UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 29, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 001-08495
CONSTELLATION BRANDS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-0716709
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Woodcliff Drive, Suite 300, Fairport, New York 14450
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (585) 218-3600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock New York Stock Exchange
(par value $.01 per share)
Class B Common Stock New York Stock Exchange
(par value $.01 per share)
Depositary Shares Each New York Stock Exchange
Representing 1/40 of a Share
of 5.75% Series A Mandatory
Convertible Preferred Stock
(par value $.01 per share)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
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The aggregate market value of the voting common equity held by non-affiliates of
the Registrant, based upon the closing sales prices of the Registrant's Class A
and Class B Common Stock as reported on the New York Stock Exchange as of the
last business day of the Registrant's most recently completed second fiscal
quarter was $2,670,810,814. The Registrant has no non-voting common equity.
The number of shares outstanding with respect to each of the classes of common
stock of Constellation Brands, Inc., as of April 30, 2004, is set forth below:
Class Number of Shares Outstanding
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Class A Common Stock, par value $.01 per share 94,775,414
Class B Common Stock, par value $.01 per share 12,057,130
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement of Constellation Brands, Inc. to be issued for the Annual
Meeting of Stockholders to be held [July 20, 2004] is incorporated by reference
in Part III to the extent described therein.
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This Annual Report on Form 10-K contains forward-looking statements. In
connection therewith, please see the cautionary statements and risk factors
contained in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Cautionary Information Regarding
Forward-Looking Statements" and elsewhere in this Report which identify
important factors which could cause actual results to differ materially from any
such forward-looking statements.
PART I
ITEM 1. BUSINESS
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INTRODUCTION
Unless the context otherwise requires, the term "Company" refers to
Constellation Brands, Inc. and its subsidiaries, and all references to "net
sales" refer to gross sales less promotions, returns and allowances, and excise
taxes to conform with the Company's method of classification. All references to
"Fiscal 2004", "Fiscal 2003" and "Fiscal 2002" shall refer to the Company's
fiscal year ended the last day of February of the indicated year. All
references to "Fiscal 2005" shall refer to the Company's fiscal year ending
February 28, 2005.
Market share and industry data disclosed in this Annual Report on Form 10-K
have been obtained from the following industry and government publications:
Adams Liquor Handbook; Adams Wine Handbook; Adams Beer Handbook; Adams Media
Handbook Advance; The U.S. Wine Market: Impact Databank Review and Forecast; The
U.S. Beer Market: Impact Databank Review and Forecast; The U.S. Spirits Market:
Impact Databank Review and Forecast; International Wine and Spirit Record;
Australian Wine and Brandy Reports; NACM; AC Nielsen; IRI; and The Drink
Pocketbook. The Company has not independently verified this data. Unless
otherwise noted, all references to market share data are based on unit volume
and unless otherwise noted, the most recent complete industry data available are
for calendar 2003.
The Company is a leading international producer and marketer of beverage
alcohol brands with a broad portfolio across the wine, spirits and imported beer
categories. The Company has the largest wine business in the world and is the
largest multi-category supplier of beverage alcohol in the United States; a
leading producer and exporter of wine from Australia and New Zealand; and both a
major producer and independent drinks wholesaler in the United Kingdom. The
Company's strong market positions increase its purchasing power and make the
Company a supplier of choice to its customers.
With its broad product portfolio, the Company believes it is distinctly
positioned to satisfy an array of consumer preferences across all beverage
alcohol categories and price points. Many of the Company's products are
recognized leaders in their respective categories. Leading brands in the
Company's portfolio include Corona Extra, Modelo Especial, Pacifico, St. Pauli
Girl, Franciscan Oakville Estate, Simi, Estancia, Ravenswood, Blackstone,
Banrock Station, Hardys, Nobilo, Houghton, Leasingham, Almaden, Inglenook, Arbor
Mist, Vendange, Alice White, Stowells, Black Velvet, Fleischmann's, Schenley,
Ten High and Blackthorn.
The Company is a Delaware corporation incorporated on December 4, 1972, as
the successor to a business founded in 1945. Since the Company's founding in
1945 as a producer and marketer of wine products, the Company has grown through
a combination of internal growth and acquisitions. The Company's internal
growth has been driven by leveraging the Company's existing portfolio of leading
brands, developing new products, new packaging and line extensions, and focusing
on the faster growing sectors of the beverage alcohol industry.
The Company has successfully integrated a number of major acquisitions that
have broadened its portfolio and increased its market share, net sales,
operating income and cash flow. Through these acquisitions, the Company has
become more competitive by: diversifying its portfolio; developing strong market
positions in the growing beverage alcohol product categories of varietal table
wine and imported beer; strengthening its relationships with wholesalers;
expanding its distribution and enhancing its production capabilities; and
acquiring additional management, operational, marketing, and research and
development expertise.
In April 2003, the Company completed the acquisition of BRL Hardy Limited,
now known as Hardy Wine Company Limited ("Hardy"), Australia's largest producer
of wine, which enhanced the Company's overall growth prospects and gave the
Company an immediate presence in the Australian domestic and export markets. As
a result of the acquisition of Hardy, the Company also acquired the remaining
50% ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the
Company established with Hardy in July 2001 that produces, markets and sells a
portfolio of premium wine in the United States, including a range of Australian
imports. The acquisition of Hardy along with the remaining interest in PWP is
referred to together as the "Hardy Acquisition." Among the well-known brands
acquired in the Hardy Acquisition are Banrock Station, Hardys Nottage Hill,
Hardys Stamp and VR, Eileen Hardy, Sir James, Omni, Nobilo, Leasingham and
Houghton. For more information about this and other recent acquisitions, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in Item 7 of this Annual Report on Form 10-K.
BUSINESS SEGMENTS
As a result of the Hardy Acquisition, 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 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,
described more fully below, reflect how the Company's operations are being
managed, how operating performance within the Company is being evaluated by
senior management and the structure of its internal financial reporting.
Information regarding net sales, operating income and total assets of each
of the Company's business segments and information regarding geographic areas is
set forth in Note 22 to the Company's consolidated financial statements located
in Item 8 of this Annual Report on Form 10-K.
CONSTELLATION WINES
Constellation Wines is the leading producer and marketer of wine in the
world. It sells a large number of wine brands across all categories - table
wine, dessert wine and sparkling wine - and across all price points - popular,
premium, super-premium and ultra-premium. The portfolio of super-premium and
ultra-premium wines is supported by vineyard holdings in California, Australia,
New Zealand and Chile. As the largest producer and marketer of wine in the
world, Constellation Wines has leading market positions in several countries.
It is the second largest producer and marketer of wine in the United States, the
largest producer and marketer of wine in Australia, and the largest marketer of
wine in the United Kingdom. In addition, Constellation Wines exports its wine
products to the major wine consuming markets of the world.
In the United States, Constellation Wines sells 18 of the top-selling 100
wine brands and has one of the largest fine wine portfolios. In the United
Kingdom, it has seven of the top-selling 20 selling table wine brands to the
off-premise market, three of the top-selling 10 table wine brands in the
on-premise market and the best selling brand of fortified British wine. In
Australia, it has wine brands across all price points and varieties, including
the most comprehensive range of premium wine brands, and is the largest producer
of cask (box) wines.
Constellation Wines' leading wine brands include Franciscan Oakville
Estate, Simi, Estancia, Ravenswood, Blackstone, Banrock Station, Hardys, Nobilo,
Houghton, Leasingham, Almaden, Inglenook, Arbor Mist, Vendange, Alice White and
Stowells.
Constellation Wines is also the leading independent beverage wholesaler to
the on-premise trade in the United Kingdom and has more than 16,000 on-premise
accounts. The wholesaling business is wine led, but also involves the
distribution of branded distilled spirits, cider, beer, RTDs and soft drinks.
While these products are primarily produced by other major drinks companies,
they also include Constellation Wines' branded wine, cider and water products.
Constellation Wines is also the second largest producer and marketer of
cider in the United Kingdom, with leading cider brands Blackthorn and Gaymer's
Olde English, and produces and markets Strathmore, the leading bottled water
brand in the United Kingdom on-premise market.
In conjunction with its wine production, Constellation Wines produces and
sells bulk wine and other related products and services.
CONSTELLATION BEERS AND SPIRITS
Constellation Beers and Spirits imports and markets a diversified line of
beer and produces, bottles, imports and markets a diversified line of distilled
spirits. It is the largest marketer of imported beer in 25 primarily western
U.S. states, where it has exclusive rights to distribute the Mexican brands in
its portfolio. Constellation Beers and Spirits has exclusive rights to the
entire United States for its non-Mexican beer brands. It distributes six of the
top 22 imported beer brands in the United States: Corona Extra, Modelo
Especial, Pacifico, Corona Light, St. Pauli Girl, and Negra Modelo. Corona
Extra is the best selling imported beer in the United States and the seventh
best selling beer overall in the United States. It also imports the Tsingtao
beer brand from China.
Constellation Beers and Spirits is the third largest producer and marketer
of distilled spirits in the United States and exports its distilled spirits to
other major distilled spirits consuming markets. Its principal distilled spirits
brands include Black Velvet, Barton, Skol, Fleischmann's, Canadian LTD,
Montezuma, Ten High, Chi-Chi's prepared cocktails, Mr. Boston, Inver House, and
Monte Alban. Substantially all of this segment's distilled spirits unit volume
consists of products marketed in the value and mid-premium priced category.
Constellation Beers and Spirits also sells bulk distilled spirits and other
related products and services.
CORPORATE OPERATIONS AND OTHER
The Corporate Operations and Other segment includes traditional
corporate-related items.
MARKETING AND DISTRIBUTION
The Company employs full-time, in-house marketing, sales and customer
service organizations within its segments to maintain a high degree of focus on
each of its product categories. The organizations use a range of marketing
strategies and tactics to build brand equity and increase sales, including
market research, consumer and trade advertising, price promotions, point-of-sale
materials, event sponsorship and public relations. Where opportunities exist,
particularly with national accounts, the Company leverages its sales and
marketing skills across the organization.
In North America, the Company's products are primarily distributed by more
than 1,000 wholesale distributors as well as state and provincial alcoholic
beverage control agencies. As is the case with all other beverage alcohol
companies, products sold through state or provincial alcoholic beverage control
agencies are subject to obtaining and maintaining listings to sell the Company's
products in that agency's state or province. State and provincial governments
can affect prices paid by consumers of the Company's products. This is possible
either through the imposition of taxes or, in states and provinces in which the
government acts as the distributor of the Company's products through an
alcoholic beverage control agency, by directly setting retail prices for the
Company's products. In the Company's other markets, products are primarily
distributed either directly to retailers or through wholesalers and importers.
In Australasia, the distribution channels are dominated by a small number of
industry leaders. Its U.K. wholesaling business sells and distributes the
Company's branded products and those of other major drinks companies through a
network of depots located throughout the United Kingdom.
TRADEMARKS AND DISTRIBUTION AGREEMENTS
Trademarks are an important aspect of the Company's business. The Company
sells its products under a number of trademarks, which the Company owns or uses
under license. Throughout its segments, the Company also has various licenses
and distribution agreements for the sale, or the production and sale of its
products and products of third parties. These licenses and distribution
agreements have varying terms and durations. Agreements include, among others,
a long-term license agreement with Hiram Walker & Sons, Inc., which expires in
2116, for the Ten High, Crystal Palace, Northern Light, Lauder's and Imperial
Spirits brands, and a long-term license agreement with Chi-Chi's, Inc., which
expires in 2117, for the production, marketing and sale of beverage products,
alcoholic and non-alcoholic, utilizing the Chi-Chi's brand name.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products.
These agreements have terms that vary and prohibit the Company from importing
other beer from other producers from the same country. The Company's agreement
to distribute Corona Extra and other Mexican beer brands exclusively throughout
25 primarily western U.S. states expires in December 2006 and, subject to
compliance with certain performance criteria, continued retention of certain
Company personnel and other terms under the agreement, will be automatically
renewed for additional terms of five years. Changes in control of the Company
or of its subsidiaries involved in importing the Mexican beer brands, changes in
the position of the Chief Executive Officer of Barton Beers, Ltd., including by
death or disability, or the termination of the President of Barton Incorporated,
may be a basis for the supplier, unless it consents to such changes, to
terminate the agreement. The supplier's consent to such changes may not be
unreasonably withheld. Prior to their expiration, all of the Company's imported
beer distribution agreements may be terminated if the Company fails to meet
certain performance criteria. The Company believes it is currently in
compliance with its material imported beer distribution agreements. From time
to time, the Company has failed, and may in the future fail, to satisfy certain
performance criteria in its distribution agreements. Although there can be no
assurance that the Company's material beer distribution agreements will be
renewed, given the Company's long-term relationships with its suppliers, the
Company expects that such agreements will be renewed prior to their expiration
and does not believe that these agreements will be terminated.
COMPETITION
The beverage alcohol industry is highly competitive. The Company competes
on the basis of quality, price, brand recognition and distribution strength.
The Company's beverage alcohol products compete with other alcoholic and
nonalcoholic beverages for consumer purchases, as well as shelf space in retail
stores, restaurant presence and wholesaler attention. The Company competes with
numerous multinational producers and distributors of beverage alcohol products,
some of which may have greater resources than the Company.
Constellation Wines' principal wine competitors include: E & J Gallo
Winery, The Wine Group, Beringer Blass, The Robert Mondavi Corporation and
Kendall-Jackson in the United States; Southcorp Wines, Orlando Wyndham and
Beringer Blass in Australia; and E & J Gallo Winery, Southcorp Wines, Western
Wines, Halewood Vintners and Pernod-Ricard in the United Kingdom. Its wholesale
business competes with major brewers who also have wholesale operations, in
particular, Scottish Courage, Coors, Interbrew and Carlsberg Tetley, and other
independent national and regional wholesalers. Constellation Wines' principal
cider competitor is Scottish & Newcastle.
Constellation Beers and Spirits' principal competitors include: Heineken
USA, Molson, Labatt USA and Guinness Import Company in the imported beer
category as well as domestic producers such as Anheuser Busch, Coors and
SAB-Miller; and Diageo, Brown-Forman Beverages, Jim Beam Brands and Heaven Hill
Distilleries in the distilled spirits category.
PRODUCTION
In the United States, the Company operates 17 wineries where wine is
produced from many varieties of grapes grown principally in the Napa, Sonoma,
Monterey and San Joaquin regions of California. In Australia, the Company
operates 11 wineries where wine is produced from many varieties of grapes grown
in most of the major viticultural regions. Grapes are crushed at most of the
Company's wineries and stored as wine until packaged for sale under the
Company's brand names or sold in bulk. Most of the Company's wine is packaged
and sold within 18 months after the grape crush. In the United States, the
Company's inventories of wine are usually at their highest levels in November
and December immediately after the crush of each year's grape harvest, and are
substantially reduced prior to the subsequent year's crush. Similarly, in
Australia, the Company's inventories of wine are usually at their highest levels
in April and May immediately after the crush of each year's grape harvest, and
are substantially reduced prior to the subsequent year's crush. The Company also
operates one winery in Chile and two wineries in New Zealand.
The bourbon whiskeys and domestic blended whiskeys marketed by the Company
are primarily produced and aged by the Company at its distillery in Bardstown,
Kentucky. The Company's primary distilled spirits bottling facility in the
United States is in Owensboro, Kentucky. The majority of the Company's Canadian
whisky requirements are produced and aged at its Canadian distilleries in
Lethbridge, Alberta, and Valleyfield, Quebec. The Company's requirements of
Scotch whisky, tequila, mezcal and the neutral grain spirits it uses in the
production of gin, vodka and other spirits products, are primarily purchased
from various suppliers.
The Company operates three facilities in the United Kingdom that produce,
bottle and package wine, cider and water. To produce Stowells, wine is imported
in bulk from various countries and packaged at the Company's facility at
Bristol. The Bristol facility also produces fortified British wine and wine
style drinks. All cider production takes place at the Company's facility at
Shepton Mallet. The Strathmore brand of bottled water is sourced and bottled in
Forfar, Scotland.
SOURCES AND AVAILABILITY OF PRODUCTION MATERIALS
The principal components in the production of the Company's branded
beverage alcohol products are agricultural products, such as grapes and grain,
and packaging materials (primarily glass).
Most of the Company's annual grape requirements are satisfied by purchases
from each year's harvest which normally begins in August and runs through
October in the United States and begins in February and runs through May in
Australia. The Company believes that it has adequate sources of grape supplies
to meet its sales expectations. However, in the event demand for certain wine
products exceeds expectations, the Company would seek to source the extra
requirements from the bulk wine markets, but could experience shortages.
The Company receives grapes from approximately 800 independent growers in
the United States and 1,450 growers in Australia. The Company enters into
written purchase agreements with a majority of these growers and pricing
generally varies year-to-year based on then-current market prices. In
Australia, approximately 800 of the 1,450 growers belong to a grape growers'
cooperative. The Company purchases the majority of its Australian grape
requirements from this cooperative under a long-term arrangement. In the United
Kingdom, the Company produces wine from materials purchased either on a contract
basis or on the open market.
The Company currently owns or leases approximately 14,500 acres of land and
vineyards, either fully bearing or under development, in California (U.S.), New
York (U.S.), Australia, Chile and New Zealand. This acreage supplies only a
small percentage of the Company's overall total wine needs. However, most of
this acreage is used to supply a large portion of the grapes used for the
production of the Company's super-premium and ultra-premium wines. The Company
continues to consider the purchase or lease of additional vineyards, and
additional land for vineyard plantings, to supplement its grape supply.
The distilled spirits manufactured by the Company require various
agricultural products, neutral grain spirits and bulk spirits. The Company
fulfills its requirements through purchases from various sources by contractual
arrangement and through purchases on the open market. The Company believes that
adequate supplies of the aforementioned products are available at the present
time.
In the United Kingdom, the Company sources apples for cider production
primarily through long-term supply arrangements with owners of apple orchards.
There are adequate supplies of apples at this particular time.
The Company utilizes glass and polyethylene terephthalate ("PET") bottles
and other materials such as caps, corks, capsules, labels, wine bags and
cardboard cartons in the bottling and packaging of its products. Glass bottle
costs are one of the largest components of the Company's cost of product sold.
In the United States and Australia, the glass bottle industry is highly
concentrated with only a small number of producers. The Company has
traditionally obtained, and continues to obtain, its glass requirements from a
limited number of producers. Currently, substantially all of the Company's
glass container requirements for its United States operations are supplied by
one producer and most of the Company's glass container requirements for its
Australian operations are supplied by another producer. The Company has not
experienced difficulty in satisfying its requirements with respect to any of the
foregoing and considers its sources of supply to be adequate. However, the
inability of any of the Company's glass bottle suppliers to satisfy the
Company's requirements could adversely affect the Company's operations.
GOVERNMENT REGULATION
The Company is subject to a range of regulations in the countries in which
it operates. Where it produces products, the Company is subject to
environmental laws and regulations and may be required to obtain permits and
licenses to operate its facilities. Where it markets and sells products, it may
be subject to laws and regulations on trademark and brand registration,
packaging and labeling, distribution methods and relationships, pricing and
price changes, sales promotions, advertising and public relations. The Company
is also subject to rules and regulations relating to changes in officers or
directors, ownership or control.
The Company believes it is in compliance in all material respects with all
applicable governmental laws and regulations in the countries in which it
operates. The Company also believes that the cost of administration and
compliance with, and liability under, such laws and regulations does not have,
and is not expected to have, a material adverse impact on its financial
condition, results of operations or cash flows.
SEASONALITY
The beverage alcohol industry is subject to seasonality in each major
category. As a result, in response to wholesaler and retailer demand which
precedes consumer purchases, the Company's wine and spirits sales are typically
highest during the third quarter of its fiscal year, primarily due to seasonal
holiday buying, and its imported beer sales are typically highest during the
first and second quarters of the Company's fiscal year, which correspond to the
Spring and Summer periods in the United States.
EMPLOYEES
As of the end of April 2004, the Company had approximately 7,800 full-time
employees throughout the world. Approximately 3,200 full-time employees were in
the United States and approximately 4,600 full-time employees were outside of
the United States, in countries including Australia, the United Kingdom, Canada
and New Zealand. Additional workers may be employed by the Company during the
peak and grape crushing seasons. The Company considers its employee relations
generally to be good.
COMPANY INFORMATION
The Company's internet address is http://www.cbrands.com. The Company's
filings with the Securities and Exchange Commission ("SEC"), including its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports, filed or furnished pursuant to Section
13(a) or 15 (d) of the Securities Exchange Act of 1934, are accessible free of
charge at http://www.cbrands.com as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the SEC.
Alternatively, such reports may be accessed at the internet address of the SEC,
which is http://www.sec.gov. Also, the public may read and copy any materials
that the Company files with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The Company has adopted a Chief Executive Officer and Senior Financial
Executive Code of Ethics that specifically applies to its chief executive
officer, its principal financial officer, and controller. This Chief Executive
Officer and Senior Financial Executive Code of Ethics meets the requirements as
set forth in the Securities Exchange Act of 1934, Item 406 of Regulation S-K.
The Company has posted on its internet website a copy of the Chief Executive
Officer and Senior Financial Officer Code of Ethics. It is accessible at
http://www.cbrands.com/CBI/investors.htm.
The Company also has adopted a Code of Business Ethics and Conduct that
applies to all employees, directors and officers, including each person who is
subject to the Chief Executive Officer and Senior Financial Executive Code of
Ethics. The Code of Business Ethics and Conduct is also available on the
Company's internet website, together with its Board of Directors Corporate
Governance Guidelines and the Charters of the Board's Audit Committee, Human
Resources Committee (which serves as the Board's compensation committee)
and Corporate Governance Committee (which serves as the Board's
nominating committee). These materials are accessible at
http://www.cbrands.com/CBI/investors.htm. Additionally, amendments to, and
waivers granted to the Company's directors and executive officers under the
Company's codes of ethics, if any, will be posted in this area of the Company's
website. A copy of the Code of Business Ethics and Conduct and/or the Board of
Directors Corporate Governance Guidelines and committee charters are available
in print to any shareholder who requests it. Shareholders should direct such
requests to Mark Maring, Vice President Investor Relations, 370 Woodcliff Drive,
Suite 300, Fairport, New York 14450.
The foregoing information regarding the Company's website and its content
is for your convenience only. The content of the Company's website is not
deemed to be incorporated by reference in this report or filed with the SEC.
ITEM 2. PROPERTIES
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Through its business segments, the Company operates wineries, distilling
plants, bottling plants, and cider and water producing facilities, most of which
include warehousing and distribution facilities on the premises. The Company
also operates separate distribution centers under the Constellation Wines
segment's wholesaling business. In addition to the Company's properties
described below, certain of the Company's businesses maintain office space for
sales and similar activities and offsite warehouse and distribution facilities
in a variety of geographic locations.
The Company believes that its facilities, taken as a whole, are in good
condition and working order and have adequate capacity to meet its needs for the
foreseeable future.
The following discussion details the properties associated with the
Company's three business segments.
CONSTELLATION WINES
Through the Constellation Wines segment, the Company maintains facilities
in the United States, Australia, New Zealand, the United Kingdom, Chile and the
Republic of Ireland. These facilities include wineries, bottling plants, cider
and water producing facilities, warehousing and distribution facilities,
distribution centers and office facilities. The segment maintains owned and/or
leased division offices in Canandaigua, New York; St. Helena, California;
Gonzales, California; Reynella, South Australia; Bristol, England and Esher,
England.
United States
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In the United States, the Company through its Constellation Wines segment
operates two wineries in New York, located in Canandaigua and Naples; 12
wineries in California, located in Gonzales, Healdsburg, Kenwood, Soledad,
Rutherford, Ukiah, two in Lodi, two in Madera and two in Sonoma; two wineries in
Washington, located in Woodinville and Sunnyside; and one winery in Caldwell,
Idaho. All of these wineries are owned, except for the wineries in Caldwell
(Idaho) and Woodinville (Washington), which are leased. The Constellation Wines
segment considers its principal wineries in the United States to be the Mission
Bell winery in Madera (California), the Canandaigua winery in Canandaigua (New
York), the Ravenswood wineries in Sonoma (California), the Franciscan Vineyards
winery in Rutherford (California) and the Blackstone Winery in Gonzales
(California). The Mission Bell winery crushes grapes, produces, bottles and
distributes wine and produces specialty concentrates and Mega Colors for sale.
The Canandaigua winery crushes grapes and produces, bottles and distributes
wine. The other principal wineries crush grapes, vinify, cellar and bottle
wine. In Fiscal 2004, the segment closed and sold wineries located in Fresno
and Escalon (California) and closed a winery located in Batavia (New York).
Through the Constellation Wines segment, the Company owns or leases
approximately 5,400 acres of vineyards, either fully bearing or under
development, in California and New York to supply a portion of the grapes used
in the production of wine.
Australasia
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Through the Constellation Wines segment, the Company owns and operates 11
Australian wineries, six of which are in South Australia, two in Western
Australia and the other three in New South Wales, Australian Capital Territory
and Tasmania. Additionally, through this segment the Company also owns two
wineries in New Zealand. All but one of these Australasian wineries crush
grapes, vinify and cellar wine. Four include bottling and/or packaging
operations. The facility in Reynella, South Australia bottles a significant
portion of the wine produced in Australia, produces all Australian sparkling
wines and cellars wines. The Company considers the segment's principal
facilities in Australasia to be the Berri Estates winery located in Glossop and
the bottling facility located in Reynella, both in South Australia.
Through the Constellation Wines segment, the Company owns or has interests
in approximately 6,200 plantable acres of vineyards in South Australia, the
Australian Capital Territory, Western Australia, Victoria, and Tasmania, and
approximately 1,900 acres of vineyards, either fully bearing or under
development, in New Zealand.
Europe
------
Through the Constellation Wines segment, in the United Kingdom the Company
owns and operates two facilities in England, located in Bristol and Shepton
Mallet and one facility in Scotland, located in Forfar. The Bristol facility is
considered a principal facility and produces, bottles and packages wine; the
Shepton Mallet facility produces, bottles and packages cider; and the Forfar
facility produces, bottles and packages water products. The Constellation Wines
segment also owns another facility in Taunton, England, which it plans to sell
since the operations have been consolidated into the Shepton Mallet facility.
In Fiscal 2004, the Company sold its interest in a winery in France.
Through this segment, the Company operates a National Distribution Centre,
located at a leased facility in Severnside, England, to distribute the Company's
products that are produced at the Bristol and Shepton Mallet facilities as well
as products imported from other wine suppliers. To support its wholesaling
business, the Company operates 11 distribution centers located throughout the
United Kingdom, 10 of which are leased. These 11 distribution centers are used
to distribute products produced by third parties, as well as by the Company.
The Company has been and will continue consolidating the operations of its
United Kingdom wholesaling distribution centers.
Additionally, through the Constellation Wines segment, the Company leases
warehouse and office facilities in Dublin and leases back office facilities in
Cork in support of the Company's business of marketing and distributing
alcoholic beverages in the Republic of Ireland.
Chile
-----
Through the Constellation Wines segment, the Company also operates, through
a majority owned subsidiary, a winery in the Casablanca Valley, Chile, that
crushes grapes and vinifies, cellars and bottles wine. Through this segment,
the Company also owns or leases approximately 1,000 acres of vineyards, either
fully bearing or under development, in Chile for the production of wine.
CONSTELLATION BEERS AND SPIRITS
Through the Constellation Beers and Spirits segment, the Company maintains
leased division offices in Chicago, Illinois. On behalf of the segment's beer
business, the Company contracts with five providers of warehouse space and
services in eight locations throughout the United States.
