Item 1. Business
Unless the context otherwise requires, the term "Company" refers to Canandaigua Wine Company, Inc. and its subsidiaries, all references to "net sales" refer to gross revenues less excise taxes and returns and allowances to conform with the Company's method of classification, and all references to the Company's fiscal year shall refer to the year ended August 31 of the indicated year. Market share and industry data disclosed in this Report have been obtained from the following industry publications: Wines & Vines; The Gomberg-Fredrikson Report; Jobson's Liquor Handbook; Jobson's Wine Handbook; The U.S. Wine Market: Impact Databank Review and Forecast, 1994 Edition; The U.S. Beer Market: Impact Databank Review and Forecast, 1994 Edition; Beer Marketer's Insights: 1994 Import Insights; and 1994 Beer Industry Update. The Company has not independently verified this data. References to market share data are based on unit volume.
The Company is a Delaware corporation organized in 1972 as the successor to a business founded in 1945 by Marvin Sands, Chairman of the Board of the Company.
The Company is a leading producer and marketer of branded beverage alcohol products, with over 125 national and regional brands which are distributed by over 1,000 wholesalers throughout the United States and in selected international markets. The Company is the second largest supplier of wines, the fourth largest importer of beers and the eighth largest supplier of distilled spirits in the United States. The Company's beverage alcohol brands are marketed in five general categories: table wines, sparkling wines, dessert wines, imported beer and distilled spirits, and include the following principal brands:
. Table Wines: Almaden, Inglenook, Paul Masson, Taylor California Cellars, Cribari, Manischewitz, Taylor New York, Marcus James, Deer Valley and Dunnewood
. Sparkling Wines: Cook's, J. Roget, Great Western and Taylor New York
. Dessert Wines: Richards Wild Irish Rose, Cisco, Taylor New York and Italian Swiss Colony
. Imported Beer: Corona, St. Pauli Girl, Modelo Especial, Tsingtao and Pacifico
. Distilled Spirits: Barton's Gin and Vodka, Ten High Bourbon Whiskey, Crystal Palace Gin and Vodka, Montezuma Tequila, Northern Light Canadian Whisky, Lauder's Scotch Whisky and Monte Alban Mezcal
Based on available industry data, the Company believes it has a 21% share of the wine market, a 10% share of the imported beer market and a 4% share of the distilled spirits market in the United States. Within the wine market, the Company believes it has a 31% share of the non-varietal table wine market, a 10% share of the varietal table wine market, a 50% share of the dessert wine market and a 32% share of the sparkling wine
market. Many of the Company's brands are leaders in their respective categories in the United States, including Corona, the second largest selling imported beer brand, Almaden and Inglenook, the fifth and sixth largest selling wine brands, Richards Wild Irish Rose, the largest selling dessert wine brand, Cook's champagne, the second largest selling sparkling wine brand, Montezuma, the second largest selling tequila brand, and Monte Alban, the largest selling mezcal brand.
During the past four years, the Company has diversified its product portfolio through a series of strategic acquisitions that have resulted in an increase in the Company's net sales from $176.6 million in fiscal 1991 to $876.4 million on a pro forma basis in fiscal 1994. Through these acquisitions, the Company acquired strong market positions in growing product categories in the beverage alcohol industry, such as varietal table wine and imported beer. The Company ranks second and fourth in the varietal table wine and imported beer categories, respectively. Over the past four years, industry shipments of varietal table wine and imported beer have grown 64% and 7%, respectively. The Company has successfully integrated the acquired businesses into its existing business and achieved significant cost reductions through reduced product and organizational costs. The Company has also strengthened its relationship with wholesalers, expanded its distribution and enhanced its production capabilities as well as acquired additional management, operational, marketing and research and development expertise.
In October 1991, the Company acquired the Cook's, Cribari, Dunnewood and other brands and related facilities and assets (the "Guild Acquisition") from Guild Wineries and Distillers ("Guild"), which enabled the Company to establish a significant market position in the California sparkling wine category and to enter the California table wine market. The Company acquired Barton Incorporated ("Barton") in June 1993, further diversifying into the imported beer and distilled spirits categories (the "Barton Acquisition"). On October 15, 1993, the Company acquired the Paul Masson, Taylor California Cellars and other brands and related facilities and assets of Vintners International Company, Inc. ("Vintners") (the "Vintners Acquisition"). On August 5, 1994, the Company acquired the Almaden, Inglenook and other brands, a grape juice concentrate business and related facilities and assets (the "Almaden/Inglenook Product Lines") from Heublein Inc. (the "Almaden/Inglenook Acquisition," and together with the Barton Acquisition and the Vintners Acquisition, the "Acquisitions"). See "Recent Acquisitions."
The Company's business strategy is to continue to strengthen its market position in each of its principal product lines. Key elements of its strategy include: (i) making selective acquisitions in the beverage alcohol industry to improve market position and capitalize on growth trends within the industry; (ii) improving operating efficiencies through reduced product and organizational costs of existing and acquired businesses; (iii) capitalizing on strong wholesaler relationships resulting from its expanded portfolio of brands; and (iv) expanding distribution into new markets and increasing penetration of existing markets primarily through line extensions and promotional activities.
In furtherance of its business strategy of improving operating efficiencies of acquired businesses, the Company announced a plan to restructure the operations of its California wineries, including a consolidation of facilities, centralization of bottling operations and
reduction of overhead, including the elimination of approximately 260 jobs (the "Restructuring Plan"). As a result of the Restructuring Plan, the Company has taken a charge in the fourth quarter of fiscal 1994 which reduced after-tax income for fiscal 1994 by $14.9 million, or $0.91 per share on a fully diluted basis. The Company anticipates that the Restructuring Plan will result in net cost savings of approximately $1.7 million in fiscal 1995 and approximately $13.3 million of annual net cost savings beginning in fiscal 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
RECENT ACQUISITIONS
The Barton Acquisition. On June 29, 1993, the Company acquired all of the outstanding shares of capital stock of Barton. Barton is the United States' fourth largest importer of beers and eighth largest supplier of distilled spirits. The Barton Acquisition has enabled the Company to diversify within the beverage alcohol industry by participating in the imported beer and distilled spirits markets, which have similar marketing approaches and distribution channels to the Company's wine business, and to take advantage of the experienced management team that developed Barton as a successful company. With this acquisition, the Company acquired the right to distribute Corona and Modelo Especial beer in 25 primarily western states, national distribution rights for St. Pauli Girl and Tsingtao and a diversified line of distilled spirits including Barton Gin and Vodka, Ten High Bourbon Whiskey and Montezuma Tequila.
Barton is being operated independently by its current management as a subsidiary of the Company. Until August 31, 1996, consistent with past practices and subject to annual approval by the Company's Board of Directors of an annual operating plan for the coming year, Ellis M. Goodman, the Chief Executive Officer of Barton, has full and exclusive strategic and operational responsibility for Barton and all of its subsidiaries.
The Vintners Acquisition. On October 15, 1993, the Company acquired substantially all of the assets of Vintners, and assumed certain liabilities. Vintners was the United States' fifth largest supplier of wine with two of the country's most highly recognized brands, Paul Masson and Taylor California Cellars. The Vintners Acquisition enabled the Company to expand its wine portfolio to include several large and highly recognized table wine brands that are distributed by a substantially common wholesaler network. Vintners' operations were immediately integrated with those of the Company at the closing of the acquisition. With this acquisition, the Company acquired the Paul Masson, Taylor California Cellars, Taylor New York, Deer Valley, St. Regis (non- alcoholic) and Great Western brands and related facilities.
The Almaden/Inglenook Acquisition. On August 5, 1994, the Company acquired the Almaden and Inglenook brands, the fifth and sixth largest selling table wines in the United States, a grape juice concentrate business, and wineries in Madera and Escalon, California, from Heublein. The Company also acquired Belaire Creek Cellars, Chateau La Salle and Charles Le Franc table wines, Le Domaine champagne and Almaden, Hartley and Jacques Bonet brandy. The accounts receivable and the accounts payable related to the acquired assets were not acquired by the Company.
As a result of the Almaden/Inglenook Acquisition, the Company has strengthened its position as the second largest supplier of wines in the United States. The acquisition of the Inglenook brand significantly expands the Company's restaurant and bar on-premises presence. The Company intends to maintain the existing sales force and distribution network of the Almaden and Inglenook brands. Further, the Almaden/Inglenook Acquisition has resulted in the Company becoming the leading grape juice concentrate producer in the United States. The Company believes that the Almaden/Inglenook Acquisition will enable the Company to achieve significant cost savings through the consolidation of its California winery operations.
Heublein also agreed not to compete with the Company in the United States and Canada for a period of five years following the closing of the Almaden/Inglenook Acquisition in the production and sale of grape juice concentrate or sale of packaged wines bearing the designation "Chablis" or "Burgundy" except where, among other exceptions, such designations are currently used with certain brands retained by Heublein. Certain companies acquired by Heublein, however, may compete directly with the Company.
INDUSTRY
The beverage alcohol industry in the United States consists of the production, importation, marketing and distribution of beer, wine and distilled spirits products. Over the past five years there has been increasing consolidation at the supplier, wholesaler and, in some 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 some markets, retailers. From 1978 through 1993, the overall per capita consumption of beverage alcohol products in the United States has generally declined. However, table wines, and in particular varietal table wines, and imported beer consumption have increased during the period.
The following table sets forth the industry unit volumes for shipments of beverage alcohol products in the Company's five principal beverage alcohol product categories in the United States for the five calendar years ended December 31, 1993:
(a) Units are in thousands of gallons. Data exclude sales of wine coolers. (b) Includes other special natural (flavored) wines under 14% alcohol. (c) Includes dessert wines, other special natural (flavored) wines over 14% alcohol and vermouth. (d) Units are in thousands of cases (2.25 gallons per case). (e) Units are in thousands of 9-liter cases (2.378 gallons per case).
Table Wines. Wines containing 14% or less alcohol by volume are generally referred to as table wines. Within this category, table wines are further characterized as either "non-varietal" or "varietal." Non- varietal wines include wines named after the European regions where similar types of wines were originally produced (e.g., burgundy), niche products and proprietary brands. Varietal wines are those named for the grape that comprises the principal component of the wine. Table wines that retail at less than $5.75 per 750 ml. bottle are generally considered to be popularly priced while those that retail at $5.75 or more per 750 ml. bottle are considered premium wines.
