Item 1. Legal Proceedings................................................ 21
Item 5. Other Events..................................................... 21
Item 6. Exhibits and Reports on Form 8-K................................. 21
Signature........................................................ 22
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National Wine & Spirits, Inc. Notes To Condensed Consolidated Financial Statements (Unaudited)
1. Nature of Business and Basis of Presentation
The unaudited condensed consolidated financial statements include the accounts of National Wine & Spirits, Inc. (NWS), National Wine & Spirits Corporation (NWSC), NWS, Inc. (NWSI), NWS-Illinois, LLC (NWS-LLC), and NWS Michigan, Inc. (NWSM). In November 2000, NWSM commenced doing business through its subsidiary, National Wine & Spirits, LLC (NWSM-LLC) to sell low-proof alcohol and non-alcoholic products in the State of Michigan. References to U.S. Beverage (USB) relate to the operations of the Company's national import, craft and specialty beer marketing business performed by NWS-Illinois. All significant intercompany accounts and transactions have been eliminated from the consolidated financial statements. Substantially all revenues result from the sale of liquor, beer, and wine.
Based in Indianapolis, NWSC is a wholesale distributor of liquor and wines throughout Indiana. Based in Chicago, NWS-LLC is a wholesale distributor of liquor, wines and beer throughout Illinois. NWSM is a wholesale distributor of liquor throughout Michigan. NWS performs periodic credit evaluations of its customers' financial condition and generally does not require collateral. Credit losses have been within management's expectations.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the nine-month period ended December 31, 2001 are not necessarily indicative of the results that may be expected for the year ending March 31, 2002.
There is no provision for federal or state income taxes reflected in the financial statements because the stockholders have consented to NWS' election to be taxed as an S corporation under the applicable provisions of the Internal Revenue Code. NWS' income is taxable directly to its stockholders.
The balance sheet at March 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In accordance with APB 18, the historical results have been retroactively presented as if the Company had been accounting for the investment in eSkye Solutions, Inc. under the equity method for all periods presented (Note 6).
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In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Company is adopting the new rules on accounting for goodwill and other intangible assets effective April 1, 2002. The adoption of this statement is expected to reduce annual amortization expense approximately $100,000. During fiscal 2003, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets. The Company has not yet determined what the effect of these tests will be on its earnings and financial position.
FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 144 also addresses the accounting for expected disposals of long-lived assets. The Company will adopt Statement 144 in the first quarter of fiscal 2003 and, based on current circumstances, does not believe the effect of adoption will be material.
For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Form 10-K dated June 29, 2001.
2. Sale of Bottled Water Division
Effective June 5, 2000, NWSC sold certain of its licensed brands, trademarks and trade names of its bottled water division for approximately $10,440,000. NWSC received $9,960,000 for the sale of the assets at the sale date, and the balance of $480,000 was received in September 2000. NWSC recognized a gain of approximately $7,524,000 from the sales of the related assets and liabilities.
3. Inventory
Inventory is comprised of the following:
December 31, 2001 March 31, 2001 ----------------- --------------
Inventory at FIFO $ 104,295,000 $ 89,377,000 Less: LIFO reserve 10,566,000 9,761,000 -------------- -------------
$ 93,729,000 $ 79,616,000 ============== =============
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4. Debt
(A) On January 25, 1999, the Company issued $110,000,000 of unsecured senior notes with a maturity of January 15, 2009. Interest on the senior notes is 10.125% and is payable semiannually. The Company used the net proceeds of the senior notes (approximately $106,900,000) to repay its outstanding bank and other debt and amounts outstanding under its revolving credit facilities.
The bond indenture restricts the ability of the Company and its subsidiaries to incur additional indebtedness, pay dividends, engage in mergers or consolidations, make capital expenditures and otherwise restricts corporate activities.
On or after January 15, 2004, the Company may redeem some or all of the senior notes at any time at stated redemption prices plus accrued interest and liquidated damages. Notwithstanding the foregoing, during the first 36 months after January 20, 1999, the Company may redeem up to 33% of the aggregate principal amount of the senior notes at a redemption price of 110.125%, plus accrued interest and liquidated damages, with the net cash proceeds of one or more public offerings of common stock of the Company.