Through this segment, the Company owns and operates four distilling plants,
two in the United States and two in Canada. The two distilling plants in the
United States are located in Bardstown, Kentucky and Albany, Georgia. The two
distilling plants in Canada are located in Valleyfield, Quebec and Lethbridge,
Alberta. The Company considers this segment's principal distilling plants to be
the facilities located in Bardstown (Kentucky), Valleyfield (Quebec) and
Lethbridge (Alberta). The Bardstown facility distills, bottles and warehouses
distilled spirits products for the Company and, on a contractual basis, for
other industry members. The two Canadian facilities distill, bottle and store
Canadian whisky for the segment, and distill and/or bottle and store Canadian
whisky, vodka, rum, gin and liqueurs for third parties.
In the United States, the Company through its Constellation Beers and
Spirits segment also operates three bottling plants, located in Atlanta,
Georgia; Owensboro, Kentucky and Carson, California. The facilities located in
Atlanta (Georgia) and Owensboro (Kentucky) are owned, while the facility in
Carson (California) is operated and leased through an arrangement involving an
ongoing management contract. The Company considers this segment's bottling
plant located in Owensboro to be one of the segment's principal facilities. The
Owensboro facility bottles and warehouses distilled spirits products for the
segment and is also utilized for contract bottling.
CORPORATE OPERATIONS AND OTHER
The Company's corporate headquarters are located in leased offices in
Fairport, New York.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
In the course of their business, the Company and its subsidiaries are
subject to litigation from time to time. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
Not Applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to the current executive officers of the Company
is as follows:
NAME AGE OFFICE OR POSITION HELD
- ---- --- -----------------------
Richard Sands 53 Chairman of the Board and Chief Executive Officer
Robert Sands 45 President and Chief Operating Officer
Alexander L. Berk 54 Chief Executive Officer, Constellation Beers and
Spirits, and President and Chief Executive Officer,
Barton Incorporated
F. Paul Hetterich 41 Executive Vice President, Business Development and
Corporate Strategy
Stephen B. Millar 60 Chief Executive Officer, Constellation Wines
Thomas J. Mullin 52 Executive Vice President and General Counsel
Thomas S. Summer 50 Executive Vice President and Chief Financial Officer
W. Keith Wilson 53 Executive Vice President and Chief Human Resources
Officer
Richard Sands, Ph.D., is the Chairman of the Board and Chief Executive
Officer of the Company. He has been employed by the Company in various
capacities since 1979. He was elected Chief Executive Officer in October 1993
and has served as a director since 1982. In September 1999, Mr. Sands was
elected Chairman of the Board. He served as Executive Vice President from 1982
to May 1986, as President from May 1986 to December 2002 and as Chief Operating
Officer from May 1986 to October 1993. He is the brother of Robert Sands.
Robert Sands was appointed President and Chief Operating Officer of the
Company in December 2002 and has served as a director since January 1990. Mr.
Sands also had served as Group President from April 2000 through December 2002,
as Chief Executive Officer, International from December 1998 through April 2000,
as Executive Vice President from October 1993 through April 2000, as General
Counsel from June 1986 through May 2000, and as Vice President from June 1990
through October 1993. He is the brother of Richard Sands.
Alexander L. Berk is the Chief Executive Officer of Constellation Beers and
Spirits and the President and Chief Executive Officer of Barton Incorporated.
Since 1990 and prior to becoming Chief Executive Officer of Barton Incorporated
in March 1998, Mr. Berk was President and Chief Operating Officer of Barton
Incorporated and from 1988 to 1990, he was the President and Chief Executive
Officer of Schenley Industries. Mr. Berk has been in the beverage alcohol
industry for most of his career, serving in various positions.
F. Paul Hetterich has been the Company's Executive Vice President, Business
Development and Corporate Strategy since June 2003. From April 2001 to June
2003, Mr. Hetterich served as the Company's Senior Vice President, Corporate
Development. Prior to that, Mr. Hetterich held several increasingly senior
positions in the Company's marketing and business development groups. Mr.
Hetterich has been with the Company since 1986.
Stephen B. Millar is the Chief Executive Officer of Constellation Wines and
has held this position since the closing of the Hardy Acquisition. Prior to the
Company's acquisition of Hardy, Mr. Millar was Hardy's Managing Director and had
held this position since 1991. Mr. Millar currently serves in leadership roles
in a number of industry organizations. He is an Executive Council Member and
Chairman of the Audit Committee of the Winemakers' Federation of Australia. He
also serves as the President of the Australian Wine and Brandy Producers'
Association, as the Deputy Chairman of the International Trade Advisory
Committee and the Australian Wine Export Council and as a Council Member of the
South Australian Wine Industry Council.
Thomas J. Mullin joined the Company as Executive Vice President and General
Counsel in May 2000. Prior to joining the Company, Mr. Mullin served as
President and Chief Executive Officer of TD Waterhouse Bank, NA since February
2000, of CT USA, F.S.B. since September 1998, and of CT USA, Inc. since March
1997. He also served as Executive Vice President, Business Development and
Corporate Strategy of C.T. Financial Services, Inc. from March 1997 through
February 2000. From 1985 through 1997, Mr. Mullin served as Vice Chairman and
Senior Executive Vice President of First Federal Savings and Loan Association of
Rochester, New York and from 1982 through 1985, he was a partner in the law firm
of Phillips, Lytle, Hitchcock, Blaine & Huber.
Thomas S. Summer joined the Company in April l997 as Senior Vice President
and Chief Financial Officer and in April 2000 was elected Executive Vice
President. From November 1991 to April 1997, Mr. Summer served as Vice
President, Treasurer of Cardinal Health, Inc., a large national health care
services company, where he was responsible for directing financing strategies
and treasury matters. Prior to that, from November 1987 to November 1991, Mr.
Summer held several positions in corporate finance and international treasury
with PepsiCo, Inc.
W. Keith Wilson joined the Company in January 2002 as Senior Vice
President, Human Resources, and in September 2002, he was elected Chief Human
Resources Officer and in April 2003 he was elected Executive Vice President.
From 1999 to 2001, Mr. Wilson served as Senior Vice President, Global Human
Resources of Xerox Engineering Systems, a subsidiary of Xerox Corporation, that
engineers, manufactures and sells hi-tech reprographics equipment and software
worldwide. From 1990 to 1999, he served in various senior human resource
positions with the banking, marketing and real estate and relocation businesses
of Prudential Life Insurance of America, an insurance company that also provides
other financial products.
Executive officers of the Company are generally chosen or elected to their
positions annually and hold office until the earlier of their removal or
resignation or until their successors are chosen and qualified.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- ----------------------------------------------------------------------
MATTERS
-------
The Company's Class A Common Stock (the "Class A Stock") and Class B Common
Stock (the "Class B Stock") trade on the New York Stock Exchange (Registered)
("NYSE") under the symbols STZ and STZ.B, respectively. The following tables set
forth for the periods indicated the high and low sales prices of the Class A
Stock and the Class B Stock as reported on the NYSE.
CLASS A STOCK
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Fiscal 2003
High $ 31.62 $ 32.00 $ 29.80 $ 26.26
Low $ 25.25 $ 24.10 $ 21.99 $ 22.30
Fiscal 2004
High $ 27.65 $ 31.80 $ 34.65 $ 35.92
Low $ 21.90 $ 26.61 $ 28.70 $ 29.30
CLASS B STOCK
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Fiscal 2003
High $ 31.50 $ 32.50 $ 30.05 $ 26.10
Low $ 25.50 $ 25.29 $ 21.64 $ 22.55
Fiscal 2004
High $ 27.65 $ 31.95 $ 34.25 $ 35.85
Low $ 22.75 $ 27.35 $ 29.00 $ 30.25
At April 30, 2004, the number of holders of record of Class A Stock and
Class B Stock of the Company were 1,000 and 237, respectively.
With respect to its common stock, the Company's policy is to retain all of
its earnings to finance the development and expansion of its business, and the
Company has not paid any cash dividends on its common stock since its initial
public offering in 1973. In addition, under the terms of the Company's senior
credit facility, the Company is currently constrained from paying cash dividends
on its common stock. Also, the indentures for the Company's outstanding senior
notes and senior subordinated notes may restrict the payment of cash dividends
on its common stock under certain circumstances. Any indentures for debt
securities issued in the future and any credit agreements entered into in the
future may also restrict or prohibit the payment of cash dividends on common
stock.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
For the Years Ended
------------------------------------------------------------------------
February 29, February 28, February 28, February 28, February 29,
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
Sales $ 4,469,270 $ 3,583,082 $ 3,420,213 $ 2,983,629 $ 2,909,954
Less-excise taxes (916,841) (851,470) (813,455) (757,609) (748,230)
------------ ------------ ------------ ------------ ------------
Net sales 3,552,429 2,731,612 2,606,758 2,226,020 2,161,724
Cost of product sold (2,576,641) (1,970,897) (1,911,598) (1,647,081) (1,626,804)
------------ ------------ ------------ ------------ ------------
Gross profit 975,788 760,715 695,160 578,939 534,920
Selling, general and
administrative expenses(1) (457,277) (350,993) (355,269) (308,071) (294,369)
Restructuring and
related charges(2) (31,154) (4,764) - - -
Nonrecurring charges(3) - - - - (5,510)
------------ ------------ ------------ ------------ ------------
Operating income 487,357 404,958 339,891 270,868 235,041
Gain on change in fair value of
derivative instruments 1,181 23,129 - - -
Equity in earnings
of joint ventures 542 12,236 1,667 - -
Interest expense, net (144,683) (105,387) (114,189) (108,631) (106,082)
------------ ------------ ------------ ------------ ------------
Income before income taxes 344,397 334,936 227,369 162,237 128,959
Provision for income taxes(1) (123,983) (131,630) (90,948) (64,895) (51,584)
------------ ------------ ------------ ------------ ------------
Net income 220,414 203,306 136,421 97,342 77,375
Dividends on preferred stock (5,746) - - - -
------------ ------------ ------------ ------------ ------------
Income available to common
stockholders $ 214,668 $ 203,306 $ 136,421 $ 97,342 $ 77,375
============ ============ ============ ============ ============
Earnings per common share(4):
Basic $ 2.13 $ 2.26 $ 1.60 $ 1.33 $ 1.07
============ ============ ============ ============ ============
Diluted $ 2.06 $ 2.19 $ 1.55 $ 1.30 $ 1.05
============ ============ ============ ============ ============
Supplemental data restated for
effect of SFAS No. 142:
Adjusted operating income $ 487,357 $ 404,958 $ 369,780 $ 290,372 $ 254,833
============ ============ ============ ============ ============
Adjusted net income $ 220,414 $ 203,306 $ 155,367 $ 111,635 $ 91,793
============ ============ ============ ============ ============
Adjusted income available
to common stockholders $ 214,668 $ 203,306 $ 155,367 $ 111,635 $ 91,793
============ ============ ============ ============ ============
Adjusted earnings per common share:
Basic $ 2.13 $ 2.26 $ 1.82 $ 1.52 $ 1.27
============ ============ ============ ============ ============
Diluted $ 2.06 $ 2.19 $ 1.77 $ 1.49 $ 1.24
============ ============ ============ ============ ============
Total assets $ 5,558,673 $ 3,196,330 $ 3,069,385 $ 2,512,169 $ 2,348,791
============ ============ ============ ============ ============
Long-term debt, including
current maturities $ 2,046,098 $ 1,262,895 $ 1,374,792 $ 1,361,613 $ 1,289,788
============ ============ ============ ============ ============
(1) Effective March 1, 2003, the Company completed its adoption of 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." Accordingly, the adoption of the provisions
rescinding Statement of Financial Accounting Standards No. 4 ("SFAS
No. 4"), "Reporting Gains and Losses from Extinguishment of Debt,"
resulted 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).
(2) For a detailed discussion of restructuring and related charges for the
years ended February 29, 2004, and February 28, 2003, see Management's
Discussion and Analysis of Financial Condition and Results of Operations
under Item 7 of this Annual Report on Form 10-K under the captions "Fiscal
2004 Compared to Fiscal 2003 - Restructuring and Related Charges" and
"Fiscal 2003 Compared to Fiscal 2002 - Restructuring and Related Charges,"
respectively.
(3) The Company incurred nonrecurring charges of $5.5 million for the year
ended February 29, 2000, related to (i) the closure of a cider production
facility within the U.K. Brands and Wholesale segment in the United Kingdom
and (ii) a management reorganization within the Popular and Premium Wine
segment in the United States.
(4) All per share data have been adjusted to give effect to the two-for-one
splits of the Company's two classes of common stock in each of May 2002 and
May 2001.
For the years ended February 29, 2004, and February 28, 2003, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 of this Annual Report on Form 10-K and the Consolidated
Financial Statements and notes thereto under Item 8 of this Annual Report on
Form 10-K.
Effective March 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed at least
annually for impairment. Intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives and are
subject to review for impairment. Upon adoption of SFAS No. 142, the Company
determined that certain of its intangible assets met the criteria to be
considered indefinite lived and, accordingly, ceased their amortization
effective March 1, 2002. These intangible assets consisted principally of
trademarks. 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 were not modified as a
result of adopting SFAS No. 142. The supplemental data section above presents
operating income, income before extraordinary item, net income, and earnings per
share information for the comparative periods as if the nonamortization
provisions of SFAS No. 142 had been applied as of March 1, 1999.
The consolidated financial statements for the years ended February 29,
2004, and February 28, 2003, were audited by KPMG LLP. The consolidated
financial statements for the years ended February 28, 2002, February 28, 2001,
and February 29, 2000, were audited by Arthur Andersen LLP and the reports for
those years have not been reissued by Arthur Andersen LLP.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
- --------
The Company generates revenue through the production, marketing and sale of
beverage alcohol products, primarily in North America, Europe and Australia.
The Company has a broad portfolio of brands across the wine, imported beer and
distilled spirits categories, and with the acquisition of Hardy in Fiscal 2004
solidified its position as the world's largest wine company.
The Company's business strategy is to remain focused across the beverage
alcohol industry by offering a broad range of products in each of the Company's
three major categories: wine, beer and spirits. The Company intends to keep
its portfolio positioned for superior top-line growth while maximizing the
profitability of its brands. In addition, the Company seeks to increase its
relative importance to key customers in major markets by increasing its share of
their overall purchasing, which is increasingly important in a consolidating
industry. The Company's strategy of breadth across categories and geographies,
and strengthening scale in core markets, is designed to deliver long-term
profitable growth. This strategy allows the Company more investment choices,
provides flexibility to address changing market conditions and creates stronger
routes-to-market.
The Company's businesses fall within one of two areas: growth or scale.
The growth businesses represent approximately 60% of the Company's Fiscal 2004
net sales and include approximately half of the Company's branded wine business
(specifically premium wines in the U.S. and wines in the U.K.), imported beer in
the U.S. and the U.K. wholesale business. The scale businesses represent
approximately 40% of Fiscal 2004 net sales and include spirits, the remaining
half of the Company's branded wine business, cider, and non-branded sales. The
scale businesses are operated to maximize profitability and cash flow and to
maintain strong routes-to-market. With a solid foundation of growth and scale
businesses, the Company expects to continue to be able to leverage sales growth
into even higher growth in earnings and cash flow.
The U.S. beer industry has experienced a healthy pricing environment over
the last several years; however, this could change due to market dynamics.
Beginning January 2004, the Company raised prices to its wholesalers on the
Company's imported Mexican beer brands. The timing of this price increase
resulted in a shift in sales volume from Fiscal 2005 to Fiscal 2004 due to
wholesaler buy-in ahead of the price increase. As a result of the wholesaler
buy-in and as retailers and consumers adapt to the higher price, the Company
expects a negative impact on volume trends for Fiscal 2005.
The Company remains committed to its long-term financial model of growing
sales (both organically and through acquisitions), expanding margins and
increasing cash flow to achieve superior earnings per share growth and improve
return on invested capital.
INTRODUCTION
- ------------
The Company is a leading international producer and marketer of beverage
alcohol brands with a broad portfolio across the wine, spirits and imported beer
categories. The Company has the largest wine business in the world and is the
largest multi-category supplier of beverage alcohol in the United States; a
leading producer and exporter of wine from Australia and New Zealand; and both a
major producer and independent drinks wholesaler in the United Kingdom.
Through February 28, 2003, the Company reported its operating results in
five segments: Popular and Premium Wine (branded popular and premium wine and
brandy, and other, primarily grape juice concentrate and bulk wine); Imported
Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands
and Wholesale (branded wine, cider, and bottled water, and wholesale wine,
distilled spirits, cider, beer, RTDs and soft drinks); Fine Wine (primarily
branded super-premium and ultra-premium wine); and Corporate Operations and
Other (primarily corporate related items). As a result of the Hardy Acquisition
(as defined below), 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
reports its operating results in three segments: Constellation Wines (branded
wine, and U.K. wholesale and other), Constellation Beers and Spirits (imported
beer and distilled spirits) and Corporate Operations and Other (primarily
corporate related items and other). Amounts included in the Corporate
Operations and Other segment consist of general corporate administration and
finance expenses. These amounts include costs of executive management, investor
relations, internal audit, treasury, tax, corporate development, legal,
financial reporting, professional fees and public relations. Any costs incurred
at the corporate office that are applicable to the segments are allocated to the
appropriate segment. The amounts included in the Corporate Operations and Other
segment are general costs that are applicable to the consolidated group and are
therefore not allocated to the other reportable segments. All costs reported
within the Corporate Operations and Other segment are not included in the chief
operating decision maker's evaluation of the operating income performance of the
other operating segments. The new business segments reflect how the Company's
operations are being managed, how operating performance within the Company is
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
Fiscal 2003 and Fiscal 2002 (as defined below) have been restated to conform to
the new segment presentation.
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the year
ended February 29, 2004 ("Fiscal 2004"), compared to the year ended February 28,
2003 ("Fiscal 2003"), and Fiscal 2003 compared to the year ended February 28,
2002 ("Fiscal 2002"), and (ii) financial liquidity and capital resources for
Fiscal 2004. This discussion and analysis also identifies certain restructuring
and related charges expected to affect consolidated results of operations of the
Company for the year ended February 28, 2005 ("Fiscal 2005"). This discussion
and analysis should be read in conjunction with the Company's consolidated
financial statements and notes thereto included herein.
As discussed in Note 1 to the financial statements, the Company adopted
SFAS No. 142 on March 1, 2002. Upon the adoption of SFAS No. 142, the Company
ceased amortization of goodwill and indefinite lived intangible assets.
Retroactive application of SFAS No. 142 is not permitted.
ACQUISITIONS IN FISCAL 2004, FISCAL 2003 AND FISCAL 2002 AND JOINT VENTURE
ACQUISITION OF HARDY
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. As a
result of the acquisition of Hardy, the Company also acquired the remaining 50%
ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the Company
established with Hardy in July 2001. The acquisition of Hardy along with the
remaining interest in PWP is referred to together as the "Hardy Acquisition."
Through this acquisition, the Company acquired Australia's largest wine producer
with interests in wineries and vineyards in most of Australia's major wine
regions as well as New Zealand and the United States. Hardy has a comprehensive
portfolio of wine products across all price points with a strong focus on
premium wine production. Hardy's wines are distributed worldwide through a
network of marketing and sales operations, with the majority of sales generated
in Australia, the United Kingdom and the United States.
Total consideration paid in cash and Class A Common Stock to the Hardy
shareholders was $1,137.4 million. Additionally, the Company recorded direct
acquisition costs of $17.7 million. The acquisition date for accounting
purposes is March 27, 2003. The Company has recorded a $1.6 million reduction
in the purchase price to reflect imputed interest between the accounting
acquisition date and the final payment of consideration. This charge is
included as interest expense in the Consolidated Statement of Income for the
year ended February 29, 2004. The cash portion of the purchase price paid to
the Hardy shareholders and optionholders ($1,060.2 million) was financed with
$660.2 million of borrowings under the Company's March 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. The purchase price was based primarily on a discounted cash flow
analysis that contemplated, among other things, the value of a broader
geographic distribution in strategic international markets and a presence in the
important Australian winemaking regions. The Company and Hardy have
complementary businesses that share a common growth orientation and operating
philosophy. The Hardy Acquisition supports the Company's strategy of growth and
breadth across categories and geographies, and strengthens its competitive
position in its core markets. The purchase price and resulting goodwill were
primarily based on the growth opportunities of the brand portfolio of Hardy. In
particular, the Company believes there are growth opportunities for Australian
wines in the United Kingdom, United States and other wine markets. 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.
The results of operations of Hardy and PWP have been reported in the
Company's Constellation Wines segment as of March 27, 2003.
ACQUISITION OF RAVENSWOOD WINERY
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. (the "Ravenswood Acquisition"), a leading premium
wine producer based in Sonoma, California. On June 30, 2002, Ravenswood Winery,
Inc. was merged into Franciscan Vineyards, Inc. (a wholly-owned subsidiary of
the Company). The Ravenswood business produces, markets and sells super-premium
and ultra-premium California wine, primarily under the Ravenswood brand name.
The vast majority of the wine the Ravenswood business produces and sells is red
wine, including the number one super-premium Zinfandel in the United States.
The results of operations of the Ravenswood business are reported in the
Constellation Wines segment and have been included in the consolidated results
of operations of the Company since the date of acquisition.
ACQUISITION OF THE CORUS ASSETS
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. In connection with the transaction, the Company
also entered into long-term grape supply agreements with affiliates of Corus
Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards.
The results of operations of the Corus Assets are reported in the Constellation
Wines segment and have been included in the consolidated results of operations
of the Company since the date of acquisition.
ACQUISITION OF THE TURNER ROAD VINTNERS ASSETS
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The results of operations
of the Turner Road Vintners Assets are reported in the Constellation Wines
segment and have been included in the consolidated results of operations of the
Company since the date of acquisition.
PACIFIC WINE PARTNERS
On July 31, 2001, the Company and Hardy completed the formation of PWP, a
joint venture owned equally by the Company and Hardy through March 26, 2003.
Pacific Wine Partners LLC ("PWP") produces, markets and sells a portfolio of
premium wine in the United States, including a range of Australian imports. PWP
also exports certain of its U.S.-produced wines to other countries. In
connection with the initial formation of the joint venture, PWP was given the
exclusive distribution rights in the United States and the Caribbean to several
brands, including Banrock Station, Hardys, Leasingham, Barossa Valley Estate and
Chateau Reynella from Australia; and Nobilo from New Zealand. PWP also owns
Farallon, a premium California coastal wine. In addition, PWP owns a winery and
controls 1,400 acres of vineyards in Monterey County, California.
On October 16, 2001, the Company announced that PWP completed the purchase
of certain assets of Blackstone Winery, including the Blackstone brand and the
Codera wine business in Sonoma County.
As a result of the Hardy Acquisition, PWP became a wholly-owned subsidiary
of the Company. Accordingly, as noted above, its results of operations have
been consolidated and reported in the Constellation Wines segment since March
27, 2003. Prior to March 27, 2003, the investment in PWP was accounted for
using the equity method; accordingly, the results of operations of PWP from July
31, 2001, through March 26, 2003, were included in the equity in earnings of
joint ventures line in the Consolidated Statements of Income of the Company.
RESULTS OF OPERATIONS
- ---------------------
FISCAL 2004 COMPARED TO FISCAL 2003
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2004 and Fiscal 2003.
Fiscal 2004 Compared to Fiscal 2003
---------------------------------------
Net Sales
---------------------------------------
2004 2003 %Increase
------------ ------------ ---------
Constellation Wines:
Branded wines $ 1,549,750 $ 983,505 57.6%
Wholesale and other 846,306 689,794 22.7%
------------ ------------
Constellation Wines net sales $ 2,396,056 $ 1,673,299 43.2%
------------ ------------
Constellation Beers and Spirits:
Imported beers $ 862,637 $ 776,006 11.2%
Spirits 284,551 282,307 0.8%
------------ ------------
Constellation Beers and Spirits net sales $ 1,147,188 $ 1,058,313 8.4%
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Unusual gain $ 9,185 $ - N/A
------------ ------------
Consolidated Net Sales $ 3,552,429 $ 2,731,612 30.0%
============ ============
Net sales for Fiscal 2004 increased to $3,552.4 million from $2,731.6
million for Fiscal 2003, an increase of $820.8 million, or 30.0%. This increase
resulted primarily from the inclusion of $571.4 million of net sales of products
acquired in the Hardy Acquisition as well as increases in imported beer sales of
$86.6 million and U.K. wholesale sales of $61.1 million (on a local currency
basis). In addition, net sales benefited from a favorable foreign currency
impact of $74.6 million.
Constellation Wines
Net sales for the Constellation Wines segment for Fiscal 2004 increased to
$2,396.1 million from $1,673.3 million for Fiscal 2003, an increase of $722.8
million, or 43.2%. Branded wine net sales increased $566.2 million, primarily
due to the addition of $548.4 million of net sales of branded wine acquired in
the Hardy Acquisition. Wholesale and other net sales increased $156.5 million
primarily due to a favorable foreign currency impact of $63.1 million, growth in
the U.K. wholesale business of $61.1 million (on a local currency basis), and
the addition of $23.0 million of net sales of bulk wine acquired in the Hardy
Acquisition. The net sales increase in the U.K. Wholesale business on a local
currency basis is primarily due to the addition of new accounts and increased
average delivery sizes as the Company's national accounts business continues to
grow. The Company continues to face competitive discounting within select
markets and geographies driven in part by excess grape supplies. The Company
believes that the grape supply/demand cycle should come into balance over the
next couple of years. The Company has taken a strategy of preserving the
long-term brand equity of its portfolio and investing its marketing dollars in
the higher growth sectors of the wine business.
Constellation Beers and Spirits
Net sales for the Constellation Beers and Spirits segment for Fiscal 2004
increased to $1,147.2 million from $1,058.3 million for Fiscal 2003, an increase
of $88.9 million, or 8.4%. This increase resulted primarily from volume gains on
the Company's imported beer portfolio, which increased $86.6 million. Spirits
net sales remained relatively flat as increased branded spirits sales were
offset by lower bulk whisky and contract production sales.
GROSS PROFIT
The Company's gross profit increased to $975.8 million for Fiscal 2004 from
$760.7 million for Fiscal 2003, an increase of $215.1 million, or 28.3%. The
Constellation Wines segment's gross profit increased $200.4 million primarily
due to gross profit on the sales of branded wine acquired in the Hardy
Acquisition. The Constellation Beers and Spirits segment's gross profit
increased $42.5 million primarily due to the volume growth in the segment's
imported beer portfolio. These increases were partially offset by $27.8 million
of net unusual costs which consist of certain items that are excluded by
management in their evaluation of the results of each operating segment. These
net costs represent the flow through of inventory step-up associated with the
Hardy Acquisition of $22.5 million and the write-down of concentrate inventory
recorded in connection with the Company's decision to exit the commodity
concentrate product line of $16.8 million (see additional discussion under
"Restructuring and Related Charges" below), partially offset by the relief from
certain excise tax, duty and other costs incurred in prior years of $11.5
million, which was recognized in the fourth quarter of fiscal 2004. Gross
profit as a percent of net sales decreased slightly to 27.5% for Fiscal 2004
from 27.8% for Fiscal 2003 as an increase in gross profit margin from sales of
higher margin wine brands acquired in the Hardy Acquisition was more than offset
by the net unusual costs discussed above and a decrease in gross profit margin
on the Constellation Wines' U.K. wholesale business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $457.3 million
for Fiscal 2004 from $351.0 million for Fiscal 2003, an increase of $106.3
million, or 30.3%. The Constellation Wines segment's selling, general and
administrative expenses increased $76.8 million primarily due to $67.7 million
of selling, general and administrative expenses from the addition of the Hardy
and PWP businesses. The Constellation Beers and Spirits segment's selling,
general and administrative expenses increased $7.9 million due to increased
imported beer and spirits advertising and selling expenses to support the growth
across this segment's businesses, partially offset by foreign currency gains.