From 1989 to 1993, shipments of domestic table wines increased at an average compound annual rate of approximately 1.5%. In 1992, domestic table wine shipments increased 8% from the previous year; this rate of increase was markedly larger than in previous years and was attributed in large part to the November 1991 CBS television 60 Minutes, French Paradox broadcast about the healthful benefits of moderate red wine consumption. In 1993, domestic table wine shipments declined by 2.3% when compared to 1992. This decline has been attributed to an overall wholesale and retail wine inventory surplus at the end of 1992. Based on shipments of California table wines, which constituted approximately 94% of the total domestically produced table wine market in 1993, shipments of varietal wines have grown at an average compound annual rate of 13.3% since 1989, with shipments in the first half of 1994 increasing 16% over the prior year. In contrast, shipments of non-varietal table wines have generally declined over the same period although they showed a slight increase in
1992 as compared to 1991. For the first half of calendar 1994, shipments of California table wines increased approximately 7% over the same period in 1993. Shipments of imported table wines have generally decreased over the last six years, decreasing from 58.9 million gallons in 1989 to 52.4 million gallons in 1993. Imported table wines constituted 15% of the United States table wine market in calendar 1993.
Dessert Wines. Wines containing more than 14% alcohol by volume are generally referred to as dessert wines. Dessert wines generally fall into the same price categories as table wines. Dessert wine consumption in the United States has been declining for many years reflecting a general shift in consumer preferences to table and sparkling wines. For calendar year 1993, shipments of domestic dessert wines decreased 9.9% over calendar year 1992, a lesser rate than from 1989 to 1993, during which period shipments of domestic dessert wines declined at an average compound annual rate of 14.2%. Dessert wines, which are generally popularly priced, have been adversely affected by the January 1, 1991 increase in federal excise taxes which had the effect of increasing the cost of these products to the consumer disproportionately with certain other beverage alcohol products. Shipments of dessert wines continued to decline during the first half of calendar 1994 as compared to the first half of calendar 1993 as is evidenced by a 7% decline during this period in shipments of California dessert wines, which constituted approximately 73% of the domestically produced dessert wine market in 1993.
Sparkling Wines. Sparkling wines include effervescent wines like champagne and spumante. Sparkling wines generally fall into the same price categories as table wines. Shipments of sparkling wines declined at an average compound annual rate of 2.9% from 1989 to 1993; with shipments of domestic sparkling wines declining 0.8% in calendar 1993 as compared to calendar 1992. The decline in sparkling wine consumption is believed to reflect mounting concerns about drinking and driving, as a large part of sparkling wine consumption occurs outside the home at social gatherings and restaurants. Shipments of sparkling wines continued to decline during the first half of 1994 as compared to the first half of 1993 as is evidenced by a decline of 12% during this period in shipments of California sparkling wines which constituted approximately 92% of the domestically produced sparkling wine market in 1993. The Company believes that shipments in the first half of 1994 were also adversely affected by high levels of retail inventory at the beginning of the period.
Imported Beer. Shipments of imported beers have increased at an average compound annual rate of 1.7% from 1989 to 1993. Shipments of Mexican beers in calendar 1993 increased 10.4% over 1992. During the first half of calendar 1994 as compared to the corresponding period in 1993, shipments of Mexican beers increased 14.5% as compared to an increase of 19.3% for the entire imported beer category. In 1993, imported beers constituted 4.9% of the United States beer market. This reflects an increase from 1992 when imported beers constituted 4.4% of the United States beer market. Imported beers are generally priced above the leading domestic premium brands. This price category also includes beers produced by microbreweries and super-premium priced domestic beers.
Distilled Spirits. Shipments of distilled spirits in the United States declined at an average compound annual rate of 1.9% from 1989 to 1993. Although shipments increased slightly in calendar 1992 as compared to calendar 1991, shipments again declined in calendar 1993 by 2.6% when
compared to calendar 1992. Shipments of distilled spirits have been affected by many of the same trends evident in the rest of the beverage alcohol industry. Over the past five years, whiskey sales have declined significantly while sales of rum, tequila, cordials and liqueurs have increased. The Company believes that distilled spirits can be divided into two general price segments, with distilled spirits selling for less than $7.00 a 750 ml. bottle being referred to as price value products and those selling for over $7.00 a 750 ml. bottle being referred to as premium products.
PRODUCT CATEGORIES
The Company produces, imports and markets beverage alcohol products in five principal product categories: table wines, dessert wines, sparkling wines, imported beer and distilled spirits. The table below sets forth the unit volumes (in thousands of gallons) and net sales (in thousands) for all of the table, dessert and sparkling wines, grape juice concentrate and other wine related products and services sold by the Company and under brands and products acquired in the Vintners Acquisition and the Almaden/Inglenook Acquisition for the 1992, 1993 and 1994 fiscal years.
(a) Data for fiscal years ended August 31, 1992, 1993 and 1994. The data for the Company's fiscal year ended August 31, 1994 excludes the net sales for the brands and other products acquired in the Vintners Acquisition and the Almaden/Inglenook Acquisition.
(b) Data for fiscal years ended July 31, 1992 and 1993 and for the twelve months ended August 31, 1994.
(c) Data for fiscal years ended September 30, 1992 and 1993 and for the twelve months ended August 31, 1994.
Table Wines. The Company sells over 45 different brands of non- varietal table wines, substantially all of which are marketed in the popularly priced segment which constituted approximately 43% of the domestic table wine market in the United States for the 1993 calendar year. The Company also sells over 15 different brands of varietal table wines in both the popularly priced and premium categories. The table
below sets forth the unit volumes (in thousands of gallons) for the domestic table wines sold by the Company and under domestic table wine brands acquired in the Vintners Acquisition and the Almaden/Inglenook Acquisition for the 1992, 1993 and 1994 fiscal years:
(a) Excludes sales of wine coolers but includes sales of wine in bulk.
The Company's table wine brands include:
Almaden: The fifth largest selling table wine brand and the ninth largest varietal wine brand in the United States. Almaden is one of the oldest and best known table wines in the United States.
Inglenook: The sixth largest selling table wine brand and the seventh largest varietal wine in the United States with a significant restaurant and bar presence.
Paul Masson: The 11th largest selling table wine brand in the United States which is offered in all major varietal and non-varietal product categories in a full range of sizes.
Taylor California Cellars: The 14th largest domestic selling table wine brand in the United States which is also offered in all major varietal and non-varietal product categories in a full range of sizes.
Cribari: A well known brand of both varietal and non-varietal table wines marketed in the popularly priced segment.
Manischewitz: The largest selling brand of kosher wine in the United States.
Taylor New York: One of the United States' oldest brands of non- varietal wine marketed primarily in the eastern half of the United States.
Richards Wild Irish Rose: A brand of table wine possessing unique taste characteristics which is a line extension of the nation's leading dessert wine brand.
Deer Valley: This line of California varietal and non-varietal table wines introduced in 1989 has had significant success in California. The Company is in the process of introducing this brand in other regions of the country.
Cook's: This varietal wine was created to take advantage of the brand recognition associated with Cook's sparkling wines.
Dunnewood: From California's north coast, unit volumes of this varietal wine have also increased significantly. This brand is marketed at the lower end of the premium price category.
The Company has pursued a strategy of increasing its unit volume sales in the table wine segment by acquiring new brands and by growing existing brands. The Company's unit volume sales of non-varietal table wines increased from approximately 9.3 million gallons in fiscal 1992 to approximately 52.6 million gallons on a pro forma basis for fiscal 1994 as a result of the Vintners Acquisition and the Almaden/Inglenook Acquisition. Likewise, the Company's unit volume sales of varietal table wines increased from approximately 1.1 million gallons in fiscal 1992 to over 12.8 million gallons on a pro forma basis for fiscal 1994 as a result of the Vintners Acquisition and the Almaden/Inglenook Acquisition. The Company believes that its recent acquisition of the Almaden/Inglenook Product Lines, including the Almaden and Inglenook brands, creates additional opportunities for growth in this product category.
The 1993 decrease in unit volume of Vintners' table wines resulted from a number of factors including a significant decrease in Vintners' expenditures for advertising, promotion and selling activities during the three year period ended July 31, 1993. The Company believes that this decrease resulted in a reduction in the level of wholesaler attention paid to Vintners' brands, and the Company believes that certain of Vintners' products were not competitively priced. During the Company's fiscal 1994, unit volume sales of Vintners table wines continued to decline. During fiscal 1994, the Company implemented steps to address this decline, including a reduction in prices for its Taylor California brands, the implementation of new promotional programs and repackaging of selected products. As a result of these efforts, the Company believes that sales of Vintners' brands have begun to stabilize.
The Company also markets a selection of popularly priced imported table wines. These brands include:
Marcus James: One of the largest selling imported varietal wines in the United States. Marcus James is a line of varietal table wines which includes white zinfandel, chardonnay, cabernet sauvignon and merlot. The Company owns the Marcus James brand and contracts for its production in Brazil.
Partager: A popularly priced French table wine with both varietal and non-varietal products. The Company owns the Partager brand and contracts for its production in France.
Mateus: The second largest selling Portuguese table wine and a highly recognized brand name. This brand is imported by the Company under a distribution agreement.
The Company's unit volume sales of imported wine increased steadily from 1.3 million gallons in fiscal 1992 to 1.9 million gallons in fiscal 1994. This increase is attributable primarily to increased sales of the Marcus James brand and the inclusion of a full year of Mateus sales. Including sales of Partager by Vintners prior to its acquisition by the Company, on a pro forma basis for fiscal 1994, the Company sold approximately 2.0 million gallons of imported table wines.
Dessert Wines. The Company markets substantially all of its dessert wines in the lower end of the popularly priced segment. The popularly priced segment represented approximately 88% of the dessert wine market in calendar 1993. Sales of dessert wines comprised 10.2% of the Company's total revenues during the fiscal year ended August 31, 1994, on a pro forma basis. The table below sets forth the unit volumes (in thousands of gallons) for the domestic dessert wines sold by the Company and under domestic dessert wine brands acquired in the Vintners Acquisition for the 1992, 1993 and 1994 fiscal years:
The Company's dessert wines include:
Richards Wild Irish Rose: The largest selling dessert wine brand in the United States and the Company's leading dessert wine brand in unit volume sales.
Cisco: The fourth largest selling dessert wine brand in the United States. Cisco is a flavored dessert wine positioned higher in price than Richards Wild Irish Rose.
Taylor New York: Premium dessert wines, including port and sherry.
The Company's unit volume sales of dessert wines have declined over the last three years. The decline can be attributed to a general decline in dessert wine consumption in the United States. The Company's unit volume sales of its dessert wine brands (including the brands acquired from Vintners) have decreased 26.9% from fiscal 1992 to fiscal 1994.
