EXHIBIT 99.2
------------
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2003, CONFORMED TO REFLECT
THE COMPANY'S NEW BASIS OF SEGMENT REPORTING
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheet of
Constellation Brands, Inc. and subsidiaries as of February 28, 2003 and the
related consolidated statements of income, stockholders' equity and cash flows
for the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit. The
February 28, 2002 and 2001 consolidated financial statements of Constellation
Brands, Inc. and subsidiaries were audited by other auditors who have ceased
operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements, before the revisions described in Notes 1, 2
and 21 to the consolidated financial statements, in their report dated April 9,
2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Constellation
Brands, Inc. and subsidiaries as of February 28, 2003, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the accompanying consolidated balance sheet of Constellation
Brands, Inc. and subsidiaries as of February 28, 2002, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended February 28, 2002 and 2001 were audited by other auditors who have
ceased operations. As described in Note 2, these consolidated financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company as of March 1, 2002. In our
opinion these disclosures for 2002 and 2001 in Note 2 are appropriate.
Additionally, as described in Note 2, the consolidated statements of income for
the years ended February 28, 2002 and 2001 have been revised to reflect
reclassifications of certain consumer and trade promotional expenses as required
by Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given
by a Vendor to a Customer (EITF 01-9), which was also adopted by the Company as
of March 1, 2002; as described in Note 1, the proforma disclosures of net income
and earnings per common share related to stock-based compensation for the years
ended February 28, 2002 and 2001 have been adjusted from the amounts originally
reported; and as described in Note 21, the Company changed the composition of
its reportable segments, and the amounts in the 2002 and 2001 consolidated
financial statements relating to reportable segments have been restated to
conform to the current composition of reportable segments. We audited the
adjustments that were applied to restate the 2002 and 2001 consolidated
financial statements for the adoption of EITF 01-9, to restate the disclosure of
amounts of pro forma net income and earnings per share related to stock-based
compensation for the years ended February 28, 2002 and 2001 and to restate the
disclosures for reportable segments reflected in the 2002 and 2001 consolidated
financial statements. In our opinion, such adjustments are appropriate and have
been properly applied. However, we were not engaged to audit, review, or apply
any procedures to the February 28, 2002 and 2001 consolidated financial
statements of Constellation Brands, Inc. and subsidiaries, other than with
respect to such disclosures and adjustments; accordingly, we do not express an
opinion or any other form of assurance on the February 28, 2002 and 2001
consolidated financial statements taken as a whole.
/s/ KPMG LLP
April 9, 2003, except as to Notes 2 and 21, which are as of October 28, 2003
Rochester, New York
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. AS DESCRIBED IN
NOTE 2 TO THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS, THE COMPANY
ADOPTED THE PROVISIONS OF EMERGING ISSUES TASK FORCE ISSUE NO. 01-9, ACCOUNTING
FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER, WHICH REQUIRES
RECLASSIFICATION OF CERTAIN CONSUMER AND TRADE PROMOTIONAL EXPENSES IN
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED FEBRUARY 28, 2002 AND
FEBRUARY 28, 2001. ALSO, IN THE YEAR ENDED FEBRUARY 28, 2003, THE COMPANY
ADOPTED STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, GOODWILL AND OTHER
INTANGIBLE ASSETS (SFAS NO. 142). INCLUDED IN NOTE 2 ARE TRANSITIONAL
DISCLOSURES FOR FISCAL 2002 AND FISCAL 2001 THAT ARE REQUIRED BY SFAS NO. 142.
ALSO, THE COMPANY ADJUSTED THE PROFORMA DISCLOSURE OF NET INCOME AND EARNINGS
PER COMMON SHARE RELATED TO STOCK-BASED COMPENSATION FOR THE YEARS ENDED
FEBRUARY 28, 2002 AND FEBRUARY 28, 2001, INCLUDED IN NOTE 1, FROM THE AMOUNTS
ORIGINALLY REPORTED. LASTLY, THE COMPANY CHANGED THE STRUCTURE OF ITS INTERNAL
ORGANIZATION EFFECTIVE MARCH 1, 2003. IN CONNECTION WITH THE COMPANY'S FILING OF
ITS CURRENT REPORT ON FORM 8-K DATED NOVEMBER 24, 2003, THE COMPANY ADJUSTED THE
SEGMENT DISCLOSURE INCLUDED IN NOTE 21 FOR THE YEARS ENDED FEBRUARY 28, 2002 AND
FEBRUARY 28, 2001, FROM THE AMOUNTS ORIGINALLY REPORTED. THE ARTHUR ANDERSEN LLP
REPORT DOES NOT EXTEND TO THESE CHANGES IN THE 2002 AND 2001 CONSOLIDATED
FINANCIAL STATEMENTS. THE TRANSITIONAL DISCLOSURES IN AND THE ADJUSTMENTS TO THE
FISCAL 2002 AND FISCAL 2001 CONSOLIDATED FINANCIAL STATEMENTS WERE REPORTED ON
BY KPMG LLP AS STATED IN THEIR REPORT APPEARING HEREIN.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation
Brands, Inc. (a Delaware corporation) and subsidiaries as of February 28, 2002
and February 28, 2001, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended February 28, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Constellation Brands, Inc. and
subsidiaries as of February 28, 2002 and February 28, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended February 28, 2002 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Rochester, New York
April 9, 2002
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
February 28, February 28,
2003 2002
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 13,810 $ 8,961
Accounts receivable, net 399,095 383,922
Inventories, net 819,912 777,586
Prepaid expenses and other 97,284 60,779
------------ ------------
Total current assets 1,330,101 1,231,248
PROPERTY, PLANT AND EQUIPMENT, net 602,469 578,764
GOODWILL 722,223 668,083
INTANGIBLE ASSETS, net 382,428 425,987
OTHER ASSETS 159,109 165,303
------------ ------------
Total assets $ 3,196,330 $ 3,069,385
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 2,623 $ 54,775
Current maturities of long-term debt 71,264 81,609
Accounts payable 171,073 153,433
Accrued excise taxes 36,421 60,238
Other accrued expenses and liabilities 303,827 245,155
------------ ------------
Total current liabilities 585,208 595,210
------------ ------------
LONG-TERM DEBT, less current maturities 1,191,631 1,293,183
------------ ------------
DEFERRED INCOME TAXES 145,239 163,146
------------ ------------
OTHER LIABILITIES 99,268 62,110
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, none at February 28, 2003,
and February 28, 2002 - -
Class A Common Stock, $.01 par value-
Authorized, 275,000,000 shares;
Issued, 81,435,135 shares at
February 28, 2003, and 79,309,174 shares
at February 28, 2002 814 793
Class B Convertible Common Stock,
$.01 par value-
Authorized, 30,000,000 shares;
Issued, 14,578,490 shares at
February 28, 2003, and 14,608,390 shares
at February 28, 2002 146 146
Additional paid-in capital 469,724 431,216
Retained earnings 795,525 592,219
Accumulated other comprehensive loss (59,257) (35,222)
------------ ------------
1,206,952 989,152
------------ ------------
Less - Treasury stock-
Class A Common Stock, 2,749,384 shares at
February 28, 2003, and 2,895,526 shares at
February 28, 2002, at cost (29,610) (31,159)
Class B Convertible Common Stock, 2,502,900 shares
at February 28, 2003, and February 28, 2002, at cost (2,207) (2,207)
------------ ------------
(31,817) (33,366)
------------ ------------
Less - Unearned compensation - restricted stock awards (151) (50)
------------ ------------
Total stockholders' equity 1,174,984 955,736
------------ ------------
Total liabilities and stockholders' equity $ 3,196,330 $ 3,069,385
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
----------------------------------------------
February 28, February 28, February 28,
2003 2002 2001
-------------- -------------- --------------
GROSS SALES $ 3,583,082 $ 3,420,213 $ 2,983,629
Less - Excise taxes (851,470) (813,455) (757,609)
-------------- -------------- --------------
Net sales 2,731,612 2,606,758 2,226,020
COST OF PRODUCT SOLD (1,970,897) (1,911,598) (1,647,081)
-------------- -------------- --------------
Gross profit 760,715 695,160 578,939
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (350,993) (352,679) (308,071)
RESTRUCTURING CHARGES (4,764) - -
-------------- -------------- --------------
Operating income 404,958 342,481 270,868
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS 23,129 - -
EQUITY IN EARNINGS OF JOINT VENTURE 12,236 1,667 -
INTEREST EXPENSE, net (105,387) (114,189) (108,631)
-------------- -------------- --------------
Income before income taxes 334,936 229,959 162,237
PROVISION FOR INCOME TAXES (131,630) (91,984) (64,895)
-------------- -------------- --------------
Income before extraordinary item 203,306 137,975 97,342
EXTRAORDINARY ITEM, net of income taxes - (1,554) -
-------------- -------------- --------------
NET INCOME $ 203,306 $ 136,421 $ 97,342
============== ============== ==============
SHARE DATA:
Earnings per common share:
Basic:
Income before extraordinary item $ 2.26 $ 1.62 $ 1.33
Extraordinary item, net of income taxes - (0.02) -
-------------- -------------- --------------
Earnings per common share - basic $ 2.26 $ 1.60 $ 1.33
============== ============== ==============
Diluted:
Income before extraordinary item $ 2.19 $ 1.57 $ 1.30
Extraordinary item, net of income taxes - (0.02) -
-------------- -------------- --------------
Earnings per common share - diluted $ 2.19 $ 1.55 $ 1.30
============== ============== ==============
Weighted average common shares outstanding:
Basic 89,856 85,505 73,446
Diluted 92,746 87,825 74,751
SUPPLEMENTAL DATA RESTATED FOR
EFFECT OF SFAS NO. 142:
Adjusted operating income $ 404,958 $ 369,780 $ 290,372
============== ============== ==============
Adjusted income before extraordinary item $ 203,306 $ 156,921 $ 111,635
============== ============== ==============
Adjusted net income $ 203,306 $ 155,367 $ 111,635
============== ============== ==============
Adjusted earnings per common share:
Basic:
Income before extraordinary item $ 2.26 $ 1.84 $ 1.52
============== ============== ==============
Earnings per common share - basic $ 2.26 $ 1.82 $ 1.52
============== ============== ==============
Diluted:
Income before extraordinary item $ 2.19 $ 1.79 $ 1.49
============== ============== ==============
Earnings per common share - diluted $ 2.19 $ 1.77 $ 1.49
============== ============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Common Stock Additional Other
---------------- Paid-in Retained Comprehensive Treasury Unearned
Class A Class B Capital Earnings Loss Stock Compensation Total
------- ------- ---------- --------- ------------- --------- ------------ ----------
BALANCE, February 29, 2000 $ 728 $ 150 $ 247,291 $ 358,456 $ (4,149) $ (81,636) $ - $ 520,840
Comprehensive income:
Net income for Fiscal 2001 - - - 97,342 - - - 97,342
Foreign currency translation
adjustments - - - - (21,855) - - (21,855)
----------
Comprehensive income 75,487
Conversion of 177,052 Class B
Convertible Common shares to
Class A Common shares 2 (2) - - - - - -
Exercise of 1,859,136 Class A
stock options 19 - 13,811 - - - - 13,830
Employee stock purchases of 147,776
treasury shares - - 1,389 - - 158 - 1,547
Acceleration of 63,500 Class A
stock options - - 179 - - - - 179
Issuance of 15,100 restricted
Class A Common shares - - 201 - - - (201) -
Amortization of unearned restricted
stock compensation - - - - - - 50 50
Tax benefit on Class A stock
options exercised - - 4,256 - - - - 4,256
Tax benefit on disposition of
employee stock purchases - - 28 - - - - 28
Other - - 51 - - - - 51
------- ------- ---------- --------- ------------- --------- ------------ ----------
BALANCE, February 28, 2001 749 148 267,206 455,798 (26,004) (81,478) (151) 616,268
Comprehensive income:
Net income for Fiscal 2002 - - - 136,421 - - - 136,421
Other comprehensive (loss) income,
net of tax:
Foreign currency translation
adjustments - - - - (9,239) - - (9,239)
Unrealized gain on cash
flow hedges:
Net derivative gains, net
of tax effect of $105 - - - - 212 - - 212
Reclassification
adjustments, net of tax
effect of $92 - - - - (191) - - (191)
----------
Unrealized gain on cash
flow hedges 21
----------
Other comprehensive loss,
net of tax (9,218)
----------
Comprehensive income 127,203
Conversion of 196,798 Class B
Convertible Common shares to
Class A Common shares 2 (2) - - - - - -
Exercise of 4,234,440 Class A
stock options 42 - 45,602 - - - - 45,644
Employee stock purchases of 120,674
treasury shares - - 639 - - 1,347 - 1,986
Amortization of unearned restricted
stock compensation - - - - - - 101 101
Issuance of 9,385,000 treasury
shares, net of fees - - 104,714 - - 46,765 - 151,479
Tax benefit on Class A
stock options exercised - - 12,836 - - - - 12,836
Tax benefit on disposition of
employee stock purchases - - 65 - - - - 65
Other - - 154 - - - - 154
------- ------- ---------- --------- ------------- --------- ------------ ----------
BALANCE, February 28, 2002 793 146 431,216 592,219 (35,222) (33,366) (50) 955,736
Comprehensive income:
Net income for Fiscal 2003 - - - 203,306 - - - 203,306
Other comprehensive (loss) income,
net of tax:
Foreign currency translation
adjustments - - - - 18,521 - - 18,521
Reclassification adjustments
for net derivative gains,
net of tax effect of $13 - - - - (21) - - (21)
Minimum pension liability
adjustment, net of tax
effect of $18,681 - - - - (42,535) - - (42,535)
----------
Other comprehensive loss,
net of tax (24,035)
----------
Comprehensive income 179,271
Conversion of 29,900 Class B
Convertible Common shares to
Class A Common shares - - - - - - - -
Exercise of 2,096,061 Class A
stock options 21 - 28,148 - - - - 28,169
Employee stock purchases of 139,062
treasury shares - - 1,410 - - 1,475 - 2,885
Issuance of 7,080 restricted
Class A Common shares - - 127 - - 74 (201) -
Amortization of unearned restricted
stock compensation - - - - - - 100 100
Tax benefit on Class A
stock options exercised - - 8,440 - - - - 8,440
Tax benefit on disposition of
employee stock purchases - - 74 - - - - 74
Other - - 309 - - - - 309
------- ------- ---------- --------- ------------- --------- ------------ ----------
BALANCE, February 28, 2003 $ 814 $ 146 $ 469,724 $ 795,525 $ (59,257) $ (31,817) $ (151) $1,174,984
======= ======= ========== ========= ============= ========= ============ ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
------------------------------------------
February 28, February 28, February 28,
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 203,306 $ 136,421 $ 97,342
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 54,147 51,873 44,613
Deferred tax provision 21,050 3,675 6,677
Loss on sale of assets and restructuring charges 7,263 324 2,356
Amortization of goodwill and intangible assets 5,942 33,531 25,770
Stock-based compensation expense 100 101 280
Amortization of discount on long-term debt 60 516 503
Extraordinary item, net of income taxes - 1,554 -
Gain on change in fair value of derivative instrument (23,129) - -
Equity in earnings of joint venture (12,236) (1,667) -
Change in operating assets and liabilities, net of
effects from purchases of businesses:
Accounts receivable, net 6,164 (44,804) (27,375)
