UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the quarterly period ended December 31,
2001.
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ________________
to ________________.
Commission File Number: 333-74589
NATIONAL WINE & SPIRITS, INC.
(Exact name of registrant as specified in its charter)
Indiana 35-2064429
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
P.O. Box 1602, 700 W. Morris Street, Indianapolis, Indiana 46206
- ---------------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
(317) 636-6092
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of February 8, 2002.
Class Outstanding at February 8, 2002
----- -------------------------------
Common Stock,
$.01 par value 104,520 shares
voting
Common Stock,
$.01 par value 5,226,001 shares
non-voting
NATIONAL WINE & SPIRITS, INC.
Quarterly Report
For the period ended December 31, 2001
INDEX
Page
Number
------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
December 31, 2001 and March 31, 2001......................... 3
Condensed Consolidated Statements of Income
Three Months Ended December 31, 2001 and 2000; Nine Months
ended December 31, 2001 and 2000............................. 4
Condensed Consolidated Statements of Cash Flows
Nine Months Ended December 31, 2001 and 2000................. 5
Notes to Condensed Consolidated Financial Statements............. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk...................................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................ 21
Item 5. Other Events..................................................... 21
Item 6. Exhibits and Reports on Form 8-K................................. 21
Signature........................................................ 22
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
NATIONAL WINE & SPIRITS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
December 31, 2001 March 31, 2001
(unaudited) (Note 1)
ASSETS
Current assets:
Cash $ 3,313 $ 4,094
Accounts receivable, less allowances for doubtful accounts 54,270 39,001
Inventory 93,729 79,616
Prepaid expenses and other 4,528 4,231
---------- ----------
Total current assets 155,840 126,942
Property and equipment, net 42,342 43,734
Other assets
Notes receivable 563 811
Cash surrender value of life insurance, net of loans 3,198 2,821
Investment in Kentucky distributor 6,593 6,609
Investment in eSkye Solutions, Inc. 455 1,471
Intangible assets, net of amortization 8,087 9,290
Deferred pension costs 487 487
Deposits and other 87 125
---------- ----------
Total other assets 19,470 21,614
---------- ----------
TOTAL ASSETS $ 217,652 $ 192,290
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 30,081 $ 35,739
Accrued payroll and payroll taxes 7,135 6,913
Excise taxes payable 6,160 5,401
Other accrued expenses and taxes 12,794 8,510
Current maturities of long-term debt --- 571
---------- ----------
Total current liabilities 56,170 57,134
Deferred pension liability 487 487
Long-term debt 132,989 110,000
---------- ----------
Total liabilities 189,646 167,621
---------- ----------
Stockholders' equity
Voting common stock, $.01 par value 1 1
Nonvoting common stock, $.01 par value 53 53
Additional paid-in capital 25,009 25,009
Retained earnings (deficit) 2,943 (224)
---------- ----------
28,006 24,839
Notes receivable from stockholders, net --- (170)
---------- ----------
Total stockholders' equity 28,006 24,669
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 217,652 $ 192,290
========== ===========
See notes to condensed consolidated financial statements.
- 3 -
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
NATIONAL WINE & SPIRITS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands)
(unaudited)
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, December 31, December 31, December 31,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Restated Restated
Net product sales $ 203,490 $ 194,787 $ 518,056 $ 503,545
Distribution fees 5,863 6,945 16,818 16,991
--------- --------- --------- ---------
Total revenue 209,353 201,732 534,874 520,536
Cost of products sold 164,089 157,746 415,603 405,024
--------- --------- --------- ---------
Gross profit 45,264 43,986 119,271 115,512
Operating expenses:
Warehouse and delivery 10,112 10,188 30,114 29,834
Selling 12,178 12,228 36,036 36,354
Administrative 11,167 10,252 32,319 29,461
--------- --------- --------- ---------
Total operating expenses 33,457 32,668 98,469 95,649
--------- --------- --------- ---------
Income from operations 11,807 11,318 20,802 19,863
Interest expense:
Related parties (58) (120) (208) (362)
Third parties (2,899) (3,348) (8,800) (9,719)
--------- --------- --------- ---------
(2,957) (3,468) (9,008) (10,081)
Other income (expense):
Equity in earnings
of Kentucky distributor 324 275 389 359
Equity in losses of eSkye (530) (173) (1,016) (578)
Rental and other income 124 42 254 22
Gain on sale of assets 6 223 34 7,819
Interest income 50 166 241 583
--------- --------- --------- ---------
Total other income (expense) (26) 533 (98) 8,205
--------- --------- --------- ---------
Net income $ 8,824 $ 8,383 $ 11,696 $ 17,987
========= ========= ========= =========
See notes to condensed consolidated financial statements.
