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, 2003
---------------
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.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-0716709
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450
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(Address of principal executive offices) (Zip Code)
(585) 218-3600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The number of shares outstanding with respect to each of the classes of common
stock of Constellation Brands, Inc., as of September 30, 2003, is set forth
below:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Class A Common Stock, Par Value $.01 Per Share 93,077,510
Class B Common Stock, Par Value $.01 Per Share 12,068,730
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 28,
2003 2003
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 47,465 $ 13,810
Accounts receivable, net 615,470 399,095
Inventories, net 1,198,350 819,912
Prepaid expenses and other 108,883 97,284
------------ ------------
Total current assets 1,970,168 1,330,101
PROPERTY, PLANT AND EQUIPMENT, net 991,990 602,469
GOODWILL 1,305,218 722,223
INTANGIBLE ASSETS, net 834,331 382,428
OTHER ASSETS 96,983 159,109
------------ ------------
Total assets $ 5,198,690 $ 3,196,330
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 35,092 $ 2,623
Current maturities of long-term debt 81,997 71,264
Accounts payable 255,840 171,073
Accrued excise taxes 51,577 36,421
Other accrued expenses and liabilities 429,576 303,827
------------ ------------
Total current liabilities 854,082 585,208
------------ ------------
LONG-TERM DEBT, less current maturities 2,146,928 1,191,631
------------ ------------
DEFERRED INCOME TAXES 151,319 145,239
------------ ------------
OTHER LIABILITIES 151,633 99,268
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, 170,500 shares at
August 31, 2003, and none at
February 28, 2003 (Aggregate
liquidation preference of $171,344
at August 31, 2003) 2 -
Class A Common Stock, $.01 par value-
Authorized, 275,000,000 shares;
Issued, 95,636,122 shares at
August 31, 2003, and 81,435,135
shares at February 28, 2003 956 814
Class B Convertible Common Stock,
$.01 par value-
Authorized, 30,000,000 shares;
Issued, 14,572,030 shares at
August 31, 2003, and 14,578,490
shares at February 28, 2003 146 146
Additional paid-in capital 989,325 469,724
Retained earnings 869,434 795,525
Accumulated other comprehensive
income (loss) 65,731 (59,257)
------------ ------------
1,925,594 1,206,952
------------ ------------
Less-Treasury stock-
Class A Common Stock, 2,653,451
shares at August 31, 2003,
and 2,749,384 shares at
February 28, 2003, at cost (28,559) (29,610)
Class B Convertible Common Stock,
2,502,900 shares at August 31, 2003,
and February 28, 2003, at cost (2,207) (2,207)
------------ ------------
(30,766) (31,817)
------------ ------------
Less-Unearned compensation-restricted
stock awards (100) (151)
------------ ------------
Total stockholders' equity 1,894,728 1,174,984
------------ ------------
Total liabilities and stockholders' equity $ 5,198,690 $ 3,196,330
============ ============
<FN>
The accompanying notes are an integral part of these statements.
1
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Six Months Ended August 31, For the Three Months Ended August 31,
----------------------------------- -------------------------------------
2003 2002 2003 2002
-------------- -------------- -------------- --------------
(unaudited) (unaudited) (unaudited) (unaudited)
GROSS SALES $ 2,137,280 $ 1,759,460 $ 1,148,213 $ 898,997
Less - Excise taxes (456,891) (419,261) (239,453) (209,191)
------------- -------------- -------------- --------------
Net sales 1,680,389 1,340,199 908,760 689,806
COST OF PRODUCT SOLD (1,234,249) (970,211) (670,532) (496,544)
------------- -------------- -------------- --------------
Gross profit 446,140 369,988 238,228 193,262
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (231,618) (178,377) (124,989) (87,616)
RESTRUCTURING AND RELATED CHARGES (19,399) - (17,083) -
------------- -------------- -------------- --------------
Operating income 195,123 191,611 96,156 105,646
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS 1,181 - - -
EQUITY IN EARNINGS OF JOINT VENTURES 839 5,911 511 3,172
INTEREST EXPENSE, net (80,341) (54,292) (41,098) (27,151)
------------- -------------- -------------- --------------
Income before income taxes 116,802 143,230 55,569 81,667
PROVISION FOR INCOME TAXES (42,049) (56,289) (20,005) (32,095)
------------- -------------- -------------- --------------
NET INCOME 74,753 86,941 35,564 49,572
Dividends on preferred stock (844) - (844) -
------------- -------------- -------------- --------------
INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 73,909 $ 86,941 $ 34,720 $ 49,572
============= ============== ============== ==============
SHARE DATA:
Earnings per common share:
Basic $ 0.77 $ 0.97 $ 0.35 $ 0.55
============= ============== ============== ==============
Diluted $ 0.75 $ 0.94 $ 0.34 $ 0.53
============= ============== ============== ==============
Weighted average common shares outstanding:
Basic 95,726 89,268 98,572 89,691
Diluted 99,916 92,550 104,131 93,029
<FN>
The accompanying notes are an integral part of these statements.
2
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Six Months Ended August 31,
-----------------------------------
2003 2002
------------ ------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 74,753 $ 86,941
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 38,902 28,061
Amortization of intangible and other assets 14,041 2,940
Deferred tax provision 2,811 2,708
Loss on extinguishment of debt 800 -
Loss on sale of assets 468 1,736
Stock-based compensation expense 183 50
Amortization of discount on long-term debt 28 32
Gain on change in fair value of derivative instruments (1,181) -
Equity in earnings of joint ventures (839) (5,911)
Change in operating assets and liabilities, net of effects
from purchases of businesses:
Accounts receivable, net (99,984) (38,261)
Inventories, net 77,826 8,526
Prepaid expenses and other current assets 14,155 (23,070)
Accounts payable (44,289) 135
Accrued excise taxes 13,906 (15,829)
Other accrued expenses and liabilities (13,305) 65,860
Other assets and liabilities, net 10,140 (352)
------------ ------------
Total adjustments 13,662 26,625
------------ ------------
Net cash provided by operating activities 88,415 113,566
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (1,069,166) -
Purchases of property, plant and equipment (46,444) (34,219)
Payment of accrued earn-out amount (978) (804)
Proceeds from sale of assets 10,150 708
Proceeds from sale of marketable equity securities 777 -
------------ ------------
Net cash used in investing activities (1,105,661) (34,315)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,600,000 10,000
Proceeds from equity offerings, net of fees 426,359 -
Net proceeds from (repayments of) notes payable 32,407 (53,757)
Exercise of employee stock options 15,227 22,008
Proceeds from employee stock purchases 1,817 1,309
Principal payments of long-term debt (1,021,688) (43,793)
Payment of issuance costs of long-term debt (33,473) (5)
------------ ------------
Net cash provided by (used in) financing activities 1,020,649 (64,238)
------------ ------------
Effect of exchange rate changes on cash and cash investments 30,252 1,041
------------ ------------
NET INCREASE IN CASH AND CASH INVESTMENTS 33,655 16,054
CASH AND CASH INVESTMENTS, beginning of period 13,810 8,961
------------ ------------
CASH AND CASH INVESTMENTS, end of period $ 47,465 $ 25,015
============ ============
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 $ -
============ ============
<FN>
The accompanying notes are an integral part of these statements.
3
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2003
1) MANAGEMENT'S REPRESENTATIONS:
The accompanying unaudited consolidated financial statements included
herein have been prepared by Constellation Brands, Inc. and its subsidiaries
(the "Company") 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 28, 2003. Results of operations for interim periods
are not necessarily indicative of annual results.
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 will result in a
reclassification of the extraordinary loss related to the extinguishment of debt
recorded in the fourth quarter of Fiscal 2002 ($1.6 million, net of income
taxes), by increasing selling, general and administrative expenses ($2.6
million) and decreasing the provision for income taxes ($1.0 million). 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
4
require disclosure about those effects in interim financial information.
Accordingly, 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 Six Months For the Three Months
Ended August 31, Ended August 31,
----------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(in thousands, except per share data)
Net income, as reported $ 74,753 $ 86,941 $ 35,564 $ 49,572
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (4,689) (6,724) (2,329) (3,362)
------------ ------------ ------------ ------------
Pro forma net income $ 70,064 $ 80,217 $ 33,235 $ 46,210
============ ============ ============ ============
Pro forma income available to
common stockholders $ 69,220 $ 80,217 $ 32,391 $ 46,210
============ ============ ============ ============
Earnings per common share:
Basic - as reported $ 0.77 $ 0.97 $ 0.35 $ 0.55
Basic - pro forma $ 0.72 $ 0.90 $ 0.33 $ 0.52
Diluted - as reported $ 0.75 $ 0.94 $ 0.34 $ 0.53
Diluted - pro forma $ 0.70 $ 0.96 $ 0.32 $ 0.49
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.
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."
Hardy is Australia's largest wine producer with interests in wineries and
vineyards in most of Australia's major wine regions as well as New Zealand and
the United States. In addition, Hardy has significant marketing and sales
operations in the United Kingdom. This acquisition supports the Company's
strategy of driving long-term growth and positions the Company to capitalize on
the growth opportunities in "new world" wine markets.
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 $20.0 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
5
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 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 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 Company is in the process of obtaining third-party valuations of certain
assets; thus, the allocation of the purchase price is subject to refinement.
