UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[ X ] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended March 31, 2002.
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
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)
700 W. Morris Street, P.O. Box 1602, Indianapolis, Indiana 46206
- ----------------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(317) 636-6092
--------------
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
by Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any Amendment to this
Form 10-K. [ X ]
The registrant is a privately held corporation. As such, there is no practicable
method to determine the aggregate market value of the voting stock held by
non-affiliates of the registrant.
The number of shares of Common Stock, $.01 par value, of National Wine &
Spirits, Inc. outstanding as of May 21, 2002 was 5,330,521, of which 104,520
were voting stock.
Documents Incorporated by Reference: None
- 1 -
TABLE OF CONTENTS
Page
----
PART I
Item 1. Business 3
Item 2. Properties 16
Item 3. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 18
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 19
Item 6. Selected Consolidated Financial Data 19
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 21
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 27
Item 8. Financial Statements and Supplementary Data 28
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 50
PART III
Item 10. Directors and Executive Officers of the Registrant 51
Item 11. Executive Compensation 53
Item 12. Security Ownership of Certain Beneficial Owners
and Management 54
Item 13. Certain Relationships and Related Transactions 55
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 57
- 2 -
Part I
Disclosure Regarding Forward-Looking Statements
This Form 10-K, including, but not limited to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
sections, 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. A variety of factors could cause the Company's
actual results to differ from the reported results expressed in such
forward-looking statements. These factors are discussed in the cautionary
statements contained in Exhibit 99 to this filing. All forward-looking
statements are expressly qualified by such cautionary statements, and the
Company undertakes no obligation to update such forward-looking statements.
Item 1. Business
General
National Wine & Spirits, Inc. (NWS) is one of the largest distributors of
wine and spirits in the United States. NWS is the largest distributor of spirits
in Indiana with 54% market share and Michigan with 52% market share, and one of
the largest in Illinois with 30% market share. NWS' markets include Chicago and
Detroit, which are the second largest and the sixth largest metropolitan markets
for spirits in the United States, respectively. NWS conducts its operations
through its wholly owned subsidiaries, NWS Corporation in Indiana (NWS-Indiana),
NWS Illinois, LLC (NWS-Illinois), NWS Michigan, Inc. (NWS-Michigan), and United
States Beverage, L.L.C. (USB).
NWS is the exclusive distributor in one or more of its markets for many of
the world's leading suppliers of brand name domestic and imported spirits,
including Diageo-UDV (Diageo), formed through the merger of United Distillers
(Guinness) and International Distillers and Vintners (Grand Metropolitan),
Fortune Brands, Allied Domecq, and Pernod Ricard. NWS' featured brands include:
o Absolut
o Chivas Regal
o Crown Royal
o DeKuyper
o Jim Beam
o Jose Cuervo
o Smirnoff
o Kahlua
o Maker's Mark
o Canadian Club
- 3 -
NWS also is the exclusive distributor in Indiana and Illinois for many of
the world's leading wineries, including:
o Kendall Jackson, featuring Kendall Jackson and LaCrema vines
o Banfi Vintners, featuring Riunite and other Italian and Chilean wines
o Canandaigua, featuring Sebastiani, Inglenook, Paul Masson, and Almaden
wines
o Diageo, featuring premium European and California wines
NWS operates 12 strategically located distribution facilities and a fleet
of approximately 325 delivery vehicles to provide overnight or second-day
delivery to over 36,000 retail locations, including package liquor stores, drug
and grocery stores, mass merchandisers, hotels and restaurants and bars. NWS'
customers include both local and regional businesses as well as national chains
such as American Stores (Osco), Walgreens, CVS, Sam's Club, Meijer, Morton's,
Ruth's Chris, T.G.I. Friday's, and Hyatt. In select locations, NWS also
distributes premium domestic and imported beer and other products.
From 1998 to 2002, NWS' total revenue increased steadily from $521.4
million to $681.6 million, representing a compound annual growth rate of 6.9%,
while NWS' EBITDA (i.e. income from operations plus depreciation and
amortization) increased from $16.7 million to $27.9 million, representing a
compound annual growth rate of 13.7%. NWS achieved this performance by
successfully integrating several strategic acquisitions, actively developing new
geographic market areas, pursuing new supplier and brand relationships,
implementing advanced product handling technology and proprietary information
systems, and providing high levels of supplier and customer service.
Under the three-tier regulatory framework established by federal and state
law, suppliers of alcohol-based beverages are generally prohibited from selling
their products directly to retail outlets or consumers, effectively requiring
suppliers to use distributors such as NWS. This regulatory framework effectively
insulates distributors from vertical competition from suppliers or retail
customers. In some states, referred to as "control states," state law has
historically mandated the state to act as the exclusive wholesale distributor
and/or retailer of alcohol-based beverages. In 1996, Michigan became the first
control state to privatize aspects of the wholesale distribution of spirits, and
NWS has become the leading distributor of spirits in that state.
Industry Overview
The United States alcohol-based beverage industry generated total retail
sales of approximately $127.3 billion in calendar 2001. Sales of wine and
spirits, in which NWS primarily competes, accounted for approximately 15% and
30%, respectively, or $57.4 billion of total retail sales in 2001. In the United
States wine and spirits markets, total consumption has increased since 1994 and
1998, respectively. During 2001, wine and spirits consumption in the United
States grew 0.8% and 1.3% respectively, as compared to 2000. In both the wine
and spirits industries, consumer preference has been to purchase higher quality
and more expensive products; management believes this trend will continue.
In June of 2000, Seagram announced its intention to merge with Vivendi and
divest of their wine and spirits business. Subsequently, Diageo and Pernod
Ricard jointly bid and agreed to purchase the brands with the intention of
assigning them to their respective companies. The most notable Seagram brands
that Diageo purchased were Crown Royal, Seagrams V.O., 7 Crown, Captain Morgan
and Myers's Rum. The notable brands Pernod purchased include Chivas Regal, The
Glenlivet, Martell Cognacs and Seagrams Gin. The purchase agreement was approved
by the Federal Trade Commission in December, 2001. Absolut Vodka, which had a
marketing arrangement with Seagram, has assigned the U.S. marketing rights to
Future Brands L.L.C., a joint venture with V & S (parent of Absolut) and Jim
Beam Brands. Diageo, the largest supplier, has requested formal proposals (RFP)
from distributors for the right to distribute Diageo brands within a given
state. Pernod consolidated the Seagram brands that they purchased into their
existing distribution network. Other suppliers are developing strategies to deal
with the brand sales to Diageo and Pernod Ricard. Most recently, Bacardi and
Brown-Forman have entered into an alliance (Gemini Alliance) intended to
leverage their business to gain advantages through their distributor partners.
- 4 -
Since the repeal of Prohibition in 1933, the federal and state governments
have regulated the sale of spirits, wine, and beer. State regulatory frameworks
fall into three types: control, open and open-franchise. In nearly all
circumstances, suppliers may not legally sell directly to retailers. In the 18
control states, the state controls either the distribution or the retail sale,
or both. In open states, including Indiana, Illinois, and Kentucky, the
distributors and retailers are privately owned businesses. In the open-franchise
states, there are laws and regulations that restrict the suppliers' ability to
change distributors.
Given the three tier regulatory structure, the wine and spirits
distribution industry varies greatly from other industries such as food, drugs,
non-alcohol-based beverages and paper products. As suppliers can compete
directly with the distributors in these other industries by shipping directly to
retailers, distributor margins can be much lower than those in the wine and
spirits industry. In addition, the liquor industry as a whole has shown a
remarkable resilience to economic downturns relative to other industries.
Competitive Strengths
Adoption and promotion of NWS Core Values and Operating Imperatives
Two important internal efforts aimed at clarifying NWS' identity and goals
both internally and externally gained traction in fiscal 2002, further
differentiating the company from competitors: The promotion of Corporate-wide
Core Values and Operating Imperatives.
Core Values
Recognizing the need to empower the company managers as well as the other
employees and move away from a directive management style to a decentralized
system that would operate on a common set of values, but centralized control and
accountability, NWS started a company-wide process in 2000 that lasted nine
months that developed a set of core values. Included in the process were
employees from all parts of the company facilitated by one of our directors,
Professor Bill Cochrum from the Anderson School of Business at UCLA. At the end
of the process which included substantial and active participation from all
levels of the company, a set of values was determined which everyone bought into
and which form the basis for how we manage the business and how employees should
interact with each other. The values identified are:
o Customer and Supplier Focus
o Respect for the Individual
o Teamwork
o Citizenship
o Integrity
o Financial Responsibility to Stakeholders
Operating Imperatives
NWS has documented and now promotes its key Operating Imperatives as the
corporate "recipe for success," seeking to leave no doubt in the minds of
suppliers, customers and employees the company's objectives. These Operating
Imperatives include:
o Focus - on the business - industry and geography
o Execution - of the core capabilities required for effective distribution
o Efficiency - in everything we do
o Technology Leadership - to improve our information, reduce lead times
and reduce costs
o Capital Structure - that provides flexibility and access to investment
opportunities
o Innovation - to constantly improve the way we operate
- 5 -
Market Leadership. NWS is the largest distributor of spirits in Indiana and
Michigan and one of the largest in Illinois. NWS' market leadership reflects its
strong relationships with both suppliers and customers and provides NWS with
numerous advantages over smaller distributors, including significant economies
of scale and increased purchasing power. NWS maintains and seeks to enhance its
market leadership by providing high levels of service to its suppliers and
customers and through its investments in technology and information systems.
Strong Supplier Relationships. NWS' success is due in part to its
long-standing relationships with its major wine and spirits suppliers, many of
which extend back more than 25 years. The strength of these relationships was
demonstrated in 1997 when each of NWS' three largest suppliers, Seagram, Fortune
Brands and Diageo, selected NWS over numerous competitors to be its exclusive
distributor of spirits in Michigan. In Indiana and Michigan, NWS is the
exclusive distributor of seven out of the top ten brands of spirits sold in the
United States, including Smirnoff, Absolut, Captain Morgan, Jose Cuervo, Jim
Beam, Crown Royal, and Seagram's Gin. In Illinois, NWS is the exclusive
distributor of five out of the top ten U.S. brands. NWS also represents a
significant share of each of its major suppliers' total United States business.
Stable Industry and Diversified Customer Base. Total wine and spirits
industry revenues have grown steadily over the past 25 years, even during
periods of economic decline. NWS offers products to over 36,000 retail locations
and no single customer or chain represented more than 1.8% of NWS' 2002 total
revenue. Moreover, the three-tier regulatory framework established by federal
and state law generally prohibits vertical integration by suppliers and
retailers and thereby enhances the stability of the wine and spirits
distribution industry. NWS believes that the nature of the wine and spirits
distribution industry and NWS' diverse customer base provide it with increased
stability and predictability of cash flow relative to distributors in many other
industries.
Customer Service Focus. NWS' commitment to highly effective customer
service has also been a major factor in its historical success. Management
emphasizes on-time delivery, product availability, the ability to accept
last-minute orders and special orders for low volume or unusual items, and
reliability on a long-term basis. NWS provides numerous value-added services to
its customers, including category management, customized advertising and
point-of-sale materials, customized packaging and on-line electronic ordering.
Management believes that highly effective customer service strengthens customer
relationships, thereby improving product positioning and sell-through to the
consumer.
Advanced Infrastructure, Distribution Network and Information Systems. NWS
maintains an extensive distribution network consisting of master warehouses,
hyper-terminals and cross-docking facilities strategically located across
Indiana, Illinois and Michigan and a fleet of approximately 334 delivery
vehicles. This distribution system generates significant operating leverage by
enabling NWS to deliver hundreds of suppliers' products from each master
warehouse and optimize delivery routes by maximizing the density of customer
locations served from each facility. NWS plans to invest approximately $4
million over the next 24 months to expand the existing Indianapolis facilities
as well as upgrade and computerize material handling systems. NWS also utilizes
supplier and customer ordering via electronic data interchange, Internet
interfaces and on-line reporting systems used by suppliers to track sales. In
addition to enhancing supplier and customer relationships, the implementation of
these systems has improved NWS' efficiency and enabled NWS to remain a low cost
provider.
Experienced Management Team. The eight individuals who comprise NWS' senior
management team have an average of over 20 years of experience in the
alcohol-based beverage industry and 15 years of experience with NWS. In
addition, NWS' senior management team has successfully integrated eight
acquisitions since 1992. Management's experience and expertise have enabled NWS
to establish and maintain long-term relationships with both suppliers and
customers and take advantage of consolidation and privatization opportunities.
Operating Strategy
Continue to Maximize Operating Leverage. As the largest or one of the
largest wine and spirits distributors in each of its markets, NWS continuously
seeks to minimize its operating costs by leveraging its resources in the areas
of warehousing, transportation, general and administrative functions and
information systems to create economies of scale. The fixed nature of many of
these costs enables NWS to generate a higher level of profitability on
incremental increases in volume and price. In addition, all of NWS' major
facilities have additional capacity, which positions NWS to take advantage of
future expansion opportunities in these markets with relatively low capital
expenditures.
- 6 -
Growth through Addition of New Brands. Long-term relationships are critical
to maintaining supplier and brand continuity with distributors. Although brand
movements among distributors are relatively infrequent as the result of these
relationships, consolidation of distributors or suppliers can affect existing
relationships and present NWS with opportunities to add brands affected by the
consolidation.
Selectively Pursue Strategic Acquisitions and Joint Ventures. NWS plans to
continue to strengthen its competitive position by selectively acquiring other
distributors and entering into strategic joint ventures both in its current
markets and in contiguous markets. These strategic opportunities may arise for
several reasons, including:
(1) Suppliers sometimes encourage the consolidation of distributors in
order to reduce costs and improve efficiency.
(2) Most distributors are family businesses, and acquisition opportunities
can develop as owners approach retirement age without a definite
succession plan.
(3) Many distributors lack the resources and supplier support to meet the
demands of large suppliers, including expanding outside of their brand
lines or geographic markets.
Management believes NWS' reputation with suppliers and customers, as well
as its financial position, market share and established infrastructure, make NWS
an attractive buyer of, or strategic partner for, other distributors.
As an example of this strategy, in December 1998, NWS formed a new Kentucky
distributorship, Commonwealth Wine & Spirits, LLC, in partnership with two
existing Kentucky-based distributors, The Vertner Smith Company and Kentucky
Wine & Spirits. NWS invested $7.5 million, in exchange for 25% of the new
company. Vertner and Kentucky W&S equally own the remaining 75%.
Continue to Invest in Logistics Technology and Information Systems. The
wine and spirits distribution industry is a relatively mature industry, which is
not extensively automated. Many of NWS' competitors continue to rely primarily
on manual processes and limited technology. NWS plans to expand on its recent
investments in sales and logistics technology and sales and marketing
information systems to further reduce costs and improve service to its customers
and suppliers.
Capitalize on Further Privatizations. NWS' established reputation and
relationships with its major suppliers has made it the leading spirits
distributor in Michigan, the first control state to privatize aspects of its
wholesale spirits distribution business. NWS believes that other control states
may choose to privatize all or part of their wholesale distribution business,
which may allow NWS to expand its geographic markets without acquiring or
merging with existing distributors. Should any such privatization opportunities
arise, particularly in the central United States, NWS plans to selectively
pursue such opportunities by leveraging its experience in Michigan, its strong
relationships with suppliers and its distribution expertise.
