CONSTELLATION BRANDS, INC. — Annual Report 1994

Nov 29, 1994

PART I Item 1. Business Unless the context otherwise requires, the term "Company" refers to Canandaigua Wine Company, Inc. and its subsidiaries, all references to "net sales" refer to gross revenues less excise taxes and returns and allowances to conform with the Company's method of classification, and all references to the Company's fiscal year shall refer to the year ended August 31 of the indicated year. Market share and industry data disclosed in this Report have been obtained from the following industry publications: Wines & Vines; The Gomberg-Fredrikson Report; Jobson's Liquor Handbook; Jobson's Wine Handbook; The U.S. Wine Market: Impact Databank Review and Forecast, 1994 Edition; The U.S. Beer Market: Impact Databank Review and Forecast, 1994 Edition; Beer Marketer's Insights: 1994 Import Insights; and 1994 Beer Industry Update. The Company has not independently verified this data. References to market share data are based on unit volume. The Company is a Delaware corporation organized in 1972 as the successor to a business founded in 1945 by Marvin Sands, Chairman of the Board of the Company. The Company is a leading producer and marketer of branded beverage alcohol products, with over 125 national and regional brands which are distributed by over 1,000 wholesalers throughout the United States and in selected international markets. The Company is the second largest supplier of wines, the fourth largest importer of beers and the eighth largest supplier of distilled spirits in the United States. The Company's beverage alcohol brands are marketed in five general categories: table wines, sparkling wines, dessert wines, imported beer and distilled spirits, and include the following principal brands: . Table Wines: Almaden, Inglenook, Paul Masson, Taylor California Cellars, Cribari, Manischewitz, Taylor New York, Marcus James, Deer Valley and Dunnewood . Sparkling Wines: Cook's, J. Roget, Great Western and Taylor New York . Dessert Wines: Richards Wild Irish Rose, Cisco, Taylor New York and Italian Swiss Colony . Imported Beer: Corona, St. Pauli Girl, Modelo Especial, Tsingtao and Pacifico . Distilled Spirits: Barton's Gin and Vodka, Ten High Bourbon Whiskey, Crystal Palace Gin and Vodka, Montezuma Tequila, Northern Light Canadian Whisky, Lauder's Scotch Whisky and Monte Alban Mezcal Based on available industry data, the Company believes it has a 21% share of the wine market, a 10% share of the imported beer market and a 4% share of the distilled spirits market in the United States. Within the wine market, the Company believes it has a 31% share of the non-varietal table wine market, a 10% share of the varietal table wine market, a 50% share of the dessert wine market and a 32% share of the sparkling wine market. Many of the Company's brands are leaders in their respective categories in the United States, including Corona, the second largest selling imported beer brand, Almaden and Inglenook, the fifth and sixth largest selling wine brands, Richards Wild Irish Rose, the largest selling dessert wine brand, Cook's champagne, the second largest selling sparkling wine brand, Montezuma, the second largest selling tequila brand, and Monte Alban, the largest selling mezcal brand. During the past four years, the Company has diversified its product portfolio through a series of strategic acquisitions that have resulted in an increase in the Company's net sales from $176.6 million in fiscal 1991 to $876.4 million on a pro forma basis in fiscal 1994. Through these acquisitions, the Company acquired strong market positions in growing product categories in the beverage alcohol industry, such as varietal table wine and imported beer. The Company ranks second and fourth in the varietal table wine and imported beer categories, respectively. Over the past four years, industry shipments of varietal table wine and imported beer have grown 64% and 7%, respectively. The Company has successfully integrated the acquired businesses into its existing business and achieved significant cost reductions through reduced product and organizational costs. The Company has also strengthened its relationship with wholesalers, expanded its distribution and enhanced its production capabilities as well as acquired additional management, operational, marketing and research and development expertise. In October 1991, the Company acquired the Cook's, Cribari, Dunnewood and other brands and related facilities and assets (the "Guild Acquisition") from Guild Wineries and Distillers ("Guild"), which enabled the Company to establish a significant market position in the California sparkling wine category and to enter the California table wine market. The Company acquired Barton Incorporated ("Barton") in June 1993, further diversifying into the imported beer and distilled spirits categories (the "Barton Acquisition"). On October 15, 1993, the Company acquired the Paul Masson, Taylor California Cellars and other brands and related facilities and assets of Vintners International Company, Inc. ("Vintners") (the "Vintners Acquisition"). On August 5, 1994, the Company acquired the Almaden, Inglenook and other brands, a grape juice concentrate business and related facilities and assets (the "Almaden/Inglenook Product Lines") from Heublein Inc. (the "Almaden/Inglenook Acquisition," and together with the Barton Acquisition and the Vintners Acquisition, the "Acquisitions"). See "Recent Acquisitions." The Company's business strategy is to continue to strengthen its market position in each of its principal product lines. Key elements of its strategy include: (i) making selective acquisitions in the beverage alcohol industry to improve market position and capitalize on growth trends within the industry; (ii) improving operating efficiencies through reduced product and organizational costs of existing and acquired businesses; (iii) capitalizing on strong wholesaler relationships resulting from its expanded portfolio of brands; and (iv) expanding distribution into new markets and increasing penetration of existing markets primarily through line extensions and promotional activities. In furtherance of its business strategy of improving operating efficiencies of acquired businesses, the Company announced a plan to restructure the operations of its California wineries, including