Sparkling Wines. The Company markets substantially all of its sparkling wines in the popularly priced segment, which constituted
approximately 48% of the domestic sparkling wine market in calendar 1993. The table below sets forth the unit volumes (in thousands of gallons) for the domestic sparkling wines sold by the Company and under domestic sparking wine brands acquired in the Vintners Acquisition and the Almaden/Inglenook Acquisition for the 1992, 1993 and 1994 fiscal years:
The Company's sparkling wine brands include:
Cook's: The second largest selling domestic sparkling wine in the United States. This brand of champagne is marketed in a bell shaped bottle and is cork-finished, packaging generally associated with higher priced products.
J. Roget: The sixth largest selling domestic sparkling wine in the United States, priced slightly below Cook's.
Great Western: A premium priced champagne, fermented in the bottle.
Taylor New York: A well known premium priced champagne also fermented in the bottle.
Codorniu: The second largest Spanish sparkling wine imported in the United States; sold in the premium price category.
Jacques Bonet: Priced in the economy segment, this product appeals to restaurants and caterers.
The Company has maintained sales levels of sparkling wine over the last three years in contrast to a general industry decline in sales for this product category.
Grape Juice Concentrate. As part of its wine business, the Company produces grape juice concentrate. Grape juice concentrate is sold to the food and wine industries as a raw material for the production of juice- based products, no-sugar-added foods and beverages. Grape juice concentrate competes with other domestically produced and imported fruit- based concentrates. As a result of the Almaden/Inglenook Acquisition, the Company believes that it is the leading grape juice concentrate producer in the United States. Sales of grape juice concentrate accounted for approximately 11% and 12% of the Company's net sales for its fiscal years ended 1992 and 1993, respectively. The table below sets forth the unit volumes (in thousands of gallons) for the grape juice concentrate sold by the Company and the grape juice concentrate business acquired in the Almaden/Inglenook Product Lines for the 1992, 1993 and 1994 fiscal years:
Other Wine Product and Related Services. The Company's other wine related products and services include: grape juice; St. Regis, the leading non-alcoholic line of wines in the United States; Paul Masson and other brandies; wine coolers sold primarily under the Sun Country brand name; cooking wine; and wine for the production of vinegar. The Company also provides various bottling and distillation production services for third parties.
Beer. The Company is the fourth largest marketer of imported beers in the United States. The Company distributes Corona, St. Pauli Girl, Modelo Especial and Tsingtao, four of the top imported beer brands in the United States. The table below sets forth the unit volume (in thousands of cases) and net sales (in thousands) for the beer sold by Barton for the years ended August 31:
1992 1993 1994
NET VOLUME NET VOLUME NET VOLUME SALES SALES SALES
$131,868 10,152 $158,359 12,422 $173,883 14,100
The Company's principal imported beer brands include:
Corona: The number one selling beer in Mexico and the second largest selling imported beer in the United States. In addition, the Company believes that Corona is the largest selling import in the territory in which it is distributed by the Company. The Company has represented the supplier of Corona since 1978 and currently sells Corona and its related Mexican beer brands in 25 primarily western states.
St. Pauli Girl: The 15th largest selling imported beer in the United States, and the second largest selling German import.
Modelo Especial: One of the family of products imported from the supplier of Corona, Modelo Especial is the number one selling canned beer in Mexico and is growing in the United States with 1994 shipments into the United States increasing by 57% over 1993 shipments in the same period.
Tsingtao: The largest selling Chinese beer in the United States.
The Company's other imported beer brands include Pacifico and Negra Modelo from Mexico, Peroni from Italy and Double Diamond from the United
Kingdom. In September 1992 the Company acquired the Stevens Point Brewery, a regional brewer located in Wisconsin, together with its brands including Point Special.
Net sales and unit volumes of the Company's beer brands have grown during the previous two fiscal years as a result of the acquisition of the St. Pauli Girl and Double Diamond brands on July 1, 1992, the acquisition of the Point brands in September 1992 and increased sales of Corona and the Company's other Mexican beer brands. The Company's selling prices were not increased significantly over this time period.
Distilled Spirits. The Company is the eighth largest producer, importer and marketer 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 more than 15 foreign countries. The table below sets forth the unit volumes (in thousands of 9-liter cases) and net sales (in thousands) for the distilled products case goods sold by Barton for the years ended August 31:
1992 1993 1994
NET VOLUME NET VOLUME NET VOLUME SALES SALES SALES
$82,677 5,609 $82,270 5,529 $81,367 5,370
The Company's leading distilled spirits brands include:
Monte Alban: A premium priced product which the Company believes is the number one selling mezcal in the United States.
Montezuma: This brand is the number two selling tequila in the United States.
Ten High Bourbon: One of the leading bourbon brands in the United States.
Barton Gin and Vodka: Well-known leading national brands.
Other products include Crystal Palace Gin and Vodka, Lauder's, House of Stuart and Highland Mist Scotch whiskeys, Kentucky Gentleman, Very Old Barton and Tom Moore bourbon whiskeys, Sabroso coffee liqueur, Northern Light, Canadian Host and Canadian Supreme Canadian whiskeys and Imperial, Barton Reserve and Barton Premium blended whiskeys. Substantially all of the Company's unit volume consists of products marketed in the price value segment, which the Company believes constituted approximately 50% of the distilled spirits market in calendar 1993.
Net sales and unit volumes of the Company's distilled spirits brands have decreased 1.6% and 4.3%, respectively, over the periods shown, there have been changes in sales of particular brands. Unit volumes of vodka and tequila have increased while Scotch and bourbon have experienced
decreases in unit volume. Net sales have generally not been affected by price increases.
In addition to the branded products described above, the Company also sells distilled spirits in bulk and provides contract production and bottling services. These activities accounted for net sales during the 12 month periods ended August 31, 1992, 1993 and 1994 of $11.8 million, $10.6 million and $7.0 million, respectively.
Marketing and Distribution
The Company's products are distributed and sold throughout the United States through over 1,000 wholesalers, as well as through state alcoholic beverage control agencies. The Company employs a full-time in-house sales organization of approximately 350 people to develop and service its sales to wholesalers and state agencies. The Company's sales force is organized in four sales units: a beer unit, a spirits unit and two wine units, one of which focuses on the newly acquired brands purchased in the Almaden/Inglenook Acquisition. The Company believes that the organization of its sales force into four 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 closely manages its advertising expenditures in relation to the performance of its brands. The Company has extensive marketing programs for its brands including television, radio, outdoor and print advertising, promotional programs on both a national basis and regional basis in accordance with the strength of the brands, event sponsorship, market research, point-of- sale materials, trade advertising and public relations.
Trademarks and Distribution Agreements
The Company's wine products are sold under a number of trademarks. All of these trademarks are either owned by the Company or used by the Company under exclusive license or distribution agreements.
The Company also owns the following trademarks used in its distilled spirits business: Montezuma, House of Stuart, Highland Mist, Kentucky Gentleman, Barton, Canadian Supreme and Sabroso. The Monte Alban trademark for use outside of Mexico is jointly owned by the Company and the supplier of Monte Alban Mezcal. The Company owns the world-wide sales and marketing rights outside of Mexico.
In September 1989, Barton purchased certain assets from Hiram Walker & Sons, Inc. ("Hiram Walker") and obtained licenses to use the trade names Ten High, Crystal Palace, Northern Light, Lauder's, and Imperial for an initial seven year period. Under an agreement dated January 28, 1994, the Company paid $5.1 million to Hiram Walker for the extension of licenses to use these brand names and certain other spirits brands, for varying periods, the longest of which terminates in 2116.
All of the Company's imported beer products are marketed and sold pursuant to exclusive distribution agreements from the suppliers of these products. These agreements have terms that vary and prohibit the Company from importing other beers from the same country. The Company's agreement
to distribute Corona and its other Mexican beer brands exclusively throughout 25 states was renewed effective January 1994 and expires in December 1998 with automatic renewal thereafter for one year periods from year to year unless terminated. Under this agreement, the Mexican supplier has the right to consent to Mr. Goodman's successor as Chairman and Chief Executive Officer of Barton's beer subsidiary, which consent may not be unreasonably withheld, and, if such consent is properly withheld, to terminate the agreement. The Company's agreement for the importation of St. Pauli Girl expires in 1998 with automatic renewal until 2003 unless the Company terminates the Agreement. The Company's agreement for the exclusive importation of Tsingtao throughout the entire United States was renewed effective January 1994 and expires in December 1996 with an automatic renewal to December 1999. 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 all of its material distribution agreements. Given the Company's long-term relationships with its suppliers, the Company does not believe that these agreements will be terminated and expects that such agreements will be renewed prior to their expiration.
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 non-alcoholic beverages for consumer purchases, as well as shelf space in retail stores and for 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. The Company's principal competitors include E&J Gallo Winery in the wine category, Van Munching & Co., Molson Breweries USA and Guinness in the imported beer category and United Distillers Glenmore and Jim Beam Brands in the distilled spirits category.
PRODUCTION
The Company's wines are 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 wines, high-proof grape spirits or brandy. Most of the Company's wines are bottled and sold within 18 months after the grape crush. The Company's inventories of wines, 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 from time to time supplement its inventories through purchases from other distillers. At its Atlanta, Georgia facility, the Company produces all of the grain neutral spirits 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 whiskeys, and tequila, mezcal, and the grain neutral 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.
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 bottles and other materials, such as caps, corks, capsules, labels and cardboard cartons in the bottling and packaging of its products. Glass bottle costs is 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 occurs from July through October. The Company owns no vineyards in California and purchases grapes from over 1,000 independent growers principally in California and New York. In connection with the Vintners Acquisition and the Almaden/Inglenook Acquisition, the Company acquired certain long term grape purchase contracts. The Company enters into written purchase agreements with a majority of these growers on a year-to-year basis. As a result of this ample grape supply the Company believes that its exposure to phylloxera and other agricultural risks is minimal.
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.
GOVERNMENT REGULATION
The Company's operations 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. The Company believes that it is in compliance in all material respects with all presently applicable governmental laws and regulations and that the cost of administration of 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 has approximately 2,650 full-time employees, approximately 900 of whom are covered by collective bargaining agreements. The Company's collective bargaining agreement covering 368 employees at the Mission Bell winery has expired and negotiations have commenced. Additional workers may be employed by the Company during the grape crushing season. The Company considers its employee relations to be good.
Item 2.
Item 2. PROPERTIES
The Company currently operates 15 wineries, two bottling and distilling plants, one bottling and rectifying plant and a brewery, all of which include warehousing and distribution facilities on the premises. The Company considers its principal facilities to be the Mission Bell winery in Madera, California, the Canandaigua, New York winery, and the Gonzales, California winery and the distilling and bottling facility located in Bardstown, Kentucky. Under the Restructuring Plan, the Central Cellars winery located in Lodi, California and the Soledad, California winery will be closed and offered for sale to reduce excess capacity.