- 7 -
Suppliers and Products
NWS represents many of the largest suppliers of wine and spirits in the
United States, and offers hundreds of brands and more than 12,000 individual
products. The breakdown of sales among wine, spirits and other products
distributed by NWS in 2002, 2001 and 2000 is as follows:
Wine (in thousands) Spirits (in thousands) Other (in thousands)
------------------- ---------------------- --------------------
2002 2001 2000 2002 2001 2000 2002 2001 2000
---- ---- ---- ---- ---- ---- ---- ---- ----
Product sales ........... $161,445 $ 160,840 $149,160 $408,199 $397,754 $377,437 $ 89,950 $ 78,285 $ 77,028
Distribution fees........ --- --- --- 21,963 21,573 20,770 --- --- ---
Percentage of total
Company revenue.......... 23.7% 24.4% 23.9% 63.1% 63.7% 63.8% 13.2% 11.9% 12.3%
In Michigan, spirits distributors have exclusive relationships with
suppliers by law, and receive distribution fees from suppliers as set by the
state, rather than purchasing from the suppliers for resale to customers. This
arrangement has the effect of understating the importance of spirits in NWS'
overall product mix. For purposes of illustrating the scale of NWS' operations
in Michigan, the total wholesale prices of products delivered by NWS for
Michigan in 2002, 2001, and 2000 was $360.0 million, $355.0 million and $365.0
million, respectively, based on the fixed wholesale prices of the spirits
delivered by NWS.
NWS' products include the following brands, among many others:
PRODUCT TYPE BRAND NAMES
- ------------ -----------
Vodka: Absolut Popov
VOX Smirnoff
Grey Goose Stolichnaya
Gordons Belvedere
Bourbon and Blended Whiskey: Crown Royal Seven Crown
Jim Beam Wild Turkey
Seagram's V.O. Windsor Canadian
Old Grand Dad Knob Creek
Scotch and Single Malt Whiskey: Chivas Regal Glenlivet
Grant's Isle of Jura
Balvenie J&B Rare
Bowmore Dalmore
Glenfiddich Macallan
Gin: Boodles Gilbey's
Seagram's Gordons
Rum: Captain Morgan Myers
Malibu Ronrico
Tequila: Herradura Patron
Jose Cuervo Margaritaville
- 8 -
Cognacs/Brandy: Courvoisier Martell
Hine Paul Masson
Remy Martin
Specialty Spirits: Chambord DeKuyper Cordials
Bailey's Irish Cream Jagermeister
Campari TGI Friday's
Hiram Walker Cordials Kahlua
Wine: Kendall Jackson Inglenook
Almaden Perrier Jouet
Banfi Sebastiani
Beringer Stags Leap
Caymus Sterling
Chateau Lafite Veuve Clicquot
Rothschild Rosemount
Gundlach Bundschu Ravenswood
Penfolds Columbia Crest
Mumm Chateau St. Michelle
Hess Collection Seagram Wine Coolers
Specialty Beer: Goose Island Sierra Nevada
Grolsch Hooper's Hooch
K Cider
Non-Alcohol: Evian Stewart's
Perrier Nantucket Nectars
NWS has entered into written distribution agreements with several of its
principal suppliers that generally may be extended on an annual basis but are
terminable upon 30 days or 60 days written notice to NWS. In addition, NWS has
informal arrangements with many of its suppliers whereby NWS distributes the
suppliers' products pursuant to purchase orders without written distribution
agreements. Although the written agreements provide NWS with the non-exclusive
right to distribute the suppliers' products in a particular state, in practice
the suppliers have generally selected a distributor to be the exclusive
distributor of specified products in each state. In each of Indiana, Illinois
and Michigan, NWS is presently acting as the exclusive distributor with respect
to virtually all of the products it distributes.
- 9 -
The following chart summarizes information about the leading spirits
suppliers in the United States, their rank in Indiana, Illinois and Michigan,
the length of NWS' relationship with those suppliers and their impact on 2001
case sales.
Length of
U.S. Company
Rank State Representation Relationship
Supplier (1) IN IL MI (in years)(2) Representative Brands
- -------- --- -- -- -- ------------- ---------------------
Diageo (3)............... 1 X X 27 Smirnoff, Jose Cuervo, Crown Royal
Fortune Brands........... 2 X X X 25 Jim Beam, DeKuyper's, Absolut
Constellation (4)........ 7 X X 28 Paul Masson Grande Amber
Pernod Ricard......... 8 X X 29 Chivas Regal, Wild Turkey
(1) Source: 2002 Adams Handbook Advance.
(2) All of the relationships expressed in this column represent the duration of NWS' relationship with the
suppliers or their predecessors in the Indiana market.
(3) Diageo represents that portion of Diageo PLC formed by merger between United Distillers and International
Distillers & Vintners. NWS does not represent Diageo's interest in the Schieffelin & Somerset joint
venture that remains a separate organization.
(4) NWS does not represent the entire brand portfolio.
Top United States wine brands and wineries represented by NWS include
Kendall Jackson, Beringer, Constellation, Inglenook, and Sebastiani. NWS
currently does not distribute wine in Michigan. Major wine producers served by
NWS in Indiana and Illinois include:
Length of
U.S. State Company
Rank Representation Relationship
Supplier (1) IN IL (in years)(2) Representative Brands
- -------- ---- -- -- ------------- ---------------------
Constellation Brands..... 2 X X 28 Inglenook, Paul Masson, Sebastiani
Beringer Wine Estates... 6 X 27 Beringer, Meridian
Banfi Vintners............ 7 X X 28 Riunite, Concha y Toro
Diageo - UDV............ 9 X X 28 Sterling, B&G
Southcorp Wines (3)... 10 X 11 Lindeman's, Rosemount Estate
Kendall Jackson.......... 8 X X 3 Kendall Jackson, LaCrema
Stimson Lane............ -- X 16 Chateau St. Michelle, Columbia Crest
(1) Source: 2002 Adams Handbook Advance, 2002 Adams Wine & Spirits Industry and Marketing.
(2) All of the relationships expressed in this column represent the duration of NWS' relationship with the
suppliers or their predecessors in the Indiana market.
(3) NWS does not represent the entire brand portfolio in Illinois.
- 10 -
Related Operations
In addition to its core alcohol-based beverage distribution operations, NWS
has conducted related beverage operations through a division, Cameron Springs
Water Company, and through NWS' U.S. Beverage operations. Cameron Springs, a
bottled water supplier in Indiana, was sold to Perrier Group for approximately
$10.4 million in cash, which was in excess of net book value as of June 2000.
U.S. Beverage commenced operations as a division of NWS in March 1997 to market
and sell imported, specialty and microbrewed beers and specialty malt products
nationally. The brand distribution contracts related to the U.S. Beverage
operations are held by an entity, for which NWS-Illinois has 100% voting
control. In select markets, NWS sells and distributes premium cigars primarily
as a complement to NWS' distribution of fine wines and spirits.
In 1998, U.S. Beverage entered into a multiyear agreement with Bass, PLC,
granting U.S. Beverage the exclusive U.S. distribution rights for Hooper's Hooch
flavored malt beverage. The Hooper's Hooch business and its growth have provided
U.S. Beverage with the critical mass to support its nationwide sales and
marketing force. In April 2000, U.S. Beverage entered into an agreement with the
Goose Island Brewing Company by which U.S. Beverage became the exclusive sales
and marketing firm for the Goose Island brand throughout the United States. On
January 2, 2002 U.S. Beverage entered into a distribution contract with Grolsch
International, BV as the exclusive importer, seller and marketer of Grolsch
products within the United States. Commencing April 1, 2002, U.S. Beverage
became the exclusive marketer and distributor of Seagram's Coolers and Rick's
Lemonade for the United States.
Customers
Most states, including Indiana, Illinois and Michigan, require wine and
spirits retailers to purchase alcohol-based beverages from licensed
distributors. Suppliers in these states may not legally sell directly to retail
customers. NWS' customers fall into two broad categories depending on where the
alcohol-based beverage ultimately will be consumed: on-premise and off-premise.
Off-premise customers include package liquor stores, grocery stores, drug stores
and mass merchandisers. On-premise customers include hotels, restaurants and
bars, and similar establishments. NWS currently serves over 36,000 retail
locations in Indiana, Illinois and Michigan. No single customer represented more
than 1.8% of NWS' 2002 total revenue. As is customary in the industry, NWS'
products are generally purchased under standard purchase orders and not under
long-term supply contracts. As a result, backlog is not meaningful in the
wholesale distribution industry.
The following table summarizes NWS' customer base:
Percentage
of Company
Type of Customer 2002 Revenue Representative Customers
---------------- ------------ ------------------------
Off-Premise
Package Stores 40.6% Gold Standard and Cap'n Cork
Grocery stores, drug stores 25.3 Kroger, Dominicks, Marsh, American Stores (Osco),
and mass merchandisers Walgreens, CVS, Sam's Club, Meijer
Other 7.7 7-Eleven, White Hen, Village Pantry
----
Percent of total 73.6%
====
On-Premise
Restaurants and Bars 21.7 Charlie Trotter's, Hard RockCafe, House of Blues,
Mortons, Lettuce Entertain U, Levy, Ruth's Chris
Hotels, Entertainment 2.7 Four Seasons, Hyatt, Hilton, the United Center
Other 2.0 Crooked Stick Golf Course, American
---- Legion
Percent of total 26.4%
====
- 11 -
Management believes that the number and diversity of NWS' customers and the
nature of NWS' business strengthens NWS' liquidity. The prompt payment of NWS'
invoices is governed by law in all states in which NWS operates. Indiana has a
15-day credit law beyond which retail customers are restricted from buying
alcohol-based beverages from any distributor in the market. Illinois has a
similar 30-day credit law. Typically, NWS' bad debt expenses are incurred less
than 30 days after shipment since the credit laws prohibit extension of terms.
Average bad debt expense for the past five years has been less than 0.10% of
revenue.
Marketing and Sales
Brand Management. NWS was one of the first distributors to recognize the
benefits of a dedicated approach to brand management and separating it from
sales execution. Our approach has contributed to our success. Suppliers
appreciate and depend upon the local expertise and understanding of the
intricacies of the market. Our brand managers, through interaction with our
sales teams and analysis of the competitive landscape, adjust suppliers'
national brand strategies to plans that work in our respective states.
Sales Teams. NWS sales organizational design is predicated upon category
knowledge and expertise, trade channel knowledge and effectiveness, and
geographic coverage. Through its approximately 700-person marketing and sales
force, NWS acts as the field marketing and merchandising arm of its suppliers by
maintaining regular contact with NWS' off-premise and on-premise customers. NWS
provides its customers with a wide variety of services in addition to order
taking, merchandising, and delivery. These services include item selection and
SKU optimization using space and financial tools, fact-based business
presentations to capitalize on fair share, consumer pull-through marketing
programs and communicating business-building solutions.
Sales, Marketing and Information Systems. Our investment in technology, in
the areas of and sales and marketing is a critical factor in our success and
customer satisfaction. NWS is generally recognized as an industry innovator and
leader in MIS in the wine and spirits distribution tier. Our proprietary sales
system manages sales data to the SKU level in all retail accounts we service
(approximately 36,000) and is refreshed nightly based on deliveries. This system
provides our brand teams the necessary information to develop targeted,
effective brand plans. Moreover, our sales managers depend on the information to
monitor and control retail execution within their sales teams. Most recently we
have moved this information to the Internet to allow for greater speed and
accessibility to management, retail, and supplier partners. We have also
invested to significantly improving our category management expertise. This has
improved our service and effectiveness particularly in the off-premise national
and regional chain accounts.
Warehousing and Distribution
NWS utilizes a series of four master warehouses, three hyper-terminals and
five cross-docking facilities strategically located throughout Indiana, Illinois
and Michigan to store and ship its products pending sale to customers. NWS uses
common carriers to transport products from suppliers to its master warehouses.
Master warehouses located in Chicago, Indianapolis and Detroit serve as the
primary storage facilities for NWS' inventory. A smaller master warehouse is
located in Champaign, Illinois. Upon receipt of the product at one of the master
warehouses, the products are inspected and stored on pallets or in racks.
Temperature-sensitive products, such as fine wines, are stored in
temperature-controlled areas of the warehouses. Hyper-terminals located in
Peoria, Illinois, South Bend, Indiana and Grand Rapids, Michigan stock only high
volume products and provide an extension of the master warehouses. NWS strives
to optimize inventory levels, taking into account minimum out-of-stock
percentages, projected sales, including seasonal demands, periodic supplier
shipments to meet supplier sales requirements and working capital requirements.
NWS' customers ordinarily receive either next day or second-day delivery.
In general, orders are collected during the day for batch routing and order
"picking" at night. The Chicago and Detroit master warehouses each use an
automated material handling system, including scanners, automated conveyors,
dispensers and sorters. Products from the master warehouses are then shuttled
nightly to either a hyper-terminal or a cross-docking facility where the orders
are consolidated and loaded onto delivery trucks. Cross-docking facilities
located in Belleville, Illinois, Evansville, Indiana, and Traverse City, Saginaw
and Escanaba, Michigan further extend the service areas of the master
warehouses. Orders for delivery out of the various cross-docking facilities are
picked in the master warehouses, shipped in during the night, and then
transferred onto local delivery trucks for final delivery. NWS owns or leases a
total fleet of approximately 325 delivery trucks, consisting of 238 delivery
trucks, 15 tractors, 24 trailers, 44 vans and 4 pick-up trucks. To maximize
prompt and efficient product delivery, NWS' fleet is allocated among NWS' master
warehouses, hyper-terminals and cross-docking facilities located throughout
Indiana, Illinois and Michigan.
- 12 -
As a result of a number of factors including state laws and regulations,
NWS maintains independent distribution networks in Indiana, Illinois and
Michigan. The Indiana distribution network operates with the Indianapolis master
warehouse feeding the South Bend hyper-terminal and the Evansville cross-docking
facility. The Michigan distribution network operates with the Detroit master
warehouse feeding the Grand Rapids hyper-terminal and the cross-docking
facilities located in Escanaba, Saginaw and Traverse City. The Illinois
distribution network is separated into the metropolitan Chicago area, and all
other service areas. The Chicago area is serviced out of the Chicago master
warehouse, while the downstate areas are serviced by the smaller Champaign
master warehouse, the Peoria hyper-terminal and the Belleville cross-docking
facility.
Management Information Systems
NWS employs customized management information systems to more efficiently
utilize its material handling and distribution system. NWS' information systems
help streamline its distribution network from receipt of order through final
delivery by calculating and implementing efficient product selection, optimizing
delivery routes to meet specific delivery times, and allocating the proper types
and volume of products on specific delivery trucks. These information systems,
when used in connection with NWS' material handling systems, have allowed NWS to
more efficiently manage its inventory and minimize its handling costs per case
primarily by reducing labor costs.
NWS' commitment to technology has also advanced its sales and marketing
initiatives. NWS' sales force and management is equipped with laptop computers,
which expedites order entry and provides instant feedback to customers regarding
order activity. NWS provides its customers and suppliers with the ability to
directly enter and track orders via electronic data interchange. In addition,
NWS' proprietary information systems provide its sales and marketing personnel,
customers and suppliers with access to a database of information regarding the
purchase and sale of alcohol-based beverages in specific geographic markets.
NWS' suppliers have immediate access to information regarding product and
demographic trends within specific geographic markets and NWS' customers have
access to information regarding popular products or other trends from similarly
situated retail locations. Management believes that its management information
systems enhance its operating performance and improve its relationships with
customers and suppliers.
Competition
There are significant barriers to entry into the wholesale wine and spirits
distribution business. These barriers include established supplier-distributor
relationships, specialized distribution equipment such as material handling
systems and delivery vehicles, important industry knowledge regarding pricing,
inventory management, and distribution logistics. Historically, it is extremely
rare for organizations not already engaged as wine and spirits distributors to
enter other markets. New distributors typically enter existing markets through
acquisition.
The wine and spirits wholesale distribution business is highly competitive.
NWS' primary competition in Illinois includes Romano Brothers and Judge & Dolph,
and to a lesser degree Pacific Wine. In Indiana, the only competitor of
consequence is Olinger (a partnership of Glazer and Romano). The Olinger
operation has become a more formidable competitor in Indiana with the corporate
strength and relationships that Glazer and Romano lend. None of the ten largest
United States distributors competes with NWS in Michigan. Distributors compete
for new suppliers or brands based on reputation, market share, access to
customers and ability to satisfy supplier demands. This will be particularly
relevant in the short term as the industry continues to consolidate as evidenced
by the sale of the Seagram brands to Diageo in 2001. Given its size, supplier
relationships, effective sales and marketing organization and low cost efficient
distribution networks, NWS is well positioned to compete in Indiana, Illinois
and Michigan.