Estimated fair values at March 27, 2003, are as follows:
(in thousands)
Current assets $ 532,207
Property, plant and equipment 332,088
Other assets 33,403
Trademarks 399,294
Goodwill 505,513
-----------
Total assets acquired 1,802,505
Current liabilities 324,206
Long-term liabilities 322,526
-----------
Total liabilities assumed 646,732
-----------
Net assets acquired $ 1,155,773
===========
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 six months and three months ended August 31,
2003, and August 31, 2002. The unaudited pro forma results of operations for the
six months ended August 31, 2003, and August 31, 2002, and the three months
ended August 31, 2002, 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 upon certain assumptions that the Company
believes are reasonable under the circumstances. The unaudited pro forma results
of operations for the six months ended August 31, 2002, do not reflect total
pretax nonrecurring charges of $29.9 million ($0.22 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. 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 transaction 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.
6
For the Six Months For the Three Months
Ended August 31, Ended August 31,
---------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(in thousands, except per share data)
Net sales $ 1,714,141 $ 1,593,216 $ 908,760 $ 820,264
Income before income taxes $ 125,382 $ 141,785 $ 55,569 $ 76,927
Net income $ 79,458 $ 90,059 $ 35,564 $ 48,298
Income available to common stockholders $ 78,614 $ 90,059 $ 34,720 $ 48,298
Earnings per common share:
Basic $ 0.82 $ 0.97 $ 0.35 $ 0.52
============ ============ ============ ============
Diluted $ 0.79 $ 0.94 $ 0.34 $ 0.50
============ ============ ============ ============
Weighted average common shares outstanding:
Basic 96,423 92,557 98,572 92,980
Diluted 100,500 95,839 104,131 96,318
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, February 28,
2003 2003
------------ ------------
(in thousands)
Raw materials and supplies $ 49,529 $ 26,472
In-process inventories 734,232 534,073
Finished case goods 414,589 259,367
------------ ------------
$ 1,198,350 $ 819,912
============ ============
5) PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
August 31, February 28,
2003 2003
------------ ------------
(in thousands)
Land and land improvements $ 156,641 $ 84,758
Vineyards 96,017 37,394
Buildings and improvements 259,566 173,943
Machinery and equipment 725,147 551,271
Motor vehicles 12,198 5,468
Construction in progress 57,243 32,839
------------ ------------
1,306,812 885,673
Less - Accumulated depreciation (314,822) (283,204)
------------ ------------
$ 991,990 $ 602,469
============ ============
7
6) GOODWILL:
The changes in the carrying amount of goodwill for the six months ended
August 31, 2003, 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 540,462 - 540,462
Foreign currency translation
adjustments 40,657 833 41,490
Purchase price earn-out 1,043 - 1,043
------------- ------------- ------------
Balance, August 31, 2003 $ 1,172,425 $ 132,793 $ 1,305,218
============= ============= ============
7) INTANGIBLE ASSETS:
The major components of intangible assets are:
August 31, 2003 February 28, 2003
----------------------- -----------------------
Gross Net Gross Net
Carrying Carrying Carrying Carrying
Amount Amount Amount Amount
---------- ---------- ---------- ----------
(in thousands)
Amortizable intangible assets:
Distribution agreements $ 11,198 $ 4,398 $ 10,158 $ 4,434
Other 4,184 471 3,978 345
---------- ---------- ---------- ----------
Total $ 15,382 4,869 $ 14,136 4,779
========== ==========
Nonamortizable intangible assets:
Trademarks 809,796 357,166
Distributor and agency
relationships 19,640 20,458
Other 26 25
---------- ----------
Total 829,462 377,649
---------- ----------
Total intangible assets $ 834,331 $ 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 $0.9 million and $1.1 million for
the six months ended August 31, 2003, and August 31, 2002, respectively, and
$0.5 million and $0.6 million for the three months ended August 31, 2003, and
August 31, 2002, respectively. Estimated amortization expense for the remaining
six months of fiscal 2004 and for each of the five succeeding fiscal years is as
follows:
(in thousands)
2004 $ 1,123
2005 $ 1,957
2006 $ 1,424
2007 $ 365
2008 $ -
2009 $ -
8
8) OTHER ASSETS:
The major components of other assets are as follows:
August 31, February 28,
2003 2003
---------- ------------
(in thousands)
Deferred financing costs $ 56,238 $ 28,555
Derivative assets 29,283 -
Investment in marketable equity securities 11,694 -
Investment in joint ventures 6,713 123,064
Other 11,666 18,418
---------- ------------
115,594 170,037
Less - Accumulated amortization (18,611) (10,928)
---------- ------------
$ 96,983 $ 159,109
========== ============
The Company's investment in marketable equity securities is classified as
an available-for-sale security. As such, gross unrealized losses of $1.2 million
were included, net of applicable income taxes, within accumulated other
comprehensive income as of August 31, 2003. 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 six months and three
months ended August 31, 2003, were immaterial.
Amortization expense for other assets was included in selling, general and
administrative expenses and was $13.1 million and $1.8 million for the six
months ended August 31, 2003, and August 31, 2002, respectively, and $7.6
million and $0.9 million for the three months ended August 31, 2003, and August
31, 2002, respectively. Amortization expense for the six months ended August 31,
2003, and three months ended August 31, 2003, include $9.2 million and $5.2
million, respectively, related to amortization of the deferred financing costs
associated with the Bridge Loans (as defined in Note 10). As of August 31, 2003,
the deferred financing costs associated with the Bridge Loans have been fully
amortized.
9) OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
August 31, February 28,
2003 2003
---------- ------------
(in thousands)
Advertising and promotions $ 106,050 $ 63,155
Income taxes payable 41,723 58,347
Salaries and commissions 32,774 35,769
Adverse grape contracts 32,465 10,244
Interest 23,773 22,019
Other 192,791 114,293
---------- ------------
$ 429,576 $ 303,827
========== ============
10) 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 (the "Administrative Agent"), and certain other lenders
(such other lenders, together with the Administrative Agent, are collectively
referred to herein as the "Lenders") entered into a new credit agreement, which
was subsequently amended and restated on March 19, 2003 (the "2003 Credit
Agreement"). The 2003 Credit Agreement provides for aggregate credit facilities
of $1.6 billion consisting of a $400.0 million
9
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 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 intends to use the remaining availability under the 2003 Credit
Agreement to fund its working capital needs on an ongoing basis.
The Tranche A Term Loan facility and the Tranche B Term Loan facility were
fully drawn on March 27, 2003. The required annual repayments of the Tranche A
Term Loan facility are $40.0 million in fiscal 2004 and increase by $20.0
million each year through fiscal 2008. In August 2003, the Company prepaid
$100.0 million of the Tranche B Term Loan facility. After this prepayment, the
required annual repayments of the Tranche B Term Loan, which is backend loaded,
were revised to $37.0 million beginning in fiscal 2005 with increases to $359.0
million in fiscal 2009.
The rate of interest payable, at the Company's option, is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate
plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the 2003 Credit Agreement) and, with respect to LIBOR borrowings,
ranges between 1.50% and 2.75%. The initial LIBOR margin for the Revolving
Credit facility and the Tranche A Term Loan facility is 2.25%, while the initial
LIBOR margin on the Tranche B Term Loan facility is 2.75%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company has pledged collateral of (i) 100% of the
capital stock of all of the Company's U.S. subsidiaries and (ii) 65% of the
voting capital stock of 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 thresholds. As a
result of the prepayment of the Bridge Loans (as defined below) with the
proceeds from the 2003 Equity Offerings, 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 2003 Credit Agreement, ceased to apply.
Hardy has guaranteed debt of a joint venture in the maximum amount of $3.4
million as of August 31, 2003, which is permitted under the 2003 Credit
Agreement. The primary financial covenants require the maintenance of a debt
coverage ratio, a senior debt coverage ratio, a fixed charges ratio and an
interest coverage ratio. As of August 31, 2003, the Company is in compliance
with all of its debt covenants.
As of August 31, 2003, under the 2003 Credit Agreement, the Company had
outstanding Tranche A Term Loans of $386.7 million bearing a weighted average
interest rate of 3.6%, Tranche B Term Loans of $696.7 million bearing a weighted
average interest rate of 4.1%, $33.5 million of revolving loans bearing a
weighted average interest rate of 4.6%, undrawn revolving letters of credit of
$15.8 million, and $350.7 million in revolving loans available to be drawn.
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
10
"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. The rate of interest payable on the Bridge Loans was equal to
LIBOR plus an initial margin of 3.75%. On July 30, 2003, the Company used
proceeds from the 2003 Equity Offerings to prepay the $400.0 million Bridge
Loans in their entirety.
11) OTHER LIABILITIES:
The major components of other liabilities are as follows:
August 31, February 28,
2003 2003
---------- ------------
(in thousands)
Adverse grape contracts $ 72,150 $ 22,550
Accrued pension liability 36,678 36,351
Other 42,805 40,367
---------- ------------
$ 151,633 $ 99,268
========== ============
12) STOCKHOLDERS' EQUITY:
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 $261.4 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 $165.0 million. The Class A Common Stock offering and the
Preferred Stock offering are referred to together as the "2003 Equity
Offerings." 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 2003
Credit Agreement.
As of August 31, 2003, 170,500 shares of Preferred Stock were outstanding
and $0.8 million of dividends were accrued. 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
11
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.
13) EARNINGS PER COMMON SHARE:
Basic earnings per common share exclude the effect of common stock
equivalents and are computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period
for Class A Common Stock and Class B Convertible Common Stock. Diluted earnings
per common share reflect the potential dilution that could result if securities
or other contracts to issue common stock were exercised or converted into common
stock. Diluted earnings per common share assume the exercise of stock options
using the treasury stock method and the conversion of the Preferred Stock using
the if-converted method.