Inventories, net (40,676) (19,130) (57,126)
Prepaid expenses and other current assets (11,612) 566 (6,443)
Accounts payable 10,135 19,069 (11,354)
Accrued excise taxes (25,029) 4,502 26,519
Other accrued expenses and liabilities 42,882 30,996 4,333
Other assets and liabilities, net (2,314) (4,228) (2,320)
------------ ------------ ------------
Total adjustments 32,747 76,878 6,433
------------ ------------ ------------
Net cash provided by operating activities 236,053 213,299 103,775
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (71,575) (71,148) (68,217)
Payment of accrued earn-out amount (1,674) - -
Proceeds from sale of assets 1,288 35,815 2,009
Purchases of businesses, net of cash acquired - (472,832) (4,459)
Investment in joint venture - (77,282) -
------------ ------------ ------------
Net cash used in investing activities (71,961) (585,447) (70,667)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (151,134) (260,982) (221,908)
Net (repayment of) proceeds from notes payable (51,921) 51,403 (23,615)
Payment of issuance costs of long-term debt (20) (4,537) (5,794)
Exercise of employee stock options 28,706 45,027 13,806
Proceeds from issuance of long-term debt 10,000 252,539 319,400
Proceeds from employee stock purchases 2,885 1,986 1,547
Proceeds from equity offerings, net of fees - 151,479 -
------------ ------------ ------------
Net cash (used in) provided by financing activities (161,484) 236,915 83,436
------------ ------------ ------------
Effect of exchange rate changes on cash and cash investments 2,241 (1,478) (5,180)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS 4,849 (136,711) 111,364
CASH AND CASH INVESTMENTS, beginning of year 8,961 145,672 34,308
------------ ------------ ------------
CASH AND CASH INVESTMENTS, end of year $ 13,810 $ 8,961 $ 145,672
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 103,161 $ 122,121 $ 105,644
============ ============ ============
Income taxes $ 67,187 $ 75,054 $ 54,427
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ - $ 617,487 $ 15,115
Liabilities assumed - (138,913) (10,656)
------------ ------------ ------------
Cash paid - 478,574 4,459
Less - cash acquired - (5,742) -
------------ ------------ ------------
Net cash paid for purchases of businesses $ - $ 472,832 $ 4,459
============ ============ ============
Property, plant and equipment contributed to joint venture $ - $ 30,020 $ -
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS -
Constellation Brands, Inc. and its subsidiaries (the "Company") operate
primarily in the beverage alcohol industry. The Company is a leading producer
and marketer of beverage alcohol brands, with a broad portfolio of wine, spirits
and imported beer. The Company is the largest single-source supplier of these
products in the United States ("U.S."), and both a major producer and
independent drinks wholesaler in the United Kingdom ("U.K."). In North America,
the Company distributes its products through wholesale distributors. In the
U.K., the Company distributes its products directly to off-premise accounts,
such as major retail chains, and to other wholesalers. Through the Company's
U.K. wholesale business, the Company distributes its branded products and those
of other major drinks companies to on-premise accounts: pubs, clubs, hotels and
restaurants.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements of the Company include the accounts
of Constellation Brands, Inc. and all of its subsidiaries. All intercompany
accounts and transactions have been eliminated.
MANAGEMENT'S USE OF ESTIMATES -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION -
Sales are recognized when title passes to the customer, which is generally
when the product is shipped. Amounts billed to customers for shipping and
handling are classified as gross sales. Gross sales reflect reductions
attributable to consideration given to customers in various customer incentive
programs, including pricing discounts on single transactions, volume discounts,
promotional and advertising allowances, coupons, and rebates.
FOREIGN CURRENCY TRANSLATION -
The "functional currency" for translating the accounts of the Company's
operations outside the U.S. is the local currency. The translation from the
applicable foreign currencies to U.S. dollars is performed for balance sheet
accounts using exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange rate during the
period. The resulting translation adjustments are recorded as a component of
accumulated other comprehensive income/loss ("AOCI"). Gains or losses resulting
from foreign currency transactions are included in selling, general and
administrative expenses.
CASH INVESTMENTS -
Cash investments consist of highly liquid investments with an original
maturity when purchased of three months or less and are stated at cost, which
approximates market value. The amounts at February 28, 2003, and February 28,
2002, are not significant.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The Company records an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
majority of the accounts receivable balance is generated from sales to
independent distributors with whom the Company has a predetermined collection
date arranged through electronic funds transfer. The allowance for doubtful
accounts was $13.8 million and $10.4 million as of February 28, 2003, and
February 28, 2002, respectively. In Fiscal 2003, the allowance for doubtful
accounts was increased by $6.1 million for provisions and decreased by $2.7
million primarily for write-offs of uncollectible accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments," the
Company calculates the fair value of financial instruments using quoted market
prices whenever available. When quoted market prices are not available, the
Company uses standard pricing models for various types of financial instruments
(such as forwards, options, swaps, etc.) which take into account the present
value of estimated future cash flows.
The carrying amount and estimated fair value of the Company's financial
instruments are summarized as follows:
February 28, 2003 February 28, 2002
------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(in thousands)
Assets:
- -------
Cash and cash investments $ 13,810 $ 13,810 $ 8,961 $ 8,961
Accounts receivable $ 399,095 $ 399,095 $ 383,922 $ 383,922
Currency forward contracts $ 35,132 $ 35,132 $ 6 $ 6
Liabilities:
- ------------
Notes payable to banks $ 2,623 $ 2,623 $ 54,775 $ 54,775
Accounts payable $ 171,073 $ 171,073 $ 153,433 $ 153,433
Long-term debt, including
current portion $ 1,262,895 $ 1,400,794 $ 1,374,792 $ 1,407,374
Currency forward contracts $ - $ - $ 105 $ 105
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH INVESTMENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: The
carrying amounts approximate fair value due to the short maturity of these
instruments.
NOTES PAYABLE TO BANKS: These instruments are variable interest rate
bearing notes for which the carrying value approximates the fair value.
LONG-TERM DEBT: The senior credit facility is subject to variable interest
rates which are frequently reset; accordingly, the carrying value of this debt
approximates its fair value. The fair value of the remaining long-term debt,
which is all fixed rate, is estimated by discounting cash flows using interest
rates currently available for debt with similar terms and maturities.
CURRENCY FORWARD CONTRACTS: The fair value of currency forward contracts is
estimated based on quoted market prices.
DERIVATIVE INSTRUMENTS -
From time to time, the Company enters into interest rate futures and a
variety of currency forward contracts in the management of interest rate risk
and foreign currency transaction exposure. The Company has limited involvement
with derivative instruments and does not use them for trading purposes. The
Company uses derivatives solely to reduce the financial impact of the related
risks. Effective March 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended, which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133 requires that the Company recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The cash flows from derivative instruments accounted for as hedges are
classified in the same category as the items being hedged. The adoption of SFAS
No. 133 did not have a material impact on the Company's consolidated financial
position, results of operations, or cash flows.
The use of derivative instruments exposes the Company to credit risk.
However, the Company mitigates the credit risk associated with the
non-performance of counterparties by using major financial institutions with
high credit ratings.
The Company uses foreign currency exchange agreements to reduce the risk of
foreign currency exchange rate fluctuations resulting primarily from contracts
to purchase inventory items that are denominated in various foreign currencies.
In the past, certain of these derivative contracts have been designated to hedge
the exposure to variable cash flows of a forecasted transaction and have been
classified as cash flow hedges. As such, the effective portion of the change in
the fair value of the derivatives has been recorded each period in the balance
sheet in AOCI, and has been reclassified into the statement of income, primarily
as a component of cost of product sold, in the same period during which the
hedged transaction affects earnings. The currency forward exchange contracts
used generally have maturity terms of twelve months or less. If the Company
determines that the hedging relationship no longer qualifies as an effective
cash flow hedge, then the derivative will continue to be carried on the balance
sheet at its fair value, with changes in fair value recorded in earnings. If
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, then the derivative will continue to be recorded on
the balance sheet at its fair value, changes in the fair value will be recorded
in earnings, and any amounts previously recorded in AOCI will immediately be
recorded in earnings. As of February 28, 2003, the entire balance in AOCI
related to cash flow hedges has been reclassified to the statement of income.
The Company also uses foreign currency exchange agreements to reduce the
risk of foreign currency exchange rate fluctuations resulting primarily from
recorded accounts payable denominated in various foreign currencies. As these
derivative contracts have not been designated as hedging instruments, the
resulting gains or losses from changes in the fair value of these agreements
which are not significant, are recognized in earnings.
In connection with the Hardy Acquisition (as defined in Note 23), the
Company entered into a foreign currency collar contract in February 2003 to lock
in a range for the cost of the acquisition in U.S. dollars. As of February 28,
2003, this derivative instrument had a fair value of $23.1 million. Under SFAS
No. 133, a transaction that involves a business combination is not eligible for
hedge accounting treatment. As such, this derivative was recorded on the balance
sheet at its fair value with the change in the fair value recognized separately
on the Company's Consolidated Statements of Income.
The Company has exposure to foreign currency risk as a result of having
international subsidiaries, primarily in the U.K. The Company uses British pound
sterling borrowings to hedge a portion of its exposure to adverse changes in
foreign currency exchange rates related to its investments in these U.K.
subsidiaries. Such borrowings are designated as a hedge of the foreign currency
exposure of the net investment in these foreign operations. Accordingly, foreign
currency gain or loss on this instrument is reported in AOCI as part of the
foreign currency translation adjustments. For years ended February 28, 2003,
February 28, 2002, and February 28, 2001, net (losses) gains of ($29.5) million,
$5.4 million and $20.0 million, respectively, are included in foreign currency
translation adjustments within AOCI.
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 are classified as follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Raw materials and supplies $ 26,472 $ 34,126
In-process inventories 534,073 524,373
Finished case goods 259,367 219,087
------------ ------------
$ 819,912 $ 777,586
============ ============
A substantial portion of barreled whiskey and brandy will not be sold
within one year because of the duration of the aging process. All barreled
whiskey and brandy are classified as in-process inventories and are included in
current assets, in accordance with industry practice. Bulk wine inventories are
also included as in-process inventories within current assets, in accordance
with the general practices of the wine industry, although a portion of such
inventories may be aged for periods greater than one year. Warehousing,
insurance, ad valorem taxes and other carrying charges applicable to barreled
whiskey and brandy held for aging are included in inventory costs.
The Company assesses the valuation of its inventories and reduces the
carrying value of those inventories that are obsolete or in excess of the
Company's forecasted usage to their estimated net realizable value. The Company
estimates the net realizable value of such inventories based on analyses and
assumptions including, but not limited to, historical usage, future demand and
market requirements. Reductions to the carrying value of inventories are
recorded in cost of goods sold. If the future demand for the Company's products
is less favorable than the Company's forecasts, then the value of the
inventories may be required to be reduced, which would result in additional
expense to the Company and affect its results of operations.
PROPERTY, PLANT AND EQUIPMENT -
Property, plant and equipment is stated at cost. Major additions and
betterments are charged to property accounts, while maintenance and repairs are
charged to operations as incurred. The cost of properties sold or otherwise
disposed of and the related accumulated depreciation are eliminated from the
accounts at the time of disposal and resulting gains and losses are included as
a component of operating income.
DEPRECIATION -
Depreciation is computed primarily using the straight-line method over the
following estimated useful lives:
Depreciable Life in Years
-------------------------
Land improvements 15
Vineyards 26
Buildings and improvements 10 to 33
Machinery and equipment 3 to 15
Motor vehicles 3 to 7
GOODWILL AND OTHER INTANGIBLE ASSETS -
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. Additionally, in the year of adoption, a transitional
impairment test is also required. The Company uses December 31 as its annual
impairment test measurement date. Intangible assets that are not deemed to have
an indefinite life will continue to be amortized over their useful lives and are
also 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. The Company's trademarks relate to well established brands owned by
the Company which were previously amortized over 40 years. Intangible assets
determined to have a finite life, primarily distribution agreements, continue to
be amortized over their estimated useful lives which did not require
modification 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 goodwill and
nonamortizable intangible assets pursuant to the requirements of SFAS No. 142.
