FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 30, 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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450
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(Address of principal executive offices) (Zip Code)
(585) 218-3600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
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 December 31, 2003, is set forth
below:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Class A Common Stock, Par Value $.01 Per Share 93,809,404
Class B Common Stock, Par Value $.01 Per Share 12,064,130
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)
November 30, February 28,
2003 2003
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 38,375 $ 13,810
Accounts receivable, net 768,096 399,095
Inventories, net 1,291,979 819,912
Prepaid expenses and other 117,946 97,284
------------ ------------
Total current assets 2,216,396 1,330,101
PROPERTY, PLANT AND EQUIPMENT, net 1,047,982 602,469
GOODWILL 1,546,380 722,223
INTANGIBLE ASSETS, net 701,267 382,428
OTHER ASSETS 112,255 159,109
------------ ------------
Total assets $ 5,624,280 $ 3,196,330
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 168,041 $ 2,623
Current maturities of long-term debt 65,833 71,264
Accounts payable 340,070 171,073
Accrued excise taxes 63,877 36,421
Other accrued expenses and liabilities 475,503 303,827
------------ ------------
Total current liabilities 1,113,324 585,208
------------ ------------
LONG-TERM DEBT, less current maturities 1,970,819 1,191,631
------------ ------------
DEFERRED INCOME TAXES 169,462 145,239
------------ ------------
OTHER LIABILITIES 165,738 99,268
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, 170,500 shares at November 30, 2003, and
none at February 28, 2003 (Aggregate liquidation
preference of $173,794 at November 30, 2003) 2 -
Class A Common Stock, $.01 par value-
Authorized, 275,000,000 shares;
Issued, 96,333,605 shares at November 30, 2003,
and 81,435,135 shares at February 28, 2003 963 814
Class B Convertible Common Stock, $.01 par value-
Authorized, 30,000,000 shares;
Issued, 14,569,630 shares at November 30, 2003,
and 14,578,490 shares at February 28, 2003 146 146
Additional paid-in capital 998,214 469,724
Retained earnings 949,824 795,525
Accumulated other comprehensive income (loss) 286,626 (59,257)
------------ ------------
2,235,775 1,206,952
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Less-Treasury stock-
Class A Common Stock, 2,653,112 shares at
November 30, 2003, and 2,749,384 shares at
February 28, 2003, at cost (28,556) (29,610)
Class B Convertible Common Stock, 2,502,900 shares
at November 30, 2003, and February 28, 2003, at cost (2,207) (2,207)
------------ ------------
(30,763) (31,817)
------------ ------------
Less-Unearned compensation-restricted stock awards (75) (151)
------------ ------------
Total stockholders' equity 2,204,937 1,174,984
------------ ------------
Total liabilities and stockholders' equity $ 5,624,280 $ 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 Nine Months Ended November 30, For the Three Months Ended November 30,
-------------------------------------- ---------------------------------------
2003 2002 2003 2002
--------------- --------------- --------------- ---------------
(unaudited) (unaudited) (unaudited) (unaudited)
SALES $ 3,354,298 $ 2,729,219 $ 1,213,541 $ 969,759
Less - Excise taxes (683,184) (650,641) (226,293) (231,380)
--------------- --------------- --------------- ---------------
Net sales 2,671,114 2,078,578 987,248 738,379
COST OF PRODUCT SOLD (1,938,881) (1,495,096) (704,632) (524,885)
--------------- --------------- --------------- ---------------
Gross profit 732,233 583,482 282,616 213,494
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (348,428) (263,847) (113,333) (85,470)
RESTRUCTURING AND RELATED CHARGES (27,487) - (8,088) -
--------------- --------------- --------------- ---------------
Operating income 356,318 319,635 161,195 128,024
GAIN ON CHANGE IN FAIR VALUE
OF DERIVATIVE INSTRUMENTS 1,181 - - -
EQUITY IN EARNINGS OF JOINT VENTURES 965 10,093 126 4,182
INTEREST EXPENSE, net (112,230) (80,494) (31,889) (26,202)
--------------- --------------- --------------- ---------------
Income before income taxes 246,234 249,234 129,432 106,004
PROVISION FOR INCOME TAXES (88,641) (97,949) (46,592) (41,660)
--------------- --------------- --------------- ---------------
NET INCOME 157,593 151,285 82,840 64,344
Dividends on preferred stock (3,294) - (2,450) -
--------------- --------------- --------------- ---------------
INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 154,299 $ 151,285 $ 80,390 $ 64,344
=============== =============== =============== ===============
SHARE DATA:
Earnings per common share:
Basic $ 1.56 $ 1.69 $ 0.76 $ 0.71
=============== =============== =============== ===============
Diluted $ 1.51 $ 1.63 $ 0.73 $ 0.69
=============== =============== =============== ===============
Weighted average common shares
outstanding:
Basic 98,902 89,617 105,323 90,323
Diluted 104,559 92,669 114,196 93,083
<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 Nine Months Ended November 30,
--------------------------------------
2003 2002
-------------- --------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 157,593 $ 151,285
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 58,666 41,174
Amortization of intangible and other assets 18,713 4,409
Deferred tax provision 4,622 4,062