The Company purchased $2,125,000 of its senior notes from the open market on September 28, 2001. The notes were purchased for $2,082,500 plus accrued interest of $46,617. Related unamortized issuance costs of $74,391 were written off due to the purchase of the senior notes. The Company utilized its revolving credit facility to fund the purchase of the senior notes. The net loss on the purchase of $32,000 is included in other income and expenses.
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(B) On January 25, 1999, the Company entered into a credit agreement that provides a revolving line of credit for borrowings of up to $60,000,000 through January 25, 2004. Line of credit borrowings are limited to eligible accounts receivable plus eligible inventories. The credit agreement permits the Company to elect an interest rate based upon the Eurodollar rate or the higher of the prime lending rate or the federal funds effective rate plus 0.5%. At December 31, 2001, $17,000,000 bears interest at 5.00% based on the prime rate pricing, and $6,000,000 bears interest at 4.12% based on LIBOR based pricing. The Company also pays a commitment fee ranging from 0.25% to 0.5% of the available portion of its line of credit.
The Company has subordinated notes payable to its two stockholders, with a legal right of offset against the Company's note receivable from one stockholder. The Company had previously reported the net amount as a reduction in stockholder's equity when the net balance was a receivable. The balance of the receivable and payable at December 31, 2001 was $2,597,000 and $4,711,000, respectively. The resulting net payable is classified as long-term debt. It is the Company's intent to satisfy the receivable through future stockholder distributions.
5. Litigation
The Company is a party to various lawsuits and claims arising in the normal course of business. While the ultimate resolution of lawsuits or claims against the Company cannot be predicted with certainty, management is vigorously defending all claims and does not expect that these matters will have a material adverse effect on the financial position or results of operations of the Company.
6. eSkye Solutions, Inc. Investment
The Company has been accounting for its investment in eSkye Solutions, Inc. (eSkye) on the cost method. On December 28, 2001 eSkye redeemed a significant portion of its outstanding preferred stock at a significant discount. Since the company elected not to participate in this redemption, its voting control increased to over 20% of voting stock. In accordance with Accounting Principles Board Opinion 18 (APB 18), the Company is required to apply the equity method going forward. In addition, in accordance with APB 18, the historical results have been retroactively adjusted as if the Company had been accounting for this investment under the equity method for all periods presented. APB 18 also requires the Company to evaluate whether or not an "other than temporary" decline in value of an investment has occurred. As a result of this evaluation, the Company has written down the investment to a value of $455,000 at December 31, 2001, which the Company believes approximates the current fair value of the investment. After retroactively reporting the historical results for the application of the equity method, this impairment evaluation resulted in an additional write-down of $530,000 in the quarter ended December 31, 2001. Losses from applying the equity method and the impairment charges are included in "Equity in losses of eSkye" in the Statements of Income.
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7. Restatement of December 31, 2000 Results
The Company restated its Consolidated Financial Statements for the fiscal years 2000, 1999, and 1998 due to an overstatement of accounts receivable caused by a misappropriation of funds discovered during fiscal 2001. For the Company's 2001 fiscal year, a total charge of $0.8 million was reflected in operating results. Amounts charged to the fiscal 2000, 1999 and 1998 results were $1.2 million, $0.5 million and $1.0 million respectively. The Company is reporting the $0.8 million that was charged to the 2001 fiscal year in the quarter ended December 31, 2000. Since the investigation of the misappropriation was in process at December 31, 2000, the Company originally estimated the overstatement of accounts receivable at $2.8 million and charged that estimate to the quarter ended December 31, 2000. Thus, the net effect of the restatement of the three months ended December 31, 2000 results in an increase in net income of $2.0 million. The effect of this restatement, and the retroactive adjustment described in Note 6, on results of operations and balance sheets are as follows (in thousands):
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8. Segment Reporting
The Company's reportable segments are business units that engage in product sales and all other activities. The majority of the all other activities relate to distribution fee operations. The Company evaluates performance and allocates resources based on these segments.
9. Subsequent Event
On January 2, 2002 the Company's USB division entered into a distribution contract with Grolsch International, BV as the exclusive importer, seller and marketer of Grolsch products within the United States. The Company paid approximately $1.7 million and recorded an intangible asset to be amortized over the life of the contract.