- 13 -
Environmental Matters
NWS currently owns and leases a number of properties, and historically it
has owned and/or leased others. Under applicable environmental laws, NWS may be
responsible for remediation of environmental conditions relating to the presence
of 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 NWS is not aware of the presence of
hazardous substances requiring remediation, there can be no assurance that
releases unknown to NWS have not occurred. Except for blending and bottling of a
few of its own brands, NWS 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.
Employees
As of March 31, 2002, NWS had approximately 1,618 employees. Approximately
157 employees in Michigan and 465 employees in Illinois are represented by labor
unions. In Illinois, NWS has relationships with three unions:
(1) Teamsters Union Local 744, annual agreements expiring March 30, 2004
and March 30, 2005;
(2) Liquor and Allied Workers Union Local 3, annual agreements expiring
September 30, 2004 and October 31, 2004; and
(3) Teamsters, Chauffeurs & Helpers Union Local 50, expiring August 31,
2004.
In Michigan, NWS has relationships with four unions:
(1) Teamsters Union Local 337, expiring March 4, 2005;
(2) Teamsters Union Local 406, expired March 1, 2002
(3) Teamsters Union Local 299, expiring March 2, 2004; and
(4) Teamsters Union Local 486, expiring March 5, 2004.
The Company's contract with Local 406 has been ratified, but has not been
finalized. It is the Company's expectation that both parties will sign the
contract by June 1, 2002, with an effective date of March 1, 2002. Employees are
currently operating under a renewable 30 day contract extension period.
Employees of NWS in Indiana are not represented by any labor unions.
NWS has not experienced any work stoppages in more than 19 years as a result of
labor disputes and considers its employee relations to be good.
- 14 -
Regulatory Considerations
The manufacturing, importation, distribution and sale of alcohol-based
beverages is subject to regulation by the federal government through the
Department of the Treasury, Bureau of Alcohol, Tobacco and Firearms (BATF), as
well as by state and local regulatory agencies. Suppliers, distributors and
customers must be properly licensed in order to sell alcohol-based beverages.
In most states, the alcohol-based beverage industry operates within what is
commonly referred to as a three-tier system of distribution. The three tiers are
identified as follows:
(1) Tier one is comprised of suppliers that produce alcohol-based
beverages and/or importers of alcohol-based beverages.
(2) Tier two is comprised of distributors, such as NWS.
(3) Tier three is comprised of retail licensees.
Under this system, suppliers sell to distributors, distributors sell to
retailers, and retailers sell to consumers. Suppliers may not sell to retailers
or consumers and distributors may not sell directly to consumers. Most states
prohibit suppliers or distributors from having an interest in retail licensees.
NWS directly and through its affiliates holds federal basic permits and state
permits/licenses as a distributor and importer. Also, NWS-Illinois holds
out-of-state shipper permits that allow it to ship products from one state to a
licensed distributor in any one of the other states.
NWS is required to have each of its officers, directors and principal
stockholders who owns 5% or more of the issued and outstanding stock qualified
by federal and state governmental agencies to have an interest in a licensed
company. NWS' officers, directors and principal stockholders have been, or are
in the process of being, deemed to be qualified parties by BATF and state
regulatory agencies.
Suppliers and retail licensees selling directly to consumers are more
heavily regulated than distributors by governmental authorities. Distributors
like NWS face scrutiny in a number of important areas, including initial
licensing or permitting and sales and marketing activities with or on behalf of
retail customers. The distributors may not give or transfer anything of value to
their customers in exchange for business or other consideration. The definition
of "value" differs from state to state. NWS participates in significant
promotional activities for suppliers and customers. Suppliers also are
increasingly asking distributors to be responsible for activities and related
costs formerly undertaken by suppliers as suppliers pursue ways to reduce their
operating costs. These increased demands will likely challenge distributors,
including NWS, which desire to meet the wishes of their suppliers and customers.
As a result, NWS regularly provides training and education programming for its
sales and marketing personnel.
NWS believes that it is in compliance with applicable regulations in all
material respects. Consistent with industry practice, the sales and marketing
activities permitted by distributors for the benefit of tier one suppliers are
generally regulated by state licensing authorities, many of which regularly
advise distributor representatives of activities that would not be the subject
of enforcement action for failure to comply with all regulations they
administer. NWS relies on such enforcement guidance, which is subject to change
at the discretion of the regulatory authorities, in determining the scope of its
permitted sales and marketing activities.
- 15 -
As part of its regulatory compliance program, NWS is in frequent contact
with regulatory agencies so that NWS can:
(1) Be kept current on regulatory developments affecting NWS.
(2) Obtain answers from the agencies to questions from company personnel
regarding compliance issues.
(3) Encourage enforcement of applicable laws and regulations on a
consistent basis throughout its markets.
NWS believes that prompt and consistent enforcement by the regulatory agencies
is important and benefits NWS.
Reorganization of the Company
Historically, NWS' operations in Indiana, Michigan and Illinois have been
conducted through wholly owned subsidiaries for Indiana, NWS-Indiana, and
Michigan, NWS-Michigan, and through an affiliate for Illinois, NWS-Illinois.
Prior to the reorganization, James E. LaCrosse, or a trust for the benefit of
his family, and Norma M. Johnston owned substantially all of the voting and
non-voting shares of common stock of NWS-Indiana and, together with Martin H.
Bart, owned substantially all of the voting and non-voting shares of common
stock of NWS-Illinois.
In December, 1998, a reorganization took place which created a new holding
company, NWS, into which all of the shares of capital stock in NWS-Indiana and
NWS-Illinois owned by Mr. LaCrosse, or a trust for the benefit of his family, or
Mrs. Johnston were contributed in exchange for shares of NWS. NWS-Indiana
subsequently distributed all of its shares in NWS-Michigan to NWS. Finally,
NWS-LLC was created as a new limited liability company subsidiary of
NWS-Illinois into which substantially all of NWS' Illinois operations were
transferred. NWS-Illinois has 100% voting stock ownership in NWS-LLC and
economic ownership is 75% by NWS-Illinois and 25% by Mr. Bart. However, Mr. Bart
will not share in profits of NWS-LLC until preference requirements of
NWS-Illinois for operating advances have been repaid. Mr. LaCrosse, or a trust
for the benefit of his family, and Mrs. Johnston substantially wholly own NWS.
The primary purpose of the reorganization was to establish a holding
company structure for NWS-Indiana and all of its significant affiliated
companies. The reorganization was accounted for as a combination of entities
under common control, similar to a pooling-of-interest. As such, the NWS
financial statements have been presented to reflect this accounting treatment.
Item 2. Properties
NWS' distribution facilities consist of four master warehouses, three
hyper-terminals and five cross-docking facilities. NWS' corporate headquarters
are located in Indianapolis, Indiana.
The master warehouses, located in Indianapolis, Chicago, Detroit and
Champaign, serve as the primary storage facilities and regional offices for NWS.
The Chicago warehouse contains approximately 650,000 square feet of warehousing
space, including a designated temperature controlled area for
temperature-sensitive products. The Indianapolis warehouse contains
approximately 351,000 square feet of warehousing space, including a designated
temperature controlled area for temperature-sensitive products. The Detroit
warehouse consists of approximately 238,000 square feet of warehousing space,
including a material handling system and eight shipping docks. The Champaign
warehouse contains 50,000 square feet of warehousing space and is designed to
hold more high volume products for delivery to customers in central and southern
Illinois.
- 16 -
The following chart lists NWS' warehouses and delivery, production and
office facilities:
Total
Owned/ Square
Location Leased Feet Principal Function
-------- ------ ---- ------------------
Indiana Indianapolis Owned 351,000 Master Warehouse/Office
South Bend Owned 76,900 Hyper-Terminal/Office
Evansville Owned 5,800 Cross-Docking Facility
Evansville Owned 2,400 Office
Ft. Wayne Leased 5,500 Office
Crown Point Leased 7,900 Office
Indianapolis Owned 3,500 Office - Leased to Perrier
Indianapolis Owned 15,000 Warehouse - Leased to Perrier
Indianapolis Owned 19,500 Leased Office Property
Connecticut Stamford Leased 5,700 Office
Illinois Chicago Owned 650,000 Master Warehouse/Office
Chicago Leased 1,840 Leased Office Property
Champaign Leased 50,000 Master Warehouse/Office
Peoria Leased 56,000 Hyper-Terminal/Office
Collinsville Leased 14,200 Cross-Docking Facility/Office
Rockford Leased 5,000 Office
Springfield Leased 1,000 Office
Michigan Detroit (Brownstown) Leased 238,000 Master Warehouse/Office
Grand Rapids Leased 100,000 Hyper-Terminal/Office
Escanaba Leased 7,500 Cross-Docking Facility/Office
Saginaw Leased 1,000 Cross-Docking Facility
Traverse City Leased 5,000 Cross-Docking Facility
NWS' lease agreements for the Detroit master warehouse and the Grand Rapids
hyper-terminal each have a ten-year term, expiring April 20, 2007 and January
31, 2007, respectively, and provide NWS with an option to purchase.
Item 3. 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.
- 17 -
Item 4. Submission of Matters to a Vote of Security Holders
None.
- 18 -
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
There is no established trading market for the common stock of NWS.
Item 6. Selected Consolidated Financial Data
You should read the following summary historical financial information in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto included elsewhere herein.
Distribution fees include our per case distribution fee for cases of
spirits delivered in and on behalf of the State of Michigan. We do not take
title to or finance any inventory in Michigan. Please also note that we have
elected "S" corporation status under the Internal Revenue Code and consequently,
we do not incur liability for federal and state income taxes.
The following will also assist in the review of the following financial
information:
o For purposes of calculating earnings to fixed charges, earnings
consist of net income plus fixed charges. Fixed charges consist of
interest expense, amortization of debt expense and discount or premium
relating to indebtedness and the portion of rental expense on
operating leases which we estimate to be representative of the
interest factor attributable to rental expense.
- 19 -
Years Ended March 31,
(Dollars and cases in thousands, except per case amount)
-----------------------------------------------------------------
2002 2001 2000 1999 1998
Statement of Income Data:
Net product sales................... $ 659,594 $ 636,879 $ 603,625 $ 535,355 $ 505,141
Distribution fees................... 21,963 21,573 20,770 17,832 16,270
--------- --------- --------- --------- ---------
Total revenue....................... 681,557 658,452 624,395 553,187 521,411
Cost of products sold............... 530,910 513,928 488,444 436,734 411,734
--------- --------- --------- --------- ---------
Gross profit........................ 150,647 144,524 135,951 116,453 109,677
Selling, general and
administrative expenses........... 131,072 125,345 119,569 104,958 100,136
--------- --------- --------- --------- ---------
Income from operations.............. 19,575 19,179 16,382 11,495 9,541
Interest expense.................... (11,934) (13,214) (13,274) (11,037) (9,672)
Gain on sale of assets 47 7,835 173 188 4,139
Other income........................ (228) 325 1,139 341 2,085
--------- --------- --------- --------- ---------
Income before extraordinary item.... 7,460 14,125 4,420 987 6,093
Extraordinary item.................. --- --- --- 318 ---
--------- --------- --------- --------- ---------
Net income.......................... $ 7,460 $ 14,125 $ 4,420 $ 669 $ 6,093
========= ========= ========= ========= =========
Other Financial Data:
EBITDA (1).......................... $ 27,850 $ 28,069 $ 25,287 $ 19,869 $ 16,656
EBITDA margin....................... 4.1% 4.3% 4.0% 3.6% 3.2%
Cash provided by operating
activities........................ 22,030 7,357 16,648 6,013 9,783
Cash provided (used)
by investing activities........... (5,307) 2,717 (7,715) (20,846) (9,908)
Cash provided (used) by
financing activities............. (9,082) (9,539) (7,282) 15,371 (1,900)
Depreciation and amortization....... 8,275 8,890 8,905 8,374 7,115
Capital expenditures(2)............. 4,332 6,083 6,672 7,858 13,952
Ratio of earnings to fixed charges.. 1.5x 1.9x 1.3x 1.1x 1.5x
Adjusted EBITDA (1)................. 28,746 29,345 26,226 20,415 17,226
Operating Statistics:
Product Sales Operations
Cases shipped (spirits and wine).... 6,351 6,425 6,394 6,182 6,343
Gross profit margin................. 19.5% 19.3% 19.1% 18.4% 18.5%
Fee Operations
Cases shipped (spirits)............. 2,721 2,684 2,786 2,731 2,545
Distribution fee per case........... $ 7.48 $ 7.32 $ 6.50 $ 6.50 $ 6.50
As of March 31,
(in thousands)
-----------------------------------------------------------------
2002 2001 2000 1999 1998
Balance Sheet Data
Cash................................ $ 11,735 $ 4,094 $ 3,559 $ 1,908 $ 1,370
Total assets........................ 201,405 192,290 188,197 178,868 168,084
Total debt.......................... 109,805 110,571 112,471 117,222 102,434
Stockholders' equity ............... 23,095 24,669 18,183 16,266 13,564
- 20 -
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(1) EBITDA is defined as income from operations plus depreciation and
amortization. Adjusted EBITDA is defined as EBITDA plus non-cash LIFO
charges, as follows:
Years Ended March 31
(in thousands)
--------------------------------------------------------
2002 2001 2000 1999 1998
EBITDA................. $ 27,850 $ 28,069 $ 25,287 $ 19,869 $ 16,656
LIFO charge............ 896 1,276 939 546 570
-------- -------- -------- -------- --------
Adjusted EBITDA..... $ 28,746 $ 29,345 $ 26,226 $ 20,415 $ 17,226
======== ======== ======== ======== ========
EBITDA is presented because it is a widely accepted financial indicator
used by investors and analysts to analyze and compare companies on the
basis of debt service capability. Adjusted EBITDA is presented because we
believe it may assist in evaluating our ability to service our
indebtedness, including the senior notes. EBITDA and Adjusted EBITDA are
not intended to represent cash flows for the periods presented, nor have
they been presented as an alternative to operating income as an indicator
of operating performance and should not be considered in isolation or as a
substitute for measures of performance and cash flow prepared in accordance
with generally accepted accounting principles. The EBITDA and Adjusted
EBITDA information reflected above may not be comparable to similarly
titled measures used by other companies.
(2) The breakdown of our capital expenditures by significant project is set
forth below:
Years Ended March 31
(in thousands)
--------------------------------------------------------
2002 2001 2000 1999 1998
Business expansion..... $ 1,144 $ 2,374 $ 3,112 $ 4,856 $ 10,758
Information systems.... 1,418 1,750 970 1,281 1,781
Maintenance............ 1,770 1,959 2,590 1,721 1,413
-------- -------- -------- -------- --------
$ 4,332 $ 6,083 $ 6,672 $ 7,858 $ 13,952
======== ======== ======== ======== ========
Item 7. Management's Discussion And Analysis Of Financial Condition And Results
Of Operations
You should read the following discussion in conjunction with "Selected
Consolidated Financial Data" and NWS' historical consolidated financial
statements and the accompanying notes included elsewhere in this Form 10-K.
Unless otherwise indicated, all references to years are to NWS' fiscal year
ended March 31.
Disclosure Regarding Forward-Looking Statements
This Form 10-K, including, but not limited to the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business"
sections, 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.
- 21 -
Overview
National Wine & Spirits, Inc. ("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, Kentucky, and
from U.S. Beverage, L.L.C. (USB), the Company's national import and craft beer
marketing business. The Company's reported revenues include net product sales in
Indiana, Michigan, Illinois, and from USB. Distribution fee revenue is from the
Michigan operations that derives revenue from a per case charge for warehousing
and delivering products for the State of Michigan.