a consolidation of facilities, centralization of bottling operations and reduction of overhead, including the elimination of approximately 260 jobs (the "Restructuring Plan"). As a result of the Restructuring Plan, the Company has taken a charge in the fourth quarter of fiscal 1994 which reduced after-tax income for fiscal 1994 by $14.9 million, or $0.91 per share on a fully diluted basis. The Company anticipates that the Restructuring Plan will result in net cost savings of approximately $1.7 million in fiscal 1995 and approximately $13.3 million of annual net cost savings beginning in fiscal 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." RECENT ACQUISITIONS The Barton Acquisition. On June 29, 1993, the Company acquired all of the outstanding shares of capital stock of Barton. Barton is the United States' fourth largest importer of beers and eighth largest supplier of distilled spirits. The Barton Acquisition has enabled the Company to diversify within the beverage alcohol industry by participating in the imported beer and distilled spirits markets, which have similar marketing approaches and distribution channels to the Company's wine business, and to take advantage of the experienced management team that developed Barton as a successful company. With this acquisition, the Company acquired the right to distribute Corona and Modelo Especial beer in 25 primarily western states, national distribution rights for St. Pauli Girl and Tsingtao and a diversified line of distilled spirits including Barton Gin and Vodka, Ten High Bourbon Whiskey and Montezuma Tequila. Barton is being operated independently by its current management as a subsidiary of the Company. Until August 31, 1996, consistent with past practices and subject to annual approval by the Company's Board of Directors of an annual operating plan for the coming year, Ellis M. Goodman, the Chief Executive Officer of Barton, has full and exclusive strategic and operational responsibility for Barton and all of its subsidiaries. The Vintners Acquisition. On October 15, 1993, the Company acquired substantially all of the assets of Vintners, and assumed certain liabilities. Vintners was the United States' fifth largest supplier of wine with two of the country's most highly recognized brands, Paul Masson and Taylor California Cellars. The Vintners Acquisition enabled the Company to expand its wine portfolio to include several large and highly recognized table wine brands that are distributed by a substantially common wholesaler network. Vintners' operations were immediately integrated with those of the Company at the closing of the acquisition. With this acquisition, the Company acquired the Paul Masson, Taylor California Cellars, Taylor New York, Deer Valley, St. Regis (non- alcoholic) and Great Western brands and related facilities. The Almaden/Inglenook Acquisition. On August 5, 1994, the Company acquired the Almaden and Inglenook brands, the fifth and sixth largest selling table wines in the United States, a grape juice concentrate business, and wineries in Madera and Escalon, California, from Heublein. The Company also acquired Belaire Creek Cellars, Chateau La Salle and Charles Le Franc table wines, Le Domaine champagne and Almaden, Hartley and Jacques Bonet brandy. The accounts receivable and the accounts payable related to the acquired assets were not acquired by the Company. As a result of the Almaden/Inglenook Acquisition, the Company has strengthened its position as the second largest supplier of wines in the United States. The acquisition of the Inglenook brand significantly expands the Company's restaurant and bar on-premises presence. The Company intends to maintain the existing sales force and distribution network of the Almaden and Inglenook brands. Further, the Almaden/Inglenook Acquisition has resulted in the Company becoming the leading grape juice concentrate producer in the United States. The Company believes that the Almaden/Inglenook Acquisition will enable the Company to achieve significant cost savings through the consolidation of its California winery operations. Heublein also agreed not to compete with the Company in the United States and Canada for a period of five years following the closing of the Almaden/Inglenook Acquisition in the production and sale of grape juice concentrate or sale of packaged wines bearing the designation "Chablis" or "Burgundy" except where, among other exceptions, such designations are currently used with certain brands retained by Heublein. Certain companies acquired by Heublein, however, may compete directly with the Company. INDUSTRY The beverage alcohol industry in the United States consists of the production, importation, marketing and distribution of beer, wine and distilled spirits products. Over the past five years there has been increasing consolidation at the supplier, wholesaler and, in some markets, retailer tiers of the beverage alcohol industry. As a result, it has become advantageous for certain suppliers to expand their portfolio of brands through acquisitions and internal development in order to take advantage of economies of scale and to increase their importance to a more limited number of wholesalers and, in some markets, retailers. From 1978 through 1993, the overall per capita consumption of beverage alcohol products in the United States has generally declined. However, table wines, and in particular varietal table wines, and imported beer consumption have increased during the period. The following table sets forth the industry unit volumes for shipments of beverage alcohol products in the Company's five principal beverage alcohol product categories in the United States for the five calendar years ended December 31, 1993:

(a) Units are in thousands of gallons. Data exclude sales of wine coolers. (b) Includes other special natural (flavored) wines under 14% alcohol. (c) Includes dessert wines, other special natural (flavored) wines over 14% alcohol and vermouth. (d) Units are in thousands of cases (2.25 gallons per case). (e) Units are in thousands of 9-liter cases (2.378 gallons per case). Table Wines. Wines containing 14% or less alcohol by volume are generally referred to as table wines. Within this category, table wines are further characterized as either "non-varietal" or "varietal." Non- varietal wines include wines named after the European regions where similar types of wines were originally produced (e.g., burgundy), niche products and proprietary brands. Varietal wines are those named for the grape that comprises the principal component of the wine. Table wines that retail at less than $5.75 per 750 ml. bottle are generally considered to be popularly priced while those that retail at $5.75 or more per 750 ml. bottle are considered premium wines. From 1989 to 1993, shipments of domestic table wines increased at an average compound annual rate of approximately 1.5%. In 1992, domestic table wine shipments increased 8% from the previous year; this rate of increase was markedly larger than in previous years and was attributed in large part to the November 1991 CBS television 60 Minutes, French Paradox broadcast about the healthful benefits of moderate red wine consumption. In 1993, domestic table wine shipments declined by 2.3% when compared to 1992. This decline has been attributed to an overall wholesale and retail wine inventory surplus at the end of 1992. Based on shipments of California table wines, which constituted approximately 94% of the total domestically produced table wine market in 1993, shipments of varietal wines have grown at an average compound annual rate of 13.3% since 1989, with shipments in the first half of 1994 increasing 16% over the prior year. In contrast, shipments of non-varietal table wines have generally declined over the same period although they showed a slight increase in 1992 as compared to 1991. For the first half of calendar 1994, shipments of California table wines increased approximately 7% over the same period in 1993. Shipments of imported table wines have generally decreased over the last six years, decreasing from 58.9 million gallons in 1989 to 52.4 million gallons in 1993. Imported table wines constituted 15% of the United States table wine market in calendar 1993. Dessert Wines. Wines containing more than 14% alcohol by volume are generally referred to as dessert wines. Dessert wines generally fall into the same price categories as table wines. Dessert wine consumption in the United States has been declining for many years reflecting a general shift in consumer preferences to table and sparkling wines. For calendar year 1993, shipments of domestic dessert wines decreased 9.9% over calendar year 1992, a lesser rate than from 1989 to 1993, during which period shipments of domestic dessert wines declined at an average compound annual rate of 14.2%. Dessert wines, which are generally popularly priced, have been adversely affected by the January 1, 1991 increase in federal excise taxes which had the effect of increasing the cost of these products to the consumer disproportionately with certain other beverage alcohol products. Shipments of dessert wines continued to decline during the first half of calendar 1994 as compared to the first half of calendar 1993 as is evidenced by a 7% decline during this period in shipments of California dessert wines, which constituted approximately 73% of the domestically produced dessert wine market in 1993. Sparkling Wines. Sparkling wines include effervescent wines like champagne and spumante. Sparkling wines generally fall into the same price categories as table wines. Shipments of sparkling wines declined at an average compound annual rate of 2.9% from 1989 to 1993; with shipments of domestic sparkling wines declining 0.8% in calendar 1993 as compared to calendar 1992. The decline in sparkling wine consumption is believed to reflect mounting concerns about drinking and driving, as a large part of sparkling wine consumption occurs outside the home at social gatherings and restaurants. Shipments of sparkling wines continued to decline during the first half of 1994 as compared to the first half of 1993 as is evidenced by a decline of 12% during this period in shipments of California sparkling wines which constituted approximately 92% of the domestically produced sparkling wine market in 1993. The Company believes that shipments in the first half of 1994 were also adversely affected by high levels of retail inventory at the beginning of the period. Imported Beer. Shipments of imported beers have increased at an average compound annual rate of 1.7% from 1989 to 1993. Shipments of Mexican beers in calendar 1993 increased 10.4% over 1992. During the first half of calendar 1994 as compared to the corresponding period in 1993, shipments of Mexican beers increased 14.5% as compared to an increase of 19.3% for the entire imported beer category. In 1993, imported beers constituted 4.9% of the United States beer market. This reflects an increase from 1992 when imported beers constituted 4.4% of the United States beer market. Imported beers are generally priced above the leading domestic premium brands. This price category also includes beers produced by microbreweries and super-premium priced domestic beers. Distilled Spirits. Shipments of distilled spirits in the United States declined at an average compound annual rate of 1.9% from 1989 to 1993. Although shipments increased slightly in calendar 1992 as compared to calendar 1991, shipments again declined in calendar 1993 by 2.6% when compared to calendar 1992. Shipments of distilled spirits have been affected by many of the same trends evident in the rest of the beverage alcohol industry. Over the past five years, whiskey sales have declined significantly while sales of rum, tequila, cordials and liqueurs have increased. The Company believes that distilled spirits can be divided into two general price segments, with distilled spirits selling for less than $7.00 a 750 ml. bottle being referred to as price value products and those selling for over $7.00 a 750 ml. bottle being referred to as premium products. PRODUCT CATEGORIES The Company produces, imports and markets beverage alcohol products in five principal product categories: table wines, dessert wines, sparkling wines, imported beer and distilled spirits. The table below sets forth the unit volumes (in thousands of gallons) and net sales (in thousands) for all of the table, dessert and sparkling wines, grape juice concentrate and other wine related products and services sold by the Company and under brands and products acquired in the Vintners Acquisition and the Almaden/Inglenook Acquisition for the 1992, 1993 and 1994 fiscal years.