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Item 2.
Item 2. Management's Discussion and Analysis
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 10-Q, including, but not limited to the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section, contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, which can be identified by the use of forward-looking terminology, such as "may," "intend," "will," "expect," "anticipate," "should," "plans to," "estimate" or "continue" or the negative thereof or other variations thereon or comparable terminology. In particular, any statement, express or implied, concerning future operating results or the ability to generate revenues, income or cash flow to service the Company's debt are forward-looking statements. Although the Company believes that the expectations will prove to have been correct. All forward-looking statements are expressly qualified by such cautionary statements, and the Company undertakes no obligation to update such forward-looking statements.
Overview
The Company is one of the largest distributors of wine and spirits in the United States. Substantially all of the Company's current operations are in Illinois, Indiana, Michigan, and Kentucky. The Company's reported revenues include net product sales in Indiana, Illinois and Michigan, and distribution fees in Michigan. References to U.S. Beverage (USB) relate to the operations of the Company's national import, craft and specialty beer marketing business performed by NWS-Illinois.
The Company was able to increase total revenue by 3.8% to $209.4 million for the three months ended December 31, 2001, while realizing a 2.9% increase in gross margin compared to the prior year's comparable quarter. The Company was pleased with its revenue and case volume for the third quarter ended December 31, 2001 considering the uncertain economic and travel outlook heading into the quarter. Case sales of wine and spirits were stable as compared to the prior year's comparable quarter, reflecting a slight shift by consumers to off-premise purchases versus the on-premise restaurant and hotel purchases. Other case sales declined 4.8% compared to the prior year's comparable quarter primarily from reduced non-alcoholic sales in the Indiana market, due to reduced representation of certain bottled water brands.
Outlook
The quarter ended December 31, 2001 affirmed the relative stability of the alcoholic beverage industry. Management was concerned about the effects of September 11, 2001, on sales during the holiday period, but sales during the three months ended December 31, 2001 were even with the previous year's comparable period in case volume with modestly higher revenue and gross margin.
The Federal Trade Commission ("FTC") has approved the sale of the Seagram Brands from Vivendi to Diageo and Pernod Ricard. As a condition of FTC approval, Diageo has agreed to sell the Malibu Rum brand in order to resolve the FTC's concern over a potential duopoly in the rum category. This sale of the Malibu Rum brand is expected to occur in the coming months. The Company currently represents the Malibu Rum Brand and the other Seagram Brands in each of its markets.
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Pernod Ricard began managing the Seagram brands it acquired on December 28, 2001, including Seagram's Gin, Martell, Chivas Regal, and others. Until the sale of the Malibu Rum brand is completed, Seagram employees will continue to manage the Seagram brands acquired by Diageo, including Captain Morgan, Crown Royal, V.O., 7 Crown, Myers's Rum and others.
In connection with its acquisition of those Seagram brands, Diageo has announced a formal request for proposal ("RFP") process for all Seagram distributors in the United States. NWS has been asked to submit proposals for all of our current markets. If one or more of the Company's proposals are not accepted by Diageo, Management anticipates acquiring the representation of some competing brands. There can be no assurance, however, that the failure of Diageo to accept the proposals of the Company will not have a material adverse effect on the business and financial condition of the Company.
On January 2, 2002 the Company's U.S. Beverage division entered into a distribution contract with Grolsch International, BV as the exclusive importer, seller and marketer of Grolsch products within the United States.
Results of Operations
The following table includes information regarding total cases shipped by the Company during the three months and nine months ended December 31, 2001 compared with the comparable periods ended December 31, 2000:
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Three Months Ended December 31, 2001, Compared with the Three Months Ended December 31, 2000.