In New York, the Company operates four wineries located in Canandaigua, Naples, Batavia and Hammondsport. The Hammondsport winery lease, acquired in the Vintners Acquisition, expires in April 1995. Production at this winery will be consolidated at the Company's other New York wineries.
The Company currently operates 11 winery facilities in California, including Central Cellars and Soledad Cellars which are to be closed. In the Almaden/Inglenook Acquisition, the Company acquired two new facilities located in Escalon and Madera, California. The Madera winery (known as the Mission Bell winery) is a crushing, wine production, bottling and distribution facility and a grape juice concentrate production facility. The Mission Bell winery will absorb the production of Central Cellars. The Escalon facility is operated under a long-term lease with an option to buy. As part of the Restructuring Plan, the branded wine bottling operations at the Gonzales, California facility where Paul Masson and Taylor Cellars are currently bottled will be moved to the Mission Bell winery during fiscal 1995. The other wineries operated in California are located in Lodi, McFarland, Madera, Fresno and Ukiah.
The Company operates three facilities that produce and/or bottle and store distilled spirits. It owns production, bottling and storage facilities in Bardstown, Kentucky and Atlanta, Georgia, and operates a bottling plant in Carson, California, near Los Angeles, under a management contract. The Bardstown facility distills, bottles and warehouses whiskey for the Company's account and on a contractual basis for other participants in the industry. The Company also owns a production plant in Atlanta, Georgia which produces vodka, gin and blended whiskeys. 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 Company owns a brewery in Stevens Point, Wisconsin where it produces and bottles Point beer. In addition, the Company owns and maintains its corporate headquarters in Canandaigua, New York, and 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.
Most of the Company's real property has been pledged under the terms of collateral security mortgages as security for the payment of outstanding loans under the Credit Facility.
Item 3.
Item 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are subject to litigation from time to time in the ordinary course of business. Although the amount of any liability with respect to such litigation cannot be determined, in the opinion of management, such liability will not have a material adverse effect on the Company's financial condition or results of operations.
In connection with an investigation in the State of New Jersey into regulatory trade practices in the beverage alcohol industry, one employee of the Company was arrested in March 1994 and another employee has subsequently come under investigation in connection with providing "free goods" to retailers in violation of New Jersey beverage alcohol laws. Employees of several wholesalers and other alcoholic beverage manufacturers were also arrested or are under active investigation. Although the New Jersey Attorney General's office may expand its criminal investigation to include the Company and other manufacturers, to date, no grand jury subpoenas have been issued and no charges have been brought. The Company has cooperated with the Attorney General's office and, as a result of extensive discussions, the Attorney General's office has requested and the Company has submitted a detailed proposal to achieve a resolution of all civil, criminal and regulatory issues. The Company does not believe that the dollar amount of such a settlement or its effect on the Company's operations, if any, will be material.
The United States Environmental Protection Agency (the "EPA") and the Georgia Environmental Protection Division (the "GEPD") conducted a Compliance Evaluation Inspection ("CEI") of Barton Brands of Georgia, Inc. ("Barton Georgia"), a subsidiary of Canandaigua Wine Company, Inc., on February 15, 1994. The CEI was conducted to determine compliance with the Resource Conservation and Recovery Act ("RCRA"). Following the inspection, the EPA sent a report of its findings together with a transmittal letter, dated March 7, 1994, to Barton Georgia.
By letter dated March 21, 1994, the GEPD implemented enforcement action by serving Barton Georgia with a formal Notice of Violation alleging that between August 1991 and August 1993, Barton Georgia has violated certain regulations pertaining to (i) generation and accumulation of hazardous waste and (ii) hazardous waste burning in boilers. These alleged violations relate to the burning of fusel oil which is a mixture of alcohols created by the distillation process used
in manufacturing various types of liquor products. Accompanying the Notice of Violation was a proposed settlement agreement in the form of a Consent Order between the GEPD and Barton Georgia. Following counterproposals, on October 21, 1994, Barton Georgia entered into a settlement agreement under the terms of a final Consent Order (the "Order") with the GEPD with respect to this matter. Under the Order, Barton Georgia has paid a stipulated civil penalty of $99,000, and will incur approximately $16,000 of other costs. Barton Georgia is not burning fusel oil in its current operations. The signing of the settlement agreement by Barton Georgia does not constitute any finding, determination or adjudication of liabiity on the part of Barton Georgia, nor any finding, determination or adjudication of a violation of any State or Federal laws, rules, standards or requirements; nor did Barton Georgia make any admission with respect thereto by signing the settlement agreement.
Executive Officers of the Company
The following table sets forth information with respect to the executive officers of the Company:
NAME AGE OFFICE HELD
Marvin Sands 70 Chairman of the Board Richard Sands 43 President and Chief Executive Officer Robert Sands 36 Executive Vice President and General Counsel Ellis M. Goodman 57 Executive Vice President of the Company and Chief Executive Officer of Barton Incorporated Lynn K. Fetterman 47 Senior Vice President, Chief Financial Officer and Secretary Chris Kalabokes 47 Senior Vice President, President of Wine Division Bertram E. Silk 62 Senior Vice President
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 Executive Vice President, General Counsel in October 1993. He was elected a director of the Company in January 1990 and served as Vice President, General Counsel since June 1990. From June 1986, until his appointment as Vice President, 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.
Ellis M. Goodman has been a director and Vice President since July 1993 and was elected Executive Vice President in October 1993. Mr. Goodman has been Chief Executive Officer of Barton Incorporated since
1987 and Chief Executive Officer of Barton Brands, Ltd. (predecessor to Barton Incorporated) since 1982.
Lynn K. Fetterman joined the Company during April 1990 as its Vice President, Finance and Administration, Secretary and Treasurer and was elected Senior Vice President, Chief Financial Officer and Secretary in October 1993. For more than 10 years prior to that, he was employed by Reckitt and Colman in various executive capacities, including Vice President, Finance of its Airwick Industries Division and Vice President, Finance of its Durkee-French Foods Division. Mr. Fetterman's most recent position with Reckitt and Colman was as its Vice President-Controller. Reckitt and Colman's principal business relates to consumer food and household products.
Chris Kalabokes joined the Company during October 1991 as President and Chief Executive Officer of the Company's Guild Wineries & Distilleries, Inc. subsidiary. During September 1992, he was appointed to the position of Vice President, President of the Wine Division of the Company and in October 1993 was appointed a Senior Vice President. For more than five years prior to joining the Company, he was employed by Guild. Mr. Kalabokes joined Guild in April 1985 as its Chief Financial Officer and continued in that position until June 1987 when he was promoted to President and Chief Executive Officer.
Bertram E. Silk has been a director and Vice President of the Company since 1973 and was elected Senior Vice President in October 1993. He has been employed by the Company since 1965. Currently, Mr. Silk is in charge of the Company's grape grower relations in California. Before moving from Canandaigua, New York to California in 1989, Mr. Silk was in charge of production for the Company. From 1989 to August 1994, Mr. Silk was in charge of the Company's grape juice concentrate business in California.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters.
The Company's Class A Common Stock and Class B Common Stock are quoted on the Nasdaq National Market under the symbols "WINEA" and "WINEB", respectively. The following table sets forth for the periods indicated the high and low sales prices of the Class A Common Stock and the Class B Common Stock as reported on the Nasdaq National Market.
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 allowance for depreciation are eliminated from the accounts at the time of disposal and resulting gains or losses are included as a component of operating income.
Other assets - Other assets which consist of goodwill, distribution rights, agency license agreements, trademarks, 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 periods ranging from five to forty years. At August 31, 1994, the weighted average of the remaining useful lives of these assets was approximately thirty-five years. The face value of the officers' life insurance policies totaled $2,852,000 in both 1994 and 1993.
Depreciation - Depreciation is computed primarily using the straight-line method over the following estimated useful lives:
Description Depreciable Life Buildings and improvements 10 to 33 1/3 years Machinery and equipment 7 to 15 years Motor vehicles 3 to 7 years
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.
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. In fiscal 1992, the Company adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" which replaced Statement of Financial Accounting Standards No. 96, which was the standard the Company previously used. The cumulative effect of this change in accounting principle was not material to the Company's financial statements and was included in the fiscal 1992 tax provision.
Environmental - Environmental expenditures that relate to current operations are expensed or capitalized 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 completion of a feasibility study or the Company's commitment to a formal plan of action. At August 31,1994 and 1993, liabilities for environmental costs of $100,000 and $1,300,000, respectively, are recorded in other accrued liabilities.
Common stock - The Company has two classes of common stock: Class A Common Stock and Class B Common Stock. Class B 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 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 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 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 Common Stock.
On September 26, 1991 and June 1, 1992, the Company approved three-for-two stock splits of both Class A and Class B Common Stock to stockholders of record on October 11, 1991 and June 22, 1992, respectively. All references in the consolidated financial statements to weighted average number of shares and issued shares have been retroactively restated to reflect the splits (see Note 10).
Net income per common and common equivalent share - Primary net income per common and common equivalent share is based on the weighted average number of common and common equivalent shares (stock options and stock appreciation rights determined under the treasury stock method) outstanding during the year for Class A Common Stock and Class B Common Stock. Fully diluted earnings per common and common equivalent share assumes the conversion of the 7% convertible subordinated debentures under the "if converted method" and assumes exercise of stock options and stock appreciation rights using the treasury stock method.
All share and per share amounts have been adjusted for the three-for-two stock splits (see Note 10).
2. ACQUISITIONS:
Guild - On October 1, 1991, the Company acquired Cook's, Cribari, Dunnewood and other brands and substantially all of the assets and assumed certain liabilities (the Guild Acquisition) from Guild Wineries and Distilleries (Guild). The assets acquired included accounts receivable, inventories, property, plant and equipment and other assets. The Company also assumed certain liabilities consisting primarily of accounts payable. The aggregate purchase price, after adjustments based on a post-closing audit, was approximately $69,300,000. With respect to the purchase price, the Company paid approximately $59,400,000 in cash at closing, assumed liabilities of approximately $11,400,000 of which approximately $1,600,000 was discharged immediately and, based upon the results of a post-closing audit, received from Guild during October 1992 approximately $1,500,000, exclusive of accrued interest. The Company also paid approximately $2,700,000 of direct acquisition costs and $2,600,000 in escrow to finance the purchase of grapes related to Guild's 1991 grape harvest.
