TO OUR SHAREHOLDERS:
Sales in the second quarter rose 8.3% to $36.6 million, and increased 6.7% to $70.7 million for the first six months of the year. Supporting this growth, we experienced solid performance in all of our distribution channels, including our estate wineries and Vineyards / The Wine Shoppe retail stores, provincial liquor boards, restaurants and other licensed establishments, as well as our consumer-made wines. This sales growth, combined with our ongoing focus on the higher-margin premium and ultra-premium Peller Estates, Hillebrand Estates and Trius brands, resulted in gross profit in the quarter rising to 39.4% of sales from 37.4% last year. For the six months ended September 30, 2002 gross margin increased to 38.9% of sales from 37.7% in fiscal 2002. Earnings before interest, taxes, amortization and unusual items (EBITA) increased 24.3% to $3.6 million in the second quarter and 17.4% to $7.5 million for the six months ended September 30, 2002 compared to the same periods last year. Selling and administration expenses increased in both periods compared to the prior year as we continued to invest in the selling and marketing of our premium brands and by the impact of increased costs associated with the operating of the Peller Estates Winery which opened on June 6, 2001. Net earnings in the second quarter increased 21.3% to $1.0 million or $0.23 per Class A share. For the six months ended September 30, 2002 net earnings were $2.6 million or $0.56 per Class A share compared to $3.2 million or $0.70 per Class A share last year. Included in last year’s first quarter was an after-tax gain of $1.0 million resulting from the sale of our remaining interest in a Quebec-based winery. Exclusive of the sale, net earnings for the six months increased by 15.5% over the previous year. Andrés’ balance sheet strengthened in the quarter due to the enhanced financial performance and improved cash flow from operations in the period. Through the first six months of fiscal 2003, the Company generated cash from operations, after changes in non-cash working capital items, of $9.4 million compared to $2.0 million last year. Inventories have been reduced as we continue to rationalize our product lines to focus on our higher-margin premium and ultra-premium brands. Working capital stood at $24.4 million compared to $24.6 million at the year-end, while shareholders’ equity rose to $15.09 per Class A share as at September 30, 2002 compared to $14.87 per Class A share as at March 31, 2002. On October 16, 2002 the Company completed a refinancing of its term debt by entering into a $25 million seven-year term facility at a favorable interest rate with the Bank of Montreal. Proceeds from the facility will be used to repay current long-term debt and to reduce short-term bank indebtedness. As a result, the ratio of long-term debt to equity is 0.34:1 compared to 0.37:1 at the end of fiscal 2002. On Behalf of the Board
MANAGEMENT’S DISCUSSION AND ANALYSIS
The following management discussion and analysis provides a review of the operating results and financial position of Andrés Wines Ltd. (‘Andrés’) for the three months and six months ended September 30, 2002 and 2001. This discussion should be read in conjunction with the consolidated financial statements and the accompanying notes contained therein, as well as management’s discussion and analysis of the results and financial position for the year ended March 31, 2002 contained in the Company’s 2002 annual report. Net earnings in the second quarter were $1.0 million or $0.23 per Class A share compared to $.9 million or $0.19 per Class A share last year. For the six months ended September 30, 2002 net earnings were $2.6 million or $0.56 per Class A share compared to $3.2 million or $0.70 per Class A share last year. Included in last year’s first quarter was an unusual gain of $1.5 million ($1.0 million after-tax) resulting from the sale of the Company’s remaining interest in a Quebec-based winery.
Andrés Wines Ltd.
Management Report and Interim Consolidated Financial Statements
Results of Operations
Sales for the second quarter of fiscal 2003 rose 8.3% to $36.6 million compared to $33.8 million in the same three-month period last year. For the six months ended September 30, 2002, sales increased 6.7% to $70.7 million from $66.3 million last year. The increase in sales in the quarter and first six months of the year compared to the same periods last year is primarily due to higher sales volumes of the Company’s premium and ultra-premium, Trius and Peller Estates brands, which rose 10.8% and 8.3% respectively through the six months ended September 30, 2002 compared to last year. Improved performance was experienced throughout the Company’s comprehensive network of distribution channels, including its estate wineries, Vineyards/The Wine Shoppe retail stores, provincial liquor boards, restaurants and other licensed establishments. Sales increases were also achieved in the Company’s consumer-made wine businesses, Brew King and Vineco International Products. Gross margin as a percentage of sales increased in the second quarter of fiscal 2003 to 39.4% compared to 37.4% last year. For the six months ended September 30, 2002 gross margin as a percentage of sales increased to 38.9% from 37.7% last year. The improved profitability this year is due to the Company’s increased sales of higher-margin premium and ultra-premium VQA wines in the period, lower imported wine costs and the impact of facility rationalization. Selling and administrative expenses increased in the second quarter to $10.9 million compared to $9.8 million last year, and for the six months ended September 30, 2002 to $19.9 million from $18.6 million last year. The increases are due to the Company’s ongoing strategies to invest in the selling and marketing of its premium wines and by the impact of increased costs associated with the operating of the Peller Estates Winery which opened on June 6, 2001. Primarily as a result of the higher sales and improved gross margin, earnings before interest, taxes, amortization and unusual item (EBITA) for the three months ended September 30, 2002 increased to $3.6 million compared to $2.9 million for the same period last year. EBITA for the first six months of fiscal 2003 rose to $7.5 million from $6.4 million last year. Interest expense was higher in the second quarter and first six months of fiscal 2003 compared to the prior year due to higher average interest rates offset by modest decreases in overall debt levels compared to last year. Amortization expense increased compared to the prior year due primarily to the completion of the Peller Estates winery in June of last year.
