Form 10-Q for quarter ended 8-31-04

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2004

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________________ to ____________________

Commission File Number 001-08495

CONSTELLATION BRANDS, INC.

(Exact name of registrant as specified in its charter)

Delaware		16-0716709
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

370 Woodcliff Drive, Suite 300, Fairport, New York	14450
(Address of principal executive offices)	(Zip Code)

(585) 218-3600

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of September 30, 2004, is set forth below:

Class		Number of Shares Outstanding
Class A Common Stock, Par Value $.01 Per Share		95,935,580
Class B Common Stock, Par Value $.01 Per Share		11,984,930

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)

	August 31,			February 29,
	2004			2004
ASSETS
CURRENT ASSETS:
Cash and cash investments	$	9,768		$	37,136
Accounts receivable, net		789,081			635,910
Inventories		1,318,748			1,261,378
Prepaid expenses and other		176,999			137,047
Total current assets		2,294,596			2,071,471
PROPERTY, PLANT AND EQUIPMENT, net		1,061,278			1,097,362
GOODWILL		1,491,925			1,540,637
INTANGIBLE ASSETS, net		720,037			744,978
OTHER ASSETS, net		87,814			104,225
Total assets	$	5,655,650		$	5,558,673

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks	$	193,596		$	1,792
Current maturities of long-term debt		79,343			267,245
Accounts payable		403,073			270,291
Accrued excise taxes		69,598			48,465
Other accrued expenses and liabilities		457,658			442,009
Total current liabilities		1,203,268			1,029,802
LONG-TERM DEBT, less current maturities		1,720,588			1,778,853
DEFERRED INCOME TAXES		197,835			187,410
OTHER LIABILITIES		152,790			184,989
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, 170,500 shares at August 31, 2004, and
February 29, 2004 (Aggregate liquidation preference
of $172,951 at August 31, 2004)		2			2
Class A Common Stock, $.01 par value-
Authorized, 275,000,000 shares;
Issued, 98,301,048 shares at August 31, 2004,
and 97,150,219 shares at February 29, 2004		983			971
Class B Convertible Common Stock, $.01 par value-
Authorized, 30,000,000 shares;
Issued, 14,550,230 shares at August 31, 2004,
and 14,564,630 shares at February 29, 2004		146			146
Additional paid-in capital		1,043,467			1,024,048
Retained earnings		1,137,234			1,010,193
Accumulated other comprehensive income		228,354			372,302
		2,410,186			2,407,662
Less-Treasury stock-
Class A Common Stock, 2,485,307 shares at
August 31, 2004, and 2,583,608 shares at
February 29, 2004, at cost		(26,810	)		(27,786	)
Class B Convertible Common Stock, 2,502,900 shares
at August 31, 2004, and February 29, 2004, at cost		(2,207	)		(2,207	)
		(29,017	)		(29,993	)
Less-Unearned compensation-restricted stock awards		-			(50	)
Total stockholders' equity		2,381,169			2,377,619
Total liabilities and stockholders' equity	$	5,655,650		$	5,558,673

The accompanying notes are an integral part of these statements.


	1

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

	For the Six Months Ended August 31,						For the Three Months Ended August 31,
	2004			2003			2004			2003
SALES	$	2,474,557		$	2,140,757		$	1,300,242		$	1,150,517
Less - Excise taxes		(510,311	)		(456,891	)		(263,301	)		(239,453	)
Net sales		1,964,246			1,683,866			1,036,941			911,064
COST OF PRODUCT SOLD		(1,424,101	)		(1,234,249	)		(747,258	)		(670,532	)
Gross profit		540,145			449,617			289,683			240,532
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES		(270,783	)		(235,095	)		(132,355	)		(127,293	)
RESTRUCTURING AND RELATED CHARGES		(2,782	)		(19,399	)		(1,169	)		(17,083	)
Operating income		266,580			195,123			156,159			96,156
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS		-			1,181			-			-
EQUITY IN EARNINGS OF EQUITY
METHOD INVESTEES		262			839			200			511
INTEREST EXPENSE, net		(60,681	)		(80,341	)		(30,400	)		(41,098	)
Income before income taxes		206,161			116,802			125,959			55,569
PROVISION FOR INCOME TAXES		(74,218	)		(42,049	)		(45,345	)		(20,005	)
NET INCOME		131,943			74,753			80,614			35,564
Dividends on preferred stock		(4,902	)		(844	)		(2,451	)		(844	)
INCOME AVAILABLE TO COMMON
STOCKHOLDERS	$	127,041		$	73,909		$	78,163		$	34,720


SHARE DATA:
Earnings per common share:
Basic - Class A Common Stock	$	1.20		$	0.78		$	0.73		$	0.36
Basic - Class B Common Stock	$	1.09		$	0.71		$	0.67		$	0.32
Diluted	$	1.14		$	0.75		$	0.69		$	0.34
Weighted average common shares outstanding:
Basic - Class A Common Stock		95,085			83,655			95,451			86,502
Basic - Class B Common Stock		12,054			12,071			12,049			12,070
Diluted		115,588			99,916			116,147			104,131

The accompanying notes are an integral part of these statements.