The computation of basic and diluted earnings per common share is as
follows:
For the Six Months For the Three Months
Ended August 31, Ended August 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands, except per share data)
Net income $ 74,753 $ 86,941 $ 35,564 $ 49,572
Dividends on preferred stock (844) - (844) -
---------- ---------- ---------- ----------
Income available to common stockholders $ 73,909 $ 86,941 $ 34,720 $ 49,572
========== ========== ========== ==========
Weighted average common shares
outstanding - basic 95,726 89,268 98,572 89,691
Stock options 3,101 3,282 3,381 3,338
Preferred stock 1,089 - 2,178 -
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 99,916 92,550 104,131 93,029
========== ========== ========== ==========
Earnings per common share - basic $ 0.77 $ 0.97 $ 0.35 $ 0.55
========== ========== ========== ==========
Earnings per common share - diluted $ 0.75 $ 0.94 $ 0.34 $ 0.53
========== ========== ========== ==========
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, 2002. In addition, there were no anti-dilutive options
outstanding during the three months ended August 31, 2003, or August 31, 2002.
12
14) 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 For the Three Months
Ended August 31, Ended August 31,
------------------------ ------------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands)
Net income $ 74,753 $ 86,941 $ 35,564 $ 49,572
Other comprehensive income, net of tax:
Foreign currency translation adjustments 106,117 13,139 (21,654) 5,451
Cash flow hedges:
Net derivative gains, net of tax effect of $9,148
and $2,127, respectively 21,295 - 8,813 -
Reclassification adjustments, net of tax effect
of $612, $13, $612 and $3, respectively (1,343) (21) (1,343) (5)
---------- ---------- ---------- ----------
Net cash flow hedges 19,952 (21) 7,470 (5)
Unrealized loss on marketable equity securities, net
of tax effect of $347 and $347, respectively (810) - (810) -
Minimum pension liability adjustment, net of tax
effect of $148, $255, $874 and $5, respectively (271) (382) 1,547 8
---------- ---------- ---------- ----------
Total comprehensive income $ 199,741 $ 99,677 $ 22,117 $ 55,026
========== ========== ========== ==========
Accumulated other comprehensive income (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 106,117 19,952 (809) (271) 124,989
----------- ----------- ------------ ------------ -------------
Balance, August 31, 2003 $ 89,395 $ 19,952 $ (809) $ (42,806) $ 65,732
=========== =========== ============ ============ =============
Hardy utilized derivative instruments to a more extensive degree than did
the Company prior to the Hardy Acquisition. These derivative instruments are
used to reduce the risk of foreign currency exchange rate fluctuation resulting
from the sale of product denominated in various foreign currencies. These
instruments have been qualified and are being accounted for as cash flow hedges
in accordance with the Company's pre-existing accounting policies.
15) RESTRUCTURING AND RELATED CHARGES
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 Company's wine segment. Restructuring and related charges resulted
from (i) the realignment of business operations in the Company's wine 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. 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.
13
The Company recorded restructuring and related charges of $2.3 million for
the three months ended May 31, 2003, including $2.2 million of employee
termination benefit costs and $0.1 million of other related charges.
The Company recorded restructuring and related charges of $17.1 million for
the three months ended August 31, 2003, including $1.7 million of employee
termination benefit costs, $10.6 million of grape contract termination costs,
$1.0 million of facility consolidation and relocation costs, and other related
charges of $3.7 million, which consisted of a $1.9 million loss on the sale of
the Escalon facility and $1.8 million of other costs related to the realignment
of the business operations in the Company's wine segment.
The Company estimates that the completion of the restructuring plan will
include a total of $4.5 million of employee termination benefit costs through
February 29, 2004, of which $3.9 million has been incurred through August 31,
2003. The Company estimates that the completion of the restructuring plan will
include a total of $30.3 million of grape contract termination costs through
February 29, 2004, of which $10.6 million has been incurred through August 31,
2003. The Company estimates that the completion of the restructuring plan will
include a total of $2.0 million of facility consolidation and relocation costs
through February 29, 2004, of which $1.0 million has been incurred through
August 31, 2003. The Company estimates that payments for certain of these
restructuring liabilities will be made through the year ending February 28,
2005. 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 Company's wine segment and expects to incur additional costs
during the year ending February 29, 2004.
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 2,183 - - 2,183
Cash Expenditures (1,554) - - (1,554)
----------- ------------ -------------- -----------
Balance, May 31, 2003 629 - - 629
Restructuring charges 1,743 10,642 1,024 13,409
Cash Expenditures (1,542) (2,063) (1,024) (4,629)
----------- ------------ -------------- -----------
Balance, August 31, 2003 $ 830 $ 8,579 $ - $ 9,409
=========== ============ ============== ===========
16) CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets of the Company as of August 31, 2003, and February 28, 2003, and the
condensed consolidating statements of income for the six months and three months
ended August 31, 2003, and August 31, 2002, and the condensed consolidating
statements of cash flows for the six months ended August 31, 2003, and August
31, 2002, 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
14
described for the Company in the Summary of Significant Accounting Policies in
Note 1 to the Company's consolidated financial statements included in the
Company's Annual Report on Form 10-K for the fiscal year ended February 28,
2003, 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.
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at August 31, 2003
- ------------------
Current assets:
Cash and cash investments $ 2,154 $ 1,388 $ 43,923 $ - $ 47,465
Accounts receivable, net 124,339 149,014 342,117 - 615,470
Inventories, net 15,702 594,812 588,103 (267) 1,198,350
Prepaid expenses and other 10,548 58,583 39,752 - 108,883
Intercompany (payable) receivable (239,630) (523,616) 763,246 - -
----------- ----------- ------------- ------------ ------------
Total current assets (86,887) 280,181 1,777,141 (267) 1,970,168
Property, plant and equipment, net 49,076 351,656 591,258 - 991,990
Investments in subsidiaries 4,222,235 2,264,695 - (6,486,930) -
Goodwill 47,458 496,679 761,081 - 1,305,218
Intangible assets, net 10,868 315,098 508,365 - 834,331
Other assets 45,383 2,371 49,229 - 96,983
----------- ----------- ------------- ------------ ------------
Total assets $ 4,288,133 $ 3,710,680 $ 3,687,074 $ (6,487,197) $ 5,198,690
=========== =========== ============= ============ ============
Current liabilities:
Notes payable to banks $ 33,500 $ - $ 1,592 $ - $ 35,092
Current maturities of long-term debt 69,100 3,616 9,281 - 81,997
Accounts payable 30,799 47,626 177,415 - 255,840
Accrued excise taxes 8,341 22,052 21,184 - 51,577
Other accrued expenses and liabilities 137,706 44,526 247,344 - 429,576
----------- ------------ ------------- ------------ ------------
Total current liabilities 279,446 117,820 456,816 - 854,082
Long-term debt, less current maturities 2,108,589 833 37,506 - 2,146,928
Deferred income taxes 52,404 79,655 19,260 - 151,319
Other liabilities 6,584 36,410 108,639 - 151,633
Stockholders' equity:
Preferred stock 2 - - - 2
Class A and Class B common stock 1,102 6,434 64,867 (71,301) 1,102
Additional paid-in capital 989,325 1,859,311 2,956,146 (4,815,457) 989,325
Retained earnings 869,701 1,456,475 143,697 (1,600,439) 869,434
Accumulated other comprehensive
income (loss) 11,846 153,742 (99,857) - 65,731
Treasury stock and other (30,866) - - - (30,866)
----------- ----------- ------------- ------------ ------------
Total stockholders' equity 1,841,110 3,475,962 3,064,853 (6,487,197) 1,894,728
----------- ----------- ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 4,288,133 $ 3,710,680 $ 3,687,074 $ (6,487,197) $ 5,198,690
=========== =========== ============= ============ ============
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 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
15
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
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 Six Months Ended August 31, 2003
- ----------------------------------------
Gross sales $ 379,913 $ 1,059,468 $ 899,128 $ (201,229) $ 2,137,280
Less - excise taxes (65,204) (213,903) (177,784) - (456,891)
----------- ----------- ------------- ------------ ------------
Net sales 314,709 845,565 721,344 (201,229) 1,680,389
Cost of product sold (278,296) (583,784) (573,206) 201,037 (1,234,249)
----------- ----------- ------------- ------------ ------------
Gross profit 36,413 261,781 148,138 (192) 446,140
Selling, general and administrative
expenses (62,985) (90,131) (78,502) - (231,618)
Restructuring and related charges - (18,095) (1,304) - (19,399)
----------- ----------- ------------- ------------ ------------
Operating (loss) income (26,572) 153,555 68,332 (192) 195,123
Gain on change in fair value of
derivative instruments 1,181 - - - 1,181
Equity in earnings of
subsidiary/joint venture 93,096 44,414 299 (136,970) 839
Interest expense, net 1,167 (76,518) (4,990) - (80,341)
----------- ----------- ------------- ------------ ------------