Liquidity and Capital Resources
For the three months ended September 30, 2002, the Company generated $9.1 million in cash from operating activities, after changes in non-cash working capital items, compared to $3.1 million last year. For the six months ended September 30, 2002 cash from operations, after changes in non-cash working capital items, was $9.4 million compared to $2.0 million in the prior year. The increases in cash from operations are due to the improved net profit and reduced demand on the Company’s working capital in fiscal 2003 compared to the prior year. Investments in capital assets reduced significantly in the second quarter and first six months of fiscal 2003 compared to the prior year as last year’s expenditures included investments in the completion of the new Peller Estates Winery in Niagara-on-theLake that opened in June 2001. In addition, during the first quarter of last year the Company generated cash of approximately $7.4 million from the sale of a Quebec based winery. On October 16, 2002, the Company completed the refinancing of its term debt by entering into a $25 million seven-year term facility at a favorable interest rate with the Bank of Montreal. Proceeds will be used to repay existing term debt and reduce short-term bank indebtedness. As a result, the ratio of long-term debt to equity is 0.34:1 compared to 0.37.1 at the end of fiscal 2002. Dividends amounting to approximately $.7 million per quarter were paid in both years based on the Company’s annual dividend of $0.644 per Class A share and $0.560 per Class B share. Shareholders’ equity increased to $69.6 million or $15.09 per common share as at September 30, 2002 from $68.5 million or $14.87 per Class A share as at March 31, 2002 and $69.3 million or $14.71 per Class A share as at September 30, 2001. Number of Issued & Outstanding Shares as at September 30, 2002: Class A Shares, non-voting 3,741,082 Class B Shares, votiing 1,002,972
For the six months ended September 30, 2002
A Simple Truth
Second Quarter Report 2003
Head Office: Andrés Wines Ltd. 697 South Service Road Grimsby, Ontario L3M 4E8 Tel: (905) 643-4131 Fax: (905) 643-4944
Risks and Uncertainties
Certain statements in this discussion could be considered as forward-looking information. The information and the Company’s financial performance are subject to certain risks and uncertainties, which could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties are outlined in the Management Discussion and Analysis section of the Company’s 2002 Annual Report.
Joseph A. Peller Chairman Grimsby, Ontario October 31, 2002
CONSOLIDATED STATEMENTS OF EARNINGS & RETAINED EARNINGS
For the Period Ended September 30, 2002 & 2001 (Unaudited) (in thousands of dollars except per share amounts) Three Months Ended September 30
2002 $ 2001 $
Outlook
Six Months Ended September 30
2002 $ 2001 $
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
Unaudited Sept. 30 2002 $ Audited March 31 2002 $
SALES Cost of goods sold GROSS PROFIT Selling and administration EARNINGS before interest and amortization Interest Amortization EARNINGS before unusual items and income taxes Unusual Items EARNINGS BEFORE INCOME TAXES Provision for income taxes Current Future NET EARNINGS FOR THE PERIOD RETAINED EARNINGS - BEGINNING OF PERIOD Dividends: Class A & Class B RETAINED EARNINGS - END OF PERIOD NET EARNINGS PER SHARE Basic Class A Class B Diluted Class A Class B
36,626 22,180 14,446 10,870 3,576 560 1,086 1,930 0 1,930 805 78 883 1,047 64,831 742 65,136
$0.23 $0.19 $0.22 $0.19
33,811 21,172 12,639 9,762 2,877 441 919 1,517 0 1,517 518 136 654 863 63,315 742 63,436
$0.19 $0.16 $0.19 $0.16
70,709 43,236 27,473 19,934 7,539 1046 2,163 4,330 0 4,330 1,547 214 1,761 2,569 64,052 1,485 65,136
$0.56 $0.48 $0.55 $0.61
66,271 41,293 24,978 18,553 6,425 975 1,882 3,568 1,505 5,073 1,154 694 1,848 3,225 61,694 1,483 63,436
$0.70 $0.61 $0.70 $0.61
The overall Canadian wine market continues to grow, although the share of the market held by domestic producers has declined moderately over the past few years. Management believes its sales and marketing initiatives aimed at capitalizing on the growing trend toward premium and ultra-premium VQA wines will benefit the Company over the long term. The Company is also well positioned in the popular and consumer-made segments of the Canadian wine market. Andrés will continue to invest in the premium and ultra-premium wine market with the launch of new Peller Estates, Hillebrand Estates and Trius wines in the first six months of the year and will be continuing through the balance of fiscal 2003. Marketing and sales support will be focused on key brands sold across the country and by increased capital expenditures that support the Company’s on-going commitment to producing the highest quality wines. The Company believes that the investments made over the past few years will result in increased sales and continuing improvements in profitability going forward. The Company remains focused on improving production efficiencies and maintaining a tight control over operational and administrative spending. The Company will also continue to evaluate investment opportunities, including acquisitions, which support its strategic direction. Notes to the Interim Consolidated Financial Statements
(in thousands of dollars)
ASSETS
Current assets Accounts receivable Inventories Prepaid expenses
11,226 44,942 2,514 58,682 49,411 21,324 129,417
11,497 49,893 942 62,332 49,644 21,324 133,300
Capital assets Goodwill
1.