The Guild Acquisition was accounted for using the purchase method; accordingly, the assets and liabilities of Guild have been recorded at their estimated fair market value at the date of acquisition. The excess of purchase price over the estimated fair market value of the net assets acquired (goodwill), $1,344,000, is being amortized on a straight-line basis over forty years. The results of operations of Guild have been included in the Consolidated Statements of Income since the date of acquisition.
Barton - On June 29, 1993, pursuant to the terms of a Stock Purchase Agreement (the Stock Purchase Agreement) among the Company, Barton Incorporated (Barton) and the Selling Stockholders, the Company acquired from the Selling Stockholders all of the outstanding shares of the capital stock of Barton (the Barton Acquisition), a marketer of imported beers and imported distilled spirits and a producer and marketer of distilled spirits and domestic beers.
The aggregate consideration for Barton consisted of approximately $65,510,000 in cash, one million shares of the Company's Class A Common Stock and payments of up to an aggregate amount of $57,300,000 (the Earn-Out Amounts) which are payable to the Selling Stockholders in cash over a three year period upon the satisfaction of certain performance goals. In addition, the Company paid approximately $1,981,000 of direct acquisition costs, $2,269,000 of direct financing costs, and assumed liabilities of approximately $47,926,000.
The purchase price was funded through a $50,000,000 term loan (see Note 7), through $18,835,000 of revolving loans under the Company's Credit Agreement (see Note 7), and through approximately $925,000 of accrued expenses. In addition, one million shares of the Company's Class A Common Stock were issued at $13.59 per share, which reflects the closing market price of the stock at the closing date, discounted for certain restrictions on the issued shares. Of these shares, 428,571 were delivered to the Selling Stockholders and 571,429 were delivered into escrow to secure the Selling Stockholders' indemnification obligations to the Company. Subsequent to year end, the 571,429 shares were released from escrow and delivered to the Selling Stockholders.
The Earn-Out Amounts consist of four payments scheduled to be made over a three year period ending November 29, 1996. The first payment of $4,000,000 is required to be made to the Selling Stockholders upon satisfaction of certain performance goals. These goals have been satisfied and this payment was accrued at August 31, 1993 and was made on December 31, 1993. The second payment of $28,300,000 has been accrued at August 31, 1994 and will be made to the Selling Stockholders on December 30, 1994, as a result of satisfaction of certain performance goals and the achievement of targets for earnings before interest and taxes at August 31, 1994. These additional payments have been properly accounted for as additional purchase price for the Barton acquisition. The remaining payments are contingent upon Barton achieving and exceeding certain targets for earnings before interest and taxes and certain other performance goals and are to be made as follows: up to $10,000,000 is to be made on November 30, 1995; and up to $15,000,000 is to be made on November 29, 1996. Such payment obligations are secured in part by the Company's standby irrevocable letter of credit (see Note 7) under the Credit Agreement in an original maximum face amount of $28,200,000 and are subject to acceleration in certain events as defined in the Stock Purchase Agreement. All Earn-Out amounts will be accounted for as additional purchase price for the Barton acquisition when the contingency has been satisfied in accordance with the Stock Purchase Agreement and allocated based upon the fair market value of the underlying assets.
Pursuant to Barton's Phantom Stock Plan (the Phantom Stock Plan) effective April 1, 1990 and amended and restated for Units (as defined in the Phantom Stock Plan) granted after March 31, 1992, certain participants received payments at closing amounting in the aggregate to $1,959,000 in connection with the Barton acquisition. Certain other participants will receive payments only upon vesting in the Phantom Stock Plan during years subsequent to the acquisition. All participants under the Phantom Stock Plan may receive additional payments in the event of satisfaction of the performance goals set forth in the Stock Purchase Agreement and upon release of the shares held in escrow. In the event the maximum payments are received under the Stock Purchase Agreement, the participants will receive an additional $2,137,000 in connection therewith. At August 31, 1994, $554,000 has been accrued under the Phantom Stock Plan and will be paid on January 3, 1995.
The Acquisition was accounted for using the purchase method; accordingly, Barton's assets were recorded at fair market value at the date of acquisition. The fair market value of Barton totaled $236,178,000 which was adjusted for negative goodwill of $72,390,000 and an additional deferred tax liability of $24,326,000 based on the difference between the fair market value of Barton's assets and liabilities as adjusted for allocation of negative goodwill and the tax basis of those assets and liabilities which was allocated on a pro-rata basis to noncurrent assets. The results of operations of Barton have been included in the Consolidated Statements of Income since the date of Acquisition.
Vintners - On October 15, 1993, the Company acquired substantially all of the tangible and intangible assets of Vintners International Company, Inc. (Vintners) other than cash and the Hammondsport Winery (the Vintners Assets), and assumed certain current liabilities associated with the ongoing business (the Vintners Acquisition). Vintners was the United States fifth largest supplier of wine with two of the country's most
highly recognized brands, Paul Masson and Taylor California Cellars. The wineries acquired from Vintners are the Gonzales winery in Gonzales, California and the Paul Masson wineries in Madera and Soledad, California. In addition, the Company is leasing from Vintners the Hammondsport winery in Hammondsport, New York. The lease is for a period of 18 months from the date of the Vintners Acquisition.
The aggregate purchase price of $148,900,000 (the Cash Consideration), is subject to adjustment based upon the determination of the Final Net Current Asset Amount (as defined below). In addition, the Company incurred $8,961,000 of direct acquisition and financing costs. The Company also delivered options to Vintners and Household Commercial of California, Inc., one of Vintners' lenders, to purchase an aggregate of 500,000 shares (the Vintners Option Shares) of the Company's Class A Common Stock, at an exercise price per share of $18.25, which are exercisable at any time until October 15, 1996. These options have been recorded at $8.42 per share, based upon an independent appraisal and $4,210,000 has been reflected as a component of additional paid-in capital. Subsequent to year-end, 432,067 of the Vintners Option Shares have been exercised (see Note 10).
The Cash Consideration was funded by the Company pursuant to (i) approximately $12,600,000 of Revolving Loans under the Credit Facility of which $11,200,000 funded the Cash Consideration and $1,400,000 funded the payment of direct acquisition costs; (ii) an accrued liability of approximately $7,700,000 for the holdback described below and (iii) the $130,000,000 Subordinated Bank Loan (see Note 7).
At closing the Company held back from the Cash Consideration approximately 10% of the then estimated net current assets of Vintners purchased by the Company, and deposited an additional $2,800,000 of the Cash Consideration into an escrow to be held until October 15, 1995. If the amount of the net current assets as determined after the closing (the Final Net Current Asset Amount) is greater than 90% and less than 100% of the amount of net current assets estimated at closing (the Estimated Net Current Asset Amount), then the Company shall pay into the established escrow an amount equal to the Final Net Current Asset Amount less 90% of the Estimated Net Current Asset Amount. If the Final Net Current Asset Amount is greater than the Estimated Net Current Asset Amount, then, in addition to the payment described above, the Company shall pay an amount equal to such excess, plus interest from the closing, to Vintners. If the Final Net Current Asset Amount is less than 90% of the Estimated Net Current Asset Amount, then the Company shall be paid such deficiency out of the escrow account. As of August 31, 1994, no adjustment to the established escrow was required and the Final Net Current Asset Amount has not been determined.
The Vintners Acquisition was accounted for using the purchase method; accordingly, the Vintners 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), $42,049,000, is being amortized on a straight-line basis over forty years. The results of operations of Vintners have been included in the Consolidated Statements of Income since the date of acquisition.
Almaden/Inglenook -
On August 5, 1994 the Company acquired the Almaden and Inglenook brands, the fifth and sixth largest selling table wines in the United States, a grape juice concentrate business, and wineries in Madera and Escalon, California, from Heublein, Inc. (Heublein) (the Almaden/Inglenook Acquisition). The Company also acquired Belaire Creek Cellars, Chateau La Salle and Charles Le Franc table wines, Le Domaine champagne and Almaden, Hartley and Jacques Bonet brandy. The accounts receivable and the accounts payable related to the acquired assets were not acquired by the Company.
The aggregate consideration for the acquired brands and other assets consisted of $130,600,000 in cash, assumption of certain current liabilities and options to purchase an aggregate of 600,000 shares of Class A Common Stock (the Almaden Option Shares). Of the Almaden Option Shares, 200,000 are exercisable at a price of $30 per share and the remaining 400,000 are exercisable at a price of $35 per share. All of the options are exercisable at any time until August 5, 1996. The 200,000 and 400,000 options have been recorded at $5.83 and $4.19 per share, respectively based upon an independent appraisal, and $2,842,000 has been reflected as a component of additional paid-in capital. The source of the cash payment made at closing, together with payment of other costs and expenses required by the Almaden/Inglenook Acquisition, was financing provided by the Company pursuant to a term loan under the Credit Facility (see Note 7).
The cash purchase price is subject to adjustment based upon the determination of the Final Net Asset Amount as defined in the Asset Purchase Agreement; and, based upon a closing statement delivered to the company by Heublein, was reduced by $9,297,000. In accordance with the terms of the Asset Purchase Agreement, Heublein is obligated to the pay Company this amount plus interest from the closing date. The purchase price for the Almaden/Inglenook Acquisition at August 31, 1994, reflects the purchase price as adjusted for the payment expected to be received from Heublein. However, as of August 31, 1994, the Final Net Asset Amount has not been determined.
Heublein also agreed not to compete with the Company in the United States and Canada for a period of five years following the closing of the Almaden/Inglenook Acquisition in the production and sale of grape juice concentrate or sale of packaged wines bearing the designation "Chablis" or "Burgundy" except where, among other exceptions, such designations are currently used with certain brands retained by Heublein. Certain companies acquired by Heublein, however, may compete directly with the Company.
The Almaden/Inglenook Acquisition was accounted for using the purchase method; accordingly, the Almaden/Inglenook assets were recorded at fair market value at the date of acquisition. The excess of purchase price over the estimated fair market value of the net assets acquired (goodwill), $43,939,000, is being amortized on a straight-line basis over forty years. The results of operations of Almaden/Inglenook have been included in the Consolidated Statement of Income since the date of the acquisition.
The following table sets forth unaudited pro forma consolidated statements of income of the Company for the years ended August 31, 1994 and 1993. The fiscal 1994 pro forma consolidated statement of income
gives effect to the Almaden/Inglenook Acquisition and the Vintners Acquisition as if they occurred on September 1, 1993. The fiscal 1993 pro forma consolidated statement of income gives effect to the Almaden/Inglenook Acquisition, the Vintners Acquisition and the Barton Acquisition as if they occurred on September 1, 1992. The August 31, 1994 and 1993 unaudited pro forma consolidated income statements are presented after giving effect to certain adjustments for depreciation, amortization of goodwill, interest expense on the acquisition financing and related income tax effects. The pro forma consolidated statements of income are based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The pro forma consolidated statements of income do not purport to represent what the Company's results of operations would actually have been if the aforementioned transactions in fact had occurred on such date or at the beginning of the period indicated or to project the Company's financial position or results of operations at any future date or for any future period.