The Company increased both product and distribution fee revenue for the
year ended March 31, 2002, as compared to the prior annual period. The revenue
increase was primarily from the increased sales of premium priced products such
as higher end vodkas, brandies, rums, and fine wines. This was evidenced by flat
case sales for the year ended March 31, 2002 in the spirits and wine categories
with revenue growth of 2.6% and 0.4% respectively. Revenue from wine sales was
adversely affected by the economic downturn that the United States economy
experienced during 2002 and 2001, and the depressed travel activity by consumers
which affected the hotel and the on-premise sales. Overall, the Company was
pleased with the results of the year ended March 31, 2002, which affirmed the
relative stability of the alcoholic beverage industry during periods of economic
uncertainty. Distribution fee revenue increased slightly due to the fee increase
of $0.16 per case effective February 1, 2002 and an increase in case volume
compared to the prior annual period. Gross margin on product sales increased
slightly to 19.5% for the fiscal year ended March 31, 2002 as compared to 19.3%
for the prior year. The increase in revenue and gross margin offset operating
expense increases, resulting in operating income of $19.6 million, an increase
of $0.4 million over the results for fiscal 2001. Net income decreased $6.7
million for the year ended March 31, 2002, as compared to the prior annual
period. The decrease was primarily due to the gain from the sale of the bottled
water division of $7.5 million during the previous annual period. Net income,
excluding the gain from the sale of the bottled water division, increased 13.0%
or $0.9 million for the year ended March 31, 2002, as compared to the prior
annual period.
Outlook
Dominating news specific to the wine and spirits distribution business is
the continued effect of the sale of the Seagram brands to Pernod and Diageo. The
sale of the Seagram's brands from Vivendi to Diageo and Pernod Ricard occurred
in early 2001 and was approved by the Federal Trade Commission ("FTC") in
December 2001. Diageo, the largest supplier, has requested formal proposals
(RFP) through an RFP process for the right to distribute their brands within a
given state. NWS submitted proposals mid March, 2002, which are currently being
evaluated by Diageo. The Company expects a decision by Diageo by mid summer
2002.
Pernod Ricard, as expected, consolidated the Seagram brands they purchased
into their existing distribution network. As a result, the Company will
discontinue representing Pernod Ricard brands during fiscal 2003 in Michigan but
continue to represent them in Illinois and Indiana. The Company estimates the
fee revenue effect from the loss of these Pernod Ricard brands to be
approximately $1.5 million for fiscal 2003. Other suppliers are developing
strategies to deal with the brand sales to Diageo and Pernod Ricard. Most
recently, Bacardi and Brown-Forman have entered into an alliance (Gemini
Alliance) intended to leverage their business to gain advantages through their
distributor partners. NWS management has submitted what we feel are winning
proposals to Diageo. However, if Diageo does not accept one or more of the
Company's proposals we anticipate 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.
- 22 -
Results of Operations
The following table includes information regarding total cases shipped by
NWS in 2002, 2001 and 2000:
Years ended March 31,
(Cases in thousands)
-------------------------------------------------
2002 2001 2000
--------------- ---------------- ------
Percent Percent
Cases Change Cases Change Cases
Wine (product sales operations)........... 2,952 (2.6)% 3,032 (0.4)% 3,044
Spirits (product sales operations)........ 3,399 0.2% 3,393 1.3% 3,350
Spirits (distribution fee operations)..... 2,721 1.4% 2,684 (3.7)% 2,786
Total wine and spirits.................. 9,072 (0.4)% 9,109 (0.8)% 9,180
Other*.................................... 4,972 (1.0)% 5,021 17.5% 4,274
------ ---- ------ ---- ------
Total................................... 14,044 (0.6)% 14,130 5.0% 13,454
====== ==== ====== ==== ======
*U.S. Beverage's results are included in the other category for the current year and prior years.
Fiscal 2002 Compared with Fiscal 2001
Revenue. The Company reported product sales for the year ended March 31,
2002 of $659.6 million, an increase of $22.7 million, or 3.6% over the prior
year period. The increase was primarily the result of continued consumer
preference for premium-priced goods in both the spirits and wine categories. The
revenue growth was primarily from the spirits category, which experienced a 2.6%
increase in revenue on flat case sales for the current fiscal year as compared
to the prior annual period. Revenue from wine sales remained stable, increasing
0.4% for the current fiscal year on slightly lower case sales as compared to the
prior annual period. The case sales decline was primarily the result of the
Indiana market, which did not represent the Sutter Home line during the most
recent fiscal year, which adversely affected case sales by 115,000 as compared
to the prior annual period. Distribution fee revenue remained stable at $22.0
million for the year ended March 31, 2002, compared to $21.6 million for the
pror annual period. A rate increase authorized by the State of Michigan of $0.16
per case was effective February 1, 2002.
Gross Profit. Gross profit dollars on product sales increased $5.7 million
for the year ended March 31, 2002, an increase of 4.7% from the prior year
period. Gross profit percentage on product sales was 19.5% for the year ended
March 31, 2002 versus 19.3% for the prior year period. The increase in gross
margin dollars were primarily from increased revenue in the Illinois market and
increased margin percentage on stable revenue for the Indiana market.
Operating Expenses. Total operating expenses for the year ended March
31, 2002 increased $5.7 million, or 4.6% over the operating expenses for the
year ended March 31, 2001. The Company had stable warehouse and delivery costs,
while experiencing higher costs for professional fees, sales and marketing
wages, and casualty and health insurance.
Warehouse and delivery expenses were essentially even with the prior year's
amounts, decreasing 0.1% or $0.1 million for the year ended March 31, 2002.
Total warehouse and delivery expenses, as a percentage of total revenue,
declined slightly to 5.8% during the current year period as compared to 6.0% for
the prior annual period. The decrease was primarily due to the savings
experienced in the Indiana market from lower case sales of water and
non-alcoholic products, along with construction of more efficient warehousing
facilities.
Selling expenses increased $1.1 million to $46.8 million for the year ended
March 31, 2002 as compared to the prior year period. Additional sales and
marketing costs, including staff and wage increases were primarily responsible
for the greater selling expenses.
- 23 -
Total administrative expense increased $4.6 million or 11.6% for the year
ended March 31, 2002 versus the prior annual period. Increases in health &
welfare benefits, casualty and workman's compensation insurance, and
professional fees were primarily responsible for the increase from the prior
annual period. The Company has experienced higher costs for employee's health
care throughout the current fiscal year, both in the partially self funded plan,
and by increases in multi-employer fully insured plans that cover bargaining
unit employees. The Company renewed its property and casualty insurance in
December, 2001 and expects to report increased costs for the current policy
period due to increased rates on facilities, and excess liability coverage.
Professional fees have increased from the comparable prior annual period due to
costs related to the implementation of enhanced internal control procedures and
the change of auditors from the prior year.
Income from Operations. Total operating income increased $0.4 million, or
2.1% for the year ended March 31, 2002, over the prior annual period. The
increase in operating income was primarily due to the increased gross profit
dollars and reduced operating expenses by the Indiana market for the year ended
March 31, 2002 as compared to the prior annual period.
Interest Expense. Interest expense decreased $1.3 million or 9.7% for the
year ended March 31, 2002 compared to the prior year. The Company was able to
take advantage of LIBOR pricing, which reduced the Company's rate relative to
prime based pricing on its revolving line of credit. The Company's reduction in
its average borrowings on the revolving line of credit and the reductions in the
prime rate were primarily responsible for the reduced expense for the year ended
March 31, 2002, compared to the prior annual period. The Company's revolver rate
was 4.75% at March 31, 2002 and was 8.5% at March 2001.
Other Income. Other income decreased $8.3 million from the comparable
annual period, primarily due to the $7.5 million gain from the sale of the
bottled water division in June 2000, increased equity losses and impairment in
value from the investment in eSkye, and reduced interest income due to
reductions in balances of the shareholder notes in NWSC.
Net Income. Net income decreased $6.7 million for the year ended March 31,
2002, as compared to the prior annual period. The decrease was primarily due to
the gain from the sale of the bottled water division of $7.5 million during the
previous annual period. Net income, excluding the gain from the sale of the
bottled water division, increased 13.0% or $0.9 million for the year ended March
31, 2002, as compared to the prior annual period.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization (EBITDA) for the year ended March
31, 2002 was $27.9 million, a decrease of $0.2 million, or 0.8% as compared to
the prior annual period.
Fiscal 2001 Compared with Fiscal 2000
Revenue. The Company reported product sales for the year ended March 31,
2001 of $636.9 million, an increase of $33.3 million, or 5.5% over the prior
year period. The increase was primarily the result of consumer demand for
premium-priced spirits and wines, along with growth of the United States
Beverage division. Price increases on popular brands, such as tequila, also
contributed to the revenue increase this year versus the prior year period.
Distribution fee revenue increased 3.9% to $21.6 million, primarily the result
of a rate increase to $7.32 a case from $6.50 per case, as authorized by the
State of Michigan. Case volume from fee operations declined due to the sale of
the Black Velvet, Christian Brothers (both in May 2000) and Arrow brands
(February 2000) by Diageo. The Company added the Allied Domecq line in Michigan
(July 2000); however, the case volume was not equal to the Diageo brands that
were sold.
Gross Profit. Gross profit dollars on product sales increased $7.8 million
for the year ended March 31, 2001, an increase of 6.7% from the prior year
period. Gross profit percentage on product sales was 19.3% for the year ended
March 31, 2001 versus 19.1% for the prior year period. The increased sales of
premium spirits and wines, which carry a higher gross profit percentage, along
with the growth of the United States Beverage division, were primarily
responsible for the gross margin dollar and percentage increase.
- 24 -
Operating Expenses. Total operating expenses for the year ended March 31,
2001 increased $5.8 million, or 4.8% over the operating expenses for the year
ended March 31, 2000. Expanded sales operations in the United States Beverage
division, along with increased brand promotion costs in the product markets,
were primarily responsible for the operating expense increase.
Operating expenses for the annual period ended March 31, 2001 in the fee
operations increased $1.7 million, or 8.3% from the prior year period.
Operational costs associated with increased bottle or less than full case
orders, and expansion of the sales area were primarily responsible for the cost
increases.
Warehouse and delivery expenses increased 3.3% or $1.3 million for the year
ended March 31, 2001 versus the prior year period. Operational costs associated
with the increased bottle orders in our fee market contributed to higher
warehouse costs. Total warehouse and delivery expenses, as a percentage of total
revenue, declined slightly to 6.0% during the current year period as compared to
6.2% for the prior annual period.
Selling expenses increased $4.6 million to $45.7 million for the year ended
March 31, 2001 as compared to the prior year period. Expansion of the United
States Beverage sales area due to the Grolsch brand addition along with
increased brand support for the Hooper's Hooch products were primarily
responsible for the sales expense increase. Expenses for the brokerage operation
in our fee market increased $0.3 million from the prior year period. This
represents a leveling off for the brokerage expenses, while revenue from the
brokerage operation increased $0.2 million for the annual period ended March 31,
2001, versus the comparable year period.
Total administrative expense remained stable at $40.0 million. Cost
increases in casualty and health insurance were offset by savings on
communication and wages. Administrative expense as a percentage of total revenue
was 6.1% for the year ended March 31, 2001, down slightly from 6.4% for the
prior annual period.
Income from Operations. Total operating income increased $2.8 million, or
17.1% for the year ended March 31, 2001, over the prior annual period. The
revenue gains and an increased gross profit percentage more than offset the
increases in operating expenses. Operating income for the product markets
increased $3.7 million, or 23.3% from the prior annual period due to the
increased gross profit. The fee operations experienced a decline in operating
income for the year ended March 31, 2001 of $0.9 million due to increased
operational costs and the decreased case sales from the prior annual period.
Interest Expense. Interest expense remained stable, decreasing $0.1 million
for the year ended March 31, 2001 over the prior annual period. The Company
reduced the balance outstanding on the revolving credit facility with the
proceeds of the sale of the bottled water division, and was able to take
advantage of LIBOR pricing, which reduced the Company's rate relative to prime
based pricing. The Company's revolver rate was 9.5% at March 31, 2000 and was
8.5% during March 2001.
Other Income. The gain from the sale from the bottled water division of
$7.5 million was the primary reason for the increase of $6.8 million in other
income for the year ended March 31, 2001 as compared to the prior annual period.
Rental income increased slightly due to facilities rented to the purchaser of
the bottled water division and office facilities to eSkye Solutions, Inc.
The Company's share of income from Commonwealth Wine & Spirits, L.L.C.
increased $0.2 million during the year ended March 31, 2001 to $0.3 million as
compared to the prior annual period. Distributions received from Commonwealth
were $0.8 million for the year ended March 31, 2001 as compared to $0.5 million
for the prior annual period.
- 25 -
The Company's share of losses from eSkye Solutions, Inc. was $0.8 million
for the year ended March 31, 2001 an increase of $0.5 million as compared to the
prior annual period.
Net Income. Net income increased $9.7 million for the year ended March 31,
2001, as compared to the prior annual period. The increase was due to the gain
from the sale of the bottled water division along with increased revenue and
gross profit. Net income from the product markets, excluding the gain from the
sale of the bottled water division, increased 55.4% to $8.6 million for the year
ended March 31, 2001, as compared to $5.5 million for the prior annual period.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization (EBITDA) for the year ended March
31, 2001 increased $2.8 million, or 11.0% to $28.1 million as compared to the
prior annual period.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund accounts
receivable and inventories in Indiana, Illinois, and its U.S. Beverage
operations. NWS has historically satisfied its cash requirements principally
through cash flow from operations, trade terms and bank borrowings.
NWS' working capital and borrowings under its revolving credit facility
fluctuate over the course of each year. In fiscal 2002, NWS' minimum and maximum
amount of borrowings under the current $60.0 million revolving credit facility,
at any one time, was $0.0 in March 2002 and $29.0 million in January, 2002. At
March 31, 2002 NWS' did not have a balance outstanding under its revolving
credit facility.
Net cash provided by operating activities for the year ended March 31, 2002
was $22.0 million, as compared to $7.4 million for the prior year; an increase
of $14.6 million. The $14.6 million increase primarily resulted from $13.7
million in cash made available by net changes for the year ended March 31, 2002
in certain working capital accounts as compared to changes in those accounts
during the prior year.
Net cash used by investing activities increased $8.0 million for the year
ended March 31, 2002 as compared to the prior annual period. This net increase
in funds used was primarily the result of the receipt of funds from the sale of
the bottled water division during the prior fiscal year and increased purchases
of intangibles during the current fiscal year. The intangible purchases were
primarily to fund distribution agreements for USB. The Company was able to limit
spending on capital expenditures related to additional capacity or real estate
and the company expects capital expenditures in fiscal 2003 to be between $5
million and $6 million.
Net cash used by financing activities was $9.1 million for the year ended
March 31, 2002, as compared to $9.5 million used during the prior annual period.
The Company had distributions to stockholders during the year that were for tax
liabilities and used to repay shareholder receivables. The Company's
distributions to stockholders were reduced by $2.1 million for the year ended
March 31, 2002 as compared to the prior annual period. Stockholder distributions
of $8.5 million for the year ended March 31, 2002 were distributed for the
following purposes: $5.7 million for stockholders' tax liabilities, $2.3 million
for the repayment of stockholder debts to the Company, and $0.5 million to a
stockholder that has no obligation to the Company. Payments of long-term debt
increased primarily from the Company purchasing $2.1 million of its senior notes
from the open market during September, 2001.
Total assets increased to $201.4 million at March 31, 2002, a $9.1 million
increase from the prior year. This increase was primarily the result of
increased cash of $7.6 million and inventories of $2.3 million as compared to
the prior annual period. Total debt at March 31, 2002 of $109.8 million remained
constant with the prior year's ending balance of $110.6 million. The Company had
$60.0 million available under the revolving line of credit at March 31, 2002.