	2

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)

	For the Six Months Ended August 31,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	131,943		$	74,753

Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property, plant and equipment		43,311			38,902
Deferred tax provision		14,884			2,811
Amortization of intangible and other assets		5,756			14,041
Loss on disposal of assets		2,813			468
Noncash portion of loss on extinguishment of debt		1,799			800
Stock-based compensation expense		53			183
Amortization of discount on long-term debt		35			28
Equity in earnings of equity method investees		(262	)		(839	)
Gain on change in fair value of derivative instruments		-			(1,181	)
Change in operating assets and liabilities, net of effects
from purchases of businesses:
Accounts receivable, net		(169,792	)		(99,984	)
Inventories		(119,808	)		77,826
Prepaid expenses and other current assets		(36,251	)		14,155
Accounts payable		145,195			(44,289	)
Accrued excise taxes		22,085			13,906
Other accrued expenses and liabilities		20,502			(13,305	)
Other, net		(8,113	)		10,140
Total adjustments		(77,793	)		13,662
Net cash provided by operating activities		54,150			88,415

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(50,910	)		(46,444	)
Payment of accrued earn-out amount		(1,339	)		(978	)
Proceeds from sale of assets		1,024			10,150
Purchases of businesses, net of cash acquired		-			(1,069,166	)
Proceeds from sale of marketable equity securities		-			777
Net cash used in investing activities		(51,225	)		(1,105,661	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt		(234,676	)		(1,021,688	)
Payment of preferred stock dividends		(4,902	)		-
Payment of issuance costs of long-term debt		(901	)		(33,473	)
Net proceeds from notes payable		192,472			32,407
Exercise of employee stock options		17,351			15,227
Proceeds from employee stock purchases		2,432			1,817
Proceeds from issuance of long-term debt		-			1,600,000
Proceeds from equity offerings, net of fees		-			426,359
Net cash (used in) provided by financing activities		(28,224	)		1,020,649

Effect of exchange rate changes on cash and cash investments		(2,069	)		30,252

NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS		(27,368	)		33,655
CASH AND CASH INVESTMENTS, beginning of period		37,136			13,810
CASH AND CASH INVESTMENTS, end of period	$	9,768		$	47,465

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired	$	-		$	1,804,875
Liabilities assumed		-			(648,089	)
Net assets acquired		-			1,156,786
Less - stock issuance		-			(77,243	)
Less - direct acquisition costs accrued or previously paid		-			(8,872	)
Less - cash acquired		-			(1,505	)
Net cash paid for purchases of businesses	$	-		$	1,069,166

The accompanying notes are an integral part of these statements.


	3

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2004

1)	MANAGEMENT’S REPRESENTATIONS:

The consolidated financial statements included herein have been prepared by Constellation Brands, Inc. and its subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2004. Results of operations for interim periods are not necessarily indicative of annual results.

2)	RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:

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". FIN No. 46(R) supersedes FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities". 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 adoption of FIN No. 46(R) did not have a material impact on the Company’s consolidated financial statements.

Effective June 1, 2004, the Company adopted EITF Issue No. 03-6 ("EITF No. 03-6"), "Participating Securities and the Two-Class Method under FASB Statement No. 128." EITF No. 03-6 clarifies what is meant by a "participating security" provides guidance on applying the two-class method for computing earnings per share, and requires affected companies to retroactively restate earnings per share amounts for all periods presented.

The Company has two classes of common stock: Class A Common Stock and Class B Convertible Common Stock. With respect to dividend rights, the Class A Common Stock is entitled to cash dividends of at least ten percent higher than those declared and paid on the Class B Convertible Common Stock. Therefore, under EITF No. 03-6, the Class B Convertible Common Stock is considered a participating security requiring the use of the two-class method for the computation of net income per share - basic, rather than the if-converted method as previously used. In addition, the shares of Class B Convertible Common Stock are considered to be participating convertible securities since the shares of Class B Convertible Common Stock are convertible into shares of Class A Common Stock on a one-to-one basis at any time at the option of the holder. The two-class computation method for each period reflects the amount of allocated undistributed earnings per share computed using the participation percentage which reflects the minimum dividend rights of each class of stock. Net income per share - basic reflects the application of EITF No. 03-6 and has been computed using the two-class method for all period presented. Net income per share - diluted continues to be computed using the if-converted method. (See Note 10).