Revenue
Total product sales increased 4.5% to $203.5 million for the quarter ended December 31, 2001 as compared to $194.8 million for the prior year's comparable quarter. Product sales revenue increased due to increased consumer demand for wine and spirits products from the off-premise channel opposed to the weakened on-premise channel. The on-premise sales, primarily represented by restaurants and hotels, have been adversely affected by the economic downturn and decline in business travel during the three months ended December 31, 2001. Case volume from non-alcoholic products declined from the comparable year's quarterly period due to the discontinued representation of two suppliers in the Indiana market. The decline in these relatively low priced units has not had a significant effect on our revenues, but has continued to allow for lower operating expenses due to reduced handling and delivery operations. Fee revenue for the quarter ended December 31, 2000 included the effect of a retroactive fee increase granted by Michigan, and accordingly, that quarter exceeds the current year quarter by approximately $1.1 million. Case volume for the fee operations declined approximately 3,000 cases, or 0.4% from the prior year's comparable quarter. The state of Michigan has authorized a fee increase of $.16 per case, effective February 3, 2002, resulting in a total per case fee of $7.48 as compared to the current $7.32 per case.
Gross Profit
Gross margin on product sales increased $2.4 million, or 6.4% for the quarter ended December 31, 2001 as compared to the prior year's comparable quarter. Gross profit percentage on product sales increased to 19.4% for the quarter ended December 31, 2001 as compared to 19.0% for the prior year's comparable quarter. The increase in gross margin dollars was primarily due to strong sales in the Illinois market and offset by the decline in fee revenue compared to the prior year's comparable quarter.
Operating Expenses
Total operating expenses increased 2.4% to $33.5 million for the quarter ended December 31, 2001 as compared to $32.7 million for the prior year's comparable quarter. Cost savings by the USB division during the quarter ended December 31, 2001 were offset by cost increases in other markets.
Warehouse and delivery expenses decreased slightly to $10.1 million for the quarter ended December 31, 2001 as compared to $10.2 million for the prior year's comparable quarter. The operational savings were primarily from reduced non-alcoholic case volume in the Indiana market and favorable weather conditions during the quarter ended December 31, 2001.
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Selling expenses decreased $0.1 million, to $12.2 million for the quarter ended December 31, 2001 as compared to the prior year's comparable quarter. This decrease was primarily the result of reduced promotional and advertising expenses for the USB division offset by increases in wages and brand spending in other markets.
Administrative expense increased $0.9 million, or 8.9% for the quarter ended December 31, 2001 from the prior year's comparable quarter. Increased costs of health benefits, casualty insurance, and professional fees were primarily responsible for the expense increase. The Company is partially self-insured for group health costs, and has experienced increases in claims for the three months ended December 31, 2001 as compared to the prior year's comparable quarter. The Company renewed its property and casualty insurance during the quarter ended December 31, 2001 and expects to show increased costs for the upcoming policy period. Professional fees have increased due to additional accounting and legal costs associated with the fiscal 2001 restatement and implementation of enhanced internal control procedures.
Income From Operations
Operating income increased 4.3% to $11.8 million for the quarter ended December 31, 2001 as compared to $11.3 million for the prior year's comparable quarter. The revenue increases and stable margins in the product markets, along with isolated operating expense increases, were primarily responsible for the increase in operating income as compared to the prior year's comparable quarter.
Interest Expense
Interest expense declined $0.5 million, or 14.7% to $3.0 million for the quarter ended December 31, 2001 as compared to the prior year's comparable quarter. Reduced revolving credit balances during the quarter ended December 31, 2001, along with the decline in the prime rate upon which the Company's revolving line of credit is based, were primarily responsible for the decreased expense.
Other Income
Other income decreased $.6 million from the prior year's comparable quarter primarily due from the impairment charge and applying the equity method to record the Company's share of losses from eSkye for the three months ended December 31, 2001. The Company's interest income declined by $0.1 million for the three months ended December 31, 2001 as compared to the prior year's comparable quarter due to the reductions in the prime rate, upon which the shareholder notes in NWSC are based.
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Net Income
Net income increased $0.4 million to $8.8 million for the quarter ended December 31, 2001 as compared to $8.4 million for the prior year's comparable quarter. The increase in net income for the quarter ended December 31, 2001 was primarily from the product markets which had increased revenue and operating income as compared to the prior year's comparable quarterly period.
For financial analysis purposes only, the Company's earning before interest, taxes, depreciation, and amortization (EBITDA) for the three months ended December 31, 2001 increased $0.4 million to $13.8 million as compared to $13.4 million for the prior year's comparable reporting period. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.