The Corporate Operations and Other segment's general and administrative expenses
increased $8.9 million primarily due to additional deferred financing costs
associated with the Company's new bank credit facility and increased general and
administrative expenses to support the Company's growth. In addition, there was
a $12.7 million increase in selling, general and administrative expenses related
to unusual costs which consist of certain items that are excluded by management
in their evaluation of the results of each operating segment. These costs
consist primarily of the additional amortized deferred financing costs
associated with the bridge financing in connection with the Hardy Acquisition of
$11.6 million. Selling, general and administrative expenses as a percent of net
sales increased slightly to 12.9% for Fiscal 2004 as compared to 12.8% for
Fiscal 2003 due primarily to the unusual costs and the increased general and
administrative expenses within the Corporate Operations and Other segment as
discussed above.
RESTRUCTURING AND RELATED CHARGES
The Company recorded $31.2 million of restructuring and related charges for
Fiscal 2004 associated with the restructuring plan of the Constellation Wines
segment. Restructuring and related charges resulted from (i) $10.0 million
related to the realignment of business operations and (ii) $21.2 million related
to exiting the commodity concentrate product line in the U.S. and selling its
winery located in Escalon, California. In total, the Company recorded $38.0
million of costs associated with exiting the commodity concentrate product line
and selling its Escalon facility allocated between cost of product sold ($16.8
million) and restructuring and related charges ($21.2 million).
The Company recorded $4.8 million of restructuring and related charges for
Fiscal 2003 associated with an asset impairment charge in connection with two of
Constellation Wines segment's production facilities.
In Fiscal 2005, the Company expects to incur additional restructuring and
related charges of $11.6 million associated with the restructuring plan of the
Constellation Wines segment. These charges are expected to consist of $7.2
million related to the further realignment of business operations in the
Constellation Wines segment and $4.4 million related to renegotiating existing
grape contracts as a result of exiting the commodity concentrate product line
and selling the Escalon facility.
Approximately half of the total charges in connection with exiting the
commodity concentrate product line and selling the Escalon facility are non-cash
charges.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2004 and Fiscal 2003.
Fiscal 2004 Compared to Fiscal 2003
---------------------------------------
Operating Income (Loss)
---------------------------------------
2004 2003 %Increase
------------ ------------ ---------
Constellation Wines $ 348,132 $ 224,556 55.0%
Constellation Beers and Spirits 252,533 217,963 15.9%
Corporate Operations and Other (41,717) (32,797) 27.2%
------------ ------------
Total Reportable Segments 558,948 409,722 36.4%
Restructuring and Related Charges
and Unusual Costs (71,591) (4,764) 1402.7%
------------ ------------
Consolidated Operating Income $ 487,357 $ 404,958 20.3%
============ ============
Restructuring and related charges and unusual costs of $71.6 million and
$4.8 million for Fiscal 2004 and Fiscal 2003, respectively, consist of certain
costs that are excluded by management in their evaluation of the results of each
operating segment. Fiscal 2004 costs represent the flow through of inventory
step-up and the amortization of deferred financing costs associated with the
Hardy Acquisition of $22.5 million and $11.6 million, respectively, and costs
associated with exiting the commodity concentrate product line and the Company's
realignment of its business operations in the wine segment, including the
write-down of concentrate inventory of $16.8 million and restructuring and
related charges of $31.2 million, partially offset by the relief from certain
excise taxes, duty and other costs incurred in prior years of $10.4 million.
Fiscal 2003 costs represent restructuring and related charges associated with
the Company's realignment of its business operations in the wine segment. As a
result of these costs and the above factors, consolidated operating income
increased to $487.4 million for Fiscal 2004 from $405.0 million for Fiscal 2003,
an increase of $82.4 million, or 20.3%.
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
The Company entered into a foreign currency collar contract in February
2003 in connection with the Hardy Acquisition 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, the 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. During the first quarter of fiscal
2004, the gain on change in fair value of the derivative instrument of $1.2
million was recognized separately on the Company's Consolidated Statement of
Income.
EQUITY IN EARNINGS OF JOINT VENTURES
The Company's equity in earnings of joint ventures decreased to $0.5
million in Fiscal 2004 from $12.2 million in Fiscal 2003 due to the acquisition
of the remaining 50% ownership of PWP in March 2003 resulting in consolidation
of PWP's results of operations since the date of acquisition.
INTEREST EXPENSE, NET
Interest expense, net of interest income of $3.6 million and $0.8 million
for Fiscal 2004 and Fiscal 2003, respectively, increased to $144.7 million for
Fiscal 2004 from $105.4 million for Fiscal 2003, an increase of $39.3 million,
or 37.3%. The increase resulted from higher average borrowings due to the
financing of the Hardy Acquisition, partially offset by a lower average
borrowing rate, and $1.7 million of imputed interest expense related to the
Hardy Acquisition.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for Fiscal 2004 declined to 36.0% from
39.3% for Fiscal 2003 as a result of the Hardy Acquisition, which significantly
increased the allocation of income to jurisdictions with lower income tax rates.
NET INCOME
As a result of the above factors, net income increased to $220.4 million
for Fiscal 2004 from $203.3 million for Fiscal 2003, an increase of $17.1
million, or 8.4%.
FISCAL 2003 COMPARED TO FISCAL 2002
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2003 and Fiscal 2002.
Fiscal 2003 Compared to Fiscal 2002
---------------------------------------
Net Sales
---------------------------------------
2003 2002 %Increase
------------ ------------ ---------
Constellation Wines:
Branded wines $ 983,505 $ 963,514 2.1%
Wholesale and other 689,794 641,589 7.5%
------------ ------------
Constellation Wines net sales $ 1,673,299 $ 1,605,103 4.2%
------------ ------------
Constellation Beers and Spirits:
Imported beers $ 776,006 $ 726,953 6.7%
Spirits 282,307 274,702 2.8%
------------ ------------
Constellation Beers and Spirits net sales $ 1,058,313 $ 1,001,655 5.7%
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Consolidated Net Sales $ 2,731,612 $ 2,606,758 4.8%
============ ============
Net sales for Fiscal 2003 increased to $2,731.6 million from $2,606.8
million for Fiscal 2002, an increase of $124.9 million, or 4.8%. This increase
resulted primarily from increased sales of imported beer of $49.1 million and
the impact of foreign currency changes of $50.7 million in the Constellation
Wines segment. Also contributing to the sales growth were increased sales in
U.K. wholesale of $28.6 million (on a local currency basis), fine wine sales of
$23.8 million and spirits sales of $7.6 million, offset by lower bulk wine,
grape juice concentrate sales of $14.7 million, popular and premium branded wine
sales of $13.9 million and U.K. branded sales of $9.4 million (on a local
currency basis).
Constellation Wines
Net sales for the Constellation Wines segment for Fiscal 2003 increased to
$1,673.3 million from $1,605.1 million for Fiscal 2002, an increase of $68.2
million, or 4.2%. Branded wines sales increased $20.0 million due to increased
fine wine sales of $23.8 million and a favorable foreign currency impact of $9.3
million partially offset by lower popular and premium wine sales of $13.9
million. The increase in fine wine sales resulted from an additional four
months of sales of the brands acquired in the acquisition of Ravenswood Winery,
Inc. ("Ravenswood"), completed in July 2001, of $14.1 million, as well as an
increase of $9.7 million due to volume growth in the fine wine business
partially offset by higher promotional costs and a shift towards lower priced
fine wine brands. Popular and premium wine sales declined $13.9 million on
lower volume offset slightly by higher average selling prices. Volumes were
negatively impacted as a result of increased promotional spending in the
industry, which the Company did not participate in heavily. In this competitive
pricing environment, the Company continues to be selective in its promotional
activities, focusing instead on growth areas, long-term brand building
initiatives and increased profitability. Wholesale and other sales increased
$48.2 million primarily due to a favorable foreign currency impact of $41.4
million and a $28.6 million local currency increase in U.K. wholesale sales due
to the addition of new accounts and increased average delivery sizes, partially
offset by lower bulk wine, grape juice concentrate and cider sales of $24.7
million.
Constellation Beers and Spirits
Net sales for the Constellation Beers and Spirits segment for Fiscal 2003
increased to $1,058.3 million from $1,001.7 million for Fiscal 2002, an increase
of $56.7 million, or 5.7%. This increase resulted primarily from a $49.1
million increase in imported beer sales. The growth in imported beer sales was
due to a price increase on the Company's Mexican beer portfolio, which took
effect in the first quarter of fiscal 2003. Spirits sales increased $7.6
million due primarily to increased bulk whiskey sales of $6.4 million, along
with a slight increase in branded sales of $1.2 million.
GROSS PROFIT
The Company's gross profit increased to $760.7 million for Fiscal 2003 from
$695.2 million for Fiscal 2002, an increase of $65.6 million, or 9.4%. The
Constellation Wines segment's gross profit increased $30.8 million due to lower
wine costs, the additional four months of sales of the brands acquired in the
Ravenswood Acquisition (completed in July 2001), a favorable mix of sales
towards higher margin popular and premium wine, and a favorable foreign currency
impact. These increases were partially offset by lower gross profit on the
segment's reduced bulk wine and grape juice concentrate sales. The
Constellation Beers and Spirits segment's gross profit increased $34.8 million
due to increased gross profit on imported beer sales and increased gross profit
on spirits sales. The increased gross profit on imported beer sales is
primarily due to increased average selling prices in the Company's Mexican beer
portfolio and the increased gross profit on the segment's spirits business is
due to a favorable mix of sales towards higher margin products and lower average
spirits costs. As a result of the foregoing, gross profit as a percent of net
sales increased to 27.8% for Fiscal 2003 from 26.7% for Fiscal 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $351.0 million
for Fiscal 2003 from $355.3 million for Fiscal 2002, a decrease of $4.3 million,
or (1.2%). The Company adopted SFAS No. 142 on March 1, 2002, and, accordingly,
stopped amortizing goodwill and other indefinite lived intangible assets.
Therefore, the decrease of $4.3 million consists of a decrease of $27.3 million
of amortization expense from Fiscal 2002 offset by an increase of $23.0 million.
The Constellation Wines segment's selling, general and administrative expenses
decreased $2.6 million due to lower amortization expense of $19.1 million
partially offset by (i) higher selling costs to support the growth in the U.K.
wholesale business, (ii) increased selling and advertising costs on certain
popular and premium wine brands, and (iii) higher selling, general and
administrative expenses to support the growth in the fine wine business. The
Constellation Beers and Spirits segment's selling, general and administrative
expenses decreased $4.4 million due to lower amortization expense of $8.2
million partially offset by increased selling, general and administrative
expenses to support the growth in the imported beer portfolio. The Corporate
Operations and Other segment's selling, general and administrative expenses
increased $2.7 million primarily due to increased personnel costs to support the
Company's growth. Selling, general and administrative expenses as a percent of
net sales decreased to 12.8% for Fiscal 2003 as compared to 13.6% for Fiscal
2002. This decrease was due to the reduced amortization expense noted above
partially offset by (i) the percent increase in general and administrative
expenses growing at a faster rate than the percent increase in net sales across
all segments, and (ii) the percent increase in the Constellation Wines
segment's U.K. wholesale and U.K. branded wine selling costs being greater than
the percent increase in the U.K. wholesale and U.K. branded wine net sales.
RESTRUCTURING AND RELATED CHARGES
The Company recorded a property, plant and equipment impairment charge of
$4.8 million in Fiscal 2003 in connection with the planned closure of two of its
production facilities within its Constellation Wines segment in Fiscal 2004.
During Fiscal 2004, the Company began the realignment of its business operations
within this segment to further improve productivity. This realignment is not
expected to have an impact on brand sales. No such charges were incurred in
Fiscal 2002.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2003 and Fiscal 2002.
Fiscal 2003 Compared to Fiscal 2002
-----------------------------------------
Operating Income (Loss)
-----------------------------------------
2003 2002 %Increase
---------- ---------- ---------
Constellation Wines $ 224,556 $ 191,227 17.4%
Constellation Beers and Spirits 217,963 178,805 21.9%
Corporate Operations and Other (32,797) (30,141) 8.8%
---------- ----------
Total Reportable Segments 409,722 339,891 20.5%
Restructuring and Related Charges
and Unusual Costs (4,764) - N/A
---------- ----------
Consolidated Operating Income . . $ 404,958 $ 339,891 19.1%
========== ==========
Restructuring and related charges and unusual costs of $4.8 million for
Fiscal 2003 consist of certain costs that are excluded by management in their
evaluation of the results of each operating segment. These costs represent
restructuring and related charges associated with the Company's realignment of
its business operations in the wine segment. As a result of the above factors,
operating income increased to $405.0 million for Fiscal 2003 from $339.9 million
for Fiscal 2002, an increase of $65.1 million, or 19.1%. Fiscal 2002 operating
income for Constellation Wines and Constellation Beers and Spirits included
amortization expense of $19.1 million and $8.2 million, respectively.
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
In February 2003, the Company entered into a foreign currency collar
contract in connection with the Hardy Acquisition 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, the 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.
EQUITY IN EARNINGS OF JOINT VENTURES
The Company's equity in earnings of joint venture increased to $12.2
million in Fiscal 2003 from $1.7 million in Fiscal 2002. Due to the formation
of the joint venture in July 2001, there were seven months of earnings in Fiscal
2002 versus twelve months of earnings in Fiscal 2003. In addition, Fiscal 2003
benefited from an additional seven months of earnings due to the joint venture's
purchase of certain assets of the Blackstone Winery, including the Blackstone
brand and the Codera wine business in Sonoma County, which was completed in
October 2001.
INTEREST EXPENSE, NET
Interest expense, net of interest income of $0.8 million and $1.6 million
for Fiscal 2003 and Fiscal 2002, respectively, decreased to $105.4 million for
Fiscal 2003 from $114.2 million for Fiscal 2002, a decrease of $8.8 million, or
(7.7)%. The decrease resulted from decreases in both the average borrowings for
the year and the average interest rate for the year.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for Fiscal 2003 declined to 39.3% from
40.0% for Fiscal 2002 as a result of the adoption of SFAS No. 142 on March 1,
2002.
NET INCOME
As a result of the above factors, net income increased to $203.3 million
for Fiscal 2003 from $136.4 million for Fiscal 2002, an increase of $66.9
million, or 49.0%.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------
GENERAL
The Company's principal use of cash in its operating activities is for
purchasing and carrying inventories and carrying seasonal accounts receivable.
The Company's primary source of liquidity has historically been cash flow from
operations, except during annual grape harvests when the Company has relied on
short-term borrowings. In the United States, the annual grape crush normally
begins in August and runs through October. In Australia, the annual grape crush
normally begins in February and runs through May. The Company generally begins
taking delivery of grapes at the beginning of the crush season with payments for
such grapes beginning to come due one month later. The Company's short-term
borrowings to support such purchases generally reach their highest levels one to
two months after the crush season has ended. Historically, the Company has used
cash flow from operating activities to repay its short-term borrowings and fund
capital expenditures. The Company will continue to use its short-term
borrowings to support its working capital requirements. The Company believes
that cash provided by operating activities and its financing activities,
primarily short-term borrowings, will provide adequate resources to satisfy its
working capital, scheduled principal and interest payments on debt, preferred
dividend payment requirements, and anticipated capital expenditure requirements
for both its short-term and long-term capital needs.
FISCAL 2004 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Fiscal 2004 was $340.3
million, which resulted from $220.4 million of net income, plus $137.9 million
of net noncash items charged to the Consolidated Statement of Income, less $18.0
million representing the net change in the Company's operating assets and
liabilities. The net non-cash items consisted primarily of depreciation of
property, plant and equipment, deferred tax provision and amortization of
intangible and other assets. The net change in operating assets and liabilities
resulted primarily from an increase in accounts receivable and a decrease in
accounts payable, partially offset by a decrease in inventories and an increase
in accrued advertising and promotion.
INVESTING ACTIVITIES
Net cash used in investing activities for Fiscal 2004 was $1,158.5 million,
which resulted primarily from net cash paid of $1,069.5 million for the
purchases of businesses and $105.1 million of capital expenditures.
FINANCING ACTIVITIES
Net cash provided by financing activities for Fiscal 2004 was $745.2
million resulting primarily from proceeds of $1,600.0 million from issuance of
long-term debt, including $1,060.2 million of long-term debt incurred to acquire
Hardy, plus net proceeds from the 2003 Equity Offerings (as defined below) of
$426.1 million. This amount was partially offset by principal payments of
long-term debt of $1,282.3 million.
FISCAL 2003 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Fiscal 2003 was $236.1
million, which resulted from $203.3 million of net income, plus $53.2 million of
net noncash items charged to the Consolidated Statement of Income, less $20.4
million representing the net change in the Company's operating assets and
liabilities. The net noncash items consisted primarily of depreciation of
property, plant and equipment and provision for deferred taxes, partially offset
by a gain on changes in fair value of derivative instrument. The net change in
operating assets and liabilities resulted primarily from an increase in
inventories and a reduction in accrued excise taxes and adverse grape contracts
partially offset by increases in accrued income taxes payable and accrued
advertising and promotion expenses.
INVESTING ACTIVITIES
Net cash used in investing activities for Fiscal 2003 was $72.0 million,
which resulted primarily from $71.6 million of capital expenditures.
FINANCING ACTIVITIES
Net cash used in financing activities for Fiscal 2003 was $161.5 million
resulting primarily from $151.1 million of principal payments of long-term debt
and $51.9 million of net repayments of notes payable. These debt payments were
partially funded by $28.7 million of proceeds from employee stock option
exercises and $10.0 million of proceeds from long-term debt which was used for
the repayment of debt at one of the Company's Chilean subsidiaries.
During June 1998, the Company's Board of Directors authorized the
repurchase of up to $100.0 million of its Class A Common Stock and Class B
Common Stock. The repurchase of shares of common stock will be accomplished,
from time to time, in management's discretion and depending upon market
conditions, through open market or privately negotiated transactions. The
Company may finance such repurchases through cash generated from operations or
through the senior credit facility. The repurchased shares will become treasury
shares. As of May 14, 2004, the Company had purchased a total of 4,075,344
shares of Class A Common Stock at an aggregate cost of $44.9 million, or at an
average cost of $11.01 per share. Of this total amount, no shares were
repurchased during Fiscal 2004, Fiscal 2003 or Fiscal 2002.
DEBT
Total debt outstanding as of February 29, 2004, amounted to $2,047.9
million, an increase of $782.4 million from February 28, 2003. The ratio of
total debt to total capitalization decreased to 46.3% as of February 29, 2004,
from 51.9% as of February 28, 2003.
SENIOR CREDIT FACILITY
Credit Agreement
----------------
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
entered into a new credit agreement (as subsequently amended and restated as of
March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the Company
entered into a Second Amended and Restated Credit Agreement (the " October
Credit Agreement") that (i) refinanced the then outstanding principal balance
under the Tranche B Term Loan facility on essentially the same terms as the
Tranche B Term Loan facility under the March 2003 Credit Agreement, but at a
lower Applicable Rate (as such term is defined in the October Credit Agreement)
and (ii) otherwise restated the terms of the March 2003 Credit Agreement, as
amended. The October Credit Agreement was further amended during February 2004
(the "Credit Agreement"). The March 2003 Credit Agreement provided 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 February 29, 2008. Proceeds of the March 2003 Credit Agreement were used to
pay off the Company's obligations under its prior senior credit facility, to
fund a portion of the cash required to pay the former Hardy shareholders and to
pay indebtedness outstanding under certain of Hardy's credit facilities. The
Company uses the remaining availability under the Credit Agreement to fund its
working capital needs on an on-going basis.
The Tranche A Term Loan facility and the Tranche B Term Loan facility were
fully drawn on March 27, 2003. As of February 29, 2004, the Company has made
$40.0 million of scheduled and required payments on the Tranche A Term Loan
facility. In August 2003, the Company paid $100.0 million of the Tranche B Term
Loan facility. In October 2003, the Company paid an additional $200.0 million
of the Tranche B Term Loan facility. As of February 29, 2004, the required
annual repayments of the Tranche A Term Loan and the Tranche B Term Loan are as
follows:
Tranche A Tranche B
Term Loan Term Loan Total
---------- ---------- ---------
(in thousands)
2005 $ 60,000 $ - $ 60,000
2006 80,000 54,420 134,420
2007 100,000 54,420 154,420
2008 120,000 119,048 239,048
2009 - 272,112 272,112
---------- ---------- ---------
$ 360,000 $ 500,000 $ 860,000
========== ========== =========
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 Credit Agreement) and, with respect to LIBOR borrowings, ranges
between 1.50% and 2.50%. As of February 29, 2004, the LIBOR margin for the
Revolving Credit facility and the Tranche A Term Loan facility is 1.75%, while
the LIBOR margin on the Tranche B Term Loan facility is 2.00%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company is obligated to pledge 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 certain foreign subsidiaries of the Company.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, the incurrence of additional
indebtedness (including guarantees of 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/or thresholds. As a
result of the prepayment of the Bridge Loans (as defined below) with the
proceeds from the 2003 Equity Offerings (see Note 16), the requirement under
certain circumstances for the Company and the Guarantors to pledge certain
assets consisting of, among other things, inventory, accounts receivable and
trademarks to secure the obligations under the Credit Agreement, ceased to
apply. The primary financial covenants require the maintenance of a debt
coverage ratio, a senior debt coverage ratio, a fixed charge ratio and an
interest coverage ratio. As of February 29, 2004, the Company is in compliance
with all of its covenants under its Credit Agreement.
As of February 29, 2004, under the Credit Agreement, the Company had
outstanding Tranche A Term Loans of $360.0 million bearing a weighted average
interest rate of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted
average interest rate of 3.2%, undrawn revolving letters of credit of $18.6
million, and $381.4 million in revolving loans available to be drawn. There
were no outstanding revolving loans under the Credit Agreement as of February
29, 2004.
Bridge Agreement
----------------
On January 16, 2003, the Company, certain subsidiaries of the Company,
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"). On April 9,
2003, the Company used $400.0 million of the Bridge Loans to fund a portion of
the cash required to pay the former Hardy shareholders. On July 30, 2003, the
Company used proceeds from the 2003 Equity Offerings to prepay the $400.0
million Bridge Loans in their entirety.
SUBSIDIARY FACILITIES
The Company has additional line of credit arrangements available totaling
$91.5 million and $44.5 million as of February 29, 2004, and February 28, 2003,
respectively. These lines support the borrowing needs of certain of the
Company's foreign subsidiary operations. Interest rates and other terms of
these borrowings vary from country to country, depending on local market
conditions. As of February 29, 2004, and February 28, 2003, amounts outstanding
under the subsidiary revolving credit facilities were $1.8 million and $0.6
million, 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. As of February 29, 2004, the Company had outstanding $200.0
million aggregate principal amount of August 1999 Senior Notes.
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. 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 29, 2004, the Company had outstanding
(pound) 1.0 million ($1.9 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"). Interest on the Sterling
Series C Senior Notes is payable semiannually on May 15 and November 15. As of
February 29, 2004, the Company had outstanding (pound) 154.0 million ($287.2
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. 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. As of February 29, 2004, the Company had
outstanding $200.0 million aggregate principal amount of February 2001 Senior
Notes.
The senior notes described above are redeemable, in whole or in part, at
the option of the Company at any time at a redemption price equal to 100% of the
outstanding principal amount and a make whole payment based on the present value
of the future payments at the adjusted Treasury rate or adjusted Gilt rate plus
50 basis points. The senior notes are unsecured senior obligations and rank
equally in right of payment to all existing and future unsecured senior
indebtedness of the Company. Certain of the Company's significant operating
subsidiaries guarantee the senior notes, on a senior basis.
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. As of February 29, 2004, the Company had outstanding $200.0 million
aggregate principal amount of Senior Subordinated Notes. On February 10, 2004,
the Company issued a Notice of Redemption for its Senior Subordinated Notes.
The Senior Subordinated Notes were redeemed with proceeds from the Revolving
Credit facility on March 11, 2004, at 104.25% of par plus accrued interest. In
the first quarter of fiscal 2005, the Company recorded a charge of $10.3 million
related to this redemption.
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. 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. As of
February 29, 2004, the Company had outstanding $250.0 million aggregate
principal amount of January 2002 Senior Subordinated Notes.
GUARANTEES
A foreign subsidiary of the Company has guaranteed debt of a joint venture
in the maximum amount of $4.2 million as of February 29, 2004. The liability
for this guarantee is not material and the Company does not have any collateral
from this entity.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table sets forth information about the Company's long-term
contractual obligations outstanding at February 29, 2004. It brings together
data for easy reference from the consolidated balance sheet and from individual
notes to the Company's consolidated financial statements. See Notes 10, 12, 13,
14 and 15 to the Company's consolidated financial statements located in Item 8
of this Annual Report on Form 10-K for detailed discussion of items noted in the
following table.
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
Less than After
Total 1 year 1-3 years 3-5 years 5 years
----------- ----------- ----------- ----------- -----------
(in thousands)
CONTRACTUAL OBLIGATIONS
Notes payable to banks $ 1,792 $ 1,792 $ - $ - $ -
Long-term debt (excluding
unamortized discount) 2,046,617 267,245 508,163 1,012,872 258,337
Operating leases 301,310 39,155 67,623 39,597 154,935
Other long term liabilities 225,094 51,674 80,930 50,819 41,671
Unconditional purchase
obligations(1) 2,298,051 359,391 635,244 381,487 921,929
----------- ----------- ----------- ----------- -----------
Total contractual cash
obligations $ 4,872,864 $ 719,257 $ 1,291,960 $ 1,484,775 $ 1,376,872
=========== =========== =========== =========== ===========
(1) Total unconditional purchase obligations consist of $20.3 million for
contracts to purchase various spirits over the next five fiscal years,
$2,131.3 million for contracts to purchase grapes over the next fifteen
fiscal years, $78.9 million for contracts to purchase bulk wine over the
next four fiscal years, and $67.5 million for processing contracts over the
next 16 years. See Note 15 to the Company's consolidated financial
statements located in Item 8 of this Annual Report on Form 10-K for a
detailed discussion of these items.
EQUITY OFFERINGS
During July 2003, the Company completed a public offering of 9,800,000
shares of its Class A Common Stock resulting in net proceeds to the Company,
after deducting underwriting discounts and expenses, of $261.2 million. In
addition, the Company also completed a public offering of 170,500 shares of its
5.75% Series A Mandatory Convertible Preferred Stock ("Preferred Stock")
resulting in net proceeds to the Company, after deducting underwriting discounts
and expenses, of $164.9 million. The Class A Common Stock offering and the
Preferred Stock offering are referred to together as the "2003 Equity
Offerings." The majority of the net proceeds from the 2003 Equity Offerings were
used to repay the Bridge Loans that were incurred to partially finance the Hardy
Acquisition. The remaining proceeds were used to repay term loan borrowings
under the March 2003 Credit Agreement.
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.
CAPITAL EXPENDITURES
During Fiscal 2004, the Company incurred $105.1 million for capital
expenditures. The Company plans to spend approximately $125.0 million for
capital expenditures in Fiscal 2005. In addition, the Company continues to
consider the purchase, lease and development of vineyards and may incur
additional expenditures for vineyards if opportunities become available. See
"Business - Sources and Availability of Raw Materials" under Item 1 of this
Annual Report on Form 10-K. Management reviews the capital expenditure program
periodically and modifies it as required to meet current business needs.
