FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 2002 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- -------------- COMMISSION FILE NUMBER 001-08495 CONSTELLATION BRANDS, INC. -------------------------- (Exact name of registrant as specified in its charter) DELAWARE 16-0716709 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) (585) 218-3600 ----------------------------------------------------- (Registrant's telephone number, including area code) ----------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- --- The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of December 31, 2002, is set forth below: CLASS NUMBER OF SHARES OUTSTANDING ----- ---------------------------- Class A Common Stock, Par Value $.01 Per Share 78,412,803 Class B Common Stock, Par Value $.01 Per Share 12,078,490 PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ------- --------------------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) November 30, February 28, 2002 2002 ------------ ------------ (unaudited) ASSETS ------ CURRENT ASSETS: Cash and cash investments $ 29,936 $ 8,961 Accounts receivable, net 479,662 383,922 Inventories, net 880,149 777,586 Prepaid expenses and other current assets 76,165 60,779 ------------ ------------ Total current assets 1,465,912 1,231,248 PROPERTY, PLANT AND EQUIPMENT, net 599,153 578,764 GOODWILL 721,104 668,083 INTANGIBLE ASSETS, net 382,668 425,987 OTHER ASSETS 171,566 165,303 ------------ ------------ Total assets $ 3,340,403 $ 3,069,385 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable $ 5,198 $ 54,775 Current maturities of long-term debt 83,338 81,609 Accounts payable 217,715 153,433 Accrued excise taxes 52,615 60,238 Other accrued expenses and liabilities 352,583 245,155 ------------ ------------ Total current liabilities 711,449 595,210 ------------ ------------ LONG-TERM DEBT, less current maturities 1,265,574 1,293,183 ------------ ------------ DEFERRED INCOME TAXES 151,293 163,146 ------------ ------------ OTHER LIABILITIES 64,171 62,110 ------------ ------------ STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value- Authorized, 1,000,000 shares; Issued, none at November 30, 2002, and February 28, 2002 - - Class A Common Stock, $.01 par value- Authorized, 275,000,000 shares; Issued, 81,198,268 shares at November 30, 2002, and 79,309,174 shares at February 28, 2002 812 793 Class B Convertible Common Stock, $.01 par value- Authorized, 30,000,000 shares; Issued, 14,583,990 shares at November 30, 2002, and 14,608,390 shares at February 28, 2002 146 146 Additional paid-in capital 457,271 431,216 Retained earnings 743,504 592,219 Accumulated other comprehensive loss (20,965) (35,222) ------------ ------------ 1,180,768 989,152 ------------ ------------ Less - Treasury stock- Class A Common Stock, 2,829,951 shares at November 30, 2002, and 2,895,526 shares at February 28, 2002, at cost (30,469) (31,159) Class B Convertible Common Stock, 2,502,900 shares at November 30, 2002, and February 28, 2002, at cost (2,207) (2,207) ------------ ------------ (32,676) (33,366) ------------ ------------ Less - Unearned compensation - restricted stock awards (176) (50) ------------ ------------ Total stockholders' equity 1,147,916 955,736 ------------ ------------ Total liabilities and stockholders' equity $ 3,340,403 $ 3,069,385 ============ ============ The accompanying notes are an integral part of these statements.
1
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) For the Nine Months Ended November 30, For the Three Months Ended November 30, -------------------------------------- --------------------------------------- 2002 2001 2002 2001 --------------- --------------- --------------- --------------- (unaudited) (unaudited) (unaudited) (unaudited) GROSS SALES $ 2,729,219 $ 2,616,477 $ 969,759 $ 925,556 Less - Excise taxes (650,641) (627,064) (231,380) (223,702) --------------- --------------- --------------- --------------- Net sales 2,078,578 1,989,413 738,379 701,854 COST OF PRODUCT SOLD (1,495,096) (1,457,124) (524,885) (508,740) --------------- --------------- --------------- --------------- Gross profit 583,482 532,289 213,494 193,114 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (263,847) (264,542) (85,470) (84,291) --------------- --------------- --------------- --------------- Operating income 319,635 267,747 128,024 108,823 EQUITY IN EARNINGS OF JOINT VENTURE 10,093 1,028 4,182 1,165 INTEREST EXPENSE, net (80,494) (86,408) (26,202) (27,249) --------------- --------------- --------------- --------------- Income before income taxes 249,234 182,367 106,004 82,739 PROVISION FOR INCOME TAXES (97,949) (72,947) (41,660) (33,096) --------------- --------------- --------------- --------------- NET INCOME $ 151,285 $ 109,420 $ 64,344 $ 49,643 =============== =============== =============== =============== SHARE DATA: Earnings per common share: Basic $ 1.69 $ 1.29 $ 0.71 $ 0.57 =============== =============== =============== =============== Diluted $ 1.63 $ 1.26 $ 0.69 $ 0.55 =============== =============== =============== =============== Weighted average common shares outstanding: Basic 89,617 84,724 90,323 86,858 Diluted 92,669 87,140 93,083 89,477 SUPPLEMENTAL DATA RESTATED FOR EFFECT OF SFAS NO. 142: Adjusted operating income $ 319,635 $ 287,132 $ 128,024 $ 115,285 =============== =============== =============== =============== Adjusted net income $ 151,285 $ 123,069 $ 64,344 $ 54,413 =============== =============== =============== =============== Adjusted earnings per common share - basic $ 1.69 $ 1.45 $ 0.71 $ 0.63 =============== =============== =============== =============== Adjusted earnings per common share - diluted $ 1.63 $ 1.41 $ 0.69 $ 0.61 =============== =============== =============== =============== The accompanying notes are an integral part of these statements.
2
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Nine Months Ended November 30, -------------------------------------- 2002 2001 --------------- --------------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 151,285 $ 109,420 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 41,174 39,943 Amortization of intangible assets and other assets 4,409 24,048 Deferred tax provision 4,062 - Loss (gain) on sale of assets 1,956 (2,175) Stock-based compensation expense 75 76 Amortization of discount on long-term debt 46 413 Equity in earnings of joint venture (10,093) (1,028) Change in operating assets and liabilities, net of effects from purchases of businesses: Accounts receivable, net (81,470) (134,321) Inventories, net (102,901) (57,664) Prepaid expenses and other current assets (14,029) (10,499) Accounts payable 57,198 83,138 Accrued excise taxes (8,972) (5,720) Other accrued expenses and liabilities 100,812 80,560 Other assets and liabilities, net 3,712 (2,517) --------------- --------------- Total adjustments (4,021) 14,254 --------------- --------------- Net cash provided by operating activities 147,264 123,674 --------------- --------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment (51,833) (47,158) Payment of accrued earn-out amount (1,674) - Purchases of businesses, net of cash acquired - (472,337) Investment in joint venture - (77,282) Proceeds from sale of assets 977 35,499 --------------- --------------- Net cash used in investing activities (52,530) (561,278) --------------- --------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments of long-term debt (62,519) (43,080) Net (repayments of) proceeds from notes payable (49,429) 156,226 Payment of issuance costs of long-term debt (10) (1,339) Exercise of employee stock options 25,539 35,249 Proceeds from issuance of long-term debt, net of discount 10,000 2,910 Proceeds from employee stock purchases 1,319 842 Proceeds from equity offering, net of fees - 151,486 --------------- --------------- Net cash (used in) provided by financing activities (75,100) 302,294 --------------- --------------- Effect of exchange rate changes on cash and cash investments 1,341 (908) --------------- --------------- NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS 20,975 (136,218) CASH AND CASH INVESTMENTS, beginning of period 8,961 145,672 --------------- --------------- CASH AND CASH INVESTMENTS, end of period $ 29,936 $ 9,454 =============== =============== SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Fair value of assets acquired, including cash acquired $ - $ 541,296 Liabilities assumed - (63,217) --------------- --------------- Cash paid - 478,079 Less - cash acquired - (5,742) --------------- --------------- Net cash paid for purchases of businesses $ - $ 472,337 =============== =============== Property, plant and equipment contributed to joint venture $ - $ 30,020 =============== =============== The accompanying notes are an integral part of these statements.