- 4 -
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
NATIONAL WINE & SPIRITS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine Months Ended
-----------------
December 31, 2001 December 31, 2000
----------------- -----------------
Restated
Operating activities
Net income $ 11,696 $ 17,987
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Depreciation of property and equipment 4,949 5,345
Gain on sales of assets (34) (7,819)
Amortization of intangible assets 1,223 1,438
Equity in earnings of Kentucky distributor (389) (359)
Equity in losses of eSkye 1,016 578
Loss on extinguishment of debt 32 ---
Changes in operating assets and liabilities
Accounts receivable (15,269) (23,796)
Inventory (14,113) (17,673)
Prepaid expenses and other (297) 618
Accounts payable (5,658) 1,323
Accrued expenses and taxes 5,265 4,254
---------- ----------
Net cash used by operating activities (11,579) (18,104)
Investing activities:
Purchases of property and equipment (3,616) (5,407)
Investment in eSkye Solutions, Inc. --- (2,013)
Proceeds from sale of assets 93 10,832
Distributions from Kentucky distributor 405 429
Purchases of intangible assets (95) (1,000)
Decrease in deposits and other 38 6
Increase in cash surrender value of insurance (377) (243)
Decrease in notes receivable 248 235
---------- ----------
Net cash provided (used) by investing activities (3,304) 2,839
Financing activities:
Proceeds of line of credit borrowings 131,650 126,500
Principal payments on line of credit borrowings (108,650) (102,750)
Principal payments on long-term debt (2,653) (875)
Proceeds of borrowings from stockholder 208 51
Repayments on borrowings from stockholders (50) ---
Notes receivable from stockholders and others 2,126 1,551
Distributions to stockholders (8,529) (8,822)
---------- ----------
Net cash provided by financing activities 14,102 15,655
---------- ----------
Net increase (decrease) in cash (781) 390
Cash at beginning of period 4,094 3,559
---------- ----------
Cash at end of period $ 3,313 $ 3,949
========== ==========
See notes to condensed consolidated financial statements.
- 5 -
National Wine & Spirits, Inc.
Notes To Condensed Consolidated Financial Statements
(Unaudited)
1. Nature of Business and Basis of Presentation
The unaudited condensed consolidated financial statements include the
accounts of National Wine & Spirits, Inc. (NWS), National Wine & Spirits
Corporation (NWSC), NWS, Inc. (NWSI), NWS-Illinois, LLC (NWS-LLC), and NWS
Michigan, Inc. (NWSM). In November 2000, NWSM commenced doing business through
its subsidiary, National Wine & Spirits, LLC (NWSM-LLC) to sell low-proof
alcohol and non-alcoholic products in the State of Michigan. References to U.S.
Beverage (USB) relate to the operations of the Company's national import, craft
and specialty beer marketing business performed by NWS-Illinois. All significant
intercompany accounts and transactions have been eliminated from the
consolidated financial statements. Substantially all revenues result from the
sale of liquor, beer, and wine.
Based in Indianapolis, NWSC is a wholesale distributor of liquor and wines
throughout Indiana. Based in Chicago, NWS-LLC is a wholesale distributor of
liquor, wines and beer throughout Illinois. NWSM is a wholesale distributor of
liquor throughout Michigan. NWS performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral. Credit
losses have been within management's expectations.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the nine-month
period ended December 31, 2001 are not necessarily indicative of the results
that may be expected for the year ending March 31, 2002.
There is no provision for federal or state income taxes reflected in the
financial statements because the stockholders have consented to NWS' election to
be taxed as an S corporation under the applicable provisions of the Internal
Revenue Code. NWS' income is taxable directly to its stockholders.
The balance sheet at March 31, 2001 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements. In accordance with APB 18, the
historical results have been retroactively presented as if the Company had been
accounting for the investment in eSkye Solutions, Inc. under the equity method
for all periods presented (Note 6).
- 6 -
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company is adopting the new rules on accounting for goodwill and other
intangible assets effective April 1, 2002. The adoption of this statement is
expected to reduce annual amortization expense approximately $100,000. During
fiscal 2003, the Company will perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets. The Company has not yet
determined what the effect of these tests will be on its earnings and financial
position.
FASB Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 144 also addresses the
accounting for expected disposals of long-lived assets. The Company will adopt
Statement 144 in the first quarter of fiscal 2003 and, based on current
circumstances, does not believe the effect of adoption will be material.
For further information, refer to the consolidated financial statements and
footnotes thereto included in the Company's Form 10-K dated June 29, 2001.
2. Sale of Bottled Water Division
Effective June 5, 2000, NWSC sold certain of its licensed brands,
trademarks and trade names of its bottled water division for approximately
$10,440,000. NWSC received $9,960,000 for the sale of the assets at the sale
date, and the balance of $480,000 was received in September 2000. NWSC
recognized a gain of approximately $7,524,000 from the sales of the related
assets and liabilities.