EFFECTS OF INFLATION AND CHANGING PRICES
The Company's results of operations and financial condition have not been
significantly affected by inflation and changing prices. The Company has been
able, subject to normal competitive conditions, to pass along rising costs
through increased selling prices. There can be no assurances, however, that the
Company will continue to be able to pass along rising costs through increased
selling prices.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in
Note 1 to the Company's consolidated financial statements located in Item 8 of
this Annual Report on Form 10-K. However, certain of the Company's accounting
policies are particularly important to the portrayal of the Company's financial
position and results of operations and require the application of significant
judgment by the Company's management; as a result they are subject to an
inherent degree of uncertainty. In applying those policies, the Company's
management uses its judgment to determine the appropriate assumptions to be used
in the determination of certain estimates. Those estimates are based on the
Company's historical experience, the Company's observance of trends in the
industry, information provided by the Company's customers and information
available from other outside sources, as appropriate. On an ongoing basis, the
Company reviews its estimates to ensure that they appropriately reflect changes
in the Company's business. The Company's critical accounting policies include:
- Accounting for promotional activities. 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. Certain customer incentive programs require management to
estimate the cost of those programs. The accrued liability for these
programs is determined through analysis of programs offered, historical
trends, expectations regarding customer and consumer participation,
sales and payment trends, and experience with payment patterns
associated with similar programs that had been previously offered. If
assumptions included in the Company's estimates were to change or market
conditions were to change, then material incremental reductions to
revenue could be required, which would have a material adverse impact on
the Company's financial statements. Promotional costs were $336.4
million, $231.6 million and $223.9 million for Fiscal 2004, Fiscal 2003
and Fiscal 2002, respectively.
- Inventory valuation. Inventories are stated at the lower of cost or
market, cost being determined on the first-in, first-out method. 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 could result in material additional expense to the
Company and have a material adverse impact on the Company's financial
statements.
- Accounting for business combinations. The acquisition of businesses is
an important element of the Company's strategy. Under the purchase
method, the Company is required to record the net assets acquired at the
estimated fair value at the date of acquisition. The determination of
the fair value of the assets acquired and liabilities assumed requires
the Company to make estimates and assumptions that affect the Company's
financial statements. For example, the Company's acquisitions typically
result in goodwill and other intangible assets; the value and estimated
life of those assets may affect the amount of future period amortization
expense for intangible assets with finite lives as well as possible
impairment charges that may be incurred.
- Impairment of goodwill and intangible assets with indefinite lives.
Intangible assets with indefinite lives consist primarily of trademarks
as well as agency relationships. The Company is required to analyze its
goodwill and other intangible assets with indefinite lives for
impairment on an annual basis as well as when events and circumstances
indicate that an impairment may have occurred. Certain factors that may
occur and indicate that an impairment exists include, but are not
limited to, operating results that are lower than expected and adverse
industry or market economic trends. The impairment testing requires
management to estimate the fair value of the assets or reporting unit
and record an impairment loss for the excess of the carrying value over
the fair value. The estimate of fair value of the assets is generally
determined on the basis of discounted future cash flows. The estimate of
fair value of the reporting unit is generally determined on the basis of
discounted future cash flows supplemented by the market approach. In
estimating the fair value, management must make assumptions and
projections regarding such items as future cash flows, future revenues,
future earnings and other factors. The assumptions used in the estimate
of fair value are generally consistent with the past performance of each
reporting unit and other intangible assets and are also consistent with
the projections and assumptions that are used in current operating
plans. Such assumptions are subject to change as a result of changing
economic and competitive conditions. If these estimates or their related
assumptions change in the future, the Company may be required to record
an impairment loss for these assets. The recording of any resulting
impairment loss could have a material adverse impact on the Company's
financial statements.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) ("FIN No. 46(R)"), "Consolidation
of Variable Interest Entities--an interpretation of ARB No. 51", which will
replace FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable
Interest Entities," upon its effective date. FIN No. 46(R) retains many of the
basic concepts introduced in FIN No. 46; however, it also introduces a new scope
exception for certain types of entities that qualify as a business as defined in
FIN No. 46(R) and revises the method of calculating expected losses and residual
returns for determination of primary beneficiaries, including new guidance for
assessing variable interests. The application of the transition requirements of
FIN No. 46(R) with regard to special purpose entities and existing variable
interest entities did not result in any entities requiring consolidation or any
additional disclosures. The Company is continuing to evaluate the impact of FIN
No. 46(R) for its adoption as of May 31, 2004. However, it is not expected to
have a material impact on the Company's consolidated financial statements.
In December 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (revised 2003) ("SFAS No. 132(R)"),
"Employers' Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132(R) supersedes
Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by
revising employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS
No. 132 regarding the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28
("APB Opinion No. 28"), "Interim Financial Reporting," to require additional
disclosures for interim periods. The Company has adopted certain of the annual
disclosure provisions of SFAS No. 132(R), primarily those related to its U.S.
postretirement plan, for the fiscal year ending February 29, 2004. The Company
is required to adopt the remaining annual disclosure provisions, primarily those
related to its foreign plans, for the fiscal year ending February 28, 2005. 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, 2004.
In March 2004, the Financial Accounting Standards Board issued a proposed
statement, "Share-Based Payment, an amendment of FASB Statements No. 123 and
95." The objective of the proposed statement is to require recognition in an
entity's financial statements of the cost of employee services received in
exchange for equity instruments issued, and liabilities incurred, to employees
in share-based payment (or compensation) transactions based on the fair value of
the instruments at the grant date. The proposed statement would eliminate the
alternative of continuing to account for share-based payment arrangements with
employees under APB No. 25 and require that the compensation cost resulting from
all share-based payment transactions be recognized in an entity's financial
statements. If adopted in its current form, the proposed statement would be
effective for awards that are granted, modified, or settled in fiscal years
beginning after December 15, 2004. Also, if adopted in its current form, the
proposed statement could result in a significant charge to the Company's
Consolidated Statement of Income for the fiscal year ended February 28, 2006.
CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause actual results to differ materially from
those set forth in, or implied by, such forward-looking statements. All
statements other than statements of historical facts included in this Annual
Report on Form 10-K, including the statements under Item 1 "Business" and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's business strategy, future financial
position, prospects, plans and objectives of management, as well as information
concerning expected actions of third parties are forward-looking statements.
When used in this Annual Report on Form 10-K, the words "anticipate," "intend,"
"expect," and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain such identifying
words. All forward-looking statements speak only as of the date of this Annual
Report on Form 10-K. The Company undertakes no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to the
risks and uncertainties of ordinary business operations, important factors that
could cause actual results to differ materially from those set forth in, or
implied, by the Company's forward-looking statements contained in this Annual
Report on Form 10-K are as follows:
THE COMPANY'S INDEBTEDNESS COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS FINANCIAL
HEALTH.
The Company has incurred substantial indebtedness to finance its
acquisitions and may incur substantial additional indebtedness in the future to
finance further acquisitions or for other purposes. The Company's ability to
satisfy its debt obligations outstanding from time to time will depend upon the
Company's future operating performance, which is subject to prevailing economic
conditions, levels of interest rates and financial, business and other factors,
many of which are beyond the Company's control. Therefore, there can be no
assurance that the Company's cash flow from operations will be sufficient to
meet all of its debt service requirements and to fund its capital expenditure
requirements.
The Company's current and future debt service obligations and covenants
could have important consequences. These consequences include, or may include,
the following:
- the Company's ability to obtain financing for future working capital
needs or acquisitions or other purposes may be limited;
- a significant portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness
and dividends on its Series A mandatory convertible preferred stock,
thereby reducing funds available for operations, expansion or
distributions;
- the Company's ability to conduct its business could be limited by
restrictive covenants; and
- the Company may be more vulnerable to adverse economic conditions than
less leveraged competitors and, thus, may be limited in its ability to
withstand competitive pressures.
The restrictive covenants and provisions in the Company's senior credit
facility and its indentures under which its debt securities are issued include,
among others, those restricting additional liens, additional borrowing, the
sale of assets, changes of control, the payment of dividends, transactions with
affiliates, the making of investments and certain other fundamental changes.
The senior credit facility also contains restrictions on acquisitions and
certain financial ratio tests including a debt coverage ratio, a senior debt
coverage ratio, a fixed charges ratio and an interest coverage ratio. These
restrictions could limit the Company's ability to conduct business. A failure
to comply with the obligations contained in the senior credit facility, its
existing indentures or other loan agreements or indentures entered into in the
future could result in an event of default under such agreements, which could
require the Company to immediately repay the related debt and also debt under
other agreements that may contain cross-acceleration or cross-default
provisions.
THE COMPANY'S ACQUISITION OR JOINT VENTURE STRATEGIES MAY NOT BE SUCCESSFUL.
The Company has made a number of acquisitions, including the recent
acquisitions of Hardy, Ravenswood, the Turner Road Vintners Assets, and the
Corus Assets, and anticipates that it may, from time to time, acquire additional
businesses, assets or securities of companies that the Company believes would
provide a strategic fit with its business. In addition, the Company has
entered joint ventures and may enter into additional joint ventures. Acquired
businesses will need to be integrated with the Company's existing operations.
There can be no assurance that the Company will effectively assimilate the
business or product offerings of acquired companies into its business or product
offerings. Acquisitions are also accompanied by risks such as potential
exposure to unknown liabilities of acquired companies and the possible loss of
key employees and customers of the acquired business. Acquisitions are subject
to risks associated with the difficulty and expense of integrating the
operations and personnel of the acquired companies, the potential disruption to
the Company's business and the diversion of management time and attention. The
Company shares control of its existing joint ventures and may not have majority
interest or control of future joint ventures, and, therefore, there is the risk
that the Company's joint venture partners may at any time have economic,
business or legal interests or goals that are inconsistent with those of the
joint venture or the Company. There is also risk that the Company's joint
venture partners may be unable to meet their economic or other obligations and
that the Company may be required to fulfill those obligations alone. The
Company's failure or the failure of an entity in which the Company has a joint
venture interest to adequately manage the risks associated with any acquisitions
or joint ventures could have a material adverse effect on the Company's
financial condition or results of operations.
COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The Company is in a highly competitive industry and the dollar amount and
unit volume of its sales could be negatively affected by its inability to
maintain or increase prices, changes in geographic or product mix, a general
decline in beverage alcohol consumption or the decision of the Company's
wholesale customers, retailers or consumers to purchase competitive products
instead of the Company's products. Wholesaler, retailer and consumer purchasing
decisions are influenced by, among other things, the perceived absolute or
relative overall value of the Company's products, including their quality or
pricing, compared to competitive products. Unit volume and dollar sales could
also be affected by pricing, purchasing, financing, operational, advertising or
promotional decisions made by wholesalers, state and provincial agencies, and
retailers which could affect their supply of, or consumer demand for, the
Company's products. The Company could also experience higher than expected
selling, general and administrative expenses if the Company finds it necessary
to increase the number of its personnel or advertising or promotional
expenditures to maintain its competitive position or for other reasons.
AN INCREASE IN EXCISE TAXES OR GOVERNMENT REGULATIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
In the United States, the United Kingdom, Australia and other countries in
which the Company operates, the Company is subject to imposition of excise and
other taxes on beverage alcohol products in varying amounts which have been
subject to change. Significant increases in excise or other taxes on beverage
alcohol products could materially and adversely affect the Company's financial
condition or results of operations. Recently, many states have considered
proposals to increase, and some of these states have increased, state alcohol
excise taxes. In addition, the beverage alcohol products industry is subject to
extensive regulation by federal, state, local and foreign governmental agencies
concerning such matters as licensing, trade and pricing practices, permitted and
required labeling, advertising and relations with wholesalers and retailers.
Certain federal and state regulations also require warning labels and signage.
New or revised regulations or increased licensing fees, requirements or taxes
could also have a material adverse effect on the Company's financial condition
or results of operations.
THE COMPANY RELIES ON THE PERFORMANCE OF WHOLESALE DISTRIBUTORS, MAJOR RETAILERS
AND CHAINS FOR THE SUCCESS OF ITS BUSINESS.
In the United States, the Company sells its products principally to
wholesalers for resale to retail outlets including grocery stores, package
liquor stores, club and discount stores and restaurants. In the United Kingdom
and Australia, the Company sells its products principally to wholesalers and
directly to major retailers and chains. The replacement or poor performance of
the Company's major wholesalers, retailers or chains, or the Company's inability
to collect accounts receivable from the Company's major wholesalers, retailers
or chains could materially and adversely affect the Company's results of
operations and financial condition. Distribution channels for beverage alcohol
products have been consolidating in recent years. In addition, wholesalers and
retailers of the Company's products offer products which compete directly with
the Company's products for retail shelf space and consumer purchases.
Accordingly, there is a risk that wholesalers or retailers may give higher
priority to products of the Company's competitors. In the future, the Company's
wholesalers and retailers may not continue to purchase the Company's products or
provide the Company's products with adequate levels of promotional support.
THE COMPANY'S BUSINESS COULD BE ADVERSELY AFFECTED BY A DECLINE IN THE
CONSUMPTION OF PRODUCTS THE COMPANY SELLS.
Although since 1995 there have been modest increases in consumption of
beverage alcohol in most of the Company's product categories, there have been
periods in the past in which there were substantial declines in the overall per
capita consumption of beverage alcohol products in the United States and other
markets in which the Company participates. A limited or general decline in
consumption in one or more of the Company's product categories could occur in
the future due to a variety of factors, including:
- a general decline in economic conditions;
- increased concern about the health consequences of consuming beverage
alcohol products and about drinking and driving;
- a trend toward a healthier diet including lighter, lower calorie
beverages such as diet soft drinks, juices and water products;
- increased activity of anti-alcohol consumer groups; and
- increased federal, state or foreign excise or other taxes on beverage
alcohol products.
THE COMPANY GENERALLY PURCHASES RAW MATERIALS UNDER SHORT-TERM SUPPLY
CONTRACTS AND THE COMPANY IS SUBJECT TO SUBSTANTIAL PRICE FLUCTUATIONS FOR
GRAPES AND GRAPE-RELATED MATERIALS; AND THE COMPANY HAS A LIMITED GROUP OF
SUPPLIERS OF GLASS BOTTLES.
The Company's business is heavily dependent upon raw materials, such as
grapes, grape juice concentrate, grains, alcohol and packaging materials from
third-party suppliers. The Company could experience raw material supply,
production or shipment difficulties that could adversely affect the Company's
ability to supply goods to its customers. The Company is also directly affected
by increases in the costs of raw materials. In the past, the Company has
experienced dramatic increases in the cost of grapes. Although the Company
believes it has adequate sources of grape supplies, in the event demand for
certain wine products exceeds expectations, the Company could experience
shortages.
One of the Company's largest components of cost of goods sold is that of
glass bottles, which, in the United States and Australia, have only a small
number of producers. Currently, substantially all of the Company's glass
container requirements for its United States operations are supplied by one
producer and most of the Company's glass container requirements for its
Australian operations are supplied by another producer. The inability of any of
the Company's glass bottle suppliers to satisfy its requirements could adversely
affect the Company's business.
THE COMPANY'S GLOBAL OPERATIONS SUBJECT IT TO RISKS RELATED TO CURRENCY RATE
FLUCTUATIONS AND GEOPOLITICAL UNCERTAINTY WHICH COULD HAVE A MATERIAL ADVERSE
EFFECT ON THE COMPANY'S BUSINESS.
The Company has operations in different countries throughout the world and,
therefore, is subject to the risks associated with currency fluctuations.
Subsequent to the Hardy Acquisition, the Company's exposure to foreign currency
risk has increased significantly as a result of having additional international
operations in Australia, New Zealand and the United Kingdom. The Company could
experience changes in its ability to obtain or hedge against fluctuations in
exchange rates. The Company could also be affected by nationalizations or
unstable governments or legal systems or intergovernmental disputes. These
currency, economic and political uncertainties may have a material adverse
effect on the Company's results of operations, especially to the extent these
matters, or the decisions, policies or economic strength of the Company's
suppliers, affect the Company's global operations.
THE COMPANY HAS A MATERIAL AMOUNT OF GOODWILL, AND IF THE COMPANY IS REQUIRED TO
WRITE-DOWN GOODWILL, IT WOULD REDUCE THE COMPANY'S NET INCOME, WHICH IN TURN
COULD MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S RESULTS OF OPERATIONS.
As of February 29, 2004, goodwill represented approximately $1,540.6
million, or 27.7% of the Company's total assets. Goodwill is the amount by
which the costs of an acquisition accounted for using the purchase method
exceeds the fair value of the net assets acquired. The Company adopted
Statement of Financial Accounting Standard No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets," in its entirety, on March 1, 2002. Under SFAS No.
142, goodwill is no longer amortized, but instead is subject to a periodic
impairment evaluation based on the fair value of the reporting unit. Reductions
in the Company's net income caused by a write-down of goodwill could materially
and adversely affect the Company's results of operations.
THE TERMINATION OR NON-RENEWAL OF IMPORTED BEER DISTRIBUTION AGREEMENTS COULD
HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products and
are subject to renewal from time to time. The Company's agreement to distribute
Corona Extra and its other Mexican beer brands in 25 primarily western U.S.
states expires in December 2006 and, subject to compliance with certain
performance criteria, continued retention of certain personnel and other terms
of the agreement, will be automatically renewed for additional terms of five
years. Changes in control of the Company or its subsidiaries involved in
importing the Mexican beer brands, or changes in the chief executive officer of
such subsidiaries, may be a basis for the supplier, unless it consents to such
changes, to terminate the agreement. The supplier's consent to such changes may
not be unreasonably withheld. Prior to their expiration, all of the Company's
imported beer distribution agreements may be terminated if the Company fails to
meet certain performance criteria. The Company believes that it is currently in
compliance with all of its material imported beer distribution agreements. From
time to time the Company has failed, and may in the future fail, to satisfy
certain performance criteria in the Company's distribution agreements. It is
possible that the Company's beer distribution agreements may not be renewed or
may be terminated prior to expiration.
THE COMPANY'S FINANCIAL STATEMENTS FOR THE THREE FISCAL YEARS ENDED FEBRUARY 28,
2002, WERE AUDITED BY ARTHUR ANDERSEN LLP.
The Company's consolidated financial statements for the three fiscal years
ended February 28, 2002, were audited by Arthur Andersen LLP, independent public
accountants.
On August 31, 2002, Arthur Andersen LLP ceased to practice before the SEC.
Therefore, Arthur Andersen LLP did not participate in the preparation of this
Annual Report on Form 10-K, did not reissue its audit report with respect to the
financial statements included in this Form 10-K, and did not consent to the
inclusion of a copy of its previously issued audit report in this Form 10-K. As
a result, holders of the Company's securities may have no effective remedy
against Arthur Andersen LLP in connection with a material misstatement or
omission in the financial statements to which its audit report relates. In
addition, even if such holders were able to assert such a claim, because it has
ceased operations, Arthur Andersen LLP may fail or otherwise have insufficient
assets to satisfy claims made by holders of the Company's securities that might
arise under federal securities laws or otherwise with respect to the audit
report of Arthur Andersen LLP.
--------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
The Company, as a result of its global operating and financing activities,
is exposed to market risk associated with changes in interest rates and foreign
currency exchange rates. To manage the volatility relating to these risks, the
Company periodically enters into derivative transactions including foreign
currency exchange contracts and interest rate swap agreements. The Company uses
derivative instruments solely to reduce the financial impact of these risks and
does not use derivative instruments for trading purposes.
Foreign currency forward contracts and foreign currency options are used to
hedge existing foreign currency denominated assets and liabilities, forecasted
foreign currency denominated sales both to third parties as well as intercompany
sales, and intercompany principal and interest payments. As of February 29,
2004, the Company had exposures to foreign currency risk primarily related to
the Australian Dollar, Euro, New Zealand Dollar, British Pound Sterling,
Canadian Dollar and Mexican Peso.
As of February 29, 2004, and February 28, 2003, the Company had outstanding
derivative contracts with a notional value of $735.8 million and $11.6 million,
respectively. Using a sensitivity analysis based on estimated fair value of
open contracts using forward rates, if the U.S. dollar had been 10% weaker as of
February 29, 2004, and February 28, 2003, the fair value of open foreign
exchange contracts would have been increased by $6.8 million and $2.4 million,
respectively. Losses or gains from the revaluation or settlement of the related
underlying positions would substantially offset such gains or losses.
The fair value of fixed rate debt is subject to interest rate risk. The
fair value of fixed rate debt will increase as interest rates fall and decrease
as interest rates rise. The estimated fair value of the Company's total fixed
rate debt, including current maturities, was $1,274.8 million and $1,138.3
million as of February 29, 2004, and February 28, 2003, respectively. A
hypothetical 1% increase from prevailing interest rates as of February 29, 2004,
and February 28, 2003, would have resulted in a decrease in fair value of fixed
interest rate long-term debt by $52.9 million and $53.1 million, respectively.
In addition to the $1.3 billion fair value of fixed rate debt outstanding,
the Company also had variable rate debt outstanding (primarily LIBOR based) as
of February 29, 2004, and February 28, 2003, of $860.0 million and $147.4
million, respectively. A hypothetical 1% increase from prevailing interest
rates as of February 29, 2004, and February 28, 2003, would result in an
increase in cash required for interest payments on variable interest rate debt
during the next five fiscal years as follows:
February 29, February 28,
2004 2003
------------ ------------
2004 $7.4 million $1.1 million
2005 $8.3 million $0.3 million
2006 $7.3 million $ -
2007 $5.9 million $ -
2008 $3.9 million $ -
2009 $1.4 million $ -
The Company has on occasion entered into interest rate swap agreements to
reduce its exposure to interest rate changes relative to its variable rate debt.
As of February 29, 2004, and February 28, 2003, the Company had no interest rate
swap agreements outstanding.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 29, 2004
-----------------
The following information is presented in this Annual Report on Form 10-K:
Page
----
Report of Independent Public Accountants - KPMG LLP 41
Report of Independent Public Accountants - Arthur Andersen LLP 43
Consolidated Balance Sheets - February 29, 2004, and February 28, 2003 44
Consolidated Statements of Income for the years ended February 29, 2004,
February 28, 2003, and February 28, 2002 45
Consolidated Statements of Changes in Stockholders' Equity for the years
ended February 29, 2004, February 28, 2003, and February 28, 2002 46
Consolidated Statements of Cash Flows for the years ended
February 29, 2004, February 28, 2003, and February 28, 2002 47
Notes to Consolidated Financial Statements 48
Selected Quarterly Financial Information (unaudited) 90
Parent company financial statements of the Registrant have been omitted because
the Registrant is primarily an operating company and no subsidiary included in
the consolidated financial statements has minority equity interest and/or
noncurrent indebtedness, not guaranteed by the Registrant, in excess of 5% of
total consolidated assets.
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation
Brands, Inc. and subsidiaries as of February 29, 2004 and February 28, 2003 and
the related consolidated statements of income, stockholders' equity and cash
flows for the years 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 audits. The
February 28, 2002 consolidated statements of income, stockholders' equity and
cash flows 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, 5, 11 and 22 to the consolidated financial statements,
in their report dated April 9, 2002.
We conducted our audits 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
audits provide 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 29, 2004 and February 28, 2003, and
the results of their operations and their cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States
of America.
As discussed above, the accompanying consolidated statements of income,
stockholders' equity and cash flows of Constellation Brands, Inc. and
subsidiaries for the year ended February 28, 2002 were audited by other auditors
who have ceased operations. As described in Note 5, the 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 in Note 5 are appropriate. Additionally, as
described in Note 2, the consolidated statement of income for the year ended
February 28, 2002 has 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 Notes 2 and 11, the consolidated statement of income and
disclosure for income taxes for the year ended February 28, 2002 have been
revised to reflect the reclassification of the extraordinary loss, net of income
taxes, related to the extinguishment of debt by increasing selling, general and
administrative expenses and adjusting the provision for income taxes as required
by Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (FASB No. 145), which was fully adopted by the Company as of March
1, 2003; as described in Note 1, the proforma disclosures of net income and
earnings per common share related to stock-based compensation for the year ended
February 28, 2002 have been adjusted from the amounts originally reported; and
as described in Note 22, the Company changed the composition of its reportable
segments, and the amounts in the 2002 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 consolidated financial statements for the adoption of EITF 01-9 and
FASB No. 145, to restate the disclosure of amounts of pro forma net income and
earnings per share related to stock-based compensation for the year ended
February 28, 2002 and to restate the disclosures for reportable segments
reflected in the 2002 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
consolidated statements of income, stockholders' equity and cash flows 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 consolidated financial
statements taken as a whole.
/s/ KPMG LLP
Rochester, New York
April 7, 2004
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, IN THE YEAR ENDED FEBRUARY
28, 2003, 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
REQUIRED RECLASSIFICATION OF CERTAIN CONSUMER AND TRADE PROMOTIONAL EXPENSES IN
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED FEBRUARY 28, 2002. 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 5 ARE TRANSITIONAL DISCLOSURES FOR THE YEAR ENDED
FEBRUARY 28, 2002 THAT ARE REQUIRED BY SFAS NO. 142. IN THE YEAR ENDED
FEBRUARY 29, 2004, THE COMPANY ADOPTED THE PROVISIONS OF STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64,
AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, WHICH REQUIRES
THE RECLASSIFICATION OF THE EXTRAORDINARY LOSS RELATED TO THE EXTINGUISHMENT OF
DEBT RECORDED IN THE YEAR ENDED FEBRUARY 28, 2002, BY INCREASING SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES AND DECREASING THE PROVISION FOR INCOME
TAXES. NOTES 2 AND 11 REFLECT THE ADJUSTMENTS TO THE CONSOLIDATED STATEMENT OF
INCOME AND DISCLOSURE FOR INCOME TAXES FOR THE YEAR ENDED FEBRUARY 28, 2002.