	4

3)	ACQUISITIONS:

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 one of Australia’s largest wine producers with interests in wineries and vineyards in most of Australia’s major wine regions as well as New Zealand and the United States and Hardy's 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 $17.4 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 six months ended August 31, 2003. 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 then existing credit agreement and $400.0 million of borrowings under the Company’s then existing bridge loan agreement. 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 fair values of the assets acquired and liabilities assumed in the Hardy Acquisition at March 27, 2003, as adjusted for the final appraisal:

(in thousands)
Current assets	$	535,374
Property, plant and equipment		332,125
Other assets		27,672
Trademarks		265,583
Goodwill		613,805
Total assets acquired		1,774,559

Current liabilities		294,692
Long-term liabilities		326,646
Total liabilities acquired		621,338

Net assets acquired	$	1,153,221


	5

The trademarks are not subject to amortization. None of the goodwill is expected to be deductible for tax purposes.

4)	INVENTORIES:

Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following:

	August 31, 2004		February 29, 2004
(in thousands)
Raw materials and supplies	$	62,050	$	49,633
In-process inventories		794,091		803,200
Finished case goods		462,607		408,545
	$	1,318,748	$	1,261,378

GOODWILL:

The changes in the carrying amount of goodwill for the six months ended August 31, 2004, are as follows:

	Constellation Wines			Constellation Beers and Spirits		Consolidated
(in thousands)
Balance, February 29, 2004	$	1,407,350		$	133,287	$	1,540,637
Purchase accounting allocations		(2,005	)		-		(2,005	)
Foreign currency translation adjustments		(48,179	)		215		(47,964	)
Purchase price earn-out		1,257			-		1,257
Balance, August 31, 2004	$	1,358,423		$	133,502	$	1,491,925

6)	INTANGIBLE ASSETS:

The major components of intangible assets are:

	August 31, 2004				February 29, 2004
	Gross Carrying Amount		Net Carrying Amount		Gross Carrying Amount		Net Carrying Amount
(in thousands)
Amortizable intangible assets:
Distribution agreements	$	12,883	$	2,869	$	12,883	$	4,455
Other		4,021		52		4,021		64
Total	$	16,904		2,921	$	16,904		4,519

Nonamortizable intangible assets:
Trademarks				698,704				722,047
Agency relationships				18,412				18,412
Total				717,116				740,459
Total intangible assets			$	720,037			$	744,978


	6

The difference between the gross carrying amount and net carrying amount for each item presented is attributable to accumulated amortization. Amortization expense for intangible assets was $1.6 million and $0.9 million for the six months ended August 31, 2004, and August 31, 2003, and $0.9 million and $0.5 million for the three months ended August 31, 2004, and August 31, 2003, respectively. Estimated amortization expense for the remaining six months of fiscal 2005 and for each of the five succeeding fiscal years is as follows:

(in thousands)
2005	$	1,225
2006	$	1,318
2007	$	341
2008	$	25
2009	$	12
2010	$	-

7)	BORROWINGS:

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, and certain other agents, lenders, and financial institutions entered into a new credit agreement, which since has been amended (or amended and restated) in March 2003, October 2003, February 2004 and August 2004 (as amended and restated in August 2004, the "Credit Agreement"). The Credit Agreement provides for aggregate credit facilities of $1.2 billion consisting of a $345.0 million Tranche A Term Loan facility due in February 2008, a $500.0 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. The Company uses the Revolving Credit facility under the Credit Agreement to fund its working capital needs on an on-going basis. In August 2004 the then outstanding principal balance under both the Tranche A and Tranche B Term Loan facilities was refinanced on essentially the same terms as the credit agreement in effect prior to August 2004 but at a lower Applicable Rate (as such term is defined in the Credit Agreement) and the remaining payment schedule of the Tranche B Term Loan facility was modified.

As of August 31, 2004, the required principal repayments of the Tranche A Term Loan and the Tranche B Term Loan are as follows:

	Tranche A Term Loan		Tranche B Term Loan		Total
(in thousands)
2005	$	30,000	$	-	$	30,000
2006		80,000		5,000		85,000
2007		100,000		5,000		105,000
2008		120,000		125,313		245,313
2009		-		364,687		364,687
	$	330,000	$	500,000	$	830,000

The rate of interest payable, at the Company’s option, is 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 1.00% and 2.50%. As of August 31, 2004, the LIBOR margin for the Revolving Credit facility is 1.75%, the LIBOR margin for the Tranche A Term Loan facility is 1.25%, and the LIBOR margin on the Tranche B Term Loan facility is 1.50%.