Nine Months Ended December 31, 2001, Compared with the Nine Months Ended December 31, 2000.
Revenue
The Company's total revenue for the nine months ended December 31, 2001 was $534.9 million, an increase of 2.8% over the comparable prior year period. Product sales increased due to the strong sales in the Company's Illinois market and offset by lower sales in the USB division. Case sales for wine and spirits in the product markets increased 3.1% for the nine months ended December 31, 2001 over the comparable prior year period, again driven by volume increases in the Illinois market. Fee revenue was down slightly, due to decreased case volume, to $16.8 million for the nine months ended December 31, 2001 compared to $17.0 million for the comparable prior year period.
Gross Profit
Gross profit on product sales increased $3.9 million, or 4.0% for the nine months ended December 31, 2001, over the comparable prior year period. The Illinois and Indiana markets were primarily responsible for the increase, and were offset by decreases in gross profit from the USB division as compared to the comparable prior year period. Gross profit percentage on product sales has increased slightly to 19.8% for the nine months ended December 31, 2001 as compared to 19.6% for the comparable prior year period.
Operating Expenses
Total operating expenses for the nine months ended December 31, 2001 increased $2.8 million, or 2.9% from the comparable prior year period. The increases were primarily from the Illinois and Michigan markets due to increased selling expenses and labor costs, respectively.
Warehouse and delivery expenses increased slightly, by $0.3 million or 1.0% for the nine months ended December 31, 2001 from the comparable prior year period. Cost efficiencies were created by the lower non-alcoholic volume in the Indiana market and offset by wage increases in the other product and fee markets.
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Selling expenses decreased $0.3 million, or 0.9% for the nine months ended December 31, 2001 over the comparable prior year period. Promotional and advertising expense reductions by USB during the nine months ended December 31, 2001 were primarily responsible for the reduced selling expense from the comparable prior year period.
Total administrative expenses increased $2.9 million, or 9.7% for the nine months ended December 31, 2001 from the comparable prior year period. Continued increases in health & welfare benefits, casualty and workman's compensation insurance, and professional fees were primarily responsible for the expense increase from the comparable prior year period. The Company has experienced higher costs for employee's health care and has implemented cost saving benefit changes effective January 2002. The Company renewed it property and casualty insurance during the quarter ended December 31, 2001 and expects to show increased costs for the upcoming policy period due to increased rates on facilities and excess liability coverage. Professional fees have increased from the comparable prior year period due to costs related to the March 2001 restatement and implementation of enhanced internal control procedures.
Income from Operations
Operating income increased $0.9 million, or 4.7%, to $20.8 million for the nine months ended December 31, 2001 as compared to the prior year period. The increase in operating income was primarily from the Illinois and Indiana markets due to increased revenue, stable and increased margins and margin percentages, along with moderate cost increases as compared to the prior year period.
Interest Expense
Interest expense declined $1.1 million, or 10.6% to $9.0 million for the nine months ended December 31, 2001 from the comparable prior year period. Reductions in the prime rate, upon which the Company's revolving line of credit is based, was primarily responsible for the decreased expense. The Company's prime based rate on its revolving credit facility was 10.0% on December 31, 2000 and was 5.0% on December 31, 2001.
Other Income
Other income decreased $8.3 million from the comparable prior year period, primarily due to the $7.5 million gain from the sale of the Cameron Springs bottled water division in June 2000, increased equity in losses and impairment in value from the investment in eSkye, and reduced interest income due to the reductions in the prime rate upon which the shareholder notes in NWSC are based.
The Company purchased $2,125,000 of its senior notes from the open market on September 28, 2001. The notes were purchased for $2,082,500 plus accrued interest of $46,617. Related unamortized issuance costs of $74,391 were written off due to the purchase of the senior notes.
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The net loss of $32,000 on the purchase is included in other income and expenses. The Company purchased the notes due to the favorable interest rate and the availability of funds under its revolving credit facility.
Net Income
Net income was $11.7 million for the nine months ended December 31, 2001, as compared to $18.0 million for the comparable prior year period. The net income variance from the prior year period was primarily due to the Company's gain from the sale of the bottled water division of $7.5 million during the nine months ended December 31, 2000.