Income before income taxes 68,872 121,451 63,641 (137,162) 116,802
Provision for income taxes 6,073 (28,355) (19,767) - (42,049)
----------- ----------- ------------- ------------ ------------
Net income 74,945 93,096 43,874 (137,162) 74,753
Dividends on preferred stock (844) - - - (844)
----------- ----------- ------------- ------------ ------------
Income available to common
stockholders $ 74,101 $ 93,096 $ 43,874 $ (137,162) $ 73,909
=========== =========== ============= ============ ============
16
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Six Months Ended August 31, 2002
- ----------------------------------------
Gross sales $ 376,683 $ 957,427 $ 547,303 $ (121,953) $ 1,759,460
Less - excise taxes (67,933) (208,805) (142,523) - (419,261)
----------- ----------- ------------- ------------ ------------
Net sales 308,750 748,622 404,780 (121,953) 1,340,199
Cost of product sold (239,112) (525,399) (327,557) 121,857 (970,211)
----------- ----------- ------------- ------------ ------------
Gross profit 69,638 223,223 77,223 (96) 369,988
Selling, general and administrative
expenses (53,409) (74,441) (50,527) - (178,377)
----------- ----------- ------------- ------------ ------------
Operating income 16,229 148,782 26,696 (96) 191,611
Equity in earnings of
subsidiary/joint venture 74,675 6,676 - (75,440) 5,911
Interest expense, net 4,137 (35,085) (23,344) - (54,292)
----------- ----------- ------------- ------------ ------------
Income before income taxes 95,041 120,373 3,352 (75,536) 143,230
Provision for income taxes (8,004) (45,698) (2,587) - (56,289)
----------- ----------- ------------- ------------ ------------
Net income $ 87,037 $ 74,675 $ 765 $ (75,536) $ 86,941
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended August 31, 2003
- ------------------------------------------
Gross sales $ 207,587 $ 562,166 $ 489,030 $ (110,570) $ 1,148,213
Less - excise taxes (35,351) (108,623) (95,479) - (239,453)
----------- ----------- ------------- ------------ ------------
Net sales 172,236 453,543 393,551 (110,570) 908,760
Cost of product sold (160,004) (311,169) (309,806) 110,447 (670,532)
----------- ----------- ------------- ------------ ------------
Gross profit 12,232 142,374 83,745 (123) 238,228
Selling, general and administrative
expenses (34,084) (47,446) (43,459) - (124,989)
Restructuring and related charges - (16,104) (979) - (17,083)
----------- ----------- ------------- ------------ ------------
Operating (loss) income (21,852) 78,824 39,307 (123) 96,156
Equity in earnings of
subsidiary/joint venture 48,785 22,792 511 (71,577) 511
Interest expense, net 2,731 (40,747) (3,082) - (41,098)
----------- ----------- ------------- ------------ ------------
Income before income taxes 29,664 60,869 36,736 (71,700) 55,569
Provision for income taxes 6,023 (12,084) (13,944) - (20,005)
----------- ----------- ------------- ------------ ------------
Net income 35,687 48,785 22,792 (71,700) 35,564
Dividends on preferred stock (844) - - - (844)
----------- ----------- ------------- ------------ ------------
Income available to common
stockholders $ 34,843 $ 48,785 $ 22,792 $ (71,700) $ 34,720
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended August 31, 2002
- ------------------------------------------
Gross sales $ 200,944 $ 484,167 $ 273,892 $ (60,006) $ 898,997
Less - excise taxes (35,201) (103,422) (70,568) - (209,191)
----------- ----------- ------------- ------------ ------------
Net sales 165,743 380,745 203,324 (60,006) 689,806
Cost of product sold (126,130) (267,766) (162,615) 59,967 (496,544)
----------- ----------- ------------- ------------ ------------
Gross profit 39,613 112,979 40,709 (39) 193,262
Selling, general and administrative
expenses (30,033) (31,531) (26,052) - (87,616)
----------- ----------- ------------- ------------ ------------
Operating income 9,580 81,448 14,657 (39) 105,646
Equity in earnings of
subsidiary/joint venture 42,531 (3,675) - (35,684) 3,172
Interest expense, net 2,084 (6,511) (22,724) - (27,151)
------------ ----------- ------------- ------------ ------------
Income before income taxes 54,195 71,262 (8,067) (35,723) 81,667
Provision for income taxes (4,584) (28,731) 1,220 - (32,095)
----------- ----------- ------------- ------------ ------------
Net income $ 49,611 $ 42,531 $ (6,847) $ (35,723) $ 49,572
=========== =========== ============= ============ ============
17
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Six Months Ended August 31, 2003
- ----------------------------------------
Net cash provided by (used in)
operating activities $ 42,542 $ (19,674) $ 65,547 $ - $ 88,415
Cash flows from investing activities:
Purchases of businesses, net of cash - (1,069,166) - - (1,069,166)
Purchases of property, plant and
equipment (4,558) (16,886) (25,000) - (46,444)
Payment of accrued earn-out amount - (978) - - (978)
Proceeds from sale of assets - 5,004 5,146 - 10,150
Other - - 777 - 777
----------- ----------- ------------- ------------ ------------
Net cash used in investing activities (4,558) (1,082,026) (19,077) - (1,105,661)
----------- ----------- ------------- ------------ ------------
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 426,359 - - - 426,359
Net proceeds of notes payable 31,500 - 907 - 32,407
Exercise of employee stock options 15,227 - - - 15,227
Proceeds from employee stock
purchases 1,817 - - - 1,817
Intercompany financing activities, net (1,418,274) 1,069,166 349,108 - -
Principal payments of long-term debt (661,961) (1,904) (357,823) - (1,021,688)
Payment of issuance costs of
long-term debt (33,473) - - - (33,473)
----------- ----------- ------------- ------------ ------------
Net cash (used in) provided by
financing activities (38,805) 1,067,262 (7,808) - 1,020,649
----------- ----------- ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments 1,549 34,578 (5,875) - 30,252
----------- ----------- ------------- ------------ ------------
Net increase in cash and cash
investments 728 140 32,787 - 33,655
Cash and cash investments, beginning
of period 1,426 1,248 11,136 - 13,810
----------- ----------- ------------- ------------ ------------
Cash and cash investments, end of
period $ 2,154 $ 1,388 $ 43,923 $ - $ 47,465
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Six Months Ended August 31, 2002
- ----------------------------------------
Net cash provided by
operating activities $ 57,695 $ 45,878 $ 9,993 $ - $ 113,566
Cash flows from investing activities:
Purchases of property, plant and
equipment (4,542) (22,975) (6,702) - (34,219)
Other - (337) 241 - (96)
----------- ----------- ------------- ------------ ------------
Net cash used in investing activities (4,542) (23,312) (6,461) - (34,315)
----------- ------------ ------------- ------------ ------------
18
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Cash flows from financing activities:
Net repayments of notes payable (50,000) - (3,757) - (53,757)
Principal payments of long-term debt (35,996) (1,615) (6,182) - (43,793)
Payment of issuance costs of
long-term debt (5) - - - (5)
Exercise of employee stock options 22,008 - - - 22,008
Proceeds from long-term debt - - 10,000 - 10,000
Proceeds from employee
stock purchase 1,309 - - - 1,309
----------- ----------- ------------- ------------ ------------
Net cash (used in) provided by
financing activities (62,684) (1,615) 61 - (64,238)
----------- ----------- ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments 21,768 (21,741) 1,014 - 1,041
----------- ----------- ------------- ------------ ------------
Net increase (decrease) in cash
and cash investments 12,237 (790) 4,607 - 16,054
Cash and cash investments, beginning
of period 838 2,084 6,039 - 8,961
----------- ----------- ------------- ------------ ------------
Cash and cash investments, end of
period $ 13,075 $ 1,294 $ 10,646 $ - $ 25,015
=========== =========== ============= ============ ============
17) 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 now reports its operating results in three segments: Constellation Wines
(branded wine, and U.K. wholesale and other), Constellation Beers and Spirits
(imported beers and distilled spirits) and Corporate Operations and Other
(primarily corporate related items and other). The new business segments reflect
how the Company's operations are now being managed, how operating performance
within the Company is now being evaluated by senior management and the structure
of its internal financial reporting. In addition, the Company changed its
definition of operating income for segment purposes to exclude restructuring and
related charges and unusual costs that affect comparability. Accordingly, the
financial information for the six months ended August 31, 2002, and three months
ended August 31, 2002, has been restated to conform to the new segment
presentation. For the six months ended August 31, 2003, restructuring and
unusual costs consist of the flow through of inventory step-up and financing
costs associated with the Hardy Acquisition of $14.5 million and $9.2 million,
respectively, and restructuring and related charges of $36.3 million, including
write-down of commodity concentrate inventory of $16.8 million. For the three
months ended August 31, 2003, restructuring and unusual costs consist of the
flow through of inventory step-up and financing costs associated with the Hardy
Acquisition of $9.0 million and $5.2 million, respectively, and restructuring
and related charges of $33.9 million, including write-down of commodity
concentrate inventory of $16.8 million. The accounting policies of the segments
are the same as those described for the Company in the Summary of Significant
Accounting Policies in Note 1 to the Company's consolidated financial statements
included in the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 2003, and include the recently adopted accounting pronouncements
described in Note 2 herein.