No instances of impairment were noted as a result of these processes.
OTHER ASSETS -
Other assets, include an investment in joint venture which is carried under
the equity method of accounting (see Note 7) and deferred financing costs which
are stated at cost, net of accumulative amortization, and are amortized on an
effective interest basis over the term of the related debt.
LONG-LIVED ASSETS IMPAIRMENT -
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 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). In accordance with SFAS No. 144, the
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized for
the amount by which the carrying amount of the asset exceeds its fair value.
Assets to be disposed of would be reported at the lower of the carrying amount
or fair value less costs to sell and are no longer depreciated.
Pursuant to this policy, during the fourth quarter of Fiscal 2003, the
Company recorded an asset impairment charge of $4.8 million in connection with
two of its production facilities within the Constellation Wines segment. One of
the facilities, which is to be held and used for a short period prior to its
planned closing in fiscal 2004, has been written down to its appraised value and
comprised most of the impairment charge. The other facility, which is held for
sale in fiscal 2004, was written down to a value based on the Company's estimate
of salvage value. This impairment charge is included in restructuring charges on
the Company's Consolidated Statements of Income since it is part of a
realignment of its business operations that is expected to be completed in
fiscal 2004. The impaired assets consist primarily of buildings, machinery and
equipment located at the two production facilities. The charge resulted from the
determination that the assets' undiscounted future cash flows were less than
their carrying values. The Company recorded an asset impairment charge of $1.4
million in Fiscal 2002 in connection with the sale of the Stevens Point Brewery
in March 2002. This charge has been included in selling, general and
administrative expenses. The Company did not record any asset impairment charge
in Fiscal 2001.
ADVERTISING COSTS -
The Company expenses advertising costs as incurred, shown or distributed.
Prepaid advertising costs at February 28, 2003, and February 28, 2002, were not
material. Advertising expense for the years ended February 28, 2003, February
28, 2002, and February 28, 2001, was $89.6 million, $87.0 million and $85.9
million, respectively.
INCOME TAXES -
The Company uses the asset and liability method of accounting for income
taxes. This method accounts for deferred income taxes by applying statutory
rates in effect at the balance sheet date to the difference between the
financial reporting and tax bases of assets and liabilities.
ENVIRONMENTAL -
Environmental expenditures that relate to current operations or to an
existing condition caused by past operations, and which do not contribute to
current or future revenue generation, are expensed. Liabilities for environment
risks or components thereof are recorded when environmental assessments and/or
remedial efforts are probable, and the cost can be reasonably estimated.
Generally, the timing of these accruals coincides with the completion of a
feasibility study or the Company's commitment to a formal plan of action.
Liabilities for environmental costs were not material at February 28, 2003, and
February 28, 2002.
EARNINGS PER COMMON SHARE -
Basic earnings per common share excludes the effect of common stock
equivalents and is 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 reflects 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 assumes the exercise of stock options
using the treasury stock method and assumes the conversion of convertible
securities, if any, using the "if converted" method.
STOCK-BASED EMPLOYEE COMPENSATION PLANS -
As of February 28, 2003, the Company has four stock-based employee
compensation plans, which are described more fully in Note 15. The Company
applies the intrinsic value method described in Accounting Principles Board
Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations in accounting for these plans. In accordance with APB
No. 25, the compensation cost for stock options is recognized in income based on
the excess, if any, of the quoted market price of the stock at the grant date of
the award or other measurement date over the amount an employee must pay to
acquire the stock. The Company utilizes the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," as amended. Options granted under the
Company's plans have an exercise price equal to the market value of the
underlying common stock on the date of grant; therefore, no incremental
compensation expense has been recognized for grants made to employees under the
Company's stock option plans. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
For the Years Ended February 28,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Net income, as reported $ 203,306 $ 136,421 $ 97,342
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (13,447) (25,456) (12,913)
---------- ---------- ----------
Pro forma net income $ 189,859 $ 110,965 $ 84,429
========== ========== ==========
Earnings per common share:
Basic-as reported $ 2.26 $ 1.60 $ 1.33
Basic-pro forma $ 2.11 $ 1.30 $ 1.15
Diluted-as reported $ 2.19 $ 1.55 $ 1.30
Diluted-pro forma $ 2.03 $ 1.25 $ 1.13
Pro forma net income for the years ended February 28, 2002, and February
28, 2001, has been adjusted from the amounts previously reported to properly
reflect the increased expense, net of income tax benefits, primarily
attributable to the accelerated vesting of certain options during those years.
The accelerated vesting was attributable to the attainment of preexisting
performance rights set forth in the stock option grants. The impact of the
accelerated vesting was not reflected in the Fiscal 2002 and Fiscal 2001 amounts
originally reported. The pro forma net income amounts reflected above for Fiscal
2002 and Fiscal 2001 have been reduced by $12.9 million and $2.4 million,
respectively, for this matter. Basic pro forma earnings per common share have
been reduced by $0.15 and $0.03 in Fiscal 2002 and Fiscal 2001, respectively.
Diluted pro forma earnings per common share have been reduced by $0.16 and $0.03
for these periods.
OTHER -
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 reclassified assets,
from a 1993 acquisition, relate to non-specific customer relationships that were
neither contractual nor separable. The adoption of SFAS No. 141 did not have any
other material impact on the Company's financial statements.
As discussed in Note 1, effective March 1, 2002, the Company adopted SFAS
No. 142. The following table presents earnings and earnings per share
information for the comparative periods as if SFAS No. 141 and the
nonamortization provisions of SFAS No. 142 had been applied beginning March 1,
2000:
For the Years Ended February 28,
------------------------------------
2003 2002 2001
---------- ---------- ----------
(in thousands, except per share data)
Reported net income $ 203,306 $ 136,421 $ 97,342
Add back: amortization of goodwill - 16,114 11,282
Add back: amortization of intangibles
reclassified to goodwill - 2,147 2,174
Add back: amortization of indefinite
lived intangible assets - 9,038 6,048
Less: income tax effect - (8,353) (5,211)
---------- ---------- ----------
Adjusted net income $ 203,306 $ 155,367 $ 111,635
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE:
Reported net income $ 2.26 $ 1.60 $ 1.33
Add back: amortization of goodwill - 0.19 0.15
Add back: amortization of intangibles
reclassified to goodwill - 0.02 0.03
Add back: amortization of indefinite
lived intangible assets - 0.11 0.08
Less: income tax effect - (0.10) (0.07)
---------- ---------- ----------
Adjusted net income $ 2.26 $ 1.82 $ 1.52
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Reported net income $ 2.19 $ 1.55 $ 1.30
Add back: amortization of goodwill - 0.18 0.15
Add back: amortization of intangibles
reclassified to goodwill - 0.03 0.03
Add back: amortization of indefinite
lived intangible assets - 0.10 0.08
Less: income tax effect - (0.09) (0.07)
---------- ---------- ----------
Adjusted net income $ 2.19 $ 1.77 $ 1.49
========== ========== ==========
The changes in the carrying amount of goodwill for the year ended February
28, 2003, are as follows:
Constellation
Constellation Beers and
Wines Spirits Consolidated
------------- ------------- -------------
(in thousands)
Balance, February 28, 2002 $ 562,403 $ 105,680 $ 668,083
Impact of Adopting SFAS No. 141:
Intangible assets reclassified to
goodwill at March 1, 2002 6,765 40,030 46,795
Elimination of deferred tax
liabilities (2,030) (14,611) (16,641)
Purchase accounting allocations 4,300 - 4,300
Foreign currency translation
adjustments 16,191 860 17,051
Purchase price earn-out 2,635 - 2,635
------------- ------------- -------------
Balance, February 28, 2003 $ 590,264 $ 131,959 $ 722,223
============= ============= =============
Also, 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 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, the Company has restated net sales, cost of product
sold, and selling, general and administrative expenses for the years ended
February 28, 2002, and February 28, 2001. Net sales were reduced by $213.8
million and $170.7 million, respectively; cost of product sold was increased by
$10.1 million and $7.8 million, respectively; and selling, general and
administrative expenses were reduced by $223.9 million and $178.5 million,
respectively. This reclassification did not affect operating income or net
income.
The Company adopted EITF Issue No. 02-16 ("EITF No. 02-16"), "Accounting by
a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor" for new arrangements, including modifications of existing arrangements,
entered into after November 21, 2002, or December 31, 2002, as appropriate. EITF
No. 02-16 addresses how a vendor should characterize consideration given to a
customer, including a reseller, and, to a limited extent, when to recognize that
consideration in the income statement. The adoption of EITF No. 02-16 did not
have a material impact on the Company's financial statements.
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.
Effective January 1, 2003, the Company adopted Financial Accounting
Standards Board ("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 have been applied on a prospective
basis to guarantees issued or modified after December 31, 2002 and have not had
a material impact on the Company's financial statements. Additionally, the
Company has adopted the disclosure requirements of FIN No. 45 for the fiscal
year ended February 28, 2003 (see Note 14).
3. ACQUISITIONS:
FORTH WINES ACQUISITION -
On October 27, 2000, the Company purchased all of the issued Ordinary
Shares and Preference Shares of Forth Wines Limited ("Forth Wines"). The
purchase price was $4.5 million and was accounted for using the purchase method;
accordingly, the acquired net assets were recorded at fair value at the date of
acquisition. The excess of the purchase price over the fair market value of the
net assets acquired (goodwill), $2.2 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 Forth Wines are reported in the
Constellation Wines segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
TURNER ROAD VINTNERS ASSETS 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 purchase price of the
Turner Road Vintners Assets, including direct acquisition costs, was $279.4
million. In addition, the Company assumed indebtedness of $9.4 million. The
acquisition was financed by the proceeds from the sale of the February 2001
Senior Notes (as defined in Note 9) 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 value at the date of acquisition. The excess of the
purchase price over the fair value of the net assets acquired (goodwill), $146.2
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 Constellation
Wines segment and have been included in the Consolidated Statements of Income
since the date of acquisition.
CORUS ASSETS 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. The purchase price of the Corus Assets, including
direct acquisition costs, was $48.9 million plus an earn-out over six years
based on the performance of the brands. In addition, the Company assumed
indebtedness of $3.0 million. As of February 28, 2003, 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
value at the date of acquisition. The excess of the purchase price over the fair
value of the net assets acquired (goodwill), $48.5 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 Constellation Wines segment and have been included in the
Consolidated Statements of Income since the date of acquisition.
RAVENSWOOD 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 direct acquisition costs, was $149.7 million.
In addition, the Company assumed indebtedness of $2.8 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 value at the
date of acquisition. The excess of the purchase price over the fair 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 Constellation Wines 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
Goodwill 99,756
Trademarks 45,600
Other assets 26
---------
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.
The following table sets forth the unaudited pro forma results of
operations of the Company for the years ended February 28, 2002, and February
28, 2001, respectively. The unaudited pro forma results of operations give
effect to the acquisitions of the Turner Road Vintners Assets, the Corus Assets
and the Ravenswood Acquisition as if they occurred on March 1, 2000. 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 year ended February 28, 2002, do not reflect total
nonrecurring charges of $12.6 million ($0.10 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 March 1, 2000, nor do they
project the Company's financial position or results of operations at any future
date or for any future period.
For the Years Ended
February 28,
-------------------------
2002 2001
----------- -----------
(in thousands, except per share data)
Net sales $ 2,622,117 $ 2,485,112
Income before extraordinary item $ 136,971 $ 80,710
Extraordinary item, net of income taxes $ (1,554) $ -
Net income $ 135,417 $ 80,710
Earnings per common share:
Basic:
Income before extraordinary item $ 1.60 $ 1.10
Extraordinary item, net of income taxes (0.02) -
----------- -----------
Earnings per common share - basic $ 1.58 $ 1.10
=========== ===========
Diluted:
Income before extraordinary item $ 1.56 $ 1.08
Extraordinary item, net of income taxes (0.02) -
----------- -----------
Earnings per common share - diluted $ 1.54 $ 1.08
=========== ===========
Weighted average common shares outstanding:
Basic 85,505 73,446
Diluted 87,825 74,751
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, had
acquired all of Hardy's outstanding capital stock (the "Hardy Acquisition"). See
Note 23 for discussion.
4. PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Land and land improvements $ 84,758 $ 92,193
Vineyards 37,394 32,828
Buildings and improvements 173,943 153,643
Machinery and equipment 551,271 486,881
Motor vehicles 5,468 7,046
Construction in progress 32,839 38,071
------------ ------------
885,673 810,662
Less - Accumulated depreciation (283,204) (231,898)
------------ ------------
$ 602,469 $ 578,764
============ ============
5. INTANGIBLE ASSETS:
The major components of intangible assets are:
February 28, 2003 February 28, 2002
---------------------- ----------------------
Gross Net Gross Net
Carrying Carrying Carrying Carrying
Amount Amount Amount Amount
---------- ---------- ---------- ----------
(in thousands)
Amortizable intangible assets:
Distribution agreements $ 10,158 $ 4,434 $ 10,158 $ 5,960
Other 3,978 345 4,049 1,067
---------- ---------- ---------- ----------
Total $ 14,136 4,779 $ 14,207 7,027
========== ==========
Nonamortizable intangible assets:
Trademarks 357,166 351,707
Distributor and agency
relationships 20,458 60,488
Other 25 6,765
---------- ----------
Total 377,649 418,960
---------- ----------
Total intangible assets $ 382,428 $ 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 $2.2 million, $13.4 million and
$10.4 million for the years ended February 28, 2003, February 28, 2002 and
February 28, 2001, respectively. Estimated amortization expense for each of the
five succeeding fiscal years is as follows:
(in thousands)
2004 $ 1,625
2005 $ 1,427
2006 $ 1,362
2007 $ 365
2008 $ -
6. OTHER ASSETS:
The major components of other assets are as follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Investment in joint venture $ 123,064 $ 110,520
Deferred financing costs 28,555 27,104
Other 18,418 9,674
Prepaid pension benefits - 25,394
------------ ------------
170,037 172,692
Less - Accumulated amortization (10,928) (7,389)
------------ ------------
$ 159,109 $ 165,303
============ ============
Amortization expense for other assets was included in selling, general and
administrative expenses and was $3.7 million, $4.0 million and $4.1 million for
the years ended February 28, 2003, February 28, 2002, and February 28, 2001,
respectively.