3 CONSTELLATION BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2002 (UNAUDITED) 1) MANAGEMENT'S REPRESENTATIONS: The consolidated financial statements included herein have been prepared by Constellation Brands, Inc. and its subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all significant adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002. Results of operations for interim periods are not necessarily indicative of annual results. Certain February 28, 2002, balances have been reclassified to conform to current year presentation. 2) ACCOUNTING CHANGES: Effective March 1, 2002, the Company completed its adoption of Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations," resulting in a reclassification of $46.8 million of previously identified separable intangible assets to goodwill and an elimination of $16.6 million of deferred tax liabilities previously associated with those intangible assets with a corresponding deduction from goodwill. The adoption of SFAS No. 141 did not have any other material impact on the Company's financial statements. Effective March 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives and are subject to review for impairment. Upon adoption of SFAS No. 142, the Company determined that certain of its intangible assets met the criteria to be considered indefinite lived and, accordingly, ceased their amortization effective March 1, 2002. These intangible assets consisted principally of trademarks. Intangible assets determined to have a finite life, primarily distribution agreements, continue to be amortized over their estimated useful lives which were not modified as a result of adopting SFAS No. 142. Nonamortizable intangible assets are tested for impairment in accordance with the provisions of SFAS No. 142 and amortizable intangible assets are tested for impairment in accordance with the provisions of SFAS No. 144 (as defined below). Note 5 provides a summary of intangible assets segregated between amortizable and nonamortizable amounts. The Company has completed its impairment testing for nonamortizable intangible assets and goodwill pursuant to the requirements of SFAS No. 142. No instances of impairment were noted as a result of these processes. 4 The following table presents earnings and earnings per share information for the comparative periods as if the nonamortization provisions of SFAS No. 142 had been applied as of March 1, 2001:
For the Nine Months For the Three Months Ended November 30, Ended November 30, ------------------------- ------------------------ 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (in thousands, except per share data) Reported net income $ 151,285 $ 109,420 $ 64,344 $ 49,643 Add back: amortization of goodwill - 11,165 - 2,904 Add back: amortization of intangibles reclassified to goodwill - 1,611 - 540 Add back: amortization of indefinite lived intangible assets - 6,609 - 3,018 Less: income tax effect - (5,736) - (1,692) ---------- ---------- ---------- ---------- Adjusted net income $ 151,285 $ 123,069 $ 64,344 $ 54,413 ========== ========== ========== ========== Basic earnings per common share: - -------------------------------- Reported net income $ 1.69 $ 1.29 $ 0.71 $ 0.57 Add back: amortization of goodwill - 0.13 - 0.03 Add back: amortization of intangibles reclassified to goodwill - 0.02 - 0.01 Add back: amortization of indefinite lived intangible assets - 0.08 - 0.04 Less: income tax effect - (0.07) - (0.02) ---------- ---------- ---------- ---------- Adjusted net income $ 1.69 $ 1.45 $ 0.71 $ 0.63 ========== ========== ========== ========== Diluted earnings per common share: - ---------------------------------- Reported net income $ 1.63 $ 1.26 $ 0.69 $ 0.55 Add back: amortization of goodwill - 0.13 - 0.03 Add back: amortization of intangibles reclassified to goodwill - 0.02 - 0.01 Add back: amortization of indefinite lived intangible assets - 0.07 - 0.04 Less: income tax effect - (0.07) - (0.02) ---------- ---------- ---------- ---------- Adjusted net income $ 1.63 $ 1.41 $ 0.69 $ 0.61 ========== ========== ========== ==========
The changes in the carrying amount of goodwill for the nine months ended November 30, 2002, are as follows:
Popular and Imported U.K. Premium Beer and Brands and Fine Wine Spirits Wholesale Wine Consolidated ---------- ---------- ---------- ---------- ------------ (in thousands) Balance, February 28, 2002 $ 226,798 $ 105,680 $ 143,321 $ 192,284 $ 668,083 Intangible assets reclassified to goodwill at March 1, 2002 - 40,030 6,765 - 46,795 Elimination of deferred tax liabilities - (14,611) (2,030) - (16,641) Purchase accounting allocations 4,985 - - 808 5,793 Foreign currency translation adjustments - 253 14,635 - 14,888 Other 2,186 - - - 2,186 ---------- ---------- ---------- ---------- ------------ Balance, November 30, 2002 $ 233,969 $ 131,352 $ 162,691 $ 193,092 $ 721,104 ========== ========== ========== ========== ============
Effective March 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 5 No. 144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements. Effective March 1, 2002, the Company adopted EITF Issue No. 01-09 ("EITF No. 01-09"), "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)," which codified various issues related to the income statement classification of certain promotional payments under EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," EITF Issue No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future," and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF No. 01-09 addresses the recognition, measurement and income statement classification of consideration given by a vendor to a customer (including both a reseller of the vendor's products and an entity that purchases the vendor's products from a reseller). EITF No. 01-09, among other things, requires that certain consideration given by a vendor to a customer be characterized as a reduction of revenue when recognized in the vendor's income statement. The Company previously reported such costs as selling, general and administrative expenses. As a result of adopting EITF No. 01-09 on March 1, 2002, the Company has restated net sales, cost of product sold, and selling, general and administrative expenses for the nine months and three months ended November 30, 2001. Net sales were reduced by $157.5 million and $62.2 million, respectively; cost of product sold was increased by $8.2 million and $3.1 million, respectively; and selling, general and administrative expenses were reduced by $165.7 million and $65.3 million, respectively. This reclassification did not affect operating income or net income. Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." The adoption of SFAS No. 146 did not have a material impact on the Company's financial statements. 3) ACQUISITIONS: On March 5, 2001, in an asset acquisition, the Company acquired several well-known premium wine brands, including Vendange, Nathanson Creek, Heritage, and Talus, working capital (primarily inventories), two wineries in California, and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River Vintners Group (the "Turner Road Vintners Assets"). The purchase price of the Turner Road Vintners Assets, including assumption of indebtedness of $9.4 million, was $289.2 million. The acquisition was financed by the proceeds from the sale of the February 2001 Senior Notes and revolving loan borrowings under the senior credit facility. The Turner Road Vintners Assets acquisition was accounted for using the purchase method; accordingly, the acquired net assets were recorded at fair market value at the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired (goodwill), $146.7 million, is no longer being amortized, but is tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The results of operations of the Turner Road Vintners Assets are reported in the Popular and Premium Wine segment and have been included in the Consolidated Statements of Income since the date of acquisition. 6 On March 26, 2001, in an asset acquisition, the Company acquired certain wine brands, wineries, working capital (primarily inventories), and other related assets from Corus Brands, Inc. (the "Corus Assets"). In this acquisition, the Company acquired several well-known premium wine brands primarily sold in the northwestern United States, including Covey Run, Columbia, Ste. Chapelle and Alice White. The purchase price of the Corus Assets, including assumption of indebtedness (net of cash acquired) of $3.0 million, was $52.3 million plus an earn-out over six years based on the performance of the brands. As of November 30, 2002, the Company has paid an earn-out in the amount of $1.7 million. In connection with the transaction, the Company also entered into long-term grape supply agreements with affiliates of Corus Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards. The acquisition was financed with revolving loan borrowings under the senior credit facility. The Corus Assets acquisition was accounted for using the purchase method; accordingly, the acquired net assets were recorded at fair market value at the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired (goodwill), $48.9 million, is no longer being amortized, but is tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The results of operations of the Corus Assets are reported in the Popular and Premium Wine segment and have been included in the Consolidated Statements of Income since the date of acquisition. On July 2, 2001, the Company acquired all of the outstanding capital stock of Ravenswood Winery, Inc. (the "Ravenswood Acquisition"). The Ravenswood business produces, markets and sells super-premium and ultra-premium California wine, primarily under the Ravenswood brand name. The purchase price of the Ravenswood Acquisition, including assumption of indebtedness of $2.8 million, was $152.5 million. The purchase price was financed with revolving loan borrowings under the senior credit facility. The Ravenswood Acquisition was accounted for using the purchase method; accordingly, the acquired net assets were recorded at fair market value at the date of acquisition. The excess of the purchase price over the fair market value of the net assets acquired (goodwill), $99.8 million, is not amortizable and is tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Ravenswood Acquisition was consistent with the Company's strategy of further penetrating the higher gross profit margin super-premium and ultra-premium wine categories. The results of operations of the Ravenswood business are reported in the Fine Wine segment and have been included in the Consolidated Statements of Income since the date of acquisition. The following table summarizes the fair values of the assets acquired and liabilities assumed in the Ravenswood Acquisition at July 2, 2001, as adjusted for the final appraisal: Current assets $ 34,396 Property, plant and equipment 14,994 Other assets 26 Trademarks 45,600 Goodwill 99,756 --------- Total assets acquired 194,772 Current liabilities 12,523 Long-term liabilities 32,593 --------- Total liabilities assumed 45,116 --------- Net assets acquired $ 149,656 ========= The trademarks are not subject to amortization. None of the goodwill is expected to be deductible for tax purposes. 7 The following table sets forth the unaudited historical and unaudited pro forma results of operations of the Company for the nine months ended November 30, 2002, and November 30, 2001, respectively. The unaudited pro forma results of operations for the nine months ended November 30, 2001, give effect to the acquisitions of the Turner Road Vintners Assets and the Corus Assets and the Ravenswood Acquisition as if they occurred on March 1, 2001. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of goodwill, interest expense on the acquisition financing and related income tax effects. The unaudited pro forma results of operations are based upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations for the nine months ended November 30, 2001, do not reflect total nonrecurring charges of $12.6 million ($0.09 per share on a diluted basis) related to transaction costs, primarily for the acceleration of vesting of stock options, which were incurred by Ravenswood Winery, Inc. prior to the acquisition. The unaudited pro forma results of operations do not purport to present what the Company's results of operations would actually have been if the aforementioned transactions had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company's financial position or results of operations at any future date or for any future period.