19
Segment information is as follows:
For the Six Months For the Three Months
Ended August 31, Ended August 31,
---------------------------- ------------------------------
2003 2002 2003 2002
------------ ------------ ------------ ------------
(in thousands)
Constellation Wines:
- --------------------
Net sales:
Branded wine $ 704,565 $ 451,130 $ 382,755 $ 237,119
Wholesale and other 378,437 330,670 206,087 166,193
------------ ------------ ------------ ------------
Net sales $ 1,083,002 $ 781,800 $ 588,842 $ 403,312
Segment operating income $ 145,436 $ 91,079 $ 84,413 $ 52,241
Equity in earnings of joint ventures $ 839 $ 5,911 $ 511 $ 3,172
Long-lived assets $ 897,919 $ 507,267 $ 897,919 $ 507,267
Investment in joint ventures $ 6,713 $ 116,431 $ 6,713 $ 116,431
Total assets $ 4,406,344 $ 2,415,624 $ 4,406,344 $ 2,415,624
Capital expenditures $ 41,061 $ 29,067 $ 26,333 $ 18,807
Depreciation and amortization $ 34,013 $ 23,797 $ 18,463 $ 11,558
Constellation Beers and Spirits:
- --------------------------------
Net sales:
Imported beers $ 454,678 $ 419,513 $ 247,414 $ 219,807
Spirits 142,709 138,886 72,504 66,687
------------ ------------ ------------ ------------
Net sales $ 597,387 $ 558,399 $ 319,918 $ 286,494
Segment operating income $ 130,000 $ 115,976 $ 70,117 $ 61,555
Long-lived assets $ 79,938 $ 77,916 $ 79,938 $ 77,916
Total assets $ 735,686 $ 740,269 $ 735,686 $ 740,269
Capital expenditures $ 3,233 $ 4,030 $ 1,450 $ 2,122
Depreciation and amortization $ 5,166 $ 5,105 $ 2,606 $ 2,533
Corporate Operations and Other:
- -------------------------------
Net sales $ - $ - $ - $ -
Segment operating loss $ (20,309) $ (15,444) $ (10,238) $ (8,150)
Long-lived assets $ 14,133 $ 9,148 $ 14,133 $ 9,148
Total assets $ 56,660 $ 26,799 $ 56,660 $ 26,799
Capital expenditures $ 2,150 $ 1,122 $ 570 $ 948
Depreciation and amortization $ 13,764 $ 2,099 $ 8,080 $ 1,061
Restructuring and Related Charges
- ---------------------------------
and Unusual Costs:
- ------------------
Operating loss $ (60,004) $ - $ (48,136) $ -
Consolidated:
- -------------
Net sales $ 1,680,389 $ 1,340,199 $ 908,760 $ 689,806
Operating income $ 195,123 $ 191,611 $ 96,156 $ 105,646
Equity in earnings of joint ventures $ 839 $ 5,911 $ 511 $ 3,172
Long-lived assets $ 991,990 $ 594,331 $ 991,990 $ 594,331
Investment in joint ventures $ 6,713 $ 116,431 $ 6,713 $ 116,431
Total assets $ 5,198,690 $ 3,182,692 $ 5,198,690 $ 3,182,692
Capital expenditures $ 46,444 $ 34,219 $ 28,353 $ 21,877
Depreciation and amortization $ 52,943 $ 31,001 $ 29,149 $ 15,152
18) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51."
FIN No. 46 requires all variable interest entities to be consolidated by the
primary beneficiary. The primary beneficiary is the entity that holds the
20
majority of the beneficial interests in the variable interest entity. In
addition, the interpretation expands disclosure requirements for both variable
interest entities that are consolidated as well as variable interest entities
from which the entity is the holder of a significant amount of the beneficial
interests, but not the majority. The Company is required to adopt FIN No. 46 in
its entirety on December 1, 2003. The Company is currently assessing the
financial impact of FIN No. 46 on its consolidated financial statements.
In May 2003, the FASB issued 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. As required, the Company adopted SFAS No. 150
in its entirety on September 1, 2003. The adoption of SFAS No. 150 did not have
a material impact on the Company's consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
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
now 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. The
new business segments reflect how the Company's operations are now being
managed, how operating performance within the Company is now being evaluated by
senior management and the structure of its internal financial reporting. In
addition, the Company changed its definition of operating income for segment
purposes to exclude restructuring and related charges and unusual costs that
affect comparability. Accordingly, the financial information for Second Quarter
2003 and Six Months 2003 (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 three
months ended August 31, 2003 ("Second Quarter 2004"), compared to the three
months ended August 31, 2002 ("Second Quarter 2003"), and for the six months
ended August 31, 2003 ("Six Months 2004"), compared to the six months ended
August 31, 2002 ("Six Months 2003"), and (ii) financial liquidity and capital
resources for Six Months 2004. This discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included herein and in the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 2003 ("Fiscal 2003").
21
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."
Hardy is Australia's largest wine producer with interests in wineries and
vineyards in most of Australia's major wine regions as well as New Zealand and
the United States. In addition, Hardy has significant marketing and sales
operations in the United Kingdom. This acquisition supports the Company's
strategy of driving long-term growth and positions the Company to capitalize on
the growth opportunities in "new world" wine markets. 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 $20.0 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 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 results of operations of Hardy and PWP have been reported in the
Company's Constellation Wines segment as of March 27, 2003. The Hardy
Acquisition is significant and the Company expects it to have a material impact
on the Company's future results of operations, financial position and cash
flows.
22
RESULTS OF OPERATIONS
- ---------------------
SECOND QUARTER 2004 COMPARED TO SECOND QUARTER 2003
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Second Quarter 2004 and Second Quarter
2003.
Second Quarter 2004 Compared to Second Quarter 2003
---------------------------------------------------
Net Sales
---------------------------------------------------
2004 2003 %Increase
---------- ---------- ---------
Constellation Wines:
Branded wine $ 382,755 $ 237,119 61.4 %
Wholesale and other 206,087 166,193 24.0 %
---------- ----------
Constellation Wines net sales $ 588,842 $ 403,312 46.0 %
---------- ----------
Constellation Beers and Spirits:
Imported beers $ 247,414 $ 219,807 12.6 %
Spirits 72,504 66,687 8.7 %
---------- ----------
Constellation Beers and Spirits net sales $ 319,918 $ 286,494 11.7 %
---------- ----------
Corporate Operations and Other $ - $ - N/A
---------- ----------
Consolidated Net Sales $ 908,760 $ 689,806 31.7 %
========== ==========
Net sales for Second Quarter 2004 increased to $908.8 million from $689.8
million for Second Quarter 2003, an increase of $219.0 million, or 31.7%. This
increase resulted primarily from the inclusion of $140.5 million of net sales of
products acquired in the Hardy Acquisition as well as increases in imported beer
sales and U.K. wholesale sales. In addition, net sales benefited from a
favorable foreign currency impact of $13.7 million.
Constellation Wines
-------------------
Net sales for Constellation Wines increased to $588.8 million for Second
Quarter 2004 from $403.3 million in Second Quarter 2003, an increase of $185.5
million, or 46.0%. Branded wine net sales increased $145.6 million, primarily
due to the addition of $134.8 million of net sales of branded wine acquired in
the Hardy Acquisition and increases in branded wine net sales in the U.S. of
$10.5 million. Wholesale and other net sales increased $39.9 million primarily
due to growth in the U.K. wholesale business of $29.4 million, which includes a
favorable foreign currency impact of $10.0 million. The Company believes that
the growth in the U.K. Wholesale business benefited from the unusually hot
summer in the U.K. 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 Constellation Beers and Spirits increased to $319.9 million
for Second Quarter 2004 from $286.5 million for Second Quarter 2003, an increase
of $33.4 million, or 11.7%. This increase resulted primarily from volume gains
on the Company's imported beer portfolio, which increased $27.6 million, or
12.6%, against a flat Second Quarter 2003. Second Quarter 2003 was impacted by a
large buy-in by trade channels during the first quarter of fiscal 2003 as a
result of the Company's March 2002
23
price increase related to its Mexican beer portfolio. Spirits net sales also
increased $5.8 million due to strong Canadian whiskey sales, particularly Black
Velvet, and the introduction of several new products.
The Company has been notified by its Mexican beer supplier of a cost
increase on certain brands representing the majority of its portfolio. The
effective date of the increase to the Company will be January 1, 2004. The
Company intends to pass on the full amount of the cost increase to its
distributors. The Company is in the early stages of developing its roll-out
strategy for the price increase to its distributors, which will be done on a
market by market basis in early calendar year 2004.
GROSS PROFIT
The Company's gross profit increased to $238.2 million for Second Quarter
2004 from $193.3 million for Second Quarter 2003, an increase of $45.0 million,
or 23.3%. The dollar increase in gross profit resulted primarily from additional
gross profit of $42.0 million (net of $9.0 million of flow through of stepped-up
inventory costs) due to the Hardy Acquisition, higher beer sales and lower
average spirits costs. These increases were partially offset by the write-down
of $16.8 million of concentrate inventory in connection with the Company's
decision to exit the commodity concentrate product line (see additional
discussion under "Restructuring and Related Charges" below). Gross profit as a
percent of net sales decreased to 26.2% for Second Quarter 2004 from 28.0% for
Second Quarter 2003 primarily due to the flow through of the inventory step-up
associated with the Hardy Acquisition and the write-down of the concentrate
inventory, partially offset by sales of higher-margin wine brands acquired in
the Hardy Acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $125.0 million
for Second Quarter 2004 from $87.6 million for Second Quarter 2003, an increase
of $37.4 million, or 42.7%. This increase resulted primarily from $19.5 million
in selling, general and administrative expenses from the addition of the Hardy
and PWP businesses. In addition, increases in general and administrative
expenses across the base business to support the Company's growth, as well as
$5.2 million of amortized deferred financing costs associated with the bridge
financing in connection with the Hardy Acquisition contributed to the increase
in Second Quarter 2004. Selling, general and administrative expenses as a
percent of net sales increased to 13.8% for Second Quarter 2004 as compared to
12.7% for Second Quarter 2003 due primarily to the Hardy Acquisition, which has
a higher percentage of selling, general and administrative expenses than the
Company's base business, and additional amortization of the deferred financing
costs associated with the Hardy Acquisition.