7. INVESTMENT IN JOINT VENTURE:
On July 31, 2001, the Company and Hardy (as defined in Note 23) completed
the formation of Pacific Wine Partners LLC ("PWP"), a joint venture owned
equally by the Company and Hardy. The Company contributed to PWP assets with a
carrying amount of $30.0 million plus $5.5 million of cash. The Company sold
assets with a carrying amount of $31.2 million to Hardy and received $34.9
million in cash. Hardy contributed these assets plus $5.5 million of cash to
PWP. 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
February 28, 2003, amounts related to the above agreements were not material.
On October 16, 2001, 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 February 28, 2003, the Company's investment balance, which is
accounted for under the equity method, was $123.1 million. 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. Subsequent to February 28, 2003, the Company acquired Hardy (see
Note 23). Consequently, PWP will become a wholly-owned subsidiary of the Company
and its results of operations will be included in the Consolidated Statements of
Income beginning March 27, 2003.
8. OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Advertising and promotions $ 63,155 $ 46,664
Income taxes payable 58,347 22,120
Salaries and commissions 35,769 33,481
Interest 22,019 21,503
Adverse grape contracts 10,244 22,447
Other 114,293 98,940
------------ ------------
$ 303,827 $ 245,155
============ ============
9. BORROWINGS:
Borrowings consist of the following:
February 28,
February 28, 2003 2002
--------------------------------------- ------------
Current Long-term Total Total
--------- ----------- ----------- ------------
(in thousands)
Notes Payable to Banks:
- ----------------------
Senior Credit Facility -
Revolving Credit Loans $ 2,000 $ - $ 2,000 $ 50,000
Other 623 - 623 4,775
--------- ----------- ----------- ------------
$ 2,623 $ - $ 2,623 $ 54,775
========= =========== =========== ============
Long-term Debt:
- --------------
Senior Credit Facility - Term Loans $ 67,082 $ 78,281 $ 145,363 $ 281,292
Senior Notes - 643,229 643,229 619,205
Senior Subordinated Notes - 450,000 450,000 450,000
Other Long-term Debt 4,182 20,121 24,303 24,295
--------- ----------- ----------- -----------
$ 71,264 $ 1,191,631 $ 1,262,895 $ 1,374,792
========= =========== =========== ===========
SENIOR CREDIT FACILITY -
On October 6, 1999, the Company, certain of its principal operating
subsidiaries and a syndicate of banks (the "Syndicate Banks"), for which The
Chase Manhattan Bank acts as administrative agent, entered into a senior credit
facility (as subsequently amended, the "2000 Credit Agreement"). The 2000
Credit Agreement includes both U.S. dollar and British pound sterling
commitments of the Syndicate Banks of up to, in the aggregate, the equivalent of
$1.0 billion (subject to increase as therein provided to $1.2 billion).
Proceeds of the 2000 Credit Agreement were used to repay all outstanding
principal and accrued interest on all loans under the Company's prior senior
credit facility, and are available to fund permitted acquisitions and ongoing
working capital needs of the Company and its subsidiaries. Subsequent to
February 28, 2003, the Company entered into a new senior credit facility (see
Note 23).
The 2000 Credit Agreement provides for a $380.0 million Tranche I Term Loan
facility, a $320.0 million Tranche II Term Loan facility available for borrowing
in British pound sterling, and a $300.0 million Revolving Credit facility
(including letters of credit up to a maximum of $20.0 million). The Tranche I
Term Loan facility ($380.0 million) and the Tranche II Term Loan facility
((pound) 193.4 million, or $320.0 million) were fully drawn at closing. During
Fiscal 2001, the Company used proceeds from operating activities to prepay $75.0
million of the $380.0 million Tranche I Term Loan facility. During Fiscal 2002,
the Company used proceeds from the sale of 645,000 shares of the Company's Class
A Common Stock (see Note 15) to prepay $6.0 million of the $380.0 million
Tranche I Term Loan facility. During Fiscal 2003, the Company used proceeds from
operating activities to prepay $24.0 of the $380.0 million Tranche I Term Loan
facility. On November 17, 1999, proceeds from the Sterling Senior Notes (as
defined below) were used to prepay a portion of the $320.0 million Tranche II
Term Loan facility ((pound) 73.0 million, or $118.3 million). On May 15, 2000,
proceeds from the Sterling Series C Senior Notes (as defined below) were used to
prepay an additional portion of the $320.0 million Tranche II Term Loan facility
((pound) 78.8 million, or $118.2 million). During Fiscal 2003, the Company used
proceeds from operating activities to prepay an additional portion of the $320.0
million Tranche II Term Loan facility ((pound) 29.0 million, or $45.6 million).
The rate of interest payable, at the Company's option, is a function of the
London interbank offering rate ("LIBOR") plus a margin, federal funds rate plus
a margin, or the prime rate plus a margin. The margin is adjustable based upon
the Company's Debt Ratio (as defined in the 2000 Credit Agreement) and, with
respect to LIBOR borrowings, ranges between 0.75% and 1.25% for Revolving Credit
loans and 1.00% and 1.75% for Term Loans. As of February 28, 2003, the margin
was 1.00% for Revolving Credit loans and 1.50% for Term Loans. In addition to
interest, the Company pays a facility fee on the Revolving Credit commitments at
0.50% per annum as of February 28, 2003. This fee is based upon the Company's
quarterly Debt Ratio and can range from 0.25% to 0.50%.
Certain of the Company's principal operating subsidiaries have guaranteed
the Company's obligations under the 2000 Credit Agreement. The 2000 Credit
Agreement has as collateral (i) first priority pledges of 100% of the capital
stock of Canandaigua Limited and all of the Company's domestic operating
subsidiaries and (ii) first priority pledges of 65% of the capital stock of
Matthew Clark and certain other foreign subsidiaries.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, incurring additional indebtedness,
the sale of assets, the payment of dividends, transactions with affiliates and
the making of certain investments, in each case subject to customary baskets,
exceptions and thresholds. The primary financial covenants require the
maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed
charges ratio and an interest coverage ratio. Among the most restrictive
covenants contained in the 2000 Credit Agreement is the debt coverage ratio.
As of February 28, 2003, under the 2000 Credit Agreement, the Company had
outstanding term loans of $145.4 million bearing a weighted average interest
rate of 3.1% and $2.0 million of revolving loans bearing a weighted average
interest rate of 3.1%. Amounts available to be drawn down under the Revolving
Credit Loans, after deducting undrawn letters of credit of $15.1 million and
$13.2 million, were $282.9 million and $236.8 million at February 28, 2003, and
February 28, 2002, respectively. The Company had average outstanding Revolving
Credit Loans of $11.3 million, $84.4 million, and $47.6 million for the years
ended February 28, 2003, February 28, 2002, and February 28, 2001, respectively.
The average interest rate on the Revolving Credit Loans was 3.2%, 4.8%, and 7.8%
for Fiscal 2003, Fiscal 2002, and Fiscal 2001, respectively.
SENIOR NOTES -
On August 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 5/8% Senior Notes due August 2006 (the "August 1999 Senior Notes").
Interest on the August 1999 Senior Notes is payable semiannually on February 1
and August 1. The August 1999 Senior Notes are redeemable at the option of the
Company, in whole or in part, at any time. The August 1999 Senior Notes are
unsecured senior obligations and rank equally in right of payment to all
existing and future unsecured senior indebtedness of the Company. The August
1999 Senior Notes are guaranteed, on a senior basis, by certain of the Company's
significant operating subsidiaries.
On November 17, 1999, the Company issued (pound) 75.0 million ($121.7
million upon issuance) aggregate principal amount of 8 1/2% Senior Notes due
November 2009 (the "Sterling Senior Notes"). Interest on the Sterling Senior
Notes is payable semiannually on May 15 and November 15. The Sterling Senior
Notes are redeemable at the option of the Company, in whole or in part, at any
time. The Sterling Senior Notes are unsecured senior obligations and rank
equally in right of payment to all existing and future unsecured senior
indebtedness of the Company. The Sterling Senior Notes are guaranteed, on a
senior basis, by certain of the Company's significant operating subsidiaries. In
March 2000, the Company exchanged (pound) 75.0 million aggregate principal
amount of 8 1/2% Series B Senior Notes due in November 2009 (the "Sterling
Series B Senior Notes") for all of the Sterling Senior Notes. The terms of the
Sterling Series B Senior Notes are identical in all material respects to the
Sterling Senior Notes. In October 2000, the Company exchanged (pound) 74.0
million aggregate principal amount of Sterling Series C Senior Notes (as defined
below) for (pound) 74.0 million of the Sterling Series B Notes. The terms of the
Sterling Series C Senior Notes are identical in all material respects to the
Sterling Series B Senior Notes. As of February 28, 2003, the Company had
outstanding (pound) 1.0 million ($1.6 million) aggregate principal amount of
Sterling Series B Senior Notes.
On May 15, 2000, the Company issued (pound) 80.0 million ($120.0 million
upon issuance) aggregate principal amount of 8 1/2% Series C Senior Notes due
November 2009 at an issuance price of (pound) 79.6 million ($119.4 million upon
issuance, net of $0.6 million unamortized discount, with an effective interest
rate of 8.6%) (the "Sterling Series C Senior Notes"). The net proceeds of the
offering ((pound) 78.8 million, or $118.2 million) were used to repay a portion
of the Company's British pound sterling borrowings under its then existing
senior credit facility. Interest on the Sterling Series C Senior Notes is
payable semiannually on May 15 and November 15. The Sterling Series C Senior
Notes are redeemable at the option of the Company, in whole or in part, at any
time. The Sterling Series C Senior Notes are unsecured senior obligations and
rank equally in right of payment to all existing and future unsecured senior
indebtedness of the Company. The Sterling Series C Senior Notes are guaranteed,
on a senior basis, by certain of the Company's significant operating
subsidiaries. As of February 28, 2003, the Company had outstanding (pound) 154.0
million ($241.7 million, net of $0.5 million unamortized discount) aggregate
principal amount of Sterling Series C Senior Notes.
On February 21, 2001, the Company issued $200.0 million aggregate principal
amount of 8% Senior Notes due February 2008 (the "February 2001 Senior Notes").
The net proceeds of the offering ($197.0 million) were used to partially fund
the acquisition of the Turner Road Vintners Assets. Interest on the February
2001 Senior Notes is payable semiannually on February 15 and August 15. The
February 2001 Senior Notes are redeemable at the option of the Company, in whole
or in part, at any time. The February 2001 Senior Notes are unsecured senior
obligations and rank equally in right of payment to all existing and future
unsecured senior indebtedness of the Company. The February 2001 Senior Notes are
guaranteed, on a senior basis, by certain of the Company's significant operating
subsidiaries. In July 2001, the Company exchanged $200.0 million aggregate
principal amount of 8% Series B Senior Notes due February 2008 (the "February
2001 Series B Senior Notes") for all of the February 2001 Senior Notes. The
terms of the February 2001 Series B Senior Notes are identical in all material
respects to the February 2001 Senior Notes.
SENIOR SUBORDINATED NOTES -
On March 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated
Notes"). Interest on the Senior Subordinated Notes is payable semiannually on
March 1 and September 1. 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. The Senior Subordinated Notes are unsecured and subordinated to the prior
payment in full of all senior indebtedness of the Company, which includes the
senior credit facility. The Senior Subordinated Notes are guaranteed, on a
senior subordinated basis, by certain of the Company's significant operating
subsidiaries.
On January 23, 2002, the Company issued $250.0 million aggregate principal
amount of 8 1/8% Senior Subordinated Notes due January 2012 ("January 2002
Senior Subordinated Notes"). The net proceeds of the offering ($247.2 million)
were used primarily to repay the Company's $195.0 million aggregate principal
amount of 8 3/4% Senior Subordinated Notes due in December 2003. In connection
with this repayment, the Company incurred an extraordinary loss of $2.6 million
($1.6 million, net of income taxes of $1.0 million) related to the write-off of
the remaining deferred financing costs and unamortized discount. The remaining
net proceeds of the offering were used to repay a portion of the outstanding
indebtedness under the Company's then existing senior credit facility. Interest
on the January 2002 Senior Subordinated Notes is payable semiannually on January
15 and July 15. 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. The January 2002 Senior Subordinated Notes are
unsecured and subordinated to the prior payment in full of all senior
indebtedness of the Company, which includes the senior credit facility. The
January 2002 Senior Subordinated Notes are guaranteed, on a senior subordinated
basis, by certain of the Company's significant operating subsidiaries.
TRUST INDENTURES -
The Company's various Trust Indentures relating to the senior notes and
senior subordinated notes contain certain covenants, including, but not limited
to: (i) limitation on indebtedness; (ii) limitation on restricted payments;
(iii) limitation on transactions with affiliates; (iv) limitation on senior
subordinated indebtedness; (v) limitation on liens; (vi) limitation on sale of
assets; (vii) limitation on issuance of guarantees of and pledges for
indebtedness; (viii) restriction on transfer of assets; (ix) limitation on
subsidiary capital stock; (x) limitation on dividends and other payment
restrictions affecting subsidiaries; and (xi) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of the
Company to another person. The limitation on indebtedness covenant is governed
by a rolling four quarter fixed charge ratio requiring a specified minimum.
