. Unrealized gains and losses on
interest rate futures are deferred and recognized as a component of interest
expense over the borrowing period. Unrealized gains and losses on currency
forward contracts are deferred and recognized as a component of the related
transactions in the accompanying financial statements. Discounts or premiums
on currency forward contracts are recognized over the life of the contract.
Inventories--
Inventories are valued at the lower of cost (computed in accordance with the
last-in, first-out (LIFO) or first-in, first-out (FIFO) methods) or market.
Substantially all of the inventories are valued using the LIFO method at
November 30, 1998, February 28, 1998, and February 28, 1997. Replacement cost
of the inventories determined on a FIFO basis is approximately 460,061,000
(unaudited) at November 30, 1998, $411,424,000 at February 28, 1998, and
$349,006,000 at February 28, 1997.
A substantial portion of barreled whiskey and brandy will not be sold within
one year because of the duration of the aging process. All barreled whiskey
and brandy are classified as in-process inventories and are included in
current assets, in accordance with industry practice. Bulk wine inventories
are also included as work in process within current assets, in accordance with
the general practices of the wine industry, although a portion of such
inventories may be aged for periods greater than one year. Warehousing,
insurance, ad valorem taxes and other carrying charges applicable to barreled
whiskey and brandy held for aging are included in inventory costs.
Elements of cost include materials, labor and overhead and consist of the
following:
<TABLE>
<CAPTION>
November 30, February 28, February 28,
1998 1998 1997
------------ ------------ ------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Raw materials and supplies........ $16,739 $ 14,439 $ 14,191
Wine and distilled spirits in
process.......................... 340,764 304,037 262,289
Finished case goods............... 102,558 92,948 72,526
-------- -------- --------
460,061 411,424 349,006
Less--LIFO reserve ............... (19,013) (17,396) (22,380)
-------- -------- --------
$441,048 $394,028 $326,626
======== ======== ========
</TABLE>
If the FIFO method of inventory valuation had been used, reported net income
would have been: $954,000 (unaudited) or $0.05 per share on a diluted basis
(unaudited), higher for the nine months ended November 30, 1998; $664,000
(unaudited) or $0.03 per share on a diluted basis (unaudited), higher for the
nine months ended November 30, 1997; $2,941,000 or $0.15 per share on a
diluted basis, lower for the year ended February 28, 1998; $18,165,000 or
$0.93 per share on a diluted basis, higher for the year ended February 28,
1997; $3,433,000 or $0.17 per share on a diluted basis, higher for the six
months ended February 29, 1996; $616,000 (unaudited) or $0.03 per share on a
diluted basis (unaudited), lower for the six months ended February 28, 1995;
and $2,504,000 or $0.13 per share on a diluted basis, lower for the year ended
August 31, 1995.
F-10
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Property, plant and equipment--
Property, plant and equipment is stated at cost. Major additions and
betterments are charged to property accounts, while maintenance and repairs
are charged to operations as incurred. The cost of properties sold or
otherwise disposed of and the related accumulate depreciation are eliminated
from the accounts at the time of disposal and resulting gains and losses are
included as a component of operating income.
Depreciation--
Depreciation is computed primarily using the straight-line method over the
following estimated useful lives:
<TABLE>
<CAPTION>
Depreciable Life in Years
-------------------------
<S> <C>
Buildings and improvements.................... 10 to 33 1/3
Machinery and equipment....................... 3 to 15
Motor vehicles................................ 3 to 7
</TABLE>
Amortization of assets capitalized under capital leases is included with
depreciation expense. Amortization is calculated using the straight-line
method over the shorter of the estimated useful life of the asset or the lease
term.
Other assets--
Other assets, which consist of goodwill, distribution rights, trademarks,
agency license agreements, deferred financing costs, cash surrender value of
officers' life insurance and other amounts, are stated at cost, net of
accumulated amortization. Amortization is calculated on a straight-line or
effective interest basis over the following estimated useful lives:
<TABLE>
<CAPTION>
Useful Life in Years
--------------------
<S> <C>
Goodwill........................................... 40
Distribution rights................................ 40
Trademarks......................................... 40
Agency license agreements.......................... 16 to 40
Deferred financing costs........................... 5 to 10
</TABLE>
At November 30, 1998 (unaudited), and February 28, 1998, the weighted
average remaining useful life of these assets is approximately 36 years. The
face value of the officers' life insurance policies totaled $2,852,000 for all
periods presented.
Long-lived assets and intangibles--
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be disposed of," the Company reviews its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable on an undiscounted cash flow basis. The statement also requires
that long-lived assets and certain identifiable intangibles to be disposed of
be reported at the lower of carrying amount or fair value less cost to sell.
The Company did not record any asset impairment in fiscal 1998.
F-11
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Advertising and promotion costs--
The Company generally expenses advertising and promotion costs as incurred,
shown or distributed. Prepaid advertising costs at November 30, 1998
(unaudited), February 28, 1998, and February 28, 1997, were not material.
Advertising and promotion expense for the nine months ended November 30, 1998,
the nine months ended November 30, 1997, years ended February 28, 1998 and
1997, the Transition Period, the six months ended February 28, 1995, and the
year ended August 31, 1995, were approximately $116,309,000 (unaudited),
$85,427,000 (unaudited), $111,685,000, $101,319,000, $60,187,000, $41,658,000
(unaudited) and $84,246,000, respectively.
Income taxes--
The Company uses the liability method of accounting for income taxes. The
liability method accounts for deferred income taxes by applying statutory
rates in effect at the balance sheet date to the difference between the
financial reporting and tax basis of assets and liabilities.
Environmental--
Environmental expenditures that relate to current operations are expensed as
appropriate. Expenditures that relate to an existing condition caused by past
operations, and which do not contribute to current or future revenue
generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the cost can be
reasonably estimated. Generally, the timing of these accruals coincides with
the completion of a feasibility study or the Company's commitment to a formal
plan of action. Liabilities for environmental costs were not material at
November 30, 1998 (unaudited), February 28, 1998, and February 28, 1997.
Earnings Per Common Share--
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share," (SFAS No. 128) effective February 28,
1998. Basic earnings per common share excludes the effect of common stock
equivalents and is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding
during the period for Class A Common Stock and Class B Convertible Common
Stock. Diluted earnings per common share reflects the potential dilution that
could result if securities or other contracts to issue common stock were
exercised or converted into common stock. Diluted earnings per common share
assumes the exercise of stock options using the treasury stock method and
assumes the conversion of convertible securities, if any, using the "if
converted" method. Historical earnings per common share have been restated to
conform with the provisions of SFAS No. 128.
Other--
Certain fiscal 1997, Transition Period and fiscal 1995 balances have been
reclassified to conform with current year presentation.
2. ACQUISITIONS:
UDG Acquisition--
On September 1, 1995, the Company through its wholly-owned subsidiary,
Barton Incorporated (Barton), acquired certain of the assets of United
Distillers Glenmore, Inc., and certain of its North American affiliates
(collectively, UDG) (the UDG Acquisition). The acquisition was made pursuant
to
F-12
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
an Asset Purchase Agreement dated August 29, 1995 (the Purchase Agreement),
entered into between Barton and UDG. The acquisition included all of UDG's
rights to the Fleischmann's, Skol, Mr. Boston, Canadian LTD, Old Thompson,
Kentucky Tavern, Chi-Chi's, Glenmore and di Amore distilled spirits brands;
the U.S. rights to Inver House, Schenley and El Toro distilled spirits brands;
and related inventories and other assets. The acquisition also included two of
UDG's production facilities; one located in Owensboro, Kentucky, and the other
located in Albany, Georgia. In addition, pursuant to the Purchase Agreement,
the parties entered into multiyear agreements under which Barton (i) purchases
various bulk distilled spirits brands from UDG and (ii) provides packaging
services for certain of UDG's distilled spirits brands as well as warehousing
services.
The aggregate consideration for the acquired brands and other assets
consisted of $141,780,000 in cash and assumption of certain current
liabilities. The source of the cash payment made at closing, together with
payment of other costs and expenses required by the UDG Acquisition, was
financing provided by the Company pursuant to a term loan under the Company's
then existing bank credit agreement.
The UDG Acquisition was accounted for using the purchase method;
accordingly, the UDG assets were recorded at fair market value at the date of
acquisition. The excess of the purchase price over the estimated fair market
value of the net assets acquired (goodwill), $86,348,000, is being amortized
on a straight-line basis over 40 years. The results of operations of the UDG
Acquisition have been included in the Consolidated Statements of Income since
the date of acquisition.
3. PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
<TABLE>
<CAPTION>
November 30, 1998 February 28, 1998 February 28, 1997
----------------- ----------------- -----------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Land.................... $ 15,131 $ 15,103 $ 16,961
Buildings and
improvements........... 75,993 74,706 76,379
Machinery and equipment. 247,149 244,204 243,274
Motor vehicles.......... 5,413 5,316 5,355
Construction in
progress............... 33,186 17,485 13,999
--------- --------- ---------
376,872 356,814 355,968
Less--Accumulated
depreciation........... (129,373) (112,779) (106,416)
--------- --------- ---------
$ 247,499 $ 244,035 $ 249,552
========= ========= =========
</TABLE>
F-13
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
4. OTHER ASSETS:
The major components of other assets are as follows:
<TABLE>
<CAPTION>
November 30, 1998 February 28, 1998 February 28, 1997
----------------- ----------------- -----------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Goodwill................ $152,087 $150,595 $150,595
Distribution rights,
agency license
agreements and
trademarks............. 121,027 119,346 119,316
Other................... 23,466 23,686 22,936
-------- -------- --------
296,580 293,627 292,847
Less--Accumulated
depreciation........... (36,168) (28,841) (22,513)
-------- -------- --------
$260,412 $264,786 $270,334
======== ======== ========
</TABLE>
5. OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
<TABLE>
<CAPTION>
November 30, 1998 February 28, 1998 February 28, 1997
----------------- ----------------- -----------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Accrued salaries and
commissions............ $ 12,561 $23,704 $12,109
Other................... 140,672 74,059 64,047
-------- ------- -------
$153,233 $97,763 $76,156
======== ======= =======
</TABLE>
F-14
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
6. BORROWINGS:
Borrowings consist of the following:
<TABLE>
<CAPTION>
November 30, 1998 February 28, 1998 February 28, 1997
----------------------------- -------------------------- -----------------
Current Long-term Total Current Long-term Total Total
-------- ----------- -------- ------- --------- -------- -----------------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Notes Payable:
Senior Credit
Facility:
Revolving Credit
Loans............... $114,500 $ -- $114,500 $91,900 $ -- $ 91,900 $ 57,000
======== ======== ======== ======= ======== ======== ========
Long-term Debt:
Senior Credit
Facility:
Term Loan, variable
rate, aggregate
proceeds of $140,000,
due in installments
through June 2003..... $ 24,000 $ 98,000 $122,000 $24,000 $116,000 $140,000 $185,900
Senior Subordinated
Notes:
8.75% redeemable after
December 15, 1998,
due 2003.............. -- 130,000 130,000 -- 130,000 130,000 130,000
8.75% Series C
redeemable after
December 15, 1998,
due 2003 (less
unamortized discount
of $2,581, $2,868 and
$3,220 at November
30, 1998, February
28, 1998,
and February 28,
1997, respectively--
effective rate
9.76%)................ -- 62,419 62,419 -- 62,132 62,132 61,780
Capitalized Lease
Agreements:
Capitalized facility
lease bearing interest
at 9%, due in monthly
installments through
fiscal 1998........... -- -- -- -- -- -- 348
Industrial Development
Agencies:
7.50% 1980 issue,
original proceeds
$2,370, due in annual
installments of $119
through fiscal 2000... 118 -- 118 118 119 237 356
Other Long-term Debt:
Loans payable bearing
interest at 5%,
secured by cash
surrender value of
officers'
life insurance
policies.............. -- 967 967 -- 967 967 967
-------- -------- -------- ------- -------- -------- --------
$ 24,118 $291,386 $315,504 $24,118 $309,218 $333,336 $379,351
======== ======== ======== ======= ======== ======== ========
</TABLE>
Senior Credit Facility--
On December 19, 1997, the Company and a syndicate of banks (the Syndicate
Banks) entered into a new $325,000,000 senior Credit Agreement (the Credit
Agreement). The proceeds of the Credit Agreement were used to repay all
outstanding principal and accrued interest on all loans under the Company's
Third Amended and Restated Credit Agreement, as amended. As compared to the
F-15
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
previous bank credit agreement, the Credit Agreement includes, among other
things, lower interest rates, lower quarterly loan amortization and greater
flexibility with respect to effecting acquisitions, incurring indebtedness and
repurchasing the Company's capital stock. The Credit Agreement provides for a
$140,000,000 term loan facility due in June 2003 and a $185,000,000 revolving
loan facility, including letters of credit up to a maximum of $20,000,000,
which expires in June 2003. In July 1998, the revolving loan facility was
increased by $100,000,000 to $285,000,000 (unaudited). The rate of interest
payable, at the Company's option, is a function of the London interbank
offered rate (LIBOR) plus a margin, federal funds rate plus a margin, or the
prime rate. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the Credit Agreement). The Credit Agreement also provides for
certain mandatory term loan prepayments.
The term loan facility requires quarterly repayments of $6,000,000 beginning
March 1998 through December 2002, and payments of $10,000,000 in March 2003
and June 2003. At November 30, 1998 and February 28, 1998, the margin on the
term loan facility borrowings was [0.625%] and 0.75%, respectively, and may be
decreased by up to 0.35% and increased by up to 0.5% depending on the
Company's Debt Ratio.
The revolving loan facility is utilized to finance working capital
requirements. The Credit Agreement requires that the Company reduce the
outstanding balance of the revolving loan facility to less than $60,000,000
for thirty consecutive days during the nine months ending each November 30. In
June 1998, the Credit Agreement was amended to among other things, eliminate
this requirement. The margin on the revolving loan facility was 0.425% and
0.5% at November 30, 1998 and February 28, 1998, respectively and may be
decreased by up to 0.175% and 0.25% and increased by up to 0.475% and 0.4%,
respectively depending on the Company's Debt Ratio. In addition, the Company
pays a facility fee on the total revolving loan facility. At November 30, 1998
and February 28, 1998, the facility fee was 0.20% and 0.25%, respectively and
may be reduced 0.05% and 0.1% and increased by 0.15% and 0.1%, respectively
subject to the Company's Debt Ratio.
Each of the Company's principal operating subsidiaries has guaranteed,
jointly and severally, the Company's obligations under the Credit Agreement.
The Syndicate Banks have been given security interests in substantially all of
the assets of the Company including mortgage liens on certain real property.
The Company is subject to customary secured lending covenants including those
restricting additional liens, the incurrence of additional indebtedness, the
sale of assets, the payment of dividends, transactions with affiliates and the
making of certain investments. The primary financial covenants require the
maintenance of a Debt Ratio, a senior debt coverage ratio, a fixed charge
ratio and an interest coverage ratio. Among the most restrictive covenants
contained in the Credit Agreement is the requirement to maintain a fixed
charge ratio of not less than 1.0 at the last day of each fiscal quarter for
the most recent four quarters.