LIABILITIES
Current liabilities
Bank indebtedness
Summary of Significant Accounting Policies The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in Canada. The note disclosure for these interim statements only presents material changes to the disclosure found in the Company’s annual consolidated financial statements for the year ended March 31, 2002. These interim statements should be read in conjunction with those statements. Effective April 1, 2002, the Company adopted the new accounting standard which required that a fair value based method of accounting be applied to all stock-based payments to non-employees and to direct awards of stock to employees. However, the new standard permits the Company to continue its existing policy of recording no compensation costs on the grant of stock options to employees but with additional disclosures of pro-forma information. The Company will apply the pro-forma disclosures of the new standard to awards granted on or after April 1, 2002. The proforma effect of awards granted prior to April 1, 2002 will not be included. The standard requires the disclosure of pro-forma net earnings and earnings per share information as if the Company had accounted for employee stock options under the fair value method. In the first and second quarter of 2003, the Company did not grant any options and, thus, pro-forma disclosures are not required.
15,506 13,789 797 743 3,405 34,240 20,199 5,331 59,770
19,861 11,328 2,434 743 3,344 37,710 21,913 5,117 64,740
2.
CONSOLIDATED STATEMENTS OF CASH FLOW
For the Period Ended September 30, 2002 & 2001 (Unaudited) (in thousands of dollars) CASH PROVIDED BY (used in) OPERATING ACTIVITIES Net earnings for the period Items not affecting cash: Gain on disposal of MDF Amortization Future income taxes Changes in non-cash working capital items related to operations Cash flows provided from (used in) operating activities INVESTING ACTIVITIES Cash proceeds from sale of MDF Purchase of capital assets Cash flows provided from (used in) investing activities FINANCING ACTIVITIES Repayment of long-term debt Proceeds from (repayment of) bank indebtedness Issue of Class A shares Dividends paid Cash flows used in financing activities CASH & CASH EQUIVALENTS, AT BEGINNING & END OF PERIOD Three Months Ended September 30
2002 $ 2001 $
Six Months Ended September 30
2002 $ 2001 $
Accounts payable & accrued liabilities Dividends payable Taxes payable Current portion of long- term debt
1,047 0 1,086 78 2,211 6,880 9,091 0 (1,185) (1,185) (831) (6,333) 0 (742) (7,906) 0
863 0 919 136 1,918 1,202 3,120 0 (2,052) (2,052) (592) 266 0 (742) (1,068) 0
2,569 0 2,163 214 4,946 4,474 9,420 0 (1,930) (1,930) (1,653) (4,355) 3 (1,485) (7,490) 0
3,225 (1,905) 1,882 694 3,896 (1,855) 2,041 7,390 (4,337) 3,053 (1,175) (2,435) 0 (1,484) (5,094) 0
Long-term debt Future income taxes
SHAREHOLDERS’ EQUITY
Capital stock Retained earnings
4,511 65,136 69,647 129,417
4,508 64,052 68,560 133,300
3.
Stock Option Plan The Company has a stock option plan for executives and directors. All options under this plan are for a term of five years, from the date of the grant. They become exercisable with respect to 25% of the total number of shares subject to the option immediately and 25% on each of the three successive anniversaries of the date of the grant. For the six months ending September 30, 2002, 250 options were exercised for proceeds of $3 and 5,000 stock appreciation rights were exercised at a cost of $25. Subsequent Event On October 16, 2002, the Company refinanced $25.0 million of its long-term debt with the Bank of Montreal. The $25.0 million facility is for a term of seven years maturing on October 1, 2009 and will incur interest at the Bankers Acceptance Rate plus 1.2%. The loan is repayable in monthly principal payments of $187,500. The Company has also entered into an interest rate swap, which fixes the interest rate on the refinanced term debt at 5.99%. Proceeds from the new term facility will be used to repay existing term debt and reduce short-term bank indebtedness.