DEBT PAYMENTS -
Prior to the payoff of the 2000 Credit Agreement as described in Note 23,
principal payments required under long-term debt obligations (excluding
unamortized discount) during the next five fiscal years and thereafter are as
follows:
(in thousands)
2004 $ 71,264
2005 82,777
2006 4,174
2007 203,918
2008 203,947
Thereafter 697,309
-----------
$ 1,263,389
===========
10. INCOME TAXES:
Income before income taxes was generated as follows:
For the Years Ended February 28,
----------------------------------
2003 2002 2001
---------- ---------- ----------
(in thousands)
Domestic $ 294,557 $ 202,190 $ 127,608
Foreign 40,379 27,769 34,629
---------- ---------- ----------
$ 334,936 $ 229,959 $ 162,237
========== ========== ==========
The income tax provision consisted of the following:
For the Years Ended February 28,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Current:
Federal $ 79,472 $ 64,823 $ 39,082
State 13,807 10,930 7,934
Foreign 17,301 12,556 11,202
------------ ------------ ------------
Total current 110,580 88,309 58,218
------------ ------------ ------------
Deferred:
Federal 16,290 (492) (2,017)
State 2,502 (251) 402
Foreign 2,258 4,418 8,292
------------ ------------ ------------
Total deferred 21,050 3,675 6,677
------------ ------------ ------------
Income tax provision $ 131,630 $ 91,984 $ 64,895
============ ============ ============
The foreign provision for income taxes is based on foreign pretax earnings.
Earnings of foreign subsidiaries would be subject to U.S. income taxation on
repatriation to the U.S. The Company's consolidated financial statements fully
provide for any related tax liability on amounts that may be repatriated.
Significant components of deferred tax (liabilities) assets consist of the
following:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Property, plant and equipment $ (161,062) $ (174,485)
Derivative instruments (9,081) -
Inventories (2,105) (2,232)
Insurance accruals 6,061 5,415
Restructuring accruals 1,198 1,004
Effect of fiscal 1999 change in
accounting method - (1,699)
Other accruals 27,018 18,974
------------ ------------
$ (137,971) $ (153,023)
============ ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some or all of the deferred tax assets
will not be realized. Management considers the reversal of deferred tax
liabilities and projected future taxable income in making this assessment. Based
upon this assessment, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.
A reconciliation of the total tax provision to the amount computed by
applying the statutory U.S. Federal income tax rate to income before provision
for income taxes is as follows:
For the Years Ended February 28,
-------------------------------------------------------------------------
2003 2002 2001
----------------------- ---------------------- -----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Income tax provision at statutory rate $ 117,228 35.0 $ 80,486 35.0 $ 56,783 35.0
State and local income taxes, net of
federal income tax benefit 10,601 3.2 6,942 3.0 5,022 3.1
Earnings of subsidiaries taxed at
other than U.S. statutory rate 1,838 0.5 1,105 0.5 616 0.4
Miscellaneous items, net 1,963 0.6 3,451 1.5 2,474 1.5
--------- ---------- ---------- ---------- ---------- ----------
$ 131,630 39.3 $ 91,984 40.0 $ 64,895 40.0
========= ========== ========== ========== ========== ==========
11. OTHER LIABILITIES:
The major components of other liabilities are as follows:
February 28, February 28,
2003 2002
------------- -------------
(in thousands)
Accrued pension liability $ 36,351 $ 1,605
Adverse grape contracts (Note 14) 22,550 30,119
Other 40,367 30,386
------------- -------------
$ 99,268 $ 62,110
============= =============
12. PROFIT SHARING AND RETIREMENT SAVINGS PLANS:
The Company's retirement and profit sharing plan, the Constellation Brands,
Inc. 401(k) and Profit Sharing Plan (the "Plan"), covers substantially all
employees, excluding those employees covered by collective bargaining agreements
and U.K. employees. The 401(k) portion of the Plan permits eligible employees
to defer a portion of their compensation (as defined in the Plan) on a pretax
basis. Participants may defer up to 12% of their compensation for the year,
subject to limitations of the Plan. The Company makes a matching contribution
of 50% of the first 6% of compensation a participant defers. The amount of the
Company's contribution under the profit sharing portion of the Plan is in such
discretionary amount as the Board of Directors may annually determine, subject
to limitations of the Plan. Company contributions were $10.9 million, $10.5
million, and $8.2 million for the years ended February 28, 2003, February 28,
2002, and February 28, 2001, respectively.
The Company has defined benefit pension plans which cover substantially all
of its U.K. and Canadian employees. Net periodic benefit (income) cost reported
in the Consolidated Statements of Income for these plans includes the following
components:
For the Years Ended February 28,
--------------------------------
2003 2002 2001
-------- -------- --------
(in thousands)
Service cost $ 4,245 $ 4,298 $ 4,380
Interest cost 12,055 11,549 11,254
Expected return on plan assets (14,639) (15,867) (16,164)
Amortization of prior service cost 8 8 -
Recognized net actuarial gain 843 (33) (95)
-------- -------- --------
Net periodic benefit cost (income) $ 2,512 $ (45) $ (625)
======== ======== ========
The following table summarizes the funded status of the Company's defined
benefit pension plans and the related amounts included in the Consolidated
Balance Sheets:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 186,722 $ 193,516
Service cost 4,245 4,298
Interest cost 12,055 11,549
Plan participants' contributions 1,638 1,420
Plan amendment - 39
Actuarial loss (gain) 3,423 (12,785)
Benefits paid (7,706) (7,274)
Foreign currency exchange rate changes 20,309 (4,041)
------------ ------------
Benefit obligation as of last day of February $ 220,686 $ 186,722
============ ============
Change in plan assets:
Fair value of plan assets as of March 1 $ 181,815 $ 207,711
Actual return on plan assets (19,794) (16,555)
Plan participants' contributions 1,638 1,420
Employer contribution 979 554
Benefits paid (7,706) (7,274)
Foreign currency exchange rate changes 18,887 (4,041)
------------ ------------
Fair value of plan assets as of last day of February $ 175,819 $ 181,815
============ ============
Funded status of the plan as of last day of February:
Funded status $ (44,867) $ (4,907)
Unrecognized prior service cost 24 30
Unrecognized actuarial loss 69,732 28,666
------------ ------------
Net amount recognized $ 24,889 $ 23,789
============ ============
Amounts recognized in the Consolidated Balance Sheets
consist of:
Prepaid benefit cost $ - $ 25,394
Accrued benefit liability (36,351) (1,605)
Intangible asset 24 -
Deferred tax asset 18,681 -
Accumulated other comprehensive loss 42,535 -
------------ ------------
Net amount recognized $ 24,889 $ 23,789
============ ============
As of February 28, 2003, the aggregate accumulated benefit obligation was
$212.2 million. The following table sets forth the principal assumptions used in
developing the benefit obligation and the net periodic pension expense:
February 28, 2003 February 28, 2002
----------------- -----------------
Rate of return on plan assets 7.50% - 8.00% 7.75% - 8.00%
Discount rate 5.75% - 6.40% 6.00% - 7.00%
Rate of compensation increase 0.00% - 3.50% 0.00% - 3.75%
13. POSTRETIREMENT BENEFITS:
The Company currently sponsors multiple unfunded postretirement benefit
plans for certain of its Constellation Beers and Spirits segment employees.
The status of the plans is as follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 4,676 $ 4,185
Service cost 135 155
Interest cost 260 305
Benefits paid (145) (193)
Plan amendment - 184
Actuarial loss (gain) (566) 87
Foreign currency exchange rate changes 111 (47)
------------ ------------
Benefit obligation as of the last day of February $ 4,471 $ 4,676
============ ============
Funded status as of the last day of February:
Funded status $ (4,471) $ (4,676)
Unrecognized prior service cost 323 352
Unrecognized net loss (gain) (168) 349
------------ ------------
Accrued benefit liability $ (4,316) $ (3,975)
============ ============
Net periodic benefit cost reported in the Consolidated Statements of Income
includes the following components:
For the Years Ended February 28,
----------------------------------
2003 2002 2001
-------- -------- --------
(in thousands)
Service cost $ 135 $ 155 $ 136
Interest cost 260 305 261
Amortization of prior service cost 41 41 22
Recognized net actuarial loss (gain) (20) 9 -
-------- -------- -------
Net periodic benefit cost $ 416 $ 510 $ 419
======== ======== =======
The following table sets forth the principal assumptions used in developing
the benefit obligation and the net periodic non-pension postretirement and
postemployment expense:
February 28, 2003 February 28, 2002
----------------- -----------------
Discount rate 6.40% - 6.50% 6.50%
Rate of compensation increase 0.00% - 4.00% 0.00% - 4.00%
At February 28, 2003, a 10.3% annual rate of increase and a 6.2% annual
rate of increase in the per capita cost of covered health benefits were assumed
for the first year for the Non-U.S. and U.S. plans, respectively. These rates
were assumed to decrease gradually to 4.7% over seven years and 4.0% over two
years for the Non-U.S. and U.S. plans, respectively, and to remain at this level
thereafter. Assumed healthcare trend rates could have a significant effect on
the amount reported for health care plans. A 1% change in assumed health care
cost trend rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
(in thousands)
Effect on total service and interest cost components $ 52 $ (44)
Effect on postretirement benefit obligation $ 475 $ (412)
14. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES -
Future payments under noncancelable operating leases having initial or
remaining terms of one year or more are as follows during the next five fiscal
years and thereafter:
(in thousands)
2004 $ 24,612
2005 22,048
2006 17,944
2007 19,422
2008 8,807
Thereafter 100,065
---------
$ 192,898
=========
Rental expense was $25.3 million, $24.0 million, and $19.6 million for
Fiscal 2003, Fiscal 2002, and Fiscal 2001, respectively.
In connection with the formation of PWP, the Company transferred certain of
its vineyard lease and vineyard management agreements to PWP. The agreements
have terms that expire between 2012 and 2026. The Company guaranteed PWP's
payment and performance under these agreements. The estimated maximum amount of
the Company's exposure is $42.6 million in undiscounted future payments. The
Company has not recorded a liability for these guarantees and does not have any
collateral from PWP.
PURCHASE COMMITMENTS AND CONTINGENCIES -
The Company has agreements with suppliers to purchase various spirits of
which certain agreements are denominated in British pound sterling and Canadian
dollars. The maximum future obligation under these agreements, based upon
exchange rates at February 28, 2003, aggregate $24.4 million for contracts
expiring through December 2007.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements from the suppliers of these products. The
Company's agreement to distribute Corona Extra and its other Mexican beer brands
exclusively throughout 25 primarily western U.S. states expires in December
2006, with automatic five year renewals thereafter, subject to compliance with
certain performance criteria and other terms under the agreement. The remaining
agreements expire through December 2007. Prior to their expiration, these
agreements may be terminated if the Company fails to meet certain performance
criteria. At February 28, 2003, the Company believes it is in compliance with
all of its material distribution agreements and, given the Company's long-term
relationships with its suppliers, the Company does not believe that these
agreements will be terminated.
In connection with previous acquisitions as well as with the Turner Road
Vintners Assets acquisition and the Corus Assets acquisition, the Company has
assumed grape purchase contracts with certain growers and suppliers. In
addition, the Company has entered into other grape purchase contracts with
various growers and suppliers in the normal course of business. Under the grape
purchase contracts, the Company is committed to purchase all grape production
yielded from a specified number of acres for a period of time from one to
fifteen years. The actual tonnage and price of grapes that must be purchased by
the Company will vary each year depending on certain factors, including weather,
time of harvest, overall market conditions and the agricultural practices and
location of the growers and suppliers under contract. The Company purchased
$166.6 million and $177.0 million of grapes under contracts during Fiscal 2003
and Fiscal 2002, respectively. Based on current production yields and published
grape prices, the Company estimates that the aggregate purchases under these
contracts over the remaining terms of the contracts will be $564.0 million.
In connection with the Turner Road Vintners Assets acquisition and the
Corus Assets acquisition, the Company established a reserve for the estimated
loss on firm purchase commitments assumed at the time of acquisition. As of
February 28, 2003, the remaining balance on this reserve is $32.8 million.
The Company's aggregate obligations under bulk wine purchase contracts will
be $17.3 million over the remaining terms of the contracts which expire through
fiscal 2007.
EMPLOYMENT CONTRACTS -
The Company has employment contracts with certain of its executive officers
and certain other management personnel with automatic one year renewals unless
terminated by either party. These agreements provide for minimum salaries, as
adjusted for annual increases, and may include incentive bonuses based upon
attainment of specified management goals. In addition, these agreements provide
for severance payments in the event of specified termination of employment. As
of February 28, 2003, the aggregate commitment for future compensation and
severance, excluding incentive bonuses, was $5.1 million, none of which was
accruable at that date.
EMPLOYEES COVERED BY COLLECTIVE BARGAINING AGREEMENTS -
Approximately 28% of the Company's full-time employees are covered by
collective bargaining agreements at February 28, 2003. Agreements expiring
within one year cover approximately 19% of the Company's full-time employees.
LEGAL MATTERS -
The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to such
litigation cannot be determined, in the opinion of management such liability
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
15. STOCKHOLDERS' EQUITY:
COMMON STOCK -
The Company has two classes of common stock: Class A Common Stock and Class
B Convertible Common Stock. Class B Convertible Common Stock shares are
convertible into shares of Class A Common Stock on a one-to-one basis at any
time at the option of the holder. Holders of Class B Convertible Common Stock
are entitled to ten votes per share. Holders of Class A Common Stock are
entitled to one vote per share and a cash dividend premium. If the Company pays
a cash dividend on Class B Convertible Common Stock, each share of Class A
Common Stock will receive an amount at least ten percent greater than the amount
of the cash dividend per share paid on Class B Convertible Common Stock. In
addition, the Board of Directors may declare and pay a dividend on Class A
Common Stock without paying any dividend on Class B Convertible Common Stock.