The Company had average outstanding Revolving Credit Loans of approximately
$83,459,000 (unaudited) $59,892,000 and $88,825,000 for the nine months ended
November 30, 1998 and the years ended February 28, 1998 and February 27, 1997,
respectively. Amounts available to be drawn down under the Revolving Credit
Loans were $162,675,000 (unaudited) $89,235,000 and $119,378,000 at November
30, 1998, February 28, 1998 and February 28 1997, respectively. The average
interest rate on the Revolving Credit Loans was 6.2%, 6.7%, 6.57%, 6.58%,
6.76%, 6.97% and 7.16%, for the nine months ended November 30, 1998, the nine
months ended November 30, 1997, the years ended February 28, 1998 and February
28, 1997, the six months ended February 28, 1996, the six months ended
February 28, 1995 and fiscal 1995, respectively. Facility fees on the new
F-16
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Credit Agreement are due based upon the total revolving loan facility, whereas
commitment fees under the prior agreement were based upon the unused portion
of the revolving loan facility. These fees are based upon the Company's Debt
Ratio and can range from 0.15% to 0.35%. At November 30, 1998, and February
28, 1998, the facility fee percentage was [0.20%] and 0.25%, respectively. The
commitment fee percentage at February 28, 1997, was 0.325%.
Senior Subordinated Notes--
On December 27, 1993, the Company issued $130,000,000 aggregate principal
amount of 8.75% Senior Subordinated Notes due in December 2003 (the Notes).
Interest on the Notes is payable semiannually on June 15 and December 15 of
each year. The Notes are unsecured and subordinated to the prior payment in
full of all senior indebtedness of the Company, which includes the Credit
Agreement. The Notes are guaranteed, on a senior subordinated basis, by all of
the Company's significant operating subsidiaries.
The Trust Indenture relating to the Notes contains certain covenants,
including, but not limited to, (i) limitation on indebtedness; (ii) limitation
on restricted payments; (iii) limitation on transactions with affiliates; (iv)
limitation on senior subordinated indebtedness; (v) limitation on liens; (vi)
limitation on sale of assets; (vii) limitation on issuance of guarantees of
and pledges for indebtedness; (viii) restriction on transfer of assets; (ix)
limitation on subsidiary capital stock; (x) limitation on the creation of any
restriction on the ability of the Company's subsidiaries to make distributions
and other payments; and (xi) restrictions on mergers, consolidations and the
transfer of all or substantially all of the assets of the Company to another
person. The limitation on indebtedness covenant is governed by a rolling four
quarter fixed charge ratio requiring a specified minimum.
On October 29, 1996, the Company issued $65,000,000 aggregate principal
amount of 8.75% Series B Senior Subordinated Notes due in December 2003 (the
Series B Notes). The Company used the net proceeds of approximately
$61,700,000 to repay $50,000,000 of Revolving Credit Loans and to prepay and
permanently reduce $9,600,000 of the Term Loan. The remaining proceeds were
used to pay various fees and expenses associated with the offering. The terms
of the Series B Notes were substantially identical to those of the Notes. In
February 1997, the Company exchanged $65,000,000 aggregate principal amount of
8.75% Series C Senior Subordinated Notes due in December 2003 (the Series C
Notes) for the Series B Notes. The terms of the Series C Notes are identical
in all material respects to the Series B Notes.
Loans Payable--
Loans payable, secured by officers' life insurance policies, carry an
interest rate of 5%. The notes carry no due dates and it is management's
intention not to repay the notes during the next fiscal year.
Capitalized Lease Agreements--Industrial Development Agencies--
Certain capitalized lease agreements require the Company to make lease
payments equal to the principal and interest on certain bonds issued by
Industrial Development Agencies. The bonds are secured by the leases and the
related facilities. These transactions have been treated as capital leases
with the related assets included in property, plant and equipment and the
lease commitments included in long-term debt. Among the provisions under the
debenture and lease agreements are covenants that define minimum levels of
working capital and tangible net worth and the maintenance of certain
financial ratios as defined in the agreements.
F-17
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Debt Payments--
Principal payments required under long-term debt obligations during the next
five fiscal years are as follows:
<TABLE>
<CAPTION>
February 28, 1998
-----------------
(in thousands)
<S> <C>
1999............ $ 24,118
2000............ 24,119
2001............ 24,000
2002............ 24,000
2003............ 24,000
Thereafter...... 215,967
--------
$336,204
========
</TABLE>
7. INCOME TAXES:
The provision for federal and state income taxes consists of the following:
<TABLE>
<CAPTION>
For the For the Year For the Six For the Year
Year Ended Ended Months Ended Ended
February 28, 1998 February 28, February 29, August 31,
------------------------- ------------ ------------ ------------
State and
Federal Local Total 1997 1996 1995
------- --------- ------- ------------ ------------ ------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Current income tax pro-
vision................. $21,032 $7,444 $28,476 $14,347 $1,390 $ 6,446
Deferred income tax pro-
vision................. 5,935 384 6,319 5,769 1,991 19,232
------- ------ ------- ------- ------ -------
$26,967 $7,828 $34,795 $20,116 $3,381 $25,678
======= ====== ======= ======= ====== =======
</TABLE>
A reconciliation of the total tax provision to the amount computed by
applying the expected U.S. federal income tax rate to income before provision
for federal and state income taxes is as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Year Ended For the Six Months For the Year Ended
February 28, February 28, Ended February 29, August 31,
1998 1997 1996 1995
--------------------- --------------------- -------------------- ---------------------
% of % of % of % of
Pretax Pretax Pretax Pretax
Amount Income Amount Income Amount Income Amount Income
---------- --------- ---------- --------- ---------- --------- ---------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Computed "expected" tax
provision.............. $ 29,703 35.0 $ 16,727 35.0 $ 2,346 35.0 $ 23,344 35.0
State and local income
taxes, net of Federal
income tax benefit..... 5,089 6.0 3,304 6.9 827 12.3 2,395 3.6
Nondeductible meals and
entertainment expenses. 294 0.3 310 0.6 205 3.1 290 0.4
Miscellaneous items,
net.................... (291) (0.3) (225) (0.4) 3 -- (351) (0.5)
---------- ------- ---------- ------- ---------- -------- ---------- -------
$ 34,795 41.0 $ 20,116 42.1 $ 3,381 50.4 $ 25,678 38.5
========== ======= ========== ======= ========== ======== ========== =======
</TABLE>
F-18
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Deferred tax liabilities (assets) are comprised of the following:
<TABLE>
<CAPTION>
February 28, 1998 February 28, 1997
----------------- -----------------
(in thousands)
<S> <C> <C>
Depreciation and amortization......... $70,303 $68,155
LIFO reserves......................... 13,601 2,019
Inventory reserves.................... 6,974 9,418
Other accruals........................ (18,193) (13,191)
------- -------
$72,685 $66,991
======= =======
</TABLE>
At February 28, 1998, the Company has state and U.S. federal net operating
loss (NOL) carryforwards of $16,213,000 and $3,654,000, respectively, to
offset future taxable income that, if not otherwise utilized, will expire as
follows: state NOLs of $6,945,000, $6,828,000 and $2,440,000 at February 28,
2001, 2002 and 2003, respectively, and federal NOL of $3,654,000 at February
28, 2011.
8. PROFIT SHARING RETIREMENT PLANS AND RETIREMENT SAVINGS PLAN:
The Company's profit sharing retirement plans, which cover substantially all
employees, provide for contributions by the Company in such amounts as the
Board of Directors may annually determine and for voluntary contributions by
employees. The plans are qualified as tax-exempt under the Internal Revenue
Code and conform with the Employee Retirement Income Security Act of 1974. The
Company's provisions for the plans, including the Barton plan described below,
were $5,571,000 and $4,999,000 for the years ended February 28, 1998 and 1997,
respectively, $2,579,000 in the Transition Period and $3,830,000 for fiscal
1995.
The Company's retirement savings plan, established pursuant to Section
401(k) of the Internal Revenue Code, permits substantially all full-time
employees of the Company (excluding Barton employees, who are covered by a
separate plan described below) to defer a portion of their compensation on a
pretax basis. Participants may defer, subject to a maximum contribution
limitation, up to 10% of their compensation for the year. The Company makes a
matching contribution of 25% of the first 4% of compensation an employee
defers. Company contributions to this plan were $367,000 and $700,000 for the
years ended February 28, 1998 and 1997, respectively, $325,000 in the
Transition Period and $281,000 in fiscal 1995.
The Barton profit sharing and 401(k) plan covers all salaried employees of
Barton. The amount of Barton's contribution under the profit sharing portion
of the plan is at the discretion of its Board of Directors, subject to
limitations of the plan. Contribution expense was $2,799,000 and $2,504,000
for the years ended February 28, 1998 and 1997, respectively, $1,095,000 in
the Transition Period and $1,430,000 in fiscal 1995. Pursuant to the 401(k)
portion of the plan, participants may defer up to 8% of their compensation for
the year, subject to limitations of the plan, and receive no matching
contribution from Barton.
Effective March 1, 1998, the Company's existing retirement savings and
profit sharing retirement plans and the Barton profit sharing and 401(k) plan
were merged into the Canandaigua Brands, Inc. 401(k) and Profit Sharing Plan
(the Plan). The Plan covers substantially all employees, excluding those
employees covered by collective bargaining agreements. The 401(k) portion of
the Plan permits eligible employees to defer a portion of their compensation
(as defined in the Plan) on a pretax basis.
F-19
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Participants may defer up to 10% of their compensation for the year, subject
to limitations of the Plan. The Company makes a matching contribution of 50%
of the first 6% of compensation a participant defers. The amount of the
Company's contribution under the profit sharing portion of the Plan is in such
discretionary amount as the Board of Directors may annually determine, subject
to limitations of the Plan. Contribution expense for the nine months ended
November 30, 1998, was $5,469,000 (unaudited) Aggregate contribution expense
for the nine months ended November 30, 1997, under the pre-existing plans was
$4,519,000 (unaudited).
9. STOCKHOLDERS' EQUITY:
Common Stock--
The Company has two classes of common stock: Class A Common Stock and Class
B Convertible Common Stock. Class B Convertible Common Stock shares are
convertible into shares of Class A Common Stock on a one-to-one basis at any
time at the option of the holder. Holders of Class B Convertible Common Stock
are entitled to ten votes per share. Holders of Class A Common Stock are
entitled to only one vote per share but are entitled to a cash dividend
premium. If the Company pays a cash dividend on Class B Convertible Common
Stock, each share of Class A Common Stock will receive an amount at least ten
percent greater than the amount of the cash dividend per share paid on Class B
Convertible Common Stock. In addition, the Board of Directors may declare and
pay a dividend on Class A Common Stock without paying any dividend on Class B
Convertible Common Stock.
At February 28, 1998, there were 15,405,464 shares of Class A Common Stock
and 3,330,458 shares of Class B Convertible Common Stock outstanding, net of
treasury stock.
In July 1998, the stockholders of the Company approved an increase in the
number of authorized shares of Class A Common Stock from 60,000,000 shares to
120,000,000 shares, thereby increasing the aggregate number of authorized
shares of the Company to 141,000,000 shares.
Stock Repurchase Authorization--
On January 11, 1996, the Company's Board of Directors authorized the
repurchase of up to $30,000,000 of its Class A and Class B Common stock. The
Company was permitted to finance such purchases, which became treasury shares,
through cash generated from operations or through the Credit Agreement. The
Company completed its repurchase program during fiscal 1998, repurchasing
362,100 shares of Class A Common Stock for $9,233,000. Throughout the year
ended February 28, 1997, the Company repurchased 787,450 shares of Class A
Common Stock totaling $20,765,000.
In June 1998, the Company's Board of Directors authorized the repurchase of
up to $100,000,000 of its Class A Common Stock and Class B Convertible Common
Stock. The Company may finance such purchases, which will become treasury
shares, through cash generated from operations or through the bank credit
agreement. As of November 30, 1998, 1,018,836 shares of Class A Common Stock
totaling $44,878,000 (unaudited) were repurchased during the nine months ended
November 30, 1998.
F-20
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Long-Term Stock Incentive Plan--
In July 1997, the stockholders approved the amendment and restatement of the
Company's Stock Option and Stock Appreciation Right Plan (the Original Stock
Plan) as the Long-Term Stock Incentive Plan (the Long-Term Stock Plan).
Options granted under the Original Stock Plan remain outstanding and in full
force in accordance with their terms.
Under the Long-Term Stock Plan, nonqualified stock options, stock
appreciation rights, restricted stock and other stock-based awards may be
granted to employees, officers and directors of the Company. Grants, in the
aggregate, may not exceed 4,000,000 shares of the Company's Class A Common
Stock. The exercise price, vesting period and term of nonqualified stock
options granted are established by the committee administering the plan (the
Committee). Grants of stock appreciation rights, restricted stock and other
stock-based awards may contain such vesting, terms, conditions and other
requirements as the Committee may establish. During fiscal 1998, no stock
appreciation rights and 25,000 shares of restricted Class A Common Stock were
granted. At February 28, 1998, there were 1,840,258 shares available for
future grant.
A summary of nonqualified stock option activity is as follows:
<TABLE>
<CAPTION>
Weighted Weighted
Avg. Avg.
Shares Under Exercise Options Exercise
Option Price Exercisable Price
------------ -------- ----------- --------
<S> <C> <C> <C> <C>
Balance, August 31, 1994............. 563,500 $15.65
Options granted.................... 289,000 $40.29
Options exercised.................. (114,075) $ 7.02
Options forfeited/canceled......... (4,500) $19.22
----------
Balance, August 31, 1995............. 733,925 $26.68 39,675 $ 4.44
Options granted.................... 571,050 $36.01
Options exercised.................. (18,000) $13.23
Options forfeited/canceled......... (193,250) $44.06
----------
Balance, February 29, 1996........... 1,093,725 $28.70 28,675 $ 4.44
Options granted.................... 1,647,700 $22.77
Options exercised.................. (3,750) $ 4.44
Options forfeited/canceled......... (1,304,700) $32.09
----------
Balance, February 28, 1997........... 1,432,975 $18.85 51,425 $10.67
Options granted.................... 569,400 $38.72
Options exercised.................. (117,452) $15.33
Options forfeited/canceled......... (38,108) $17.66
----------
Balance, February 28, 1998........... 1,846,815 $25.23 360,630 $25.46
==========
</TABLE>
F-21
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
The following table summarizes information about stock options outstanding
at February 28, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- --------------------
Weighted
Avg. Weighted Weighted
Remaining Avg. Avg.
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$4.44 - $11.50............ 38,675 3.5 years $ 9.15 38,675 $ 9.15
$17.00 - $25.63........... 998,540 7.3 years $17.37 134,280 $17.00
$26.75 - $31.25........... 351,800 8.5 years $28.46 80,200 $27.30
$35.38 - $56.75........... 457,800 9.6 years $41.25 107,475 $40.53
---------- -------
$1,846,815 8.0 years $25.23 360,630 $25.46
========== =======
</TABLE>
The weighted average fair value of options granted during fiscal 1998,
fiscal 1997 and the Transition Period was $20.81, $10.27 and $15.90,
respectively. The fair value of options is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted
average assumptions: risk-free interest rate of 6.4% for fiscal 1998, 6.6% for
fiscal 1997 and 5.5% for the Transition Period; volatility of 41.3% for fiscal
1998, 42.7% for fiscal 1997 and 39.6% for the Transition Period; expected
option life of 6.9 years for fiscal 1998, 4.7 years for fiscal 1997 and 5.4
years for the Transition Period. The dividend yield was 0% for fiscal 1998,
fiscal 1997 and the Transition Period. Forfeitures are recognized as they
occur.