ALSO, AS DESCRIBED IN NOTE 1 TO THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS, IN THE YEAR ENDED FEBRUARY 28, 2003, THE COMPANY ADJUSTED THE PRO
FORMA DISCLOSURE OF NET INCOME AND EARNINGS PER COMMON SHARE RELATED TO
STOCK-BASED COMPENSATION FOR THE YEAR ENDED FEBRUARY 28, 2002 FROM THE AMOUNTS
ORIGINALLY REPORTED. LASTLY, AS DESCRIBED IN NOTE 22 TO THE ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS, IN THE YEAR ENDED FEBRUARY 29, 2004, THE
COMPANY CHANGED THE COMPOSITION OF ITS REPORTABLE SEGMENTS. AMOUNTS FOR THE
YEAR ENDED FEBRUARY 28, 2002, HAVE BEEN RESTATED TO CONFORM TO THE CURRENT
COMPOSITION OF REPORTABLE SEGMENTS. THE ARTHUR ANDERSEN LLP REPORT DOES NOT
EXTEND TO THESE CHANGES IN THE 2002 CONSOLIDATED FINANCIAL STATEMENTS. THE
TRANSITIONAL DISCLOSURES IN AND THE ADJUSTMENTS TO THE FISCAL 2002 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 29, February 28,
2004 2003
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 37,136 $ 13,810
Accounts receivable, net 635,910 399,095
Inventories, net 1,261,378 819,912
Prepaid expenses and other 137,047 97,284
------------ ------------
Total current assets 2,071,471 1,330,101
PROPERTY, PLANT AND EQUIPMENT, net 1,097,362 602,469
GOODWILL 1,540,637 722,223
INTANGIBLE ASSETS, net 744,978 382,428
OTHER ASSETS 104,225 159,109
------------ ------------
Total assets $ 5,558,673 $ 3,196,330
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 1,792 $ 2,623
Current maturities of long-term debt 267,245 71,264
Accounts payable 270,291 171,073
Accrued excise taxes 48,465 36,421
Other accrued expenses and liabilities 442,009 303,827
------------ ------------
Total current liabilities 1,029,802 585,208
------------ ------------
LONG-TERM DEBT, less current maturities 1,778,853 1,191,631
------------ ------------
DEFERRED INCOME TAXES 187,410 145,239
----------- ------------
OTHER LIABILITIES 184,989 99,268
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, 170,500 shares at February 29, 2004, and
none at February 28, 2003 (Aggregate liquidation
preference of $172,951 at February 29, 2004) 2 -
Class A Common Stock, $.01 par value-
Authorized, 275,000,000 shares;
Issued, 97,150,219 shares at February 29, 2004,
and 81,435,135 shares at February 28, 2003 971 814
Class B Convertible Common Stock, $.01 par value-
Authorized, 30,000,000 shares;
Issued, 14,564,630 shares at February 29, 2004,
and 14,578,490 shares at February 28, 2003 146 146
Additional paid-in capital 1,024,048 469,724
Retained earnings 1,010,193 795,525
Accumulated other comprehensive income (loss) 372,302 (59,257)
------------ ------------
2,407,662 1,206,952
------------ ------------
Less-Treasury stock-
Class A Common Stock, 2,583,608 shares at
February 29, 2004, and 2,749,384 shares at
February 28, 2003, at cost (27,786) (29,610)
Class B Convertible Common Stock, 2,502,900 shares
at February 29, 2004, and February 28, 2003, at cost (2,207) (2,207)
------------ ------------
(29,993) (31,817)
------------ ------------
Less-Unearned compensation-restricted stock awards (50) (151)
------------ ------------
Total stockholders' equity 2,377,619 1,174,984
------------ ------------
Total liabilities and stockholders' equity $ 5,558,673 $ 3,196,330
============ ============
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 29, February 28, February 28,
2004 2003 2002
------------- -------------- --------------
SALES $ 4,469,270 $ 3,583,082 $ 3,420,213
Less - Excise taxes (916,841) (851,470) (813,455)
------------- -------------- --------------
Net sales 3,552,429 2,731,612 2,606,758
COST OF PRODUCT SOLD (2,576,641) (1,970,897) (1,911,598)
------------- -------------- --------------
Gross profit 975,788 760,715 695,160
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (457,277) (350,993) (355,269)
RESTRUCTURING AND RELATED CHARGES (31,154) (4,764) -
------------- -------------- --------------
Operating income 487,357 404,958 339,891
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS 1,181 23,129 -
EQUITY IN EARNINGS OF JOINT VENTURE 542 12,236 1,667
INTEREST EXPENSE, net (144,683) (105,387) (114,189)
------------- -------------- --------------
Income before income taxes 344,397 334,936 227,369
PROVISION FOR INCOME TAXES (123,983) (131,630) (90,948)
------------- -------------- --------------
NET INCOME 220,414 203,306 136,421
Dividends on preferred stock (5,746) - -
------------- -------------- --------------
INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 214,668 $ 203,306 $ 136,421
============= ============== ==============
SHARE DATA:
Earnings per common share:
Basic $ 2.13 $ 2.26 $ 1.60
============= ============== ==============
Diluted $ 2.06 $ 2.19 $ 1.55
============= ============== ==============
Weighted average common shares outstanding:
Basic 100,702 89,856 85,505
Diluted 106,948 92,746 87,825
SUPPLEMENTAL DATA RESTATED FOR
EFFECT OF SFAS NO. 142:
Adjusted operating income $ 487,357 $ 404,958 $ 367,190
============= ============== ==============
Adjusted net income $ 220,414 $ 203,306 $ 155,367
============= ============== ==============
Adjusted income available to common stockholders $ 214,668 $ 203,306 $ 155,367
============= ============== ==============
Adjusted earnings per common share:
Basic $ 2.13 $ 2.26 $ 1.82
============= ============== ==============
Diluted $ 2.06 $ 2.19 $ 1.77
============= ============== ==============
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
Preferred ---------------- Paid-in Retained Comprehensive Treasury Unearned
Stock Class A Class B Capital Earnings Loss Stock Compensation Total
--------- ------- ------- ---------- --------- ------------- -------- ------------ ----------
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,
net of tax
effect of
$6,254 - - - - - 18,521 - - 18,521
Reclassification
adjustments for
net derivative
gains, net of
tax effect on $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
Comprehensive income:
Net income for
Fiscal 2004 - - - - 220,414 - - - 220,414
Other comprehensive
income (loss),
net of tax:
Foreign currency
translation
adjustments,
net of tax effect
of $6,254 - - - - - 410,686 - - 410,686
Unrealized gain on
cash flow hedges:
Net derivative
gains, net of
tax effect
of $15,714 - - - - - 38,199 - - 38,199
Reclassification
adjustments,
met of tax
effect of $507 - - - - - (1,250) - - (1,250)
----------
Unrealized gain on
cash flow hedges 36,949
----------
Unrealized loss on
marketable equity
securities, net
of tax effect
of $185 - - - - - (432) - - (432)
Minimum pension
liability
adjustment, net
of tax effect
of $6,888 - - - - - (15,644) - - (15,644)
----------
Other comprehensive
income, net of tax 431,559
----------
Comprehensive income 651,973
Conversion of 13,860
Class B Convertible
Common shares to
Class A Common shares - - - - - - - - -
Exercise of 2,612,311
Class A stock options - 26 - 36,209 - - - - 36,235
Employee stock
purchases of 165,776
treasury shares - - - 1,658 - - 1,824 - 3,482
Issuance of 9,800,000
Class A Common Shares - 98 - 261,118 - - - - 261,216
Issuance of 170,500
Preferred Shares 2 - - 164,868 - - - - 164,870
Dividend on Preferred
Shares - - - - (5,746) - - - (5,746)
Issuance of 3,288,913
Class A Common
Shares in
connection with
Hardy Acquisition - 33 - 77,210 - - - - 77,243
Amortization of
unearned restricted
stock compensation - - - - - - - 101 101
Tax benefit on Class A
stock options
exercised - - - 13,029 - - - - 13,029
Tax benefit on
disposition of
employee stock
purchases - - - 82 - - - - 82
Other - - - 150 - - - - 150
--------- ------- ------- ---------- --------- ------------- -------- ------------ ----------
BALANCE, February 29,
2004 $ 2 $ 971 $ 146 $1,024,048 $1,010,193 $ 372,302 $(29,993) $ (50) $2,377,619
========= ======= ======= ========== ========== ============= ======== ============ ==========
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 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 220,414 $ 203,306 $ 136,421
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property, plant and equipment 80,079 54,147 51,873
Deferred tax provision 31,398 21,050 3,675
Amortization of goodwill and intangible assets 21,875 5,942 33,531
Loss on sale of assets and restructuring charges 5,127 7,263 324
Loss on extinguishment of debt 800 - 2,590
Stock-based compensation expense 233 100 101
Amortization of discount on long-term debt 93 60 516
Gain on change in fair value of derivative instrument (1,181) (23,129) -
Equity in earnings of joint venture (542) (12,236) (1,667)
Change in operating assets and liabilities, net of effects
from purchases of businesses:
Accounts receivable, net (63,036) 6,164 (44,804)
Inventories, net 96,051 (40,676) (19,130)
Prepaid expenses and other current assets 2,192 (11,612) 566
Accounts payable (61,647) 10,135 19,069
Accrued excise taxes 7,658 (25,029) 4,502
Other accrued expenses and liabilities 11,417 42,882 29,960
Other assets and liabilities, net (10,624) (2,314) (4,228)
------------ ------------ ------------
Total adjustments 119,893 32,747 76,878
------------ ------------ ------------
Net cash provided by operating activities 340,307 236,053 213,299
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (1,069,470) - (472,832)
Purchases of property, plant and equipment (105,094) (71,575) (71,148)
Payment of accrued earn-out amount (2,035) (1,674) -
Proceeds from sale of assets 13,449 1,288 35,815
Proceeds from sale of business 3,814 - -
Proceeds from sale of marketable equity securities 849 - -
Investment in joint venture - - (77,282)
------------ ------------ ------------
Net cash used in investing activities (1,158,487) (71,961) (585,447)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,600,000 10,000 252,539
Proceeds from equity offerings, net of fees 426,086 - 151,479
Exercise of employee stock options 36,017 28,706 45,027
Proceeds from employee stock purchases 3,481 2,885 1,986
Principal payments of long-term debt (1,282,274) (151,134) (260,982)
Payment of issuance costs of long-term debt (33,748) (20) (4,537)
Payment of dividends (3,295) - -
Net (repayment of) proceeds from notes payable (1,113) (51,921) 51,403
------------ ------------ ------------
Net cash provided by (used in) financing activities 745,154 (161,484) 236,915
------------ ------------ ------------
Effect of exchange rate changes on cash and cash investments 96,352 2,241 (1,478)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS 23,326 4,849 (136,711)
CASH AND CASH INVESTMENTS, beginning of year 13,810 8,961 145,672
------------ ------------ ------------
CASH AND CASH INVESTMENTS, end of year $ 37,136 $ 13,810 $ 8,961
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 137,359 $ 103,161 $ 122,121
============ ============ ============
Income taxes $ 76,990 $ 67,187 $ 75,054
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ 1,776,064 $ - $ 617,487
Liabilities assumed (621,578) - (138,913)
------------ ------------ ------------
Net assets acquired 1,154,486 - 478,574
Less - stock issuance (77,243) - -
Less - direct acquisition costs accrued or previously paid (5,939) - -
Less - cash acquired (1,834) - (5,742)
------------ ------------ ------------
Net cash paid for purchases of businesses $ 1,069,470 $ - $ 472,832
============ ============ ============
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 29, 2004
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
international producer and marketer of beverage alcohol brands with a broad
portfolio across the wine, spirits and imported beer categories. The Company
has the largest wine business in the world and is the largest multi-category
supplier of beverage alcohol in the United States ("U.S."); a leading producer
and exporter of wine from Australia and New Zealand; 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 Australia, the Company distributes its products directly to off-premise
accounts, such as major retail chains, on-premise accounts, such as hotels and
restaurants, and large wholesalers. 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 sales. 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.
COST OF PRODUCT SOLD -
The types of costs included in cost of product sold are raw materials,
packaging materials, manufacturing costs, plant administrative support and
overheads, and freight and warehouse costs (including distribution network
costs). Distribution network costs include inbound freight charges and outbound
shipping and handling costs, purchasing and receiving costs, inspection costs,
warehousing and internal transfer costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -
The types of costs included in selling, general and administrative expenses
consist predominately of advertising and non-manufacturing administrative and
overhead costs. Distribution network costs are not included in the Company's
selling, general and administrative expenses, but are included in cost of
product sold as described above. The Company expenses advertising costs as
incurred, shown or distributed. Prepaid advertising costs at February 29, 2004
and February 28, 2003, were not material. Advertising expense for the years
ended February 29, 2004, February 28, 2003, and February 28, 2002, was $116.1
million, $89.6 million and $87.0 million, respectively.
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 denominated transactions are included in
selling, general and administrative expenses in the Company's Consolidated
Statements of Income. The Company engages in foreign currency denominated
transactions with customers, suppliers and non-U.S. subsidiaries. Aggregate
foreign currency transaction gains were $16.6 million in Fiscal 2004. Aggregate
foreign currency transaction gains were not material in Fiscal 2003 and Fiscal
2002.
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 29, 2004, and February 28,
2003, 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 $17.2 million and $13.8 million as of February 29, 2004, and
February 28, 2003, respectively.
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 29, 2004 February 28, 2003
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(in thousands)
Assets:
- -------
Cash and cash investments $ 37,136 $ 37,136 $ 13,810 $ 13,810
Accounts receivable $ 635,910 $ 635,910 $ 399,095 $ 399,095
Investment in marketable
equity securities $ 14,945 $ 14,945 $ - $ -
Currency forward contracts $ 69,993 $ 69,993 $ 23,573 $ 23,573
Liabilities:
- ------------
Notes payable to banks $ 1,792 $ 1,792 $ 2,623 $ 2,623
Accounts payable $ 270,291 $ 270,291 $ 171,073 $ 171,073
Long-term debt, including
current portion $ 2,046,098 $ 2,181,782 $ 1,262,895 $ 1,307,976
Currency forward contracts $ 1,839 $ 1,839 $ - $ -
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.
INVESTMENT IN MARKETABLE EQUITY SECURITIES: The fair value is estimated
based on quoted market prices.
CURRENCY FORWARD CONTRACTS: The fair value is estimated based on quoted
market prices.
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.
DERIVATIVE INSTRUMENTS -
As a multinational company, the Company is exposed to market risk from
changes in foreign currency exchange rates and interest rates that could affect
the Company's results of operations and financial condition. Accordingly, the
Company's results of operations are exposed to some volatility, which is
minimized or eliminated whenever possible. The amount of volatility realized
will vary based upon the effectiveness and level of derivative instruments
outstanding during a particular period of time, as well as the currency and
interest rate market movements during that same period.
The Company enters into derivative instruments, including interest rate
swaps, foreign currency forwards, and/or purchased foreign currency options to
manage interest rate and foreign currency risks. In accordance with Statement of
Financial Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended, the Company recognizes all
derivatives as either assets or liabilities on the balance sheet and measures
those instruments at fair value. The fair values of the Company's derivative
instruments change with fluctuations in interest rates and/or currency rates and
are designed so that any changes in their values are offset by changes in the
values of the underlying exposures. The Company's derivative instruments are
held solely to hedge economic exposures. The Company follows strict policies to
manage interest rate and foreign currency risks, including prohibitions on
derivative market-making or other speculative activities. As of February 29,
2004, and February 28, 2003, the Company did not have any interest rate swap
agreements outstanding. As of February 29, 2004, and February 28, 2003, the
Company had foreign exchange contracts outstanding with a notional value of
$735.8 million and $11.6 million, respectively.
To qualify for hedge accounting under SFAS No. 133, the details of the
hedging relationship must be formally documented at inception of the
arrangement, including the risk management objective, hedging strategy, hedged
item, specific risk that is being hedged, the derivative instrument, how
effectiveness is being assessed and how ineffectiveness will be measured. The
derivative must be highly effective in offsetting either changes in the fair
value or cash flows, as appropriate, of the risk being hedged. Effectiveness is
evaluated on a retrospective and prospective basis based on quantitative
measures.
Certain of the Company's derivative instruments do not qualify for SFAS No.
133 hedge accounting treatment; for others, the Company does not maintain the
required documentation to apply hedge accounting treatment. In both of these
instances, the mark to fair value is reported currently through earnings.
Furthermore, when it is determined that a derivative is not, or has ceased to
be, highly effective as a hedge, the Company discontinues hedge accounting
prospectively. The Company discontinues hedge accounting prospectively when (1)
the derivative is no longer highly effective in offsetting changes in the cash
flows of a hedged item; (2) the derivative expires or is sold, terminated, or
exercised; (3) it is no longer probable that the forecasted transaction will
occur; or (4) management determines that designating the derivative as a hedging
instrument is no longer appropriate.
CASH FLOW HEDGES:
The Company is exposed to fluctuations in foreign currency cash flows
related primarily to sales to third parties, intercompany sales, available for
sale securities and intercompany loans and interest payments. Forward and
option contracts are used to hedge some of these risks. Effectiveness is
assessed based on changes in forward rates. Derivatives used to manage cash flow
exposures generally mature within 24 months or less, with a maximum maturity of
five years.
The Company records the fair value of its foreign exchange contracts
qualifying for cash flow hedge accounting treatment in its consolidated balance
sheet with the related gain or loss on those contracts deferred in stockholders'
equity (as a component of AOCI). These deferred gains or losses are recognized
in the Company's Consolidated Statement of Income in the same period in which
the underlying hedged items are recognized, and on the same line item as the
underlying hedged items. However, to the extent that any derivative instrument
is not considered to be perfectly effective in offsetting the change in the
value of the hedged item, the amount related to the ineffective portion of this
derivative instrument is immediately recognized in the Company's Consolidated
Statement of Income.
The Company expects $14.1 million of net gains to be reclassified from AOCI
to earnings within the next 12 months. The amount of hedge ineffectiveness
associated with the Company's designated cash flow hedge instruments recognized
in the Company's Consolidated Statements of Income during the years ended
February 29, 2004, February 28, 2003, and February 28, 2002, was immaterial.
All components of the Company's derivative instruments' gains or losses are
included in the assessment of hedge effectiveness. In addition, the amount of
net gains reclassified into earnings as a result of the discontinuance of cash
flow hedge accounting due to the probability that the original forecasted
transaction would not occur by the end of the originally specified time period
was immaterial for the years ended February 29, 2004, February 28, 2003, and
February 28, 2002.
FAIR VALUE HEDGES:
Fair value hedges are hedges that offset the risk of changes in the fair
values of recorded assets and liabilities, and firm commitments. The Company
records changes in fair value of derivative instruments which are designated and
deemed effective as fair value hedges, in earnings offset by the corresponding
changes in the fair value of the hedged items.
The Company is exposed to fluctuations in the value of foreign currency
denominated receivables and payables, foreign currency investments, primarily
consisting of loans to subsidiaries and cash flows related primarily to
repatriation of those loans/investments. Forward contracts, generally less than
12 months in duration, are used to hedge some of these risks. Effectiveness is
assessed based on changes in forward rates. Gains and losses on the derivative
instruments used to hedge the foreign exchange volatility associated with
foreign currency dominated receivables and payables is recorded within selling,
general and administrative expenses.
The amount of hedge ineffectiveness associated with the Company's
designated fair value hedge instruments recognized in the Company's Consolidated
Statements of Income during the years ended February 29, 2004, February 28,
2003, and February 28, 2002, was immaterial. All components of the Company's
derivative instruments' gains or losses are included in the assessment of hedge
effectiveness. There were no gains or losses recognized in earnings resulting
from a hedged firm commitment no longer qualifying as a fair value hedge.
NET INVESTMENT HEDGES:
Net investment hedges are hedges that use derivative instruments or
non-derivative instruments to hedge the foreign currency exposure of a net
investment in a foreign operation. The Company manages currency exposures
resulting from its net investments in foreign subsidiaries principally with debt
denominated in the related foreign currency. Gains and losses on these
instruments are recorded as foreign currency translation adjustment in AOCI.
Currently, the Company has designated the Sterling Senior Notes and the Sterling
Series C Senior Notes (as defined in Note 10) totaling (pound) 155.0 million
aggregate principal amount as a hedge against the net investment in the
Company's U.K. subsidiary. For the years ended February 29, 2004, February 28,
2003, and February 28, 2002, net (losses) gains of ($45.9) million, ($24.0)
million, and $4.4 million, respectively, are included in foreign currency
translation adjustments within AOCI.
COUNTERPARTY CREDIT RISK:
Counterparty risk relates to losses the Company could incur if a
counterparty defaults on a derivative contract. The Company manages exposure to
counterparty credit risk by requiring specified minimum credit standards and
diversification of counterparties. The Company enters into master agreements
with our counterparties that allow netting of certain exposures in order to
manage this risk. All of the Company's counterpart exposures are with
counterparts that have investment grade ratings. The Company has procedures to
monitor the credit exposure for both mark to market and future potential
exposures.
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 29, February 28,
2004 2003
------------ ------------
(in thousands)
Raw materials and supplies $ 49,633 $ 26,472
In-process inventories 803,200 534,073
Finished case goods 408,545 259,367
------------ ------------
$ 1,261,378 $ 819,912
============ ============
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 to 32
Vineyards 26
Buildings and improvements 10 to 44
Machinery and equipment 3 to 35
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 6
provides a summary of intangible assets segregated between amortizable and
nonamortizable amounts. No instances of impairment were noted on the Company's
goodwill and other intangible assets for the years ended February 29, 2004,
February 28, 2003, and February 28, 2002.
OTHER ASSETS -
Other assets include the following: (i) deferred financing costs which are
stated at cost, net of accumulated amortization, and are amortized on an
effective interest basis over the term of the related debt; (ii) derivative
assets which are stated at fair value (see discussion above); (iii) investments
in marketable securities which are stated at fair value (see Note 7); and (iv)
investments in joint ventures which are carried under the equity method of
accounting (see Note 8).
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 are reported at the lower of the carrying amount or
fair value less costs to sell and are no longer depreciated.
Pursuant to this policy and in connection with the restructuring plan of
the Constellation Wines segment (see Note 20), the Company recorded losses of
$2.1 million on the disposal of certain property, plant and equipment in Fiscal
2004. These losses are included in restructuring and related charges on the
Company's Consolidated Statements of Income as they are part of the
restructuring plan.
In Fiscal 2003, the Company recorded an asset impairment charge of $4.8
million in connection with two of the production facilities disposed of in
Fiscal 2004 under the Constellation Wines segment's restructuring plan. One of
the facilities, which was held and used prior to its sale in the fourth quarter
of Fiscal 2004, was written down to its appraised value and comprised most of
the impairment charge. The other facility, which was held for sale in Fiscal
2004, was written down to a value based on the Company's estimate of salvage
value. These assets were sold in the second quarter of Fiscal 2004. This
impairment charge is included in restructuring and related charges on the
Company's Consolidated Statements of Income since it is part of the realignment
of its business operations. 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.
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
environmental 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
29, 2004, and February 28, 2003.
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 Preferred Stock
(see Note 16) using the "if converted" method.
STOCK-BASED EMPLOYEE COMPENSATION PLANS -
As of February 29, 2004, the Company has four stock-based employee
compensation plans, which are described more fully in Note 16. 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 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands, except per share data)
Net income, as reported $ 220,414 $ 203,306 $ 136,421
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 160 248 153
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (16,582) (13,695) (25,609)
------------ ------------ ------------
Pro forma net income $ 203,992 $ 189,859 $ 110,965
============ ============ ============
Earnings per common share:
Basic--as reported $ 2.13 $ 2.26 $ 1.60
Basic--pro forma $ 1.97 $ 2.11 $ 1.30
Diluted--as reported $ 2.06 $ 2.19 $ 1.55
Diluted--pro forma $ 1.90 $ 2.03 $ 1.25
As reported in the Company's Annual Report on Form 10-K for the year ended
February 28, 2003, pro forma net income for the year ended February 28, 2002,
was adjusted from the amount originally reported to properly reflect the
increased expense, net of income tax benefits, primarily attributable to the
accelerated vesting of certain options during Fiscal 2002. 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 amount originally reported. The pro forma net
income amount reflected above for Fiscal 2002 was reduced by $12.9 million for
this matter. Basic pro forma earnings per common share and diluted pro forma
earnings per common share for Fiscal 2002 were reduced by $0.15 and $0.16,
respectively.
2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
Effective March 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. The adoption of SFAS No. 143 did not have a
material impact on the Company's consolidated financial statements.
Effective March 1, 2003, the Company completed its adoption of 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
adoption of the provisions rescinding SFAS No. 4 resulted 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). The adoption of the remaining
provisions of SFAS No. 145 did not have a material impact on the Company's
consolidated financial statements.
Effective March 1, 2003, the Company completed its adoption of 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 only
of SFAS No. 148. The adoption of SFAS No. 148 did not have a material impact on
the Company's consolidated financial statements.
Effective July 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," in its entirety. 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. The adoption of SFAS No. 149 did not have a material impact
on the Company's consolidated financial statements.
Effective August 1, 2003, the Company adopted 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 adoption of EITF No.
00-21 did not have a material impact on the Company's consolidated financial
statements.
Effective September 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
the scope of SFAS No. 150 as a liability. The adoption of SFAS No. 150 did not
have a material impact on the Company's consolidated financial statements.
Also, as reported in the Company's Annual Report on Form 10-K for the year
ended February 28, 2003, effective March 1, 2002, the Company adopted EITF Issue
No. 01-9 ("EITF No. 01-9"), "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. 01-9
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. 01-9, 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. Prior to its adoption
of EITF No. 01-9 effective March 1, 2002, the Company reported such costs as
selling, general and administrative expenses. As a result of adopting EITF No.
01-9, the Company restated the amounts originally reported for net sales, cost
of product sold, and selling, general and administrative expenses for the year
ended February 28, 2002. Net sales were reduced by $213.8 million; cost of
product sold was increased by $10.1 million; and selling, general and
administrative expenses were reduced by $223.9 million. This reclassification
did not affect operating income or net income.
3. ACQUISITIONS:
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 10) 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 29, 2004, the Company has paid an
earn-out in the amount of $3.7 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:
(in thousands)
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.
HARDY ACQUISITION -
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. As a
result of the acquisition of Hardy, the Company also acquired the remaining 50%
ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the Company
established with Hardy in July 2001. The acquisition of Hardy along with the
remaining interest in PWP is referred to together as the "Hardy Acquisition."
Through this acquisition, the Company acquired Australia's largest wine producer
with interests in wineries and vineyards in most of Australia's major wine
regions as well as New Zealand and the United States. In addition, Hardy has
significant marketing and sales operations in the United Kingdom.
Total consideration paid in cash and Class A Common Stock to the Hardy
shareholders was $1,137.4 million. Additionally, the Company recorded direct
acquisition costs of $17.7 million. The acquisition date for accounting
purposes is March 27, 2003. The Company has recorded a $1.6 million reduction
in the purchase price to reflect imputed interest between the accounting
acquisition date and the final payment of consideration. This charge is
included as interest expense in the Consolidated Statement of Income for the
year ended February 29, 2004. The cash portion of the purchase price paid to
the Hardy shareholders and optionholders ($1,060.2 million) was financed with
$660.2 million of borrowings under the Company's March 2003 Credit Agreement (as
defined in Note 10) and $400.0 million of borrowings under the Company's Bridge
Agreement (as defined in Note 10). 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. The purchase price was based primarily on a discounted cash flow
analysis that contemplated, among other things, the value of a broader
geographic distribution in strategic international markets and a presence in the
important Australian winemaking regions. The Company and Hardy have
complementary businesses that share a common growth orientation and operating
philosophy. The Hardy Acquisition supports the Company's strategy of growth and
breadth across categories and geographies, and strengthens its competitive
position in its core markets. The purchase price and resulting goodwill were
primarily based on the growth opportunities of the brand portfolio of Hardy. In
particular, the Company believes there are growth opportunities for Australian
wines in the United Kingdom, United States and other wine markets. 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.
The results of operations of Hardy and PWP are reported in the
Constellation Wines segment and have been included in the Consolidated
Statements of Income since the accounting acquisition date.
The following table summarizes the estimated fair values of the Hardy
Acquisition assets acquired and liabilities assumed at the date of acquisition.
The purchase price allocation period ended on March 27, 2004, and the Company
will record final adjustments to the valuation of certain assets in the first
quarter of fiscal 2005; however, these adjustments are not material. The Company
is in the process of finalizing the tax bases of assets acquired and liabilities
assumed. Accordingly, deferred tax assets and deferred tax liabilities
associated with temporary differences may be subject to further adjustments.
Estimated fair values at March 27, 2003, are as follows:
(in thousands)
Current assets $ 535,374
Property, plant and equipment 332,125
Other assets 27,672
Trademarks 262,733
Goodwill 615,251
-----------
Total assets acquired 1,773,155
Current liabilities 294,204
Long-term liabilities 325,478
-----------
Total liabilities assumed 619,682
-----------
Net assets acquired $ 1,153,473
===========
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 29, 2004, and February
28, 2003, respectively. The unaudited pro forma results of operations give
effect to the Hardy Acquisition as if it occurred on March 1, 2002. The
unaudited pro forma results of operations are presented after giving effect to
certain adjustments for depreciation, amortization of deferred financing costs,
interest expense on the acquisition financing and related income tax effects.