Senior Credit Facility - During fiscal 1993, the Company amended its Credit Agreement which provided for $50,000,000 of term loans, up to $55,000,000 in revolving credit loans and a standby, irrevocable letter of credit with a maximum
face amount of $28,200,000. At August 31, 1993, the Company had outstanding borrowings of $50,000,000 under the term loan and $9,000,000 under the Revolving Credit Loans. At August 31, 1993, the Company had available Revolving Credit Loans totaling $46,000,000 under the amended Credit Agreement. Interest, as described in the agreement, was payable quarterly or on the last day of each interest period based upon either the base rate (higher of the Federal Funds Rate plus 1/2 of 1% or the bank's prime rate) or the Eurodollar rate, as defined in the Credit Agreement, at the discretion of the Company.
During fiscal 1994, the Company further amended its Credit Agreement in connection with the Vintners and the Almaden/Inglenook Acquisitions. The amended Credit facility provides for (i) a $224,000,000 Term Loan (the Term Loan) facility due in June 2000, (ii) a $185,000,000 Revolving Credit (the Revolving Credit Loans) facility, which expires in June 2000 and (iii) the continuation of the existing $28,200,000 Letter of Credit related to the contingent payments incurred with the Barton Acquisition. At August 31, 1994, the Company has outstanding Term Loan borrowings of $177,000,000 and Revolving Credit Loans of $19,000,000. On October 24, 1994 the Company borrowed an additional $47,000,000 on the Term Loan and used the proceeds to repay a portion of the outstanding balance on the Revolving Credit Loans incurred since August 31, 1994. The Term Loan Commitment was fully utilized after this borrowing. The Term Loans borrowed under the Credit Facility may be either base rate loans or Eurodollar base rate loans. Base rate loans have an interest rate equal to the higher of either the Federal Funds rate plus 0.5% or the prime rate. Eurodollar rate loans have an interest rate equal to LIBOR plus a margin of 1.25%. The current interest rate margin for both base rate and Eurodollar rate loans may be increased by up to 0.25% and Eurodollar rate loans may be decreased by up to .375%, depending on the Company's debt coverage ratio and long-term senior secured securities' ratings. The principal of the Term Loans is to be repaid in twenty-two quarterly installments of $7,000,000 each beginning December 15, 1994, with a final quarterly payment of $70,000,000 due June 15, 2000. The Company may prepay the principal of the Term Loans and the Revolving Credit Loans at its discretion and must prepay the principal with 65% of its annual excess cash flow, as defined, with proceeds from the sale of certain assets in excess of $10,000,000 and the first $60,000,000 of the net proceeds from any issuance of equity plus 50% of any net proceeds in excess of $60,000,000 (see Note 10). These prepayments must be first applied against regular payments due with respect to the Term Loans in their inverse order of maturity until the Term Loans are fully retired and any further prepayments will be applied to reduce the outstanding Revolving Credit Loans.
The $185,000,000 revolving credit available under the Credit Facility may be utilized by the Company either in the form of Revolving Credit Loans or as revolving letters of credit up to a maximum of $12,000,000. At August 31, 1994 the Company had available Revolving Credit Loans under the Senior Credit Facility of $163,753,000. As with Term Loans, Revolving Credit Loans may be either base rate loans or Eurodollar rate loans. Revolving Credit Loans will mature and must be repaid June 15, 2000. For thirty consecutive days at any time during the last two quarters of each fiscal year, the aggregate outstanding principal amount of Revolving Credit Loans combined with the revolving letters of credit cannot exceed $50,000,000.
The banks under the Credit Facility have been given security interests in substantially all of the assets of the Company including mortgage liens on certain real property. The Credit Facility requires the Company to meet certain covenants and provides for restrictions on mergers, consolidations and sales of assets, payment of dividends, incurring of other debt, liens or guarantees and the making of investments. The primary financial covenants as defined in the Credit Facility require the maintenance of minimum defined tangible net worth, a debt to cash flow coverage ratio, a fixed charges ratio, maximum capital expenditures, an interest coverage ratio and a current ratio. Among the most restrictive covenants contained in the Credit Facility, the Company is required to maintain a fixed charges ratio not less than 1.0 to 1.0 at the last day of each fiscal quarter of each fiscal year.
The Revolving Credit Loans require commitment fees totaling .375% per annum on the daily average unused balance. Commitment fees totaled approximately $223,000, $228,000 and $154,000 in fiscal 1994, 1993 and 1992, respectively.
The Company maintains in accordance with the Senior Credit Facility a collar agreement, which protects the Company against three-month London Interbank Offered Rates exceeding 7.5% per annum with a floor rate of 3.3% per annum in an amount equal to $25,000,000 expiring in July 1995. At August 31, 1993, there were no interest rate swap agreements outstanding. At August 31, 1992, the Company had a contract applicable to $22,000,000 of short-term seasonal borrowings which effectively guaranteed a fixed interest rate of 6.82% for seasonal borrowing during the four month period ended September 15, 1992. The Company is exposed to credit loss in the event of nonperformance by the other parties to the interest rate swap agreements. The Company has not incurred any credit losses in connection with these agreements.
Senior Subordinated Notes - During fiscal 1994, the Company borrowed $130,000,000 under the Senior Subordinated Loan Agreement. The Company repaid the Subordinated Loan in December 1993 from the proceeds from the Senior Subordinated Notes offering together with revolving loan borrowings. The $130,000,000 Notes are due in 2003 with a stated interest rate of 8.75% per annum. Interest is payable semi-annually 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 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 coverage ratio covenant requiring a specified minimum.
Convertible subordinated debentures -
On July 23, 1986, the Company issued $60,000,000 7% convertible subordinated debentures used to expand the Company's operations through capital expenditures and acquisitions. The debentures were convertible at any time prior to maturity, unless previously redeemed, into Class A Common Stock of the Company at a conversion price of $18.22 per share, subject to adjustment in the event of future issuances of Common Stock.
During fiscal 1993, an aggregate principal amount of $977,000 of these debentures was converted to 53,620 shares of Class A Common Stock.
On October 18, 1993, the Company called its Convertible Debentures for redemption on November 19, 1993 at a redemption price of 102.1% plus accrued interest. Bondholders had until November 19, 1993 to convert their debentures to common stock; any debentures remaining unconverted after that date would be redeemed for cash in accordance with the terms of the original indenture.
During the period September 1, 1993, through November 19, 1993, debentures in an aggregate principal amount of $58,960,000 were converted to 3,235,882 shares of the Company's Class A Common Stock at a price of $18.22 per share. Debentures in an aggregate principal amount of approximately $63,000 were redeemed. Interest was accrued on the debentures until the date of conversion but was forfeited by the debenture holders upon conversion. Accrued interest of approximately $1,370,000, net of the related tax effect of $520,000 was recorded as an addition to additional paid-in capital.
At the redemption date, the capitalized debenture issuance costs of approximately $2,246,000 net of accumulated amortization of approximately $677,000 were recorded as a reduction of additional paid-in-capital.
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 (IDA's). The bonds are secured by the leases and the related facilities. Upon payment of the outstanding bonds, title to the facilities will be conveyed to the Company. These transactions have been treated as capital leases with the related assets acquired to date ($10,731,000) included in property, plant and equipment and the lease commitments included in long-term debt. Accumulated amortization of the foregoing assets under capital leases at August 31, 1994 and 1993 is approximately $8,456,000 and $7,803,000 respectively.
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 debt agreements.
Principal payments required under long-term debt obligations during the next five fiscal years are as follows:
Year Ending August 31: (in thousands)
1995 $ 31,001 1996 29,220 1997 28,698 1998 28,118 1999 28,118 Thereafter 174,968 $320,123
8. INCOME TAXES:
Deferred income taxes are provided to reflect the effect of temporary differences primarily related to: (1) using the FIFO basis to value certain inventories for income tax purposes and the LIFO basis for financial reporting purposes; (2) the use of accelerated depreciation methods for income tax purposes and the straight-line method for financial reporting purposes; (3) differences in the treatment of advertising expense and other accruals for financial reporting and income tax purposes and (4) differences between the financial reporting and tax basis of assets and liabilities.
The provision for federal and state income taxes consists of the following for the years ended August 31:
The deferred tax provision has been increased by approximately $45,000 and $235,000 in fiscal 1994 and 1993, respectively for the impact of the change in the federal statutory rate.
A reconciliation of total tax provision to the amount computed by applying the expected U.S. Federal income tax rate to income before provision for income taxes is as follows for the years ended August 31:
9. PROFIT SHARING RETIREMENT PLAN AND RETIREMENT SAVINGS PLAN:
The Company's profit-sharing retirement plan, which covers substantially all employees, provides for contributions by the Company in such amounts as the Board of Directors may annually determine and for voluntary contributions by employees. The plan has qualified as tax-exempt under the Internal Revenue Code and conforms with the Employee Retirement Income Security Act of 1974. Company contributions to the plan were $3,414,000, $1,290,000, and $1,249,000 in fiscal 1994, 1993 and 1992, respectively.
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 to defer a portion of their compensation on a pre-tax basis. Participants may defer 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 $207,000, $131,000, and $109,000 in fiscal 1994, 1993 , 1992, respectively.
In connection with the Barton acquisition, the Company assumed Barton's profit-sharing plan which covers all salaried employees. The amount of Barton's contribution is at the discretion of its Board of Directors, subject to limitations of the plan. Contribution expense was $1,395,000 in fiscal 1994 and $230,000 from the date of acquisition to August 31, 1993.
10. STOCKHOLDERS' EQUITY:
Stock option and stock appreciation right plan - Canandaigua Wine Company, Inc. has in place a Stock Option and Stock Appreciation Right Plan (the Plan). Under the Plan, non-qualified stock options and incentive stock options may be granted to purchase and stock appreciation rights may be granted with respect to, in the aggregate, not more than 3,000,000 shares of the Company's Class A Common Stock. Options and stock appreciation rights may be issued to employees, officers, or directors of the Company. Non-employee directors are eligible to receive only non-qualified stock options and stock appreciation rights. The option price of any incentive stock option may not be less than the fair market value of the shares on the date of grant. The exercise price of any non-qualified stock option must equal or exceed 50% of the fair market value of the shares on the date of grant. Options are exercisable as determined by the Compensation Committee of the Board of Directors. Changes in the status of the stock option plan during fiscal 1994, 1993 and 1992 are summarized as follows:
Pursuant to the original Plan, on December 21, 1987, the Company granted to key employees stock appreciation rights with respect to 38,250 shares of the Company's Class A Common Stock at a base price of $4.40 per share (the average closing price per share for November 1987 adjusted for the effect of the stock splits). Such rights entitled the employees to payment in stock and cash of market price increases in the Company's stock in the excess of the base price in equal twenty-five percent increments on September 30, 1989 through 1992. In September 1992 and 1991, employees exercised their stock appreciation rights with respect to 4,104 and 2,556 shares of Class A Common Stock, respectively. In addition, an aggregate of 4,950 of the rights were canceled through August 31, 1992. During fiscal 1993, stock appreciation rights previously granted under the Plan expired in accordance with the terms of the Plan.