3. Inventory
Inventory is comprised of the following:
December 31, 2001 March 31, 2001
----------------- --------------
Inventory at FIFO $ 104,295,000 $ 89,377,000
Less: LIFO reserve 10,566,000 9,761,000
-------------- -------------
$ 93,729,000 $ 79,616,000
============== =============
- 7 -
4. Debt
Long-term debt is comprised of the following:
December 31, 2001 March 31, 2001
----------------- --------------
Senior notes payable (A) $ 107,875,000 $ 110,000,000
Bank revolving line of credit (B) 23,000,000 ---
Notes payable to stockholders, net 2,114,000 ---
Term loan payable due 2002, including interest --- 500,000
Other --- 71,000
------------- -------------
132,989,000 110,571,000
Less: current maturities --- 571,000
------------- -------------
$ 132,989,000 $ 110,000,000
============= =============
(A) On January 25, 1999, the Company issued $110,000,000 of unsecured
senior notes with a maturity of January 15, 2009. Interest on the senior notes
is 10.125% and is payable semiannually. The Company used the net proceeds of the
senior notes (approximately $106,900,000) to repay its outstanding bank and
other debt and amounts outstanding under its revolving credit facilities.
The bond indenture restricts the ability of the Company and its
subsidiaries to incur additional indebtedness, pay dividends, engage in mergers
or consolidations, make capital expenditures and otherwise restricts corporate
activities.
On or after January 15, 2004, the Company may redeem some or all of the
senior notes at any time at stated redemption prices plus accrued interest and
liquidated damages. Notwithstanding the foregoing, during the first 36 months
after January 20, 1999, the Company may redeem up to 33% of the aggregate
principal amount of the senior notes at a redemption price of 110.125%, plus
accrued interest and liquidated damages, with the net cash proceeds of one or
more public offerings of common stock of the Company.
The Company purchased $2,125,000 of its senior notes from the open market
on September 28, 2001. The notes were purchased for $2,082,500 plus accrued
interest of $46,617. Related unamortized issuance costs of $74,391 were written
off due to the purchase of the senior notes. The Company utilized its revolving
credit facility to fund the purchase of the senior notes. The net loss on the
purchase of $32,000 is included in other income and expenses.
- 8 -
(B) On January 25, 1999, the Company entered into a credit agreement that
provides a revolving line of credit for borrowings of up to $60,000,000 through
January 25, 2004. Line of credit borrowings are limited to eligible accounts
receivable plus eligible inventories. The credit agreement permits the Company
to elect an interest rate based upon the Eurodollar rate or the higher of the
prime lending rate or the federal funds effective rate plus 0.5%. At December
31, 2001, $17,000,000 bears interest at 5.00% based on the prime rate pricing,
and $6,000,000 bears interest at 4.12% based on LIBOR based pricing. The Company
also pays a commitment fee ranging from 0.25% to 0.5% of the available portion
of its line of credit.
The Company has subordinated notes payable to its two stockholders, with a
legal right of offset against the Company's note receivable from one
stockholder. The Company had previously reported the net amount as a reduction
in stockholder's equity when the net balance was a receivable. The balance of
the receivable and payable at December 31, 2001 was $2,597,000 and $4,711,000,
respectively. The resulting net payable is classified as long-term debt. It is
the Company's intent to satisfy the receivable through future stockholder
distributions.
5. Litigation
The Company is a party to various lawsuits and claims arising in the normal
course of business. While the ultimate resolution of lawsuits or claims against
the Company cannot be predicted with certainty, management is vigorously
defending all claims and does not expect that these matters will have a material
adverse effect on the financial position or results of operations of the
Company.
6. eSkye Solutions, Inc. Investment
The Company has been accounting for its investment in eSkye Solutions, Inc.
(eSkye) on the cost method. On December 28, 2001 eSkye redeemed a significant
portion of its outstanding preferred stock at a significant discount. Since the
company elected not to participate in this redemption, its voting control
increased to over 20% of voting stock. In accordance with Accounting Principles
Board Opinion 18 (APB 18), the Company is required to apply the equity method
going forward. In addition, in accordance with APB 18, the historical results
have been retroactively adjusted as if the Company had been accounting for this
investment under the equity method for all periods presented. APB 18 also
requires the Company to evaluate whether or not an "other than temporary"
decline in value of an investment has occurred. As a result of this evaluation,
the Company has written down the investment to a value of $455,000 at December
31, 2001, which the Company believes approximates the current fair value of the
investment. After retroactively reporting the historical results for the
application of the equity method, this impairment evaluation resulted in an
additional write-down of $530,000 in the quarter ended December 31, 2001. Losses
from applying the equity method and the impairment charges are included in
"Equity in losses of eSkye" in the Statements of Income.