- 26 -
The Company believes that 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.
Other
As a matter of policy, the Company plans to review and evaluate all
professional services firms every three to four years. This review will include
but is not limited to legal, audit and information systems services. The next
scheduled review will occur during Fiscal 2003.
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.
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.
Recently Issued Accounting Pronouncements
See Note 1 to the financial statements in Item 8.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to fluctuations in interest rate risk as a result of
its indebtedness. The Company's objectives in managing its exposure to changes
in interest rates are to limit the effect of interest rate changes on earnings
and cash flows and to minimize the amount of borrowings under the Company's
revolving line of credit. This approach to managing interest rate risk does not
consider the changes in the Company's competitive environment indirectly related
to changes in interest rates and management's responses to these changes.
- 27 -
Item 8. Financial Statements and Supplementary Data
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
National Wine & Spirits, Inc.
We have audited the accompanying consolidated balance sheet of National Wine &
Spirits, Inc. (an Indiana Corporation) and subsidiaries as of March 31, 2002 and
the related consolidated statement of income, stockholders' equity and cash
flows for the year then ended. These consolidated financial statements and
schedule referred to below are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
National Wine & Spirits, Inc., as of March 31, 2002 and the consolidated results
of their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in Item
14(a) is presented for purposes of complying with the Securities and Exchange
Commission's rules and is not a required part of the basic consolidated
financial statements. The information as of and for the year ended March 31,
2002 contained in this schedule has been subjected to the auditing procedures
applied in our audit of the basic consolidated financial statements and, in our
opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
ARTHUR ANDERSEN LLP
Indianapolis, Indiana,
May 21, 2002.
- 28 -
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
National Wine & Spirits, Inc.
We have audited the accompanying consolidated balance sheet of National Wine &
Spirits, Inc. as of March 31, 2001 and the related consolidated statements of
income, stockholders' equity and cash flows for each of the two years in the
period ended March 31, 2001. Our audits also included the financial statement
schedule listed in the Index at Item 14 (a) for the years ended March 31, 2001
and 2000. These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of National Wine &
Spirits, Inc. at March 31, 2001 and the consolidated results of its operations
and its cash flows for each of the two years in the period ended March 31, 2001
in conformity with accounting principles generally accepted in the United
States. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein for
the years ended March 31, 2001 and 2000.
The consolidated financial statements as of March 31, 2001 and for each of the
two years in the period ended March 31, 2001 have been adjusted retroactively to
adopt the equity method of accounting as described in Note 2.
Ernst & Young LLP
Indianapolis, Indiana
June 26, 2001, except for
Note 2 as to which the
date is December 28, 2001.
- 29 -
National Wine & Spirits, Inc.
Consolidated Balance Sheets
March 31
2002 2001
------------- -------------
Assets
Current assets:
Cash and cash equivalents $ 11,735,000 $ 4,094,000
Accounts receivable, less allowance for doubtful
accounts of $1,291,000 ($1,737,000 in 2001) 37,557,000 36,738,000
Inventory 81,940,000 79,616,000
Prepaid expenses and other 7,366,000 6,494,000
------------- -------------
Total current assets 138,598,000 126,942,000
Property and equipment, net 41,440,000 43,734,000
Other assets:
Notes receivable 462,000 811,000
Cash surrender value of life insurance 3,368,000 2,821,000
Investment in Commonwealth Wine & Spirits, LLC 6,611,000 6,609,000
Investment in eSkye Solutions, Inc. 160,000 1,471,000
Intangible assets, net of amortization 9,342,000 9,290,000
Deferred pension costs 1,198,000 487,000
Deposits and other 226,000 125,000
Total other assets 21,367,000 21,614,000
------------- -------------
Total assets $ 201,405,000 $ 192,290,000
============= =============
Liabilities And Stockholders' Equity
Current liabilities:
Accounts payable $ 40,795,000 $ 35,739,000
Accrued payroll and payroll taxes 7,676,000 6,913,000
Excise taxes payable 6,053,000 5,401,000
Other accrued expenses 12,108,000 8,510,000
Current maturities of long-term debt --- 571,000
------------- -------------
Total current liabilities 66,632,000 57,134,000
Deferred pension liability 1,873,000 487,000
Long-term debt, less current maturities 109,805,000 110,000,000
------------- -------------
Total liabilities 178,310,000 167,621,000
Stockholders' equity:
Voting common stock, $.01 par value. 200,000 shares
authorized, 104,520 shares issued and outstanding 1,000 1,000
Nonvoting common stock, $.01 par value. 20,000,000 shares
authorized, 5,226,001 shares issued and outstanding 53,000 53,000
Additional paid-in capital 25,009,000 25,009,000
Accumulated deficit (1,293,000) (224,000)
Accumulated other comprehensive income-
unrecognized net pension loss (675,000) ---
------------- -------------
23,095,000 24,839,000
Notes receivable from stockholders, net --- (170,000)
------------- -------------
Total stockholders' equity 23,095,000 24,669,000
------------- -------------
Total liabilities and stockholders' equity $ 201,405,000 $ 192,290,000
============= =============
See accompanying notes.
- 30 -
National Wine & Spirits, Inc.
Consolidated Statements of Income
Years Ended March 31
-----------------------------------------------------
2002 2001 2000
------------- ------------- -------------
Net product sales $ 659,594,000 $ 636,879,000 $ 603,625,000
Distribution fees 21,963,000 21,573,000 20,770,000
------------- ------------- -------------
Total revenue 681,557,000 658,452,000 624,395,000
Cost of products sold 530,910,000 513,928,000 488,444,000
------------- ------------- -------------
Gross profit 150,647,000 144,524,000 135,951,000
Selling, general and administrative expenses:
Warehouse and delivery 39,610,000 39,657,000 38,401,000
Selling 46,840,000 45,691,000 41,072,000
Administrative 44,622,000 39,997,000 40,096,000
------------- ------------- -------------
131,072,000 125,345,000 119,569,000
------------- ------------- -------------
Income from operations 19,575,000 19,179,000 16,382,000
Interest expense:
Related parties (258,000) (405,000) (425,000)
Third parties (11,676,000) (12,809,000) (12,849,000)
------------- ------------- -------------
(11,934,000) (13,214,000) (13,274,000)
Other income (expense):
Gain on sales of assets 47,000 7,835,000 173,000
Interest income 286,000 738,000 892,000
Rental and other income 390,000 59,000 371,000
Equity in income of Commonwealth Wine & Spirits, LLC 407,000 315,000 131,000
Equity in losses of eSkye Solutions, Inc. (1,311,000) (787,000) (255,000)
------------- ------------- -------------
Total other income (expense) (181,000) 8,160,000 1,312,000
------------- ------------- -------------
Net income $ 7,460,000 $ 14,125,000 $ 4,420,000
============= ============= =============
See accompanying notes.
- 31 -
National Wine & Spirits, Inc.
Consolidated Statements of Stockholders' Equity
$.01 Par Value Accumulated
Common Stock Additional Other
-------------------- Paid-in Accumulated Comprehensive
Voting Non-Voting Capital Deficit Income Stockholders Equity
------- ---------- ----------- ------------- ------------- ------------ ------------
Balance at April 1, 1999 $ 1,000 $ 53,000 $25,009,000 $ (3,391,000) $ --- $ (5,406,000) $ 16,266,000
Net income --- --- --- 4,420,000 --- --- 4,420,000
Decrease in notes
receivable from
stockholders, net --- --- --- --- --- 2,294,000 2,294,000
Distributions to
stockholders --- --- --- (4,797,000) --- --- (4,797,000)
------- -------- ----------- ------------- ---------- ------------ ------------
Balance at March 31, 2000 1,000 53,000 25,009,000 (3,768,000) --- (3,112,000) 18,183,000
Net income --- --- --- 14,125,000 --- --- 14,125,000
Decrease in notes
receivable from
stockholders, net --- --- --- --- --- 2,942,000 2,942,000
Distributions to
stockholders --- --- --- (10,581,000) --- --- (10,581,000)
------- -------- ----------- ------------- ---------- ------------ ------------
Balance at March 31, 2001 1,000 53,000 25,009,000 (224,000) --- (170,000) 24,669,000
Net income --- --- --- 7,460,000 --- --- 7,460,000
Unrecognized net
pension loss --- --- --- --- (675,000) --- (675,000)
Comprehensive Income ------------
Decrease in notes 6,785,000
receivable from
stockholders, net --- --- --- --- --- 170,000 170,000
Distributions to
stockholders --- --- --- (8,529,000) --- --- (8,529,000)
------- -------- ----------- ------------- ---------- ------------ ------------
Balance at March 31, 2002 $ 1,000 $ 53,000 $25,009,000 $ (1,293,000) $ (675,000) $ --- $ 23,095,000
======= ======== =========== ============= ========== ============ ============
See accompanying notes.
- 32 -
National Wine & Spirits, Inc.
Consolidated Statements of Cash Flows
Years Ended March 31
2002 2001 2000
-------------- -------------- --------------
Operating activities:
Net income $ 7,460,000 $ 14,125,000 $ 4,420,000
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property and equipment 6,561,000 7,046,000 7,270,000
Amortization of intangible assets 1,714,000 1,844,000 1,635,000
Equity in losses of eSkye Solutions, Inc. 1,311,000 787,000 255,000
Equity in earnings of Commonwealth Wine & Spirits, LLC (407,000) (315,000) (131,000)
Provision for bad debt expense 552,000 599,000 544,000
Gain on sales of assets (47,000) (7,835,000) (174,000)
Increase in cash surrender value of life insurance (547,000) (552,000) (413,000)
Other 32,000 --- ---
Changes in operating assets and liabilities
Accounts receivable 892,000 2,307,000 (7,908,000)
Inventories (2,324,000) (9,310,000) (3,206,000)
Prepaid expenses and other receivables (3,135,000) (677,000) 2,036,000
(Increase) decrease in deposits and other (101,000) 56,000 (42,000)
Accounts payable 5,056,000 (2,196,000) 10,329,000
Accrued expenses and taxes 5,013,000 1,478,000 2,033,000
-------------- -------------- --------------
Net cash and cash equivalents provided by operating activities 22,030,000 7,357,000 16,648,000
Investing activities:
Purchases of property and equipment (4,332,000) (6,083,000) (6,672,000)
Purchases of intangible assets (1,841,000) (1,156,000) (1,996,000)
Acquisition of R.M. Gilligan, Inc., net of cash received --- --- (1,630,000)
Proceeds from sale of property and equipment 112,000 10,860,000 2,242,000
Investment in eSkye Solutions, Inc. --- (2,013,000) (500,000)
Distributions from Commonwealth Wine & Spirits, LLC 405,000 778,000 497,000
Collections on notes receivable 349,000 331,000 344,000
-------------- -------------- --------------
Net cash and cash equivalents (used) provided by investing
activities (5,307,000) 2,717,000 (7,715,000)
Financing activities:
Proceeds from line of credit borrowings 146,900,000 149,250,000 140,000,000
Principal payments on line of credit borrowings (146,900,000) (150,250,000) (143,700,000)
Principal payments on long-term debt (2,653,000) (900,000) (1,079,000)
Proceeds of borrowings from stockholder 258,000 284,000 97,000
Repayments on borrowings from stockholders (253,000) (191,000) (205,000)
Receipts on notes receivable from stockholders and others 2,095,000 2,849,000 2,402,000
Distributions to stockholders (8,529,000) (10,581,000) (4,797,000)
-------------- -------------- --------------
Net cash and cash equivalents used by financing activities (9,082,000) (9,539,000) (7,282,000)
-------------- -------------- --------------
Net increase in cash and cash equivalents 7,641,000 535,000 1,651,000
Cash and cash equivalents, beginning of year 4,094,000 3,559,000 1,908,000
-------------- -------------- --------------
Cash and cash equivalents, end of year $ 11,735,000 $ 4,094,000 $ 3,559,000
============== ============== ==============
See accompanying notes.
- 33 -
National Wine & Spirits, Inc.
Notes to Consolidated Financial Statements
March 31, 2002
1. Nature of Business and Summary of Significant Accounting Policies
Nature of Business and Principles of Consolidation
National Wine & Spirits, Inc. (NWS or the Company) is a holding company which
operates primarily in the wine and liquor wholesale distribution business. Based
in Indianapolis, National Wine & Spirits Corporation (NWSC) is a wholesale
distributor of liquor and wines throughout Indiana and also operates a division
for the distribution of cigars and accessories. Based in Chicago, NWS-LLC is a
wholesale distributor of liquor and wines throughout Illinois. NWSM and NWSM-LLC
are distributors of liquor and non-alcoholic products throughout Michigan. Based
in Connecticut, USB distributes and markets import, craft, and specialty beer
products throughout the United States.
The consolidated financial statements include the accounts of NWS, NWSC,
NWS-LLC, NWSM, NWSM-LLC, and USB, all of which NWS wholly owns or owns 100% of
the voting stock. 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. NWS performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company's cash, accounts receivable, accounts payable and certain other
accrued liabilities are all short-term in nature and the carrying amounts
approximate fair value. Long-term notes receivable and payable, except for the
Company's senior notes payable, have primarily variable interest rates, thus
their carrying amounts approximate fair value. The carrying value of the senior
notes payable approximates fair value.
- 34 -
Cash and Cash Equivalents
For purposes of the Consolidated Statement of Cash Flows, the Company considers
all highly liquid debt instruments purchased with an original maturity of three
months or less to be cash equivalents.
Inventory
Substantially all inventory is stated at the lower of cost, determined by the
last-in, first-out (LIFO) method, or market.
Inventory primarily consists of packaged beer, wine, liquor, cigars and
accessories. The Company also has an interest in certain bulk whiskey inventory,
which is being aged by the supplying distiller. This interest serves as
collateral for related notes payable to the distiller. In accordance with
industry practices, storage and handling costs incurred during the aging process
are included as a component of the cost of bulk whiskey. Bulk whisky represented
approximately $1,452,000 and $1,421,000 of the total inventory balance at March
31, 2002 and 2001, respectively.
Advertising Costs
Advertising costs are charged to operations when incurred. Advertising expense
was $3,610,000, $4,767,000 and $4,322,000 in 2002, 2001 and 2000, respectively.
Property and Equipment
Property and equipment are recorded at cost and are depreciated using primarily
the straight-line method over their expected useful lives as follows:
Buildings and improvements 10-40 years
Furniture and equipment 5-7 years
Warehouse equipment 7 years
Automobiles and trucks 5 years
- 35 -
Intangible Assets
Intangible assets consist of the following, net of accumulated amortization:
March 31,
2002 2001
-------------- --------------
Deferred loan financing costs $ 3,740,000 $ 4,505,000
Goodwill 1,251,000 1,355,000
Deferred Distribution Rights 3,997,000 2,616,000
Other 354,000 814,000
----------- -----------
$ 9,342,000 $ 9,290,000
=========== ===========
These costs are being amortized by the straight-line method (which, for deferred
financing costs, also approximates the yield method) over the terms of the
agreements or their estimated useful lives, which range from two to twenty
years. Accumulated amortization related to these assets was $6,866,000 and
$5,194,000 at March 31, 2002 and 2001, respectively.
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
$1,746,000 for this contract and recorded this amount as an intangible asset to
be amortized over the life of the five year contract.
Long-lived Assets
The carrying value of the long-lived assets is periodically reviewed by
management. If this review indicates that the carrying value may be impaired
then the impaired amount will be written off.
Other Accrued Expenses
March 31,
2002 2001
------------ -----------
Deferred revenue $ 3,348,000 $ 131,000
Accrued personal property taxes 2,361,000 2,111,000
Accrued interest expense 2,296,000 2,374,000
Accrued health claims 1,046,000 720,000
Other-accrued expense 3,057,000 3,174,000
------------ -----------
$ 12,108,000 $ 8,510,000
============ ===========
Deferred revenue represents cash advances from customers for certain imported
wines that are in their aging phase.