(a) Data for fiscal years ended August 31, 1992, 1993 and 1994. The data for the Company's fiscal year ended August 31, 1994 excludes the net sales for the brands and other products acquired in the Vintners Acquisition and the Almaden/Inglenook Acquisition. (b) Data for fiscal years ended July 31, 1992 and 1993 and for the twelve months ended August 31, 1994. (c) Data for fiscal years ended September 30, 1992 and 1993 and for the twelve months ended August 31, 1994. Table Wines. The Company sells over 45 different brands of non- varietal table wines, substantially all of which are marketed in the popularly priced segment which constituted approximately 43% of the domestic table wine market in the United States for the 1993 calendar year. The Company also sells over 15 different brands of varietal table wines in both the popularly priced and premium categories. The table below sets forth the unit volumes (in thousands of gallons) for the domestic table wines sold by the Company and under domestic table wine brands acquired in the Vintners Acquisition and the Almaden/Inglenook Acquisition for the 1992, 1993 and 1994 fiscal years:

(a) Excludes sales of wine coolers but includes sales of wine in bulk. The Company's table wine brands include: Almaden: The fifth largest selling table wine brand and the ninth largest varietal wine brand in the United States. Almaden is one of the oldest and best known table wines in the United States. Inglenook: The sixth largest selling table wine brand and the seventh largest varietal wine in the United States with a significant restaurant and bar presence. Paul Masson: The 11th largest selling table wine brand in the United States which is offered in all major varietal and non-varietal product categories in a full range of sizes. Taylor California Cellars: The 14th largest domestic selling table wine brand in the United States which is also offered in all major varietal and non-varietal product categories in a full range of sizes. Cribari: A well known brand of both varietal and non-varietal table wines marketed in the popularly priced segment. Manischewitz: The largest selling brand of kosher wine in the United States. Taylor New York: One of the United States' oldest brands of non- varietal wine marketed primarily in the eastern half of the United States. Richards Wild Irish Rose: A brand of table wine possessing unique taste characteristics which is a line extension of the nation's leading dessert wine brand. Deer Valley: This line of California varietal and non-varietal table wines introduced in 1989 has had significant success in California. The Company is in the process of introducing this brand in other regions of the country. Cook's: This varietal wine was created to take advantage of the brand recognition associated with Cook's sparkling wines. Dunnewood: From California's north coast, unit volumes of this varietal wine have also increased significantly. This brand is marketed at the lower end of the premium price category. The Company has pursued a strategy of increasing its unit volume sales in the table wine segment by acquiring new brands and by growing existing brands. The Company's unit volume sales of non-varietal table wines increased from approximately 9.3 million gallons in fiscal 1992 to approximately 52.6 million gallons on a pro forma basis for fiscal 1994 as a result of the Vintners Acquisition and the Almaden/Inglenook Acquisition. Likewise, the Company's unit volume sales of varietal table wines increased from approximately 1.1 million gallons in fiscal 1992 to over 12.8 million gallons on a pro forma basis for fiscal 1994 as a result of the Vintners Acquisition and the Almaden/Inglenook Acquisition. The Company believes that its recent acquisition of the Almaden/Inglenook Product Lines, including the Almaden and Inglenook brands, creates additional opportunities for growth in this product category. The 1993 decrease in unit volume of Vintners' table wines resulted from a number of factors including a significant decrease in Vintners' expenditures for advertising, promotion and selling activities during the three year period ended July 31, 1993. The Company believes that this decrease resulted in a reduction in the level of wholesaler attention paid to Vintners' brands, and the Company believes that certain of Vintners' products were not competitively priced. During the Company's fiscal 1994, unit volume sales of Vintners table wines continued to decline. During fiscal 1994, the Company implemented steps to address this decline, including a reduction in prices for its Taylor California brands, the implementation of new promotional programs and repackaging of selected products. As a result of these efforts, the Company believes that sales of Vintners' brands have begun to stabilize. The Company also markets a selection of popularly priced imported table wines. These brands include: Marcus James: One of the largest selling imported varietal wines in the United States. Marcus James is a line of varietal table wines which includes white zinfandel, chardonnay, cabernet sauvignon and merlot. The Company owns the Marcus James brand and contracts for its production in Brazil. Partager: A popularly priced French table wine with both varietal and non-varietal products. The Company owns the Partager brand and contracts for its production in France. Mateus: The second largest selling Portuguese table wine and a highly recognized brand name. This brand is imported by the Company under a distribution agreement. The Company's unit volume sales of imported wine increased steadily from 1.3 million gallons in fiscal 1992 to 1.9 million gallons in fiscal 1994. This increase is attributable primarily to increased sales of the Marcus James brand and the inclusion of a full year of Mateus sales. Including sales of Partager by Vintners prior to its acquisition by the Company, on a pro forma basis for fiscal 1994, the Company sold approximately 2.0 million gallons of imported table wines. Dessert Wines. The Company markets substantially all of its dessert wines in the lower end of the popularly priced segment. The popularly priced segment represented approximately 88% of the dessert wine market in calendar 1993. Sales of dessert wines comprised 10.2% of the Company's total revenues during the fiscal year ended August 31, 1994, on a pro forma basis. The table below sets forth the unit volumes (in thousands of gallons) for the domestic dessert wines sold by the Company and under domestic dessert wine brands acquired in the Vintners Acquisition for the 1992, 1993 and 1994 fiscal years:

The Company's dessert wines include: Richards Wild Irish Rose: The largest selling dessert wine brand in the United States and the Company's leading dessert wine brand in unit volume sales. Cisco: The fourth largest selling dessert wine brand in the United States. Cisco is a flavored dessert wine positioned higher in price than Richards Wild Irish Rose. Taylor New York: Premium dessert wines, including port and sherry. The Company's unit volume sales of dessert wines have declined over the last three years. The decline can be attributed to a general decline in dessert wine consumption in the United States. The Company's unit volume sales of its dessert wine brands (including the brands acquired from Vintners) have decreased 26.9% from fiscal 1992 to fiscal 1994. Sparkling Wines. The Company markets substantially all of its sparkling wines in the popularly priced segment, which constituted approximately 48% of the domestic sparkling wine market in calendar 1993. The table below sets forth the unit volumes (in thousands of gallons) for the domestic sparkling wines sold by the Company and under domestic sparking wine brands acquired in the Vintners Acquisition and the Almaden/Inglenook Acquisition for the 1992, 1993 and 1994 fiscal years:

The Company's sparkling wine brands include: Cook's: The second largest selling domestic sparkling wine in the United States. This brand of champagne is marketed in a bell shaped bottle and is cork-finished, packaging generally associated with higher priced products. J. Roget: The sixth largest selling domestic sparkling wine in the United States, priced slightly below Cook's. Great Western: A premium priced champagne, fermented in the bottle. Taylor New York: A well known premium priced champagne also fermented in the bottle. Codorniu: The second largest Spanish sparkling wine imported in the United States; sold in the premium price category. Jacques Bonet: Priced in the economy segment, this product appeals to restaurants and caterers. The Company has maintained sales levels of sparkling wine over the last three years in contrast to a general industry decline in sales for this product category. Grape Juice Concentrate. As part of its wine business, the Company produces grape juice concentrate. Grape juice concentrate is sold to the food and wine industries as a raw material for the production of juice- based products, no-sugar-added foods and beverages. Grape juice concentrate competes with other domestically produced and imported fruit- based concentrates. As a result of the Almaden/Inglenook Acquisition, the Company believes that it is the leading grape juice concentrate producer in the United States. Sales of grape juice concentrate accounted for approximately 11% and 12% of the Company's net sales for its fiscal years ended 1992 and 1993, respectively. The table below sets forth the unit volumes (in thousands of gallons) for the grape juice concentrate sold by the Company and the grape juice concentrate business acquired in the Almaden/Inglenook Product Lines for the 1992, 1993 and 1994 fiscal years:

Other Wine Product and Related Services. The Company's other wine related products and services include: grape juice; St. Regis, the leading non-alcoholic line of wines in the United States; Paul Masson and other brandies; wine coolers sold primarily under the Sun Country brand name; cooking wine; and wine for the production of vinegar. The Company also provides various bottling and distillation production services for third parties. Beer. The Company is the fourth largest marketer of imported beers in the United States. The Company distributes Corona, St. Pauli Girl, Modelo Especial and Tsingtao, four of the top imported beer brands in the United States. The table below sets forth the unit volume (in thousands of cases) and net sales (in thousands) for the beer sold by Barton for the years ended August 31: 1992 1993 1994 NET VOLUME NET VOLUME NET VOLUME SALES SALES SALES $131,868 10,152 $158,359 12,422 $173,883 14,100 The Company's principal imported beer brands include: Corona: The number one selling beer in Mexico and the second largest selling imported beer in the United States. In addition, the Company believes that Corona is the largest selling import in the territory in which it is distributed by the Company. The Company has represented the supplier of Corona since 1978 and currently sells Corona and its related Mexican beer brands in 25 primarily western states. St. Pauli Girl: The 15th largest selling imported beer in the United States, and the second largest selling German import. Modelo Especial: One of the family of products imported from the supplier of Corona, Modelo Especial is the number one selling canned beer in Mexico and is growing in the United States with 1994 shipments into the United States increasing by 57% over 1993 shipments in the same period. Tsingtao: The largest selling Chinese beer in the United States. The Company's other imported beer brands include Pacifico and Negra Modelo from Mexico, Peroni from Italy and Double Diamond from the United Kingdom. In September 1992 the Company acquired the Stevens Point Brewery, a regional brewer located in Wisconsin, together with its brands including Point Special. Net sales and unit volumes of the Company's beer brands have grown during the previous two fiscal years as a result of the acquisition of the St. Pauli Girl and Double Diamond brands on July 1, 1992, the acquisition of the Point brands in September 1992 and increased sales of Corona and the Company's other Mexican beer brands. The Company's selling prices were not increased significantly over this time period. Distilled Spirits. The Company is the eighth largest producer, importer and marketer of distilled spirits in the United States. The Company produces, bottles, imports and markets a diversified line of quality distilled spirits, and also exports distilled spirits to more than 15 foreign countries. The table below sets forth the unit volumes (in thousands of 9-liter cases) and net sales (in thousands) for the distilled products case goods sold by Barton for the years ended August 31: 1992 1993 1994 NET VOLUME NET VOLUME NET VOLUME SALES SALES SALES $82,677 5,609 $82,270 5,529 $81,367 5,370 The Company's leading distilled spirits brands include: Monte Alban: A premium priced product which the Company believes is the number one selling mezcal in the United States. Montezuma: This brand is the number two selling tequila in the United States. Ten High Bourbon: One of the leading bourbon brands in the United States. Barton Gin and Vodka: Well-known leading national brands. Other products include Crystal Palace Gin and Vodka, Lauder's, House of Stuart and Highland Mist Scotch whiskeys, Kentucky Gentleman, Very Old Barton and Tom Moore bourbon whiskeys, Sabroso coffee liqueur, Northern Light, Canadian Host and Canadian Supreme Canadian whiskeys and Imperial, Barton Reserve and Barton Premium blended whiskeys. Substantially all of the Company's unit volume consists of products marketed in the price value segment, which the Company believes constituted approximately 50% of the distilled spirits market in calendar 1993. Net sales and unit volumes of the Company's distilled spirits brands have decreased 1.6% and 4.3%, respectively, over the periods shown, there have been changes in sales of particular brands. Unit volumes of vodka and tequila have