	7

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 certain foreign subsidiaries and (ii) 65% of the voting capital stock of certain other 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. 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 August 31, 2004, the Company is in compliance with all of its covenants under its Credit Agreement.

As of August 31, 2004, under the Credit Agreement, the Company had outstanding Tranche A Term Loans of $330.0 million bearing a weighted average interest rate of 3.2%, Tranche B Term Loans of $500.0 million bearing a weighted average interest rate of 3.5%, $139.0 million of revolving loans bearing a weighted average interest rate of 3.2%, undrawn revolving letters of credit of $26.9 million, and $234.1 million in revolving loans available to be drawn.

Subsidiary facilities -

The Company has additional line of credit facilities totaling $155.7 million as of August 31, 2004. 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 August 31, 2004, amounts outstanding under the subsidiary revolving credit facilities were $54.6 million.

Redemption of 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"). The Senior Subordinated Notes were 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. During the six months ended August 31, 2004, in connection with this redemption, the Company recorded a charge of $10.3 million in selling, general and administrative expenses for the call premium and the remaining unamortized financing fees associated with the original issuance of the Senior Subordinated Notes.

Guarantees -

A foreign subsidiary of the Company has guaranteed debt of a joint venture in the maximum amount of $3.8 million as of August 31, 2004. The liability for this guarantee is not material and the Company does not have any collateral from this entity.


	8

8)	RETIREMENT SAVINGS PLANS AND POSTRETIREMENT BENEFIT PLANS:

Net periodic benefit costs reported in the Consolidated Statements of Income for the Company’s defined benefit pension plans include the following components:

	For the Six Months Ended August 31,						For the Three Months Ended August 31,
	2004			2003			2004			2003
(in thousands)
Service cost	$	1,074		$	1,101		$	531		$	550
Interest cost		8,008			7,236			4,033			3,618
Expected return on plan assets		(8,458	)		(7,578	)		(4,257	)		(3,789	)
Amortization of prior service cost		1,156			4			583			2
Recognized net actuarial loss		100			1,010			50			505
Net periodic benefit cost	$	1,880		$	1,773		$	940		$	886

Net periodic benefit costs reported in the Consolidated Statements of Income for the Company’s unfunded postretirement benefit plans include the following components:

	For the Six Months Ended August 31,				For the Three Months Ended August 31,
	2004		2003		2004		2003
(in thousands)
Service cost	$	103	$	74	$	51	$	37
Interest cost		166		141		83		70
Expected return on plan assets		-		-		-		-
Amortization of prior service cost		4		3		2		2
Recognized net actuarial loss		11		10		6		5
Net periodic benefit cost	$	284	$	228	$	142	$	114

Contributions of $1.7 million and $0.9 million have been made by the Company to fund its pension plans for the six months and three months ended August 31, 2004, respectively. The Company presently anticipates contributing an additional $1.7 million to fund its pension plans in Fiscal 2005, resulting in total employer contributions of $3.4 million for Fiscal 2005.

9)	STOCKHOLDERS’ EQUITY:

Long-term stock incentive plan -

At the Company’s Annual Meeting of Stockholders held on July 20, 2004, stockholders approved the amendment to the Company’s Long-Term Stock Incentive Plan to increase the aggregate number of shares of the Class A Stock available for awards under the plan from 28,000,000 shares to 40,000,000 shares.

10)	EARNINGS PER COMMON SHARE:

Basic earnings per common share exclude the effect of common stock equivalents and are computed using the two-class computation method as discussed in Note 2. Diluted earnings per common share reflect the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per common share assume the exercise of stock options using the treasury stock method and the conversion of Class B Convertible Common Stock and Preferred Stock using the if-converted method.