For the Nine Months Ended November 30, ---------------------------- 2002 2001 ------------ ------------ (in thousands, except per share data) Net sales $ 2,078,578 $ 2,004,772 Income before income taxes $ 249,234 $ 179,445 Net income $ 151,285 $ 107,256 Earnings per common share: Basic $ 1.69 $ 1.27 ============ ============ Diluted $ 1.63 $ 1.23 ============ ============ Weighted average common shares outstanding: Basic 89,617 84,724 Diluted 92,669 87,140
4) INVENTORIES: Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following: November 30, February 28, 2002 2002 ------------ ------------ (in thousands) Raw materials and supplies $ 27,093 $ 34,126 In-process inventories 589,486 524,373 Finished case goods 263,570 219,087 ------------ ------------ $ 880,149 $ 777,586 ============ ============ 8 5) INTANGIBLE ASSETS: The major components of intangible assets are:
November 30, 2002 February 28, 2002 ------------------------- ------------------------- Gross Net Gross Net Carrying Carrying Carrying Carrying Amount Amount Amount Amount ---------- ---------- ---------- ---------- (in thousands) Amortizable intangible assets: Distribution agreements $ 10,158 $ 4,815 $ 10,158 $ 5,960 Other 3,978 526 4,049 1,067 ---------- ---------- ---------- ---------- Total $ 14,136 5,341 $ 14,207 7,027 ========== ========== Nonamortizable intangible assets: Trademarks 356,838 351,707 Distributor and agency relationships 20,458 60,488 Other 31 6,765 ---------- ---------- Total 377,327 418,960 ---------- ---------- Total intangible assets $ 382,668 $ 425,987 ========== ==========
The difference between the gross carrying amount and net carrying amount for each item presented is attributable to accumulated amortization. Amortization expense for intangible assets was $1.7 million and $0.6 million for the nine months and three months ended November 30, 2002, respectively. Estimated amortization expense for each of the five succeeding fiscal years is as follows: (in thousands) 2003 $ 2,249 2004 $ 1,625 2005 $ 1,427 2006 $ 1,361 2007 $ 365 6) INVESTMENT IN JOINT VENTURE: On July 31, 2001, the Company and BRL Hardy Limited ("Hardy") completed the formation of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the Company and Hardy. The Company and PWP are parties to the following agreements: crushing, wine production, bottling, storage, and related services agreement; inventory supply agreement; sublease and assumption agreements pertaining to certain vineyards, which agreements include a market value adjustment provision; and a market value adjustment agreement relating to a certain vineyard lease held by PWP. As of November 30, 2002, amounts related to the above agreements were not material. On October 16, 2001, the Company announced that PWP completed the purchase of certain assets of Blackstone Winery, including the Blackstone brand and the Codera wine business in Sonoma County (the "Blackstone Assets"). The purchase price of the Blackstone Assets was $138.0 million and was financed equally by the Company and Hardy. The Company used revolving loan borrowings under its senior credit facility to fund the Company's portion of the transaction. As of November 30, 2002, the Company's investment balance, which is accounted for under the equity method, was $120.6 million and is included on the Consolidated Balance Sheets in Other Assets. The carrying amount of the investment is less than the Company's equity in the underlying net assets of PWP by $3.9 million. This amount is included in earnings as the assets are used by PWP. 9 7) STOCKHOLDERS' EQUITY: In July 2002, the stockholders of the Company approved an increase in the number of authorized shares of Class A Common Stock from 120,000,000 shares to 275,000,000 shares and Class B Convertible Common Stock from 20,000,000 shares to 30,000,000 shares, thereby increasing the aggregate number of authorized shares of the Company to 306,000,000 shares. 8) EARNINGS PER COMMON SHARE: Basic earnings per common share exclude the effect of common stock equivalents and are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period for Class A Common Stock and Class B Convertible Common Stock. Diluted earnings per common share reflect the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per common share assume the exercise of stock options using the treasury stock method. The computation of basic and diluted earnings per common share is as follows:
For the Nine Months For the Three Months Ended November 30, Ended November 30, ------------------------- -------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (in thousands, except per share data) Income applicable to common shares $ 151,285 $ 109,420 $ 64,344 $ 49,643 ========== ========== ========== ========== Weighted average common shares outstanding - basic 89,617 84,724 90,323 86,858 Stock options 3,052 2,416 2,760 2,619 ---------- ---------- ---------- ---------- Weighted average common shares outstanding - diluted 92,669 87,140 93,083 89,477 ========== ========== ========== ========== EARNINGS PER COMMON SHARE - BASIC $ 1.69 $ 1.29 $ 0.71 $ 0.57 ========== ========== ========== ========== EARNINGS PER COMMON SHARE - DILUTED $ 1.63 $ 1.26 $ 0.69 $ 0.55 ========== ========== ========== ==========
Stock options to purchase 1.1 million and 2.2 million shares of Class A Common Stock at a weighted average price per share of $27.43 and $20.62 were outstanding during the nine months ended November 30, 2002 and 2001, but were not included in the computation of the diluted earnings per common share because the stock options' exercise price was greater than the average market price of the Class A Common Stock for the period. Stock options to purchase 1.1 million and 2.2 million shares of Class A Common Stock at a weighted average price per share of $27.41 and $20.62 were outstanding during the three months ended November 30, 2002 and 2001, but were not included in the computation of the diluted earnings per common share because the stock options' exercise price was greater than the average market price of the Class A Common Stock for the period. 9) COMPREHENSIVE INCOME: Comprehensive income consists of net income, foreign currency translation adjustments, net unrealized gains or losses on derivative instruments and minimum pension liability adjustments. The reconciliation of net income to comprehensive income is as follows: 10
For the Nine Months For the Three Months Ended November 30, Ended November 30, ------------------------- -------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (in thousands) Net income $ 151,285 $ 109,420 $ 64,344 $ 49,643 Other comprehensive income, net of tax: Foreign currency translation adjustments 14,659 (8,114) 1,520 (5,232) Cash flow hedges: Net derivative gains, net of tax effect of $0, $103, $0 and $7, respectively - 209 - (10) Reclassification adjustments, net of tax effect of $13, $80, $0 and $5, respectively (21) (173) - 13 ---------- ---------- ---------- ---------- Net cash flow hedges (21) 36 - 3 Minimum pension liability adjustment, net of tax effect of $254, $0, $(1) and $0, respectively (380) - 2 - ---------- ---------- ---------- ---------- Total comprehensive income $ 165,543 $ 101,342 $ 65,865 $ 44,414 ========== ========== ========== ==========
Accumulated other comprehensive loss includes the following components:
For the Nine Months Ended November 30, 2002 ---------------------------------------------------------- Foreign Net Minimum Accumulated Currency Unrealized Pension Other Translation Gains on Liability Comprehensive Adjustments Derivatives Adjustment Loss ------------- ----------- ------------ ------------- (in thousands) Balance, February 28, 2002 $ (35,243) $ 21 $ - $ (35,222) Current-period change 14,658 (21) (380) 14,257 ------------- ----------- ------------ ------------- Balance, November 30, 2002 $ (20,585) $ - $ (380) $ (20,965) ============= =========== ============ =============
10) RELATED PARTIES: Agustin Francisco Huneeus, the executive in charge of the Fine Wine segment, along with other members of his immediate family, through various family owned entities (the "Huneeus Interests") engaged in certain transactions with the Fine Wine segment during the nine months and three months ended November 30, 2002, and November 30, 2001. The Huneeus Interests engage the Fine Wine segment as the exclusive distributor of its Quintessa wines under a long-term contract; sell grapes to the Fine Wine segment pursuant to existing long-term contracts; participate as partners with the Fine Wine segment in the ownership and operation of a winery and vineyards in Chile; and render brand management and other consulting and advisory services in the United States and internationally to the Fine Wine segment and the Company. Total amounts to the Huneeus Interests pursuant to these transactions and arrangements for the nine months ended November 30, 2002, and November 30, 2001, totaled $4.7 million and $4.3 million, respectively. Total amounts to the Huneeus Interests pursuant to these transactions and arrangements for the three months ended November 30, 2002, and November 30, 2001, totaled $3.1 million and $2.7 million, respectively. In addition, the Fine Wine segment performs certain wine processing services for the Huneeus Interests. Total fees earned from the Huneeus Interests by the Fine Wine segment for these services were not material for the nine months and three months ended November 30, 2002, and November 30, 2001. As of November 30, 2002, and November 30, 2001, the net amounts due to/from the Huneeus Interests under these agreements are insignificant. 11 11) CONDENSED CONSOLIDATING FINANCIAL INFORMATION: The following information sets forth the condensed consolidating balance sheets of the Company as of November 30, 2002, and February 28, 2002, the condensed consolidating statements of income for the nine months and three months ended November 30, 2002 and 2001, and the condensed consolidating statements of cash flows for the nine months ended November 30, 2002 and 2001, for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company's senior notes and senior subordinated notes ("Subsidiary Guarantors") and the combined subsidiaries of the Company which are not Subsidiary Guarantors, primarily Matthew Clark, which is included in the U.K. Brands and Wholesale segment ("Subsidiary Nonguarantors"). The Subsidiary Guarantors are wholly owned and the guarantees are full, unconditional, joint and several obligations of each of the Subsidiary Guarantors. Separate financial statements for the Subsidiary Guarantors of the Company are not presented because the Company has determined that such financial statements would not be material to investors. The Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company, other than Matthew Clark, the Company's Canadian subsidiary and certain other subsidiaries which individually, and in the aggregate, are inconsequential. The accounting policies of the parent company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002, and include the accounting changes described in Note 2 herein. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.
Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ------------- ------------ ------------- ------------ ------------- (in thousands) Condensed Consolidating Balance Sheet - ------------------------------------- at November 30, 2002 - -------------------- Current assets: Cash and cash investments $ 1,467 $ 1,723 $ 26,746 $ - $ 29,936 Accounts receivable, net 129,142 150,099 200,421 - 479,662 Inventories, net 16,794 706,632 156,774 (51) 880,149 Prepaid expenses and other current assets 9,191 50,427 16,547 - 76,165 Intercompany (payable) receivable (61,225) 67,895 (6,670) - - ------------- ------------ ------------- ------------ ------------ Total current assets 95,369 976,776 393,818 (51) 1,465,912 Property, plant and equipment, net 41,574 360,627 196,952 - 599,153 Investments in subsidiaries 2,527,803 568,062 - (3,095,865) - Goodwill 51,172 496,074 173,858 - 721,104 Intangible assets, net 10,942 317,096 54,630 - 382,668 Other assets 20,082 123,880 27,604 - 171,566 ------------- ------------ ------------- ------------ ------------ Total assets $ 2,746,942 $ 2,842,515 $ 846,862 $ (3,095,916) $ 3,340,403 ============= ============ ============= ============ ============ Current liabilities: Notes payable $ 4,500 $ - $ 698 $ - $ 5,198 Current maturities of long-term debt 79,175 3,485 678 - 83,338 Accounts payable 33,517 85,222 98,976 - 217,715 Accrued excise taxes 9,379 19,273 23,963 - 52,615 Other accrued expenses and liabilities 164,838 57,405 130,340 - 352,583 ------------- ------------ ------------- ------------ ------------ Total current liabilities 291,409 165,385 254,655 - 711,449 Long-term debt, less current maturities 1,244,446 11,866 9,262 - 1,265,574 Deferred income taxes 43,422 74,783 33,088 - 151,293 Other liabilities 535 38,274 25,362 - 64,171 12 Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ------------- ------------ ------------- ------------ ------------- (in thousands) Stockholders' equity: Class A and class B common stock 958 6,434 64,867 (71,301) 958 Additional paid-in capital 457,271 1,221,076 436,466 (1,657,542) 457,271 Retained earnings 743,555 1,300,293 66,729 (1,367,073) 743,504 Accumulated other comprehensive loss (1,802) 24,404 (43,567) - (20,965) Treasury stock and other (32,852) - - - (32,852) ------------- ------------ ------------- ------------ ------------ Total stockholders' equity 1,167,130 2,552,207 524,495 (3,095,916) 1,147,916 ------------- ------------ ------------- ------------ ------------ Total liabilities and stockholders' equity $ 2,746,942 $ 2,842,515 $ 846,862 $ (3,095,916) $ 3,340,403 ============= ============ ============= ============ ============ Condensed Consolidating Balance Sheet - ------------------------------------- at February 28, 2002 - -------------------- Current assets: Cash and cash investments $ 838 $ 2,084 $ 6,039 $ - $ 8,961 Accounts receivable, net 86,315 166,875 130,732 - 383,922 Inventories, net 17,662 631,050 128,934 (60) 777,586 Prepaid expenses and other current assets 7,148 40,364 13,267 - 60,779 Intercompany (payable) receivable (64,061) (288) 64,349 - - ------------- ------------ ------------- ------------ ------------ Total current assets 47,902 840,085 343,321 (60) 1,231,248 Property, plant and equipment, net 36,834 354,431 187,499 - 578,764 Investments in subsidiaries 2,404,282 558,263 - (2,962,545) - Goodwill 51,172 462,676 154,235 - 668,083 Intangible assets, net 11,016 361,039 53,932 - 425,987 Other assets 22,598 111,892 30,813 - 165,303 ------------- ------------ ------------- ------------ ------------ Total assets $ 2,573,804 $ 2,688,386 $ 769,800 $ (2,962,605) $ 3,069,385 ============= ============ ============= ============ ============ Current liabilities: Notes payable $ 50,000 $ - $ 4,775 $ - $ 54,775 Current maturities of long-term debt 71,953 3,542 6,114 - 81,609 Accounts payable 34,590 50,425 68,418 - 153,433 Accrued excise taxes 12,244 37,033 10,961 - 60,238 Other accrued expenses and liabilities 94,067 51,250 99,838 - 245,155 ------------- ------------ ------------- ------------ ------------ Total current liabilities 262,854 142,250 190,106 - 595,210 Long-term debt, less current maturities 1,278,834 14,237 112 - 1,293,183 Deferred income taxes 39,022 91,963 32,161 - 163,146 Other liabilities 476 38,174 23,460 - 62,110 Stockholders' equity: Class A and class B common stock 939 6,434 64,867 (71,301) 939 Additional paid-in capital 431,216 1,220,917 436,466 (1,657,383) 431,216 Retained earnings 592,279 1,176,931 56,930 (1,233,921) 592,219 Accumulated other comprehensive income (loss) 1,600 (2,520) (34,302) - (35,222) Treasury stock and other (33,416) - - - (33,416) ------------- ------------ ------------- ------------ ------------ Total stockholders' equity 992,618 2,401,762 523,961 (2,962,605) 955,736 ------------- ------------ ------------- ------------ ------------ Total liabilities and stockholders' equity $ 2,573,804 $ 2,688,386 $ 769,800 $ (2,962,605) $ 3,069,385 ============= ============ ============= ============ ============ 13 Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ------------- ------------ ------------- ------------ ------------- (in thousands) Condensed Consolidating Statement of Income - ------------------------------------------- for the Nine Months Ended November 30, 2002 - ------------------------------------------- Gross sales $ 611,053 $ 1,482,454 $ 862,956 $ (227,244) $ 2,729,219 Less - excise taxes (110,952) (315,651) (224,038) - (650,641) ------------- ------------ ------------- ------------ ------------ Net sales 500,101 1,166,803 638,918 (227,244) 2,078,578 Cost of product sold (381,128) (828,517) (512,704) 227,253 (1,495,096) ------------- ------------ ------------- ------------ ------------ Gross profit 118,973 338,286 126,214 9 583,482 Selling, general and administrative expenses (79,921) (110,749) (73,177) - (263,847) ------------- ------------ ------------- ------------ ------------ Operating income 39,052 227,537 53,037 9 319,635 Equity in earnings of subsidiary/joint venture 123,362 19,892 - (133,161) 10,093 Interest expense, net 6,935 (52,151) (35,278) - (80,494) ------------- ------------ ------------- ------------ ------------ Income before income taxes 169,349 195,278 17,759 (133,152) 249,234 Provision for income taxes (18,073) (71,916) (7,960) - (97,949) ------------- ------------ ------------- ------------ ------------ Net income $ 151,276 $ 123,362 $ 9,799 $ (133,152) $ 151,285 ============= ============ ============= ============ ============ Condensed Consolidating Statement of Income - ------------------------------------------- for the Nine Months Ended November 30, 2001 - ------------------------------------------- Gross sales $ 622,687 $ 1,512,551 $ 786,188 $ (304,949) $ 2,616,477 Less - excise taxes (110,805) (316,167) (200,092) - (627,064) ------------- ------------ ------------- ------------ ------------ Net sales 511,882 1,196,384 586,096 (304,949) 1,989,413 Cost of product sold (388,457) (903,345) (470,222) 304,900 (1,457,124) ------------- ------------ ------------- ------------ ------------ Gross profit 123,425 293,039 115,874 (49) 532,289 Selling, general and administrative expenses (62,128) (130,110) (72,304) - (264,542) ------------- ------------ ------------- ------------ ------------ Operating income 61,297 162,929 43,570 (49) 267,747 Equity in earnings of subsidiary/joint venture 82,506 27,518 - (108,996) 1,028 Interest expense, net (7,011) (76,397) (3,000) - (86,408) ------------- ------------ ------------- ------------ ------------ Income before income taxes 136,792 114,050 40,570 (109,045) 182,367 Provision for income taxes (27,323) (31,544) (14,080) - (72,947) ------------- ------------ ------------- ------------ ------------ Net income $ 109,469 $ 82,506 $ 26,490 $ (109,045) $ 109,420 ============= ============ ============= ============ ============ Condensed Consolidating Statement of Income - ------------------------------------------- for the Three Months Ended November 30, 2002 - -------------------------------------------- Gross sales $ 234,370 $ 525,027 $ 315,653 $ (105,291) $ 969,759 Less - excise taxes (43,019) (106,846) (81,515) - (231,380) ------------- ------------ ------------- ------------ ------------ Net sales 191,351 418,181 234,138 (105,291) 738,379 Cost of product sold (142,016) (303,118) (185,147) 105,396 (524,885) ------------- ------------ ------------- ------------ ------------ Gross profit 49,335 115,063 48,991 105 213,494 Selling, general and administrative expenses (26,512) (36,308) (22,650) - (85,470) ------------- ------------ ------------- ------------ ------------ Operating income 22,823 78,755 26,341 105 128,024 Equity in earnings of subsidiary/joint venture 48,687 13,216 - (57,721) 4,182 Interest expense, net (2,798) (17,066) (11,934) - (26,202) ------------- ------------ ------------- ------------ ------------ Income before income taxes 74,308 74,905 14,407 (57,616) 106,004 Provision for income taxes (10,069) (26,218) (5,373) - (41,660) ------------- ------------ ------------- ------------ ------------ Net income $ 64,239 $ 48,687 $ 9,034 $ (57,616) $ 64,344 ============= ============ ============= ============ ============ 14 Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ------------- ------------ ------------- ------------ ------------- (in thousands) Condensed Consolidating Statement of Income - ------------------------------------------- for the Three Months Ended November 30, 2001 - -------------------------------------------- Gross sales $ 234,508 $ 514,490 $ 287,706 $ (111,148) $ 987,776 Less - excise taxes (42,858) (105,228) (75,616) - (223,702) ------------- ------------ ------------- ------------ ------------ Net sales 191,650 409,262 212,090 (111,148) 764,074 Cost of product sold (186,544) (265,345) (167,969) 111,118 (505,666) ------------- ------------ ------------- ------------ ------------ Gross profit 5,106 143,917 44,121 (30) 258,408 Selling, general and administrative expenses (16,917) (66,263) (1,111) - (149,585) ------------- ------------ ------------- ------------ ------------ Operating (loss) income (11,811) 77,654 43,010 (30) 108,823 Equity in earnings of subsidiary/joint venture 61,822 36,370 - (97,027) 1,165 Interest income (expense), net 911 (27,224) (936) - (27,249) ------------- ------------ ------------- ------------ ------------ Income before income taxes 50,922 86,800 42,074 (97,057) 82,739 Provision for income taxes (1,249) (24,978) (6,869) - (33,096) ------------- ------------ ------------- ------------ ------------ Net income $ 49,673 $ 61,822 $ 35,205 $ (97,057) $ 49,643 ============= ============ ============= ============ ============ Condensed Consolidating Statement of Cash Flows - ----------------------------------------------- for the Nine Months Ended November 30, 2002 - ------------------------------------------- Net cash provided by operating activities $ 59,057 $ 56,694 $ 31,513 $ - $ 147,264 Cash flows from investing activities: Purchases of property, plant and equipment (9,161) (30,801) (11,871) - (51,833) Other - (1,274) 577 - (697) ------------- ------------ ------------- ------------ ------------ Net cash used in investing activities (9,161) (32,075) (11,294) - (52,530) ------------- ------------ ------------- ------------ ------------ Cash flows from financing activities: Principal payments of long-term debt (53,987) (2,387) (6,145) - (62,519) Net repayments of notes payable (45,500) - (3,929) - (49,429) Payment of issuance costs of long-term debt (10) - - - (10) Exercise of employee stock options 25,539 - - - 25,539 Proceeds from issuance of long-term debt - - 10,000 - 10,000 Proceeds from employee stock purchases 1,319 - - - 1,319 ------------- ------------ ------------- ------------ ------------ Net cash (used in) provided by financing activities (72,639) (2,387) (74) - (75,100) ------------- ------------ ------------- ------------ ------------ Effect of exchange rate changes on cash and cash investments 23,372 (22,593) 562 - 1,341 ------------- ------------ ------------- ------------ ------------ Net increase (decrease) in cash and cash investments 629 (361) 20,707 - 20,975 Cash and cash investments, beginning of period 838 2,084 6,039 - 8,961 ------------- ------------ ------------- ------------ ------------ Cash and cash investments, end of period $ 1,467 $ 1,723 $ 26,746 $ - $ 29,936 ============= ============ ============= ============ ============ 15 Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ------------- ------------ ------------- ------------ ------------- (in thousands) Condensed Consolidating Statement of Cash Flows - ----------------------------------------------- for the Nine Months Ended November 30, 2001 - ------------------------------------------- Net cash provided by operating activities $ 38,287 $ 76,602 $ 8,785 $ - $ 123,674 Cash flows from investing activities: Purchases of businesses, net of cash acquired (478,115) 5,778 - - (472,337) Investment in joint venture - (77,282) - - (77,282) Purchases of property, plant and equipment (6,038) (31,110) (10,010) - (47,158) Proceeds from sale of assets - 35,150 349 - 35,499 ------------- ------------ ------------- ------------ ------------ Net cash used in investing activities (484,153) (67,464) (9,661) - (561,278) ------------- ------------ ------------- ------------ ------------ Cash flows from financing activities: Net proceeds from notes payable 155,000 - 1,226 - 156,226 Proceeds from equity offerings, net of fees 151,486 - - - 151,486 Exercise of employee stock options 35,249 - - - 35,249 Proceeds from issuance of long-term debt, net of discount - - 2,910 - 2,910 Proceeds from employee stock purchases 842 - - - 842 Principal payments of long-term debt (33,038) (8,348) (1,694) - (43,080) Payment of issuance costs of long-term debt (1,339) - - - (1,339) ------------- ------------ ------------- ------------ ------------- Net cash provided by (used in) financing activities 308,200 (8,348) 2,442 - 302,294 ------------- ------------ ------------- ------------ ------------ Effect of exchange rate changes on cash and cash investments (3,234) 3,751 (1,425) - (908) ------------- ------------ ------------- ------------ ------------ Net (decrease) increase in cash and cash investments (140,900) 4,541 141 - (136,218) Cash and cash investments, beginning of period 142,104 3,239 329 - 145,672 ------------- ------------ ------------- ------------ ------------ Cash and cash investments, end of period $ 1,204 $ 7,780 $ 470 $ - $ 9,454 ============= ============ ============= ============ ============