Incentive Stock Option Plan--
The ability to grant incentive stock options under the Original Stock Plan
was eliminated when it was amended and restated as the Long-Term Stock Plan.
In July 1997, stockholders approved the adoption of the Company's Incentive
Stock Option Plan. Under the Incentive Stock Option Plan, incentive stock
options may be granted to employees, including officers, of the Company.
Grants, in the aggregate, may not exceed 1,000,000 shares of the Company's
Class A Common Stock. The exercise price of any incentive stock option may not
be less than the fair market value of the Company's Class A Common Stock on
the date of grant. The vesting period and term of incentive stock options
granted are established by the Committee. The maximum term of incentive stock
options is ten years. During fiscal 1998, no incentive stock options were
granted.
Employee Stock Purchase Plan--
In fiscal 1989, the Company approved a stock purchase plan under which
1,125,000 shares of Class A Common Stock can be issued under the terms of the
plan, eligible employees may purchase shares of the Company's Class A Common
Stock through payroll deductions. The purchase price is the lower of 85% of
the fair market value of the stock on the first or last day of the purchase
period. During fiscal 1998 and fiscal 1997, the Transition Period and fiscal
1995, employees purchased 78,248, 37,768, 20,869 and 28,641 shares,
respectively.
The weighted average fair value of purchase rights granted during fiscal
1998 and fiscal 1997 was $11.90 and $8.41, respectively. The fair value of
purchase rights is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk-
free interest rate of 5.3% for fiscal 1998 and 5.6% for fiscal 1997;
volatility of 35.1% for fiscal 1998 and 65.4% for fiscal 1997; expected
purchase right life of 0.5 years for fiscal 1998 and 0.8 years for
F-22
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
fiscal 1997. The dividend yield was 0% for both fiscal 1998 and fiscal 1997.
No purchase rights were granted in the Transition Period.
Pro Forma Disclosure--
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. In fiscal 1997, the Company elected to adopt the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," (SFAS No. 123). Accordingly, no compensation
expense has been recognized for its stock-based compensation plans. Had the
Company recognized the compensation cost based upon the fair value at the date
of grant for awards under its plans consistent with the methodology prescribed
by SFAS No. 123, net income and earnings per common share would have been
reduced to the pro forma amounts as follows:
<TABLE>
<CAPTION>
For the Six
For the Year Ended For the Year Ended Months Ended
February 28, 1998 February 28, 1997 February 29, 1996
------------------ ------------------ -----------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- ------- ---------- ------- ---------- ------
(in thousands, except per
share)
<S> <C> <C> <C> <C> <C> <C>
Net income............... $ 50,071 $ 46,171 $ 27,675 $ 25,038 $ 3,322 $ 3,178
Earnings per common
share:
Basic.................. $ 2.68 $ 2.47 $ 1.43 $ 1.30 $ 0.17 $ 0.16
Diluted................ $ 2.62 $ 2.42 $ 1.42 $ 1.28 $ 0.17 $ 0.16
</TABLE>
The provisions of SFAS No. 123 have not been applied to options or purchase
rights granted prior to September 1, 1995. Therefore, the resulting pro forma
effect on net income may not be representative of that to be expected in
future years.
Stock Offering--
During November 1994, the Company completed a public offering and sold
3,000,000 shares of its Class A Common Stock, resulting in net proceeds to the
Company of approximately $95,515,000 after underwriters' discounts and
commissions and expenses. In connection with the offering, 432,067 of the
Vintners option shares were exercised and the Company received proceeds of
$7,885,000. Under the terms of the then existing bank credit agreement,
approximately $82,000,000 was used to repay a portion of the Term Loan under
the bank credit agreement. The balance of net proceeds was used to repay
Revolving Credit Loans under the bank credit agreement.
F-23
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
10. EARNINGS PER COMMON SHARE:
The following table presents historical earnings per common share restated to
conform with the provisions of SFAS No. 128.
<TABLE>
<CAPTION>
For the For the For the For the
Nine Months Ended Years Ended Six Months Ended Year Ended
------------------------- ------------------------- ------------------------- ----------
November 30, November 30, February 28, February 28, February 29, February 28, August 31,
1998 1997 1998 1997 1996 1995 1995
------------ ------------ ------------ ------------ ------------ ------------ ----------
(in thousands, except per
share data) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER COMMON
SHARE:
Income applicable to
common shares.......... $49,037 $40,022 $50,071 $27,675 $ 3,322 $20,320 $41,020
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding..... 18,412 18,663 18,672 19,333 19,611 17,989 18,776
BASIC EARNINGS PER COMMON
SHARE................... $ 2.66 $ 2.14 $ 2.68 $ 1.43 $ 0.17 $ 1.13 $ 2.18
======= ======= ======= ======= ======= ======= =======
DILUTED EARNINGS PER
COMMON SHARE:
Income applicable to
common shares.......... $49,037 $40,022 $50,071 $27,675 $ 3,322 $20,320 $41,020
======= ======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding..... 18,412 18,663 18,672 19,333 19,611 17,989 18,776
Incentive stock options. 464 387 423 179 129 152 155
Options/employee stock
purchases.............. 5 4 10 9 67 38 74
------- ------- ------- ------- ------- ------- -------
Adjusted weighted average
common shares
outstanding............. 18,881 19,054 19,105 19,521 19,807 18,179 19,005
DILUTED EARNINGS PER
COMMON SHARE............ $ 2.60 $ 2.10 $ 2.62 $ 1.42 $ 0.17 $ 1.12 $ 2.16
======= ======= ======= ======= ======= ======= =======
</TABLE>
11. COMMITMENTS AND CONTINGENCIES:
Operating Leases--
Future payments under noncancelable operating leases having initial or
remaining terms of one year or more are as follows:
<TABLE>
<CAPTION>
February 28, 1998
-----------------
(in thousands)
<S> <C>
1999............ $ 3,506
2000............ 2,627
2001............ 1,947
2002............ 1,513
2003............ 1,291
Thereafter...... 8,590
-------
$19,474
=======
</TABLE>
F-24
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Rental expense was approximately $5,279,000 (unaudited) and $4,451,000
(unaudited) for the nine months ended November 30, 1998 and 1997,
respectively, $5,554,000 and $4,716,000 for fiscal 1998 and fiscal 1997,
respectively, $2,382,000 in the Transition Period and $4,193,000 for fiscal
1995.
Purchase Commitments And Contingencies--
The Company has agreements with three suppliers to purchase blended Scotch
whisky through December 2001. The purchase prices under the agreements are
denominated in British pounds sterling. Based upon exchange rates at February
28, 1998, the Company's aggregate future obligation ranges from approximately
$10,758,000 to $22,835,000 for the contracts expiring through December 2001.
The Company has an agreement to purchase Canadian blended whisky through
September 1, 1999, with a maximum obligation of approximately $4,453,000. The
Company also has two agreements to purchase Canadian new distillation whisky
(including dumping charges) through December 2005 at purchase prices of
approximately $12,521,000 to $13,536,000. In addition, the Company has an
agreement to purchase corn whiskey through April 1999 at a purchase price of
approximately $90,000.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements from the suppliers of these products. The
Company's agreement to distribute Corona and its other Mexican beer brands
exclusively throughout 25 states was renewed effective November 22, 1996, and
expires December 2006, with automatic five year renewals thereafter, subject
to compliance with certain performance criteria and other terms under the
agreement. The remaining agreements expire through June 2003. Prior to their
expiration, these agreements may be terminated if the Company fails to meet
certain performance criteria. The Company believes it is in compliance with
all of its material distribution agreements and, given the Company's long-term
relationships with its suppliers, the Company does not believe that these
agreements will be terminated.
In connection with the Vintners Acquisition and the Almaden/Inglenook
Acquisition, the Company assumed purchase contracts with certain growers and
suppliers. In addition, the Company has entered into other purchase contracts
with various growers and suppliers in the normal course of business. Under the
grape purchase contracts, the Company is committed to purchase all grape
production yielded from a specified number of acres for a period of time
ranging up to 20 years. The actual tonnage and price of grapes that must be
purchased by the Company will vary each year depending on certain factors,
including weather, time of harvest, overall market conditions and the
agricultural practices and location of the growers and suppliers under
contract.
The Company purchased $154,909,000 of grapes under these contracts during
fiscal 1998. Based on current production yields and published grape prices,
the Company estimates that the aggregate purchases under these contracts over
the remaining term of the contracts will be approximately $915,651,000. During
fiscal 1994, in connection with the Vintners Acquisition and the
Almaden/Inglenook Acquisition, the Company established a reserve for the
estimated loss on these firm purchase commitments of approximately
$62,664,000, which was subsequently reduced during fiscal 1995 to reflect the
effects of the termination payments to cancel contracts with certain growers.
The remaining reserve for the estimated loss on the remaining contracts is
approximately $771,000 at November 30, 1998 (unaudited), and February 28,
1998.
F-25
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
The Company's aggregate obligations under bulk wine purchase contracts will
be approximately $32,502,000 over the remaining term of the contracts which
expire through fiscal 2001.
Employment Contracts--
The Company has employment contracts with certain of its executive officers
and certain other management personnel with remaining terms ranging up to
three years. These agreements provide for minimum salaries, as adjusted for
annual increases, and may include incentive bonuses based upon attainment of
specified management goals. In addition, these agreements provide for
severance payments in the event of specified termination of employment. The
aggregate commitment for future compensation and severance, excluding
incentive bonuses, was approximately $7,903,000 as of February 28, 1998, of
which approximately $1,436,000 is accrued in other liabilities as of February
28, 1998.
Employees Covered By Collective Bargaining Agreements--
Approximately 42% of the Company's full-time employees are covered by
collective bargaining agreements at February 28, 1998. Agreements expiring
within one year cover approximately 7% of the Company's full-time employees.
Legal Matters--
The Company is 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.
12. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
The Company sells its products principally to wholesalers for resale to
retail outlets including grocery stores, package liquor stores, club and
discount stores and restaurants. Gross sales to the five largest wholesalers
of the Company represented 26.4%, 22.9%, 16.9% and 21.6% of the Company's
gross sales for the fiscal years ending February 28, 1998 and 1997, the
Transition Period and for the fiscal year ended August 31, 1995, respectively.
Gross sales to the Company's largest wholesaler, Southern Wine and Spirits,
represented 12.1%, 10.5% and 10.6% of the Company's gross sales for the fiscal
years ended February 28, 1998 and 1997, and for the fiscal year ended August
31, 1995, respectively. Accounts receivable from the Company's largest
wholesaler represented 14.1% and 11.3% of the Company's total accounts
receivable as of February 28, 1998 and 1997, respectively. No single
wholesaler was responsible for greater than 10% of gross sales during the
Transition Period. Gross sales to the Company's five largest wholesalers are
expected to continue to represent a significant portion of the Company's
revenues. The Company's arrangements with certain of its wholesalers may,
generally, be terminated by either party with prior notice. The Company
performs ongoing credit evaluations of its customers' financial position, and
management of the Company is of the opinion that any risk of significant loss
is reduced due to the diversity of customers and geographic sales area.
13. RESTRUCTURING PLAN:
The Company provided for costs to restructure the operations of its
California wineries (the Restructuring Plan) in the fourth quarter of fiscal
1994. Under the Restructuring Plan, all bottling operations at the Central
Cellars winery in Lodi, California, and the branded wine bottling operations
F-26
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
at the Monterey Cellars winery in Gonzales, California, were moved to the
Mission Bell winery located in Madera, California. The Monterey Cellars winery
will continue to be used as a crushing, winemaking and contract bottling
facility. The Central Cellars winery was closed in the fourth quarter of
fiscal 1995 and was sold for its approximate net book value during fiscal
1997. In fiscal 1994, the Restructuring Plan reduced income before taxes and
net income by approximately $24,005,000 and $14,883,000, respectively, or
$0.92 per share on a diluted basis. Of the total pretax charge in fiscal 1994,
approximately $16,481,000 was to recognize estimated losses associated with
the revaluation of land, buildings and equipment related to facilities
described above to their estimated net realizable value; and approximately
$7,524,000 related to severance and other benefits associated with the
elimination of 260 jobs. In fiscal 1995, the Restructuring Plan reduced income
before income taxes and net income by approximately $2,238,000 and $1,376,000,
respectively, or $0.07 per share on a diluted basis. Of the total pretax
charge in fiscal 1995, $4,288,000 relates to equipment relocation and employee
hiring and relocation costs, offset by a decrease of $2,050,000 in the
valuation reserve as compared to fiscal 1994, primarily related to the land,
buildings and equipment at the Central Cellars winery. The Company also
expended approximately $19,071,000 in fiscal 1995 for capital expenditures to
expand storage capacity and install certain relocated equipment. In the
Transition Period, the expense incurred in connection with the Restructuring
Plan reduced income before taxes and net income by approximately $2,404,000
and $1,192,000, respectively, or $0.06 per share on a diluted basis. These
charges represented incremental, nonrecurring expenses of $3,982,000 primarily
incurred for overtime and freight expenses resulting from inefficiencies
related to the Restructuring Plan, offset by a reduction in the accrual for
restructuring expenses of $1,578,000, primarily for severance and facility
holding and closure costs. The Company completed the Restructuring Plan at
February 29, 1996, with a total employment reduction of 177 jobs. The Company
expended approximately $2,125,000 in fiscal 1997 and $6,644,000 during the
Transition Period for capital expenditures to expand storage capacity. As of
February 28, 1997, the Company had accrued liabilities of approximately
$402,000 relating to the Restructuring Plan. As of February 28, 1998, the
Company had no accrued liabilities relating to the Restructuring Plan.
14. SUMMARIZED FINANCIAL INFORMATION--SUBSIDIARY GUARANTORS:
The subsidiary guarantors are wholly owned and the guarantees are full,
unconditional, joint and several obligations of each of the subsidiary
guarantors. Summarized financial information for the subsidiary guarantors is
set forth below. Separate financial statements for the subsidiary guarantors
of the Company are not presented because the Company has determined that such
financial statements would not be material to investors. The subsidiary
guarantors comprise all of the direct and indirect subsidiaries of the
Company, other than the nonguarantor subsidiaries which individually, and in
the aggregate, are inconsequential. There are no restrictions on the ability
of the subsidiary guarantors to transfer funds to the Company in the form of
cash dividends or loan repayments; however, except for limited amounts, the
subsidiary guarantors may not loan funds to the Company.