The unaudited pro forma results of operations are based upon currently available
information and certain assumptions that the Company believes are reasonable
under the circumstances. The unaudited pro forma results of operations for the
year ended February 28, 2003, do not reflect total pretax nonrecurring charges
of $30.3 million ($0.23 per share on a diluted basis) related to transaction
costs, primarily for the payment of stock options, which were incurred by Hardy
prior to the acquisition, partially offset by the one-time tax benefit from a
change in Australian tax consolidation rules effective January 1, 2003, related
to acquisition basis adjustments to fair value of $10.6 million ($0.11 per share
on a diluted basis). The unaudited pro forma results of operations do not
purport to present what the Company's results of operations would actually have
been if the aforementioned transactions had in fact occurred on such date or at
the beginning of the period indicated, nor do they project the Company's
financial position or results of operations at any future date or for any future
period.
For the Years Ended
---------------------------
February 29, February 28,
2004 2003
------------ ------------
(in thousands, except per share data)
Net sales $ 3,583,297 $ 3,247,474
Income before income taxes $ 346,184 $ 340,412
Net income $ 222,835 $ 216,756
Income available to common stockholders $ 217,089 $ 216,756
Earnings per common share:
Basic $ 2.15 $ 2.33
============ ============
Diluted $ 2.08 $ 2.26
============ ============
Weighted average common shares outstanding:
Basic 101,052 93,145
Diluted 107,298 96,035
4. PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Land and land improvements $ 209,959 $ 84,758
Vineyards 68,633 37,394
Buildings and improvements 297,128 173,943
Machinery and equipment 800,043 551,271
Motor vehicles 13,707 5,468
Construction in progress 59,663 32,839
------------ ------------
1,449,133 885,673
Less - Accumulated depreciation (351,771) (283,204)
------------ ------------
$ 1,097,362 $ 602,469
============ ============
5. GOODWILL:
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 Statement of Financial Accounting
Standards No. 141 ("SFAS No. 141"), "Business Combinations," and the
nonamortization provisions of SFAS No. 142 had been applied beginning March 1,
2001:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands, except per share data)
Reported net income $ 220,414 $ 203,306 $ 136,421
Add back: amortization of goodwill - - 16,114
Add back: amortization of intangibles
reclassified to goodwill - - 2,147
Add back: amortization of indefinite
lived intangible assets - - 9,038
Less: income tax effect - - (8,353)
------------ ------------ ------------
Adjusted net income $ 220,414 $ 203,306 $ 155,367
============ ============ ============
BASIC EARNINGS PER COMMON SHARE:
Reported net income $ 2.13 $ 2.26 $ 1.60
Add back: amortization of goodwill - - 0.19
Add back: amortization of intangibles
reclassified to goodwill - - 0.02
Add back: amortization of indefinite
lived intangible assets - - 0.11
Less: income tax effect - - (0.10)
------------ ------------ ------------
Adjusted net income $ 2.13 $ 2.26 $ 1.82
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE:
Reported net income $ 2.06 $ 2.19 $ 1.55
Add back: amortization of goodwill - - 0.18
Add back: amortization of intangibles
reclassified to goodwill - - 0.03
Add back: amortization of indefinite
lived intangible assets - - 0.10
Less: income tax effect - - (0.09)
------------ ------------ ------------
Adjusted net income $ 2.06 $ 2.19 $ 1.77
============ ============ ============
The changes in the carrying amount of goodwill for the year ended February
29, 2004, are as follows:
Constellation
Constellation Beers and
Wines Spirits Consolidated
------------- ------------- ------------
(in thousands)
Balance, February 28, 2003 $ 590,263 $ 131,960 $ 722,223
Purchase accounting allocations 650,070 - 650,070
Foreign currency translation
adjustments 165,054 1,327 166,381
Purchase price earn-out 2,412 - 2,412
Other (449) - (449)
------------- ------------- ------------
Balance, February 29, 2004 $ 1,407,350 $ 133,287 $ 1,540,637
============= ============= ============
The Constellation Wines purchase accounting allocations of goodwill
totaling $650.1 million consist of $615.3 million of goodwill resulting from the
Hardy Acquisition, $33.4 million of goodwill previously included as part of the
Company's investment in PWP, and $1.4 million of goodwill resulting from an
immaterial business acquisition.
6. INTANGIBLE ASSETS:
The major components of intangible assets are:
February 29, 2004 February 28, 2003
---------------------- ----------------------
Gross Net Gross Net
Carrying Carrying Carrying Carrying
Amount Amount Amount Amount
---------- ---------- ---------- ----------
(in thousands)
Amortizable intangible assets:
Distribution agreements $ 12,883 $ 4,455 $ 10,158 $ 4,434
Other 4,021 64 4,003 370
---------- ---------- ---------- ----------
Total $ 16,904 4,519 $ 14,161 4,804
========== ==========
Nonamortizable intangible assets:
Trademarks 722,047 357,166
Agency relationships 18,412 20,458
---------- ----------
Total 740,459 377,624
---------- ----------
Total intangible assets $ 744,978 $ 382,428
========== ==========
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 $2.6 million, $2.2 million and
$13.4 million for the years ended February 29, 2004, February 28, 2003, and
February 28, 2002, respectively. Estimated amortization expense for each of the
five succeeding fiscal years is as follows:
(in thousands)
2005 $ 2,823
2006 $ 1,318
2007 $ 341
2008 $ 25
2009 $ 12
7. OTHER ASSETS:
The major components of other assets are as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Deferred financing costs $ 54,186 $ 28,555
Derivative assets 41,517 -
Investment in marketable equity securities 14,945 -
Investment in joint ventures 8,412 123,064
Other 7,454 18,418
------------ ------------
126,514 170,037
Less - Accumulated amortization (22,289) (10,928)
------------ ------------
$ 104,225 $ 159,109
============ ============
The Company's investment in marketable equity securities is classified as
an available-for-sale security. As such, gross unrealized losses of $0.6 million
are included, net of applicable income taxes, within AOCI as of February 29,
2004. The Company uses the average cost method as its basis on which cost is
determined in computing realized gains or losses. Realized gains on sales of
securities during the year ended February 29, 2004, are immaterial.
Amortization expense for other assets was included in selling, general and
administrative expenses and was $19.3 million, $3.7 million and $4.0 million for
the years ended February 29, 2004, February 28, 2003, and February 28, 2002,
respectively. Amortization expense for the year ended February 29, 2004,
includes $7.9 million related to amortization of the deferred financing costs
associated with the Bridge Loans (as defined in Note 10). As of February 29,
2004, the deferred financing costs associated with the Bridge Loans have been
fully amortized.
8. INVESTMENT IN JOINT VENTURE:
On March 27, 2003, as part of the Hardy Acquisition, the Company acquired
the remaining 50% ownership of PWP, the joint venture formed on July 31, 2001,
which was previously owned equally by the Company and Hardy. Prior to March 27,
2003, the Company's investment was accounted for under the equity method. Since
the Hardy Acquisition, PWP has become a wholly-owned subsidiary of the Company
and its results of operations have been included in the Consolidated Statements
of Income since March 27, 2003.
In addition, in connection with the Hardy Acquisition, the Company acquired
several investments which are being accounted for under the equity method. The
majority of these investments consist of 50% owned joint venture arrangements.
As of February 29, 2004, the Company's investment balance in these equity
investments was $8.4 million.
9. OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Advertising and promotions $ 132,821 $ 63,155
Income taxes payable 57,065 58,347
Salaries and commissions 49,834 35,769
Adverse grape contracts 40,105 10,244
Interest 25,470 22,019
Other 136,714 114,293
------------ ------------
$ 442,009 $ 303,827
============ ============
10. BORROWINGS:
Borrowings consist of the following:
February 28,
February 29, 2004 2003
--------------------------------------- ------------
Current Long-term Total Total
----------- ----------- ----------- ------------
(in thousands)
Notes Payable to Banks:
- -----------------------
Senior Credit Facility -
Revolving Credit Loans $ - $ - $ - $ 2,000
Other 1,792 - 1,792 623
----------- ----------- ----------- ------------
$ 1,792 $ - $ 1,792 $ 2,623
=========== =========== =========== ============
Long-term Debt:
- ---------------
Senior Credit Facility - Term Loans $ 60,000 $ 800,000 $ 860,000 $ 145,363
Senior Notes - 689,099 689,099 643,229
Senior Subordinated Notes 200,000 250,000 450,000 450,000
Other Long-term Debt 7,245 39,754 46,999 24,303
----------- ----------- ----------- ------------
$ 267,245 $ 1,778,853 $ 2,046,098 $ 1,262,895
=========== =========== =========== ============
SENIOR CREDIT FACILITY -
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
entered into a new credit agreement (as subsequently amended and restated as of
March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the Company
entered into a Second Amended and Restated Credit Agreement (the "October Credit
Agreement") that (i) refinanced the then outstanding principal balance under the
Tranche B Term Loan facility on essentially the same terms as the Tranche B Term
Loan facility under the March 2003 Credit Agreement, but at a lower Applicable
Rate (as such term is defined in the October Credit Agreement) and (ii)
otherwise restated the terms of the March 2003 Credit Agreement, as amended. The
October Credit Agreement was further amended during February 2004 (the "Credit
Agreement"). The March 2003 Credit Agreement provided 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
February 29, 2008. Proceeds of the March 2003 Credit Agreement were used to pay
off the Company's obligations under its prior senior credit facility, to fund a
portion of the cash required to pay the former Hardy shareholders and to pay
indebtedness outstanding under certain of Hardy's credit facilities. The Company
uses the remaining availability under the Credit Agreement to fund its working
capital needs on an on-going basis.
The Tranche A Term Loan facility and the Tranche B Term Loan facility were
fully drawn on March 27, 2003. As of February 29, 2004, the Company has made
$40.0 million of scheduled and required payments on the Tranche A Term Loan
facility. In August 2003, the Company paid $100.0 million of the Tranche B Term
Loan facility. In October 2003, the Company paid an additional $200.0 million of
the Tranche B Term Loan facility. As of February 29, 2004, the required annual
repayments of the Tranche A Term Loan and the Tranche B Term Loan are as
follows:
Tranche A Tranche B
Term Loan Term Loan Total
------------- ------------- -----------
(in thousands)
2005 $ 60,000 $ - $ 60,000
2006 80,000 54,420 134,420
2007 100,000 54,420 154,420
2008 120,000 119,048 239,048
2009 - 272,112 272,112
------------- ------------- -----------
$ 360,000 $ 500,000 $ 860,000
============= ============= ===========
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 Credit Agreement) and, with respect to LIBOR borrowings, ranges
between 1.50% and 2.50%. As of February 29, 2004, the LIBOR margin for the
Revolving Credit facility and the Tranche A Term Loan facility is 1.75%, while
the LIBOR margin on the Tranche B Term Loan facility is 2.00%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company is obligated to pledge 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 certain foreign subsidiaries of the Company.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, the incurrence of additional
indebtedness (including guarantees of 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/or thresholds. As a
result of the prepayment of the Bridge Loans (as defined below) with the
proceeds from the 2003 Equity Offerings (see Note 16), the requirement under
certain circumstances for the Company and the Guarantors to pledge certain
assets consisting of, among other things, inventory, accounts receivable and
trademarks to secure the obligations under the Credit Agreement, ceased to
apply. The primary financial covenants require the maintenance of a debt
coverage ratio, a senior debt coverage ratio, a fixed charge ratio and an
interest coverage ratio. As of February 29, 2004, the Company is in compliance
with all of its covenants under its Credit Agreement.
As of February 29, 2004, under the Credit Agreement, the Company had
outstanding Tranche A Term Loans of $360.0 million bearing a weighted average
interest rate of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted
average interest rate of 3.2%, undrawn revolving letters of credit of $18.6
million, and $381.4 million in revolving loans available to be drawn. There
were no outstanding revolving loans under the Credit Agreement as of February
29, 2004.
BRIDGE FACILITY -
On January 16, 2003, the Company, certain subsidiaries of the Company,
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"). On April 9,
2003, the Company used $400.0 million of the Bridge Loans to fund a portion of
the cash required to pay the former Hardy shareholders. On July 30, 2003, the
Company used proceeds from the 2003 Equity Offerings to prepay the $400.0
million Bridge Loans in their entirety.
SUBSIDIARY FACILITIES -
The Company has additional line of credit arrangements available totaling
$91.5 million and $44.5 million as of February 29, 2004, and February 28, 2003,
respectively. These lines support the borrowing needs of certain of the
Company's foreign subsidiary operations. Interest rates and other terms of these
borrowings vary from country to country, depending on local market conditions.
As of February 29, 2004, and February 28, 2003, amounts outstanding under the
subsidiary revolving credit facilities were $1.8 million and $0.6 million,
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. As of February 29, 2004, the Company had outstanding $200.0
million aggregate principal amount of August 1999 Senior Notes.
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. 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 29, 2004, the Company had outstanding
(pound) 1.0 million ($1.9 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"). Interest on the Sterling
Series C Senior Notes is payable semiannually on May 15 and November 15. As of
February 29, 2004, the Company had outstanding (pound) 154.0 million ($287.2
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. 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. As of February 29, 2004, the Company had outstanding
$200.0 million aggregate principal amount of February 2001 Senior Notes.
The senior notes described above are redeemable, in whole or in part, at
the option of the Company at any time at a redemption price equal to 100% of the
outstanding principal amount and a make whole payment based on the present value
of the future payments at the adjusted Treasury rate or adjusted Gilt rate plus
50 basis points. The senior notes are unsecured senior obligations and rank
equally in right of payment to all existing and future unsecured senior
indebtedness of the Company. Certain of the Company's significant operating
subsidiaries guarantee the senior notes, on a senior basis.
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. As of February 29, 2004, the Company had outstanding $200.0 million
aggregate principal amount of Senior Subordinated Notes. On February 10, 2004,
the Company issued a Notice of Redemption for its Senior Subordinated Notes. The
Senior Subordinated Notes were redeemed with proceeds from the Revolving Credit
facility on March 11, 2004, at 104.25% of par plus accrued interest. In the
first quarter of fiscal 2005, the Company recorded a charge of $10.3 million
related to this redemption.
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. 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. As of
February 29, 2004, the Company had outstanding $250.0 million aggregate
principal amount of January 2002 Senior Subordinated Notes.
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 -
Principal payments required under long-term debt obligations (excluding
unamortized discount of $0.5 million) during the next five fiscal years and
thereafter are as follows:
(in thousands)
2005 $ 267,245
2006 141,682
2007 366,481
2008 445,356
2009 567,516
Thereafter 258,337
-----------
$ 2,046,617
===========
GUARANTEES -
A foreign subsidiary of the Company has guaranteed debt of a joint venture
in the maximum amount of $4.2 million as of February 29, 2004. The liability for
this guarantee is not material and the Company does not have any collateral from
this entity.
11. INCOME TAXES:
Income before income taxes was generated as follows:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Domestic $ 289,960 $ 294,557 $ 199,600
Foreign 54,437 40,379 27,769
------------ ------------ ------------
$ 344,397 $ 334,936 $ 227,369
============ ============ ============
The income tax provision consisted of the following:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Current:
Federal $ 68,125 $ 79,472 $ 63,917
State 13,698 13,807 10,800
Foreign 14,116 17,301 12,556
------------ ------------ ------------
Total current 95,939 110,580 87,273
------------ ------------ ------------
Deferred:
Federal 18,843 16,290 (492)
State 6,180 2,502 (251)
Foreign 3,021 2,258 4,418
------------ ------------ ------------
Total deferred 28,044 21,050 3,675
------------ ------------ ------------
Income tax provision $ 123,983 $ 131,630 $ 90,948
============ ============ ============
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.
Deferred tax assets and liabilities reflect the future income tax effects
of temporary differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
are measured using enacted tax rates that apply to taxable income.
Significant components of deferred tax assets (liabilities) consist of the
following:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Deferred tax assets:
- --------------------
Inventory $ 23,347 $ -
Employee benefits 20,696 15,100
Net operating losses 15,477 -
Insurance accruals 5,682 6,061
Prepaid and other assets 815 9,156
Restructuring accruals - 1,198
Other accruals 23,433 15,778
------------ ------------
Gross deferred tax assets 89,450 47,293
Valuation allowances (2,712) -
------------ ------------
Deferred tax assets, net 86,738 47,293
------------ ------------
Deferred tax liabilities:
- -------------------------
Property, plant and equipment $ (96,059) $ (73,705)
Intangible assets (147,271) (101,338)
Derivative instruments (17,883) (9,081)
Inventory - (1,140)
Provision for unremitted earnings (2,547) -
------------ ------------
Total deferred tax liabilities (263,760) (185,264)
------------ ------------
Deferred tax liabilities, net (177,022) (137,971)
Less: Current deferred tax
assets, net 10,388 7,268
------------ ------------
Long-term deferred tax
liabilities, net $ (187,410) $ (145,239)
============ ============
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, net of
any valuation allowances.
Operating loss carryforwards totaling $47.7 million at February 29, 2004,
are being carried forward in a number of U.S. and foreign jurisdictions where
the Company is permitted to use tax operating losses from prior periods to
reduce future taxable income. Of these operating loss carryforwards, $6.6
million will expire in 2019 and $41.1 million may be carried forward
indefinitely. In addition, certain tax credits generated of $8.6 million are
available to future income taxes. These credits will expire, if not utilized, in
2007 through 2009.
The Company is subject to ongoing tax examinations and assessments in
various jurisdictions. Accordingly, the Company provides for additional tax
expense based on probable outcomes of such matters. The Internal Revenue
Service is currently examining tax returns for the years ended February 29,
2000, February 28, 2001, February 28, 2002, and February 28, 2003. While it is
often difficult to predict the final outcome or the timing of resolution of any
particular tax matter, the Company believes the reserves reflect the probable
outcome of known tax contingencies. Unfavorable settlement of any particular
issue would require use of cash. Favorable resolution would be recognized as a
reduction to the effective tax rate in the year of resolution.
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 29, February 28, February 28,
2004 2003 2002
----------------------- ----------------------- -----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Income tax provision at statutory rate $ 120,521 35.0 $ 117,228 35.0 $ 79,580 35.0
State and local income taxes, net of
federal income tax benefit 13,032 3.8 10,601 3.2 6,812 3.0
Earnings of subsidiaries taxed at
other than U.S. statutory rate (12,170) (3.5) 1,838 0.5 1,105 0.5
Miscellaneous items, net 2,600 0.7 1,963 0.6 3,451 1.5
---------- ---------- ---------- ---------- ---------- ----------
$ 123,983 36.0 $ 131,630 39.3 $ 90,948 40.0
========== ========== ========== ========== ========== ==========
The effect of earnings of foreign subsidiaries includes the difference
between the U.S. statutory rate and local jurisdiction tax rates, as well as the
provision for incremental U.S. taxes on unremitted earnings of foreign
subsidiaries offset by foreign tax credits and other foreign adjustments.
12. OTHER LIABILITIES:
The major components of other liabilities are as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Accrued pension liability $ 55,221 $ 36,351
Adverse grape contracts (Note 15) 83,464 22,550
Other 46,304 40,367
------------ ------------
$ 184,989 $ 99,268
============ ============
13. 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 U.S.
employees, excluding those employees covered by collective bargaining
agreements. 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 50% 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 a discretionary
amount as determined by the Board of Directors on an annual basis, subject to
limitations of the Plan. Company contributions under the Plan were $10.8
million, $10.9 million, and $10.5 million for the years ended February 29, 2004,
February 28, 2003, and February 28, 2002, respectively.
During the year ended February 29, 2004, in connection with the Hardy
Acquisition, the Company acquired the BRL Hardy Superannuation Fund (now known
as the Hardy Wine Company Superannuation Plan) (the "Hardy Plan") which covers
substantially all salaried Australian employees. The Hardy Plan has a defined
benefit component and a defined contribution component. The Company also has a
statutory obligation to provide a minimum defined contribution on behalf of any
Australian employees who are not covered by the Hardy Plan. Additionally in
Fiscal 2004, the Company instituted a defined contribution plan that covers
substantially all of its U.K. employees. Company contributions under the defined
contribution component of the Hardy Plan, the Australian statutory obligation,
and the U.K. defined contribution plan aggregated $6.5 million for the year
ended February 29, 2004.
The Company also has defined benefit pension plans that cover certain of
its non-U.S. employees. These consist of a Canadian plan, an U.K. plan and the
defined benefit component of the Hardy Plan. During the year ended February 29,
2004, the Company ceased future accruals for active employees under its U.K.
plan. There were no curtailment charges arising from this event. Net periodic
benefit cost (income) reported in the Consolidated Statements of Income for
these plans includes the following components:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Service cost $ 2,202 $ 4,245 $ 4,298
Interest cost 14,471 12,055 11,549
Expected return on plan assets (15,155) (14,639) (15,867)
Amortization of prior service cost 9 8 8
Recognized net actuarial loss (gain) 2,019 843 (33)
------------ ------------ ------------
Net periodic benefit cost (income) $ 3,546 $ 2,512 $ (45)
============ ============ ============
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 29, February 28,
2004 2003
------------ ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 220,686 $ 186,722
Service cost 2,202 4,245
Interest cost 14,471 12,055
Plan participants' contributions 235 1,638
Actuarial loss 19,079 3,423
Acquisition 10,764 -
Benefits paid (11,013) (7,706)
Foreign currency exchange rate changes 45,184 20,309
------------ ------------
Benefit obligation as of the last day of February $ 301,608 $ 220,686
============ ============
Change in plan assets:
Fair value of plan assets as of March 1 $ 175,819 $ 181,815
Actual return on plan assets 21,618 (19,794)
Acquisition 9,601 -
Plan participants' contributions 235 1,638
Employer contribution 3,983 979
Benefits paid (11,013) (7,706)
Foreign currency exchange rate changes 36,071 18,887
------------ ------------
Fair value of plan assets as of the last day of February $ 236,314 $ 175,819
============ ============
Funded status of the plan as of the last day of February:
Funded status $ (65,294) $ (44,867)
Unrecognized prior service cost 18 24
Unrecognized actuarial loss 93,926 69,732
------------ ------------
Net amount recognized $ 28,650 $ 24,889
============ ============
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost $ 97 $ -
Accrued benefit liability (55,221) (36,351)
Intangible asset 18 24
Deferred tax asset 25,569 18,681
Accumulated other comprehensive loss 58,187 42,535
------------ ------------
Net amount recognized $ 28,650 $ 24,889
============ ============
As of February 29, 2004, and February 28, 2003, the accumulated benefit
obligation for all defined benefit pension plans was $290.3 million and $212.2
million, respectively. The following table summarizes the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets for
those pension plans with an accumulated benefit obligation in excess of plan
assets:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Projected benefit obligation $ 286,617 $ 220,686
Accumulated benefit obligation $ 275,508 $ 212,170
Fair value of plan assets $ 220,287 $ 175,819
The increase in minimum pension liability included in AOCI for the years
ended February 29, 2004, and February 28, 2003, were $15.6 million and $42.5
million, respectively.
The following table sets forth the weighted average assumptions used in
developing the net periodic pension expense for the years ended February 29,
2004, and February 28, 2003:
For the Years Ended
---------------------------
February 29, February 28,
2004 2003
------------ ------------
Rate of return on plan assets 7.32% 7.78%
Discount rate 5.85% 6.06%
Rate of compensation increase 4.16% 3.75%
The following table sets forth the weighted average assumptions used in
developing the benefit obligation as of February 29, 2004, and February 28,
2003:
February 29, February 28,
2004 2003
------------ ------------
Rate of return on plan assets 7.62% 7.54%
Discount rate 5.57% 5.80%
Rate of compensation increase 3.34% 3.50%
14. POSTRETIREMENT BENEFITS:
The Company currently sponsors multiple unfunded postretirement benefit
plans for certain of its Constellation Beers and Spirits segment employees.
During Fiscal 2004, an amendment to one of the unfunded postretirement benefit
plans modifying the eligibility requirements and retiree contributions decreased
the postretirement benefit obligation by $0.6 million.
The status of the plans is as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 4,471 $ 4,676
Service cost 147 135
Interest cost 282 260
Benefits paid (159) (145)
Plan amendment (645) -
Actuarial loss (gain) 1,177 (566)
Foreign currency exchange rate changes 187 111
------------ -----------
Benefit obligation as of the last day of February $ 5,460 $ 4,471
============ ===========
Funded status as of the last day of February:
Funded status $ (5,460) $ (4,471)
Unrecognized prior service cost (311) 323
Unrecognized net loss (gain) 926 (168)
------------ -----------
Accrued benefit liability $ (4,845) $ (4,316)
============ ===========
Net periodic benefit cost reported in the Consolidated Statements of Income
includes the following components:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Service cost $ 147 $ 135 $ 155
Interest cost 282 260 305
Amortization of prior service cost 7 41 41
Recognized net actuarial gain (loss) 19 (20) 9
------------ ------------ ------------
Net periodic benefit cost $ 455 $ 416 $ 510
============ ============ ============
The following table sets forth the weighted average assumptions used in
developing the benefit obligation as of February 29, 2004, and February 28,
2003:
February 29, February 28,
2004 2003
------------ ------------
Discount rate 6.00% 6.46%
Rate of compensation increase 3.50% 4.00%
The following table sets forth the weighted average assumptions used in
developing the net periodic non-pension postretirement expense for the years
ended February 29, 2004, and February 28, 2003:
For the Years Ended
---------------------------
February 29, February 28,
2004 2003
------------ ------------
Discount rate 6.46% 6.50%
Rate of compensation increase 4.00% 4.00%
The following table sets forth the assumed health care cost trend rates as
of February 29, 2004, and February 28, 2003:
February 29, 2004 February 28, 2003
--------------------- ---------------------
Non-U.S. Non-U.S.
U.S. Plan Plan U.S. Plan Plan
--------- --------- --------- ---------
Health care cost trend rate assumed for next year 5.1% 10.5% 6.2% 10.3%
Rate to which the cost trend rate is assumed to
decline to (the ultimate trend rate) 4.0% 4.7% 4.0% 4.7%
Year that the rate reaches the ultimate trend rate 2005 2011 2005 2010
Assumed health care trend rates could have a significant effect on the
amount reported for health care plans. A one percent 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 $ 56 $ (47)
Effect on postretirement benefit obligation $ 623 $ (540)
15. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES -
Step rent provisions, escalation clauses, capital improvement funding and
other lease concessions, when present in the Company's leases, are taken into
account in computing the minimum lease payments. The minimum lease payments for
the Company's operating leases are recognized on a straight-line basis over the
minimum lease term. 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)
2005 $ 39,155
2006 33,621
2007 34,002
2008 21,209
2009 18,388
Thereafter 154,935
---------
$ 301,310
=========
Rental expense was $38.7 million, $25.3 million, and $24.0 million for
Fiscal 2004, Fiscal 2003, and Fiscal 2002, respectively.
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 29, 2004, aggregate $20.3 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 2008. Prior to their expiration, these
agreements may be terminated if the Company fails to meet certain performance
criteria. At February 29, 2004, 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 Hardy
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 $284.0 million and $166.6 million of grapes
under contracts during Fiscal 2004 and Fiscal 2003, 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 $2,131.3 million.
In connection with the Turner Road Vintners Assets acquisition, the Corus
Assets acquisition and the Hardy Acquisition, the Company established a reserve
for the estimated loss on firm purchase commitments assumed at the time of
acquisition. As of February 29, 2004, the remaining balance on this reserve is
$123.6 million.
The Company's aggregate obligations under bulk wine purchase contracts will
be $78.9 million over the remaining terms of the contracts which extend through
fiscal 2008.