12) BUSINESS SEGMENT INFORMATION: The Company reports its operating results in five segments: Popular and Premium Wine (branded popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider and bottled water, and wholesale wine, cider, distilled spirits, beer and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine) and Corporate Operations and Other (primarily corporate related items). Segment selection was based upon internal organizational structure, the way in which these operations are managed and their performance evaluated by management, and the availability of separate financial results. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002, and include the accounting changes described in Note 2 herein. The Company evaluates performance based on operating income of the respective business units. 16 Segment information is as follows:
For the Nine Months For the Three Months Ended November 30, Ended November 30, ------------------------- -------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (in thousands) Popular and Premium Wine: - ------------------------- Net sales: Branded: External customers $ 510,882 $ 520,627 $ 195,802 $ 194,814 Intersegment 7,601 7,532 1,876 2,888 ---------- ---------- ---------- ---------- Total Branded 518,483 528,159 197,678 197,702 ---------- ---------- ---------- ---------- Other: External customers 33,924 46,240 13,116 18,857 Intersegment 8,881 10,413 2,539 2,557 ---------- ---------- ---------- ---------- Total Other 42,805 56,653 15,655 21,414 ---------- ---------- ---------- ---------- Net sales $ 561,288 $ 584,812 $ 213,333 $ 219,116 Operating income $ 79,808 $ 75,706 $ 37,240 $ 36,377 Equity in earnings of joint venture $ 10,093 $ 1,028 $ 4,182 $ 1,165 Long-lived assets $ 196,781 $ 187,211 $ 196,781 $ 187,211 Investment in joint venture $ 120,613 $ 108,897 $ 120,613 $ 108,897 Total assets $1,190,385 $1,099,704 $1,190,385 $1,099,704 Capital expenditures $ 17,650 $ 11,841 $ 7,112 $ 5,764 Depreciation and amortization $ 17,532 $ 23,546 $ 5,772 $ 7,387 Imported Beer and Spirits: - -------------------------- Net sales: Beer $ 615,098 $ 570,178 $ 195,585 $ 174,045 Spirits 219,381 214,430 80,495 76,638 ---------- ---------- ---------- ---------- Net sales $ 834,479 $ 784,608 $ 276,080 $ 250,683 Operating income $ 175,548 $ 143,234 $ 59,572 $ 47,822 Long-lived assets $ 77,391 $ 79,633 $ 77,391 $ 79,633 Total assets $ 710,495 $ 713,416 $ 710,495 $ 713,416 Capital expenditures $ 6,054 $ 9,253 $ 2,024 $ 2,517 Depreciation and amortization $ 7,691 $ 13,487 $ 2,586 $ 4,337 U.K. Brands and Wholesale: - -------------------------- Net sales: Branded: External customers $ 179,563 $ 177,037 $ 66,988 $ 64,912 Intersegment 151 481 - - ---------- ---------- ---------- ---------- Total Branded 179,714 177,518 66,988 64,912 Wholesale 408,795 366,312 144,406 131,839 ---------- ---------- ---------- ---------- Net sales $ 588,509 $ 543,830 $ 211,394 $ 196,751 Operating income $ 46,418 $ 40,157 $ 21,643 $ 17,872 Long-lived assets $ 147,825 $ 137,562 $ 147,825 $ 137,562 Total assets $ 723,198 $ 668,932 $ 723,198 $ 668,932 Capital expenditures $ 9,285 $ 6,473 $ 3,175 $ 2,434 Depreciation and amortization $ 10,790 $ 14,390 $ 3,689 $ 4,971 17 For the Nine Months For the Three Months Ended November 30, Ended November 30, ------------------------- -------------------------- 2002 2001 2002 2001 ---------- ---------- ---------- ---------- (in thousands) Fine Wine: - ---------- Net sales: External customers $ 110,935 $ 94,589 $ 41,987 $ 40,749 Intersegment 1,092 516 404 262 ---------- ---------- ---------- ---------- Net sales $ 112,027 $ 95,105 $ 42,391 $ 41,011 Operating income $ 40,286 $ 28,315 $ 16,550 $ 13,169 Long-lived assets $ 166,185 $ 150,055 $ 166,185 $ 150,055 Total assets $ 682,489 $ 615,248 $ 682,489 $ 615,248 Capital expenditures $ 15,704 $ 16,169 $ 3,285 $ 4,871 Depreciation and amortization $ 6,369 $ 9,125 $ 1,433 $ 2,889 Corporate Operations and Other: - ------------------------------- Net sales $ - $ - $ - $ - Operating loss $ (22,425) $ (19,665) $ (6,981) $ (6,417) Long-lived assets $ 10,971 $ 7,206 $ 10,971 $ 7,206 Total assets $ 33,836 $ 30,191 $ 33,836 $ 30,191 Capital expenditures $ 3,141 $ 3,422 $ 2,019 $ 2,777 Depreciation and amortization $ 3,201 $ 3,443 $ 1,102 $ 1,146 Intersegment eliminations: - -------------------------- Net sales $ (17,725) $ (18,942) $ (4,819) $ (5,707) Consolidated: - ------------- Net sales $2,078,578 $1,989,413 $ 738,379 $ 764,074 Operating income $ 319,635 $ 267,747 $ 128,024 $ 108,823 Equity in earnings of joint venture $ 10,093 $ 1,028 $ 4,182 $ 1,165 Long-lived assets $ 599,153 $ 561,667 $ 599,153 $ 561,667 Investment in joint venture $ 120,613 $ 108,897 $ 120,613 $ 108,897 Total assets $3,340,403 $3,127,491 $3,340,403 $3,127,491 Capital expenditures $ 51,834 $ 47,158 $ 17,615 $ 18,363 Depreciation and amortization $ 45,583 $ 63,991 $ 14,582 $ 20,730
13) ACCOUNTING PRONOUNCEMENTS: In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company is required to adopt SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently assessing the financial impact of SFAS No. 143 on its financial statements. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds Statement of Financial Accounting Standards No. 4 ("SFAS No. 4"), "Reporting Gains and Losses from Extinguishment of Debt," Statement of Financial Accounting Standards No. 44, "Accounting for Intangible Assets of Motor Carriers," and Statement of Financial Accounting Standards No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." In addition, SFAS No. 145 amends Statement of Financial Accounting Standards No. 13, "Accounting for Leases," to eliminate an inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Lastly, SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability 18 under changed conditions. The Company is required to adopt the provisions related to the rescission of SFAS No. 4 for fiscal years beginning March 1, 2003. All other provisions of SFAS No. 145 were adopted on March 1, 2002. The adoption of the applicable provisions of SFAS No. 145 did not have a material impact on the Company's financial statements. The adoption of the remaining provisions will result in a reclassification of the extraordinary loss related to the extinguishment of debt recorded in the fourth quarter of the fiscal year ended February 28, 2002 ($1.6 million, net of income taxes), by increasing selling, general and administrative expenses ($2.6 million) and decreasing the provision for income taxes ($1.0 million). In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others -- an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN No. 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN No. 45 also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee. Lastly, FIN No. 45 supersedes FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others (An Interpretation of FASB Statement No. 5)." The initial recognition and initial measurement provisions of FIN No. 45 will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is required to adopt the disclosure requirements of FIN No. 45 for the fiscal year ended February 28, 2003. In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF No. 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The Company is required to adopt EITF No. 00-21 for all revenue arrangements entered into beginning August 1, 2003. The Company is currently assessing the financial impact of EITF No. 00-21 on its financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation--Transition and Disclosure." SFAS No. 148 amends Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Lastly, SFAS No. 148 amends Accounting Principles Board Opinion No. 28 ("APB Opinion No. 28"), "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The Company is required to adopt the disclosure provisions of SFAS No. 148 for fiscal year ended February 28, 2003. The Company is required to adopt the amendment to APB Opinion No. 28 for financial reports containing condensed financial statements for interim periods beginning March 1, 2003. 19 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- ----------------------------------------------------------------------- OF OPERATIONS ------------- INTRODUCTION - ------------ The Company is a leading producer and marketer of beverage alcohol brands, with a broad portfolio of wine, distilled spirits and imported beer. The Company is the largest single-source supplier of these products in the United States, and both a major producer and independent drinks wholesaler in the United Kingdom. The Company reports its operating results in five segments: Popular and Premium Wine (branded popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider and bottled water, and wholesale wine, cider, distilled spirits, beer and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine) and Corporate Operations and Other (primarily corporate related items). During April 2002, the Board of Directors of the Company approved a two-for-one stock split of both the Company's Class A Common Stock and Class B Common Stock, which was distributed in the form of a stock dividend on May 13, 2002, to stockholders of record on April 30, 2002. Pursuant to the terms of the stock dividend, each holder of Class A Common Stock received one additional share of Class A stock for each share of Class A stock held, and each holder of Class B Common Stock received one additional share of Class B stock for each share of Class B stock held. All share and per share amounts in this Quarterly Report on Form 10-Q are adjusted to give effect to the common stock split. The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for the three months ended November 30, 2002 ("Third Quarter 2003"), compared to the three months ended November 30, 2001 ("Third Quarter 2002"), and for the nine months ended November 30, 2002 ("Nine Months 2003"), compared to the nine months ended November 30, 2001 ("Nine Months 2002"), and (ii) financial liquidity and capital resources for Nine Months 2003. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included herein and in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002 ("Fiscal 2002"). As discussed in Note 2 to the financial statements, the Company adopted SFAS No. 142 and EITF No. 01-09 on March 1, 2002. ACQUISITIONS IN FISCAL 2002 On July 2, 2001, the Company acquired all of the outstanding capital stock of Ravenswood Winery, Inc. (the "Ravenswood Acquisition"), a leading premium wine producer based in Sonoma, California. On June 30, 2002, Ravenswood Winery, Inc. was merged into Franciscan Vineyards, Inc. (a wholly-owned subsidiary of the Company). The Ravenswood business produces, markets and sells super-premium and ultra-premium California wine primarily under the Ravenswood brand name. The vast majority of wine the Ravenswood business produces and sells is red wine, including the number one super-premium Zinfandel in the United States. The results of operations of the Ravenswood business are reported in the Fine Wine segment and have been included in the consolidated results of operations of the Company since the date of acquisition. On March 26, 2001, in an asset acquisition, the Company acquired certain wine brands, wineries, working capital (primarily inventories), and other related assets from Corus Brands, Inc. (the "Corus Assets"). In this acquisition, the Company acquired several well-known premium wine brands primarily sold in the northwestern United States, including Covey Run, Columbia, Ste. Chapelle and Alice White. In connection with the transaction, the Company also entered into long-term grape supply agreements with affiliates of Corus Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards. 20 The results of operations of the Corus Assets are reported in the Popular and Premium Wine segment and have been included in the consolidated results of operations of the Company since the date of acquisition. On March 5, 2001, in an asset acquisition, the Company acquired several well-known premium wine brands, including Vendange, Nathanson Creek, Heritage, and Talus, working capital (primarily inventories), two wineries in California, and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River Vintners Group (the "Turner Road Vintners Assets"). The results of operations of the Turner Road Vintners Assets are reported in the Popular and Premium Wine segment and have been included in the consolidated results of operations of the Company since the date of acquisition. JOINT VENTURE On July 31, 2001, the Company and BRL Hardy Limited completed the formation of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the Company and BRL Hardy Limited. On October 16, 2001, the Company announced that PWP completed the purchase of certain assets of Blackstone Winery, including the Blackstone brand and the Codera wine business in Sonoma County. The investment in PWP is accounted for using the equity method; accordingly, the results of operations of PWP since July 31, 2001, have been included in the equity in earnings of joint venture line in the Consolidated Statements of Income of the Company. 21 RESULTS OF OPERATIONS - --------------------- THIRD QUARTER 2003 COMPARED TO THIRD QUARTER 2002 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Third Quarter 2003 and Third Quarter 2002.