increased while Scotch and bourbon have experienced decreases in unit volume. Net sales have generally not been affected by price increases. In addition to the branded products described above, the Company also sells distilled spirits in bulk and provides contract production and bottling services. These activities accounted for net sales during the 12 month periods ended August 31, 1992, 1993 and 1994 of $11.8 million, $10.6 million and $7.0 million, respectively. Marketing and Distribution The Company's products are distributed and sold throughout the United States through over 1,000 wholesalers, as well as through state alcoholic beverage control agencies. The Company employs a full-time in-house sales organization of approximately 350 people to develop and service its sales to wholesalers and state agencies. The Company's sales force is organized in four sales units: a beer unit, a spirits unit and two wine units, one of which focuses on the newly acquired brands purchased in the Almaden/Inglenook Acquisition. The Company believes that the organization of its sales force into four divisions positions it to maintain a high degree of focus on each of its principal product categories. The Company's marketing strategy places primary emphasis upon promotional programs directed at its broad national distribution network (and to the retailers served by that network). The Company closely manages its advertising expenditures in relation to the performance of its brands. The Company has extensive marketing programs for its brands including television, radio, outdoor and print advertising, promotional programs on both a national basis and regional basis in accordance with the strength of the brands, event sponsorship, market research, point-of- sale materials, trade advertising and public relations. Trademarks and Distribution Agreements The Company's wine products are sold under a number of trademarks. All of these trademarks are either owned by the Company or used by the Company under exclusive license or distribution agreements. The Company also owns the following trademarks used in its distilled spirits business: Montezuma, House of Stuart, Highland Mist, Kentucky Gentleman, Barton, Canadian Supreme and Sabroso. The Monte Alban trademark for use outside of Mexico is jointly owned by the Company and the supplier of Monte Alban Mezcal. The Company owns the world-wide sales and marketing rights outside of Mexico. In September 1989, Barton purchased certain assets from Hiram Walker & Sons, Inc. ("Hiram Walker") and obtained licenses to use the trade names Ten High, Crystal Palace, Northern Light, Lauder's, and Imperial for an initial seven year period. Under an agreement dated January 28, 1994, the Company paid $5.1 million to Hiram Walker for the extension of licenses to use these brand names and certain other spirits brands, for varying periods, the longest of which terminates in 2116. All of the Company's imported beer products are marketed and sold pursuant to exclusive distribution agreements from the suppliers of these products. These agreements have terms that vary and prohibit the Company from importing other beers from the same country. The Company's agreement to distribute Corona and its other Mexican beer brands exclusively throughout 25 states was renewed effective January 1994 and expires in December 1998 with automatic renewal thereafter for one year periods from year to year unless terminated. Under this agreement, the Mexican supplier has the right to consent to Mr. Goodman's successor as Chairman and Chief Executive Officer of Barton's beer subsidiary, which consent may not be unreasonably withheld, and, if such consent is properly withheld, to terminate the agreement. The Company's agreement for the importation of St. Pauli Girl expires in 1998 with automatic renewal until 2003 unless the Company terminates the Agreement. The Company's agreement for the exclusive importation of Tsingtao throughout the entire United States was renewed effective January 1994 and expires in December 1996 with an automatic renewal to December 1999. Prior to their expiration, these agreements may be terminated if the Company fails to meet certain performance criteria. The Company believes it is currently in compliance with all of its material distribution agreements. Given the Company's long-term relationships with its suppliers, the Company does not believe that these agreements will be terminated and expects that such agreements will be renewed prior to their expiration. COMPETITION The beverage alcohol industry is highly competitive. The Company competes on the basis of quality, price, brand recognition and distribution. The Company's beverage alcohol products compete with other alcoholic and non-alcoholic beverages for consumer purchases, as well as shelf space in retail stores and for marketing focus by the Company's wholesalers. The Company competes with numerous multinational producers and distributors of beverage alcohol products, many of which have significantly greater resources than the Company. The Company's principal competitors include E&J Gallo Winery in the wine category, Van Munching & Co., Molson Breweries USA and Guinness in the imported beer category and United Distillers Glenmore and Jim Beam Brands in the distilled spirits category. PRODUCTION The Company's wines are produced from several varieties of wine grapes grown principally in California and New York. The grapes are crushed at the Company's wineries and stored as wine, grape juice or concentrate. Such grape products may be made into wine for sale under the Company's brand names, sold to other companies for resale under their own labels, or shipped to customers in the form of juice, juice concentrate, unfinished wines, high-proof grape spirits or brandy. Most of the Company's wines are bottled and sold within 18 months after the grape crush. The Company's inventories of wines, grape juice and concentrate are usually at their highest levels in November and December, immediately after the crush of each year's grape harvest, and are substantially reduced prior to the subsequent year's crush. The bourbon whiskeys, domestic blended whiskeys and light whiskeys marketed by the Company are primarily produced and aged by the Company at its distillery in Bardstown, Kentucky, though it may from time to time supplement its inventories through purchases from other distillers. At its Atlanta, Georgia facility, the Company produces all of the grain neutral spirits used by it in the production of vodka, gin and blended whiskey sold by it to customers in the state of Georgia. The Company's requirements of Canadian and Scotch whiskeys, and tequila, mezcal, and the grain neutral spirits used by it in the production of gin and vodka for sale outside of Georgia, and other spirits products, are purchased from various suppliers. Sources and Availability of Raw Materials The principal components in the production of the Company's branded beverage alcohol products are: packaging materials, primarily glass; grapes; and other agricultural products, such as grain. The Company utilizes glass bottles and other materials, such as caps, corks, capsules, labels and cardboard cartons in the bottling and packaging of its products. Glass bottle costs is one of the largest components of the Company's cost of product sold. The glass bottle industry is highly concentrated with only a small number of producers. The Company has traditionally obtained, and continues to obtain, its glass requirements from a limited number of producers. The Company has not experienced difficulty in satisfying its requirements with respect to any of the foregoing and considers its sources of supply to be adequate. However, the inability of any of the Company's glass bottle suppliers to satisfy the Company's requirements could adversely affect the Company's operations. Most of the Company's annual grape requirements are satisfied by purchases from each year's harvest, which occurs from July through October. The Company owns no vineyards in California and purchases grapes from over 1,000 independent growers principally in California and New York. In connection with the Vintners Acquisition and the Almaden/Inglenook Acquisition, the Company acquired certain long term grape purchase contracts. The Company enters into written purchase agreements with a majority of these growers on a year-to-year basis. As a result of this ample grape supply the Company believes that its exposure to phylloxera and other agricultural risks is minimal. The distilled spirits manufactured by the Company require various agricultural products, neutral grain spirits and bulk spirits. The Company fulfills its requirements through purchases from various sources, through contractual arrangements and through purchases on the open market. The Company believes that adequate supplies of the aforementioned products are available at the present time. GOVERNMENT REGULATION The Company's operations are subject to extensive federal and state regulation. These regulations cover, among other matters, sales promotion, advertising and public relations, labeling and packaging, changes in officers or directors, ownership or control, distribution methods and relationships, and requirements regarding brand registration and the posting of prices and price changes. All of the Company's facilities are also subject to federal, state and local environmental laws and regulations and the Company is required to obtain permits and licenses to operate its facilities. The Company believes that it is in compliance in all material respects with all presently applicable governmental laws and regulations and that the cost of administration of compliance with such laws and regulations does not have, and is not expected to have, a material adverse impact on the Company's financial condition or results of operations. EMPLOYEES The Company has approximately 2,650 full-time employees, approximately 900 of whom are covered by collective bargaining agreements. The Company's collective bargaining agreement covering 368 employees at the Mission Bell winery has expired and negotiations have commenced. Additional workers may be employed by the Company during the grape crushing season. The Company considers its employee relations to be good. Item 2. PROPERTIES The Company currently operates 15 wineries, two bottling and distilling plants, one bottling and rectifying plant and a brewery, all of which include warehousing and distribution facilities on the premises. The Company considers its principal facilities to be the Mission Bell winery in Madera, California, the Canandaigua, New York winery, and the Gonzales, California winery and the distilling and bottling facility located in Bardstown, Kentucky. Under the Restructuring Plan, the Central Cellars winery located in Lodi, California and the Soledad, California winery will be closed and offered for sale to reduce excess capacity. In New York, the Company operates four wineries located in Canandaigua, Naples, Batavia and Hammondsport. The Hammondsport winery lease, acquired in the Vintners Acquisition, expires in April 1995. Production at this winery will be consolidated at the Company's other New York wineries. The Company currently operates 11 winery facilities in California, including Central Cellars and Soledad Cellars which are to be closed. In the Almaden/Inglenook Acquisition, the Company acquired two new facilities located in Escalon and Madera, California. The Madera winery (known as the Mission Bell winery) is a crushing, wine production, bottling and distribution facility and a grape juice concentrate production facility. The Mission Bell winery will absorb the production of Central Cellars. The Escalon facility is operated under a long-term lease with an option to buy. As part of the Restructuring Plan, the branded wine bottling operations at the Gonzales, California facility where Paul Masson and Taylor Cellars are currently bottled will be moved to the Mission Bell winery during fiscal 1995. The other wineries operated in California are located in Lodi, McFarland, Madera, Fresno and Ukiah. The Company operates three facilities that produce and/or bottle and store distilled spirits. It owns production, bottling and storage facilities in Bardstown, Kentucky and Atlanta, Georgia, and operates a bottling plant in Carson, California, near Los Angeles, under a management contract. The Bardstown facility distills, bottles and warehouses whiskey for the Company's account and on a contractual basis for other participants in the industry. The Company also owns a production plant in Atlanta, Georgia which produces vodka, gin and blended whiskeys. The Carson plant receives distilled spirits in bulk from Bardstown and outside vendors, which it bottles and distributes. The Company also performs contract bottling at the Carson plant. The Company owns a brewery in Stevens Point, Wisconsin where it produces and bottles Point beer. In addition, the Company owns and maintains its corporate headquarters in Canandaigua, New York, and leases office space in Chicago, Illinois, for its Barton headquarters. The Company believes that all of its facilities are in good condition and working order and have adequate capacity to meet its needs for the foreseeable future. Most of the Company's real property has been pledged under the terms of collateral security mortgages as security for the payment of outstanding loans under the Credit Facility. Item 3. LEGAL PROCEEDINGS The Company and its subsidiaries are subject to litigation from time to time in the ordinary course of business. Although the amount of any liability with respect to such litigation cannot be determined, in the opinion of management, such liability will not have a material adverse effect on the Company's financial condition or results of operations. In connection with an investigation in the State of New Jersey into regulatory trade practices in the beverage alcohol industry, one employee