F-27
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
The following table presents summarized financial information for subsidiary
guarantors in connection with all of the Company's 8.75% Senior Subordinated
Notes:
<TABLE>
<CAPTION>
November 30, February 28, February 28,
1998 1998 1997
------------ ------------ ------------
(unaudited)
(in thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Current assets........................... $539,422 $460,618 $401,870
Noncurrent Assets........................ $396,441 $395,225 $403,068
Current liabilities...................... $110,068 $102,207 $100,009
Noncurrent liabilities................... $ 62,224 $ 61,784 $ 65,300
</TABLE>
<TABLE>
<CAPTION>
For the For the
For the Nine Months Ended For the Years Ended Six months Ended Year Ended
------------------------- ------------------------- ------------------------- ----------
November 30, November 30, February 28, February 28, February 29, February 28, August 31,
1998 1997 1998 1997 1996 1995 1995
------------ ------------ ------------ ------------ ------------ ------------ ----------
(unaudited) (unaudited) (unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net Sales............... $848,196 $764,457 $985,757 $907,387 $416,839 $334,885 $716,969
Gross profit............ $185,749 $153,590 $196,642 $164,471 $ 73,843 $ 62,883 $ 31,489
Income before provision
for Federal and state
income taxes........... $ 75,693 $ 58,658 $ 64,270 $ 47,303 $ 17,083 $ 22,690 $ 52,756
Net income.............. $ 44,659 $ 34,886 $ 38,094 $ 27,392 $ 8,466 $ 13,954 $ 32,445
</TABLE>
15. ACCOUNTING PRONOUNCEMENTS:
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," (SFAS No. 130) and Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information," (SFAS No. 131) were issued. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its components
in a full set of financial statements. The Company is required to adopt SFAS
No. 130 for interim periods and fiscal years beginning March 1, 1998.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company believes the effect of adoption
will not be significant. SFAS No. 131 establishes standards for reporting
information about operating segments in annual financial statements and
requires reporting of selected information in interim financial statements.
The Company is required to adopt SFAS No. 131 for fiscal years beginning March
1, 1998, and for interim periods beginning March 1, 1999. Restatement of
comparative information for earlier years is required in the initial year of
adoption and comparative information for interim periods in the initial year
of adoption is to be reported for interim periods in the second year of
application. The Company has not yet determined the impact of SFAS No. 131 on
its financial statements.
F-28
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
16. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of selected quarterly financial information is as follows:
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------------
May 31, August 31, November 30, February 28,
Fiscal 1998 1997 1997 1997 1998 Full Year
- ------------------------- -------- ---------- ------------ ------------ ----------
(in thousands, except for
per share data)
<S> <C> <C> <C> <C> <C>
Net sales................ $306,011 $301,524 $322,703 $282,550 $1,212,788
Gross profit............. $ 80,732 $ 84,759 $ 98,000 $ 85,244 $ 348,735
Net income............... $ 10,046 $ 12,365 $ 17,611 $ 10,049 $ 50,071
Earnings per common
share:
Basic.................. $ 0.54 $ 0.67 $ 0.94 $ 0.54 $ 2.68
Diluted................ $ 0.53 $ 0.65 $ 0.92 $ 0.53 $ 2.62
<CAPTION>
Quarter Ended
---------------------------------------------
May 31, August 31, November 30, February 28,
Fiscal 1997 1996 1996 1996 1997 Full Year
- ------------------------- -------- ---------- ------------ ------------ ----------
(in thousands, except for
per share data)
<S> <C> <C> <C> <C> <C>
Net sales................ $276,493 $279,218 $317,733 $261,569 $1,135,013
Gross profit............. $ 72,907 $ 69,835 $ 81,683 $ 66,407 $ 290,832
Net income............... $ 8,501 $ 4,941 $ 8,311 $ 5,922 $ 27,675
Earnings per common
share:
Basic.................. $ 0.43 $ 0.25 $ 0.43 $ 0.31 $ 1.43
Diluted................ $ 0.43 $ 0.25 $ 0.43 $ 0.31 $ 1.42
</TABLE>
17. SUBSEQUENT EVENTS (UNAUDITED)
Acquisition of Matthew Clark plc.
On November 3, 1998, Canandaigua Limited, a wholly-owned subsidiary of the
Company, announced a cash tender offer for the entire issued and to be issued
ordinary share capital of Matthew Clark plc ("Matthew Clark"). The offer
valued each Matthew Clark share at 243 pence, valuing the whole of the issued
ordinary share capital of Matthew Clark at approximately (Pounds)215.1
million.
On December 1, 1998, Canandaigua Limited declared the cash tender offer to
be wholly unconditional--all conditions to the offer having either been
satisfied or waived. Canandaigua Limited thereby acquired control of Matthew
Clark. On December 15, 1998, Canandaigua Limited paid for all shares tendered
at the time the offer was declared wholly unconditional. The cash tender offer
remains open for acceptance by Matthew Clark's shareholders until further
notice. On December 14, 1998, valid acceptances had been received representing
approximately 95.6 percent of the existing issued ordinary share capital of
Matthew Clark. Therefore, Canandaigua Limited has utilized certain provisions
of the UK companies Act to enable it to compulsorily acquire Matthew Clark
shares that have not been tendered pursuant to the offer by the end of a
prescribed statutory period.
F-29
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
The purchase price for the Matthew Clark shares was funded with proceeds
from loans under a First Amended and Restated Credit Agreement (the "1998
Credit Agreement"), effective as of November 2, 1998, between the Company and
The Chase Manhattan Bank, as administrative agent, and a syndicate of banks
who are parties to the 1998 Credit Agreement.
1998 Credit Agreement
On December 14, 1998, the Company, its principal operating subsidiaries
(other than Matthew Clark and its subsidiaries), and a syndicate of banks (the
"Syndicate Banks"), for which The Chase Manhattan Bank acts as administrative
agent, entered into the 1998 Credit Agreement, effective as of November 2,
1998, which amends and restates in its entirety the credit agreement entered
into between the Company and The Chase Manhattan Bank on November 2, 1998. The
1998 Credit Agreement includes both US Dollar and Pound Sterling commitments
of the Syndicate Banks of up to, in the aggregate, the equivalent of $1.0
billion (subject to increase as therein provided to $1.2 billion) with the
proceeds available for repayment of all outstanding principal and accrued
interest on all loans under the Company's bank credit agreement dated as of
December 19, 1997, payment of the purchase price for the Matthew Clark shares,
repayment of Matthew Clark's credit facilities, funding of permitted
acquisitions, payment of transaction expenses and ongoing working capital
needs of the Company.
The 1998 Credit Agreement provides for a $350.0 million Tranche I Term Loan
facility due in December 2004, a $200.0 million Tranche II Term Loan facility
due in June 2000, a $150.0 million Tranche III Term Loan facility due in
December 2005, and a $300.0 million Revolving Credit facility (including
letters of credit up to a maximum of $20.0 million) which expires in December
2004. Portions of the Tranche I Term Loan facility and the Revolving Credit
facility are available for borrowing in Pounds Sterling.
The Tranche I Term Loan facility requires quarterly repayments, starting at
$6.265 million in December 1999, increasing annually thereafter and with a
balloon payment at maturity of approximately $110.0 million. The Tranche II
Term Loan facility requires no principal payments prior to stated maturity.
The Tranche III Term Loan facility requires quarterly repayments, starting at
$0.375 million in December 1999 and increasing to approximately $17.95 million
in March 2004. There are certain mandatory term loan prepayments, including
those based on excess cash flow, sale of assets, issuance of debt or equity,
and fluctuations in the US Dollar/Pound Sterling exchange rate, in each case
subject to baskets and thresholds which (other than with respect to those
pertaining to fluctuations in the Dollar/Pound exchange rate, which were
inapplicable under the previous bank credit agreement) are generally more
favorable to the Company than those contained in its previous bank credit
agreement.
The rate of interest payable, at the Company's option, is a function of the
London interbank offered rate ("LIBOR") plus a margin, federal funds rate plus
a margin, or the prime rate plus a margin. The margin is adjustable based upon
the Company's Debt Ratio (as defined in the 1998 Credit Agreement). The
initial margin on LIBOR borrowings ranges between 1.75% and 2.50% and (other
than for the Tranche II Term Loan facility) may be reduced after November 30,
1999 to between 1.125% and 1.50%, depending on the Company's Debt Ratio.
Conversely, if the Debt Ratio of the Company should increase, the margin would
be adjusted upwards to up to between 2.0% and 2.75% for LIBOR based
borrowings. In addition to interest, the Company pays a facility fee on the
Revolving Credit commitments, initially at 0.50% per annum and subject to
reduction after November 30, 1999, to 0.375%, depending on the Company's Debt
Ratio.
F-30
<PAGE>
CANANDAIGUA BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
FEBRUARY 28, 1998 AND NOVEMBER 30, 1998 (UNAUDITED)
Each of the Company's principal operating subsidiaries (other than Matthew
Clark and its subsidiaries) has guaranteed the Company's obligations under the
1998 Credit Agreement, and the Company and those subsidiaries have given
security interests to the Syndicate Banks in substantially all of their
assets. The Company and its subsidiaries are subject to customary secured
lending covenants including those restricting additional liens, the incurrence
of additional indebtedness, the sale of assets, the payment of dividends,
transactions with affiliates and the making of certain investments. The
primary financial covenants require the maintenance of a debt coverage ratio,
a senior debt coverage ratio, a fixed charges ratio and an interest coverage
ratio. Among the most restrictive covenants contained in the 1998 Credit
Agreement is the requirement to maintain a fixed charges ratio of not less
than 1.0 at the last day of each fiscal quarter for the most recent four
quarters.
F-31
<PAGE>
INDEPENDENT AUDITOR'S REPORT
The Board of Directors and Shareholders
Matthew Clark plc
We have audited the accompanying consolidated balance sheets of Matthew Clark
plc and its subsidiaries at 30 April 1998 and 1997, and the related
consolidated profit and loss accounts and cash flow statements for each of the
years in the three-year period ended 30 April 1998. These consolidated
financial statements are the responsibility of the management of Matthew Clark
plc. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United Kingdom which are substantially equivalent to generally
accepted auditing standards in the United States of America. Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Matthew
Clark plc and its subsidiaries at 30 April 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended 30 April 1998, in conformity with generally accepted accounting
principles in the United Kingdom.
Accounting principles generally accepted in the United Kingdom vary in certain
significant respects from accounting principles generally accepted in the
United States of America. Application of accounting principles generally
accepted in the United States would have affected net profit for the two years
ended 30 April 1998 and shareholders' equity at 30 April 1998 and 1997, to the
extent summarised in Note 26 to the consolidated financial statements.
/s/ KPMG Audit Plc
Chartered Accountants
Registered Auditor
London, England
30 November 1998
F-32
<PAGE>
MATTHEW CLARK plc
BALANCE SHEETS
(in (Pounds) millions)
<TABLE>
<CAPTION>
30 April
---------------
Note 1998 1997(1)
---- ------ -------
<S> <C> <C> <C>
Fixed assets
Intangible assets....................................... 12 9.7 9.7
Tangible assets......................................... 13 97.1 98.6
------ ------
106.8 108.3
------ ------
Current assets
Stocks.................................................. 14 44.6 49.3
Debtors................................................. 15 115.7 123.7
Cash at bank and in hand................................ 17.3 5.8
------ ------
177.6 178.8
------ ------
Creditors: amounts falling due within one year
Trade and other creditors............................... 16 (105.2) (116.3)
Proposed dividend....................................... 10 (7.1) (13.3)
Bank loans and overdrafts............................... -- (56.4)
------ ------
(112.3) (186.0)
------ ------
Net current assets/(liabilities)
Amounts due within one year............................. 44.4 (29.6)
Debtors due after more than one year.................... 15 20.9 22.4
------ ------
65.3 (7.2)
------ ------
Total assets less current liabilities..................... 172.1 101.1
Creditors: amounts falling due after more than one year... 17 (61.2) (1.9)
Provisions for liabilities and charges.................... 18 (15.5) (17.6)
------ ------
Net assets.............................................. 2 95.4 81.6
====== ======
Capital and reserves
Called up share capital................................. 19 22.1 22.1
Share premium account................................... 21 105.5 105.5
Capital redemption reserve.............................. 21 0.1 0.1
Profit and loss account................................. 21 (32.3) (46.1)
------ ------
Equity shareholders' funds................................ 22 95.4 81.6
====== ======
</TABLE>
- --------
(1) As restated Note 1 (Goodwill)
F-33
<PAGE>
MATTHEW CLARK plc
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
(in (Pounds) millions, except per share amounts)
<TABLE>
<CAPTION>
For the Years
Ended 30 April
-----------------------
Note 1998 1997 1996(1)
---- ------ ------ -------
<S> <C> <C> <C> <C>
Turnover.......................................... 2 553.1 570.7 450.9
Operating costs................................... 3 (516.0) (525.6) (429.4)
------ ------ ------
Operating profit.................................. 4 37.1 45.1 21.5
Profit/(loss) on fixed asset sales................ 7 3.7 0.4 (2.0)
------ ------ ------
Profit before interest and tax.................... 2 40.8 45.5 19.5
Interest receivable............................... 0.1 0.2 0.4
Interest payable and similar charges.............. 8 (5.1) (5.1) (2.7)
------ ------ ------
Profit on ordinary activities before tax.......... 2 35.8 40.6 17.2
Tax on profit on ordinary activities.............. 9 (10.5) (12.4) (5.0)
------ ------ ------
Profit on ordinary activities after tax........... 25.3 28.2 12.2
Equity minority interests......................... -- -- (0.1)
Dividends......................................... 10 (11.5) (21.2) (21.2)
------ ------ ------
Retained profit/(loss) for the year............... 21 13.8 7.0 (9.1)
====== ====== ======
Earnings per share................................ 11 28.6p 31.9p 18.4p
====== ====== ======
</TABLE>
- --------
(1) Includes exceptional items for reorganisation as a result of integration of
acquisitions (Note 4). Pre-exceptional items, profit attributable to
ordinary shareholders was (Pounds)29.3m and earnings per share was 44.4p.
There are no recognised gains or losses in any year other than the
profit/(loss) for the year.
The results above derive from continuing activities.