Third Quarter 2003 Compared to Third Quarter 2002 ------------------------------------------------- Net Sales ------------------------------------------------- %Increase/ 2003 2002 (Decrease) ---------- ---------- ---------- Popular and Premium Wine: Branded: External customers $ 195,802 $ 194,814 0.5 % Intersegment 1,876 2,888 (35.0)% ---------- ---------- Total Branded 197,678 197,702 0.0 % ---------- ---------- Other: External custome 13,116 18,857 (30.4)% Intersegment 2,539 2,557 (0.7)% ---------- ---------- Total Other 15,655 21,414 (26.9)% ---------- ---------- Popular and Premium Wine net sales $ 213,333 $ 219,116 (2.6)% ---------- ---------- Imported Beer and Spirits: Imported Beer $ 195,585 $ 174,045 12.4 % Spirits 80,495 76,638 5.0 % ---------- ---------- Imported Beer and Spirits net sales $ 276,080 $ 250,683 10.1 % ---------- ---------- U.K. Brands and Wholesale: Branded: External customers $ 66,988 $ 64,912 3.2 % Intersegment - - N/A ---------- ---------- Total Branded 66,988 64,912 3.2 % Wholesale 144,406 131,839 9.5 % ---------- ---------- U.K. Brands and Wholesale net sales $ 211,394 $ 196,751 7.4 % ---------- ---------- Fine Wine: External customers $ 41,987 $ 40,749 3.0 % Intersegment 404 262 54.2 % ---------- ---------- Fine Wine net sales $ 42,391 $ 41,011 3.4 % ---------- ---------- Corporate Operations and Other $ - $ - N/A ---------- ---------- Intersegment eliminations $ (4,819) $ (5,707) (15.6)% ---------- ---------- Consolidated Net Sales $ 738,379 $ 701,854 5.2 % ========== ==========
Net sales for Third Quarter 2003 increased to $738.4 million from $701.9 million for Third Quarter 2002, an increase of $36.5 million, or 5.2%. Excluding a favorable foreign currency impact of $15.2 million, net sales increased $21.3 million, or 3.0%, primarily from increased sales of imported beer. Also contributing to the sales growth were increases in spirits, U.K. wholesale and fine wine sales offset by lower grape juice concentrate, bulk wine and U.K. branded sales. Popular and Premium Wine ------------------------ Net sales for the Popular and Premium Wine segment for Third Quarter 2003 decreased to $213.3 million from $219.1 million for Third Quarter 2002, a decrease of $5.8 million, or (2.6)%. This decline 22 was due to a decrease in Other sales of $5.8 million, or (26.9)%, due to lower grape juice concentrate and bulk wine sales. Branded sales remained comparable with prior year on slightly lower volume. Imported Beer and Spirits ------------------------- Net sales for the Imported Beer and Spirits segment for Third Quarter 2003 increased to $276.1 million from $250.7 million for Third Quarter 2002, an increase of $25.4 million, or 10.1%. This increase resulted primarily from a $21.5 million increase in imported beer sales due to both a price increase on the Company's Mexican beer portfolio, which took effect during the first quarter of fiscal 2003, and volume growth. Spirits sales increased $3.9 million primarily due to increased bulk whiskey sales partially offset by slightly lower branded sales. U.K. Brands and Wholesale ------------------------- Net sales for the U.K. Brands and Wholesale segment for Third Quarter 2003 increased to $211.4 million from $196.8 million for Third Quarter 2002, an increase of $14.6 million, or 7.4%. Excluding a favorable foreign currency impact of $15.2 million, net sales were flat as a 1.6% increase in wholesale sales were offset by a 4.4% decrease in branded sales. The decline in branded sales was primarily related to lower cider sales. Fine Wine --------- Net sales for the Fine Wine segment for Third Quarter 2003 increased to $42.4 million from $41.0 million for Third Quarter 2002, an increase of $1.4 million, or 3.4%. This increase resulted primarily from volume growth, led by the Ravenswood and Simi brands, partially offset by higher promotional activity and a shift towards lower priced brands. The Fine Wine segment's sales growth continues to be negatively impacted by slower on-premise sales as the economy continues to affect fine dining. GROSS PROFIT The Company's gross profit increased to $213.5 million for Third Quarter 2003 from $193.1 million for Third Quarter 2002, an increase of $20.4 million, or 10.6%. The dollar increase in gross profit resulted from higher imported beer sales, a favorable mix of sales towards higher margin wine brands, lower average wine costs, and a favorable foreign currency impact. These increases were partially offset by higher average imported beer costs. As a result of the foregoing, gross profit as a percent of net sales increased to 28.9% for Third Quarter 2003 from 27.5% for Third Quarter 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $85.5 million for Third Quarter 2003 from $84.3 million for Third Quarter 2002, an increase of $1.2 million, or 1.4%. The Company adopted SFAS No. 142 on March 1, 2002 and accordingly, stopped amortizing goodwill and other indefinite lived intangible assets. Excluding $6.5 million of amortization expense from Third Quarter 2002, the Company's selling, general and administrative expenses for Third Quarter 2003 increased $7.6 million, or 9.8%. This increase was due to (i) higher selling costs to support the growth in the Imported Beer and Spirits segment and U.K. wholesale business, partially offset by lower selling costs as the Company eliminated brokers associated with the Ravenswood brand and fully integrated the brand into the Company's fine wine sales force, (ii) increased personnel costs to support the Company's growth within the Corporate Operations and Other segment, and (iii) the recognition of a gain in Third Quarter 2002 in 23 conjunction with the formation of the Company's joint venture, partially offset by costs associated with the formation of the joint venture. Selling, general and administrative expenses as a percent of net sales decreased to 11.6% for Third Quarter 2003 as compared to 12.0% for Third Quarter 2002. Excluding amortization expense in Third Quarter 2002, selling, general and administrative expenses as a percent of net sales increased to 11.6% for Third Quarter 2003 as compared to 11.1% for Third Quarter 2002 based on the foregoing reasons. OPERATING INCOME The following table sets forth the operating income/(loss) (in thousands of dollars) by operating segment of the Company for Third Quarter 2003 and Third Quarter 2002.
Third Quarter 2003 Compared to Third Quarter 2002 ------------------------------------------------- Operating Income/(Loss) ------------------------------------------------- 2003 2002 %Increase ---------- ---------- --------- Popular and Premium Wine $ 37,240 $ 36,377 2.4% Imported Beer and Spirits 59,572 47,822 24.6% U.K. Brands and Wholesale 21,643 17,872 21.1% Fine Wine 16,550 13,169 25.7% Corporate Operations and Other (6,981) (6,417) 8.8% ---------- ---------- Consolidated Operating Income $ 128,024 $ 108,823 17.6% ========== ==========
As a result of the above factors, consolidated operating income increased to $128.0 million for Third Quarter 2003 from $108.8 million for Third Quarter 2002, an increase of $19.2 million, or 17.6%. Excluding amortization expense for Third Quarter 2002, operating income for Popular and Premium Wine, Imported Beer and Spirits, U.K. Brands and Wholesale and Fine Wine would have been $38.3 million, $49.8 million, $19.3 million and $14.2 million, respectively. Further, consolidated operating income would have been $115.3 million. INTEREST EXPENSE, NET Net interest expense decreased to $26.2 million for Third Quarter 2003 from $27.2 million for Third Quarter 2002, a decrease of $1.0 million, or (3.8)%. The decrease resulted primarily from lower average borrowings during the period. NET INCOME As a result of the above factors, net income increased to $64.3 million for Third Quarter 2003 from $49.6 million for Third Quarter 2002, an increase of $14.7 million, or 29.6%. Excluding amortization expense and the associated income tax benefit for Third Quarter 2002, net income increased $9.9 million, or 18.3%. For financial analysis purposes only, the Company's earnings (including equity in earnings of joint venture) before interest, taxes, depreciation and amortization ("EBITDA") for Third Quarter 2003 were $146.8 million, an increase of $16.1 million over EBITDA of $130.7 million for Third Quarter 2002. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities determined in accordance with generally accepted accounting principles and should not be construed as an indication of operating performance or as a measure of liquidity. 24 NINE MONTHS 2003 COMPARED TO NINE MONTHS 2002 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Nine Months 2003 and Nine Months 2002.