RESTRUCTURING AND RELATED CHARGES
Restructuring and related charges resulted from (i) the realignment of
business operations in the Company's wine segment, as previously announced in
the Company's fourth quarter of fiscal 2003, 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, as previously announced in the Company's first
quarter of fiscal 2004.
The Company recorded restructuring and related charges of $3.3 million in
Second Quarter 2004 related to the realignment of business operations in the
Company's wine segment and expects to incur additional charges of approximately
$1.6 million for the previously announced actions over the remainder of fiscal
2004.
The Company recorded restructuring and related charges of $13.8 million in
Second Quarter 2004 related to exiting the commodity concentrate product line
and selling the Escalon facility. In total, the
24
Company recorded $30.6 million of costs allocated between cost of product sold
and restructuring and related charges associated with these actions in Second
Quarter 2004. The Company expects to incur additional restructuring and related
charges of $19.7 million over the next two quarters, beginning with an estimated
$15 million in the third quarter of fiscal 2004. All of the remaining charges
will be recorded as Restructuring and Related Charges on the Company's
consolidated statement of income in the next two quarters. The remaining charges
result from renegotiating existing grape contracts associated with commodity
concentrate and the Escalon facility, asset write-offs and severance-related
costs. More than half of the total charges to be recorded 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 Second Quarter 2004 and Second
Quarter 2003.
Second Quarter 2004 Compared to Second Quarter 2003
---------------------------------------------------
Operating Income (Loss)
---------------------------------------------------
%Increase
2004 2003 (Decrease)
---------- ---------- ----------
Constellation Wines $ 84,413 $ 52,241 61.6 %
Constellation Beers and Spirits 70,117 61,555 13.9 %
Corporate Operations and Other (10,238) (8,150) 25.6 %
---------- ----------
Total Reportable Segments 144,292 105,646 36.6 %
Restructuring and Unusual Costs (48,136) - N/A
---------- ----------
Consolidated Operating Income $ 96,156 $ 105,646 (9.0)%
========== ==========
Restructuring and unusual costs of $48.1 million for Second Quarter 2004
included restructuring and certain unusual costs that are excluded by management
in their evaluation of the results of each operating segment. These costs
represent the flow through of inventory step-up and the amortization of deferred
financing costs associated with the Hardy Acquisition of $9.0 million and $5.2
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 $17.1
million. As a result of these costs and the above factors, consolidated
operating income decreased to $96.2 million for Second Quarter 2004 from $105.6
million for Second Quarter 2003, a decrease of $9.5 million, or (9.0%).
INTEREST EXPENSE, NET
Net interest expense increased to $41.1 million for Second Quarter 2004
from $27.2 million for Second Quarter 2003, an increase of $13.9 million, or
51.4%. The increase resulted from higher average borrowings due to the
financing of the Hardy Acquisition, partially offset by a lower average
borrowing rate.
PROVISION FOR INCOME TAXES
The Company's effective tax rate decreased to 36.0% for Second Quarter 2004
as compared to 39.3% for Second Quarter 2003 as a result of the Hardy
Acquisition, which significantly increases the allocation of income to
jurisdictions with lower income tax rates.
NET INCOME
As a result of the above factors, net income decreased to $35.6 million for
Second Quarter 2004 from $49.6 million for Second Quarter 2003, a decrease of
$14.0 million, or (28.3%).
25
SIX MONTHS 2004 COMPARED TO SIX MONTHS 2003
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Six Months 2004 and Six Months 2003.
Six Months 2004 Compared to Six Months 2003
-------------------------------------------
Net Sales
-------------------------------------------
2004 2003 %Increase
------------ ------------ ---------
Constellation Wines:
Branded wine $ 704,565 $ 451,130 56.2 %
Wholesale and other 378,437 330,670 14.4 %
------------ ------------
Constellation Wines net sales $ 1,083,002 $ 781,800 38.5 %
------------ ------------
Constellation Beers and Spirits:
Imported beers $ 454,678 $ 419,513 8.4 %
Spirits 142,709 138,886 2.8 %
------------ ------------
Constellation Beers and Spirits net sales $ 597,387 $ 558,399 7.0 %
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Consolidated Net Sales $ 1,680,389 $ 1,340,199 25.4 %
============ ============
Net sales for Six Months 2004 increased to $1,680.4 million from $1,340.2
million for Six Months 2003, an increase of $340.2 million, or 25.4%. This
increase resulted primarily from the inclusion of $241.8 million of net sales of
products acquired in the Hardy Acquisition as well as increases in U.K.
wholesale sales and imported beer sales. In addition, net sales benefited from
a favorable foreign currency impact of $43.3 million.
Constellation Wines
-------------------
Net sales for Constellation Wines increased to $1,083.0 million for Six
Months 2004 from $781.8 million in Six Months 2003, an increase of $301.2
million, or 38.5%. Branded wine net sales increased $253.4 million, primarily
due to the addition of $234.9 million of net sales of branded wine acquired in
the Hardy Acquisition and increases in branded wine net sales in the U.S. of
$6.3 million. Wholesale and other net sales increased $47.8 million primarily
due to growth in the U.K. wholesale business of $45.0 million, which includes a
favorable foreign currency impact of $23.9 million. 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 Constellation Beers and Spirits increased to $597.4 million
for Six Months 2004 from $558.4 million for Six Months 2003, an increase of
$39.0 million, or 7.0%. This increase resulted primarily from volume gains on
the Company's imported beer portfolio, which increased $35.2 million or 8.4%.
In addition, Spirits net sales increased $3.8 million due to volume gains and a
favorable mix towards higher priced products.
26
GROSS PROFIT
The Company's gross profit increased to $446.1 million for Six Months 2004
from $370.0 million for Six Months 2003, an increase of $76.2 million, or 20.6%.
The dollar increase in gross profit resulted primarily from additional gross
profit of $68.8 million (net of $14.5 million of flow through of stepped-up
inventory costs) due to the Hardy Acquisition, higher average beer sales and
lower average spirits costs. These increases were partially offset by the
write-down of $16.8 million of concentrate inventory in connection with the
Company's decision to exit the commodity concentrate product line (see
additional discussion under "Restructuring and Related Charges" below) as well
as higher average beer costs. Gross profit as a percent of net sales decreased
to 26.5% for Six Months 2004 from 27.6% for Six Months 2003 primarily due to the
flow through of the inventory step-up associated with the Hardy Acquisition and
the write-down of the concentrate inventory, partially offset by sales of
higher-margin wine brands acquired in the Hardy Acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $231.6 million
for Six Months 2004 from $178.4 million for Six Months 2003, an increase of
$53.2 million, or 29.8%. This increase resulted primarily from $30.9 million in
selling, general and administrative expenses from the addition of the Hardy and
PWP businesses. In addition, $9.2 million of amortized deferred financing costs
associated with the bridge financing in connection with the Hardy Acquisition
contributed to the increase in Six Months 2004, as well as an additional $2.1
million of amortized deferred financing costs associated with the Company's new
bank credit facility. Selling, general and administrative expenses as a percent
of net sales increased to 13.8% for Six Months 2004 as compared to 13.3% for Six
Months 2003 due primarily to the additional amortization of the deferred
financing costs associated with the Hardy Acquisition.
RESTRUCTURING AND RELATED CHARGES
Restructuring and related charges resulted from (i) the realignment of
business operations in the Company's wine segment, as previously announced in
the Company's fourth quarter of fiscal 2003, 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, as previously announced in the Company's first
quarter of fiscal 2004.
The Company recorded restructuring and related charges of $5.6 million in
Six Months 2004 related to the realignment of business operations in the
Company's wine segment and expects to incur additional charges of approximately
$1.6 million for the previously announced actions over the remainder of fiscal
2004.
The Company recorded restructuring and related charges of $13.8 million in
Six Months 2004 related to exiting the commodity concentrate product line and
selling the Escalon facility. In total, the Company recorded $30.6 million of
costs allocated between cost of product sold and restructuring and related
charges associated with these actions. The Company expects to incur additional
restructuring and related charges of $19.7 million over the next two quarters,
beginning with an estimated $15 million in the third quarter of fiscal 2004. All
of the remaining charges will be recorded as Restructuring and Related Charges
on the Company's consolidated statement of income in the next two quarters. The
remaining charges result from renegotiating existing grape contracts associated
with commodity concentrate and the Escalon facility, asset write-offs and
severance-related costs. More than half of the total charges to be recorded in
connection with exiting the commodity concentrate product line and selling the
Escalon facility are non-cash charges.
27
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Six Months 2004 and Six Months
2003.
Six Months 2004 Compared to Six Months 2003
-------------------------------------------
Operating Income (Loss)
-------------------------------------------
2004 2003 %Increase
--------- ---------- ---------
Constellation Wines $ 145,436 $ 91,079 59.7 %
Constellation Beers and Spirits 130,000 115,976 12.1 %
Corporate Operations and Other (20,309) (15,444) 31.5 %
--------- ----------
Total Reportable Segments 255,127 191,611 33.1 %
Restructuring and Unusual Costs (60,004) - N/A
--------- ----------
Consolidated Operating Income $ 195,123 $ 191,611 1.8 %
========= ==========
Restructuring and unusual costs of $60.0 million for Six Months 2004
included restructuring and certain unusual costs that are excluded by management
in their evaluation of the results of each operating segment. These costs
represent the flow through of inventory step-up and the amortization of deferred
financing costs associated with the Hardy Acquisition of $14.5 million and $9.2
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 $19.5
million. As a result of these costs and the above factors, consolidated
operating income increased to $195.1 million for Six Months 2004 from $191.6
million for Six Months 2003, an increase of $3.5 million, or 1.8%.