F-34
<PAGE>
MATTHEW CLARK plc
CONSOLIDATED CASH FLOW STATEMENTS
(in (Pounds) millions)
<TABLE>
<CAPTION>
For the
Years Ended
30 April
-------------------
Note 1998 1997 1996
---- ----- ----- -----
<S> <C> <C> <C> <C>
Cash inflow from operating activities................ 25 49.8 52.3 29.1
----- ----- -----
Returns on investments and servicing of finance
Interest received.................................. 0.1 0.2 0.5
Interest paid...................................... (6.1) (5.0) (2.7)
Interest element of finance lease rental payments.. (0.1) (0.1) --
----- ----- -----
(6.1) (4.9) (2.2)
----- ----- -----
Taxation paid...................................... (7.5) (7.0) (3.5)
----- ----- -----
Capital expenditure
Purchase of tangible fixed assets.................. (31.6) (21.3) (18.4)
Receipts from sale of fixed assets................. 22.2 2.6 2.4
----- ----- -----
(9.4) (18.7) (16.0)
----- ----- -----
Acquisitions....................................... (0.8) 0.3 (32.5)
----- ----- -----
Dividends paid..................................... (17.7) (21.2) (13.9)
----- ----- -----
Cash inflow/(outflow) before financing............. 8.3 0.8 (39.0)
----- ----- -----
Financing
Drawdown of committed loan......................... 25.0 10.0 10.0
Repayment of other loan............................ -- -- (1.0)
Issue of ordinary share capital.................... -- 0.6 0.2
Capital element of finance lease payments.......... (0.4) (0.2) (0.8)
----- ----- -----
24.6 10.4 8.4
----- ----- -----
Increase/(decrease) in cash in the period............ 32.9 11.2 (30.6)
===== ===== =====
Reconciliation of net cashflow to movement in net
debt
Increase/(decrease) in cash in period.............. 32.9 11.2 (30.6)
Cash inflow from increase in debt and lease
financing......................................... (25.6) (9.8) (8.2)
----- ----- -----
Change in net debt resulting from cashflows........ 7.3 1.4 (38.8)
Loans and finance leases acquired with subsidiary.. -- -- (0.1)
----- ----- -----
Movement in net debt in the period................. 7.3 1.4 (38.9)
Net debt at the start of the period................ (51.2) (52.6) (13.7)
----- ----- -----
Net debt at the end of the period.................. (43.9) (51.2) (52.6)
===== ===== =====
Analysis of net debt
Cash at bank and in hand........................... 17.3 5.8 4.6
Bank loans and overdrafts.......................... (60.0) (56.4) (56.4)
Finance lease obligations.......................... (1.2) (0.6) (0.8)
----- ----- -----
(43.9) (51.2) (52.6)
===== ===== =====
</TABLE>
F-35
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS
NOTE 1. ACCOUNTING POLICIES
The accounts have been prepared under the historical cost convention, using
the following accounting policies, which have been applied consistently except
as noted below under "Goodwill', and in compliance with applicable accounting
standards including Financial Reporting Standard 10.
Basis of consolidation--
The Group accounts consist of a consolidation of the accounts of the Company
with those of its subsidiary undertakings. All accounts are drawn up to 30
April. The acquisition method of accounting has been adopted. Under this
method, the results of acquired subsidiaries and other businesses are included
in the consolidated profit and loss account from the date when control passes.
Goodwill--
During the year Financial Reporting Standard 10 "Goodwill and intangible
assets' was issued and is mandatory for periods ending on or after 23 December
1998. The Group has chosen to adopt the requirements of this standard early.
The Group's policy for acquisitions which occurred prior to the issue of the
standard is that purchased goodwill, being the excess of the fair value of
consideration paid or payable over the fair value of the identifiable net
assets acquired, has been taken directly to reserves. On subsequent disposal,
goodwill previously taken direct to reserves is included in determining the
profit or loss on disposal. Previously, such goodwill was presented separately
within reserves as a "goodwill write off reserve'. This is not permitted by
the Standard and, accordingly, goodwill has been taken to merger reserve to
the extent available ((Pounds)309.5m) and the balance ((Pounds)52.8m) taken to
the profit and loss account reserve. The comparatives have been restated
accordingly.
Turnover--
Turnover consists of the value of goods and services supplied to customers
outside the Group, including duty and excluding VAT.
Depreciation--
Depreciation of fixed assets is provided on the original cost of the Group
or its acquired businesses at rates calculated to write down the assets to
their estimated residual values on a straight line basis over the total
expected economic lives of the assets. The principal periods used are:
<TABLE>
<S> <C>
Freehold buildings........................................ 50 years
Leasehold buildings....................................... Length of lease
Plant and machinery....................................... 8 to 25 years
Computer equipment........................................ 3 to 5 years
Motor vehicles............................................ 4 to 7 years
</TABLE>
Assets in the course of the construction are not depreciated. They are
transferred to the relevant fixed asset category when they become operational.
Freehold land is not depreciated.
Stocks--
Stocks have been valued at the lower of cost (including Customs and Excise
Duty where incurred), determined on a first in first out basis, and net
realisable value. In the case of beverages produced by the Group, cost
includes direct materials and labour together with appropriate overheads
incurred in bringing the product to its present location and condition.
F-36
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
Deferred tax--
Deferred tax is provided using the liability method in respect of the tax
effect of all timing differences to the extent that it is probable that
liabilities or assets will crystallise in the future.
Foreign currency--
Receipts and payments of foreign currency are recorded at actual rates
obtained. Foreign currency balances at the year end are translated at the rate
ruling at that date. All exchange differences are dealt with through the
profit and loss account.
Brand valuation--
The cost of acquired brands is capitalised as an intangible asset at the
time of acquisition. No annual amortisation is provided on these assets but
the directors assess the value of the brands each year and any permanent
diminution in value is written off to the profit and loss account.
Leases--
Where the Group enters into a lease which entails taking substantially all
the risks and rewards of ownership of an asset, the lease is treated as a
"finance lease'. The asset is recorded in the balance sheet as a tangible
fixed asset and is depreciated over its estimated useful economic life or the
term of the lease, whichever is shorter. Future instalments under such leases,
net of finance charges, are included within creditors. Rentals payable are
apportioned between the finance element, which is charged to the profit and
loss account, and the capital element which reduces the outstanding obligation
for future instalments. All other rentals relating to assets held under
operating leases are charged to the profit and loss account on a straight line
basis over the period of the lease.
Pension costs--
Pension costs for the Group's defined benefit pension schemes are charged
against profits so as to spread the cost of pensions over the employees'
expected working lives within the Group.
F-37
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
NOTE 2. SEGMENTAL INFORMATION
All turnover and profit originates in the UK. There are no material sales to
customers outside the UK.
<TABLE>
<CAPTION>
Branded drinks Wholesale Group
------------------- ----------------- -------------------
1998 1997 1996 1998 1997 1996 1998 1997 1996
----- ----- ----- ----- ----- ----- ----- ----- -----
(in (Pounds) millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Turnover:
Total................... 343.5 367.0 297.0 225.2 215.1 162.5 568.7 582.1 459.5
Less intersegmental
sales.................. (15.6) (11.4) (8.6) -- -- -- (15.6) (11.4) (8.6)
----- ----- ----- ----- ----- ----- ----- ----- -----
Sales to third parties.. 327.9 355.6 288.4 225.2 215.1 162.5 553.1 570.7 450.9
===== ===== ===== ===== ===== ===== ===== ===== =====
Operating profit........ 28.7 38.1 41.2 8.4 7.0 2.7 37.1 45.1 21.5
Profit on fixed asset
disposals.............. 3.7 -- 0.7 -- 0.4 -- 3.7 0.4 (2.0)
----- ----- ----- ----- ----- ----- ----- ----- -----
Profit before interest
and tax................ 32.4 38.1 41.9 8.4 7.4 2.7 40.8 45.5 19.5
Net interest payable.... (5.0) (4.9) (2.3)
----- ----- -----
Profit before tax....... 35.8 40.6 17.2
===== ===== =====
Net assets:
Segment net assets...... 120.3 116.7 20.6 27.0 140.9 143.7
Unallocated net
liabilities............ (45.5) (62.1)
----- -----
Total net assets........ 95.4 81.6
===== =====
Unallocated assets and
liabilities consist of:
Cash at bank and in
hand................... 17.3 5.8
Pension prepayment...... 19.0 19.1
Dividends payable....... (7.1) (13.3)
Finance lease
liabilities and
deferred consideration. (2.8) (2.9)
Loans and overdrafts.... (60.0) (56.4)
Provisions.............. (11.9) (14.4)
----- -----
(45.5) (62.1)
===== =====
</TABLE>
NOTE 3. OPERATING COSTS
<TABLE>
<CAPTION>
Note 1998 1997 1996
---- ----- ----- -----
(in (Pounds) millions)
<S> <C> <C> <C> <C>
Change in stocks of finished goods and work in
progress...................................... 7.5 11.7 (1.6)
Raw materials, consummables and other external
charges (incl. duty).......................... 466.2 474.6 387.6
Staff costs.................................... 6 32.8 30.9 37.3
Depreciation and amounts written off fixed
asset investments............................. 13 9.8 8.7 6.4
Royalties from overseas........................ (0.3) (0.3) (0.3)
----- ----- -----
516.0 525.6 429.4
===== ===== =====
</TABLE>
F-38
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
NOTE 4. OPERATING PROFIT
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
(in (Pounds) millions)
<S> <C> <C> <C>
Operating profit is stated after
charging/(crediting):
Operating lease charges:
Plant and machinery.......................... 0.4 0.4 0.5
Other........................................ 1.7 1.4 1.6
Auditors' remuneration for audit services...... 0.2 0.3 0.3
Loss on disposal of fixed assets............... 3.6 2.9 0.7
Release of amounts charged as exceptional costs
in prior years no longer required............. (1.2) -- --
Exceptional write down of wine dispense
equipment with customers...................... 1.0 -- --
</TABLE>
Amounts payable to the auditors and their associates for non audit services
were (Pounds)0.1m (1997-(Pounds)0.1m, 1996-(Pounds)0.4m).
Exceptional items in the year ended 30 April 1996 were as follows:
<TABLE>
<CAPTION>
Branded
Drinks Wholesale Total
Division Division 1996
-------- --------- -----
(in (Pounds) millions)
<S> <C> <C> <C>
Reorganisation:
Employee severance and relocation costs.......... 3.7 3.6 7.3
Stock write downs................................ 1.5 0.7 2.2
Property, plant relocation and other costs....... 7.5 5.4 12.9
---- --- ----
12.7 9.7 22.4
Provision for loss on disposal of fixed assets... 2.5 0.2 2.7
---- --- ----
15.2 9.9 25.1
==== === ====
</TABLE>
The reorganisation costs arose as a result of integration programmes within
the divisions following acquisition of businesses. The costs charged in 1996
were net of a release of provisions of (Pounds)2,249,000 established in 1995
and which were no longer required.
F-39
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
NOTE 5. DIRECTORS' INTERESTS
Directors' emoluments
<TABLE>
<CAPTION>
Total
Emoluments
Cash Value of (excluding
Benefits in pension
Basic Salary Kind contributions)
--------------- --------------- ---------------
1997/98 1996/97 1997/98 1996/97 1997/98 1996/97
------- ------- ------- ------- ------- -------
(in (Pounds) thousands)
<S> <C> <C> <C> <C> <C> <C>
Peter Aikens.................... 230 230 14 14 244 244
Hugh Etheridge.................. 130 130 13 13 143 143
Peter Huntley................... 119 130 10 11 129 141
Robert MacNevin................. 128 -- 18 -- 146 --
Kevin Philp..................... 100 -- 6 -- 106 --
Martin Boase.................... 21 21 -- -- 21 21
Michael Garner.................. 21 40 -- -- 21 40
Graham Wilson................... 60 -- -- -- 60 --
Andrew Nash..................... -- 130 -- 12 -- 142
Former directors................ -- 67 -- 6 -- 73
--- --- --- --- --- ---
809 748 61 56 870 804
=== === === === === ===
</TABLE>
<TABLE>
<CAPTION>
Total
Cash Value Emoluments
Bonus Bonus of (excluding
Basic Paid Invested Benefits Relocation pension
Salary as Cash in Shares in Kind Assistance contributions)
------- ------- --------- ---------- ---------- --------------
1995/96 1995/96 1995/96 1995/96 1995/96 1995/96
------- ------- --------- ---------- ---------- --------------
(in (Pounds) thousands)
<S> <C> <C> <C> <C> <C> <C>
Peter Aikens............ 151 62 120 8 431 772
Hugh Etheridge.......... 87 35 70 13 -- 205
Peter Huntley........... 87 35 70 11 -- 203
Martin Boase............ 10 -- -- -- -- 10
Michael Garner.......... 10 -- -- -- -- 10
Michael Cottrell........ 70 26 -- 6 -- 102
Andrew Nash............. 50 20 79 3 -- 152
Alan Dean............... 20 -- -- -- -- 20
David Fisher............ 47 -- -- 3 -- 50
Robin Manners........... 20 -- -- -- -- 20
--- --- --- --- ---- -----
552 178 339 44 431 1,544
=== === === === ==== =====
</TABLE>
On 19 March 1998 the sum of (Pounds)110,000 was paid to Peter Huntley by way
of compensation for the termination of his employment with the Company. On 12
May 1997 the sum of (Pounds)177,630 was paid to Andrew Nash (a former
director) by way of compensation for the termination of his employment with
the Company.
F-40
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
Directors' pension contributions
Directors who were members of the Matthew Clark Executive Pension Plan had
benefits as follows:
<TABLE>
<CAPTION>
Hugh Michael Robert Kevin
Etheridge Cottrell MacNevin Philp
--------- -------- -------- ------
(in (Pounds))
<S> <C> <C> <C> <C>
Increase in accrued pension during
1996/97 ((Pounds) p.a.)................ 2,767 1,812 -- --
Transfer value of the increase.......... 26,242 25,363 -- --
Contributions by individual director.... 4,200 3,875 -- --
Increase attributable to Company........ 22,042 21,488 -- --
Accumulated accrued pension at 30 April
1997................................... 17,026 13,671 -- --
Increase in accrued pension during
1997/98 ((Pounds) p.a.)................ 3,036 -- 2,920 1,585
Transfer value of the increase.......... 35,000 -- 24,056 13,618
Contributions by individual director.... 4,200 -- 4,200 4,908
Increase attributable to Company........ 30,800 -- 19,856 8,710
Accumulated accrued pension at 30 April
1998................................... 20,672 -- 2,920 32,463
</TABLE>
Contributions to Personal Pension schemes in 1997/98 and 1996/97 and Pension
schemes in 1995/96 were as follows:
<TABLE>
<CAPTION>
1997/98 1996/97 1995/96
------- ------- -------
(in (Pounds) thousands)
<S> <C> <C> <C>
Peter Aikens...................................... 83 83 42
Peter Huntley..................................... 35 37 18
Andrew Nash....................................... -- 39 14
Hugh Etheridge.................................... 13 14 18
Robert MacNevin................................... 10 -- --
Michael Cottrell.................................. -- -- 12
</TABLE>
Contributions in respect of Peter Aikens, Andrew Nash and Peter Huntley were
to their respective personal pension plans up to the maximum permitted under
Inland Revenue rules. The element of contributions in excess of Inland Revenue
rules is paid into a Funded Unapproved Retirement Benefit Scheme for the
benefit of each individual.
Directors' beneficial interest in shares
<TABLE>
<CAPTION>
30 April 1998 1 May 1997
------------- ----------
<S> <C> <C>
Peter Aikens..................................... 79,467* 71,267
Hugh Etheridge................................... 31,591* 28,891
Peter Huntley.................................... -- 29,391
Robert MacNevin.................................. -- --
Kevin Philip..................................... 5,000 5,000
Martin Boase..................................... 10,000 10,000
Michael Garner................................... 10,000 10,000
Graham Wilson.................................... 10,000 10,000
</TABLE>
--------
* Note: A number of these shares were purchased from bonus paid under
the Capital Incentive Scheme which imposes a minimum period before
such shares may be sold. Details are provided below:
F-41
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
<TABLE>
<CAPTION>
Shares to be Held Shares to be Held
Until 1998 Until 1999
----------------- -----------------
<S> <C> <C>
Peter Aikens.......................... 8,227 9,715
Hugh Etheridge........................ 4,775 5,675
</TABLE>
There were no changes between 30 April 1998 and 6 July 1998.