In connection with the Hardy Acquisition, the Company assumed certain
processing contracts which commits the Company to utilize outside services to
process and/or package a minimum volume quantity. In addition, the Company
entered into a new processing contract in Fiscal 2004 utilizing outside services
to process a minimum volume of brandy at prices which are dependent on the
processing ingredients provided by the Company. The Company's aggregate
obligations under these processing contracts will be $67.5 million over the
remaining terms of the contracts which extend through December 2014.
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 29, 2004, the aggregate commitment for future compensation and
severance, excluding incentive bonuses, was $8.0 million, none of which was
accruable at that date.
EMPLOYEES COVERED BY COLLECTIVE BARGAINING AGREEMENTS -
Approximately 31.2% of the Company's full-time employees are covered by
collective bargaining agreements at February 29, 2004. Agreements expiring
within one year cover approximately 11.9% of the Company's full-time employees.
LEGAL MATTERS -
In the course of its business, the Company is subject to litigation from
time to time. 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.
16. 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, under the terms of the Company's senior credit facility, the Company is
currently constrained from paying cash dividends on its common stock. In
addition, the indentures for the Company's outstanding senior notes and senior
subordinated notes may restrict the payment of cash dividends on its common
stock under certain circumstances.
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 29, 2004, there were 94,566,611 shares of Class A Common Stock
and 12,061,730 shares of Class B Convertible Common Stock outstanding, net of
treasury stock.
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 2004, Fiscal 2003 and Fiscal
2002.
PREFERRED STOCK -
In Fiscal 2004, the Company issued 5.75% Series A Mandatory Convertible
Preferred Stock ("Preferred Stock") (see "Equity Offerings" discussion below).
Dividends are cumulative and payable quarterly, if declared, in cash, shares of
the Company's Class A Common Stock, or a combination thereof, at the discretion
of the Company. Dividends are payable, if declared, on the first business day
of March, June, September, and December of each year, commencing on December 1,
2003. On September 1, 2006, the automatic conversion date, each share of
Preferred Stock will automatically convert into, subject to certain
anti-dilution adjustments, between 29.276 and 35.716 shares of the Company's
Class A Common Stock, depending on the then applicable market price of the
Company's Class A Common Stock, in accordance with the following table:
Applicable market price Conversion rate
----------------------- ---------------
Less than or equal to $28.00 35.716 shares
Between $28.00 and $34.16 35.716 to 29.276 shares
Equal to or greater than $34.16 29.276 shares
The applicable market price is the average of the closing prices per share of
the Company's Class A Common Stock on each of the 20 consecutive trading days
ending on the third trading day immediately preceding the applicable conversion
date. At any time prior to September 1, 2006, holders may elect to convert each
share of Preferred Stock, subject to certain anti-dilution adjustments, into
29.276 shares of the Company's Class A Common Stock. If the closing market price
of the Company's Class A Common Stock exceeds $51.24 for at least 20 trading
days within a period of 30 consecutive trading days, the Company may elect,
subject to certain limitations and anti-dilution adjustments, to cause the
conversion of all, but not less than all, of the then outstanding shares of
Preferred Stock into shares of the Company's Class A Common Stock at a
conversion rate of 29.276 shares of the Company's Class A Common Stock. In order
for the Company to cause the early conversion of the Preferred Stock, the
Company must pay all accrued and unpaid dividends on the Preferred Stock as well
as the present value of all remaining dividend payments through and including
September 1, 2006. If the Company is involved in a merger in which at least 30%
of the consideration for all or any class of the Company's common stock consists
of cash or cash equivalents, then on or after the date of such merger, each
holder will have the right to convert each share of Preferred Stock into the
number of shares of the Company's Class A Common Stock applicable on the
automatic conversion date. The Preferred Stock ranks senior in right of payment
to all of the Company's common stock and has a liquidation preference of $1,000
per share, plus accrued and unpaid dividends.
As of February 29, 2004, 170,500 shares of Preferred Stock were outstanding
and $2.5 million of dividends were accrued.
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.
During July 2003, the Company completed a public offering of 9,800,000
shares of its Class A Common Stock resulting in net proceeds to the Company,
after deducting underwriting discounts and expenses, of $261.1 million. In
addition, the Company also completed a public offering of 170,500 shares of its
5.75% Series A Mandatory Convertible Preferred Stock resulting in net proceeds
to the Company, after deducting underwriting discounts and expenses, of $164.9
million. The Class A Common Stock offering and the Preferred Stock offering are
referred to together as the "2003 Equity Offerings." The majority of the net
proceeds from the 2003 Equity Offerings were used to repay the Bridge Loans that
were incurred to partially finance the Hardy Acquisition. The remaining proceeds
were used to repay term loan borrowings under the March 2003 Credit Agreement.
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. The
aggregate number of shares of the Company's Class A Common Stock available for
awards under the Company's Long-Term Stock Incentive Plan is 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 2004, Fiscal 2003
and Fiscal 2002, no stock appreciation rights were granted. No restricted stock
was granted during Fiscal 2004. 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.
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 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
Options granted 2,816,357 $ 23.86
Options exercised (2,612,311) $ 13.87
Options forfeited/canceled (324,504) $ 25.61
------------
Balance, February 29, 2004 11,287,473 $ 17.73 8,821,298 $ 15.80
============
The following table summarizes information about stock options outstanding
at February 29, 2004:
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 1,486,583 2.6 years $ 7.71 1,486,583 $ 7.71
$11.19 - $17.74 4,621,375 5.9 years $ 14.49 4,541,215 $ 14.50
$18.75 - $32.38 5,179,515 8.4 years $ 23.49 2,793,500 $ 22.21
----------- ----------
11,287,473 6.6 years $ 17.73 8,821,298 $ 15.80
=========== =========
The weighted average fair value of options granted during Fiscal 2004,
Fiscal 2003 and Fiscal 2002 was $9.74, $12.18 and $8.99, 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 3.2% for Fiscal 2004, 5.0% for Fiscal 2003 and 4.7% for Fiscal
2002; volatility of 35.7% for Fiscal 2004, 36.7% for Fiscal 2003 and 41.0% for
Fiscal 2002; and expected option life of 6.2 years for Fiscal 2004, 6.0 years
for Fiscal 2003 and 6.0 years for Fiscal 2002. The dividend yield was 0% for
Fiscal 2004, Fiscal 2003 and Fiscal 2002. 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 2004,
Fiscal 2003 and Fiscal 2002, employees purchased 137,985 shares, 138,304 shares
and 120,674 shares, respectively.
The weighted average fair value of purchase rights granted during Fiscal
2004, Fiscal 2003 and Fiscal 2002 was $6.60, $7.02 and $5.59, 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 1.0% for Fiscal 2004, 1.4% for Fiscal
2003 and 2.6% for Fiscal 2002; volatility of 22.2% for Fiscal 2004, 40.3% for
Fiscal 2003 and 33.2% for Fiscal 2002; and expected purchase right life of 0.5
years for Fiscal 2004, Fiscal 2003 and Fiscal 2002. The dividend yield was 0%
for Fiscal 2004, Fiscal 2003 and Fiscal 2002.
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 2004 and Fiscal 2003, employees purchased
27,791 shares and 758 shares, respectively. During Fiscal 2002, there were no
shares purchased under this plan.
The weighted average fair value of purchase rights granted during Fiscal
2002 was $6.26. There were no purchase rights granted during Fiscal 2004 and
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 for Fiscal 2002: risk-free interest rate of 4.9%; volatility of
36.2%; and expected purchase right life of 3.8 years. The dividend yield was 0%
for Fiscal 2002.
17. EARNINGS PER COMMON SHARE:
Earnings per common share are as follows:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands, except per share data)
Net income $ 220,414 $ 203,306 $ 136,421
Dividends on preferred stock (5,746) - -
------------ ------------ ------------
Income available to common stockholders $ 214,668 $ 203,306 $ 136,421
============ ============ ============
Weighted average common shares outstanding - basic 100,702 89,856 85,505
Stock options 3,314 2,890 2,320
Preferred stock 2,932 - -
------------ ------------ ------------
Weighted average common shares outstanding - diluted 106,948 92,746 87,825
============ ============ ============
Earnings per common share:
Earnings per common share - basic $ 2.13 $ 2.26 $ 1.60
============ ============ ============
Earnings per common share - diluted $ 2.06 $ 2.19 $ 1.55
============ ============ ============
Stock options to purchase 0.1 million, 1.1 million and 2.2 million shares
of Class A Common Stock at a weighted average price per share of $31.09, $27.41
and $20.70 were outstanding during the years ended February 29, 2004, February
28, 2003, and February 28, 2002, 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.
18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Accumulated other comprehensive loss, net of tax effects, includes the
following components:
Unrealized
Foreign Net Loss On Minimum Accumulated
Currency Unrealized Marketable Pension Other
Translation Gains on Equity Liability Comprehensive
Adjustments Derivatives Securities Adjustment Income (Loss)
----------- ----------- ---------- ---------- -------------
(in thousands)
Balance, February 28, 2003 $ (16,722) $ - $ - $ (42,535) $ (59,257)
Current period change 410,694 36,949 (432) (15,652) 431,559
----------- ----------- ---------- ---------- -------------
Balance, February 29, 2004 $ 393,972 $ 36,949 $ (432) $ (58,187) $ 372,302
=========== =========== ========== ========== =============
19. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
Sales to the five largest customers represented 20.6%, 21.2%, and 19.1% of
the Company's sales for the years ended February 29, 2004, February 28, 2003,
and February 28, 2002, respectively. No single customer was responsible for
greater than 10% of sales during these years. Accounts receivable from the
Company's largest customer, Southern Wine and Spirits, represented 8.3%, 11.4%,
and 10.0% of the Company's total accounts receivable as of February 29, 2004,
February 28, 2003, and February 28, 2002, respectively. 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. RESTRUCTURING AND RELATED CHARGES:
For the year ended February 29, 2004, the Company recorded $31.2 million of
restructuring and related charges associated with the restructuring plan of the
Constellation Wines segment. Restructuring and related charges resulted from (i)
the realignment of business operations and (ii) the decision to exit the
commodity concentrate product line in the U.S. and sell its winery located in
Escalon, California. In addition, in connection with the Company's decision to
exit the commodity concentrate product line in the U.S., the Company recorded a
write-down of concentrate inventory of $16.8 million, which was recorded in cost
of product sold. For the year ended February 28, 2003, the Company recorded
restructuring and related charges associated with an asset impairment charge of
$4.8 million in connection with two of Constellation Wines segment's production
facilities (see Note 1). No restructuring and related charges were recorded for
the year ended February 28, 2002.
The retructuring and related charges of $31.2 million for the year ended
February 29, 2004, included $6.9 million of employee termination benefit costs,
$17.7 million of grape contract termination costs, $1.9 million of facility
consolidation and relocation costs, and $4.7 million of other related charges,
which consisted of a $2.1 million loss on the sale of the Escalon facility and
$2.6 million of other costs related to the realignment of the business
operations in the Constellation Wines segment.
The Company estimates that the completion of the restructuring actions will
include (i) a total of $9.9 million of employee termination benefit costs
through February 28, 2005, of which $6.9 million has been incurred through
February 29, 2004, (ii) a total of $22.1 million of grape contract termination
costs through February 28, 2005, of which $17.7 million has been incurred
through February 29, 2004, and (iii) a total of $4.8 million of facility
consolidation and relocation costs through February 28, 2005, of which $1.9
million has been incurred through February 29, 2004. The Company has incurred
other costs related to the restructuring plan for the disposal of fixed assets
and other costs of realigning the business operations of the Constellation Wines
segment and expects to incur additional costs of realigning the business
operations of $1.3 million during the year ending February 28, 2005.
The following table illustrates the changes in the restructuring liability
balance since February 28, 2003:
Employee Grape Facility
Termination Contract Consolidation/
Benefit Termination Relocation
Costs Costs Costs Total
----------- ----------- -------------- ---------
(in thousands)
Balance, February 28, 2003 $ - $ - $ - $ -
Restructuring charges 6,834 17,697 1,935 26,466
Cash expenditures (5,295) (16,649) (1,935) (23,879)
----------- ----------- -------------- ---------
Balance, February 29, 2004 $ 1,539 $ 1,048 $ - $ 2,587
=========== =========== ============== =========
21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets as of February 29, 2004, and February 28, 2003, the condensed
consolidating statements of income and cash flows for each of the three years in
the period ended February 29, 2004, 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 and Hardy and their subsidiaries, which are 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 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 recently adopted accounting pronouncements 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 29, 2004
- --------------------
Current assets:
Cash and cash investments $ 1,048 $ 3,931 $ 32,157 $ - $ 37,136
Accounts receivable, net 137,422 127,004 371,484 - 635,910
Inventories, net 9,922 621,866 636,962 (7,372) 1,261,378
Prepaid expenses and other
current assets 8,734 68,596 59,717 - 137,047
Intercompany (payable) receivable (381,765) (150,962) 532,727 - -
----------- ------------ --------------- -------------- -------------
Total current assets (224,639) 670,435 1,633,047 (7,372) 2,071,471
Property, plant and equipment, net 50,022 353,693 693,647 - 1,097,362
Investments in subsidiaries 4,270,871 1,852,036 - (6,122,907) -
Goodwill 50,338 496,691 993,608 - 1,540,637
Intangible assets, net 10,572 314,423 419,983 - 744,978
Other assets 36,041 2,146 66,038 - 104,225
------------ ------------ --------------- -------------- -------------
Total assets $ 4,193,205 $ 3,689,424 $ 3,806,323 $ (6,130,279) $ 5,558,673
=========== ============ =============== ============== =============
Current liabilities:
Notes payable to banks $ - $ - $ 1,792 $ - $ 1,792
Current maturities of long-term debt 260,061 3,542 3,642 - 267,245
Accounts payable 33,631 60,327 176,333 - 270,291
Accrued excise taxes 8,005 15,053 25,407 - 48,465
Other accrued expenses and liabilities 151,534 11,956 278,519 - 442,009
----------- ------------ --------------- -------------- -------------
Total current liabilities 453,231 90,878 485,693 - 1,029,802
Long-term debt, less current maturities 1,739,221 7,510 32,122 - 1,778,853
Deferred income taxes 56,815 98,119 32,476 - 187,410
Other liabilities 6,209 21,646 157,134 - 184,989
Stockholders' equity:
Preferred stock 2 - - - 2
Class A and Class B common stock 1,117 6,434 141,582 (148,016) 1,117
Additional paid-in capital 1,024,048 1,829,418 2,660,711 (4,490,129) 1,024,048
Retained earnings 1,017,565 1,425,789 58,973 (1,492,134) 1,010,193
Accumulated other comprehensive
income (loss) (74,960) 209,630 237,632 - 372,302
Treasury stock and other (30,043) - - - (30,043)
----------- ------------ --------------- -------------- -------------
Total stockholders' equity 1,937,729 3,471,271 3,098,898 (6,130,279) 2,377,619
----------- ------------ -------------- -------------- -------------
Total liabilities and
stockholders' equity $ 4,193,205 $ 3,689,424 $ 3,806,323 $ (6,130,279) $ 5,558,673
=========== ============ =============== ============== =============
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
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 Statement of Income
- -------------------------------------------
for the Year Ended February 29, 2004
- ------------------------------------
Gross sales $ 814,042 $ 1,757,950 $ 1,987,657 $ (90,379) $ 4,469,270
Less - excise taxes (143,964) (412,999) (359,878) - (916,841)
----------- ------------ --------------- -------------- -------------
Net sales 670,078 1,344,951 1,627,779 (90,379) 3,552,429
Cost of product sold (553,391) (818,612) (1,287,720) 83,082 (2,576,641)
----------- ------------ --------------- -------------- -------------
Gross profit 116,687 526,339 340,059 (7,297) 975,788
Selling, general and administrative
expenses (115,163) (163,805) (178,309) - (457,277)
Restructuring and related charges - (28,232) (2,922) - (31,154)
----------- ------------ --------------- -------------- -------------
Operating income (loss) 1,524 334,302 158,828 (7,297) 487,357
Gain on change in fair value of
derivative instruments 1,181 - - - 1,181
Equity in earnings of
subsidiary/joint venture 215,775 98,212 2 (313,447) 542
Interest income (expense), net 15,945 (154,842) (5,786) - (144,683)
----------- ------------ --------------- -------------- -------------
Income before income taxes 234,425 277,672 153,044 (320,744) 344,397
Provision for income taxes (6,714) (61,897) (55,372) - (123,983)
----------- ------------ --------------- -------------- -------------
Net income 227,711 215,775 97,672 (320,744) 220,414
Dividends on preferred stock (5,746) - - - (5,746)
----------- ------------ --------------- -------------- -------------
Income available to common
stockholders $ 221,965 $ 215,775 $ 97,672 $ (320,744) $ 214,668
=========== ============ =============== ============== =============
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 (92,891) (167,521) (94,857) - (355,269)
----------- ------------ --------------- -------------- -------------
Operating income 80,014 205,597 54,274 6 339,891
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 166,945 133,475 50,384 (123,435) 227,369
Provision for income taxes (30,530) (42,855) (17,563) - (90,948)
----------- ------------ --------------- -------------- -------------
Net income $ 136,415 $ 90,620 $ 32,821 $ (123,435) $ 136,421
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 29, 2004
- ------------------------------------------
Net cash provided by (used in)
operating activities $ 397,785 $ 117,754 $ (175,232) $ - $ 340,307
Cash flows from investing activities:
Purchases of businesses, net of cash - (1,069,470) - - (1,069,470)
Purchases of property, plant and
equipment (25,063) (17,365) (62,666) - (105,094)
Payment of accrued earn-out amount - (2,035) - - (2,035)
Proceeds from sale of assets - 5,892 7,557 - 13,449
Proceeds from sale of business - - 3,814 - 3,814
Proceeds from sale of marketable
equity securities - - 849 - 849
----------- ------------ --------------- -------------- -------------
Net cash used in investing activities (25,063) (1,082,978) (50,446) - (1,158,487)
----------- ------------ --------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt, net of discount 1,600,000 - - - 1,600,000
Proceeds from equity offerings,
net of fees 426,086 - - - 426,086
Exercise of employee stock options 36,017 - - - 36,017
Proceeds from employee stock
purchases 3,481 - - - 3,481
Intercompany financing activities, net (1,474,100) 756,757 717,343 - -
Principal payments of long-term debt (885,359) (3,518) (393,397) - (1,282,274)
Payment of issuance costs of
long-term debt (33,748) - - - (33,748)
Payment of dividends (3,295) - - - (3,295)
Net (repayment of) proceeds from
notes payable (2,000) (1,400) 2,287 - (1,113)
----------- ------------ --------------- -------------- -------------
Net cash (used in) provided by
financing activities (332,918) 751,839 326,233 - 745,154
------------ ------------ --------------- -------------- -------------
Effect of exchange rate changes on
cash and cash investments (40,182) 216,068 (79,534) - 96,352
----------- ------------ --------------- -------------- -------------
Net (decrease) increase in cash and
cash investments (378) 2,683 21,021 - 23,326
Cash and cash investments, beginning
of period 1,426 1,248 11,136 - 13,810
----------- ------------ --------------- -------------- -------------
Cash and cash investments, end of
period $ 1,048 $ 3,931 $ 32,157 $ - $ 37,136
=========== ============ =============== ============== =============
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) (39,451) (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)
----------- ------------ --------------- -------------- -------------
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
=========== ============ =============== ============== =============
22. BUSINESS SEGMENT INFORMATION:
As a result of the Hardy Acquisition, 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 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). Amounts included in the Corporate
Operations and Other segment consist of general corporate administration and
finance expenses. These amounts include costs of executive management, investor
relations, internal audit, treasury, tax, corporate development, legal,
financial reporting, professional fees and public relations. Any costs incurred
at the corporate office that are applicable to the segments are allocated to the
appropriate segment. The amounts included in the Corporate Operations and Other
segment are general costs that are applicable to the consolidated group and are
therefore not allocated to the other reportable segments. All costs reported
within the Corporate Operations and Other segment are not included in the chief
operating decision maker's evaluation of the operating income performance of the
other operating segments. The new business segments reflect how the Company's
operations are being managed, how operating performance within the Company is
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, and February 28, 2002, has been restated to
conform to the new segment presentation. For the year ended February 29, 2004,
restructuring and related charges and unusual costs consist of the flow through
of inventory step-up and financing costs associated with the Hardy Acquisition
of $22.5 million and $11.6 million, respectively, and restructuring and related
charges of $48.0 million, including a write-down of commodity concentrate
inventory of $16.8 million, partially offset by the relief from certain excise
tax, duty and other costs incurred in prior years of $10.4 million. 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. For the year ended February 28, 2002, restructuring
and related charges and unusual costs consist of the write-off of the remaining
deferred financing costs and unamortized discount associated with certain of the
Company's senior subordinated notes which were redeemed in February 2002 of $2.6
million. 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 recently adopted accounting pronouncements
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 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Constellation Wines:
- --------------------
Net sales:
Branded wine $ 1,549,750 $ 983,505 $ 963,514
Wholesale and other 846,306 689,794 641,589
------------ ------------ ------------
Net sales $ 2,396,056 $ 1,673,299 $ 1,605,103
Segment operating income $ 348,132 $ 224,556 $ 191,227
Equity in earnings of joint venture $ 542 $ 12,236 $ 1,667
Long-lived assets $ 1,004,906 $ 509,598 $ 492,252
Investment in joint venture $ 8,412 $ 123,064 $ 110,520
Total assets $ 4,789,199 $ 2,429,890 $ 2,323,295
Capital expenditures $ 94,147 $ 57,551 $ 58,616
Depreciation and amortization $ 73,046 $ 46,167 $ 63,043
Constellation Beers and Spirits:
- --------------------------------
Net sales:
Imported beers $ 862,637 $ 776,006 $ 726,953
Spirits 284,551 282,307 274,702
------------ ------------ ------------
Net sales $ 1,147,188 $ 1,058,313 $ 1,001,655
Segment operating income $ 252,533 $ 217,963 $ 178,805
Long-lived assets $ 80,388 $ 79,757 $ 78,516
Total assets $ 718,380 $ 700,545 $ 711,484
Capital expenditures $ 7,497 $ 8,722 $ 8,350
Depreciation and amortization $ 9,491 $ 9,732 $ 17,940
Corporate Operations and Other:
- -------------------------------
Net sales $ - $ - $ -
Segment operating loss $ (41,717) $ (32,797) $ (27,551)
Long-lived assets $ 12,068 $ 13,114 $ 7,996
Total assets $ 51,094 $ 65,895 $ 34,606
Capital expenditures $ 3,450 $ 5,302 $ 4,182
Depreciation and amortization $ 19,417 $ 4,190 $ 4,421
Restructuring and Related
- -------------------------
Charges and Unusual Costs:
- ----------------------------
Net sales $ 9,185 $ - $ -
Operating loss $ (71,591) $ (4,764) $ (2,590)
Consolidated:
- -------------
Net sales $ 3,552,429 $ 2,731,612 $ 2,606,758
Operating income $ 487,357 $ 404,958 $ 339,891
Equity in earnings of joint venture $ 542 $ 12,236 $ 1,667
Long-lived assets $ 1,097,362 $ 602,469 $ 578,764
Investment in joint venture $ 8,412 $ 123,064 $ 110,520
Total assets $ 5,558,673 $ 3,196,330 $ 3,069,385
Capital expenditures $ 105,094 $ 71,575 $ 71,148
Depreciation and amortization $ 101,954 $ 60,089 $ 85,404
The Company's areas of operations are principally in the United States.
Operations outside the United States are primarily in the United Kingdom and
Australia and are included within the Constellation Wines segment.
Geographic data is as follows:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Net Sales
- ---------
United States $ 2,169,798 $ 1,941,794 $ 1,886,861
Non-U.S. 1,382,631 789,818 719,897
------------ ------------ ------------
Total $ 3,552,429 $ 2,731,612 $ 2,606,758
============ ============ ============
Significant non-U.S. revenue sources include:
United Kingdom $ 1,128,022 $ 789,818 $ 719,897
Australia $ 205,696 $ - $ -
New Zealand $ 32,533 $ - $ -
February 29, February 28,
2004 2003
------------ ------------
Long-lived assets
- -----------------
United States $ 518,015 $ 454,016
Non-U.S. 579,347 148,453
------------ ------------
Total $ 1,097,362 $ 602,469
============ ============
Significant non-U.S. long-lived assets include:
United Kingdom $ 183,214 $ 148,453
Australia $ 340,510 $ -
New Zealand $ 55,532 $ -
23. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) ("FIN No. 46(R)"), "Consolidation
of Variable Interest Entities--an interpretation of ARB No. 51", which will
replace FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable
Interest Entities," upon its effective date. FIN No. 46(R) retains many of the
basic concepts introduced in FIN No. 46; however, it also introduces a new scope
exception for certain types of entities that qualify as a business as defined in
FIN No. 46(R) and revises the method of calculating expected losses and residual
returns for determination of primary beneficiaries, including new guidance for
assessing variable interests. The application of the transition requirements of
FIN No. 46(R) with regard to special purpose entities and existing variable
interest entities did not result in any entities requiring consolidation or any
additional disclosures. The Company is continuing to evaluate the impact of FIN
No. 46(R) for its adoption as of May 31, 2004. However, it is not expected to
have a material impact on the Company's consolidated financial statements.
In December 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (revised 2003) ("SFAS No. 132(R)"),
"Employers' Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132(R) supersedes
Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by
revising employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS
No. 132 regarding the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28
("APB Opinion No. 28"), "Interim Financial Reporting," to require additional
disclosures for interim periods. The Company has adopted certain of the annual
disclosure provisions of SFAS No. 132(R), primarily those related to its U.S.
postretirement plan, for the fiscal year ending February 29, 2004. The Company
is required to adopt the remaining annual disclosure provisions, primarily those
related to its foreign plans, for the fiscal year ending February 28, 2005. 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, 2004.
In March 2004, the Financial Accounting Standards Board issued a proposed
statement, "Share-Based Payment, an amendment of FASB Statements No. 123 and
95." The objective of the proposed statement is to require recognition in an
entity's financial statements of the cost of employee services received in
exchange for equity instruments issued, and liabilities incurred, to employees
in share-based payment (or compensation) transactions based on the fair value of
the instruments at the grant date. The proposed statement would eliminate the
alternative of continuing to account for share-based payment arrangements with
employees under APB No. 25 and require that the compensation cost resulting from
all share-based payment transactions be recognized in an entity's financial
statements. If adopted in its current form, the proposed statement would be
effective for awards that are granted, modified, or settled in fiscal years
beginning after December 15, 2004. Also, if adopted in its current form, the
proposed statement could result in a significant charge to the Company's
Consolidated Statement of Income for the fiscal year ended February 28, 2006.
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 29,
Fiscal 2004 2003 2003 2003 2004 Full Year
- ------------------------------------- ----------- ---------- ------------ ------------ -----------
(in thousands, except per share data)
Net sales(1) $ 772,801 $ 911,065 $ 987,248 $ 881,315 $ 3,552,429
Gross profit(1) $ 209,085 $ 240,532 $ 282,616 $ 243,555 $ 975,788
Net income(2) $ 39,189 $ 35,564 $ 82,840 $ 62,821 $ 220,414
Earnings per common share(3):
Basic $ 0.42 $ 0.35 $ 0.76 $ 0.57 $ 2.13
=========== ========== ============ ============ ===========
Diluted $ 0.41 $ 0.34 $ 0.73 $ 0.55 $ 2.06
=========== ========== ============ ============ ===========
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(4) $ 37,369 $ 49,572 $ 64,344 $ 52,021 $ 203,306
Earnings per common share(3):
Basic $ 0.42 $ 0.55 $ 0.71 $ 0.57 $ 2.26
=========== ========== ============ ============ ===========
Diluted $ 0.40 $ 0.53 $ 0.69 $ 0.56 $ 2.19
=========== ========== ============ ============ ===========
(1) In the third quarter of fiscal 2004, the Company revised its accounting
policy with regard to the income statement presentation of the
reclassification adjustments of cash flow hedges of certain sales
transactions. These cash flow hedges are used to reduce the risk of foreign
currency exchange rate fluctuations resulting from the sale of product
denominated in various foreign currencies. As such, the Company's revised
accounting policy is to report the reclassification adjustments from
AOCI to sales. Previously, the Company reported such reclassification
adjustments in selling, general and administrative expenses. This change in
accounting policy resulted in a reclassification which increased selling,
general and administrative expenses and sales by $1.2 million and $2.3
million for the three months ended May 31, 2003, and August 31, 2003,
respectively. No such reclassification was required for the comparable
prior year periods. This reclassification did not affect operating income
or net income.