- 36 -
Income Taxes
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.
Revenue Recognition
NWSC, NWS-LLC, NWSM-LLC, and USB purchase inventory items for resale to
customers and are liable for payment to the suppliers, as well as collecting
payment from customers. NWSM receives a fixed fee per case of liquor distributed
for the State of Michigan (distribution fees) which is also responsible for
payments to suppliers. All Michigan shipments are cash on delivery.
Net sales and distribution fees are recognized at the time product is shipped
which is when title passes. Shipping and handling charged to customers is
included in Net Product Sales. For the years ended March 31, 2002, 2001, and
2000, the Company incurred delivery expenses of $16,533,000, $16,474,000, and
$16,759,000, respectively, which are included in warehouse and delivery expenses
in the accompanying Consolidated Statements of Income.
Recently Issued Accounting Pronouncements
The Company adopted SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities as amended by SFAS 137 and SFAS 138, as of April 1, 2001.
These standards require that all derivative instruments be recorded on the
balance sheet at fair value. The adoption of these standards did not have an
affect on the Company's annual results of operations or its financial position.
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 have on its earnings and financial position.
- 37 -
In June 2001, the Financial Accounting Standards Board issued SFAS No. 143,
Accounting for Asset Retirement Obligations with an effective date of June 15,
2002 which becomes effective for the Company on April 1, 2003. This standard
requires obligations associated with retirement of long-lived assets to be
capitalized as part of the carrying value of the related asset. The Company does
not believe the adoption of this standard will have an impact on its financial
statements.
FASB Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived
Assets (Statement 144), 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.
In April, 2002 the Financial Accounting Standards Board issued Statement No.
145: Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. This Statement amends FASB
Statement No. 13, Accounting for Leases, to eliminate an inconsistency between
the required accounting for sale-leaseback transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-leaseback transactions. This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings, or describe their applicability under changed conditions as
well as addresses the classifications of gains and losses on debt
extinguishment. The Company does not anticipate that there will be a material
impact on its financial statements.
On January 1, 2002, the Company adopted the Emerging Issues Task Force Issue
01-09: Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products). This statement provides guidance on when
consideration received by a customer from a vendor should be reflected as a
reduction of revenue or cost in the statement of income. Upon adoption of this
statement, financial statements for prior periods presented for comparative
purposes were reclassified to comply with the provisions of this statement. As a
result of adopting this statement, $2,029,000 of consideration paid to customers
was reflected as a reduction of revenue in the statement of income for the year
ended March 31, 2002. For the years ended March 31, 2001 and 2000, $2,361,000
and $1,362,000, respectively, was reclassed from selling expense to reduce
revenue in the Consolidated Statements of Income. These reclasses have no effect
on net income for any of the periods presented.
Reclassifications
Certain amounts in the 2001 and 2000 consolidated financial statements have been
reclassified to conform to the 2002 presentation.
- 38 -
2. Investment in Unconsolidated Subsidiaries
eSkye Solutions, Inc.
Prior to December 28, 2001, 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 No. 18 The Equity Method of
Accounting for Investments in Common Stock (APB 18), the Company adopted
retroactively the equity method of accounting. Accordingly, the years ended
March 31, 2002, 2001 and 2000, have been adjusted to reflect this adoption. In
addition, 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 recorded an impairment charge of $530,000 for the
year ended March 31, 2002, which is included in "Equity in losses of eSkye
Solutions, Inc." in the Consolidated Statements of Income. In addition, losses
applying the equity method are $781,000 for the year ended March 31, 2002, which
is included in "Equity in losses of eSkye Solutions, Inc." in the Consolidated
Statements of Income. The Company believes its remaining carrying value of
$160,000 approximates the current fair value of the investment.
Commonwealth Wine & Spirits, LLC
In December 1998, NWSC formed a new distributorship in Kentucky (Commonwealth
Wine & Spirits, LLC) in partnership with two existing Kentucky-based
distributors, The Vertner Smith Company ("Vertner") and Kentucky Wine & Spirits
("Kentucky W&S"). NWSC has accounted for its investment in Commonwealth Wine &
Spirits, LLC using the equity method. Under the terms, NWSC invested $7,500,000
in exchange for a 25% interest in the new company. Vertner and Kentucky W&S
equally own the remaining 75%. A portion of NWSC's initial investment related to
a franchise fee paid by NWSC on behalf of the new distributorship. As part of
the operating agreement, NWSC's initial cash distributions from the new
distributorship are treated as return of NWSC's original investment. As a
result, the amortization of this franchise fee is allocated 100% to NWSC and is
reflected in the Company's recorded equity in income of Commonwealth Wine &
Spirits, LLC in the accompanying consolidated income statement. The Company
received distributions of $405,000, $778,000 and $497,000 from Commonwealth Wine
& Spirits, LLC in 2002, 2001 and 2000 respectively.
- 39 -
Summary financial information for eSkye Solutions, Inc. and Commonwealth Wine &
Spirits, LLC is as follows:
Years Ended March 31,
2002 2001 2000
------------- ------------- ------------
Sales $ 86,365,000 $ 82,632,000 $ 79,173,000
Operating Income (Loss) (18,076,000) (14,742,000) 765,000
Net Loss (16,132,000) (15,043,000) (1,308,000)
March 31,
2002 2001
------------- -------------
Current Assets $ 25,056,000 $ 47,021,000
Non-current Assets 4,311,000 10,940,000
Current Liabilities 8,545,000 9,035,000
Non-current Liabilities 209,000 2,445,000
Minority Interest 102,000 ---
Redeemable Stock 20,055,000 58,905,000
3. 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.
4. Purchase of R. M. Gilligan, Inc.
On April 30, 1999, NWSM purchased all of the stock of R. M. Gilligan, Inc. for
$1,800,000. R. M. Gilligan, Inc. is a Michigan corporation that conducts liquor
brokerage activities and receives revenue on a per case basis from NWSM's
suppliers.
The acquisition was accounted for using the purchase method of accounting and
the results of operations have been included in the consolidated financial
statements since the date of acquisition. The purchase price was allocated to
the net assets acquired of $253,000, and the remaining $1,547,000 was allocated
to goodwill and recorded in intangible assets, based upon the fair market value
at the date of acquisition.
- 40 -
5. Inventory
Inventory at March 31 is comprised of the following:
2002 2001
------------- -------------
Inventory at FIFO $ 92,597,000 $ 89,377,000
Less: LIFO reserve 10,657,000 9,761,000
------------- -------------
$ 81,940,000 $ 79,616,000
============= =============
If the Company had used the first-in, first-out (FIFO) inventory method, net
income would have been $896,000, $1,276,000 and $939,000 greater in 2002, 2001
and 2000, respectively.
6. Property and Equipment
Property and equipment at March 31 is comprised of the following:
2002 2001
------------- -------------
Land and improvements $ 1,473,000 $ 1,473,000
Buildings and improvements 31,474,000 30,298,000
Furniture and equipment 15,256,000 15,070,000
Warehouse equipment 28,076,000 27,650,000
Automobiles and trucks 6,327,000 5,850,000
Construction in progress --- 427,000
------------- -------------
82,606,000 80,768,000
Less: Accumulated depreciation 41,166,000 37,034,000
------------- -------------
$ 41,440,000 $ 43,734,000
============= =============
- 41 -
7. Debt
Long-term debt at March 31 is comprised of the following:
2002 2001
------------- -------------
Senior notes payable (A) $ 107,875,000 $ 110,000,000
Bank revolving line of credit (B) --- ---
Notes payable to stockholders, net (see Note 11) 1,930,000 ---
Term note payable (repaid September, 2001) --- 500,000
Other --- 71,000
------------- -------------
109,805,000 110,571,000
Less: current maturities --- 571,000
------------- -------------
$ 109,805,000 $ 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. These senior notes are guaranteed by the Company's
subsidiaries. The guarantors are either wholly owned or the Company owns 100% of
the voting stock and there are no non-guarantor subsidiaries. The guarantees are
full, unconditional and joint and several.
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 initially 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.
- 42 -
(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, all of which are available at March 31, 2002. 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 LIBOR rate
or the higher of the prime lending rate or the federal funds effective rate plus
0.5%. At March 31, 2000, all borrowings were being charged the prime lending rate
plus 0.5%. The Company also pays a commitment fee ranging from 0.25% to 0.5% of its
undrawn portion of its line of credit. The Company must comply with certain
financial covenants and as of March 31, 2002 the Company was in compliance with all
such covenants.
Credit borrowings are secured by the accounts receivable and inventory of the
Company and its subsidiaries and are guaranteed by NWS' subsidiaries. In addition,
the agreement 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.
Principal payments due on debt at March 31, 2002 are as follows:
2003 $ ---
2004 ---
2005 ---
2006 ---
2007 ---
Thereafter 109,805,000
-------------
$ 109,805,000
=============
Cash paid for interest was $11,754,000, $13,212,000 and $13,116,000 in 2002,
2001 and 2000, respectively.
8. Common Stock
The Company has two authorized classes of capital stock: voting $0.01 par value
common shares and nonvoting $0.01 par value common shares. Both classes of stock
have the same relative rights, performance limitations and restrictions, except
that nonvoting shares are not entitled to vote on any matters submitted to a
vote of the stockholders, except as provided by law.
- 43 -
9. Commitments
The Company leases office and warehouse space under noncancellable operating
leases ranging from two to ten years, some of which include renewal and purchase
options and escalation clauses, expiring on various dates through 2011. The
Company also leases certain trucks and equipment pursuant to noncancellable
operating leases with terms ranging from three to seven years. Future minimum
rent payments as of March 31, 2002 are as follows:
2003 $ 4,150,000
2004 3,397,000
2005 2,871,000
2006 2,522,000
2007 2,235,000
Thereafter 1,102,000
------------
$ 16,277,000
============
Rent expense was $4,800,000, $4,738,000 and $4,171,000 in 2002, 2001 and 2000,
respectively.
10. Pension Plans
The Company sponsors a defined benefit pension plan covering substantially all
of its warehousemen and drivers. The Company makes contributions to the plan
based on amounts permitted by law.
The components of net periodic pension cost of the defined benefit plan are as
follows for the years ended March 31:
2002 2001 2000
----------- ---------- ------------
Service cost-benefits earned during the year $ 263,000 $ 231,000 $ 270,000
Interest on projected benefit obligation 288,000 255,000 248,000
Expected return on plan assets (305,000) (337,000) (267,000)
Amortization of unrecognized net transition asset 20,000 20,000 20,000
Amortization of loss --- (40,000) ---
Amortization of prior service cost 53,000 35,000 35,000
----------- ---------- ------------
Net periodic pension cost $ 319,000 $ 164,000 $ 306,000
=========== ========== ============
- 44 -
The change in the projected benefit obligation, plan assets, funded status and
amounts recognized in the accompanying consolidated balance sheets at March 31,
2002 and 2001 for the defined benefit pension plan are as follows:
2002 2001
------------- --------------
Change in projected benefit obligation:
Benefit obligation at beginning of year $ 3,802,000 $ 3,483,000
Service cost 263,000 231,000
Interest cost 288,000 255,000
Actuarial changes 807,000 44,000
Benefits paid (198,000) (211,000)
------------- --------------
Benefit obligation at end of year $ 4,962,000 $ 3,802,000
============= ==============
2002 2001
------------- --------------
Change in plan assets:
Fair value of plan assets at beginning of year $ 3,552,000 $ 3,953,000
Actual return on plan assets (345,000) (600,000)
Company contributions 578,000 410,000
Benefits paid (198,000) (211,000)
------------- --------------
Fair value of plan assets at end of year $ 3,587,000 $ 3,552,000
============= ==============
Funded status of the plan (under-funded) $ (1,375,000) $ (250,000)
Unrecognized net actuarial gain 1,086,000 (372,000)
Unrecognized prior service cost 700,000 752,000
Unrecognized transition obligation 87,000 107,000
------------- --------------
Prepaid benefit cost $ 498,000 $ 237,000
============= ==============
Weighted-average assumptions:
Discount rate 7.00% 7.75%
Expected return on plan assets 8.50% 8.50%
Balance Sheet Classification:
Prepaid benefit cost $ (498,000) $ (237,000)
Noncurrent deferred additional liability $ 1,873,000 487,000
------------- --------------
Minimum liability $ 1,375,000 $ 250,000
============= ==============
Deferred pension costs (intangible asset) $ 1,198,000 $ 487,000
Accumulated other comprehensive income -
unrecognized net pension loss $ 675,000 $ ---
- 45 -
As of March 31, 2002 and 2001, the Company recorded an additional minimum
pension liability of $1,873,000 and $487,000, respectively. This minimum
liability represents the excess of the unfunded accumulated benefit obligation
over the fair market value of plan assets as of the measurement date. As the
minimum liability exceeded the related unrecognized prior service cost, the
excess was recorded in Accumulated Other Comprehensive Income as a reduction of
stockholders' equity of $675,000 as of March 31, 2002. An intangible asset of
$1,198,000 and $487,000 was recorded at March 31, 2002 and 2001, respectively.
The change in the pension liability at March 31, 2002 over the liability at
March 31, 2001 was primarily caused by the difference in the actual return on
assets compared to the expected return on assets and the 0.75% decrease in the
discount rate assumption.
It is the Company's policy to make contributions to the plan sufficient to meet
the funding requirements of applicable laws and regulations, plus such
additional amounts as deemed appropriate.
The Company also sponsors a defined contribution pension plan for substantially
all employees not covered by the defined benefit plan. Contributions to the plan
are made at the discretion of the Company and may not exceed 5% of a
participant's compensation. The Company's pension expense for the defined
contribution plan was $1,411,000, $1,215,000 and $1,293,000 in 2002, 2001 and
2000, respectively.
NWS-LLC contributes to union-sponsored multi-employer pension plans, which
provide for contributions based on a specified rate per labor hour. Union
employees constitute approximately 61% of NWS-LLC's workforce and 52% of NWSM's
workforce. Contributions charged to expense were $665,000, $588,000 and $668,000
in 2002, 2001 and 2000, respectively. Information as to NWS-LLC's portion of
accumulated plan benefits and plan net assets is not currently available. Under
the Employee Retirement Income Security Act of 1974 as amended, an employer upon
withdrawal from a multi-employer plan is required to continue funding its
proportionate share of the plan's unfunded vested benefits. NWS-LLC has no
intention of withdrawing from the plans.
11. Related Party Transactions
NWSC has notes receivable from its two stockholders totaling $2,628,000 and
$4,723,000 at March 31, 2002 and 2001, respectively. The notes earn interest at
the prime lending rate. Interest income earned was $222,000, $635,000 and
$809,000 in 2002, 2001, and 2000, respectively. Proceeds of the notes were used
by the stockholders to purchase additional capital stock of NWSC and to make
loans to NWS-LLC. The notes, which are due on demand, were reflected net of
notes payable to stockholders as a reduction of stockholders' equity in the
consolidated balance sheets at March 31, 2001 as it is the Company's present
intent to satisfy these receivables through future stockholder distributions.
- 46 -
Effective July 31, 1998, the Company and its stockholders executed new notes
payable to stockholders to provide for a legal right of offset against the notes
receivable from stockholders. Accordingly, as of March 31, 2001, the notes
payable to stockholders (principal plus accrued interest) have been offset
against the notes receivable from stockholders, with the resulting net
receivable reflected as a reduction of stockholders'equity at March 31, 2001.
The notes payable outstanding as of March 31, 2002 have been offset with
corresponding notes receivable and reflected in long-term-debt in the
accompanying Consolidated Balance Sheet. The total of the subordinated notes
payable was $4,558,000 and $4,553,000 at March 31, 2002 and 2001, respectively
with the principal balance due in 2009. These notes bear interest at the prime
lending rate. Interest expense on these notes was $258,000, $405,000, and
$425,000 in 2002, 2001, and 2000, respectively.