Directors' share options
<TABLE>
<CAPTION>
Date from
which
1 May 1997 30 April 1998 Exercise Price Exercisable Expiry Date
---------- ------------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Peter Aikens............ 52,652 52,652 331p 1996 2003
24,723 24,723 566p 1997 2004
56,811 56,811 561p 1997 2004
59,000 59,000 662p 1998 2005
------- -------
193,186 193,186
======= =======
Hugh Etheridge.......... 24,723 24,723 566p 1997 2004
18,937 18,937 561p 1997 2004
33,000 33,000 662p 1998 2005
------- -------
76,660 76,660
======= =======
Robert MacNevin......... -- 40,000 247.5p 2000 2007
======= =======
Kevin Philp............. 21,041 21,041 566p 1997 2004
10,521 10,521 523p 1997 2004
10,000 10,000 555p 1998 2005
2,000 2,000 662p 1998 2005
2,000 2,000 680p 1999 2005
-- 60,000 247.5p 2000 2007
------- -------
45,562 105,562
======= =======
</TABLE>
At 30 April 1998, the Company's share price was 201.5p. The highest and
lowest share prices during the year were 277.5p and 162.5p, respectively.
Exercise of the above options was not conditional upon any performance
criteria.
All options were granted for nil consideration.
NOTE 6. STAFF NUMBERS AND COSTS
The average number of people employed by the Group, including directors,
within each category of activity was:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(number of
people)
<S> <C> <C> <C>
Production staff........................................ 471 516 513
Sales, marketing and distribution staff................. 883 792 663
Administration staff.................................... 268 270 276
----- ----- -----
1,622 1,578 1,452
===== ===== =====
</TABLE>
F-42
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
The aggregate payroll costs of these persons were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in (Pounds)
millions)
<S> <C> <C> <C>
Wages and salaries........................................ 30.2 28.6 27.3
Social security costs..................................... 2.4 2.4 2.4
Other pension costs....................................... 0.2 (0.1) 0.3
---- ---- ----
32.8 30.9 30.0
</TABLE>
NOTE 7. PROFIT/(LOSS) ON FIXED ASSET SALES
The profit/(loss) on fixed asset sales comprises:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in (Pounds)
millions)
<S> <C> <C> <C>
Profit on property sales................................. 4.2 0.4 --
Provision for loss on plant and machinery sales.......... (0.5) -- (2.0)
---- --- ----
3.7 0.4 (2.0)
==== === ====
</TABLE>
The tax charge for 1998 includes (Pounds)1.2m in respect of property sales.
NOTE 8. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in (Pounds)
millions)
<S> <C> <C> <C>
Bank interest and interest on loans repayable
within 5 years........................................... 5.0 4.9 2.5
Finance charges on finance leases......................... 0.1 0.1 0.1
Other..................................................... -- 0.1 0.1
--- --- ---
5.1 5.1 2.7
=== === ===
</TABLE>
In addition interest capitalised into tangible fixed assets during the year
was (Pounds)0.6m (1997--(Pounds)nil, 1996-- (Pounds)nil).
NOTE 9. TAX ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
(in (Pounds)
millions)
<S> <C> <C> <C>
The charge in the profit and
loss account consists of:
Corporation tax at 31%
(1997--33%, 1996--33%)................................ 14.9 7.6 1.8
Deferred tax--effect of
change in rate from
33% to 30%............................................ (0.9) -- --
Deferred tax--other.................................... (3.5) 4.8 3.2
---- ---- ---
10.5 12.4 5.0
==== ==== ===
</TABLE>
F-43
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
<TABLE>
<CAPTION>
1998 1997
---- ----
(in
(Pounds)
millions)
<S> <C> <C>
The deferred tax provision/(asset) represents:
Excess of capital allowances over
depreciation.............................................. (1.4) 6.6
Unutilised losses.......................................... -- (1.3)
Pensions timing differences................................ 5.7 6.3
Other timing differences................................... (0.7) (3.6)
Offset of ACT recoverable.................................. -- (4.8)
---- ----
3.6 3.2
==== ====
</TABLE>
The tax effect of exceptional items for the year ended 30 April 1996 was a
credit of (Pounds)7.9m, which included a credit of (Pounds)0.8m attributable
to the provision for loss on fixed asset disposals.
Full provision has been made for deferred tax except for a deferred tax
asset of (Pounds)0.1m (1997--(Pounds)0.2m) on the excess of capital allowances
over depreciation.
<TABLE>
<CAPTION>
1998 1997
---- ----
(in
(Pounds)
millions)
<S> <C> <C>
Deferred tax
At the beginning of the year................................ 3.2 (0.4)
ACT and losses transferred to/(from) corporation tax........ 4.8 (2.9)
Adjustment to fair value.................................... -- 1.7
Deferred tax (credit)/charge to profit and loss account..... (4.4) 4.8
---- ----
At the end of the year...................................... 3.6 3.2
==== ====
</TABLE>
NOTE 10. DIVIDENDS
<TABLE>
<CAPTION>
1998
Pence 1997 1996
per Pence Pence 1998 1997 1996
share per share per share (Pounds)m (Pounds)m (Pounds)m
----- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Dividend paid or
proposed:
Ordinary shares
Interim dividend paid
of................... 5.0 9.0 9.0 4.4 7.9 7.9
Proposed final
dividend of.......... 8.0 15.0 15.0 7.1 13.3 13.3
----- ---- ---- ---- ---- ----
Total................... 13.0 24.0 24.0 11.5 21.2 21.2
===== ==== ==== ==== ==== ====
Gross equivalent per
share.................. 16.25 30.0 30.0
===== ==== ====
</TABLE>
NOTE 11. EARNINGS PER SHARE
The calculation of earnings per share is based on a profit of (Pounds)25.3m
(1997--(Pounds)28.2m, 1996--(Pounds)12.1m) and 88,520,498 shares (1997--
88,469,740 shares, 1996--66,023,926 shares), being the weighted average number
in issue. A fully diluted earnings per share figure based on share options
outstanding is not provided as the effect on earnings per share is not
material.
NOTE 12. INTANGIBLE ASSETS
<TABLE>
<CAPTION>
Group
---------
(Pounds)m
<S> <C>
Cost and net book value of Strathmore brand
At 30 April 1998, 30 April 1997 and 30 April 1996............... 9.7
===
</TABLE>
F-44
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
NOTE 13. TANGIBLE ASSETS
<TABLE>
<CAPTION>
Land and Building Plant Fixtures,
---------------------------- Machinery Fittings,
Long Short Assets Under and Tools and
Group Freehold Leasehold Leasehold Construction Vehicles Equipment Total
----- -------- --------- --------- ------------ --------- --------- -----
(in (Pounds) millions)
<S> <C> <C> <C> <C> <C> <C> <C>
Cost
At 30 April 1996....... 28.5 2.0 0.9 5.2 101.0 11.9 149.5
Additions.............. 0.5 -- 0.1 9.7 13.3 1.6 25.2
Reclassifications...... 1.4 -- -- (10.2) 8.5 0.3 --
Disposals.............. (1.3) -- (0.1) -- (12.5) (2.1) (16.0)
----- ---- ---- ----- ----- ---- -----
At 30 April 1997....... 29.1 2.0 0.9 4.7 110.3 11.7 158.7
Additions.............. 1.2 0.7 0.3 14.2 12.2 2.5 31.1
Reclassifications...... 16.1 (0.1) -- (18.3) 1.7 0.6 --
Disposals.............. (22.2) (1.3) -- -- (8.9) (2.8) (35.2)
----- ---- ---- ----- ----- ---- -----
At 30 April 1998....... 24.2 1.3 1.2 0.6 115.3 12.0 154.6
===== ==== ==== ===== ===== ==== =====
Depreciation
At 30 April 1996....... 7.2 0.7 0.1 -- 45.6 8.7 62.3
Charged in the year.... 0.4 -- 0.1 -- 7.0 1.2 8.7
Disposals.............. -- -- -- -- (8.8) (2.1) (10.9)
----- ---- ---- ----- ----- ---- -----
At 30 April 1997....... 7.6 0.7 0.2 -- 43.8 7.8 60.1
Charged in the year.... 0.4 -- -- -- 8.2 1.2 9.8
Disposals.............. (5.2) (0.4) -- -- (4.2) (2.6) (12.4)
----- ---- ---- ----- ----- ---- -----
At 30 April 1998....... 2.8 0.3 0.2 -- 47.8 6.4 57.5
===== ==== ==== ===== ===== ==== =====
Net book amounts:
At 30 April 1996....... 21.3 1.3 0.8 5.2 55.4 3.2 87.2
===== ==== ==== ===== ===== ==== =====
At 30 April 1997....... 21.5 1.3 0.7 4.7 66.5 3.9 98.6
===== ==== ==== ===== ===== ==== =====
At 30 April 1998....... 21.4 1.0 1.0 0.6 67.5 5.6 97.1
===== ==== ==== ===== ===== ==== =====
</TABLE>
Included within the depreciation charge for 1998 for plant machinery and
vehicles of (Pounds)8.2m is an exceptional write down of (Pounds)1.0m of wine
dispensing equipment with customers.
The net book value of assets held under finance leases within plant
machinery and vehicles as at 30 April 1998 was (Pounds)1.1m (1997--
(Pounds)0.9m, 1996--(Pounds)1.4m). Depreciation on assets held under finance
leases during the year ended 30 April 1998 was (Pounds)0.2m (1997--
(Pounds)0.4m, 1996--(Pounds)0.4m). Freehold land and buildings includes
(Pounds)4.6m (1997--(Pounds)4.6m, 1996--(Pounds)5.9m) in respect of land.
NOTE 14. STOCKS
<TABLE>
<CAPTION>
1998 1997
---- ----
(in
(Pounds)
millions)
<S> <C> <C>
Raw materials and consummables.................................. 8.7 5.9
Work in progress................................................ 7.3 9.7
Finished goods for resale....................................... 28.6 33.7
---- ----
44.6 49.3
==== ====
</TABLE>
F-45
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
NOTE 15. DEBTORS
<TABLE>
<CAPTION>
1998 1997
----- -----
(in
(Pounds)
millions)
<S> <C> <C>
Amounts falling due within one year:
Trade debtors................................................. 83.3 91.2
ACT recoverable............................................... -- 1.7
Other debtors................................................. 6.4 4.9
Prepayments and accrued income................................ 5.1 3.5
----- -----
94.8 101.3
===== =====
Amounts falling due after more than one year:
ACT recoverable............................................... 1.9 3.3
Pension prepayment............................................ 19.0 19.1
----- -----
20.9 22.4
----- -----
115.7 123.7
===== =====
</TABLE>
NOTE 16. CREDITORS: AMOUNTS FALLING DUE WITHIN ONE YEAR
<TABLE>
<CAPTION>
1998 1997
----- -----
(in
(Pounds)
millions)
<S> <C> <C>
Trade and other creditors:
Trade creditors............................................... 52.0 52.8
Corporation tax............................................... 4.7 2.9
Other tax, including social security and ACT payable.......... 10.4 12.3
Finance lease obligations less than one year (note 17)........ 0.4 0.4
Other creditors, including deferred duty...................... 11.0 12.5
Accruals and deferred income.................................. 26.7 35.4
----- -----
105.2 116.3
===== =====
</TABLE>
NOTE 17. CREDITORS: AMOUNTS FALLING DUE AFTER MORE THAN ONE YEAR
<TABLE>
<CAPTION>
1998 1997
---- ----
(in
(Pounds)
millions)
<S> <C> <C>
Bank loans and overdrafts (unsecured)........................... 60.0 --
Obligations under finance leases................................ 0.8 0.2
Deferred purchase consideration................................. 0.4 1.7
---- ---
61.2 1.9
==== ===
</TABLE>
The deferred purchase consideration of (Pounds)0.4m in the current year is
in addition to (Pounds)1.2m (1997-- (Pounds)0.6m, 1996--(Pounds)nil), included
within other creditors due in less than one year and relates to the
acquisitions of Dunn & Moore and Liddingtons and is related to future profits.
The amount provided represents both the current best estimate of the amount
payable in due course, and the maximum amount payable.
F-46
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
The maturity of net obligations under finance leases and hire purchase
contracts is as follows:
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(in (Pounds) millions)
<S> <C> <C>
Within one year................................. 0.4 0.4
In the second to fifth years.................... 0.4 0.2
Over five years................................. 0.4 --
----------- -----------
1.2 0.6
=========== ===========
</TABLE>
NOTE 18. PROVISIONS FOR LIABILITIES AND CHARGES
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(in (Pounds) millions)
<S> <C> <C>
Deferred tax (see note 9)...................... 3.6 3.2
Provisions..................................... 11.9 14.4
----------- -----------
15.5 17.6
=========== ===========
Provisions:
At the beginning of the year................... 14.4 17.5
Transfer to creditors.......................... -- (0.4)
Release to profit and loss account within
exceptional item.............................. (1.0) --
Used during the year........................... (1.5) (2.3)
Released to goodwill........................... -- (0.4)
----------- -----------
At the end of the year......................... 11.9 14.4
=========== ===========
</TABLE>
Provisions primarily relate to surplus property costs.
The Group has a number of freehold and leasehold properties which are
surplus to operational requirements. Provision has been made for future fixed
costs associated with these properties for the period up to their expected
disposal. To the extent that these properties are disposed of earlier than
anticipated a benefit will arise; conversely if the properties are not
disposed of within the anticipated period a contingent liability exists for
the ongoing fixed costs.
NOTE 19. SHARE CAPITAL
<TABLE>
<CAPTION>
4.9 per cent
Cumulative
Redeemable
Preference Ordinary
Shares Shares
of (Pounds)1 each of 25p each Total
----------------- --------------------- ---------
Number (Pounds)m Number (Pounds)m (Pounds)m
Authorised: ------- --------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C>
Beginning and end of the year. 260,000 0.3 117,920,000 29.5 29.8
Allocated, called up and fully
paid
In issue at the beginning and
end of the year............. -- -- 88,520,498 22.1 22.1
</TABLE>
During the year no ordinary shares were issued under the share option
schemes (1997--217,240 shares were issued for a total consideration of
(Pounds)0.6m, 1996--64,270 shares for (Pounds)0.2m). In 1996 42.4m shares were
issued for a non cash consideration of (Pounds)267.6m.
F-47
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
NOTE 20. SHARE OPTIONS
Savings related share option scheme: Employees and directors in the UK with
a minimum of two years' service were entitled to apply for options to acquire
ordinary shares at 100% (1997--100%) of the average of the middle market price
on the three dealing days immediately preceding the date of the invitation.
At 30 April 1998 options granted and outstanding under employee share
schemes amounted to 458,102 ordinary shares. These options are exercisable at
varying dates up to 2002 at prices ranging from (Pounds)2.92 to (Pounds)5.26
per share. During the year the Company issued no ordinary shares under the
employee share schemes.
Executive share option scheme: Under the Company's executive scheme the
board may offer options to executives, whose performance contributes
significantly to the Company's results, at the middle market price on the
dealing day immediately preceding the date of the grant of the option.