Nine Months 2003 Compared to Nine Months 2002 --------------------------------------------- Net Sales --------------------------------------------- %Increase/ 2003 2002 (Decrease) ---------- ---------- ---------- Popular and Premium Wine: Branded: External customers $ 510,882 $ 520,627 (1.8)% Intersegment 7,601 7,532 0.9 % ---------- ---------- Total Branded 518,483 528,159 (1.8)% ---------- ---------- Other: External customers 33,924 46,240 (26.6)% Intersegment 8,881 10,413 (14.7)% ---------- ---------- Total Other 42,805 56,653 (24.4)% ---------- ---------- Popular and Premium Wine net sales $ 561,288 $ 584,812 (4.0)% ---------- ---------- Imported Beer and Spirits: Imported Beer $ 615,098 $ 570,178 7.9 % Spirits 219,381 214,430 2.3 % ---------- ---------- Imported Beer and Spirits net sales $ 834,479 $ 784,608 6.4 % ---------- ---------- U.K. Brands and Wholesale: Branded: External customers $ 179,563 $ 177,037 1.4 % Intersegment 151 481 (68.6)% ---------- ---------- Total Branded 179,714 177,518 1.2 % Wholesale 409,795 366,312 11.6 % ---------- ---------- U.K. Brands and Wholesale net sales $ 588,509 $ 543,830 8.2 % ---------- ---------- Fine Wine: External customers $ 110,935 $ 94,589 17.3 % Intersegment 1,092 516 111.6 % ---------- ---------- Fine Wine net sales $ 112,027 $ 95,105 17.8 % ---------- ---------- Corporate Operations and Other $ - $ - N/A ---------- ---------- Intersegment eliminations $ (17,725) $ (18,942) (6.4)% ---------- ---------- Consolidated Net Sales $2,078,578 $1,989,413 4.5 % ========== ==========
Net sales for Nine Months 2003 increased to $2,078.6 million from $1,989.4 million for Nine Months 2002, an increase of $89.2 million, or 4.5%. Excluding a favorable foreign currency impact of $29.9 million, net sales increased $59.3 million, or 3.0%, primarily from increased sales of imported beer. Also contributing to the sales growth were increases in U.K. wholesale, fine wine and spirits sales offset by lower bulk wine, grape juice concentrate, branded wine and U.K. branded sales. Popular and Premium Wine ------------------------ Net sales for the Popular and Premium Wine segment for Nine Months 2003 decreased to $561.3 million from $584.8 million for Nine Months 2002, a decrease of $23.5 million, or (4.0)%. Other sales declined $13.8 million, or (24.4)%, on lower bulk wine and grape juice concentrate sales. Branded sales declined $9.7 million, or (1.8)%, on lower volume. Volumes were negatively impacted, primarily in the 25 second quarter of the Company's fiscal year, as a result of increased promotional spending in the industry, which the Company did not participate in heavily. Imported Beer and Spirits ------------------------- Net sales for the Imported Beer and Spirits segment for Nine Months 2003 increased to $834.5 million from $784.6 million for Nine Months 2002, an increase of $49.9 million, or 6.4%. This increase resulted primarily from a $44.9 million increase in imported beer sales. The growth in imported beer sales is primarily due to a price increase on the Company's Mexican beer portfolio, which took effect in the first quarter of fiscal 2003, and increased volume. Spirits sales increased $5.0 million resulting primarily from bulk whiskey sales growth partially offset by slightly lower branded sales. U.K. Brands and Wholesale ------------------------- Net sales for the U.K. Brands and Wholesale segment for Nine Months 2003 increased to $588.5 million from $543.8 million for Nine Months 2002, an increase of $44.7 million, or 8.2%. Excluding a favorable foreign currency impact of $29.9 million, net sales increased $14.8 million, or 2.7%. This increase resulted primarily from a 6.0% increase in wholesale sales due to the addition of new accounts and increased average delivery sizes, partially offset by a 4.0% decline in branded sales as a decrease in cider sales was partially offset by increases in wine sales. Fine Wine --------- Net sales for the Fine Wine segment for Nine Months 2003 increased to $112.0 million from $95.1 million for Nine Months 2002, an increase of $16.9 million, or 17.8%. This increase resulted primarily from an additional four months of sales of the brands acquired in the Ravenswood Acquisition, completed in July 2001, as well as growth primarily in the Simi brand. Excluding the additional four months of sales of $14.1 million of the acquired brands, Fine Wine net sales increased $2.8 million, or 3.0%, due to higher sales volumes led by Simi and Ravenswood, partially offset by higher promotional activity and a shift towards lower priced brands. GROSS PROFIT The Company's gross profit increased to $583.5 million for Nine Months 2003 from $532.3 million for Nine Months 2002, an increase of $51.2 million, or 9.6%. The dollar increase in gross profit resulted from higher imported beer sales, the additional four months of sales of the brands acquired in the Ravenswood Acquisition (completed in July 2001), a favorable mix of sales towards higher margin products, particularly popular and premium wine and tequila, lower average wine and spirits costs, and a favorable foreign currency impact. These increases were partially offset by higher average imported beer costs and lower concentrate and bulk wine sales. As a result of the foregoing, gross profit as a percent of net sales increased to 28.1% for Nine Months 2003 from 26.8% for Nine Months 2002. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses decreased to $263.8 million for Nine Months 2003 from $264.5 million for Nine Months 2002, a decrease of $0.7 million, or (0.3)%. The Company adopted SFAS No. 142 on March 1, 2002 and accordingly, stopped amortizing goodwill and other indefinite lived intangible assets. Excluding $19.4 million of amortization expense from Nine Months 2002, the Company's selling, general and administrative expenses increased $18.7 million, or 7.6%. This increase resulted primarily from increased personnel costs to support the Company's growth and higher selling 26 costs to support the growth in the U.K. wholesale business. Selling, general and administrative expenses as a percent of net sales decreased to 12.7% for Nine Months 2003 as compared to 13.3% for Nine Months 2002. Excluding amortization expense in Nine Months 2002, selling, general and administrative expenses as a percent of net sales increased to 12.7% for Nine Months 2003 as compared to 12.3% for Nine Months 2002. This increase was primarily due to (i) the percent increase in general and administrative expenses growing at a faster rate than the percent change in the Corporate Operations and Other, Popular and Premium Wine and U.K. Brands and Wholesale segments' net sales, and (ii) the percent increase in the U.K. Brands and Wholesale segment's selling costs being greater than the percent increase in the U.K. Brands and Wholesale segment's net sales. OPERATING INCOME The following table sets forth the operating income/(loss) (in thousands of dollars) by operating segment of the Company for Nine Months 2003 and Nine Months 2002.