However, the Company's 2000 Credit Agreement restricts the payment of a cash
dividend.
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.
At February 28, 2003, there were 78,685,751 shares of Class A Common Stock
and 12,075,590 shares of Class B Convertible Common Stock outstanding, net of
treasury stock.
COMMON STOCK SPLIT -
During May 2002, a two-for-one stock split was distributed in the form of a
stock dividend to stockholders of record on April 30, 2002. All share and per
share amounts have been retroactively restated to give effect to the common
stock split.
STOCK REPURCHASE AUTHORIZATION -
In June 1998, the Company's Board of Directors authorized the repurchase of
up to $100.0 million of its Class A Common Stock and Class B Convertible Common
Stock. The Company may finance such purchases, which will become treasury
shares, through cash generated from operations or through the senior credit
facility. No shares were repurchased during Fiscal 2003, Fiscal 2002 and Fiscal
2001.
EQUITY OFFERINGS -
During March 2001, the Company completed a public offering of 8,740,000
shares of its Class A Common Stock, which was held as treasury stock. This
resulted in net proceeds to the Company, after deducting underwriting discounts
and expenses, of $139.4 million. The net proceeds were used to repay revolving
loan borrowings under the senior credit facility of which a portion was incurred
to partially finance the acquisition of the Turner Road Vintners Assets.
During October 2001, the Company sold 645,000 shares of its Class A Common
Stock, which was held as treasury stock, in connection with a public offering of
Class A Common Stock by stockholders of the Company. The net proceeds to the
Company, after deducting underwriting discounts, of $12.1 million were used to
repay borrowings under the senior credit facility.
LONG-TERM STOCK INCENTIVE PLAN -
Under the Company's Long-Term Stock Incentive Plan, nonqualified stock
options, stock appreciation rights, restricted stock and other stock-based
awards may be granted to employees, officers and directors of the Company. At
the Company's Annual Meeting of Stockholders held on July 20, 1999, stockholders
approved the amendment to the Company's Long-Term Stock Incentive Plan to
increase the aggregate number of shares of the Class A Common Stock available
for awards under the plan from 16,000,000 shares to 28,000,000 shares. The
exercise price, vesting period and term of nonqualified stock options granted
are established by the committee administering the plan (the "Committee").
Grants of stock appreciation rights, restricted stock and other stock-based
awards may contain such vesting, terms, conditions and other requirements as the
Committee may establish. During Fiscal 2003, Fiscal 2002 and Fiscal 2001, no
stock appreciation rights were granted. During Fiscal 2003, 7,080 shares of
restricted Class A Common Stock were granted at a weighted average grant date
fair value of $28.41 per share. No restricted stock was granted during Fiscal
2002. During Fiscal 2001, 15,100 shares of restricted Class A Common Stock were
granted at a weighted average grant date fair value of $13.31 per share.
INCENTIVE STOCK OPTION PLAN -
Under the Company's Incentive Stock Option Plan, incentive stock options
may be granted to employees, including officers, of the Company. Grants, in the
aggregate, may not exceed 4,000,000 shares of the Company's Class A Common
Stock. The exercise price of any incentive stock option may not be less than the
fair market value of the Company's Class A Common Stock on the date of grant.
The vesting period and term of incentive stock options granted are established
by the Committee. The maximum term of incentive stock options is ten years.
A summary of stock option activity under the Company's Long-Term Stock
Incentive Plan and the Incentive Stock Option Plan is as follows:
Weighted Weighted
Shares Average Average
Under Exercise Options Exercise
Option Price Exercisable Price
----------- --------- ----------- ---------
Balance, February 29, 2000 10,953,000 $ 9.70 2,949,820 $ 6.76
Options granted 3,860,400 $ 13.01
Options exercised (1,859,136) $ 7.44
Options forfeited/canceled (645,460) $ 11.91
-----------
Balance, February 28, 2001 12,308,804 $ 10.97 4,816,884 $ 8.51
Options granted 5,115,100 $ 19.12
Options exercised (4,234,440) $ 11.20
Options forfeited/canceled (711,656) $ 15.49
-----------
Balance, February 28, 2002 12,477,808 $ 14.12 7,565,199 $ 12.31
Options granted 1,243,200 $ 27.20
Options exercised (2,096,061) $ 13.44
Options forfeited/canceled (217,016) $ 20.06
-----------
Balance, February 28, 2003 11,407,931 $ 15.55 8,345,855 $ 13.58
===========
The following table summarizes information about stock options outstanding
at February 28, 2003:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- ---------- ------------ ---------
$ 4.25 - $10.25 1,982,941 3.5 years $ 7.24 1,982,941 $ 7.24
$11.19 - $17.74 6,258,140 7.0 years $ 14.36 5,351,164 $ 14.58
$18.75 - $27.50 3,166,850 8.7 years $ 23.12 1,011,750 $ 20.70
----------- ------------
11,407,931 6.8 years $ 15.55 8,345,855 $ 13.58
=========== ============
The weighted average fair value of options granted during Fiscal 2003,
Fiscal 2002 and Fiscal 2001 was $12.18, $8.99 and $5.45, respectively. The fair
value of options is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk-free
interest rate of 5.0% for Fiscal 2003, 4.7% for Fiscal 2002 and 6.2% for Fiscal
2001; volatility of 36.7% for Fiscal 2003, 41.0% for Fiscal 2002 and 38.8% for
Fiscal 2001; and expected option life of 6.0 years for Fiscal 2003, 6.0 years
for Fiscal 2002 and 4.7 years for Fiscal 2001. The dividend yield was 0% for
Fiscal 2003, Fiscal 2002 and Fiscal 2001. Forfeitures are recognized as they
occur.
EMPLOYEE STOCK PURCHASE PLANS -
The Company has a stock purchase plan under which 4,500,000 shares of Class
A Common Stock may be issued. Under the terms of the plan, eligible employees
may purchase shares of the Company's Class A Common Stock through payroll
deductions. The purchase price is the lower of 85% of the fair market value of
the stock on the first or last day of the purchase period. During Fiscal 2003,
Fiscal 2002 and Fiscal 2001, employees purchased 138,304 shares, 120,674 shares
and 147,776 shares, respectively.
The weighted average fair value of purchase rights granted during Fiscal
2003, Fiscal 2002 and Fiscal 2001 was $7.02, $5.59 and $3.78, respectively. The
fair value of purchase rights is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rate of 1.4% for Fiscal 2003, 2.6% for Fiscal
2002 and 5.7% for Fiscal 2001; volatility of 40.3% for Fiscal 2003, 33.2% for
Fiscal 2002 and 36.8% for Fiscal 2001; and expected purchase right life of 0.5
years for Fiscal 2003, Fiscal 2002 and Fiscal 2001. The dividend yield was 0%
for Fiscal 2003, Fiscal 2002 and Fiscal 2001.
The Company has a stock purchase plan under which 2,000,000 shares of the
Company's Class A Common Stock may be issued to eligible employees and directors
of the Company's United Kingdom subsidiaries. Under the terms of the plan,
participants may purchase shares of the Company's Class A Common Stock through
payroll deductions. The purchase price may be no less than 80% of the closing
price of the stock on the day the purchase price is fixed by the committee
administering the plan. During Fiscal 2003, employees purchased 758 shares.
During Fiscal 2002 and Fiscal 2001, there were no shares purchased under this
plan.
The weighted average fair value of purchase rights granted during Fiscal
2002 and Fiscal 2001 was $6.26 and $5.18, respectively. There were no purchase
rights granted during Fiscal 2003. The fair value of purchase rights is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: risk-free interest rate of 4.9% for
Fiscal 2002 and 6.7% for Fiscal 2001; volatility of 36.2% for Fiscal 2002 and
39.2% for Fiscal 2001; and expected purchase right life of 3.8 years for Fiscal
2002 and 4.3 years for Fiscal 2001. The dividend yield was 0% for Fiscal 2002
and Fiscal 2001.
16. EARNINGS PER COMMON SHARE:
Earnings per common share are as follows:
For the Years Ended February 28,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
(in thousands, except per share data)
Income before extraordinary item $ 203,306 $ 137,975 $ 97,342
Extraordinary item, net of income taxes - (1,554) -
---------- ---------- ----------
Income applicable to common shares $ 203,306 $ 136,421 $ 97,342
========== ========== ==========
Weighted average common shares outstanding - basic 89,856 85,505 73,446
Stock options 2,890 2,320 1,305
---------- ---------- ----------
Weighted average common shares outstanding - diluted 92,746 87,825 74,751
========== ========== ==========
Earnings per common share:
Basic:
Income before extraordinary item $ 2.26 $ 1.62 $ 1.33
Extraordinary item, net of income taxes - (0.02) -
---------- ---------- ----------
Earnings per common share - basic $ 2.26 $ 1.60 $ 1.33
========== ========== ==========
Diluted:
Income before extraordinary item $ 2.19 $ 1.57 $ 1.30
Extraordinary item, net of income taxes - (0.02) -
---------- ---------- ----------
Earnings per common share - diluted $ 2.19 $ 1.55 $ 1.30
========== ========== ==========
Stock options to purchase 1.1 million, 2.2 million and 1.1 million shares
of Class A Common Stock at a weighted average price per share of $27.41, $20.70
and $13.93 were outstanding during the years ended February 28, 2003, February
28, 2002, and February 28, 2001, respectively, 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 respective periods.
17. ACCUMULATED OTHER COMPREHENSIVE LOSS:
Accumulated other comprehensive loss, net of tax effects, includes the
following components:
Foreign Net Minimum Accumulated
Currency Unrealized Pension Other
Translation Gains on Liability Comprehensive
Adjustments Derivatives Adjustment Loss
----------- ----------- ---------- -------------
Balance, February 28, 2002 $ (35,243) $ 21 $ - $ (35,222)
Current period change 18,521 (21) (42,535) (24,035)
----------- ----------- ---------- -------------
Balance, February 28, 2003 $ (16,722) $ - $ (42,535) $ (59,257)
=========== =========== ========== =============
18. RELATED PARTIES:
Agustin Francisco Huneeus, the executive in charge of the Constellation
Wines segment's Franciscan Vineyards, Inc. ("Franciscan") business, along with
other members of his immediate family, through various family owned entities
(the "Huneeus Interests") engaged in certain transactions with Franciscan during
each of the three years in the period ended February 28, 2003. The Huneeus
Interests engage Franciscan as the exclusive distributor of its Quintessa wines
under a long-term contract; sell grapes to Franciscan pursuant to existing
long-term contracts; lease a vineyard consisting of 67 acres to Franciscan
pursuant to a 5-year lease contract; participate as joint owners with Franciscan
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 Franciscan and the Company. Total amounts paid or
payable to the Huneeus Interests pursuant to these transactions and arrangements
totaled $6.5 million, $4.8 million, and $5.0 million for the years ended
February 28, 2003, February 28, 2002, and February 28, 2001, respectively. In
addition, Franciscan performs certain wine processing services for the Huneeus
Interests. Total fees earned from the Huneeus Interests to Franciscan for these
services totaled $0.2 million, $0.4 million, and $0.6 million for the years
ended February 28, 2003, February 28, 2002, and February 28, 2001, respectively.
As of February 28, 2003, and February 28, 2002, the net amounts due to/from the
Huneeus Interests under these agreements are insignificant.
19. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
Gross sales to the five largest customers represented 21.2%, 19.1% and
17.6% of the Company's gross sales for the years ended February 28, 2003,
February 28, 2002, and February 28, 2001, respectively. No single customer was
responsible for greater than 10% of gross sales during these years. Accounts
receivable from the Company's largest customer, Southern Wine and Spirits,
represented 11.4%, 10.0% and 9.8% of the Company's total accounts receivable as
of February 28, 2003, February 28, 2002, and February 28, 2001, respectively.
Gross sales to the Company's five largest customers are expected to continue to
represent a significant portion of the Company's revenues. The Company's
arrangements with certain of its customers may, generally, be terminated by
either party with prior notice. The Company performs ongoing credit evaluations
of its customers' financial position, and management of the Company is of the
opinion that any risk of significant loss is reduced due to the diversity of
customers and geographic sales area.
The Company purchases the majority of its glass inventories from a limited
number of suppliers. Glass bottle costs are one of the largest components of the
Company's cost of product sold. The glass bottle industry is highly concentrated
with only a small number of producers. The inability of any of the Company's
glass bottle suppliers to satisfy the Company's requirements could adversely
affect the Company's operations.