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 1993, the plan was amended to allow the participation of Barton employees. During fiscal 1994, 1993 and 1992, employees purchased 58,955, 21,071 and 18,526 shares, respectively.
Common stock - On September 26, 1991 and June 1, 1992, the Company's Board of Directors declared three-for-two splits of the Company's common shares. The new shares were distributed on November 8, 1991 and July 20, 1992 to holders of record on October 11, 1991 and June 22, 1992, respectively. At August 31,1994, there were 12,617,301 shares of Class A Common Stock and 3,390,051 shares of Class B Common Stock outstanding, net of treasury stock. All per share amounts have been retroactively restated to give effect to the splits.
On June 28, 1993, the Company approved an increase in the number of authorized shares of the Company's Class A Common Stock from 15,000,000 shares to 60,000,000 shares and an increase in the number of authorized shares of the Company's Class B Common Stock from 5,000,000 shares to 20,000,000 shares.
Stock offering - During February 1992, the Company completed a public offering of 2,589,750 shares of its Class A Common Stock resulting in net proceeds after underwriters' discounts and commissions and expenses to the Company, of approximately $31,981,000. Under the terms of the Credit Agreement, approximately $16,000,000, constituting approximately 50% of the net proceeds, was applied to reduction of the Term Loans, and $5,000,000 was applied by the Company to reduce the balances outstanding under the Revolving Credit Loans.
On November 10, 1994, the Company completed a public offering of 3,000,000 shares of its Class A Common Stock resulting in net proceeds after underwriters' discounts and commissions and estimated expenses to the Company, of approximately $95,428,000 . 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 amended Credit Agreement, approximately $82,000,000, will be used to repay a portion of the Term Loan under the Company's Credit Agreement. The balance of net proceeds will be used for working capital purposes and will initially be used to repay Revolving Credit Loans under the Credit Facility.
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:
Year ending August 31: (in thousands) 1995 $1,487 1996 1,352 1997 1,358 1998 1,114 1999 831 Thereafter 3,543 $9,685
Rental expense was approximately $3,318,000 in fiscal 1994, $1,841,000 in fiscal 1993 and $1,460,000 in fiscal 1992.
Purchase commitments - The Company has two agreements with certain suppliers to purchase blended Scotch whisky through December 31, 1999. The purchase prices under the agreements are denominated in British pounds sterling and based upon exchange rates at August 31, 1994, the Company's aggregate future obligation will be approximately $13,124,000 to $16,306,000 for the contracts expiring on December 31, 1995 and approximately $11,160,000 to $13,640,000 for the contracts expiring on December 31, 1999.
In connection with the Vintners Acquisition, and the Almaden/Inglenook Acquisition, the Company has assumed purchase contracts with certain growers and suppliers. 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 ten 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 $ 25,167,000 of grapes under these contracts during the period October 15, 1993 through August 31, 1994. 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 $394,467,000. 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.
The Company's aggregate obligations under the grape crush and processing contracts will be approximately $5,503,000 over the remaining term of the contracts which expire through fiscal 1997.
Currency forward contracts - At August 31, 1994 and 1993, the Company had open currency forward contracts to purchase German deutsche marks of $6,674,000 and $6,031,000 respectively, and British pounds of $579,000 and $928,000, respectively,
all of which mature within 12 months; their fair market values, based upon August 31, 1994 and 1993 market exchange rates, were $7,382,000 and $6,262,000, respectively, for German deutsche marks and $614,000 and $929,000 respectively for British pounds.
Employment contracts - The Company has employment contracts with certain of its executive officers and certain other management personnel with remaining terms ranging up to five 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 also provide for severance payments in the event of specified terminations of employment. The aggregate commitment for future compensation and severance, excluding incentive bonuses, was approximately $7,300,000 as of August 31, 1994.
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 23.7%, 25.1% and 28.5% of the Company's gross sales for the fiscal years ended August 31, 1994, 1993 and 1992, respectively. Gross sales to the Company's largest wholesaler represented 12.3% of the Company's gross sales for the fiscal year ended August 31, 1994; no single wholesaler was responsible for greater than 10% of gross sales during the fiscal years ended August 31, 1993 and 1992. 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. THE RESTRUCTURING PLAN
In the fourth quarter, the Company provided for costs to restructure the operations of its California wineries (the Restructuring Plan). Under the Restructuring Plan, all bottling operations at the Central Cellars winery in Lodi, California and the branded wine bottling operations at the Monterey Cellars Winery in Gonzales, California will be moved to the Mission Bell Winery located in Madera, California which was acquired by the Company in the Almaden/Inglenoook Acquisition. The Monterey Cellars Winery will continue to be used as a crushing, winemaking and contract bottling facility. The Central Cellars Winery and the winery in Soledad, California will be closed and offered for sale to reduce surplus capacity. The
Restructuring Plan reduced income before income taxes and net income by approximately $24,005,000 and $14,883,000, respectively or $.91 per share, on a fully diluted basis. Of the total pretax charge, approximately $16,481,000 is to recognize estimated losses associated with the revaluation of land, buildings and equipment related to the facilities described above to their estimated net realizable value; and approximately $7,524,000 relates to severance and other benefits associated with the elimination of 260 jobs. The Restructuring Plan will require the Company to make capital expenditures of approximately $20,000,000 during fiscal 1995 to expand storage capacity and install certain relocated equipment. As of August 31,1994, the Company has a remaining accrual of approximately $9,106,000 with respect to the Restructuring Plan. The Company expects to have the Restructuring Plan fully implemented by the end of fiscal 1995.
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992 (In thousands, except per share data)
QUARTER ENDED 11/30/93 2/28/94 5/31/94 8/31/94 YEAR
Net sales $154,485 $140,031 $154,223 $180,845 $629,584 Gross profit 44,655 41,668 42,775 53,275 182,373 Net income 5,653 5,741 6,655 (6,316) 11,733 Earnings per share: Primary .40 .35 .41 (.39) .74 Fully diluted .37 .35 .41 (.38) .74
QUARTER ENDED 11/30/92 2/28/93 5/31/93 8/31/93 YEAR
Net sales $71,109 $58,782 $60,495 $115,922 $306,308 Gross profit 21,537 17,693 18,411 33,737 91,378 Net income 3,604 2,952 3,391 5,657 15,604 Earnings per share: Primary .31 .25 .29 .45 1.30 Fully diluted .28 .24 .27 .41 1.20
QUARTER ENDED 11/30/91 2/28/92 5/31/92 8/31/92 YEAR
Net sales $63,580 $56,942 $65,068 $59,652 $245,242 Gross profit 17,834 17,211 18,829 16,683 70,557 Net income 2,410 2,128 3,357 3,461 11,356 Earnings per share: Primary .26 .23 .29 .30 1.08 Fully diluted .25 .22 .27 .27 1.01
Per share amounts have been appropriately adjusted to reflect the Company's stock splits (see Note 10 in the Company's consolidated financial statements).
The accompanying notes to consolidated financial statements are an integral part of this schedule. /TABLE
SCHEDULE V CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992 (in thousands)
Balance at Transfers, Balance Beginning Addition Retirements at End Classification of Year at Cost or Sales of Year
YEAR ENDED AUGUST 31, 1992: Land $ 1,206 $ 2,925 $ - $ 4,131 Buildings and improvements 19,926 6,370 - 26,296 Machinery and equipment 57,606 25,126 60 82,672 Motor vehicles 1,792 19 - 1,811 Construction in progress 937 3,702 2,425 2,214 $81,467 $38,142 $ 2,485 $117,124
YEAR ENDED AUGUST 31, 1993: Land $ 4,131 $ 472 $ 298 $ 4,305 Buildings and improvements 26,296 3,839 - 30,135 Machinery and equipment 82,672 9,095 606 91,161 Motor vehicles 1,811 1,495 752 2,554 Construction in progress 2,214 5,404 5,543 2,075 $117,124 $20,305 $ 7,199 $130,230
YEAR ENDED AUGUST 31, 1994: Land $ 4,305 $ 9,889 $ 380 $ 13,814 Buildings and improvements 30,135 34,160 1,855 62,440 Machinery and equipment 91,161 90,006 12,936 168,222 Motor vehicles 2,554 171 173 2,552 Construction in progress 2,075 6,964 59 8,989 $130,230 $141,190 $15,403 $256,017
The accompanying notes to consolidated financial statements are an integral part of this schedule. /TABLE
SCHEDULE VI
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992 (in thousands)
Balance at Retirements Balance at Beginning and Other End of Classification of Year Provision Disposals Year
YEAR ENDED AUGUST 31, 1992: Buildings and improvements $ 5,990 $ 760 $ - $ 6,750 Machinery and equipment 31,523 5,150 3 36,670 Motor vehicles 962 172 - 1,134 $38,475 $6,082 $ 3 $44,554
YEAR ENDED AUGUST 31, 1993: Buildings and improvements $ 6,750 $ 918 $ - $ 7,668 Machinery and equipment 36,670 6,315 9 42,976 Motor vehicles 1,134 156 304 986 $44,554 $7,389 $313 $51,630
YEAR ENDED AUGUST 31, 1994: Buildings and improvements $ 7,668 $ 1,361 $ 2 $ 9,027 Machinery and equipment 42,976 8,989 296 51,669 Motor vehicles 986 184 132 1,038 $51,630 $10,534 $430 $61,734
The accompanying notes to consolidated financial statements are an integral part of this schedule. /TABLE
SCHEDULE IX
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
SHORT-TERM BORROWINGS
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992 (in thousands)
1994 1993 1992
Notes Payable to Banks for Short-Term Borrowings
Balance at August 31, $19,000 $ 9,000 $ -
Weighted average interest rate on notes payable to banks at end of year 6.45% 5.7% -
Maximum amount of notes payable outstanding at any month-end 185,000 35,000 14,000
Weighted average amount of notes payable outstanding during the year (a) 55,375 18,500 4,000 Weighted average interest rate on notes payable outstanding during the year (b) 6.07% 5.7% 7.3%
(a) The weighted average amount of notes payable outstanding for fiscal 1994, 1993 and 1992 was calculated by dividing the sum of total short-term borrowings outstanding at each month end by the number of months in the fiscal year.