For financial analysis purposes only, the Company's earning before interest, taxes, depreciation, and amortization (EBITDA) for the nine months ending December 31, 2001 was $27.0 million, as compared to the $26.6 million for the prior year reporting period. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity.
Liquidity and Capital Resources
The Company's primary cash requirements have been to fund accounts receivable and inventories for the product markets in Illinois, Indiana, and its U. S. Beverage operations. The Company has historically satisfied its cash requirements principally through cash flow from operations, trade terms and bank borrowings.
At December 31, 2001, the Company had $23.0 million outstanding and $37.0 million available on its $60.0 million revolving credit facility, as compared to $24.8 million outstanding at December 31, 2000.
The Company used $11.6 million in net cash from operating activities for the nine months ended December 31, 2001, a net increase of cash of $6.5 million from the comparable prior year period. The net increase in cash provided, as compared to the prior year's comparable period, primarily resulted from increased cash provided by accounts receivable of $8.5 million, reduced use of cash for inventories of $3.6 million, and increased use of cash to decrease accounts payable by $7.0 million. The Company has realized increased cash flow from reducing the days in trade accounts receivable with improved credit management procedures and management focus. The timing of inventory purchases during the quarter ended December 31, 2001 resulted in increased inventories and decreased accounts payable as compared to the prior year's comparable period.
Net cash used by investing activities increased $6.1 million from the comparable prior year period. This net decrease in funds provided was primarily the result of reduced purchases of property and equipment during the nine months ended December 31, 2001 as compared to the prior year's comparable period and expenditures during June 2000 for investments in eSkye Solutions, Inc., intangibles and the receipt of funds from the sale of the bottled water division.
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Net cash provided by financing activities was $14.1 million for the nine months ended December 31, 2001 as compared to $15.7 million from the comparable prior year period. Proceeds from the revolving credit facility during the current nine-month period were less than the comparable prior year period by $3.8 million. Payments of long-term debt increased primarily from the Company purchasing $2,125,000 of its senior notes from the open market on September 28, 2001. The Company's distributions to stockholders were reduced by $0.3 million for the nine months ended December 31, 2001 as compared to the prior year's comparable nine-month period, due to the timing of tax liabilities from 2000 to 2001. Stockholder distributions of $8.5 million for the nine months ended December 31, 2001 were distributed for the following purposes: $5.7 million for stockholders' tax liabilities, $2.3 million for repayment of stockholder debts to the Company, and $0.5 million to a stockholder that has no obligation to the Company.
Total assets increased to $217.7 million at December 31, 2001, a $25.4 million increase from March 31, 2001. The increase in assets is primarily due to greater accounts receivable and inventories at December 31, 2001 as compared to March 31, 2001. The December quarter is the Company's highest sales volume period, while the Company's March quarter is typically the lowest sales volume period. The Company's total assets were lower at December 31, 2001 as compared to December 31, 2000 by $9.5 million. Inventories at December 31, 2001 are $5.8 million higher than the levels at December 31, 2000 due to increased inventory purchases during the three- month period ended December 31, 2001. Total debt increased at December 31, 2001 as compared to March 31, 2001 due to the revolving credit facility's balance of $23.0 million at December 31, 2001 as compared to none at March 31, 2001, and $24.8 million at December 31, 2000. Equity increased $3.3 million, to $28.0 million at December 31, 2001 as compared to March 31, 2001 primarily due to net income of $11.7 million, the reclassification of the net shareholder payable to long-term debt of $2.1 million, and the distributions to stockholders that were not repaid to the Company of $6.2 million.
The Company believes cash flow from operations and existing capital resources, including cash and borrowings available under the Company's revolving credit facility, will be sufficient to satisfy the Company's anticipated working capital and debt service requirements and expansion plans.
Inflation
Inflation has not had a significant impact on the Company's operations but there can be no assurance that inflation will not have a negative effect on the Company's financial condition, results of operations or debt service capabilities in the future.