	9

The computation of basic and diluted earnings per common share is as follows:

	For the Six Months Ended August 31,						For the Three Months Ended August 31,
	2004			2003			2004			2003
(in thousands, except per share data)
Net income	$	131,943		$	74,753		$	80,614		$	35,564
Dividends on preferred stock		(4,902	)		(844	)		(2,451	)		(844	)
Income available to common stockholders	$	127,041		$	73,909		$	78,163		$	34,720

Weighted average common shares outstanding - basic:
Class A Common Stock		95,085			83,655			95,451			86,502
Class B Common Convertible Stock		12,054			12,071			12,049			12,070
Total weighted average common shares outstanding - basic		107,139			95,726			107,500			98,572
Stock options		3,457			3,101			3,655			3,381
Preferred stock		4,992			1,089			4,992			2,178
Weighted average common shares outstanding - diluted		115,588			99,916			116,147			104,131

Earnings per common share - basic:
Class A Common Stock	$	1.20		$	0.78		$	0.73		$	0.36
Class B Common Convertible Stock	$	1.09		$	0.71		$	0.67		$	0.32
Earnings per common share - diluted	$	1.14		$	0.75		$	0.69		$	0.34

Stock options to purchase 0.9 million shares of Class A Common Stock at a weighted average price per share of $27.58 were outstanding during the six months ended August 31, 2003, but were not included in the computation of the diluted earnings per common share because the stock options’ exercise price was greater than the average market price of the Class A Common Stock for the period. There were no anti-dilutive options outstanding during the six months ended August 31, 2004. In addition, there were no anti-dilutive options outstanding during the three months ended August 31, 2004, or August 31, 2003.

11)	STOCK-BASED COMPENSATION:

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 its stock-based employee compensation 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. 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 Company utilizes the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," as amended. (See Note 16 for additional discussion regarding a proposed statement dealing with Share Based Payments.) 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.


	10

	For the Six Months Ended August 31,						For the Three Months Ended August 31,
	2004			2003			2004			2003
(in thousands, except per share data)
Net income, as reported	$	131,943		$	74,753		$	80,614		$	35,564
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		32			120			17			15
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(10,476	)		(4,809	)		(7,842	)		(2,344	)
Pro forma net income	$	121,499		$	70,064		$	72,789		$	33,235

Earnings per common share - basic:
Class A Common Stock, as reported	$	1.20		$	0.78		$	0.73		$	0.36
Class B Common Convertible Stock, as reported	$	1.09		$	0.71		$	0.67		$	0.32

Class A Common Stock, pro forma	$	1.10		$	0.73		$	0.66		$	0.33
Class B Common Convertible Stock, pro forma	$	1.00		$	0.67		$	0.60		$	0.30

Earnings per common share - diluted, as reported	$	1.14		$	0.75		$	0.69		$	0.34
Earnings per common share - diluted, pro forma	$	1.05		$	0.70		$	0.63		$	0.32

12)	COMPREHENSIVE INCOME:

Comprehensive income consists of net income, foreign currency translation adjustments, net unrealized gains or losses on derivative instruments, net unrealized gains or losses on available-for-sale marketable equity securities and minimum pension liability adjustments. The reconciliation of net income to comprehensive income is as follows:

	For the Six Months Ended August 31,						For the Three Months Ended August 31,
	2004			2003			2004			2003
(in thousands)
Net income	$	131,943		$	74,753		$	80,614		$	35,564
Other comprehensive income, net of tax:
Foreign currency translation adjustments		(124,245	)		106,117			(19,500	)		(21,654	)
Cash flow hedges:
Net derivative (losses) gains, net of tax benefit (expense) of $9,948, ($9,148), $484 and ($2,127), respectively		(23,097	)		21,295			(1,201	)		8,813
Reclassification adjustments, net of tax expense (benefit) of $659, ($612), ($844) and ($612), respectively		1,434			(1,343	)		(1,977	)		(1,343	)
Net cash flow hedges		(21,663	)		19,952			(3,178	)		7,470
Unrealized gains (losses) on marketable equity securities, net of tax (expense) benefit of ($17), $347, ($62) and $347, respectively		39			(810	)		(143	)		(810	)
Minimum pension liability adjustment, net of tax (expense) benefit of ($813), $148, ($316) and ($874), respectively		1,921			(271	)		790			1,547
Total comprehensive (loss) income	$	(12,005	)	$	199,741		$	58,583		$	22,117


	11

Accumulated other comprehensive income (loss) ("AOCI"), net of tax effects, includes the following components:

	Foreign Currency Translation Adjustments			Net Unrealized Gains on Derivatives			Unrealized Loss on Marketable Equity Securities			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income (Loss)
(in thousands)
Balance, February 29, 2004	$	393,972		$	36,949		$	(432	)	$	(58,187	)	$	372,302
Current period change		(124,245	)		(21,663	)		39			1,921			(143,948	)
Balance, August 31, 2004	$	269,727		$	15,286		$	(393	)	$	(56,266	)	$	228,354

The Company has an investment in marketable equity securities with an aggregate fair value of $13.6 million and $14.8 million as of August 31, 2004, and February 29, 2004, respectively, which is classified as an available-for-sale security. As such, gross unrealized losses of $0.6 million as of August 31, 2004, and February 29, 2004, are included, net of applicable income taxes, within AOCI. The Company uses the average cost method as its basis on which cost is determined in computing realized gains or losses. There were no realized gains or losses on sales of securities during the six months and three months ended August 31, 2004. Realized gains on sales of securities during the six months and three months ended August 31, 2003, are immaterial.