- 9 -
7. Restatement of December 31, 2000 Results
The Company restated its Consolidated Financial Statements for the fiscal
years 2000, 1999, and 1998 due to an overstatement of accounts receivable caused
by a misappropriation of funds discovered during fiscal 2001. For the Company's
2001 fiscal year, a total charge of $0.8 million was reflected in operating
results. Amounts charged to the fiscal 2000, 1999 and 1998 results were $1.2
million, $0.5 million and $1.0 million respectively. The Company is reporting
the $0.8 million that was charged to the 2001 fiscal year in the quarter ended
December 31, 2000. Since the investigation of the misappropriation was in
process at December 31, 2000, the Company originally estimated the overstatement
of accounts receivable at $2.8 million and charged that estimate to the quarter
ended December 31, 2000. Thus, the net effect of the restatement of the three
months ended December 31, 2000 results in an increase in net income of $2.0
million. The effect of this restatement, and the retroactive adjustment
described in Note 6, on results of operations and balance sheets are as follows
(in thousands):
Three Months Ended Nine Months Ended
For the period ended: December 31, 2000 December 31, 2000
- --------------------- ----------------- -----------------
Previously Previously
Reported Restated Reported Restated
-------- -------- -------- --------
Total revenue $ 199,732 $ 201,732 $ 518,536 $ 520,536
Gross profit 41,986 43,986 113,512 115,512
Selling, general and
administrative expenses 32,668 32,668 95,649 95,649
Income from operations 9,318 11,318 17,863 19,863
Net income 6,556 8,383 16,565 17,987
As of:
Accounts receivable $ 66,392 $ 65,704 $ 66,392 $ 65,704
Total assets 228,675 227,154 228,675 227,154
Stockholder's equity 30,471 28,950 30,471 28,950
- 10 -
8. Segment Reporting
The Company's reportable segments are business units that engage in product
sales and all other activities. The majority of the all other activities relate
to distribution fee operations. The Company evaluates performance and allocates
resources based on these segments.
Three Months Ended Nine Months Ended
------------------ -----------------
December 31, 2001 December 31, 2000 December 31, 2001 December 31, 2000
----------------- ----------------- ----------------- -----------------
Restated Restated
Revenue from external customers
Product sales $ 203,490,000 $ 194,787,000 $ 518,056,000 $ 503,545,000
All other
5,863,000 6,945,000 16,818,000 16,991,000
Segment profit (loss)
Product sales
8,586,000 7,464,000 12,516,000 18,553,000
All other
238,000 919,000 (820,000) (566,000)
Segment assets
Product sales
206,282,000 212,789,000 206,282,000 212,789,000
All other
11,370,000 14,365,000 11,370,000 14,365,000
9. Subsequent Event
On January 2, 2002 the Company's USB division entered into a distribution
contract with Grolsch International, BV as the exclusive importer, seller and
marketer of Grolsch products within the United States. The Company paid
approximately $1.7 million and recorded an intangible asset to be amortized over
the life of the contract.
- 11 -
Item 2. Management's Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This Form 10-Q, including, but not limited to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" section, contains
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "should," "plans to," "estimate" or "continue" or the negative
thereof or other variations thereon or comparable terminology. In particular,
any statement, express or implied, concerning future operating results or the
ability to generate revenues, income or cash flow to service the Company's debt
are forward-looking statements. Although the Company believes that the
expectations will prove to have been correct. All forward-looking statements are
expressly qualified by such cautionary statements, and the Company undertakes no
obligation to update such forward-looking statements.
Overview
The Company is one of the largest distributors of wine and spirits in the
United States. Substantially all of the Company's current operations are in
Illinois, Indiana, Michigan, and Kentucky. The Company's reported revenues
include net product sales in Indiana, Illinois and Michigan, and distribution
fees in Michigan. References to U.S. Beverage (USB) relate to the operations of
the Company's national import, craft and specialty beer marketing business
performed by NWS-Illinois.
The Company was able to increase total revenue by 3.8% to $209.4 million
for the three months ended December 31, 2001, while realizing a 2.9% increase in
gross margin compared to the prior year's comparable quarter. The Company was
pleased with its revenue and case volume for the third quarter ended December
31, 2001 considering the uncertain economic and travel outlook heading into the
quarter. Case sales of wine and spirits were stable as compared to the prior
year's comparable quarter, reflecting a slight shift by consumers to off-premise
purchases versus the on-premise restaurant and hotel purchases. Other case sales
declined 4.8% compared to the prior year's comparable quarter primarily from
reduced non-alcoholic sales in the Indiana market, due to reduced representation
of certain bottled water brands.
Outlook
The quarter ended December 31, 2001 affirmed the relative stability of the
alcoholic beverage industry. Management was concerned about the effects of
September 11, 2001, on sales during the holiday period, but sales during the
three months ended December 31, 2001 were even with the previous year's
comparable period in case volume with modestly higher revenue and gross margin.
The Federal Trade Commission ("FTC") has approved the sale of the Seagram
Brands from Vivendi to Diageo and Pernod Ricard. As a condition of FTC approval,
Diageo has agreed to sell the Malibu Rum brand in order to resolve the FTC's
concern over a potential duopoly in the rum category. This sale of the Malibu
Rum brand is expected to occur in the coming months. The Company currently
represents the Malibu Rum Brand and the other Seagram Brands in each of its
markets.
- 12 -
Pernod Ricard began managing the Seagram brands it acquired on December 28,
2001, including Seagram's Gin, Martell, Chivas Regal, and others. Until the sale
of the Malibu Rum brand is completed, Seagram employees will continue to manage
the Seagram brands acquired by Diageo, including Captain Morgan, Crown Royal,
V.O., 7 Crown, Myers's Rum and others.