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets as of February 28, 2003, and February 28, 2002, the condensed
consolidating statements of income and cash flows for each of the three years in
the period ended February 28, 2003, 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 Constellation Wines 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 and
include the accounting changes described in Note 2. 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 February 28, 2003
- --------------------
Current assets:
Cash and cash investments $ 1,426 $ 1,248 $ 11,136 $ - $ 13,810
Accounts receivable, net 120,554 141,156 137,385 - 399,095
Inventories, net 20,378 654,945 144,664 (75) 819,912
Prepaid expenses and other
current assets 31,452 52,411 13,421 - 97,284
Intercompany (payable) receivable (177,332) 136,002 41,330 - -
----------- ------------ --------------- -------------- ------------
Total current assets (3,522) 985,762 347,936 (75) 1,330,101
Property, plant and equipment, net 46,379 358,180 197,910 - 602,469
Investments in subsidiaries 2,590,889 601,156 - (3,192,045) -
Goodwill 51,172 495,636 175,415 - 722,223
Intangible assets, net 10,918 315,952 55,558 - 382,428
Other assets 31,599 126,375 1,135 - 159,109
----------- ------------ --------------- -------------- ------------
Total assets $ 2,727,435 $ 2,883,061 $ 777,954 $ (3,192,120) $ 3,196,330
=========== ============ =============== ============== ============
Current liabilities:
Notes payable to banks $ 2,000 $ - $ 623 $ - $ 2,623
Current maturities of long-term debt 67,137 3,470 657 - 71,264
Accounts payable 37,567 58,843 74,663 - 171,073
Accrued excise taxes 7,447 15,711 13,263 - 36,421
Other accrued expenses and liabilities 138,963 46,664 118,200 - 303,827
----------- ------------ --------------- -------------- ------------
Total current liabilities 253,114 124,688 207,406 - 585,208
Long-term debt, less current maturities 1,171,694 10,810 9,127 - 1,191,631
Deferred income taxes 48,475 79,656 17,108 - 145,239
Other liabilities 8,718 29,446 61,104 - 99,268
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Stockholders' equity:
Class A and Class B common stock 960 6,434 64,867 (71,301) 960
Additional paid-in capital 469,724 1,221,076 436,466 (1,657,542) 469,724
Retained earnings 795,600 1,363,379 99,823 (1,463,277) 795,525
Accumulated other comprehensive
income (loss) 11,118 47,572 (117,947) - (59,257)
Treasury stock and other (31,968) - - - (31,968)
----------- ------------ --------------- -------------- ------------
Total stockholders' equity 1,245,434 2,638,461 483,209 (3,192,120) 1,174,984
----------- ------------ --------------- -------------- ------------
Total liabilities and
stockholders' equity $ 2,727,435 $ 2,883,061 $ 777,954 $ (3,192,120) $ 3,196,330
=========== ============ =============== ============== ============
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 to banks $ 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
=========== ============ =============== ============== ============
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 28, 2003
- ------------------------------------
Gross sales $ 817,458 $ 1,989,490 $ 1,145,520 $ (369,386) $ 3,583,082
Less - excise taxes (148,129) (412,022) (291,319) - (851,470)
----------- ------------ --------------- -------------- ------------
Net sales 669,329 1,577,468 854,201 (369,386) 2,731,612
Cost of product sold (558,811) (1,088,899) (692,558) 369,371 (1,970,897)
----------- ------------ --------------- -------------- ------------
Gross profit 110,518 488,569 161,643 (15) 760,715
Selling, general and administrative
expenses (109,576) (146,037) (95,380) - (350,993)
Restructuring charges - (4,764) - - (4,764)
----------- ------------ --------------- -------------- ------------
Operating income 942 337,768 66,263 (15) 404,958
Gain on change in fair value of
derivative instruments 23,129 - - - 23,129
Equity in earnings of
subsidiary/joint venture 186,448 55,129 - (229,341) 12,236
Interest expense, net 11,648 (114,051) (2,984) - (105,387)
----------- ------------ --------------- -------------- ------------
Income before income taxes 222,167 278,846 63,279 (229,356) 334,936
Provision for income taxes (18,846) (92,398) (20,386) - (131,630)
----------- ------------ --------------- -------------- ------------
Net income $ 203,321 $ 186,448 $ 42,893 $ (229,356) $ 203,306
=========== ============ =============== ============== ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 28, 2002
- ------------------------------------
Gross sales $ 832,065 $ 1,954,585 $ 1,032,130 $ (398,567) $ 3,420,213
Less - excise taxes (147,446) (408,532) (257,477) - (813,455)
----------- ------------ --------------- -------------- ------------
Net sales 684,619 1,546,053 774,653 (398,567) 2,606,758
Cost of product sold (511,714) (1,172,935) (625,522) 398,573 (1,911,598)
----------- ------------ --------------- -------------- ------------
Gross profit 172,905 373,118 149,131 6 695,160
Selling, general and administrative
expenses (90,301) (167,521) (94,857) - (352,679)
----------- ------------ --------------- -------------- ------------
Operating income 82,604 205,597 54,274 6 342,481
Equity in earnings of
subsidiary/joint venture 90,620 34,488 - (123,441) 1,667
Interest expense, net (3,689) (106,610) (3,890) - (114,189)
----------- ------------ --------------- -------------- ------------
Income before income taxes
and extraordinary item 169,535 133,475 50,384 (123,435) 229,959
Provision for income taxes (31,566) (42,855) (17,563) - (91,984)
----------- ------------ --------------- -------------- ------------
Income before extraordinary item 137,969 90,620 32,821 (123,435) 137,975
Extraordinary item, net of income taxes (1,554) - - - (1,554)
----------- ------------ --------------- -------------- ------------
Net income $ 136,415 $ 90,620 $ 32,821 $ (123,435) $ 136,421
=========== ============ =============== ============== ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 28, 2001
- -------------------------------------------
Gross sales $ 683,930 $ 1,706,609 $ 919,341 $ (326,251) $ 2,983,629
Less - excise taxes (131,997) (396,773) (228,839) - (757,609)
----------- ------------ --------------- -------------- ------------
Net sales 551,933 1,309,836 690,502 (326,251) 2,226,020
Cost of product sold (474,913) (955,893) (542,548) 326,273 (1,647,081)
----------- ------------ --------------- -------------- ------------
Gross profit 77,020 353,943 147,954 22 578,939
Selling, general and administrative
expenses (83,019) (97,482) (127,570) - (308,071)
----------- ------------ --------------- -------------- ------------
Operating (loss) income (5,999) 256,461 20,384 22 270,868
Equity in earnings of subsidiary 120,937 (3,825) - (117,112) -
Interest expense, net (27,840) (76,076) (4,715) - (108,631)
----------- ------------ --------------- -------------- ------------
Income before income taxes 87,098 176,560 15,669 (117,090) 162,237
Benefit from (provision for)
income taxes 10,222 (55,623) (19,494) - (64,895)
----------- ------------ --------------- -------------- ------------
Net income (loss) $ 97,320 $ 120,937 $ (3,825) $ (117,090) $ 97,342
=========== ============ =============== ============== ============
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 28, 2003
- ------------------------------------------
Net cash provided by operating
activities $ 135,057 $ 83,491 $ 17,505 $ - $ 236,053
Cash flows from investing activities:
Purchases of property, plant and
equipment (15,541) (39,452) (16,583) - (71,575)
Payment of accrued earn-out amount - (1,674) - - (1,674)
Proceeds from sale of assets 1 409 878 - 1,288
----------- ------------ --------------- -------------- ------------
Net cash used in investing activities (15,540) (40,716) (15,705) - (71,961)
----------- ------------ --------------- -------------- ------------
Cash flows from financing activities:
Principal payments of long-term debt (141,423) (3,458) (6,253) - (151,134)
Net repayment of notes payable (48,000) - (3,921) - (51,921)
Payment of issuance costs of
long-term debt (20) - - - (20)
Exercise of employee stock options 28,706 - - - 28,706
Proceeds from issuance of long-term
debt, net of discount - - 10,000 - 10,000
Proceeds from employee stock
purchases 2,885 - - - 2,885
Other - 142 (142) - -
----------- ------------ --------------- -------------- ------------
Net cash used in financing activities (157,852) (3,316) (316) - (161,484)
----------- ------------ --------------- -------------- ------------
Effect of exchange rate changes on
cash and cash investments 38,923 (40,295) 3,613 - 2,241
----------- ------------ --------------- -------------- ------------
Net increase (decrease) in cash
and cash investments 588 (836) 5,097 - 4,849
Cash and cash investments, beginning
of year 838 2,084 6,039 - 8,961
----------- ------------ --------------- -------------- ------------
Cash and cash investments, end of year $ 1,426 $ 1,248 $ 11,136 $ - $ 13,810
=========== ============ =============== ============== ============
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 28, 2002
- ------------------------------------------
Net cash provided by operating
activities $ 110,056 $ 82,669 $ 20,574 $ - $ 213,299
Cash flows from investing activities:
Purchases of businesses, net of
cash acquired (478,574) 5,742 - - (472,832)
Investment in joint venture - (77,282) - - (77,282)
Purchases of property, plant and
equipment (11,544) (43,812) (15,792) - (71,148)
Proceeds from sale of assets - 35,466 349 - 35,815
----------- ------------ --------------- -------------- ------------
Net cash used in investing activities (490,118) (79,886) (15,443) - (585,447)
----------- ------------ --------------- -------------- ------------
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Cash flows from financing activities:
Proceeds from issuance of long-term
debt, net of discount 250,000 - 2,539 - 252,539
Proceeds from equity offerings,
net of fees 151,479 - - - 151,479
Net proceeds from notes payable 50,000 - 1,403 - 51,403
Exercise of employee stock options 45,027 - - - 45,027
Proceeds from employee stock
purchases 1,986 - - - 1,986
Principal payments of long-term debt (249,720) (9,346) (1,916) - (260,982)
Payment of issuance costs of
long-term debt (4,537) - - - (4,537)
----------- ------------ --------------- -------------- ------------
Net cash provided by (used in)
financing activities 244,235 (9,346) 2,026 - 236,915
----------- ------------ --------------- -------------- ------------
Effect of exchange rate changes on
cash and cash investments (5,439) 5,408 (1,447) - (1,478)
----------- ------------ --------------- -------------- ------------
Net (decrease) increase in cash
and cash investments (141,266) (1,155) 5,710 - (136,711)
Cash and cash investments, beginning
of year 142,104 3,239 329 - 145,672
----------- ------------ --------------- -------------- ------------
Cash and cash investments, end of year $ 838 $ 2,084 $ 6,039 $ - $ 8,961
=========== ============ =============== ============== ============
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 28, 2001
- ------------------------------------------
Net cash provided by (used in)
operating activities $ 92,765 $ 20,479 $ (9,469) $ - $ 103,775
Cash flows from investing activities:
Purchases of property, plant and
equipment (5,609) (42,771) (19,837) - (68,217)
Purchases of businesses, net of
cash acquired - - (4,459) - (4,459)
Other 120 930 959 - 2,009
----------- ------------ --------------- -------------- ------------
Net cash used in investing activities (5,489) (41,841) (23,337) - (70,667)
----------- ------------ --------------- -------------- ------------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt 319,400 - - - 319,400
Exercise of employee stock options 13,806 - - - 13,806
Proceeds from employee stock
purchases 1,547 - - - 1,547
Principal payments of long-term debt (220,888) 639 (1,659) - (221,908)
Net repayments of notes payable (26,800) (704) 3,889 - (23,615)
Payment of issuance costs of
long-term debt (5,794) - - - (5,794)
----------- ------------ --------------- -------------- ------------
Net cash provided by (used in)
financing activities 81,271 (65) 2,230 - 83,436
----------- ------------ --------------- -------------- ------------
Effect of exchange rate changes on
cash and cash investments (26,443) 24,435 (3,172) - (5,180)
----------- ------------ --------------- -------------- ------------
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Net increase (decrease) in cash
and cash investments 142,104 3,008 (33,748) - 111,364
Cash and cash investments, beginning
of year - 231 34,077 - 34,308
----------- ------------ --------------- -------------- ------------
Cash and cash investments, end of year $ 142,104 $ 3,239 $ 329 $ - $ 145,672
=========== ============ =============== ============== ============
21. BUSINESS SEGMENT INFORMATION:
As a result of the Hardy Acquisition (see Note 23), the Company has changed
the structure of its internal organization to consist of two business divisions,
Constellation Wines and Constellation Beers and Spirits. Separate division
chief executives report directly to the Company's chief operating officer.
Consequently, the Company now reports its operating results in three segments:
Constellation Wines (branded wine, and U.K. wholesale and other), Constellation
Beers and Spirits (imported beers and distilled spirits) and Corporate
Operations and Other (primarily corporate related items and other). The new
business segments reflect how the Company's operations are now being managed,
how operating performance within the Company is now being evaluated by senior
management and the structure of its internal financial reporting. In addition,
the Company changed its definition of operating income for segment purposes to
exclude restructuring and related charges and unusual costs that affect
comparability. Accordingly, the financial information for the years ended
February 28, 2003, February 28, 2002, and February 28, 2001, has been restated
to conform to the new segment presentation. For the year ended February 28,
2003, restructuring and related charges and unusual costs consist of an asset
impairment charge of $4.8 million recorded in connection with the Company's
realignment of its business operations within the Constellation Wines segment.
The Company evaluates performance based on operating income of the respective
business units. 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 and include the accounting changes described in Note 2. Transactions
between segments consist mainly of sales of products and are accounted for at
cost plus an applicable margin.