13) RESTRUCTURING AND RELATED CHARGES:

For the six months ended August 31, 2004, the Company recorded $2.8 million of restructuring and related charges associated with the restructuring plan of the Constellation Wines segment. Restructuring and related charges resulted from the further realignment of business operations as previously announced in fiscal 2004, and included $1.4 million of employee termination benefit costs (net of reversal of prior accruals of $0.2 million), $0.6 million of facility consolidation and relocation costs, and other related charges of $0.8 million. For the six months ended August 31, 2003, the Company recorded $19.4 million of restructuring and related charges associated with the restructuring plan of the Constellation Wines segment. 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 commodity concentrate inventory of $16.8 million for the three months ended August 31, 2003, which was recorded in cost of product sold.

The Company recorded restructuring and related charges of $1.6 million for the three months ended May 31, 2004, including $1.2 million of employee termination benefit costs, $0.3 million of facility consolidation and relocation costs, and other related charges of $0.1 million. For the three months ended May 31, 2003, the Company recorded $2.3 million of restructuring and related charges associated with the restructuring plan of the Constellation Wines segment.

The Company recorded restructuring and related charges of $1.2 million for the three months ended August 31, 2004, including $0.2 million of employee termination benefit costs (net of reversal of prior accruals of $0.2 million), $0.3 million of facility consolidation and relocation costs, and other related charges of $0.7 million. For the three months ended August 31, 2003, the Company recorded $17.1 million of restructuring and related charges associated with the restructuring plan of the Constellation Wines segment.


	12

The Company estimates that the completion of the restructuring actions will include (i) a total of $9.0 million of employee termination benefit costs through February 28, 2005, of which $8.2 million has been incurred through August 31, 2004, (ii) a total of $18.0 million of grape contract termination costs through February 28, 2005, of which $17.7 million has been incurred through August 31, 2004, and (iii) a total of $4.9 million of facility consolidation and relocation costs through February 28, 2005, of which $2.5 million has been incurred through August 31, 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. The Company expects to incur additional costs of realigning the business operations of $1.7 million during the year ending February 28, 2005, of which $0.8 million has been incurred through August 31, 2004.

The following table illustrates the changes in the restructuring liability balance since February 29, 2004:

	Employee Termination Benefit Costs			Grape Contract Termination Costs		Facility Consolidation/ Relocation Costs			Total
(in thousands)
Balance, February 29, 2004	$	1,539		$	1,048	$	-		$	2,587
Restructuring charges		1,231			-		256			1,487
Cash expenditures		(1,575	)		-		(256	)		(1,831	)
Foreign currency adjustments		(55	)		-		-			(55	)
Balance, May 31, 2004		1,140			1,048		-			2,188
Restructuring charges		382			-		358			740
Reversal of prior accruals		(228	)		-		-			(228	)
Cash expenditures		(373	)		-		(358	)		(731	)
Foreign currency adjustments		(11	)		-		-			(11	)
Balance, August 31, 2004	$	910		$	1,048	$	-		$	1,958

14)	CONDENSED CONSOLIDATING FINANCIAL INFORMATION:

Subsequent to February 29, 2004, four subsidiaries of the Company which were previously included as Subsidiary Nonguarantors (as defined below) became Subsidiary Guarantors (as defined below) under the Company’s existing indentures. As such, the following information sets forth the condensed consolidating balance sheets of the Company as of August 31, 2004, and February 29, 2004, the condensed consolidating statements of income for the six months and three months ended August 31, 2004, and August 31, 2003, and the condensed consolidating statements of cash flows for the six months ended August 31, 2004, and August 31, 2003, for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company’s senior notes and senior subordinated notes ("Subsidiary Guarantors") and the combined subsidiaries of the Company which are not Subsidiary Guarantors, primarily Matthew Clark and Hardy and their subsidiaries, which are included in the Constellation Wines segment ("Subsidiary Nonguarantors"), as if the new Subsidiary Guarantors had been in place as of and for all periods presented. 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 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2004, and include the recently adopted accounting pronouncements described in Note 2 herein. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.