INTEREST EXPENSE, NET
Net interest expense increased to $80.3 million for Six Months 2004 from
$54.3 million for Six Months 2003, an increase of $26.0 million, or 48.0%. 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 decreased to 36.0% for Six Months 2004 as
compared to 39.3% for Six Months 2003 as a result of the Hardy Acquisition,
which significantly increases the allocation of income to jurisdictions with
lower income tax rates.
NET INCOME
As a result of the above factors, net income decreased to $74.8 million for
Six Months 2004 from $86.9 million for Six Months 2003, a decrease of $12.2
million, or (14.0%).
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------
GENERAL
The Company's principal use of cash in its operating activities is for
purchasing and carrying inventories. The Company's primary source of liquidity
has historically been cash flow from operations, except during the annual Fall
grape harvests when the Company has relied on short-term borrowings. 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 March and runs
through May. The Company generally begins purchasing grapes at the beginning of
the crush season with payments for such grapes
28
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. The Company will
continue to use its short-term borrowings to support its working capital
requirements. The Company believes that cash provided by operating activities
and its financing activities, primarily short-term borrowings, will provide
adequate resources to satisfy its working capital, liquidity and anticipated
capital expenditure requirements for both its short-term and long-term capital
needs.
SIX MONTHS 2004 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Six Months 2004 was $88.4
million, which resulted from $130.0 million in net income adjusted for non-cash
items, less $41.6 million representing the net change in the Company's operating
assets and liabilities. The net change in operating assets and liabilities
resulted primarily from a seasonal increase in accounts receivable and a
decrease in accounts payable, partially offset by a decrease in inventories and
an increase in accrued advertising.
INVESTING ACTIVITIES
Net cash used in investing activities for Six Months 2004 was $1,105.7
million, which resulted primarily from net cash paid of $1,069.2 million for the
purchases of businesses and $46.4 million of capital expenditures.
FINANCING ACTIVITIES
Net cash provided by financing activities for Six Months 2004 was $1,020.6
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
$426.4 million. This amount was partially offset by principal payments of
long-term debt of $1,021.7 million.
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 October 15, 2003, the Company had purchased 4,075,344 shares of
Class A Common Stock at an aggregate cost of $44.9 million, or at an average
cost of $11.01 per share. No shares were repurchased during Six Months 2004.
DEBT
Total debt outstanding as of August 31, 2003, amounted to $2,264.0 million,
an increase of $998.5 million from February 28, 2003. The ratio of total debt
to total capitalization increased to 54.5% as of August 31, 2003, from 51.9% as
of February 28, 2003.
29
SENIOR CREDIT FACILITY
2003 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
(such other lenders, together with the Administrative Agent, are collectively
referred to herein as the "Lenders") entered into a new credit agreement, which
was subsequently amended and restated on March 19, 2003 (the "2003 Credit
Agreement"). The 2003 Credit Agreement provides for aggregate credit facilities
of $1.6 billion consisting of a $400.0 million Tranche A Term Loan facility due
in February 2008, an $800.0 million Tranche B Term Loan facility due in November
2008 and a $400.0 million Revolving Credit facility (including an Australian
Dollar revolving sub-facility of up to A$10.0 million and a sub-facility for
letters of credit of up to $40.0 million) which expires on February 29, 2008.
Proceeds of the 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 intends to
use the remaining availability under the 2003 Credit Agreement to fund its
working capital needs on an ongoing basis.
The Tranche A Term Loan facility and the Tranche B Term Loan facility were
fully drawn on March 27, 2003. The required annual repayments of the Tranche A
Term Loan facility are $40.0 million in fiscal 2004 and increase by $20.0
million each year through fiscal 2008. In August 2003, the Company prepaid
$100.0 million of the Tranche B Term Loan facility. After this prepayment, the
required annual repayments of the Tranche B Term Loan, which is backend loaded,
were revised to $37.0 million beginning in fiscal 2005 with increases to $359.0
million in fiscal 2009.
The rate of interest payable, at the Company's option, is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate
plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the 2003 Credit Agreement) and, with respect to LIBOR borrowings,
ranges between 1.50% and 2.75%. The initial LIBOR margin for the Revolving
Credit facility and the Tranche A Term Loan facility is 2.25%, while the initial
LIBOR margin on the Tranche B Term Loan facility is 2.75%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company has pledged collateral of (i) 100% of the
capital stock of all of the Company's U.S. subsidiaries and (ii) 65% of the
voting capital stock of 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 thresholds. As a
result of the prepayment of the Bridge Loans (as defined below) with the
proceeds from the 2003 Equity Offerings, 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 2003 Credit Agreement, ceased to apply.
Hardy has guaranteed debt of a joint venture in the maximum amount of $3.4
million as of August 31, 2003, which is permitted under the 2003 Credit
Agreement. The primary financial covenants require the maintenance of a debt
coverage ratio, a senior debt coverage ratio, a fixed charges ratio and an
interest coverage ratio. As of August 31, 2003, the Company is in compliance
with all of its debt covenants.
As of August 31, 2003, under the 2003 Credit Agreement, the Company had
outstanding Tranche A Term Loans of $386.7 million bearing a weighted average
interest rate of 3.6%, Tranche B Term Loans
30
of $696.7 million bearing a weighted average interest rate of 4.1%, $33.5
million of revolving loans bearing a weighted average interest rate of 4.6%,
undrawn revolving letters of credit of $15.8 million, and $350.7 million in
revolving loans available to be drawn.
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. The rate of interest
payable on the Bridge Loans was equal to LIBOR plus an initial margin of 3.75%.
On July 30, 2003, the Company used proceeds from the 2003 Equity Offerings to
prepay the $400.0 million Bridge Loans in their entirety.
SENIOR NOTES
As of August 31, 2003, the Company had outstanding $200.0 million aggregate
principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior Notes").
The Senior Notes are currently redeemable, in whole or in part, at the option of
the Company.
As of August 31, 2003, the Company had outstanding (pound) 1.0 million
($1.6 million) aggregate principal amount of 8 1/2% Series B Senior Notes due
November 2009 (the "Sterling Series B Senior Notes"). In addition, as of August
31, 2003, the Company had outstanding (pound) 154.0 million ($242.5 million, net
of $0.5 million unamortized discount) aggregate principal amount of 8 1/2%
Series C Senior Notes due November 2009 (the "Sterling Series C Senior Notes").
The Sterling Series B Senior Notes and Sterling Series C Senior Notes are
currently redeemable, in whole or in part, at the option of the Company.
Also, as of August 31, 2003, the Company had outstanding $200.0 million
aggregate principal amount of 8% Senior Notes due February 2008 (the "February
2001 Senior Notes"). The February 2001 Senior Notes are currently redeemable,
in whole or in part, at the option of the Company.
SENIOR SUBORDINATED NOTES
As of August 31, 2003, the Company had outstanding $200.0 million aggregate
principal amount of 8 1/2% Senior Subordinated Notes due March 2009 (the "Senior
Subordinated Notes"). The Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after March 1,
2004.
Also, as of August 31, 2003, the Company had outstanding $250.0 million
aggregate principal amount of 8 1/8% Senior Subordinated Notes due January 2012
(the "January 2002 Senior Subordinated Notes"). The January 2002 Senior
Subordinated Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after January 15, 2007. The Company may also redeem up
to 35% of the January 2002 Senior Subordinated Notes using the proceeds of
certain equity offerings completed before January 15, 2005.
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
31
expenses, of $261.4 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 $165.0 million. The Class A
Common Stock offering and the Preferred Stock offering are referred to together
as the "2003 Equity Offerings." 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 2003 Credit Agreement.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51."
FIN No. 46 requires all variable interest entities to be consolidated by the
primary beneficiary. The primary beneficiary is the entity that holds the
majority of the beneficial interests in the variable interest entity. In
addition, the interpretation expands disclosure requirements for both variable
interest entities that are consolidated as well as variable interest entities
from which the entity is the holder of a significant amount of the beneficial
interests, but not the majority. The Company is required to adopt FIN No. 46 in
its entirety on December 1, 2003. The Company is currently assessing the
financial impact of FIN No. 46 on its consolidated financial statements.
In May 2003, the FASB issued 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. As required, the Company adopted SFAS No. 150
in its entirety on September 1, 2003. The adoption of SFAS No. 150 did not have
a material impact on the Company's consolidated financial statements.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause actual results to differ materially from
those set forth in, or implied by, such forward-looking statements. All
statements other than statements of historical facts included in this Quarterly
Report on Form 10-Q, including statements regarding the Company's future
financial position and prospects, are forward-looking statements. All
forward-looking statements speak only as of the date of this Quarterly Report on
Form 10-Q. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In addition to the risks and uncertainties of ordinary
business operations, the forward-looking statements of the Company contained in
this Form 10-Q are also subject to the following risks and uncertainties: the
on-going assimilation of the Hardy business; final management determinations and
independent appraisals vary materially from current management estimates and
preliminary independent appraisals of the fair value of the assets acquired and
the liabilities assumed in the Hardy acquisition; the Company achieving certain
sales projections and meeting certain cost targets; wholesalers and retailers
may give higher priority to products of the Company's competitors; raw material
supply, production or shipment difficulties could adversely affect the Company's
ability to supply its customers; increased competitive activities in the form of
pricing, advertising and promotions could adversely impact consumer demand for
the Company's products and/or result in higher than expected selling, general
and administrative expenses; a general decline in alcohol consumption; increases
in excise and other taxes on beverage alcohol products; and changes in foreign
exchange rates. For additional information about risks and uncertainties that
could adversely affect the Company's forward-looking statements, please refer to
the Company's Annual Report on Form 10-K for the fiscal year ended February 28,
2003.