In connection with its acquisition of those Seagram brands, Diageo has
announced a formal request for proposal ("RFP") process for all Seagram
distributors in the United States. NWS has been asked to submit proposals for
all of our current markets. If one or more of the Company's proposals are not
accepted by Diageo, Management anticipates acquiring the representation of some
competing brands. There can be no assurance, however, that the failure of Diageo
to accept the proposals of the Company will not have a material adverse effect
on the business and financial condition of the Company.
On January 2, 2002 the Company's U.S. Beverage division entered into a
distribution contract with Grolsch International, BV as the exclusive importer,
seller and marketer of Grolsch products within the United States.
Results of Operations
The following table includes information regarding total cases shipped by
the Company during the three months and nine months ended December 31, 2001
compared with the comparable periods ended December 31, 2000:
Three Months Ended December 31 Nine Months Ended December 31
------------------------------ -----------------------------
2001 2000 Percent 2001 2000 Percent
---- ---- ------- ---- ---- -------
(Cases in thousands) (Cases in thousands)
Wine (product sales operations) 973 967 0.6% 2,535 2,432 4.2%
Spirits (product sales operations) 1,091 1,082 0.8% 2,743 2,686 2.1%
Spirits (distribution fee operations) 771 774 (0.4%) 2,124 2,180 (2.6%)
----- ----- ------ ------
Total wine and spirits 2,835 2,823 0.4% 7,402 7,298 1.4%
Other 903 949 (4.8%) 3,598 4,033 (10.8%)
----- ----- ------ ------
Total 3,738 3,772 (0.9%) 11,000 11,331 (2.9%)
===== ===== ====== ======
- 13 -
Three Months Ended December 31, 2001, Compared with the Three Months Ended
December 31, 2000.
Revenue
Total product sales increased 4.5% to $203.5 million for the quarter ended
December 31, 2001 as compared to $194.8 million for the prior year's comparable
quarter. Product sales revenue increased due to increased consumer demand for
wine and spirits products from the off-premise channel opposed to the weakened
on-premise channel. The on-premise sales, primarily represented by restaurants
and hotels, have been adversely affected by the economic downturn and decline in
business travel during the three months ended December 31, 2001. Case volume
from non-alcoholic products declined from the comparable year's quarterly period
due to the discontinued representation of two suppliers in the Indiana market.
The decline in these relatively low priced units has not had a significant
effect on our revenues, but has continued to allow for lower operating expenses
due to reduced handling and delivery operations. Fee revenue for the quarter
ended December 31, 2000 included the effect of a retroactive fee increase
granted by Michigan, and accordingly, that quarter exceeds the current year
quarter by approximately $1.1 million. Case volume for the fee operations
declined approximately 3,000 cases, or 0.4% from the prior year's comparable
quarter. The state of Michigan has authorized a fee increase of $.16 per case,
effective February 3, 2002, resulting in a total per case fee of $7.48 as
compared to the current $7.32 per case.
Gross Profit
Gross margin on product sales increased $2.4 million, or 6.4% for the
quarter ended December 31, 2001 as compared to the prior year's comparable
quarter. Gross profit percentage on product sales increased to 19.4% for the
quarter ended December 31, 2001 as compared to 19.0% for the prior year's
comparable quarter. The increase in gross margin dollars was primarily due to
strong sales in the Illinois market and offset by the decline in fee revenue
compared to the prior year's comparable quarter.
Operating Expenses
Total operating expenses increased 2.4% to $33.5 million for the quarter
ended December 31, 2001 as compared to $32.7 million for the prior year's
comparable quarter. Cost savings by the USB division during the quarter ended
December 31, 2001 were offset by cost increases in other markets.
Warehouse and delivery expenses decreased slightly to $10.1 million for the
quarter ended December 31, 2001 as compared to $10.2 million for the prior
year's comparable quarter. The operational savings were primarily from reduced
non-alcoholic case volume in the Indiana market and favorable weather conditions
during the quarter ended December 31, 2001.
- 14 -
Selling expenses decreased $0.1 million, to $12.2 million for the quarter
ended December 31, 2001 as compared to the prior year's comparable quarter. This
decrease was primarily the result of reduced promotional and advertising
expenses for the USB division offset by increases in wages and brand spending in
other markets.
Administrative expense increased $0.9 million, or 8.9% for the quarter
ended December 31, 2001 from the prior year's comparable quarter. Increased
costs of health benefits, casualty insurance, and professional fees were
primarily responsible for the expense increase. The Company is partially
self-insured for group health costs, and has experienced increases in claims for
the three months ended December 31, 2001 as compared to the prior year's
comparable quarter. The Company renewed its property and casualty insurance
during the quarter ended December 31, 2001 and expects to show increased costs
for the upcoming policy period. Professional fees have increased due to
additional accounting and legal costs associated with the fiscal 2001
restatement and implementation of enhanced internal control procedures.