(2) In Fiscal 2004, the Company recorded net unusual costs consisting of the
flow through of inventory step-up and financing costs associated with the
Hardy Acquisition; restructuring and related charges resulting from (i) the
realignment of business operations in the Constellation Wines segment and
(ii) the Company's decision to exit the commodity concentrate product line
in the U.S. and sell its winery located in Escalon, California; and gains
from the relief of certain excise tax, duty and other costs incurred in
prior years. The following table identifies these items, net of income
taxes, by quarter and in the aggregate for Fiscal 2004:
QUARTER ENDED
------------------------------------------------------
May 31, August 31, November 30, February 29,
Fiscal 2004 2003 2003 2003 2004 Full Year
- ------------------------------------- ----------- ---------- ------------ ------------ -----------
(in thousands, net of tax)
Flow through of inventory step-up $ 3,531 $ 5,770 $ 1,741 $ 3,340 $ 14,382
Financing costs 2,582 3,334 1,490 - 7,406
Concentrate inventory write-down - 10,769 - - 10,769
Restructuring charges 1,482 10,934 5,176 2,347 19,939
Relief of certain excise tax, duty
and other costs - - - (6,678) (6,678)
----------- ---------- ------------ ------------ -----------
Total restructuring and related
charges and unusual costs $ 7,595 $ 30,807 $ 8,407 $ (991) $ 45,818
=========== ========== ============ ============ ===========
(3) The sum of the quarterly earnings per common share in Fiscal 2004 and
Fiscal 2003 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.
(4) During the fourth quarter of Fiscal 2003, the Company's Constellation
Wines segment recorded an asset impairment charge of $4.8 million in
connection with the planned closure of two of its production facilities in
Fiscal 2004.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Information required by this item has been previously reported in the
Company's Current Report on Form 8-K dated April 4, 2002, and Form 8-K/A filed
May 24, 2002.
ITEM 9A. CONTROLS AND PROCEDURES
- --------
The Company's Chief Executive Officer and its Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that the Company's "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. In connection with that
evaluation, no changes were identified in the Company's "internal control over
financial reporting" (as defined in the Securities Exchange Act of 1934 Rules
13a-15(f) and 15d-15(f)) that occurred during the Company's fiscal quarter ended
February 29, 2004 (the Company's fourth fiscal quarter) that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information required by this Item (except for the information regarding
executive officers required by Item 401 of Regulation S-K which is included in
Part I hereof in accordance with General Instruction G(3)) is incorporated
herein by reference to the Company's proxy statement to be issued in connection
with the Annual Meeting of Stockholders of the Company to be held on July 20,
2004, under those sections of the proxy statement to be titled "Election of
Directors", "The Board of Directors and Committees of the Board" and "Section
16(a) Beneficial Ownership Reporting Compliance", which proxy statement will be
filed within 120 days after the end of the Company's fiscal year.
The Company has adopted a code of ethics that applies to its chief
executive officer and its senior financial officers. The Company's Chief
Executive Officer and Senior Financial Executive Code of Ethics is located on
the Company's internet website at http://www.cbrands.com.investors.htm.
Amendments to, and waivers granted under, our Chief Executive Officer and Senior
Financial Executive Code of Ethics, if any, will be posted to our website as
well.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on July 20, 2004, under that
section of the proxy statement to be titled "Executive Compensation" and that
caption to be titled "Director Compensation" under "Election of Directors",
which proxy statement will be filed within 120 days after the end of the
Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- -------- ---------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on July 20, 2004, under those
sections of the proxy statement to be titled "Beneficial Ownership" and "Stock
Ownership of Management", which proxy statement will be filed within 120 days
after the end of the Company's fiscal year. Additional information required by
this item is as follows:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information with respect to the Company's
compensation plans under which its equity securities may be issued, as of
February 29, 2004. The equity compensation plans approved by security holders
include the Company's Long-Term Stock Incentive Plan, Incentive Stock Option
Plan and 1989 Employee Stock Purchase Plan. The equity compensation plans not
approved by security holders include the Company's UK Sharesave Scheme (the "UK
Plan"). Under the UK Plan, 2,000,000 shares of Class A Stock may be issued to
eligible United Kingdom employees and directors of the Company in offerings that
typically extend from three to five years. Under the terms of the UK Plan,
participants may purchase shares of Class A Stock at the end of the offering
period through payroll deductions made during the offering period. The payroll
deductions are kept in interest bearing accounts until the participant either
exercises the option at the end of the offering or withdraws from the offering.
The exercise price for each offering is fixed at the beginning of the offering
by the committee administering the plan and may be no less than 80% of the
closing price of the stock on the day the exercise price is fixed. If a
participant ceases to be employed by the Company, that participant may exercise
the option during a period of time specified in the UK Plan or may withdraw from
the offering. During the year ended February 29, 2004, an aggregate of 27,791
shares were issued pursuant to the UK Plan.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ------------- -------------------- ------------------- -------------------------
Equity compensation
plans approved by
security holders 11,287,473 $17.73 9,425,948
Equity compensation
plans not approved by
security holders (1) - - 1,971,451
Total 11,287,473 $17.73 11,397,399
- --------------------------
(1) There are currently two ongoing offerings under the UK Plan. The exercise
prices for shares that may be purchased at the end of these offerings are
$12.6093 and $14.21, respectively. The number of options outstanding that
represent the right to purchase shares at the end of the offerings is not
determinable because the exchange rate is not known and because the Company
cannot predict the level of participation by employees during the remaining
term of the offerings.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on July 20, 2004, under that
section of the proxy statement to be titled "Executive Compensation", which
proxy statement will be filed within 120 days after the end of the Company's
fiscal year.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
- -------- --------------------------------------
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on July 20, 2004, under the
relevant portion of the sections of the proxy statement to be titled "Audit
Committee Report".
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) 1. Financial Statements
The following consolidated financial statements of the Company are
submitted herewith:
Reports of Independent Public Accountants - KPMG LLP and Arthur
Andersen LLP
Consolidated Balance Sheets - February 29, 2004, and February
28, 2003
Consolidated Statements of Income for the years ended February
29, 2004, February 28, 2003, and February 28, 2002
Consolidated Statements of Changes in Stockholders' Equity for
the years ended February 29, 2004, February 28, 2003, and
February 28, 2002
Consolidated Statements of Cash Flows for the years ended
February 29, 2004, February 28, 2003, and February 28, 2002
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedules are not submitted because they are not applicable or not required
under Regulation S-X or because the required information is included in the
financial statements or notes thereto.
Parent company financial statements of the Registrant have been omitted because
the Registrant is primarily an operating company and no subsidiary included in
the consolidated financial statements has minority equity interests and/or
noncurrent indebtedness, not guaranteed by the Registrant, in excess of 5% of
total consolidated assets.
3. Exhibits required to be filed by Item 601 of Regulation S-K
For the exhibits that are filed herewith or incorporated herein by
reference, see the Index to Exhibits located on Page 97 of this
Report. The Index to Exhibits is incorporated herein by reference.
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed by the Company with the Securities
and Exchange Commission during the fourth quarter of the fiscal year ended
February 29, 2004:
(i) Form 8-K dated January 6, 2004 and filed as of January 6, 2004.
This Form 8-K reported information under Items 7, 9 and 12 and
included (i) the Company's Condensed Consolidated Balance Sheets
as of November 30, 2003 and February 28, 2003; (ii) the Company's
Condensed Consolidated Statements of Income on a Reported Basis
for the three months ended November 30, 2003 and November 30,
2002; (iii) the Company's Supplemental Consolidated Statements of
Income on a Comparable Basis for the three months ended November
30, 2003 and November 30, 2002; (iv) the Company's Consolidated
Statements of Income on a Reported Basis for the nine months
ended November 30, 2003 and November 30, 2002; (v) the Company's
Supplemental Consolidated Statements of Income on a Comparable
Basis for the nine months ended November 30, 2003 and November
30, 2002; (vi) the Company's Consolidated Statements of Cash
Flows for the nine months ended November 30, 2003 and November
30, 2002; (vii) the Company's Reconciliation of Reported and
Comparable Historical Information for the three months ended
November 30, 2003 and November 30, 2002 and the nine months ended
November 30, 2003 and November 30, 2002; and (viii) the Company's
Reconciliation of Reported and Comparable Diluted Earnings Per
Share Guidance. *
(ii) Form 8-K dated February 10, 2004 and filed as of February 10,
2004. This Form 8-K reported information under Items 7 and 9. *
(iii) Form 8-K dated February 24, 2004 and filed as of February 25,
2004. This Form 8-K reported information under Items 7 and 9,
and included the Company's Reconciliation of Reported and
Comparable Information. *
*Designates Form 8-K was furnished rather than filed.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 14, 2004 CONSTELLATION BRANDS, INC.
By: /s/ Richard Sands
---------------------------------
Richard Sands, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Richard Sands /s/ Thomas S. Summer
- ---------------------------------- ---------------------------------
Richard Sands, Director, Chairman Thomas S. Summer, Executive Vice
of the Board and Chief Executive President and Chief Financial
Officer (principal executive Officer (principal financial
officer) officer and principal accounting
Dated: May 14, 2004 officer)
Dated: May 14, 2004
/s/ Robert Sands /s/ George Bresler
- ---------------------------------- ---------------------------------
Robert Sands, Director George Bresler, Director
Dated: May 14, 2004 Dated: May 14, 2004
/s/ James A. Locke III /s/ Thomas C. McDermott
- ---------------------------------- ---------------------------------
James A. Locke III, Director Thomas C. McDermott, Director
Dated: May 14, 2004 Dated: May 14, 2004
/s/ Paul L. Smith /s/ Jeananne K. Hauswald
- ---------------------------------- ---------------------------------
Paul L. Smith, Director Jeananne K. Hauswald, Director
Dated: May 14, 2004 Dated: May 14, 2004
INDEX TO EXHIBITS
EXHIBIT NO.
- -----------
2.1 Purchase Agreement dated as of January 30, 2001, by and among
Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and
Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the
Company) (filed as Exhibit 2.5 to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 2001 and incorporated herein
by reference).
2.2 First Amendment to Purchase Agreement and Pro Forma Closing Balance
Sheet, dated as of March 5, 2001, by and among Sebastiani Vineyards,
Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc.
(filed as Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended November 30, 2001 and incorporated herein by
reference).
2.3 Second Amendment to Purchase Agreement, dated as of March 5, 2001, by
and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and
Canandaigua Wine Company, Inc. (filed as Exhibit 2.6 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended November 30,
2001 and incorporated herein by reference).
2.4 Agreement and Plan of Merger by and among Constellation Brands, Inc.,
VVV Acquisition Corp. and Ravenswood Winery, Inc. dated as of April 10,
2001 (filed as Exhibit 2.5 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended May 31, 2001 and incorporated herein
by reference).
2.5 Implementation Deed dated 17 January 2003 between Constellation Brands,
Inc. and BRL Hardy Limited (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated January 21, 2003 and incorporated
herein by reference).
2.6 Transaction Compensation Agreement dated 17 January 2003 between
Constellation Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.2
to the Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.7 No Solicitation Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.3 to the
Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.8 Backstop Fee Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.4 to the
Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.9 Letter Agreement dated 6 February 2003 between Constellation Brands,
Inc. and BRL Hardy Limited (filed as Exhibit 2.5 to the Company's
Current Report on Form 8-K dated March 27, 2003 and incorporated herein
by reference).
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2002 and incorporated herein by reference).
3.2 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 24, 2003, filed July 30, 2003 and
incorporated herein by reference).
3.3 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 2002 and
incorporated herein by reference).
4.1 Indenture, dated as of February 25, 1999, among the Company, as issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated
February 25, 1999 (Commission File No. 001-08495) and incorporated
herein by reference).
4.2 Supplemental Indenture No. 1, with respect to 8 1/2% Senior
Subordinated Notes due 2009, dated as of February 25, 1999, by and among
the Company, as Issuer, certain principal subsidiaries, as Guarantors,
and BNY Midwest Trust Company (successor Trustee to Harris Trust and
Savings Bank), as Trustee (filed as Exhibit 99.2 to the Company's
Current Report on Form 8-K dated February 25, 1999 (Commission File
No. 001-08495) and incorporated herein by reference).
4.3 Supplemental Indenture No. 2, with respect to 8 5/8% Senior Notes due
2006, dated as of August 4, 1999, by and among the Company, as Issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated
July 28, 1999 (Commission File No. 001-08495) and incorporated herein by
reference).
4.4 Supplemental Indenture No. 3, dated as of August 6, 1999, by and among
the Company, Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc.,
Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak
Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and BNY
Midwest Trust Company (successor Trustee to Harris Trust and Savings
Bank), as Trustee (filed as Exhibit 4.20 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 1999
(Commission File No. 001-08495) and incorporated herein by reference).
4.5 Supplemental Indenture No. 4, with respect to 8 1/2% Senior Notes due
2009, dated as of May 15, 2000, by and among the Company, as Issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 4.17 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 29, 2000 and incorporated herein by
reference).
4.6 Supplemental Indenture No. 5, dated as of September 14, 2000, by and
among the Company, as Issuer, certain principal subsidiaries, as
Guarantors, and BNY Midwest Trust Company (successor Trustee to The Bank
of New York), as Trustee (filed as Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended August 31,
2000 and incorporated herein by reference).
4.7 Supplemental Indenture No. 6, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor trustee to Harris Trust and Savings Bank and The Bank of New
York, as applicable), as Trustee (filed as Exhibit 4.6 to the Company's
Registration Statement on Form S-3 (Pre-effective Amendment No. 1)
(Registration No. 333-63480) and incorporated herein by reference).
4.8 Supplemental Indenture No. 7, dated as of January 23, 2002, by and
among the Company, as Issuer, certain principal subsidiaries, as
Guarantors, and BNY Midwest Trust Company, as Trustee (filed as Exhibit
4.2 to the Company's Current Report on Form 8-K dated January 17, 2002
and incorporated herein by reference).
4.9 Supplemental Indenture No. 8, dated as of March 27, 2003, by and among
the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company, as Trustee (filed as Exhibit 4.9 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2003 and
incorporated herein by reference).
4.10 Credit Agreement, dated as of October 6, 1999, between the Company,
certain principal subsidiaries, and certain banks for which JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank) acts as
Administrative Agent, The Bank of Nova Scotia acts as Syndication
Agent, and Credit Suisse First Boston and Citicorp USA, Inc. acts as
Co-Documentation Agents (filed as Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended November 30, 1999
(Commission File No. 001-08495) and incorporated herein by reference).
4.11 Amendment No. 1 to Credit Agreement, dated as of February 13, 2001,
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2001 and
incorporated herein by reference).
4.12 Amendment No. 2 to the Credit Agreement, dated as of May 16, 2001
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 31, 2001 and
incorporated herein by reference).
4.13 Amendment No. 3 to the Credit Agreement, dated as of September 7, 2001
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.7 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 2001 and
incorporated herein by reference).
4.14 Amendment No. 4 to the Credit Agreement, dated as of January 15, 2002
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2002 and
incorporated herein by reference).
4.15 Guarantee Assumption Agreement, dated as of July 2, 2001, by
Ravenswood Winery, Inc., in favor of JPMorgan Chase Bank (formerly known
as The Chase Manhattan Bank), as administrative agent, pursuant to the
Credit Agreement dated as of October 6, 1999, as amended (filed as
Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
4.16 Indenture, with respect to 8 1/2% Senior Notes due 2009, dated as of
November 17, 1999, among the Company, as Issuer, certain principal
subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor to
Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (Registration No.
333-94369) and incorporated herein by reference).
4.17 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor to Harris Trust and Savings Bank), as Trustee (filed as
Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
4.18 Supplemental Indenture No. 2, dated as of March 27, 2003, among the
Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company (successor to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 4.18 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 2003 and incorporated herein by
reference).
4.19 Indenture, with respect to 8% Senior Notes due 2008, dated as of
February 21, 2001, by and among the Company, as Issuer, certain
principal subsidiaries, as Guarantors and BNY Midwest Trust Company, as
Trustee (filed as Exhibit 4.1 to the Company's Registration Statement
filed on Form S-4 (Registration No. 333-60720) and incorporated herein
by reference).
4.20 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company, as
Trustee (filed as Exhibit 4.7 to the Company's Pre-effective Amendment
No. 1 to its Registration Statement on Form S-3 (Registration No.
333-63480) and incorporated herein by reference).
4.21 Supplemental Indenture No. 2, dated as of March 27, 2003, among the
Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company, as Trustee (filed as Exhibit 4.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2003 and
incorporated herein by reference).
4.22 Amended and Restated Credit Agreement, dated as of March 19, 2003,
among the Company and certain of its subsidiaries, the lenders named
therein, JPMorgan Chase Bank, as Administrative Agent, and JPMorgan
Europe Limited, as London Agent (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 27, 2003 and incorporated herein
by reference).
4.23 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as
of July 18, 2003, among the Company and certain of its subsidiaries, and
JPMorgan Chase Bank, as Administrative Agent (filed as Exhibit 4.17 to
the Company's Report on Form 10-Q for the fiscal quarter ended August
31, 2003 and incorporated herein by reference).
4.24 Second Amended and Restated Credit Agreement, dated as of October 31,
2003, among the Company and certain of its subsidiaries, the lenders
named therein, JPMorgan Chase Bank, as Administrative Agent, and J.P.
Morgan Europe Limited, as London Agent (filed as Exhibit 4.18 to the
Company's Report on Form 10-Q for the fiscal quarter ended November 30,
2003 and incorporated herein by reference).
4.25 Amendment No. 1, dated as of February 10, 2004, to the Second Amended
and Restated Credit Agreement, dated as of October 31, 2003, among
Constellation Brands, Inc., the Subsidiary Guarantors party thereto, the
Lenders party thereto and JPMorgan Chase Bank, as Administrative Agent
(filed herewith).
4.26 Amended and Restated Bridge Loan Agreement, dated as of January 16,
2003 and amended and restated as of March 26, 2003, among the Company
and certain of its subsidiaries, the lenders named therein, and JPMorgan
Chase Bank, as Administrative Agent (filed as Exhibit 4.2 to the
Company's Current Report on Form 8-K dated March 27, 2003 and
incorporated herein by reference).
4.27 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 24, 2003, filed July 30, 2003 and
incorporated herein by reference).
4.28 Deposit Agreement, dated as of July 30, 2003, by and among the Company,
Mellon Investor Services LLC and all holders from time to time of
Depositary Receipts evidencing Depositary Shares Representing 5.75%
Series A Mandatory Convertible Preferred Stock of the Company (filed as
Exhibit 4.2 to the Company's Current Report on Form 8-K dated July 24,
2003, filed July 30, 2003 and incorporated herein by reference).
10.1 Marvin Sands Split Dollar Insurance Agreement (filed as Exhibit 10.9
to the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1993 (Commission File No. 001-08495) and also filed
herewith).
10.2 Employment Agreement between Barton Incorporated and Alexander L. Berk
dated as of September 1, 1990 as amended by Amendment No. 1 to
Employment Agreement between Barton Incorporated and Alexander L. Berk
dated November 11, 1996 (filed as Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 1998
(Commission File No. 001-08495) and incorporated herein by reference).*
10.3 Amendment No. 2 to Employment Agreement between Barton Incorporated
and Alexander L. Berk dated October 20, 1998 (filed as Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1999 (Commission File No. 001-08495) and incorporated
herein by reference).*
10.4 Long-Term Stock Incentive Plan, which amends and restates the
Canandaigua Wine Company, Inc. Stock Option and Stock Appreciation Right
Plan (filed as Exhibit 10.1 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended May 31, 1997 (Commission File No.
001-08495) and incorporated herein by reference).*
10.5 Amendment Number One to the Company's Long-Term Stock Incentive Plan
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 1997 (Commission File No.
001-08495) and incorporated herein by reference).*
10.6 Amendment Number Two to the Company's Long-Term Stock Incentive Plan
(filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 1999 (Commission File No.
001-08495) and incorporated herein by reference).*
10.7 Amendment Number Three to the Company's Long-Term Stock Incentive Plan
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 2000 and incorporated herein by
reference).*
10.8 Amendment Number Four to the Company's Long-Term Stock Incentive Plan
(filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 2001 and incorporated herein by
reference).*
10.9 Incentive Stock Option Plan of the Company (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 1997 (Commission File No. 001-08495) and incorporated herein
by reference).*
10.10 Amendment Number One to the Company's Incentive Stock Option Plan
(filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 1997 (Commission File No.
001-08495) and incorporated herein by reference).*
10.11 Amendment Number Two to the Company's Incentive Stock Option Plan
(filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 2000 and incorporated herein by
reference).*
10.12 Amendment Number Three to the Company's Incentive Stock Option Plan
(filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 2001 and incorporated herein by
reference).*
10.13 Annual Management Incentive Plan of the Company (filed as Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1997 (Commission File No. 001-08495) and
incorporated herein by reference).*
10.14 Amendment Number One to the Company's Annual Management Incentive
Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 28, 1998 (Commission File No.
001-08495) and incorporated herein by reference).*
10.15 Amendment Number Two to the Company's Annual Management Incentive
Plan (filed as Exhibit 10.16 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 28, 2001 and incorporated herein by
reference).*
10.16 Lease, effective December 25, 1997, by and among Matthew Clark Brands
Limited and Pontsarn Investments Limited (filed as Exhibit 10.13 to the
Company's Annual Report on Form 10-K for the fiscal year ended February
28, 1999 (Commission File No. 001-08495) and incorporated herein by
reference).
10.17 Supplemental Executive Retirement Plan of the Company (filed as
Exhibit 10.14 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 1999 (Commission File No. 001-08495) and
incorporated herein by reference).*
10.18 First Amendment to the Company's Supplemental Executive Retirement
Plan (filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended May 31, 1999 (Commission File No.
001-08495) and incorporated herein by reference).*
10.19 Second Amendment to the Company's Supplemental Executive Retirement
Plan (filed as Exhibit 10.20 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 28, 2001 and incorporated herein by
reference).*
10.20 Credit Agreement, dated as of October 6, 1999, between the Company,
certain principal subsidiaries, and certain banks for which JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank) acts as
Administrative Agent, The Bank of Nova Scotia acts as Syndication Agent,
and Credit Suisse First Boston and Citicorp USA, Inc. acts as
Co-Documentation Agents (filed as Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended November 30, 1999
(Commission File No. 001-08495) and incorporated herein by reference).
10.21 Amendment No. 1 to the Credit Agreement, dated as of February 13, 2001,
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2001 and
incorporated herein by reference).
10.22 Amendment No. 2 to the Credit Agreement, dated as of May 16, 2001
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 31, 2001 and
incorporated herein by reference).
10.23 Amendment No. 3 to the Credit Agreement, dated as of September 7,
2001 between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed as Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 2001 and incorporated herein by reference).
10.24 Amendment No. 4 to the Credit Agreement, dated as of January 15, 2002
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2002 and
incorporated herein by reference).
10.25 Guarantee Assumption Agreement, dated as of July 2, 2001, by
Ravenswood Winery, Inc., in favor of JPMorgan Chase Bank (formerly known
as The Chase Manhattan Bank), as administrative agent, pursuant to the
Credit Agreement dated as of October 6, 1999, as amended (filed as
Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
10.26 Amended and Restated Credit Agreement, dated as of March 19, 2003,
among the Company and certain of its subsidiaries, the lenders named
therein, JPMorgan Chase Bank, as Administrative Agent, and JPMorgan
Europe Limited, as London Agent (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 27, 2003 and incorporated herein
by reference).
10.27 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as
of July 18, 2003, among the Company and certain of its subsidiaries, and
JPMorgan Chase Bank, as Administrative Agent (filed as Exhibit 4.17 to
the Company's Report on Form 10-Q for the fiscal quarter ended August
31, 2003 and incorporated herein by reference).
10.28 Second Amended and Restated Credit Agreement, dated as of October 31,
2003, among the Company and certain of its subsidiaries, the lenders
named therein, JPMorgan Chase Bank, as Administrative Agent, and J.P.
Morgan Europe Limited, as London Agent (filed as Exhibit 4.18 to the
Company's Report on Form 10-Q for the fiscal quarter ended November 30,
2003 and incorporated herein by reference).
10.29 Amendment No. 1, dated as of February 10, 2004, to the Second Amended
and Restated Credit Agreement, dated as of October 31, 2003, among
Constellation Brands, Inc., the Subsidiary Guarantors party thereto, the
Lenders party thereto and JPMorgan Chase Bank, as Administrative Agent
(filed as Exhibit 4.25 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 29, 2004 and incorporated herein by
reference).
10.30 Amended and Restated Bridge Loan Agreement, dated as of January 16,
2003 and amended and restated as of March 26, 2003, among the Company
and certain of its subsidiaries, the lenders named therein, and JPMorgan
Chase Bank, as Administrative Agent (filed as Exhibit 4.2 to the
Company's Current Report on Form 8-K dated March 27, 2003 and
incorporated herein by reference).
10.31 Letter Agreement between the Company and Thomas S. Summer, dated
March 10, 1997, addressing compensation (filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended February
29, 2000 and incorporated herein by reference).*
10.32 The Constellation Brands UK Sharesave Scheme, as amended (filed as
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 2002 and incorporated herein by reference).
10.33 Letter Agreement between the Company and Thomas J. Mullin, dated
February 18, 2000, addressing compensation (filed as Exhibit 10.31 to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 2003 and incorporated herein by reference).*
10.34 Letter Agreement between the Company and Stephen B. Millar, dated 9
April 2003, addressing compensation (filed herewith).*
10.35 Non-Competition Agreement between Stephen Brian Millar and BRL Hardy
Limited (now known as Hardy Wine Company Limited) dated April 8, 2003
(filed herewith).*
10.36 Memorandum of Agreement (Service Contract) between BRL Hardy
Limited (now known as Hardy Wine Company Limited) and Stephen Brian
Millar dated 11 June 1996 (filed herewith).*
10.37 BRL Hardy Superannuation Fund Deed of Variation dated 7 October 1998,
together with Amending Deed No. 5 made on 23 December 1999, Amending
Deed No. 6 made on 20 January 2003 and Amending Deed No. 7 made on 9
February 2004 (filed herewith).*
11.1 Statement re Computation of Per Share Earnings (filed herewith).
21.1 Subsidiaries of Company (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
23.2 Information Regarding Consent of Arthur Andersen (filed herewith).
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed
herewith).
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed
herewith).
32.1 Certificate of Chief Executive Officer pursuant to Section 18 U.S.C.
1350 (filed herewith).
32.2 Certificate of Chief Financial Officer pursuant to Section 18 U.S.C.
1350 (filed herewith).
99.1 1989 Employee Stock Purchase Plan (Restated June 27, 2001) (filed as
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
* Designates management contract or compensatory plan or arrangement.