The Company paid $218,000, $230,000, and $286,000 in 2002, 2001, and 2000
respectively for consulting fees to a minority stockholder of NWS-LLC.
A Director of the Company is the Chairman and Chief Executive Officer of eSkye.
The Company received 6,000,000 shares of common stock in eSkye upon inception,
representing founders stock. The Company accounts for its investment in eSkye
using the equity method. In October 1999 and May 2000, the Company invested
$500,000 and $2,013,000 in convertible preferred stock of eSkye, respectively.
NWS leases facilities and certain office equipment to eSkye under the terms of a
three-year operating lease. NWS received rent from eSkye of $270,000, $262,000
and $151,000 during the years ended March 31, 2002, 2001 and 2000 respectively.
eSkye reimbursed the Company for $384,000 of expenses paid on its behalf during
the year ended March 31, 2000.
- 47 -
12. 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. The accounting policies of the reportable
segments are the same as those described in the summary of significant
accounting policies.
2002 2001 2000
------------- ------------- -------------
Revenue from external customers
Product sales $ 659,594,000 $ 636,879,000 $ 603,625,000
All other 21,963,000 21,573,000 20,770,000
Interest expense
Product sales 10,309,000 11,599,000 11,698,000
All other 1,625,000 1,615,000 1,576,000
Depreciation expense
Product sales 4,505,000 4,941,000 5,205,000
All other 2,056,000 2,105,000 2,065,000
Amortization expense
Product sales 1,170,000 1,300,000 1,243,000
All other 544,000 544,000 392,000
Equity in earnings of Commonwealth
Wine & Spirits, LLC
Product sales 407,000 315,000 131,000
Equity in losses of eSkye Solutions, Inc.
Product sales (1,311,000) (787,000) (255,000)
All other --- --- ---
Segment income (loss)
Product sales 9,155,000 16,111,000 5,524,000
All other (1,695,000) (1,986,000) (1,104,000)
Segment assets
Product sales 190,585,000 180,383,000 174,411,000
All other 10,820,000 11,907,000 13,786,000
Investments in equity method investees
Product sales 6,771,000 8,080,000 7,317,000
All other --- --- ---
Expenditures on long-lived assets
Product sales 5,142,000 7,117,000 6,465,000
All other 1,031,000 122,000 3,833,000
- 48 -
13. Concentration of Risk
Products purchased from four suppliers amounted to approximately 62%, 66% and
70% of all purchases in 2002, 2001 and 2000, respectively.
During December 2001, one supplier, which accounted for approximately 18% of
2002 revenues was acquired by two unrelated third parties. The Company, along
with other competitors, are currently in the process of submitting proposals to
the new parties to market and distribute the acquired brands. There can be no
assurance, however, that the failure of the new parties to accept the proposals
of the Company will not have a material adverse effect on the business and
financial condition of the Company.
14. 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 annual results of operations of the
Company.
- 49 -
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Previously reported.
- 50 -
Part III
Item 10. Directors & Executive Officers of the Registrant
Directors and Executive Officers
The following table sets forth information concerning the directors and
executive officers of NWS:
Name Age Position
---- --- --------
James E. LaCrosse 69 Chairman, President, Chief Executive Officer,
Chief Financial Officer and Director
Martin H. Bart 69 Vice Chairman, Senior Vice President and Director
David R. Wilson 44 Corporate Executive Vice President,
Sales & Marketing
Catherine M. LaCrosse 35 Corporate Vice President of Sales-Indiana
Fine Wine Division and Director
John J. Baker 32 Executive Vice President, Chief Operating Officer
J. Smoke Wallin 35 Executive Vice President, Secretary and Director
James R. Beck 58 President, NWS-Indiana and Director
David H. Bart 37 President, NWS-Illinois
Joseph J. Fisch 53 President, U.S. Beverage
Mitchell T. Stoltz 48 Director
Norma M. Johnston 73 Director
William M. Cockrum 64 Director
Vaughn D. Bryson 63 Director
James E. LaCrosse has served as Chairman, President, Chief Executive
Officer and a Director of NWS since December, 1998. He assumed the
responsibilities of Chief Financial Officer in May, 2000. Previously, Mr.
LaCrosse served as Chairman and Director NWS-Indiana since its formation in
1973, and prior to 1973 was employed by various companies in a financial
capacity. Mr. LaCrosse received an MBA from Harvard Business School in 1961 and
a BA in economics from Wesleyan University in 1957.
Martin H. Bart has served as Senior Vice President, Vice Chairman and a
Director of NWS since December, 1998. Previously Mr. Bart served as Vice
Chairman of NWSI from 1995 to 1998. Prior to joining NWS, Mr. Bart served in
various positions with the Joseph E. Seagram & Son Company from 1956 to 1993,
and retired as Executive Vice President of Sales and Marketing. Mr. Bart
received a BA in economics New York University in 1955.
David R. Wilson has served as Corporate Executive Vice President, Sales &
Marketing, since March 2000. Mr. Wilson joined the NWS in 1996 and previously
served as Executive Vice President of Spirits for NWS-Illinois. His previous
experience includes 17 years with the Joseph E. Seagram Corporation in various
management positions including Vice President, on-premise, North America and
state general manager in Arizona-New Mexico, Indiana and Illinois. Mr. Wilson
received an MBA from Bellarmine College in 1983 and a BBA in business and
economics from the University of Kentucky in 1979.
Catherine M. LaCrosse has served as Director of NWS since December 1998 and
is currently Vice President of Sales of the Indiana Fine Wine Division. Ms.
LaCrosse joined NWS in 1991 and has served in various sales and marketing
positions in NWS-Indiana, NWS-Illinois and NWS-Michigan. Ms. LaCrosse received a
BA in history from Indiana University in 1990. She is Mr. LaCrosse's daughter.
- 51 -
John J. Baker has served as Executive Vice President and Chief Operating
Officer since 1999. Mr. Baker joined the Company in 1993 and has also held
positions as Director of Corporate Logistics, Director of Purchasing, and
Operations Specialist. Prior to that, he served as a Financial Analyst for
Comdata Corporation and Freight Forwarding Assistant for A.W. Fenton Company.
Mr. Baker received an MBA in operations from Vanderbilt University-Owen School
of Management in 1994 and a BS in economics and international business from
Miami University in 1992.
J. Smoke Wallin has served as Executive Vice President and a Director of
NWS since December, 1998. He served as Chief Financial Officer from December
1998 until April 2000. Mr. Wallin joined NWS in 1988 and served as Executive
Vice President, Corporate Group, from 1993 to 1998. He received an MBA in
finance, marketing and operations from Vanderbilt University-Owen School of
Management in 1993 and a BS in economics from Cornell University in 1989. Mr.
Wallin is Mr. LaCrosse's son-in-law.
James R. Beck has served as Director of NWS since December 1998 and
President of NWS-Indiana since 1992. Mr. Beck joined NWS in 1972 and has served
in various positions, including Executive Vice President of Sales for 14 years
prior to being named President of NWS-Indiana. He has been a Director of NWS
since December, 1998. Mr. Beck received a BS in education from Ball State
University in 1968.
David H. Bart became President of NWS-Illinois in April 2001. Mr. Bart
joined the company in 1993 and most recently served as Executive Vice President
of Spirits in Illinois. He has also held positions of Executive Vice President
of Wines, district manager of Hamburg Distributing and the On-Premise Division
as well as area manager in the Chain Wine Division and General Market. Mr. Bart
received a JD from Emory University School of Law in 1990 and a BS in managerial
economics from Carnegie-Mellon University in 1987. He is Martin Bart's son.
Joseph J. Fisch has served as President/CEO of U.S. Beverage, a premium
import/craft and specialty beer marketer and sales company, based in Stamford,
Connecticut, since its inception in 1997. His previous experience with Joseph E.
Seagram Corporation from 1971 through 1996 includes market research analyst;
vice president and division manager, General Wine & Spirits Company; vice
president/general manager, eastern region, House of Seagram; vice
president/general manager, House of Seagram; president, Seagram Beverage Company
He received a BS in business administration and marketing from Bowling Green
University, Ohio, in 1971.
Mitchell T. Stoltz has served as Director of NWS since December 1998. Mr.
Stoltz served as President of NWS-Illinois from 1995 to April 2001, at which
time he resigned from that position but continues as a Director of NWS. Prior to
becoming President, he served as Executive Vice President of Sales and Marketing
for NWS-Illinois. Before joining NWS in 1992, Mr. Stoltz served as Vice
President and General Manager for Magnolia Marketing Company and as President
for Admiral Wine Company. Mr. Stoltz received an M.M. from Northwestern
University Kellogg Graduate School of Management in 1985 and a BA in Business
from Notre Dame University in 1976.
Norma M. Johnston has been a Director of NWS-Indiana since 1976, and a
Director of NWS since December, 1998. Mrs. Johnston served as Secretary of NWS -
Indiana from 1976 to 1998.
William M. Cockrum has served as Director of NWS since July 1999. He has
been an Adjunct Professor of Finance in the UCLA Anderson School of Business
since 1984, teaching entrepreneurial finance, business ethics and investment
management. Mr. Cockrum was recognized as top entrepreneurial professor in the
nation by Business Week magazine in 1998. Prior to joining UCLA, he spent 25
years in investment banking, serving as a corporate officer at Becker Paribas,
Inc. until it was acquired by Merrill Lynch in 1984. Mr. Cockrum received an MBA
in finance and marketing from Harvard Business School in 1961 and a BA in
economics from DePauw University in 1959.
- 52 -
Vaughn D. Bryson has served as Director of NWS since July 1999. He serves
on the boards of several public companies, particularly in the biotech industry.
Mr. Bryson retired as Vice Chairman in 1996 from Vector Securities International
(now Prudent Vector). Prior to that, he worked for Eli Lilly and Company from
1961 to 1993 serving as President and CEO from 1991 to 1993, Executive Vice
President from 1986 to 1990, and Board Member from 1984 to 1993. Mr. Bryson is a
graduate of the Stanford Sloan Program, Stanford Graduate School of Business in
1967 and received a BS in pharmacy from the University of North Carolina in
1960.
Percy N. Stone served as Director of NWS from July 1999 until February
2002, when he died. A replacement for this directorship has not yet been
selected.
Item 11. Executive Compensation
Compensation of Directors
Only outside Directors of NWS receive compensation per year for serving as
directors. Each outside director received $60,000 for the fiscal year ended
March 31, 2002 for serving on the board.
Executive Compensation
The following table sets forth the compensation paid by NWS to James E.
LaCrosse, Chief Executive Officer, and to each of the four most highly
compensated executive officers of NWS for fiscal 2002 and 2001:
Summary Compensation Table
--------------------------
Annual Compensation
------------------------------------------------------------
Other Annual All Other
Name and Principal Position Year Salary Bonus Compensation(3) Compensation(1)
- --------------------------- ---- ------ ----- --------------- ---------------
James E. LaCrosse 2002 $ 407,000 $ 249,000 $ 6,772 $ 219,864 (2)
Chairman, President, Chief Financial
Officer, and CEO 2001 407,000 249,000 2,168 233,114 (2)
James R. Beck 2002 194,212 275,000 2,407 9,039
President, NWS-Indiana 2001 157,627 200,000 1,114 6,940
David H. Bart 2002 161,200 120,000 14,044 8,769
President, NWS-Illinois
David R. Wilson 2002 262,500 60,000 6,847 8,668
Corporate Executive Vice President,
Sales & Marketing 2001 250,000 50,000 -0- 8,920
Joseph J. Fisch 2002 225,000 60,000 -0- 4,500
President/CEO, U.S. Beverage 2001 250,000 35,000 -0- 5,000
(1) Includes 2002 employer 401(k) Plan contributions in the following amounts: Mr. LaCrosse, $8,500; Mr. Beck,
$9,039; Mr. Bart, $8,769; Mr. Wilson, $8,668; and Mr. Fisch, $4,500. Includes 2001 employer 401(k) Plan
contributions in the following amounts: Mr. LaCrosse, $8,000; Mr. Beck, $6,940; Mr. Wilson, $8,920; and Mr.
Fisch, $5,000.
(2) Includes $211,364 and $225,114 for fiscal 2002 and 2001, respectively, of life insurance premiums paid by NWS
on behalf of Mr. LaCrosse and for the benefit of the LaCrosse family trust for estate planning purposes. NWS
expects the premiums paid on behalf of Mr. LaCrosse in the future will remain at their current annual rate.
Upon the death of Mr. LaCrosse or termination of the life insurance policies, NWS is entitled to repayment
out of the proceeds of the policies of all premiums paid on behalf of Mr. LaCrosse for the benefit of the
LaCrosse family trust since the inception of the policy in 1994.
(3) Represents personal use of a company supplied automobile.
(Remainder of page intentionally left blank.)
- 53 -
Item 12. Security Ownership of Certain Beneficial Owners and Management
NWS has two authorized classes of capital stock, voting common stock and
non-voting common stock. The following table sets forth the beneficial ownership
of NWS' voting common stock:
(1) By each person known by NWS to beneficially own 5% or more of NWS'
voting common stock, and
(2) By all executive officers and directors of NWS as a group.
Except for Mr. LaCrosse and Mrs. Johnston, who have sole voting and investment
power with respect to their voting common stock, no other executive officer or
director owns any shares of NWS' voting common stock.
Number of
Name and Address Shares Percent
- ---------------- ------ -------
James E. LaCrosse
700 West Morris Street
Indianapolis, Indiana 46225......................... 86,520 83%
Norma M. Johnston
700 West Morris Street
Indianapolis, Indiana 46225......................... 18,000 17%
All executive officers and directors as a group
(11 persons)........................................ 104,520 100%
The stockholders of NWS have entered into stockholder agreements with each
other and NWS. Such agreements contain restrictions relating to transfers of
stock and provide for rights to purchase and sell stock of each corporation,
among other matters. In particular, the stockholder agreement with NWS governs
the transferability of Mrs. Johnston's stock in NWS. The LaCrosse family is
obligated to purchase Mrs. Johnston's stock at her death or during her lifetime
should she decide to sell. NWS becomes obligated to purchase only if the
LaCrosse family refuses or fails to purchase. The LaCrosse family and NWS also
have the right to purchase Mrs. Johnston's stock at the death of Mr. LaCrosse.
Any obligation of NWS to purchase the stock owned by Mrs. Johnston is subject to
the terms of the indenture and the new credit facility. No right to purchase
stock owned by Mr. LaCrosse or a trust for the benefit of his family exists in
favor of Mrs. Johnston.
The stockholders have also agreed not to take any action or effect any
transfer that would cause NWS or any of its subsidiaries to fail to qualify as
an S corporation or other pass-through entity for federal income tax purposes.
In addition, the stockholders have entered into a tax indemnification agreement
whereby they have agreed to indemnify NWS and its subsidiaries for any loss that
may arise in the event NWS or any of its subsidiaries should fail to maintain
its pass-through status.
The LaCrosse family and NWS own life insurance policies on behalf of Mrs.
Johnston in face amount of $4.0 million and $0.5 million, respectively.
(Remainder of page intentionally left blank.)
- 54 -
Item 13. Certain Relationships and Related Transactions
J. Smoke Wallin, a Director of the Company, is the Chairman and Chief
Executive Officer of eSkye Solutions, Inc. The Company received 1,500,000 shares
of common stock in eSkye Solutions Inc. upon inception, representing founders
stock. eSkye Solutions, Inc. subsequently issued a 4 to 1 split, thus 6,000,000
shares are currently held by NWS. The Company accounts for its investment in
eSkye Solutions, Inc. using the equity method. In October, 1999, the Company
invested $500,000 in convertible preferred stock of eSkye Solutions, Inc. The
Company invested an additional $2,012,500 in convertible preferred stock in May
2000.