(b) The weighted average interest rate on notes payable outstanding during fiscal 1994, 1993 and 1992 was calculated by dividing the total interest expense on all short-term borrowings by the average daily amount outstanding.
The accompanying notes to consolidated financial statements are an integral part of this schedule. /TABLE
SCHEDULE X
CANANDAIGUA WINE COMPANY, INC. AND SUBSIDIARIES
SUPPLEMENTARY OPERATING STATEMENT INFORMATION
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992 (in thousands)
Charged to Cost and Expenses Item 1994 1993 1992
Excise taxes $231,475 $83,109 $59,875
Advertising 64,540 33,002 24,285
Maintenance and repairs 5,221 2,563 2,171
The accompanying notes to consolidated financial statements are an integral part of this schedule. /TABLE
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Not Applicable. PART III
Item 10. Directors and Executive Officers of the Registrant.
The information required by this Item (except for the information regarding executive officers required by Item 401 of Regulation S-K which is included in Part I hereof in accordance with General Instruction G(3)) is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on January 19, 1995 under the heading "Nomination and Election of Directors", which proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on January 19, 1995, under the heading "Executive Compensation", which proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on January 19, 1995, under the headings "Beneficial Ownership" and "Nomination and Election of Directors", which proxy statement will be filed within 120 days after the end of the Company's fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated herein by reference to the Company's proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company to be held on January 19, 1995, under the heading "Executive Compensation", which proxy statement will be filed within 120 days after the end of the Company's fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1. Financial Statements
The following consolidated financial statements of the Company are submitted herewith:
Report of Independent Public Accountants
Consolidated Balance Sheets - August 31, 1994 and 1993
Consolidated Statements of Income for the years ended August 31, 1994, 1993 and 1992
Consolidated Statements of Changes in Stockholders' Equity for the years ended August 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows for the years ended August 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following consolidated financial information is submitted herewith:
Schedule V Property, Plant and Equipment for the years ended August 31, 1994, 1993 and 1992
Schedule VI Accumulated Depreciation and Amortization of Property, Plant and Equipment for the years ended August 31, 1994, 1993 and 1992
Schedule IX Short-term Borrowings for the years ended August 31, 1994, 1993 and 1992
Schedule X Supplementary Operating Statement Information for the years ended August 31, 1994, 1993 and 1992
Selected Financial Data -- Five-Year Summary
Selected Quarterly Financial Information (Unaudited)
All other schedules are not submitted because they are not applicable or not required under Regulation S-X or because the required information is included in the financial statements or notes thereto.
Individual financial statements of the Registrant have been omitted because the Registrant is primarily an operating company and no subsidiary included in the consolidated financial statements has minority equity interests and/or non-current indebtedness, not guaranteed by the Registrant, in excess of 5% of total consolidated assets.
3. Exhibits required to be filed by Item 601 of Regulation S-K
The following exhibits are filed herewith or incorporated herein by reference, as indicated:
2.1 Asset Purchase Agreement dated August 2, 1991 between the Registrant and Guild Wineries and Distilleries, as assigned to an acquiring subsidiary (filed as Exhibit 2(a) to the Registrant's Report on Form 8-K dated October 1, 1991 and incorporated herein by reference). 2.2 Stock Purchase Agreement dated April 27, 1993 among the Registrant, Barton Incorporated and the stockholders of Barton Incorporated, Amendment No. 1 to Stock Purchase Agreement dated May 3, 1993, and Amendment No. 2 to Stock Purchase Agreement dated June 29, 1993 (filed as Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated June 29, 1993 and incorporated herein by reference). 2.3 Asset Sale Agreement dated September 14, 1993 between the Registrant and Vintners International Company, Inc. (filed as Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated October 15, 1993 and incorporated herein by reference). 2.4 Amendment dated as of October 14, 1993 to Asset Sale Agreement dated as of September 14, 1993 by and between Vintners International Company, Inc. and the Registrant (filed as Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated October 15, 1993 and incorporated herein by reference). 2.5 Amendment No. 2 dated as of January 18, 1994 to Asset Sale Agreement dated as of September 14, 1993 by and between Vintners International Company, Inc. and the Registrant (filed as Exhibit 2.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 1994 and incorporated herein by reference). 2.6 Asset Purchase Agreement dated August 3, 1994 between the Registrant and Heublein, Inc. (filed as Exhibit 2(a) to the Registrant's Current Report on Form 8-K dated August 5, 1994 and incorporated herein by reference). 2.7 Amendment dated November 8, 1994 to Asset Purchase Agreement between Heublein, Inc. and Registrant (filed as Exhibit 2.2 to the Registrant's Registration Statement on Form S-3 (Amendment No. 2) (Registration No. 33-55997) filed with the Securities and Exchange Commission on November 8, 1994 and incorporated herein by reference).
2.8 Amendment dated November 18, 1994 to Asset Purchase Agreement between Heublein, Inc. and the Registrant (filed herewith). 3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). 3.2 Amended and Restated By-laws of the Company (filed as Exhibit 4.2 to the Registrant's Registration Statement on Form S-8 (Registration No. 33-56557) and incorporated herein by reference).
4.1 Specimen of Certificate of Class A Common Stock of the Company (filed as Exhibit 1.1 to the Registrant's Registration Statement on Form 8-A, dated April 28, 1992 and incorporated herein by reference). 4.2 Specimen of Certificate of Class B Common Stock of the Company (filed as Exhibit 1.2 to the Registrant's Registration Statement on Form 8-A, dated April 28, 1992 and incorporated herein by reference). 4.3 Indenture dated as of December 27, 1993 among the Registrant, its Subsidiaries and Chemical Bank (filed as Exhibit 4.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 1993 and incorporated herein by reference). 4.4 First Supplemental Indenture dated as of August 3, 1994 among the Registrant, Canandaigua West, Inc. and Chemical Bank (filed as Exhibit 4.5 to the Registrant's Registration Statement on Form S-8 (Registration No. 33- 56557) and incorporated herein by reference). 10.1 The Canandaigua Wine Company, Inc. Stock Option and Stock Appreciation Right Plan (filed as Appendix B of the Company's Definitive Proxy Statement dated December 23, 1987 and incorporated herein by reference). 10.2 Amendment No. 1 to the Canandaigua Wine Company, Inc. Stock Option and Stock Appreciation Right Plan (filed as Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 1992 and incorporated herein by reference). 10.3 Amendment No. 2 to the Canandaigua Wine Company, Inc. Stock Option and Stock Appreciation Right Plan (filed as Exhibit 28 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 1992 and incorporated herein by reference). 10.4 Amendment No. 3 to the Canandaigua Wine Company, Inc. Stock Option and Stock Appreciation Rights Plan (filed as Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). 10.5 Amendment No. 4 to the Canandaigua Wine Company, Inc. Stock Option and Stock Appreciation Right Plan (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 1993 and incorporated herein by reference). 10.6 Amendment No. 5 to the Canandaigua Wine Company, Inc. Stock Option and Stock Appreciation Right Plan (filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 1994 and incorporated herein by reference). 10.7 Employment Agreement between Barton Incorporated and Ellis M. Goodman dated as of October 1, 1991 as amended by Amendment to Employment Agreement between Barton Incorporated and Ellis M. Goodman dated as of June 29, 1993 (filed as Exhibit 10.5 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). 10.8 Barton Incorporated Management Incentive Plan (filed as Exhibit 10.6 to the Registrant's Annual Report on Form
10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). 10.9 Ellis M. Goodman Split Dollar Insurance Agreement (filed as Exhibit 10.7 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). 10.10 Barton Brands, Ltd. Deferred Compensation Plan (filed as Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). 10.11 Marvin Sands Split Dollar Insurance Agreement (filed as Exhibit 10.9 to the Registrant's Annual Report on Form 10-K for the fiscal year ended August 31, 1993 and incorporated herein by reference). 10.12 Amendment and Restatement dated as of June 29, 1993 of Credit Agreement among the Registrant, its subsidiaries and certain banks for which The Chase Manhattan Bank (National Association) acts as agent (filed as Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated June 29, 1993 and incorporated herein by reference). 10.13 Amendment No. 1 dated as of October 15, 1993 to Amendment and Restatement dated as of June 29, 1993 of Credit Agreement among the Registrant, its subsidiaries and certain banks for which The Chase Manhattan Bank (National Association) acts as agent (filed as Exhibit 2(c) to the Registrant's Current Report on Form 8-K dated October 15, 1993 and incorporated herein by reference). 10.14 Senior Subordinated Loan Agreement dated as of October 15, 1993 among the Registrant, its subsidiaries and certain banks for which The Chase Manhattan Bank (National Association) acts as Agent (filed as Exhibit 2(d) to the Registrant's Current Report on Form 8-K dated October 15, 1993 and incorporated herein by reference). 10.15 Second Amendment and Restatement dated as of August 5, 1994 of Amendment and Restatement of Credit Agreement dated as of June 29, 1993 among the Registrant, its subsidiaries and certain banks for which The Chase Manhattan Bank (National Association) acts as agent (filed as Exhibit 2(b) to the Registrant's Current Report on Form 8-K dated August 5, 1994 and incorporated herein by reference). 10.16 Amendment No. 1 (dated as of August 5, 1994) to Second Amendment and Restatement dated as of August 5, 1994 of Amendment and Restatement of Credit Agreement dated as of June 29, 1993 among the Registrant, its subsidiaries and certain banks for which The Chase Manhattan Bank (National Association) acts as agent (filed herewith). 10.17 Security Agreement dated as of August 5, 1994 among the Registrant, its subsidiaries and certain banks for which The Chase Manhattan Bank (National Association) acts as agent (filed as Exhibit 2(c) to the Registrant's Current Report on Form 8-K dated August 5, 1994 and incorporated herein by reference. 11.1 Statement of computation of per share earnings (filed herewith). 21.1 Subsidiaries of Registrant (filed herewith). 23.1 Consent of Arthur Andersen & Co. (filed herewith).
(b) Reports on Form 8-K
The following Current Reports on Form 8-K were filed with the Securities and Exchange Commission during the fourth quarter of the Company's 1994 fiscal year:
1. Form 8-K dated June 23, 1994. This Form 8-K reported information under Item 5 (Other Events).
2. Form 8-K dated August 5, 1994. This Form 8-K reported information under Item 2 (Acquisition or Disposition of Assets), Item 5 (Other Events) and Item 7