Nine Months 2003 Compared to Nine Months 2002 --------------------------------------------- Operating Income/(Loss) --------------------------------------------- 2003 2002 %Increase ---------- ---------- --------- Popular and Premium Wine $ 79,808 $ 75,706 5.4% Imported Beer and Spirits 175,548 143,234 22.6% U.K. Brands and Wholesale 46,418 40,157 15.6% Fine Wine 40,286 28,315 42.3% Corporate Operations and Other (22,425) (19,665) 14.0% ---------- ---------- Consolidated Operating Income $ 319,635 $ 267,747 19.4% ========== ==========
As a result of the above factors, consolidated operating income increased to $319.6 million for Nine Months 2003 from $267.7 million for Nine Months 2002, an increase of $51.9 million, or 19.4%. Excluding amortization expense for Nine Months 2002, operating income for Popular and Premium Wine, Imported Beer and Spirits, U.K. Brands and Wholesale and Fine Wine would have been $81.3 million, $149.4 million, $44.6 million and $31.5 million, respectively. Further, consolidated operating income would have been $287.1 million. INTEREST EXPENSE, NET Net interest expense decreased to $80.5 million for Nine Months 2003 from $86.4 million for Nine Months 2002, a decrease of $5.9 million, or (6.8)%. The decrease resulted from both a decrease in the average interest rate and a decrease in the average borrowings for the period. NET INCOME As a result of the above factors, net income increased to $151.3 million for Nine Months 2003 from $109.4 million for Nine Months 2002, an increase of $41.9 million, or 38.3%. Excluding amortization expense and the associated income tax benefit for Nine Months 2002, net income increased $28.2 million, or 22.9%. For financial analysis purposes only, the Company's earnings (including equity in earnings of joint venture) before interest, taxes, depreciation and amortization ("EBITDA") for Nine Months 2003 were $375.3 million, an increase of $42.5 million over EBITDA of $332.8 million for Nine Months 2002. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities determined in accordance with generally accepted accounting principles and should not be construed as an indication of operating performance or as a measure of liquidity. 27 FINANCIAL LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------- GENERAL The Company's principal use of cash in its operating activities is for purchasing and carrying inventories. The Company's primary source of liquidity has historically been cash flow from operations, except during the annual fall grape harvests when the Company has relied on short-term borrowings. The annual grape crush normally begins in August and runs through October. The Company generally begins purchasing grapes in August with payments for such grapes beginning to come due in September. The Company's short-term borrowings to support such purchases generally reach their highest levels in November or December. Historically, the Company has used cash flow from operating activities to repay its short-term borrowings. The Company will continue to use its short-term borrowings to support its working capital requirements. The Company believes that cash provided by operating activities and its financing activities, primarily short-term borrowings, will provide adequate resources to satisfy its working capital, liquidity and anticipated capital expenditure requirements for both its short-term and long-term capital needs. NINE MONTHS 2003 CASH FLOWS OPERATING ACTIVITIES Net cash provided by operating activities for Nine Months 2003 was $147.3 million, which resulted from $192.9 million in net income adjusted for noncash items, less $45.6 million representing the net change in the Company's operating assets and liabilities. The net change in operating assets and liabilities resulted primarily from seasonal increases in inventories and accounts receivable offset by increases in accounts payable, income taxes payable and accrued grape purchases. INVESTING ACTIVITIES AND FINANCING ACTIVITIES Net cash used in investing activities for Nine Months 2003 was $52.5 million, which resulted primarily from $51.8 million of capital expenditures. Net cash used in financing activities for Nine Months 2003 was $75.1 million resulting primarily from $62.5 million of principal payments of long-term debt and $49.4 million of net repayments of notes payable. These amounts were partially offset by $25.5 million of proceeds from employee stock option exercises and $10.0 million of proceeds from long-term debt which was used for the repayment of debt at one of the Company's Chilean subsidiaries. During June 1998, the Company's Board of Directors authorized the repurchase of up to $100.0 million of the Company's Class A Common Stock and Class B Common Stock. The repurchase of shares of common stock will be accomplished, from time to time, in management's discretion and depending upon market conditions, through open market or privately negotiated transactions. The Company may finance such repurchases through cash generated from operations or through the senior credit facility. The repurchased shares will become treasury shares. As of January [10], 2003, the Company had purchased 4,075,344 shares of Class A Common Stock at an aggregate cost of $44.9 million, or at an average cost of $11.01 per share. No shares were repurchased during Nine Months 2003. 28 DEBT Total debt outstanding as of November 30, 2002, amounted to $1,354.1 million, a decrease of $75.5 million from February 28, 2002. The ratio of total debt to total capitalization decreased to 54.1% as of November 30, 2002, from 59.9% as of February 28, 2002. SENIOR CREDIT FACILITY As of November 30, 2002, under its senior credit facility, the Company had outstanding term loans of $232.5 million bearing a weighted average interest rate of 3.8%, $4.5 million of revolving loans bearing a weighted average interest rate of 3.1%, undrawn revolving letters of credit of $15.2 million, and $280.3 million in revolving loans available to be drawn. SENIOR NOTES As of November 30, 2002, the Company had outstanding $200.0 million aggregate principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior Notes"). The Senior Notes are currently redeemable, in whole or in part, at the option of the Company. As of November 30, 2002, the Company had outstanding (pound) 1.0 million ($1.6 million) aggregate principal amount of 8 1/2% Series B Senior Notes due November 2009 (the "Sterling Series B Senior Notes"). In addition, as of November 30, 2002, the Company had outstanding (pound) 154.0 million ($239.4 million, net of $0.5 million unamortized discount) aggregate principal amount of 8 1/2% Series C Senior Notes due November 2009 (the "Sterling Series C Senior Notes"). The Sterling Series B Senior Notes and Sterling Series C Senior Notes are currently redeemable, in whole or in part, at the option of the Company. Also, as of November 30, 2002, the Company had outstanding $200.0 million aggregate principal amount of 8% Senior Notes due February 2008 (the "February 2001 Senior Notes"). The February 2001 Senior Notes are currently redeemable, in whole or in part, at the option of the Company. SENIOR SUBORDINATED NOTES As of November 30, 2002, the Company had outstanding $200.0 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009 (the "Senior Subordinated Notes"). The Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 2004. Also, as of November 30, 2002, the Company had outstanding $250.0 million aggregate principal amount of 8 1/8% Senior Subordinated Notes due January 2012 (the "January 2002 Senior Subordinated Notes"). The January 2002 Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after January 15, 2007. The Company may also redeem up to 35% of the January 2002 Senior Subordinated Notes using the proceeds of certain equity offerings completed before January 15, 2005. ACCOUNTING PRONOUNCEMENTS In August 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The Company is required 29 to adopt SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently assessing the financial impact of SFAS No. 143 on its financial statements. In April 2002, the FASB issued Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds Statement of Financial Accounting Standards No. 4 ("SFAS No. 4"), "Reporting Gains and Losses from Extinguishment of Debt," Statement of Financial Accounting Standards No. 44, "Accounting for Intangible Assets of Motor Carriers," and Statement of Financial Accounting Standards No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." In addition, SFAS No. 145 amends Statement of Financial Accounting Standards No. 13, "Accounting for Leases," to eliminate an inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Lastly, SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company is required to adopt the provisions related to the rescission of SFAS No. 4 for fiscal years beginning March 1, 2003. All other provisions of SFAS No. 145 were adopted on March 1, 2002. The adoption of the applicable provisions of SFAS No. 145 did not have a material impact on the Company's financial statements. The adoption of the remaining provisions will result in a reclassification of the extraordinary loss related to the extinguishment of debt recorded in the fourth quarter of the fiscal year ended February 28, 2002 ($1.6 million, net of income taxes), by increasing selling, general and administrative expenses ($2.6 million) and decreasing the provision for income taxes ($1.0 million). In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN No. 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others -- an Interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN No. 45 addresses the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees. FIN No. 45 also clarifies the requirements related to the recognition of a liability by a guarantor at the inception of a guarantee for the obligations the guarantor has undertaken in issuing that guarantee. Lastly, FIN No. 45 supersedes FASB Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of Others (An Interpretation of FASB Statement No. 5)." The initial recognition and initial measurement provisions of FIN No. 45 will be applied on a prospective basis to guarantees issued or modified after December 31, 2002. The Company is required to adopt the disclosure requirements of FIN No. 45 for the fiscal year ended February 28, 2003. In November 2002, the Emerging Issues Task Force ("EITF") reached a consensus on EITF Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF No. 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The Company is required to adopt EITF No. 00-21 for all revenue arrangements entered into beginning August 1, 2003. The Company is currently assessing the financial impact of EITF No. 00-21 on its financial statements. In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation--Transition and Disclosure." SFAS No. 148 amends Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Lastly, SFAS No. 148 amends Accounting Principles Board Opinion No. 28 30 ("APB Opinion No. 28"), "Interim Financial Reporting," to require disclosure about those effects in interim financial information. The Company is required to adopt the disclosure provisions of SFAS No. 148 for fiscal year ended February 28, 2003. The Company is required to adopt the amendment to APB Opinion No. 28 for financial reports containing condensed financial statements for interim periods beginning March 1, 2003. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including statements regarding the Company's future financial position and prospects, are forward-looking statements. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For risk factors associated with the Company and its business, which factors could cause actual results to differ materially from those set forth in, or implied by, the Company's forward-looking statements, reference should be made to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- Information about market risks for the nine months ended November 30, 2002, does not differ materially from that discussed under Item 7A in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002. ITEM 4. CONTROLS AND PROCEDURES - ------- ----------------------- The Company's Chief Executive Officer and Chief Financial Officer have concluded, based on their evaluation within 90 days prior to the filing date of this report, that the Company's disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the foregoing evaluation. 31 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- (a) See Index to Exhibits located on Page 36 of this Report. (b) No Reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended November 30, 2002. 32 SIGNATURES 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. CONSTELLATION BRANDS, INC. Dated: January 10, 2003 By:/s/ Thomas F. Howe -------------------------------------- Thomas F. Howe, Senior Vice President, Controller Dated: January 10, 2003 By:/s/ Thomas S. Summer -------------------------------------- Thomas S. Summer, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 33 CERTIFICATIONS I, Richard Sands, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Constellation Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 10, 2003 /s/ Richard Sands - ------------------------------------- Richard Sands Chief Executive Officer 34 I, Thomas S. Summer, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Constellation Brands, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: January 10, 2003 /s/ Thomas S. Summer - ---------------------------------- Thomas S. Summer Executive Vice President and Chief Financial Officer 35 INDEX TO EXHIBITS (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.1 Asset Purchase Agreement dated as of February 21, 1999 by and among Diageo Inc., UDV Canada Inc., United Distillers Canada Inc. and the Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated April 9, 1999 and incorporated herein by reference). 2.2 Stock Purchase Agreement, dated April 21, 1999, between Franciscan Vineyards, Inc., Agustin Huneeus, Agustin Francisco Huneeus, Jean-Michel Valette, Heidrun Eckes-Chantre Und Kinder Beteiligungsverwaltung II, GbR, Peter Eugen Eckes Und Kinder Beteiligungsverwaltung II, GbR, Harald Eckes-Chantre, Christina Eckes-Chantre, Petra Eckes-Chantre and Canandaigua Brands, Inc. (now known as Constellation Brands, Inc.) (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 4, 1999 and incorporated herein by reference). 2.3 Stock Purchase Agreement by and between Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the Company) and Moet Hennessy, Inc. dated April 1, 1999 (filed as Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated herein by reference). 2.4 Purchase Agreement dated as of January 30, 2001, by and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the Company) (filed as Exhibit 2.5 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2001 and incorporated herein by reference). 2.5 First Amendment to Purchase Agreement and Pro Forma Closing Balance Sheet, dated as of March 5, 2001, by and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc. (filed as Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2001 and incorporated herein by reference). 2.6 Second Amendment to Purchase Agreement, dated as of March 5, 2001, by and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc. (filed as Exhibit 2.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2001 and incorporated herein by reference). 2.7 Agreement and Plan of Merger by and among Constellation Brands, Inc., VVV Acquisition Corp. and Ravenswood Winery, Inc. dated as of April 10, 2001 (filed as Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2001 and incorporated herein by reference). (3) ARTICLES OF INCORPORATION AND BY-LAWS. 3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2002 and incorporated herein by reference). 3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2002 and incorporated herein by reference). (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. Not applicable. 36 (10) MATERIAL CONTRACTS. Not applicable. (11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS. Computation of per share earnings (filed herewith). (15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION. Not applicable. (18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES. Not applicable. (19) REPORT FURNISHED TO SECURITY HOLDERS. Not applicable. (22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS. Not applicable. (23) CONSENTS OF EXPERTS AND COUNSEL. Not applicable. (24) POWER OF ATTORNEY. Not applicable. (99) ADDITIONAL EXHIBITS. 99.1 Certification of Chief Executive Officer pursuant to Section 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) (filed herewith). 99.2 Certification of Chief Financial Officer pursuant to Section 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002) (filed herewith). 37