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Environmental Matters
The Company currently owns and leases a number of properties, and historically it has owned and/or leased others. Under applicable environmental laws, the Company may be responsible for remediation of environmental conditions relating to the presence of certain hazardous substances on such properties. The liability imposed by such laws is often joint and several without regard for whether the property owner or operator knew of, or was responsible for, the presence of such hazardous substances. In addition, the presence of such hazardous substances, or the failure to properly remediate such substances, may adversely affect the property owner's ability to borrow using the real estate as collateral and to transfer its interest in the real estate. Although the Company is not aware of the presence of hazardous substances requiring remediation, there can be no assurance that releases unknown to the Company have not occurred. Except for blending and bottling of a few of the Company's private label brands, the Company does not manufacture any of the wine or spirit products it sells and believes that it has conducted its business in substantial compliance with applicable environmental laws and regulations.
Other
As a matter of policy, the Company plans to review and evaluate all professional services firms every three years. This review will include but is not limited to legal, audit and information systems services. The next scheduled review will occur during fiscal 2005.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, "Business Combinations", and No. 142, "Goodwill and Other Intangible Assets", effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill (and intangible assets deemed to have indefinite lives) will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives.
The Company is adopting the new rules on accounting for goodwill and other intangible assets effective April 1, 2002. The adoption of this statement is expected to reduce annual amortization expense approximately $100,000. During fiscal 2003, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets. The Company has not yet determined what the effect of these tests will be on its earnings and financial position.
FASB Statement No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 144 also addresses the accounting for expected disposals of long-lived assets. The Company will adopt Statement 144 in the first quarter of fiscal 2003 and, based on current circumstances, does not believe the effect of adoption will be material.
Item 3.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no substantial change from the information previously provided in the company's Annual Report on Form 10-K.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is a party to various lawsuits and claims arising in the normal course of business. While the ultimate resolution of lawsuits or claims against the Company cannot be predicted with certainty, management is vigorously defending all claims and does not expect that these matters will have a material adverse effect on the financial position or results of operations of the Company.
Item 5.
Item 5. Other Events
In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, National Wine & Spirits, Inc. is identifying in exhibit 99 to this quarterly report important factors that could cause the Company's actual results to differ materially from those projected in forward-looking statements of the Company made by, or on behalf of the Company.
Item 6.
Item 6. Exhibits
(a) Exhibits
(99) Exhibit 99 - Forward-Looking Statements
(b) Reports on Form 8-K
The Company filed two Form 8-Ks on December 17, 2001 to dismiss Ernst & Young, LLP as the Company's principal accountant to audit the Company's financial statements, and to engage Arthur Andersen LLP as the principal accountant to audit the Company's financial statements.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NATIONAL WINE & SPIRITS, INC.
2/13/02 /S/ James E. LaCrosse - -------------------- --------------------------------------- Date James E. LaCrosse, Chief Financial Officer
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Exhibit 99
Forward-Looking Statements
From time to time, the Company may make or publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, and similar matters. Such statements are necessarily estimates reflecting the Company's best judgment based on current information. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. Such statements are usually identified by the use of words or phases such as "believes," "anticipates," "expects," "estimates," "planned," "outlook," and "goal." Because forward-looking statements involve risks and uncertainties, the Company's actual results could differ materially. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company's actual results and experiences to differ materially from the anticipated results or other expectations expressed in the Company's forward-looking statements.
While it is impossible to identify all such factors, the risks and uncertainties that may affect the operations, performance and results of the Company's business include the following:
(1) economic and competitive conditions in the markets in which the Company operates;
(2) strikes or other work stoppages affecting the Company or its major customers or suppliers;
(3) the Company's ability to continue to control and reduce its costs of storage and distribution;
(4) the level of consumer demand in the states in which the Company operates for the Company's line of alcohol-based beverages;
(5) supplier consolidation could result in brand realignment and the loss of certain products and customers;
(6) the risks associated with the reliance on one or a few significant suppliers;
(7) the impact of significant price increases or decreases in availability of certain alcohol-based beverages distributed by the Company;
(8) the nature and extent of any current or future state and federal regulations regarding the distribution of alcohol-based beverages;
(9) changes in financial markets affecting the Company's financial structure and the Company's costs of capital and borrowed money;
(10) any other factors which may be identified from time to time in the Company's periodic SEC filings and other public announcements.
Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those described in the forward-looking statements. The Company does not intend to update forward-looking statements.
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