Income From Operations
Operating income increased 4.3% to $11.8 million for the quarter ended
December 31, 2001 as compared to $11.3 million for the prior year's comparable
quarter. The revenue increases and stable margins in the product markets, along
with isolated operating expense increases, were primarily responsible for the
increase in operating income as compared to the prior year's comparable quarter.
Interest Expense
Interest expense declined $0.5 million, or 14.7% to $3.0 million for the
quarter ended December 31, 2001 as compared to the prior year's comparable
quarter. Reduced revolving credit balances during the quarter ended December 31,
2001, along with the decline in the prime rate upon which the Company's
revolving line of credit is based, were primarily responsible for the decreased
expense.
Other Income
Other income decreased $.6 million from the prior year's comparable quarter
primarily due from the impairment charge and applying the equity method to
record the Company's share of losses from eSkye for the three months ended
December 31, 2001. The Company's interest income declined by $0.1 million for
the three months ended December 31, 2001 as compared to the prior year's
comparable quarter due to the reductions in the prime rate, upon which the
shareholder notes in NWSC are based.
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Net Income
Net income increased $0.4 million to $8.8 million for the quarter ended
December 31, 2001 as compared to $8.4 million for the prior year's comparable
quarter. The increase in net income for the quarter ended December 31, 2001 was
primarily from the product markets which had increased revenue and operating
income as compared to the prior year's comparable quarterly period.
For financial analysis purposes only, the Company's earning before
interest, taxes, depreciation, and amortization (EBITDA) for the three months
ended December 31, 2001 increased $0.4 million to $13.8 million as compared to
$13.4 million for the prior year's comparable reporting period. EBITDA should
not be construed as an alternative to operating income or net cash flow from
operating activities and should not be construed as an indication of operating
performance or as a measure of liquidity.
Nine Months Ended December 31, 2001, Compared with the Nine Months Ended
December 31, 2000.
Revenue
The Company's total revenue for the nine months ended December 31, 2001 was
$534.9 million, an increase of 2.8% over the comparable prior year period.
Product sales increased due to the strong sales in the Company's Illinois market
and offset by lower sales in the USB division. Case sales for wine and spirits
in the product markets increased 3.1% for the nine months ended December 31,
2001 over the comparable prior year period, again driven by volume increases in
the Illinois market. Fee revenue was down slightly, due to decreased case
volume, to $16.8 million for the nine months ended December 31, 2001 compared to
$17.0 million for the comparable prior year period.
Gross Profit
Gross profit on product sales increased $3.9 million, or 4.0% for the nine
months ended December 31, 2001, over the comparable prior year period. The
Illinois and Indiana markets were primarily responsible for the increase, and
were offset by decreases in gross profit from the USB division as compared to
the comparable prior year period. Gross profit percentage on product sales has
increased slightly to 19.8% for the nine months ended December 31, 2001 as
compared to 19.6% for the comparable prior year period.
Operating Expenses
Total operating expenses for the nine months ended December 31, 2001
increased $2.8 million, or 2.9% from the comparable prior year period. The
increases were primarily from the Illinois and Michigan markets due to increased
selling expenses and labor costs, respectively.
Warehouse and delivery expenses increased slightly, by $0.3 million or 1.0%
for the nine months ended December 31, 2001 from the comparable prior year
period. Cost efficiencies were created by the lower non-alcoholic volume in the
Indiana market and offset by wage increases in the other product and fee
markets.
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Selling expenses decreased $0.3 million, or 0.9% for the nine months ended
December 31, 2001 over the comparable prior year period. Promotional and
advertising expense reductions by USB during the nine months ended December 31,
2001 were primarily responsible for the reduced selling expense from the
comparable prior year period.
Total administrative expenses increased $2.9 million, or 9.7% for the nine
months ended December 31, 2001 from the comparable prior year period. Continued
increases in health & welfare benefits, casualty and workman's compensation
insurance, and professional fees were primarily responsible for the expense
increase from the comparable prior year period. The Company has experienced
higher costs for employee's health care and has implemented cost saving benefit
changes effective January 2002. The Company renewed it property and casualty
insurance during the quarter ended December 31, 2001 and expects to show
increased costs for the upcoming policy period due to increased rates on
facilities and excess liability coverage. Professional fees have increased from
the comparable prior year period due to costs related to the March 2001
restatement and implementation of enhanced internal control procedures.
Income from Operations
Operating income increased $0.9 million, or 4.7%, to $20.8 million for the
nine months ended December 31, 2001 as compared to the prior year period. The
increase in operating income was primarily from the Illinois and Indiana markets
due to increased revenue, stable and increased margins and margin percentages,
along with moderate cost increases as compared to the prior year period.
Interest Expense
Interest expense declined $1.1 million, or 10.6% to $9.0 million for the
nine months ended December 31, 2001 from the comparable prior year period.
Reductions in the prime rate, upon which the Company's revolving line of credit
is based, was primarily responsible for the decreased expense. The Company's
prime based rate on its revolving credit facility was 10.0% on December 31, 2000
and was 5.0% on December 31, 2001.