	13

	Parent Company			Subsidiary Guarantors			Subsidiary Nonguarantors		Eliminations			Consolidated
(in thousands)
Condensed Consolidating Balance Sheet at August 31, 2004
Current assets:
Cash and cash investments	$	737		$	1,291		$	7,740	$	-		$	9,768
Accounts receivable, net		115,653			211,396			462,032		-			789,081
Inventories		12,665			697,885			618,212		(10,014	)		1,318,748
Prepaid expenses and other		15,856			110,297			50,846		-			176,999
Intercompany (payable) receivable		(468,880	)		(102,263	)		571,143		-			-
Total current assets		(323,969	)		918,606			1,709,973		(10,014	)		2,294,596
Property, plant and equipment, net		50,640			412,557			598,081		-			1,061,278
Investments in subsidiaries		4,402,623			1,801,493			-		(6,204,116	)		-
Goodwill		51,172			583,079			857,674		-			1,491,925
Intangible assets, net		10,572			386,851			322,614		-			720,037
Other assets, net		31,062			2,341			54,411		-			87,814
Total assets	$	4,222,100		$	4,104,927		$	3,542,753	$	(6,214,130	)	$	5,655,650

Current liabilities:
Notes payable to banks	$	139,000		$	-		$	54,596	$	-		$	193,596
Current maturities of long-term debt		72,565			3,482			3,296		-			79,343
Accounts payable		35,897			112,812			254,364		-			403,073
Accrued excise taxes		8,676			32,619			28,303		-			69,598
Other accrued expenses and liabilities		116,004			70,050			271,272		332			457,658
Total current liabilities		372,142			218,963			611,831		332			1,203,268
Long-term debt, less current maturities		1,686,496			6,488			27,604		-			1,720,588
Deferred income taxes		45,480			120,792			31,563		-			197,835
Other liabilities		3,885			22,143			126,762		-			152,790
Stockholders’ equity:
Preferred stock		2			-			-		-			2
Class A and Class B common stock		1,129			6,443			141,573		(148,016	)		1,129
Additional paid-in capital		1,043,467			1,952,157			2,415,934		(4,368,091	)		1,043,467
Retained earnings		1,148,441			1,588,158			99,851		(1,699,216	)		1,137,234
Accumulated other comprehensive (loss) income		(49,925	)		189,783			87,635		861			228,354
Treasury stock and other		(29,017	)		-			-		-			(29,017	)
Total stockholders’ equity		2,114,097			3,736,541			2,744,993		(6,214,462	)		2,381,169
Total liabilities and stockholders’ equity	$	4,222,100		$	4,104,927		$	3,542,753	$	(6,214,130	)	$	5,655,650

Condensed Consolidating Balance Sheet at February 29, 2004
Current assets:
Cash and cash investments	$	1,048		$	4,664		$	31,424	$	-		$	37,136
Accounts receivable, net		137,422			145,152			353,336		-			635,910
Inventories		9,922			696,928			561,900		(7,372	)		1,261,378
Prepaid expenses and other		8,734			72,788			55,525		-			137,047
Intercompany (payable) receivable		(381,765	)		(176,470	)		558,235		-			-
Total current assets		(224,639	)		743,062			1,560,420		(7,372	)		2,071,471
Property, plant and equipment, net		50,022			409,852			637,488		-			1,097,362
Investments in subsidiaries		4,270,871			1,757,700			-		(6,028,571	)		-
Goodwill		50,338			586,259			904,040		-			1,540,637
Intangible assets, net		10,572			385,581			348,825		-			744,978
Other assets, net		36,041			2,146			66,038		-			104,225
Total assets	$	4,193,205		$	3,884,600		$	3,516,811	$	(6,035,943	)	$	5,558,673


	14

	Parent Company			Subsidiary Guarantors			Subsidiary Nonguarantors			Eliminations			Consolidated
(in thousands)
Current liabilities:
Notes payable to banks	$	-		$	-		$	1,792		$	-		$	1,792
Current maturities of long-term debt		260,061			3,949			3,235			-			267,245
Accounts payable		33,631			67,459			169,201			-			270,291
Accrued excise taxes		8,005			15,344			25,116			-			48,465
Other accrued expenses and liabilities		151,534			23,352			267,123			-			442,009
Total current liabilities		453,231			110,104			466,467			-			1,029,802
Long-term debt, less current maturities		1,739,221			8,510			31,122			-			1,778,853
Deferred income taxes		56,815			119,704			10,891			-			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			6,443			141,573			(148,016	)		1,117
Additional paid-in capital		1,024,048			1,977,179			2,418,614			(4,395,793	)		1,024,048
Retained earnings		1,017,565			1,431,384			53,378			(1,492,134	)		1,010,193
Accumulated other comprehensive (loss) income		(74,960	)		209,630			237,632			-			372,302
Treasury stock and other		(30,043	)		-			-			-			(30,043	)
Total stockholders’ equity		1,937,729			3,624,636			2,851,197			(6,035,943	)		2,377,619
Total liabilities and stockholders’ equity	$	4,193,205		$	3,884,600		$	3,516,811		$	(6,035,943	)	$	5,558,673