At 30 April 1998 options exercisable were as follows:
<TABLE>
<CAPTION>
Price per Number of
Options exercisable between: Share Shares
---------------------------- --------- ---------
<S> <C> <C>
15 March 1992 and 14 March 1999.......................... 338p 1,300
22 June 1996 and 21 June 2003............................ 331p 65,652
20 January 1997 and 19 January 2004...................... 566p 123,089
11 July 1997 and 10 July 2004............................ 523p 50,497
17 October 1997 and 16 October 2004...................... 561p 93,633
16 January 1998 and 15 January 2005...................... 555p 61,000
20 July 1998 and 19 July 2005............................ 628p 13,000
10 November 1998 and 9 November 2005..................... 662p 106,000
16 January 1999 and 15 January 2006...................... 680p 43,000
28 January 2000 and 27 January 2007...................... 296.5p 203,000
25 July 2000 and 24 July 2007............................ 247.5p 580,000
8 January 2001 and 7 January 1008........................ 163p 225,000
</TABLE>
During the year the Company issued no ordinary shares under the executive
share option schemes.
NOTE 21. RESERVES
<TABLE>
<CAPTION>
Goodwill
Capital Write- Profit and
Share Redemption Merger off Loss
Premium Reserve Reserve Reserve Account
------- ---------- ------- -------- ----------
(in (Pounds) millions)
<S> <C> <C> <C> <C> <C>
At 30 April 1996 as previously
stated......................... 104.9 0.1 309.5 (364.4) (0.3)
Prior year adjustments (note 1
(Goodwill)).................... -- -- (309.5) 364.4 (54.9)
----- --- ------ ------ -----
At 30 April 1996 as restated.... 104.9 0.1 -- -- (55.2)
Shares issued................... 0.6 -- -- -- --
Goodwill arising on
acquisitions................... -- -- -- -- 2.1
Retained profit for the year.... -- -- -- -- 7.0
----- --- ------ ------ -----
At 30 April 1997 as restated.... 105.5 0.1 -- -- (46.1)
Retained profit for the year.... -- -- -- -- 13.8
----- --- ------ ------ -----
At 30 April 1998................ 105.5 0.1 -- -- (32.3)
----- --- ------ ------ -----
</TABLE>
The Cumulative amount of goodwill written off to reserves is (Pounds)362.3m
(1997--(Pounds)362.3m, 1996--(Pounds)364.4m).
F-48
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
NOTE 22. RECONCILIATIONS OF MOVEMENTS IN SHAREHOLDERS' FUNDS
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
(in (Pounds) millions)
<S> <C> <C> <C>
Opening shareholders' funds .................... 81.6 71.9 79.6
------- ------- --------
Profit for the year............................. 25.3 28.2 12.1
Dividends paid and proposed..................... (11.5) (21.2) (21.2)
------- ------- --------
Retained profit/(loss) for the year............. 13.8 7.0 (9.1)
New share capital subscribed.................... -- 0.6 267.9
Goodwill adjustment............................. -- 2.1 (266.5)
------- ------- --------
Net addition/(reduction) to the shareholders'
funds.......................................... 13.8 9.7 (7.7)
------- ------- --------
Closing shareholders' funds..................... 95.4 81.6 71.9
======= ======= ========
</TABLE>
NOTE 23. FINANCIAL AND CAPITAL COMMITMENTS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
(in (Pounds) millions)
<S> <C> <C>
Contracted commitments for capital expenditure.... 2.2 11.8
========== ===========
</TABLE>
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
Land & Land &
Buildings Other Buildings Other
--------- ----- --------- -----
(in (Pounds) millions)
<S> <C> <C> <C> <C>
Annual commitments under operating leases
which expire:
Within one year.......................... -- -- 0.1 0.1
In the second to fifth years inclusive... 0.1 0.6 -- 0.1
Over five years.......................... 2.9 -- 2.3 0.3
--- --- --- ---
3.0 0.6 2.4 0.5
=== === === ===
</TABLE>
The Group had (Pounds)9.8m (1997--(Pounds)5.0m) of commitments under forward
currency contracts at 30 April 1998.
NOTE 24. PENSIONS
The Company and its subsidiaries currently operate two Pension Plans, the
Matthew Clark Group Pension Plan and the Matthew Clark Executive Pension Plan.
These Plans are of the defined benefit type with assets held in Trustee
administered funds separate from the Company's finances. In addition, a
further Plan was acquired with the acquisition of Taunton Cider. This scheme
was merged with the Matthew Clark Group Pension Plan on 1 April 1997.
Actuarial valuations of the Matthew Clark Group Pension Plan have been
carried out by independent actuaries as at 1 January 1996. The funding level
of the combined Plans on the assumptions stated below as at 1 January 1996 was
141%. The combined market value of the assets at 1 January 1996 was
approximately (Pounds)92m. The pension cost is assessed in accordance with a
qualified actuary's advice. The Actuary has considered the long-term effects
of the removal of ACT relief for pension funds on the level of funding of the
Plans. The increase in the pension expense is not significant.
F-49
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
The assumptions adopted for the purposes of SSAP 24 were as follows:
<TABLE>
<S> <C>
Long-term investment return............ 9.00%
Salary escalation...................... 6.00%
</TABLE>
Pension increases were allowed for in accordance with the Rules of the Plan
and the past practice of granting discretionary increases. Assets were taken
into account at 94.6% of their market value.
On a discontinuance of either of the Plans, the market value of the assets
exceeded the cost of securing the liabilities at the appropriate valuation
date, assuming that cash equivalent transfer values were paid in respect of
active or deferred members.
NOTE 25. RECONCILIATION OF OPERATING PROFIT TO OPERATING CASHFLOWS
<TABLE>
<CAPTION>
1998 1997 1996
---- ----- -----
(in (Pounds)
millions)
<S> <C> <C> <C>
Operating profit........................................ 37.1 45.1 21.5
Exceptional charges..................................... -- -- 22.4
Depreciation charges.................................... 9.8 8.7 6.4
Loss on disposal and write-off of tangible fixed assets. 3.6 2.9 0.7
Cashflow relating to previous year's restructuring
provisions............................................. (4.5) (11.2) (15.8)
Decrease/(increase) in stocks........................... 4.7 11.7 (0.1)
Decrease/(increase) in debtors.......................... 5.4 13.6 (7.3)
(Decrease)/increase in creditors and provisions......... (6.3) (18.5) 1.3
---- ----- -----
Net cash inflow from operating activities............... 49.8 52.3 29.1
==== ===== =====
</TABLE>
NOTE 26. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM (UK) AND
UNITED STATES OF AMERICA (US) GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
The Group's consolidated financial statements are prepared in conformity
with generally accepted accounting principles applicable in the United Kingdom
(UK GAAP), which differ in certain significant respects from those applicable
in the United States of America (US GAAP). These differences together with the
approximate effects of the adjustments on net profit and equity shareholders'
funds, relate principally to the items set out below:
(a) GOODWILL: During 1998 the Group adopted Financial Reporting Standard
10 "Goodwill and intangible assets'. The Group's policy for
acquisitions which occurred prior to the issue of the standard is
that purchased goodwill, being the excess of the fair value of
consideration paid or payable over the fair value of the identifiable
net assets acquired, has been taken directly to reserves. On
subsequent disposal, goodwill previously taken direct to reserves is
included in determining the profit and loss on disposal. Previously
such goodwill was presented separately within reserves as a "goodwill
write off reserve'. This is not permitted by the Standard and,
accordingly, goodwill has been taken to merger reserve to the extent
available and the balance taken to the profit and loss account. Under
US GAAP, these intangible assets would be capitalised in the balance
sheet and amortised through the statement of income over a period not
exceeding 40 years.
F-50
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
For the purposes of calculating the effect of capitalising the goodwill
on the balance sheet and amortising the goodwill and brands through the
statement of income, a life of 40 years has generally been assumed.
However, under UK GAAP, the value of the brands, goodwill and other
intangibles is reviewed annually by reference to historic and forecast
contributions to operating income and an additional charge to the
statement of income is made where a permanent diminution in net book
value is identified.
(b) BRANDS: Significant owned brands by the Group are captialised as
intangible assets at the time of acquisition. The Group does not
provide amortisation on these assets. Under US GAAP, these would be
amortised through the statement of income over a period not exceeding
40 years.
(c) ACQUISITION ACCOUNTING: Prior to the adoption of Financial Reporting
Standard 7, "Fair values in acquisition accounting', the Group
provided for certain costs as part of the purchase accounting
adjustments on acquisition which under US GAAP would be included in
the statement of income when those costs were incurred. Examples of
such items include certain costs in respect of salaries of individuals
made redundant, the closure of certain of the Group's existing
operations and the rectification of inadequate operating systems.
With effect from 30 April 1995, the Group adopted Financial Reporting
Standard 7. This new standard sets out rules for accounting for
acquisitions in consolidated financial statements resulting in a
change in the difference between UK and US GAAP. US GAAP remained
unchanged. The fair value balance sheet of an acquired company cannot
include provisions for integration and reorganisation costs set up by
the acquiring company. In compliance with the standard, comparative
figures were not restated. Under US GAAP, certain integration and
reorganisation costs may be considered liabilities assumed and
included in the allocation of the acquisition costs.
(d) RESTRUCTURING AND INTEGRATION COSTS: Under UK GAAP, when a decision
has been taken to restructure part of the Group's business, provisions
are made for the impairment of asset values together with severance
and other costs. US GAAP requires a number of specific criteria to be
met before such costs can be recognised as an expense. Among these is
the requirement that all the significant actions arising from a
restructuring and integration plan and their expected completion dates
must be identified by the balance sheet date. US GAAP also requires
recognition of the estimated net present value of future net lease
obligations of vacant properties.
(e) PENSIONS: The Group accounts for the costs of pensions under the
rules set out in UK accounting standards. US GAAP is more prescriptive
in respect of actuarial assumptions and the allocation of costs to
accounting periods.
(f) LEASES: Under UK GAAP, provided certain conditions are met, it may be
permissible to recognise any profit arising on the sale and leaseback,
as an operating lease, of an asset. Under US GAAP, the gain or loss is
deferred and amortised in proportion to the rental payments due over
the term of the lease.
(g) DEFERRED TAXATION: UK GAAP requires that no provision for deferred
taxation should be made if there is reasonable evidence that such
taxation will not be payable within the foreseeable future and that
deferred tax assets should only be recognised if the realisation of
such assets can be assessed with reasonable certainty. US GAAP
requires full provision for deferred taxation liabilities, and permits
deferred tax assets to be recognised if their realisation is
considered to be more likely than not.
F-51
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
(h) STATEMENT OF CASH FLOWS: Under UK GAAP, cash flows are presented
separately for operating activities, returns on investments and
servicing of finance, taxation paid, capital expenditure,
acquisitions, dividends paid, and financing activities. Under US
GAAP, cash flows are reported as operating activities, investing
activities, and financing activities. Cash flows from taxation and
returns on investments and servicing of finance would, with the
exception of ordinary dividends paid, be included as operating
activities. The payment of dividends would be included under
financing activities.
Under UK GAAP, cash includes bank overdrafts repayable on demand.
Under US GAAP, cash flows in respect of overdrafts are included under
financing activities.
(i) EARNINGS PER ORDINARY SHARE: Under UK and US GAAP, basic earnings per
share is computed using the weighted average number of ordinary
shares in issue during the year. US GAAP also requires the
computation of diluted earnings per share which includes the effect
of potential common stock under the treasury stock method.
(j) ORDINARY DIVIDENDS: Under UK GAAP, the proposed dividends on ordinary
shares, as recommended by the directors, are deducted from
shareholders' equity and shown as a liability in the balance sheet at
the end of the period to which they relate. Under US GAAP, such
dividends are only deducted from shareholders' equity at the date of
declaration of the dividend.
Set out below is a summary combined statement of cash flows under US GAAP.
<TABLE>
<CAPTION>
30 April 30 April
1998 1997
-------- --------
<S> <C> <C>
(in (Pounds)
millions)
Net cash provided by operating activities................ 36.2 40.4
Net cash used in investing activities.................... (10.2) (18.4)
Net cash used in financing activities.................... (14.5) (20.8)
----- -----
Net increase in cash under US GAAP....................... 11.5 1.2
===== =====
</TABLE>
The following is a summary of the material adjustments to net income and
shareholders' equity which would have been required if US GAAP had been
applied instead of UK GAAP:
<TABLE>
<CAPTION>
1998 1997
----- ----
<S> <C> <C> <C>
(in (Pounds)
millions)
NET INCOME--UK GAAP AFTER EXCEPTIONAL ITEMS.................... 25.3 28.2
----- ----
ADJUSTMENTS TO CONFORM WITH US GAAP
--Amortisation of goodwill and intangibles.................... (9.1) (9.1)
--Restructuring costs......................................... (1.4) (1.7)
--Pension expense............................................. 0.1 0.7
--Sale and leaseback.......................................... (3.7) --
--Deferred tax on US GAAP adjustments......................... 1.5 0.3
----- ----
Total US GAAP adjustments...................................... (12.6) (9.8)
----- ----
NET INCOME--US GAAP............................................ 12.7 18.4
===== ====
</TABLE>
F-52
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
<TABLE>
<CAPTION>
Pence Pence
----- -----
<S> <C> <C> <C>
Basic earnings per Ordinary Share in accordance with US GAAP. 14.3 20.8
Diluted earnings per Ordinary Share in accordance with US
GAAP........................................................ 14.3 20.8
<CAPTION>
1998 1997
----- -----
<S> <C> <C> <C>
(in (Pounds)
millions)
SHAREHOLDERS' EQUITY, AS SHOWN IN THE GROUP BALANCE SHEETS--
UK GAAP..................................................... 95.4 81.6
----- -----
ADJUSTMENTS TO CONFORM WITH US GAAP
--Goodwill and intangibles.................................. 322.8 331.9
--Restructuring provisions.................................. 5.0 6.4
--Pension expense........................................... 2.5 2.4
--Sale and leaseback........................................ (3.7) --
--Deferred taxation on US GAAP adjustments.................. 0.4 (1.2)
--Dividends................................................. 7.1 13.3
----- -----
Total US GAAP adjustments.................................... 334.1 352.8
----- -----
TOTAL SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US GAAP........ 429.5 434.4
===== =====
</TABLE>
F-53
<PAGE>
MATTHEW CLARK plc
BALANCE SHEETS
(in (Pounds) millions)
(unaudited)
<TABLE>
<CAPTION>
31 October
--------------
1998 1997
------ ------
<S> <C> <C>
Fixed assets
Intangible assets............................................. 9.7 9.7
Tangible assets............................................... 90.5 107.6
------ ------
100.2 117.3
------ ------
Current assets
Stocks........................................................ 56.4 55.8
Debtors....................................................... 116.2 127.0
Cash at bank and in hand...................................... 7.2 16.3
------ ------
179.8 199.1
------ ------
Creditors: amounts falling due within one year
Trade and other creditors..................................... (110.9) (119.6)
Proposed dividend............................................. -- (4.4)
------ ------
(110.9) (124.0)
------ ------
Net current assets
Amounts due within one year................................... 49.7 56.1
Debtors due after more than one year.......................... 19.2 19.0
------ ------
68.9 75.1
------ ------
Total assets less current liabilities........................... 169.1 192.4
Creditors: amounts falling due after more than one year......... (60.9) (86.0)
Provisions for liabilities and charges.......................... (11.0) (16.6)
------ ------
Net assets.................................................... 97.2 89.8
====== ======
Capital and reserves
Called up share capital....................................... 22.1 22.1
Share premium account......................................... 105.5 105.5
Capital redemption reserve.................................... 0.1 0.1
Profit and loss account....................................... (30.5) (37.9)
------ ------
Equity shareholders' funds...................................... 97.2 89.8
====== ======
</TABLE>
- --------
The interim results for the six month periods ended 31 October 1998 and 1997
are based on the unaudited historic cost results.