Other Income
Other income decreased $8.3 million from the comparable prior year period,
primarily due to the $7.5 million gain from the sale of the Cameron Springs
bottled water division in June 2000, increased equity in losses and
impairment
in value from the investment in eSkye, and reduced interest income due to the
reductions in the prime rate upon which the shareholder notes in NWSC are based.
The Company purchased $2,125,000 of its senior notes from the open market
on September 28, 2001. The notes were purchased for $2,082,500 plus accrued
interest of $46,617. Related unamortized issuance costs of $74,391 were written
off due to the purchase of the senior notes.
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The net loss of $32,000 on the purchase is included in other income and
expenses. The Company purchased the notes due to the favorable interest rate and
the availability of funds under its revolving credit facility.
Net Income
Net income was $11.7 million for the nine months ended December 31, 2001,
as compared to $18.0 million for the comparable prior year period. The net
income variance from the prior year period was primarily due to the Company's
gain from the sale of the bottled water division of $7.5 million during the nine
months ended December 31, 2000.
For financial analysis purposes only, the Company's earning before
interest, taxes, depreciation, and amortization (EBITDA) for the nine months
ending December 31, 2001 was $27.0 million, as compared to the $26.6 million for
the prior year reporting period. EBITDA should not be construed as an
alternative to operating income or net cash flow from operating activities and
should not be construed as an indication of operating performance or as a
measure of liquidity.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund accounts
receivable and inventories for the product markets in Illinois, Indiana, and its
U. S. Beverage operations. The Company has historically satisfied its cash
requirements principally through cash flow from operations, trade terms and bank
borrowings.
At December 31, 2001, the Company had $23.0 million outstanding and $37.0
million available on its $60.0 million revolving credit facility, as compared to
$24.8 million outstanding at December 31, 2000.
The Company used $11.6 million in net cash from operating activities for
the nine months ended December 31, 2001, a net increase of cash of $6.5 million
from the comparable prior year period. The net increase in cash provided, as
compared to the prior year's comparable period, primarily resulted from
increased cash provided by accounts receivable of $8.5 million, reduced use of
cash for inventories of $3.6 million, and increased use of cash to decrease
accounts payable by $7.0 million. The Company has realized increased cash flow
from reducing the days in trade accounts receivable with improved credit
management procedures and management focus. The timing of inventory purchases
during the quarter ended December 31, 2001 resulted in increased inventories and
decreased accounts payable as compared to the prior year's comparable period.
Net cash used by investing activities increased $6.1 million from the
comparable prior year period. This net decrease in funds provided was primarily
the result of reduced purchases of property and equipment during the nine months
ended December 31, 2001 as compared to the prior year's comparable period and
expenditures during June 2000 for investments in eSkye Solutions, Inc.,
intangibles and the receipt of funds from the sale of the bottled water
division.
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Net cash provided by financing activities was $14.1 million for the nine
months ended December 31, 2001 as compared to $15.7 million from the comparable
prior year period. Proceeds from the revolving credit facility during the
current nine-month period were less than the comparable prior year period by
$3.8 million. Payments of long-term debt increased primarily from the Company
purchasing $2,125,000 of its senior notes from the open market on September 28,
2001. The Company's distributions to stockholders were reduced by $0.3 million
for the nine months ended December 31, 2001 as compared to the prior year's
comparable nine-month period, due to the timing of tax liabilities from 2000 to
2001. Stockholder distributions of $8.5 million for the nine months ended
December 31, 2001 were distributed for the following purposes: $5.7 million for
stockholders' tax liabilities, $2.3 million for repayment of stockholder debts
to the Company, and $0.5 million to a stockholder that has no obligation to the
Company.
Total assets increased to $217.7 million at December 31, 2001, a $25.4
million increase from March 31, 2001. The increase in assets is primarily due to
greater accounts receivable and inventories at December 31, 2001 as compared to
March 31, 2001. The December quarter is the Company's highest sales volume
period, while the Company's March quarter is typically the lowest sales volume
period. The Company's total assets were lower at December 31, 2001 as compared
to December 31, 2000 by $9.5 million. Inventories at December 31, 2001 are $5.8
million higher than the levels at December 31, 2000 due to increased inventory
purchases during the three- month period ended December 31, 2001. Total debt
increased at December 31, 2001 as compared to March 31, 2001 due to the
revolving credit facility's balance of $23.0 million at December 31, 2001 as
compared to none at March 31, 2001, and $24.8 million at December 31, 2000.
Equity increased $3.3 million, to $28.0 million at December 31, 2001 as compared
to March 31, 2001 primarily due to net income of $11.7 million, the
reclassification of the net shareholder payable to long-term debt of $2.1
million, and the distributions to stockholders that were not repaid to the
Company of $6.2 million.
The Company believes cash flow from operations and existing capital
resources, including cash and borrowings available under the Company's revolving
credit facility, will be sufficient to satisfy the Company's anticipated working
capital and debt service requirements and expansion plans.
Inflation
Inflation has not had a significant impact on the Company's operations but
there can be no assurance that inflation will not have a negative effect on the
Company's financial condition, results of operations or debt service
capabilities in the future.