Condensed Consolidating Statement of Income for the Six Months Ended August 31, 2004
Sales	$	386,014		$	1,043,690		$	1,222,083		$	(177,230	)	$	2,474,557
Less - excise taxes		(66,335	)		(224,885	)		(219,091	)		-			(510,311	)
Net sales		319,679			818,805			1,002,992			(177,230	)		1,964,246
Cost of product sold		(292,303	)		(487,190	)		(818,003	)		173,395			(1,424,101	)
Gross profit		27,376			331,615			184,989			(3,835	)		540,145
Selling, general and administrative expenses		(72,987	)		(102,139	)		(95,657	)		-			(270,783	)
Restructuring and related charges		-			(1,535	)		(1,247	)		-			(2,782	)
Operating (loss) income		(45,611	)		227,941			88,085			(3,835	)		266,580
Gain on change in fair value of derivative instruments		-			-			-			-			-
Equity in earnings of equity method investees and subsidiaries		156,774			46,473			262			(203,247	)		262
Interest income (expense), net		10,796			(55,596	)		(15,881	)		-			(60,681	)
Income before income taxes		121,959			218,818			72,466			(207,082	)		206,161
Benefit from (provision for) income taxes		13,819			(62,044	)		(25,993	)		-			(74,218	)
Net income		135,778			156,774			46,473			(207,082	)		131,943
Dividends on preferred stock		(4,902	)		-			-			-			(4,902	)
Income available to common stockholders	$	130,876		$	156,774		$	46,473		$	(207,082	)	$	127,041


	15

	Parent Company			Subsidiary Guarantors			Subsidiary Nonguarantors			Eliminations			Consolidated
(in thousands)
Condensed Consolidating Statement of Income for the Six Months Ended August 31, 2003
Sales	$	379,913		$	1,109,997		$	852,076		$	(201,229	)	$	2,140,757
Less - excise taxes		(65,204	)		(215,308	)		(176,379	)		-			(456,891	)
Net sales		314,709			894,689			675,697			(201,229	)		1,683,866
Cost of product sold		(278,296	)		(616,823	)		(540,167	)		201,037			(1,234,249	)
Gross profit		36,413			277,866			135,530			(192	)		449,617
Selling, general and administrative expenses		(62,985	)		(98,601	)		(73,509	)		-			(235,095	)
Restructuring and related charges		-			(18,095	)		(1,304	)		-			(19,399	)
Operating (loss) income		(26,572	)		161,170			60,717			(192	)		195,123
Gain on change in fair value of derivative instruments		1,181			-			-			-			1,181
Equity in earnings of equity method investees and subsidiaries		93,096			38,599			299			(131,155	)		839
Interest income (expense), net		1,167			(76,531	)		(4,977	)		-			(80,341	)
Income before income taxes		68,872			123,238			56,039			(131,347	)		116,802
Benefit from (provision for) income taxes		6,073			(30,142	)		(17,980	)		-			(42,049	)
Net income		74,945			93,096			38,059			(131,347	)		74,753
Dividends on preferred stock		(844	)		-			-			-			(844	)
Income available to common stockholders	$	74,101		$	93,096		$	38,059		$	(131,347	)	$	73,909

Condensed Consolidating Statement of Income for the Three Months Ended August 31, 2004
Sales	$	215,474		$	554,942		$	636,445		$	(106,619	)	$	1,300,242
Less - excise taxes		(34,480	)		(115,666	)		(113,155	)		-			(263,301	)
Net sales		180,994			439,276			523,290			(106,619	)		1,036,941
Cost of product sold		(161,191	)		(263,446	)		(426,237	)		103,616			(747,258	)
Gross profit		19,803			175,830			97,053			(3,003	)		289,683
Selling, general and administrative expenses		(34,143	)		(50,072	)		(48,140	)		-			(132,355	)
Restructuring and related charges		-			(234	)		(935	)		-			(1,169	)
Operating (loss) income		(14,340	)		125,524			47,978			(3,003	)		156,159
Gain on change in fair value of derivative instruments		-			-			-			-