10-Q: Quarterly report pursuant to Section 13 or 15(d)
Published on January 13, 2003
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
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 001-08495
CONSTELLATION BRANDS, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 16-0716709
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450
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(Address of principal executive offices) (Zip Code)
(585) 218-3600
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(Registrant's telephone number, including area code)
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(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
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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
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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
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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
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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.
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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:
The changes in the carrying amount of goodwill for the nine months ended
November 30, 2002, are as follows:
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
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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.
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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
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Total assets acquired 194,772
Current liabilities 12,523
Long-term liabilities 32,593
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Total liabilities assumed 45,116
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Net assets acquired $ 149,656
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The trademarks are not subject to amortization. None of the goodwill is
expected to be deductible for tax purposes.
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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.
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
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(in thousands)
Raw materials and supplies $ 27,093 $ 34,126
In-process inventories 589,486 524,373
Finished case goods 263,570 219,087
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$ 880,149 $ 777,586
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5) INTANGIBLE ASSETS:
The major components of intangible assets are:
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.
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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:
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:
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Accumulated other comprehensive loss includes the following components:
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.
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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.
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.
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Segment information is as follows:
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
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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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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INTRODUCTION
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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.
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.
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.
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.
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