of the Company was arrested in March 1994 and another employee has subsequently come under investigation in connection with providing "free goods" to retailers in violation of New Jersey beverage alcohol laws. Employees of several wholesalers and other alcoholic beverage manufacturers were also arrested or are under active investigation. Although the New Jersey Attorney General's office may expand its criminal investigation to include the Company and other manufacturers, to date, no grand jury subpoenas have been issued and no charges have been brought. The Company has cooperated with the Attorney General's office and, as a result of extensive discussions, the Attorney General's office has requested and the Company has submitted a detailed proposal to achieve a resolution of all civil, criminal and regulatory issues. The Company does not believe that the dollar amount of such a settlement or its effect on the Company's operations, if any, will be material. The United States Environmental Protection Agency (the "EPA") and the Georgia Environmental Protection Division (the "GEPD") conducted a Compliance Evaluation Inspection ("CEI") of Barton Brands of Georgia, Inc. ("Barton Georgia"), a subsidiary of Canandaigua Wine Company, Inc., on February 15, 1994. The CEI was conducted to determine compliance with the Resource Conservation and Recovery Act ("RCRA"). Following the inspection, the EPA sent a report of its findings together with a transmittal letter, dated March 7, 1994, to Barton Georgia. By letter dated March 21, 1994, the GEPD implemented enforcement action by serving Barton Georgia with a formal Notice of Violation alleging that between August 1991 and August 1993, Barton Georgia has violated certain regulations pertaining to (i) generation and accumulation of hazardous waste and (ii) hazardous waste burning in boilers. These alleged violations relate to the burning of fusel oil which is a mixture of alcohols created by the distillation process used in manufacturing various types of liquor products. Accompanying the Notice of Violation was a proposed settlement agreement in the form of a Consent Order between the GEPD and Barton Georgia. Following counterproposals, on October 21, 1994, Barton Georgia entered into a settlement agreement under the terms of a final Consent Order (the "Order") with the GEPD with respect to this matter. Under the Order, Barton Georgia has paid a stipulated civil penalty of $99,000, and will incur approximately $16,000 of other costs. Barton Georgia is not burning fusel oil in its current operations. The signing of the settlement agreement by Barton Georgia does not constitute any finding, determination or adjudication of liabiity on the part of Barton Georgia, nor any finding, determination or adjudication of a violation of any State or Federal laws, rules, standards or requirements; nor did Barton Georgia make any admission with respect thereto by signing the settlement agreement. Executive Officers of the Company The following table sets forth information with respect to the executive officers of the Company: NAME AGE OFFICE HELD Marvin Sands 70 Chairman of the Board Richard Sands 43 President and Chief Executive Officer Robert Sands 36 Executive Vice President and General Counsel Ellis M. Goodman 57 Executive Vice President of the Company and Chief Executive Officer of Barton Incorporated Lynn K. Fetterman 47 Senior Vice President, Chief Financial Officer and Secretary Chris Kalabokes 47 Senior Vice President, President of Wine Division Bertram E. Silk 62 Senior Vice President Marvin Sands is the founder of the Company, which is the successor to a business he started in 1945. He has been a director of the Company and its predecessor since 1946 and was Chief Executive Officer until October 1993. Marvin Sands is the father of Richard Sands and Robert Sands. Richard Sands, Ph.D. has been employed by the Company in various capacities since 1979. He was elected Executive Vice President and a director in 1982, became President and Chief Operating Officer in May 1986 and was elected Chief Executive Officer in October 1993. He is a son of Marvin Sands and the brother of Robert Sands. Robert Sands was appointed Executive Vice President, General Counsel in October 1993. He was elected a director of the Company in January 1990 and served as Vice President, General Counsel since June 1990. From June 1986, until his appointment as Vice President, General Counsel, Mr. Sands was employed by the Company as General Counsel. He is a son of Marvin Sands and the brother of Richard Sands. Ellis M. Goodman has been a director and Vice President since July 1993 and was elected Executive Vice President in October 1993. Mr. Goodman has been Chief Executive Officer of Barton Incorporated since 1987 and Chief Executive Officer of Barton Brands, Ltd. (predecessor to Barton Incorporated) since 1982. Lynn K. Fetterman joined the Company during April 1990 as its Vice President, Finance and Administration, Secretary and Treasurer and was elected Senior Vice President, Chief Financial Officer and Secretary in October 1993. For more than 10 years prior to that, he was employed by Reckitt and Colman in various executive capacities, including Vice President, Finance of its Airwick Industries Division and Vice President, Finance of its Durkee-French Foods Division. Mr. Fetterman's most recent position with Reckitt and Colman was as its Vice President-Controller. Reckitt and Colman's principal business relates to consumer food and household products. Chris Kalabokes joined the Company during October 1991 as President and Chief Executive Officer of the Company's Guild Wineries & Distilleries, Inc. subsidiary. During September 1992, he was appointed to the position of Vice President, President of the Wine Division of the Company and in October 1993 was appointed a Senior Vice President. For more than five years prior to joining the Company, he was employed by Guild. Mr. Kalabokes joined Guild in April 1985 as its Chief Financial Officer and continued in that position until June 1987 when he was promoted to President and Chief Executive Officer. Bertram E. Silk has been a director and Vice President of the Company since 1973 and was elected Senior Vice President in October 1993. He has been employed by the Company since 1965. Currently, Mr. Silk is in charge of the Company's grape grower relations in California. Before moving from Canandaigua, New York to California in 1989, Mr. Silk was in charge of production for the Company. From 1989 to August 1994, Mr. Silk was in charge of the Company's grape juice concentrate business in California. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's Class A Common Stock and Class B Common Stock are quoted on the Nasdaq National Market under the symbols "WINEA" and "WINEB", respectively. The following table sets forth for the periods indicated the high and low sales prices of the Class A Common Stock and the Class B Common Stock as reported on the Nasdaq National Market.