32
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------ ----------------------------------------------------------
The Company, as a result of its global operating activities, is exposed to
changes in foreign currency exchange rates and interest rates, which may
adversely affect its results of operations and financial position. In seeking
to minimize the risks and/or costs associated with such activities, the Company
may enter into derivative contracts. The Company does not utilize financial
instruments for trading or other speculative purposes.
Foreign currency forward contracts and foreign currency options are used to
hedge existing foreign currency denominated assets and liabilities, as well as
forecasted foreign currency denominated sales. Using a sensitivity analysis
based on estimated fair value of open contracts using available forward rates,
if the U.S. dollar had been 10% weaker at August 31, 2003, and August 31, 2002,
the fair value of open contracts would have increased $20.2 million and $0.1
million, respectively. Such gains or losses would be substantially offset by
losses or gains from the revaluation or settlement of the related underlying
positions.
The Company is exposed to interest rate risk primarily through its
borrowing activities. The Company utilizes U.S. dollar denominated and foreign
currency denominated borrowings to fund its working capital and investment
needs. Using a sensitivity analysis based on a hypothetical 1% increase in
prevailing interest rates at August 31, 2003, and August 31, 2002, would result
in an approximate increase in cash required for interest of $9.3 million and
$1.1 million, respectively.
The Company's policy is to use only counterparties with an investment-grade
or better rating and to monitor market risk and exposure for each counterparty.
The Company has procedures to monitor the credit exposure amounts. The maximum
credit exposure at August 31, 2003, was not significant to the Company.
ITEM 4. 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
August 31, 2003 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
At the Annual Meeting of Stockholders of Constellation Brands, Inc. held on
July 15, 2003 (the "Annual Meeting"), the holders of the Company's Class A
Common Stock (the "Class A Stock"), voting as a separate class, elected the
Company's slate of director nominees designated to be elected by the holders of
the Class A Stock, and the holders of the Company's Class B Common Stock (the
"Class B Stock"), voting as a separate class, elected the Company's slate of
director nominees designated to be elected by the holders of the Class B Stock.
33
In addition, at the Annual Meeting, the holders of Class A Stock and the
holders of Class B Stock, voting together as a single class, voted upon a
proposal to ratify the selection of KPMG LLP, Certified Public Accountants, as
the Company's independent public accountants for the fiscal year ending February
29, 2004.
Set forth below is the number of votes cast for, against or withheld, as
well as the number of abstentions and broker nonvotes, as applicable, as to each
of the foregoing matters.
I. The results of the voting for the election of Directors of the Company
are as follows:
Directors Elected by the Holders of Class A Stock:
--------------------------------------------------
Nominee For Withheld
------- --- --------
Thomas C. McDermott 48,118,361 23,512,555
Paul L. Smith 48,071,401 23,559,515
Directors Elected by the Holders of Class B Stock:
--------------------------------------------------
Nominee For Withheld
------- --- --------
George Bresler 119,930,460 24,730
Jeananne K. Hauswald 119,659,980 295,210
James A. Locke III 119,679,980 275,210
Richard Sands 119,934,460 20,730
Robert Sands 119,663,980 291,210
II. The selection of KPMG LLP was ratified with the following votes:
For: 165,835,416
Against: 25,518,575
Abstain: 231,415
Broker Nonvotes: 700
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The following Exhibits are furnished as part of this Form 10-Q:
Exhibit Number Description
- -------------- -----------
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 Implementation Deed dated 17 January 2003 between Constellation Brands,
Inc. and BRL Hardy Limited.
2.2 Transaction Compensation Agreement dated 17 January 2003 between
Constellation Brands, Inc. and BRL Hardy Limited.
2.3 No Solicitation Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited.
2.4 Backstop Fee Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited.
34
2.5 Letter Agreement dated 6 February 2003 between Constellation Brands,
Inc. and BRL Hardy Limited.
(3) ARTICLES OF INCORORATION AND BY-LAWS.
3.1 Restated Certificate of Incorporation of the Company.
3.2 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company.
3.3 By-Laws of the Company.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
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.
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.
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.
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.
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.
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.
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.
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.
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.
35
4.10 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.
4.11 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.
4.12 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.
4.13 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.
4.14 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company, as
Trustee.
4.15 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.
4.16 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.
4.17 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as
of July 18, 2003, among the Company, certain of its subsidiaries, and
JPMorgan Chase Bank, as Administrative Agent.
4.18 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.
4.19 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company.
4.20 Deposit Agreement 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.
(10) MATERIAL CONTRACTS.
10.1 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.
10.2 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.
10.3 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.
36
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
11.1 Computation of per share earnings.
(31) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS.
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.
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.
(32) SECTION 1350 CERTIFICATIONS.
32.1 Certification of Chief Executive Officer pursuant to Section 18 U.S.C.
1350.
32.2 Certification of Chief Financial Officer pursuant to Section 18 U.S.C.
1350.
(b) The following Reports on Form 8-K were filed with the Securities
and Exchange Commission during the quarter ended August 31, 2003:
(i) Form 8-K/A dated March 27, 2003 and filed as of June 9, 2003.
This Form 8-K reported information under Item 7 and included
(i) BRL Hardy Limited (now known as Hardy Wine Company
Limited) consolidated statements of financial position as at
31 December 2002 and 31 December 2001 and the related
consolidated statements of financial performance and
consolidated statements of cash flows for each of the two
years in the period ended 31 December 2002, together with the
notes thereto, and the report of PricewaterhouseCoopers,
independent accountants, thereon and (ii) the unaudited pro
forma condensed combined balance sheet as of February 28,
2003, the unaudited pro forma combined statement of income
for the year ended February 28, 2003, and the notes thereto.
(ii) Form 8-K dated July 1, 2003 and filed as of July 1, 2003.
This Form 8-K reported information under Items 7 and 9, and
included (i) the Company's Condensed Consolidated Balance
Sheets as of May 31, 2003 and February 28, 2003; (ii) the
Company's Consolidated Statements of Income on a Reported
Basis for the three months ended May 31, 2003 and
May 31, 2002; (iii) the Company's Supplemental Consolidated
Statements of Income on a Comparable Basis for the three
months ended May 31, 2003 and May 31, 2002; (iv) the
Company's Reconciliation of Reported and Comparable Financial
Information for the three months ended May 31, 2003 and May
31, 2002; and (v) the Company's Reconciliation of Reported
and Comparable Outlook.*
(iii) Form 8-K/A-2 dated March 27, 2003 and filed as of July 18,
2003. This Form 8-K reported information under Item 7 and
included (i) BRL Hardy Limited (now known as Hardy
Wine Company Limited) consolidated statements of financial
position as at 31 December 2002 and 31 December 2001 and the
related consolidated statements of financial performance and
consolidated statements of cash flows for each of the two
years in the period ended 31 December 2002, together with the
notes thereto, and the report of PricewaterhouseCoopers,
37
chartered accountants, thereon and (ii) the unaudited pro
forma condensed combined balance sheet as of February 28,
2003, the unaudited pro forma combined statement of income
for the year ended February 28, 2003, and the notes thereto.
(iv) Form 8-K dated July 18, 2003 and filed as of July 18, 2003.
This Form 8-K reported information under Items 7 and 9, and
included the Company's Reconciliation of Reported and
Comparable Diluted Earnings Per Share.*
(v) Form 8-K dated July 24, 2003 and filed as of July 30, 2003.
This Form 8-K reported information under Item 7.
(vi) Form 8-K dated July 30, 2003 and filed as of July 31, 2003.
This Form 8-K reported information under Items 7 and 9, and
included the Company's Reconciliation of Reported and
Comparable Diluted Earnings Per Share.*
*Designates Form 8-K was furnished rather than filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSTELLATION BRANDS, INC.
Dated: October 15, 2003 By:/s/ Thomas F. Howe
--------------------------------------
Thomas F. Howe, Senior Vice President,
Controller
Dated: October 15, 2003 By:/s/ Thomas S. Summer
--------------------------------------
Thomas S. Summer, Executive Vice
President and Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
38
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 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).
2.2 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).
2.3 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).
2.4 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).
2.5 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) ARTICLES OF INCORPORATION AND BY-LAWS.
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2002 and incorporated herein by reference).
3.2 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) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
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 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 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
39
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated
July 28, 1999 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 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 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).
4.11 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).
4.12 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).
40
4.13 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).
4.14 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).
4.15 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).
4.16 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).
4.17 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as
of July 18, 2003, among the Company, certain of its subsidiaries, and
JPMorgan Chase Bank, as Administrative Agent (filed herewith).
4.18 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).
4.19 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).
4.20 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) MATERIAL CONTRACTS.
10.1 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).
10.2 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).
10.3 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
41
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).
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
11.1 Computation of per share earnings (filed herewith).
(15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION.
Not applicable.
(18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES.
Not applicable.
(19) REPORT FURNISHED TO SECURITY HOLDERS.
Not applicable.
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY
HOLDERS.
Not applicable.
(23) CONSENTS OF EXPERTS AND COUNSEL.
Not applicable.
(24) POWER OF ATTORNEY.
Not applicable.
(31) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS.
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) SECTION 1350 CERTIFICATIONS.
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) ADDITIONAL EXHIBITS.
Not applicable.
42