NWS leases facilities and certain office equipment to eSkye Solutions, Inc.
under the terms of a three-year operating lease. NWS received rent from eSkye
Solutions, Inc. of $270,000 and $262,000 during the year ended March 31, 2002
and 2001, respectively. eSkye Solutions, Inc. reimbursed the Company for
$384,000 of expenses paid on its behalf during 2000.
From time to time, NWS-Indiana has loaned money to its principal
shareholders, James E. LaCrosse and Norma M. Johnston, the primary purpose of
which was to provide the necessary funds to finance start-up expenses and
working capital needs of NWS-Illinois, an affiliated company owned prior to the
reorganization by Mr. LaCrosse, Mrs. Johnston and Martin H. Bart. As of March
31, 2001, total indebtedness of Mr. LaCrosse and Mrs. Johnston to NWS-Indiana
was $4.7 million. The indebtedness, which is presently due upon demand, bears
interest at the prime lending rate of the Company's principal lending
institution (8.5% at March 31, 2001). The proceeds of the loans were provided by
Mr. LaCrosse and Mrs. Johnston to NWS-Illinois in the form of loans or
additional capital contributions. This indebtedness to Mr. LaCrosse and Mrs.
Johnston of $4.5 million, which matures in 2009, is subordinated to the senior
notes and the credit facility, and bears interest at 8.0% (prime rate at March
31, 2001). At the closing of the senior notes and the credit facility,
NWS-Indiana distributed approximately $1.8 million to Mr. LaCrosse and Mrs.
Johnston. Additionally, the obligations of NWS-Illinois under the subordinated
shareholder notes are expressly subject to timely payment by Mr. LaCrosse and
Mrs. Johnston of their obligations under their notes to NWS-Indiana.
On July 27, 1998, Mr. LaCrosse transferred substantially all of his
non-voting stock to a family trust for estate-planning purposes. As part of this
transfer and in addition to normal distributions for tax purposes, NWS
distributed $3.6 million to Mr. LaCrosse, the family trust, and Mrs. Johnston in
the annual period ended March 31, 2001. These distributions were made within the
terms and conditions contained in the Company's indenture governing its senior
notes (including the limitation on restricted payments) and the credit facility.
The family trust remitted these funds to Mr. LaCrosse in repayment of
indebtedness for the non-voting stock that was purchased on July 27, 1998. Mr.
LaCrosse and Mrs. Johnston then remitted $3.6 million to NWS-Indiana to reduce
their indebtedness described above.
NWS-Indiana and NWS-Illinois have operated as S corporations under the
Internal Revenue Code of 1986 (Code), and their respective subsidiaries have all
operated as qualified subchapter S subsidiaries under the Code or other
similarly taxed pass-through entities (the "S Corp. Businesses"). NWS has
elected to be treated as an S corporation under the Code and has elected or will
elect for each of its subsidiaries to be treated as qualified subchapter S
subsidiaries. The S Corp. Businesses have not been subject to tax on their
respective net taxable incomes, and the shareholders of the S Corp. Businesses
have been directly subject to tax on their respective proportionate shares of
such net taxable income. NWS-Indiana and NWS-Illinois have historically made
cash distributions to Mr. LaCrosse, Mrs. Johnston and Mr. Bart in amounts equal
to or greater than their respective tax obligations related to the S Corp.
Businesses. The aggregate amount of these distributions during 2002, 2001, and
2000 were $8.5 million, $10.6 million and $4.8 million, respectively. The terms
of the senior notes and the credit facility does permit NWS to make
distributions to shareholders with respect to their tax liabilities subject to
certain conditions and limitations each of the fiscal years ending 2002, 2001
and 2000.
- 55 -
NWS-Illinois also paid a company owned by Mr. Bart $0.2 million during each
of fiscal years 2002, 2001 and 2000 for certain consulting services provided by
Mr. Bart to NWS-Illinois. During 1998, NWS-Indiana entered into a five-year
non-compete agreement with James Beck, president of NWS-Indiana and a Director
of NWS, under which Mr. Beck was paid $0.3 million by the Company. NWS-Indiana
obtained certain inventory and other property related to the wholesale cigar
distribution business previously operated by Mr. Beck.
NWS pays "split-dollar" insurance premiums on seven insurance policies with
a fair value of $14.0 million on the lives of Mr. LaCrosse and Mrs. Johnston.
See Item 11-Executive Compensation. NWS is entitled to receive reimbursement for
all premiums paid out of the proceeds of these policies upon the death of Mr.
LaCrosse and Mrs. Johnston. Premiums paid by NWS were $328,000 for each of the
annual periods ended March 31, 2002, 2001 and 2000. The LaCrosse Family Trust is
the beneficiary of those policies.
(Remainder of page intentionally left blank.)
- 56 -
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this Report.
Page(s) in
this Report
-----------
1. Financial Statement
Reports of Independent Auditors 28
Consolidated balance sheets -
March 31, 2002 & 2001 30
Consolidated statements of income -
Years ended March 31, 2002, 2001 & 2000 31
Consolidated statements of stockholders'
equity - Years ended March 31, 2002, 2001 & 2000 32
Consolidated statements of cash flows -
Years ended March 31, 2002, 2001 & 2000 33
Notes to consolidated financial statements 34 to 49
2. Financial Statement Schedule:
Included as outlined in Item 8 of Part II
of this Report.
Schedule II - Valuation & Qualifying Accounts & Reserves 58
Schedules other than those listed above are omitted as they are
not required, or not applicable, or the information is shown in
the Notes to the Consolidated Financial Statements.
3. Exhibits
See the Index to Exhibits on pages 60 & 61 of this Form 10-K,
which is incorporated by reference herein.
(b) Reports on Form 8-K. None.
(c) See the Index to Exhibits on pages 60 & 61 of this Form 10-K, which is
incorporated by reference herein.
- 57 -
NATIONAL WINE & SPIRITS, INC.
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
---------
Balance at Charged to Charged to Balance at
Beginning Costs and Other End
Description of Period Expenses Accounts Deductions of Period
----------- --------- -------- -------- ---------- ---------
Year ended March 31, 2002
Deducted from assets account:
Allowance for doubtful accounts $ 1,737,000 $ 552,000 $ --- $ 998,000 (1) $ 1,291,000
LIFO reserve 9,761,000 896,000 --- --- 10,657,000
------------- ------------ -------- ----------- -------------
Total $ 11,498,000 $ 1,448,000 $ --- $ 998,000 $ 11,948,000
============= ============ ======== =========== =============
Year ended March 31, 2001
Deducted from asset account:
Allowance for doubtful accounts $ 1,412,000 $ 599,000 $ --- $ 274,000 (1) $ 1,737,000
LIFO reserve 8,485,000 1,276,000 --- --- 9,761,000
------------- ------------ -------- ----------- -------------
Total $ 9,897,000 $ 1,875,000 $ --- $ 274,000 $ 11,498,000
============= ============ ======== =========== =============
Year ended March 31, 2000
Deducted from asset account:
Allowance for doubtful accounts $ 1,298,000 $ 544,000 $ --- $ 430,000 (1) $ 1,412,000
LIFO reserve 7,546,000 939,000 --- --- 8,485,000
------------- ------------ -------- ----------- -------------
Total $ 8,844,000 $ 1,483,000 $ --- $ 430,000 $ 9,897,000
============= ============ ======== =========== =============
(1) Uncollectible accounts written off, net of recoveries.
(Remainder of page intentionally left blank.)
- 58 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on May 24, 2002.
NATIONAL WINE & SPIRITS, INC.
By: /s/ James E. LaCrosse
---------------------------------------
James E. LaCrosse,
Chairman, President,
Chief Executive Officer, and
Chief Financial Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed on the 24th day of May, 2002 by the following persons
in the capacities indicated:
SIGNATURE TITLE
/s/ James E.LaCrosse
- -------------------------------- Chairman, President, Chief Executive
James E. LaCrosse Officer (Principal Executive Officer),
and Chief Financial Officer
/s/ J. Smoke Walllin
- -------------------------------- Director, Executive Vice President, and
J. Smoke Wallin Secretary
- -------------------------------- Director
Martin H. Bart
/s/ James R. Beck
- -------------------------------- Director
James R. Beck
/s/ Mitchell T. Stoltz
- -------------------------------- Director
Mitchell T. Stoltz
/s/ Williiam M. Cockrum
- -------------------------------- Director
William M. Cockrum
/s/ Norma M. Johnson
- -------------------------------- Director
Norma M. Johnston
/s/ Vaughn D. Bryson
- -------------------------------- Director
Vaughn D. Bryson
/s/ Catherine M. LaCrosse
- -------------------------------- Director
Catherine M. LaCrosse
- 59 -
INDEX TO EXHIBITS
-----------------
Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation of National
Wine & Spirits, Inc. (Incorporated by reference to exhibit
3.1 to the Company's annual report Form 10K for the year
ended March 31, 2000.)
3.2 Amended and Restated Bylaws of National Wine & Spirits, Inc.
(Incorporated by reference to exhibit 3.2 to the Company's
annual report Form 10K for the year ended March 31, 2000.)
3.3 Articles of Incorporation of National Wine & Spirits
Corporation (incorporated by reference Exhibit 3.3 to the
Company's Registration Statement no. 333-74589 on Form S-4,
filed May 13, 1999).
3.4 Bylaws of National Wine & Spirits Corporation (incorporated
by reference Exhibit 3.4 to the Company's Registration
Statement no. 333-74589 on Form S-4, filed May 13, 1999).
3.5 Articles of Incorporation of NWS, Inc. (incorporated by
reference Exhibit 3.5 to the Company's Registration
Statement no. 333-74589 on Form S-4, filed May 13, 1999).
3.6 Bylaws of NWS, Inc. (incorporated by reference Exhibit 3.6
to the Company's Registration Statement no. 333-74589 on
Form S-4, filed May 13, 1999).
3.7 Articles of Incorporation of NWS Michigan, Inc.
(incorporated by reference Exhibit 3.7 to the Company's
Registration Statement no. 333-74589 on Form S-4, filed May
13, 1999).
3.8 Bylaws of NWS Michigan, Inc. (incorporated by reference
Exhibit 3.8 to the Company's Registration Statement no.
333-74589 on Form S-4, filed May 13, 1999).
3.9 Articles of Organization of NWS-Illinois, LLC (incorporated
by reference Exhibit 3.9 to the Company's Registration
Statement no. 333-74589 on Form S-4, filed May 13, 1999).
3.10 Operating Agreement of NWS-Illinois, LLC (incorporated by
reference Exhibit 3.10 to the Company's Registration
Statement no. 333-74589 on Form S-4, filed May 13, 1999).
4.1 Indenture relating to the Exchange Notes, dated as of
January 25, 1999 among National Wine & Spirits, Inc., the
Subsidiary Guarantors and Norwest Bank Minnesota, N.A., as
trustee (including cross-reference sheet regarding sections
310 through 318(a) of the Trust Indenture Act) (incorporated
by reference Exhibit (4b) to the Company's Registration
Statement no. 333-74589 on Form S-4, filed March 17, 1999).
4.2 A/B Exchange Registration Rights Agreement, dated as of
January 25, 1999, among National Wine & Spirits, Inc., the
Subsidiary Guarantors and the Initial Purchasers
(incorporated by reference Exhibit 4(b) to the Company's
Registration Statement no. 333-74589 on Form S-4, filed
March 17, 1999).
4.3 Form of Exchange Notes (including related Subsidiary
Guarantors) (incorporated by reference Exhibit 4(c) to the
Company's Registration Statement no. 333-74589 on Form S-4,
filed March 17, 1999).
4.4 Guaranty entered into as of January 25, 1999 by all
Subsidiary Guarantors (incorporated by reference Exhibit
4(d) to the Company's Registration Statement no. 333-74589
on Form S-4, filed March 17, 1999).
- 60 -
10.1 Purchase Agreement, dated January 20, 1999, among National
Wine & Spirits, Inc., the Subsidiary Guarantors and the
Initial Purchasers (incorporated by reference Exhibit 10(a)
to the Company's Registration Statement no. 333-74589 on
Form S-4, filed March 17, 1999).
10.2 Credit Agreement, dated January 25, 1999, among National
Wine & Spirits, Inc., the Subsidiary Guarantors and NBD, as
agent. (incorporated by reference Exhibit 10(b) to the
Company's Registration Statement no. 333-74589 on Form S-4,
filed March 17, 1999).
10.3 First Amendment to Revolving Credit Facility, dated
September 28, 2001, among National Wine & Spirits, Inc., the
Subsidiary Guarantors and NBD, as agent. (incorporated by
reference Exhibit 10 to the Company's Form 10-Q for the
quarter ended September 30, 2001).
12 Statement regarding computation of ratios
21 List of subsidiaries (incorporated by reference Exhibit 21
to the Company's Registration Statement no. 333-74589 on
Form S-4, filed March 17, 1999).
99.1 Forward - Looking Statements
99.2 Arthur Andersen LLP Representation Letter
- 61 -
Statement regarding computation of ratios
Exhibit (12)
Years Ended March 31,
(in thousands)
---------------------------------------------------------
2002 2001 2000 1999 1998
Consolidated pretax income
from continuing operations......... $ 7,460 $ 14,125 $ 4,420 $ 987 $ 6,093
Interest............................. 11,934 13,214 13,274 11,037 9,672
Net amortization of debt
discount and premium
and issuance expense............... 628 629 628 385 325
Interest portion of rental
expense............................ 1,440 1,422 1,251 1,122 1,120
-------- -------- -------- -------- ---------
Earnings............................. $ 21,462 $ 29,390 $ 19,573 $ 13,531 $ 17,210
======== ======== ======== ======== =========
Interest............................. $ 11,934 $ 13,214 $ 13,274 $ 11,037 $ 9,672
Net amortization of debt
discount and premium
and issuance expense............... 628 629 628 385 325
Interest portion of rental
expense............................ 1,440 1,422 1,251 1,122 1,120
-------- -------- -------- -------- ---------
Fixed Charges........................ $ 14,002 $ 15,265 $ 15,153 $ 12,544 $ 11,117
======== ======== ======== ======== =========
Ratio of earnings to fixed
charges............................ 1.5 1.9 1.3 1.1 1.5
-------- -------- -------- -------- ---------
- 62 -
List of subsidiaries
Exhibit (21)
State of
Companies Doing business as Incorporation
--------- ----------------- -------------
National Wine & Spirits Corporation Same Indiana
35-0540650
700 West Morris Street
Indianapolis, IN 46225
(317) 636-6092
National Wine & Spirits, Inc. Same Indiana
35-2064429
700 W. Morris Street
Indianapolis, IN 46225
(317) 636-6092
NWS - Illinois, LLC Union Beverage Company Illinois
36-4266415
2600 West 35th Street
Chicago, IL 60632
(773) 254-9000
NWS, Inc. Same Illinois
36-3784235
2600 West 35th Street
Chicago, IL 60632
(773) 254-9000
NWS Michigan, Inc. Same Michigan
38-3319025
17550 Allen Road
Brownstown, MI 48192
(734) 324-3000
United States Beverage, LLC Same Illinois
36-4150241
700 Canal
Stamford, CT 06902
(203) 961-8215
National Wine & Spirits, LLC National Wine & Spirits Michigan
38-3467586 of Michigan, LLC
17550 Allen Road
Brownstown, MI 48192
(734) 324-3000
- 63 -
Forward-Looking Statements
Exhibit (99.1)
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.
- 64 -
Arthur Andersen LLP Representation Letter
Exhibit (99.2)
Securities and Exchange Commission
Washington, D.C.
Arthur Andersen LLP has represented to National Wine & Spirits, Inc. that its
audit was subject to Andersen's quality control system for the U.S. accounting
and auditing practice to provide reasonable assurance that the engagement was
conducted in compliance with professional standards and that there was
appropriate continuity of Andersen personnel working on the audit and
availability of national office consultation. Availability of personnel at
foreign affiliates of Andersen is not relevant to the audit.
/s/ JAMES E. LACROSSE
- --------------------------
James E. LaCrosse
- 65 -