Segment information is as follows:
For the Years Ended February 28,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Constellation Wines:
- -------------------
Net sales:
Branded wine $ 983,505 $ 963,514 $ 748,473
Wholesale and other 689,794 641.589 580,781
------------ ------------ ------------
Net sales $ 1.673,299 $ 1,605,103 $ 1,329,254
Segment operating income $ 224,556 $ 191,227 $ 123,779
Equity in earnings of joint venture $ 12,236 $ 1,667 $ -
Long-lived assets $ 509,598 $ 492,252 $ 467,669
Investment in joint venture $ 123,064 $ 110,520 $ -
Total assets $ 2,429,890 $ 2,323,295 $ 1,628,430
Capital expenditures $ 57,551 $ 58,616 $ 61,385
Depreciation and amortization $ 46,167 $ 63,043 $ 50,841
For the Years Ended February 28,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Constellation Beers and Spirits:
- -------------------------------
Net sales:
Imported beers $ 776,006 $ 726,953 $ 633,833
Spirits 282,307 274,702 262,933
------------ ------------ ------------
Net sales $ 1,058,313 $ 1,001,655 $ 896,766
Segment operating income $ 217,963 $ 178,805 $ 167,680
Long-lived assets $ 79,757 $ 78,516 $ 76,777
Total assets $ 700,545 $ 711,484 $ 724,511
Capital expenditures $ 8,722 $ 8,350 $ 6,589
Depreciation and amortization $ 9,732 $ 17,940 $ 16,069
Corporate Operations and Other:
- ------------------------------
Net sales $ - $ - $ -
Segment operating loss $ (32,797) $ (27,551) $ (20,591)
Long-lived assets $ 13,114 $ 7,996 $ 4,168
Total assets $ 65,895 $ 34,606 $ 159,228
Capital expenditures $ 5,302 $ 4,182 $ 243
Depreciation and amortization $ 4,190 $ 4,421 $ 3,473
Restructuring and Related
Charges and Unusual Costs:
- ---------------------------
Operating loss $ (4,764) $ - $ -
Consolidated:
- ------------
Net sales $ 2,731,612 $ 2,606,758 $ 2,226,020
Operating income $ 404,958 $ 342,481 $ 270,868
Equity in earnings of joint venture $ 12,236 $ 1,667 $ -
Long-lived assets $ 602,469 $ 578,764 $ 548,614
Investment in joint venture $ 123,064 $ 110,520 $ -
Total assets $ 3,196,330 $ 3,069,385 $ 2,512,169
Capital expenditures $ 71,575 $ 71,148 $ 68,217
Depreciation and amortization $ 60,089 $ 85,404 $ 70,383
The Company's areas of operations are principally in the United States.
Operations outside the United States are primarily in the United Kingdom and are
included within the Constellation Wines segment. Net sales from the Company's
U.K. business were $789.6 million, $719.3 million and $629.8 million for the
years ended February 28, 2003, February 28, 2002, and February 28, 2001,
respectively. Long-lived assets held by the Company's U.K. business were $148.5
million, $138.1 million, and $145.8 million as of February 28, 2003, February
28, 2002, and February 28, 2001, respectively. No other single foreign country
or geographic area is significant to the consolidated operations.
22. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In August 2001, the Financial Accounting Standards Board 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. As required, the Company adopted
SFAS No. 143 on March 1, 2003. The adoption of SFAS No. 143 did not have a
material impact on the Company's financial statements.
In April 2002, the Financial Accounting Standards Board 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 are
effective for fiscal years beginning 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 provisions rescinding SFAS
No. 4 provisions will result in a reclassification of the extraordinary loss
related to the extinguishment of debt recorded in the fourth quarter of Fiscal
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 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 has adopted the disclosure provisions of SFAS No. 148
for the 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.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51."
FIN No. 46 requires all variable interest entities to be consolidated by the
primary beneficiary. The primary beneficiary is the entity that holds the
majority of the beneficial interests in the variable interest entity. In
addition, the interpretation expands disclosure requirements for both variable
interest entities that are consolidated as well as variable interest entities
from which the entity is the holder of a significant amount of the beneficial
interests, but not the majority. Since the Company has no transactions with
variable interest entities, the Company does not expect the adoption of FIN No.
46 in its entirety to have a significant impact on the Company's financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and
hedging relationships designated after June 30, 2003, except for those
provisions of SFAS No. 149 which relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003.
For these issues, the provisions that are currently in effect should continue to
be applied in accordance with their respective effective dates. In addition,
certain provisions of SFAS No. 149, which relate to forward purchases or sales
of when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The Company is currently assessing the financial impact of SFAS No. 149
on its financial statements.
23. SUBSEQUENT EVENTS
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company
completed its acquisition of all of Hardy's outstanding capital stock (the
"Hardy Acquisition"). Hardy is Australia's largest wine producer with interests
in wineries and vineyards in most of Australia's major wine regions as well as
New Zealand, France and the United States. In addition, Hardy has significant
marketing and sales operations in the United Kingdom. This acquisition supports
the Company's strategy of driving long-term growth and positions the Company to
capitalize on the growth opportunities in "new world" wine markets. As a result
of the Hardy Acquisition, the Company also acquired the remaining 50% ownership
of PWP, the joint venture the Company established with Hardy in July 2001. Total
consideration paid in cash and Class A Common Stock to the Hardy shareholders
was $1,137.4 million. Additionally, the Company expects to incur direct
acquisition costs of $20.0 million. The acquisition date for accounting purposes
is March 27, 2003. The Company expects to record an approximate $2 million
reduction in the purchase price to reflect imputed interest between the
accounting acquisition date and the final payment of consideration. The cash
portion of the purchase price ($1,060.2 million) was financed with $660.2
million of borrowings under the Company's 2003 Credit Agreement (as defined
below) and $400.0 million of borrowings under the Company's Bridge Agreement (as
defined below). Additionally, the Company issued 3,288,913 shares of the
Company's Class A Common Stock, which were valued at $77.2 million based on the
simple average of the closing market price of the Company's Class A Common Stock
beginning two days before and ending two days after April 4, 2003, the day the
Hardy shareholders elected the form of consideration they wished to receive. In
accordance with the purchase method of accounting, the acquired net assets are
recorded at fair value at the date of acquisition. The results of operations of
the Hardy business will be included in the Consolidated Statements of Income
beginning on the date of acquisition. The purchase price allocation, including
the third-party appraisal, is in progress.
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
the U.S. subsidiaries of the Company (excluding certain inactive subsidiaries)
and Canandaigua Limited ("Guarantors"), JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
(such other lenders, together with the Administrative Agent, are collectively
referred to herein as the "Lenders") entered into a new credit agreement, which
was subsequently amended and restated on March 19, 2003 (the "2003 Credit
Agreement"). The 2003 Credit Agreement provides for aggregate credit facilities
of $1.6 billion consisting of a $400.0 million Tranche A Term Loan facility due
in February 2008, an $800.0 million Tranche B Term Loan facility due in November
2008 and a $400.0 million Revolving Credit facility (including an Australian
Dollar revolving sub-facility of up to A$10.0 million and a sub-facility for
letters of credit of up to $40.0 million) which expires on the fifth anniversary
of the first date on which the Lenders' obligation to make loans under the 2003
Credit Agreement commences.
The required annual repayments of the Tranche A Term Loan facility is $40.0
million in Fiscal 2004 and increases by $20.0 million each year through Fiscal
2008. The required annual repayments of the Tranche B Term Loan, which is
backend loaded, is $10.0 million in Fiscal 2004 and increases to $400.0 million
in Fiscal 2009.
The rate of interest payable, at the Company's option, is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate
plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the 2003 Credit Agreement) and, with respect to LIBOR borrowings,
ranges between 1.75% and 2.75%. The initial LIBOR margin for the Revolving
Credit facility and the Tranche A Term Loan facility is 2.25%, while the initial
LIBOR margin on the Tranche B Term Loan facility is 2.75%.
The Company's obligations are guaranteed by the Guarantors and the Company
has pledged collateral of (i) 100% of the capital stock of all of the Company's
U.S. subsidiaries and (ii) 65% of the voting capital stock of Canandaigua
Limited, Matthew Clark plc, Hardy, Constellation Australia Pty Limited and
certain other foreign subsidiaries of the Company. In addition, under certain
circumstances, the Company and the Guarantors are required to pledge certain of
their assets consisting of, among other things, inventory, accounts receivable
and trademarks to secure the obligations under the 2003 Credit Agreement.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, the incurrence of additional
indebtedness, the sale of assets, the payment of dividends, transactions with
affiliates and the making of certain investments, in each case subject to
baskets, exceptions and thresholds. The primary financial covenants require the
maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed
charges ratio and an interest coverage ratio.
On January 16, 2003, the Company, the Guarantors, JPMorgan Chase Bank, as a
lender and Administrative Agent, and certain other lenders (such other lenders,
together with the Administrative Agent, are collectively referred to herein as
the "Bridge Lenders") entered into a bridge loan agreement which was amended and
restated as of March 26, 2003, containing commitments of the Bridge Lenders to
make bridge loans (the "Bridge Loans") of up to, in the aggregate, $450.0
million (the "Bridge Agreement"). The Bridge Loans are due on the first
anniversary of the date of the funding of the Bridge Loans ("Bridge Loan
Maturity Date"). The rate of interest payable on the Bridge Loans is equal to
LIBOR plus a margin. The initial margin on the Bridge Loans is 3.75%.
If the Bridge Loans are not repaid on the Bridge Loan Maturity Date, the
Bridge Lenders have committed to make certain term loans in an amount
corresponding to the then-outstanding amount of the Bridge Loans ("Term Loans").
The Term Loans are due on the seventh anniversary of the date on which the
Bridge Loans are funded ("Term Loan Maturity Date"). The rate of interest
payable on the Term Loans is equal to LIBOR plus a margin. If the Term Loans
are not repaid on the date that is three months after the Bridge Loan Maturity
Date, then the margin will increase on a quarterly basis thereafter until the
Term Loans are refinanced, exchanged or otherwise repaid in full. The rate of
interest payable on any of the Bridge Loans or the Term Loans is capped at
11.50% ("Rate Cap").
The Lenders have the right to exchange on or after the Bridge Loan Maturity
Date all or a portion of their respective Bridge Loans or Term Loans for notes
("Exchange Notes") that will be issued pursuant to an indenture to be entered
into among the Company, as issuer, certain subsidiaries of the Company, as
guarantors, and an indenture trustee on behalf of the holders of the Exchange
Notes. The Exchange Notes indenture will be in a form to be agreed between the
Company and the Administrative Agent and will contain terms and a final maturity
date that are substantially consistent with the terms and the maturity date of
the Term Loans. The Exchange Notes will bear interest at a fixed rate as
determined by the exchanging holder that will not exceed the Rate Cap.
The Guarantors have guaranteed the Company's obligations under the Bridge
Agreement.
The Company and the Guarantors have made certain representations and
warranties in the Bridge Agreement which are substantially the same as the
representations and warranties in the 2003 Credit Agreement. The Bridge
Agreement also contains covenants and events of default that are similar to the
covenants and events of default in the indentures pursuant to which the Company
issued its senior notes and senior subordinated notes.
The Company used the proceeds of the Tranche A Term Loan facility, the
Tranche B Term Loan facility and a portion of the Revolving Credit facility
under the 2003 Credit Agreement to payoff its obligations under the 2000 Credit
Agreement, to fund a portion of the cash required to pay the Hardy shareholders
and to pay indebtedness outstanding under certain of Hardy's credit facilities.
The Company also used $400.0 million of the Bridge Loans to fund the remaining
portion of the cash required to pay the former Hardy shareholders.
24. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of selected quarterly financial information is as follows:
QUARTER ENDED
------------------------------------------------------
May 31, August 31, November 30, February 28,
Fiscal 2003 2002 2002 2002 2003 Full Year
- ------------------------------------- ----------- ---------- ------------ ------------ -----------
(in thousands, except per share data)
Net sales $ 650,393 $ 689,806 $ 738,379 $ 653,034 $ 2,731,612
Gross profit $ 176,726 $ 193,262 $ 213,494 $ 177,233 $ 760,715
Net income $ 37,369 $ 49,572 $ 64,344 $ 52,021 $ 203,306
Earnings per common share (1):
Basic $ 0.42 $ 0.55 $ 0.71 $ 0.57 $ 2.26
=========== ========== ============ ============ ===========
Diluted $ 0.40 $ 0.53 $ 0.69 $ 0.56 $ 2.19
=========== ========== ============ ============ ===========
QUARTER ENDED
------------------------------------------------------
May 31, August 31, November 30, February 28,
Fiscal 2002 2001 2001 2001 2002 Full Year
- ------------------------------------- ----------- ---------- ------------ ------------ -----------
(in thousands, except per share data)
Net sales (2) $ 598,432 $ 689,127 $ 701,854 $ 617,345 $ 2,606,758
Gross profit (2) $ 155,890 $ 183,285 $ 193,114 $ 162,871 $ 695,160
Income before extraordinary item $ 23,843 $ 35,934 $ 49,643 $ 28,555 $ 137,975
Extraordinary item, net of income taxes (3) $ - $ - $ - $ (1,554) $ (1,554)
Net income $ 23,843 $ 35,934 $ 49,643 $ 27,001 $ 136,421
Earnings per common share (1):
Basic:
Income before extraordinary item $ 0.29 $ 0.42 $ 0.57 $ 0.33 $ 1.62
Extraordinary item, net of income taxes - - - (0.02) (0.02)
----------- ---------- ------------ ------------ -----------
Earnings per common share - basic $ 0.29 $ 0.42 $ 0.57 $ 0.31 $ 1.60
=========== ========== ============ ============ ===========
Diluted:
Income before extraordinary item $ 0.28 $ 0.41 $ 0.55 $ 0.32 $ 1.57
Extraordinary item, net of income taxes - - - (0.02) (0.02)
----------- ---------- ------------ ------------ -----------
Earnings per common share - diluted $ 0.28 $ 0.41 $ 0.55 $ 0.30 $ 1.55
=========== ========== ============ ============ ===========
(1) The sum of the quarterly earnings per common share in Fiscal 2003 and Fiscal
2002 may not equal the total computed for the respective years as the
earnings per common share are computed independently for each of the
quarters presented and for the full year.
(2) Net sales and gross profit have been restated to reflect the adoption of
EITF 01-09. See Note 2 to the consolidated financial statements. Net sales
by quarter before the adoption of EITF 01-09 were $642.1 million, $740.8
million, $764.1 million and $673.5 million, respectively. Gross profit by
quarter before the adoption of EITF 01-09 were $202.0 million, $237.7
million, $258.4 million and $221.0 million, respectively. Net income was not
affected by this adoption.
(3) Represents the write-off of capitalized fees related to the extinguishment
of the Company's 8 3/4% Senior Subordinated Notes.