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Environmental Matters
The Company currently owns and leases a number of properties, and
historically it has owned and/or leased others. Under applicable environmental
laws, the Company may be responsible for remediation of environmental conditions
relating to the presence of certain hazardous substances on such properties. The
liability imposed by such laws is often joint and several without regard for
whether the property owner or operator knew of, or was responsible for, the
presence of such hazardous substances. In addition, the presence of such
hazardous substances, or the failure to properly remediate such substances, may
adversely affect the property owner's ability to borrow using the real estate as
collateral and to transfer its interest in the real estate. Although the Company
is not aware of the presence of hazardous substances requiring remediation,
there can be no assurance that releases unknown to the Company have not
occurred. Except for blending and bottling of a few of the Company's private
label brands, the Company does not manufacture any of the wine or spirit
products it sells and believes that it has conducted its business in substantial
compliance with applicable environmental laws and regulations.
Other
As a matter of policy, the Company plans to review and evaluate all
professional services firms every three years. This review will include but is
not limited to legal, audit and information systems services. The next scheduled
review will occur during fiscal 2005.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations", and No. 142,
"Goodwill and Other Intangible Assets", effective for fiscal years beginning
after December 15, 2001. Under the new rules, goodwill (and intangible assets
deemed to have indefinite lives) will no longer be amortized but will be subject
to annual impairment tests in accordance with the Statements. Other intangible
assets will continue to be amortized over their useful lives.
The Company is adopting the new rules on accounting for goodwill and other
intangible assets effective April 1, 2002. The adoption of this statement is
expected to reduce annual amortization expense approximately $100,000. During
fiscal 2003, the Company will perform the first of the required impairment tests
of goodwill and indefinite lived intangible assets. The Company has not yet
determined what the effect of these tests will be on its earnings and financial
position.
FASB Statement No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets," which requires impairment losses to be recorded on
long-lived assets used in operations when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets are
less than the assets' carrying amount. Statement 144 also addresses the
accounting for expected disposals of long-lived assets. The Company will adopt
Statement 144 in the first quarter of fiscal 2003 and, based on current
circumstances, does not believe the effect of adoption will be material.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no substantial change from the information previously
provided in the company's Annual Report on Form 10-K.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various lawsuits and claims arising in the normal
course of business. While the ultimate resolution of lawsuits or claims against
the Company cannot be predicted with certainty, management is vigorously
defending all claims and does not expect that these matters will have a material
adverse effect on the financial position or results of operations of the
Company.
Item 5. Other Events
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, National Wine & Spirits, Inc. is identifying in
exhibit 99 to this quarterly report important factors that could cause the
Company's actual results to differ materially from those projected in
forward-looking statements of the Company made by, or on behalf of the Company.
Item 6. Exhibits
(a) Exhibits
(99) Exhibit 99 - Forward-Looking Statements
(b) Reports on Form 8-K
The Company filed two Form 8-Ks on December 17, 2001 to dismiss Ernst
& Young, LLP as the Company's principal accountant to audit the
Company's financial statements, and to engage Arthur Andersen LLP as
the principal accountant to audit the Company's financial statements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL WINE & SPIRITS, INC.
2/13/02 /S/ James E. LaCrosse
- -------------------- ---------------------------------------
Date James E. LaCrosse,
Chief Financial Officer
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Exhibit 99
Forward-Looking Statements
From time to time, the Company may make or publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects, technological developments, new products, and similar
matters. Such statements are necessarily estimates reflecting the Company's best
judgment based on current information. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. Such
statements are usually identified by the use of words or phases such as
"believes," "anticipates," "expects," "estimates," "planned," "outlook," and
"goal." Because forward-looking statements involve risks and uncertainties, the
Company's actual results could differ materially. In order to comply with the
terms of the safe harbor, the Company notes that a variety of factors could
cause the Company's actual results and experiences to differ materially from the
anticipated results or other expectations expressed in the Company's
forward-looking statements.
While it is impossible to identify all such factors, the risks and
uncertainties that may affect the operations, performance and results of the
Company's business include the following:
(1) economic and competitive conditions in the markets in which the Company
operates;
(2) strikes or other work stoppages affecting the Company or its major
customers or suppliers;
(3) the Company's ability to continue to control and reduce its costs of
storage and distribution;
(4) the level of consumer demand in the states in which the Company operates
for the Company's line of alcohol-based beverages;
(5) supplier consolidation could result in brand realignment and the loss of
certain products and customers;
(6) the risks associated with the reliance on one or a few significant
suppliers;
(7) the impact of significant price increases or decreases in availability of
certain alcohol-based beverages distributed by the Company;
(8) the nature and extent of any current or future state and federal
regulations regarding the distribution of alcohol-based beverages;
(9) changes in financial markets affecting the Company's financial structure
and the Company's costs of capital and borrowed money;
(10) any other factors which may be identified from time to time in the
Company's periodic SEC filings and other public announcements.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those described in the forward-looking statements. The Company does not intend
to update forward-looking statements.
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