F-54
<PAGE>
MATTHEW CLARK plc
CONSOLIDATED PROFIT AND LOSS ACCOUNTS
(in (Pounds) millions, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
For the Six Months
Ended 31 October
---------------------
1998(1) 1997
---------- ---------
<S> <C> <C>
Turnover................................................. 271.6 272.9
Operating costs.......................................... (267.2) (252.9)
--------- ---------
Operating profit......................................... 4.4 20.0
Profit on fixed asset sales.............................. 0.6 --
--------- ---------
Profit before interest and tax........................... 5.0 20.0
Interest receivable...................................... 0.1 --
Interest payable and similar charges..................... (2.6) (2.3)
--------- ---------
Profit on ordinary activities before tax................. 2.5 17.7
Tax on profit on ordinary activities..................... (0.7) (5.1)
--------- ---------
Profit on ordinary activities after tax.................. 1.8 12.6
Dividends................................................ -- (4.4)
--------- ---------
Retained profit for the period........................... 1.8 8.2
========= =========
Earnings per share....................................... 2.0p 14.2p
========= =========
</TABLE>
- --------
(1) Includes exceptional items for reorganisation as a result of the
rationalisation of production facilities. Pre-exceptional items, profit
attributable to ordinary shareholders was (Pounds)9.5m and earnings per
share was 10.7p.
There are no recognised gains or losses in any period other than the
profit/(loss) for the period.
The results above derive from continuing activities.
The interim figures are based on the unaudited historic cost results to 31
October.
The accompanying notes form an integral part of these unaudited consolidated
financial statements.
F-55
<PAGE>
MATTHEW CLARK plc
CONSOLIDATED CASH FLOW STATEMENTS
(in (Pounds) millions)
(unaudited)
<TABLE>
<CAPTION>
For the
Six Months
Ended 31
October
------------
1998 1997
----- -----
<S> <C> <C> <C>
Cash inflow from operating activities......................... 11.0 16.3
----- -----
Returns on investments and servicing of finance
Interest received........................................... 0.1 --
Interest paid............................................... (2.9) (3.6)
----- -----
(2.8) (3.6)
----- -----
Taxation paid............................................... (1.3) (2.0)
----- -----
Capital expenditure
Purchase of tangible fixed assets........................... (9.3) (18.0)
Receipts from sale of fixed assets.......................... 1.1 1.0
----- -----
(8.2) (17.0)
----- -----
Acquisitions................................................ (1.2) (0.7)
Dividends paid.............................................. (7.1) (13.3)
----- -----
Cash outflow before financing............................... (9.6) (20.3)
----- -----
Financing
Drawdown of committed loan.................................. -- 50.0
Capital element of finance lease payments................... (0.5) (0.6)
----- -----
(0.5) 49.4
----- -----
(Decrease)/increase in cash in the period..................... (10.1) 29.1
===== =====
Reconciliation of net cashflow to movement in net debt
(Decrease)/increase in cash in period....................... (10.1) 29.1
Cash inflow from increase in debt and lease financing....... (0.3) (50.0)
----- -----
Change in net debt resulting from cashflows................. (10.4) (20.9)
Net debt at the start of the period......................... (43.9) (51.2)
----- -----
Net debt at the end of the period........................... (54.3) (72.1)
===== =====
Analysis of net debt
Cash at bank and in hand.................................... 7.2 16.3
Bank loans and overdrafts................................... (60.0) (87.8)
Finance lease obligations................................... (1.5) (0.6)
----- -----
(54.3) (72.1)
===== =====
</TABLE>
F-56
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS
NOTE 1. BASIS OF PRESENTATION
The accompanying Condensed Consolidated Financial Statements present the
financial position and results of operations of the Group and have been
prepared in accordance with UK GAAP, which differ in certain significant
respects from US GAAP. See Note 4 included herein and Note 26 of the Notes to
the Accounts included in the Form 8-K/A for a discussion of the principal
differences between UK GAAP affecting the Group.
The interim financial information included in these Condensed Consolidated
Financial Statements is unaudited but reflects all adjustments (consisting
only normal recurring accruals) which are, in the opinion of management,
necessary for a fair presentation of the results for the interim periods
presented. The interim Condensed Consolidated Financial Statements should be
read in conjunction with the Consolidated Financial Statements and notes
thereto included in the Form 8-K/A.
The amount of income taxes in the Consolidated Income Statements is based
upon management's best estimate of the effective tax rate to be applicable for
the entire year and taking into account available tax loss carryforwards and
other relevant tax issues in the jurisdiction in which the Group operates.
NOTE 2. ADOPTION OF NEW ACCOUNTING STANDARD
The Group has adopted Statement of Financial Accounting Standards ("SFAS")
No. 130, "Reporting Comprehensive Income" which established standards for the
reporting and presentation of comprehensive income and its components in a
full set of financial statements. Comprehensive income/(loss) generally
encompasses all changes in shareholders' equity (except those arising from
transactions with owners). There is no difference between the Group's
comprehensive income and its net income for the six month periods ended 31
October 1997 and 1998.
NOTE 3. RECONCILIATION OF OPERATING PROFIT TO OPERATING CASHFLOWS
<TABLE>
<CAPTION>
For the Six Months
Ended 31 October
--------------------
1998 1997
--------- ---------
(in (Pounds)
millions)
<S> <C> <C>
Operating profit.......................................... 4.4 20.0
Exceptional charges....................................... 11.0 --
Depreciation charges...................................... 4.7 4.6
Loss on disposal and write-off of tangible fixed assets... 1.3 1.2
Cashflow relating to previous year's restructuring
provisions............................................... (1.9) (2.0)
Increase in stocks........................................ (11.8) (6.5)
Increase in debtors....................................... (0.2) (1.3)
Increase in creditors and provisions...................... 3.5 0.3
--------- --------
Net cash inflow from operating activities................. 11.0 16.3
========= ========
</TABLE>
NOTE 4. SUMMARY OF SIGNIFICANT DIFFERENCES BETWEEN UNITED KINGDOM (UK) AND
UNITED STATES OF AMERICA (US) GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
(GAAP)
The Group's consolidated financial statements are prepared in conformity
with generally accepted accounting principles applicable in the United Kingdom
(UK GAAP), which differ in certain significant
F-57
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
respects from those applicable in the United States of America (US GAAP).
These differences together with the approximate effects of the adjustments on
net profit and equity shareholders' funds, relate principally to the items set
out below:
(a) GOODWILL: During 1998 the Group adopted Financial Reporting Standard
10 "Goodwill and intangible assets'. The Group's policy for
acquisitions which occurred prior to the issue of the standard is
that purchased goodwill, being the excess of the fair value of
consideration paid or payable over the fair value of the identifiable
net assets acquired, has been taken directly to reserves. On
subsequent disposal, goodwill previously taken direct to reserves is
included in determining the profit and loss on disposal. Previously
such goodwill was presented separately within reserves as a "goodwill
write off reserve'. This is not permitted by the Standard and,
accordingly, goodwill has been taken to merger reserve to the extent
available and the balance taken to the profit and loss account. Under
US GAAP, these intangible assets would be capitalised in the balance
sheet and amortised through the statement of income over a period not
exceeding 40 years.
For the purposes of calculating the effect of capitalising the
goodwill on the balance sheet and amortising the goodwill and brands
through the statement of income, a life of 40 years has generally
been assumed. However, under UK GAAP, the value of the brands,
goodwill and other intangibles is reviewed annually by reference to
historic and forecast contributions to operating income and an
additional charge to the statement of income is made where a
permanent diminution in net book value is identified.
(b) BRANDS: Significant owned brands by the Group are capitalised as
intangible assets at the time of acquisition. The Group does not
provide amortisation on these assets. Under US GAAP, these would be
amortised through the statement of income over a period not exceeding
40 years.
(c) ACQUISITION ACCOUNTING: Prior to the adoption of Financial Reporting
Standard 7, "Fair values in acquisition accounting', the Group
provided for certain costs as part of the purchase accounting
adjustments on acquisition which under US GAAP would be included in
the statement of income when those costs were incurred. Examples of
such items include certain costs in respect of salaries of
individuals made redundant, the closure of certain of the Group's
existing operations and the rectification of inadequate operating
systems.
With effect from 30 April 1995, the Group adopted Financial Reporting
Standard 7. This new standard sets out rules for accounting for
acquisitions in consolidated financial statements resulting in a
change in the difference between UK and US GAAP. US GAAP remained
unchanged. The fair value balance sheet of an acquired company cannot
include provisions for integration and reorganisation costs set up by
the acquiring company. In compliance with the standard, comparative
figures were not restated. Under US GAAP, certain integration and
reorganisation costs may be considered liabilities assumed and
included in the allocation of the acquisition costs.
(d) RESTRUCTURING AND INTEGRATION COSTS: Under UK GAAP, when a decision
has been taken to restructure part of the Group's business,
provisions are made for the impairment of asset values together with
severance and other costs. US GAAP requires a number of specific
criteria to be met before such costs can be recognised as an expense.
Among these is the requirement that all the significant actions
arising from a restructuring and integration plan and their expected
completion dates must be identified by the balance sheet date. US
GAAP also requires recognition of the estimated net present value of
future net lease obligations of vacant properties.
F-58
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
(e) PENSIONS: The Group accounts for the costs of pensions under the
rules set out in UK accounting standards. US GAAP is more
prescriptive in respect of actuarial assumptions and the allocation
of costs to accounting periods.
(f) LEASES: Under UK GAAP, provided certain conditions are met, it may be
permissible to recognise any profit arising on the sale and
leaseback, as an operating lease, of an asset. Under US GAAP, the
gain or loss is deferred and amortised in proportion to the rental
payments due over the term of the lease.
(g) DEFERRED TAXATION: UK GAAP requires that no provision for deferred
taxation should be made if there is reasonable evidence that such
taxation will not be payable within the foreseeable future and that
deferred tax assets should only be recognised if the realisation of
such assets can be assessed with reasonable certainty. US GAAP
requires full provision for deferred taxation liabilities, and
permits deferred tax assets to be recognised if their realisation is
considered to be more likely than not.
(h) STATEMENT OF CASH FLOWS: Under UK GAAP, cash flows are presented
separately for operating activities, returns on investments and
servicing of finance, taxation paid, capital expenditure,
acquisitions, dividends paid, and financing activities. Under US
GAAP, cash flows are reported as operating activities, investing
activities, and financing activities. Cash flows from taxation and
returns on investments and servicing of finance would, with the
exception of ordinary dividends paid, be included as operating
activities. The payment of dividends would be included under
financing activities.
Under UK GAAP, cash includes bank overdrafts repayable on demand.
Under US GAAP, cash flows in respect of overdrafts are included under
financing activities.
(i) EARNINGS PER ORDINARY SHARE: Under UK and US GAAP, basic earnings per
share is computed using the weighted average number of ordinary
shares in issue during the year. US GAAP also requires the
computation of diluted earnings per share which includes the effect
of potential common stock under the treasury stock method.
(j) ORDINARY DIVIDENDS: Under UK GAAP, the proposed dividends on ordinary
shares, as recommended by the directors, are deducted from
shareholders' equity and shown as a liability in the balance sheet at
the end of the period to which they relate. Under US GAAP, such
dividends are only deducted from shareholders' equity at the date of
declaration of the dividend.
Set out below is a summary combined statement of cash flows under US GAAP.
<TABLE>
<CAPTION>
For the Six Months
Ended 31 October
--------------------
1998 1997
--------- ---------
(in (Pounds)
millions)
<S> <C> <C>
Net cash provided by operating activities................. 6.9 10.7
Net cash used in investing activities..................... (9.4) (17.7)
Net cash (used in)/provided by financing activities....... (7.6) 17.5
--------- ---------
Net (decrease)/increase in cash under US GAAP............. (10.1) 10.5
========= =========
</TABLE>
F-59
<PAGE>
MATTHEW CLARK plc
NOTES TO THE ACCOUNTS--(Continued)
The following is a summary of the material adjustments to net income and
shareholders' equity which would have been required if US GAAP had been applied
instead of UK GAAP:
<TABLE>
<CAPTION>
For the Six Months
Ended 31 October
---------------------
1998 1997
--------- ---------
(in (Pounds)
millions)
<S> <C> <C>
NET INCOME--UK GAAP AFTER EXCEPTIONAL ITEMS.............. 1.8 12.6
--------- ---------
ADJUSTMENTS TO CONFORM WITH US GAAP
--Amortisation of goodwill and intangibles.............. (4.6) (4.6)
--Pension expense....................................... (0.1) 0.1
--Sale and leaseback.................................... 0.1 --
--------- ---------
Total US GAAP adjustments................................ (4.6) (4.5)
--------- ---------
NET (LOSS)/INCOME--US GAAP............................... (2.8) 8.1
========= =========
<CAPTION>
Pence Pence
--------- ---------
<S> <C> <C>
Basic (loss)/earnings per Ordinary Share in accordance
with US GAAP............................................ (3.2) 9.2
Diluted (loss)/earnings per Ordinary Share in accordance
with US GAAP............................................ (3.2) 9.2
</TABLE>
<TABLE>
<CAPTION>
For the Six Months
Ended 31 October
--------------------
1998 1997
--------- ---------
<S> <C> <C> <C>
(in (Pounds) millions)
SHAREHOLDERS' EQUITY, AS SHOWN IN THE GROUP BALANCE
SHEETS--UK GAAP..................................... 97.2 89.8
--------- ---------
ADJUSTMENTS TO CONFORM WITH US GAAP
--Goodwill and intangibles.......................... 318.2 327.3
--Restructuring provisions.......................... 4.8 6.5
--Pension expense................................... 2.5 2.4
--Sale and leaseback................................ (3.6) --
--Deferred taxation on US GAAP adjustments.......... 0.3 (1.2)
--Dividends......................................... -- 4.4
--------- ---------
Total US GAAP adjustments............................ 322.2 339.4
--------- ---------
TOTAL SHAREHOLDERS' EQUITY IN ACCORDANCE WITH US
GAAP................................................ 419.4 429.2
========= =========
</TABLE>
F-60
<PAGE>
$200,000,000
[LOGO]
% Senior Subordinated Notes due 2009
Chase Securities Inc.
Credit Suisse First Boston
Fleet Securities, Inc.
Schroder & Co. Inc.
Scotia Capital Markets (USA) Inc.