Loss on extinguishment of debt 800 -
Loss on sale of assets 2,108 1,956
Stock-based compensation expense 208 75
Amortization of discount on long-term debt 59 46
Gain on change in fair value of
derivative instruments (1,181) -
Equity in earnings of joint ventures (965) (10,093)
Change in operating assets and liabilities,
net of effects from purchases of businesses:
Accounts receivable, net (218,730) (81,470)
Inventories, net 32,305 (102,901)
Prepaid expenses and other current assets 13,417 (14,029)
Accounts payable 23,615 57,198
Accrued excise taxes 23,845 (8,972)
Other accrued expenses and liabilities 39,989 100,812
Other assets and liabilities, net 24,458 3,712
-------------- --------------
Total adjustments 21,929 (4,021)
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Net cash provided by operating activities 179,522 147,264
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (1,070,074) -
Purchases of property, plant and equipment (70,584) (51,833)
Payment of accrued earn-out amount (2,035) (1,674)
Proceeds from sale of assets 11,085 977
Proceeds from sale of business 4,431 -
Proceeds from sale of marketable equity securities 790 -
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Net cash used in investing activities (1,126,387) (52,530)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,600,000 10,000
Proceeds from equity offerings, net of fees 426,069 -
Net proceeds from (repayments of) notes payable 165,209 (49,429)
Exercise of employee stock options 23,756 25,539
Proceeds from employee stock purchases 1,822 1,319
Principal payments of long-term debt (1,240,395) (62,519)
Payment of issuance costs of long-term debt (34,147) (10)
-------------- --------------
Net cash provided by (used in)
financing activities 942,314 (75,100)
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Effect of exchange rate changes on cash
and cash investments 29,116 1,341
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NET INCREASE IN CASH AND CASH INVESTMENTS 24,565 20,975
CASH AND CASH INVESTMENTS, beginning of period 13,810 8,961
-------------- --------------
CASH AND CASH INVESTMENTS, end of period $ 38,375 $ 29,936
============== ==============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired,
including cash acquired $ 1,790,142 $ -
Liabilities assumed (633,356) -
-------------- --------------
Net assets acquired 1,156,786 -
Less - stock issuance (77,243) -
Less - direct acquisition costs accrued
or previously paid (7,964) -
Less - cash acquired (1,505) -
-------------- --------------
Net cash paid for purchases of businesses $ 1,070,074 $ -
============== ==============
<FN>
The accompanying notes are an integral part of these statements.
3
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 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 Nine Months For the Three Months
Ended November 30, Ended November 30,
--------------------- ----------------------
2003 2002 2003 2002
--------- --------- --------- ---------
(in thousands, except per share data)
Net income, as reported $ 157,593 $ 151,285 $ 82,840 $ 64,344
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 133 46 16 15
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for all
awards, net of related tax effects (7,296) (10,131) (2,490) (3,377)
--------- --------- --------- ---------
Pro forma net income $ 150,430 $ 141,200 $ 80,366 $ 60,982
========= ========= ========= =========
Pro forma income available to
common stockholders $ 147,135 $ 141,200 $ 77,916 $ 60,982
========= ========= ========= =========
Earnings per common share:
Basic--as reported $ 1.56 $ 1.69 $ 0.76 $ 0.71
Basic--pro forma $ 1.49 $ 1.58 $ 0.74 $ 0.68
Diluted--as reported $ 1.51 $ 1.63 $ 0.73 $ 0.69
Diluted--pro forma $ 1.44 $ 1.51 $ 0.70 $ 0.65
Effective July 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," in its entirety. SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts (collectively referred to as derivatives) and for hedging activities
under SFAS No. 133. The adoption of SFAS No. 149 did not have a material impact
on the Company's consolidated financial statements.
Effective August 1, 2003, the Company adopted EITF Issue No. 00-21 ("EITF
No. 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21
addresses certain aspects of the accounting by a vendor for arrangements under
which it will perform multiple revenue-generating activities. EITF No. 00-21
also addresses how arrangement consideration should be measured and allocated to
the separate units of accounting in the arrangement. The adoption of EITF No.
00-21 did not have a material impact on the Company's consolidated financial
statements.
Effective September 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
No. 150 requires that an issuer classify a financial instrument that is within
the scope of SFAS No. 150 as a liability. The adoption of SFAS No. 150 did not
have a material impact on the Company's consolidated financial statements.
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
5
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.
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 nine months ended
November 30, 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 March 2003 Credit Agreement (as
defined in Note 10) and $400.0 million of borrowings under the Company's Bridge
Agreement (as defined in Note 10). Additionally, the Company issued 3,288,913
shares of the Company's Class A Common Stock, which were valued at $77.2 million
based on the simple average of the closing market price of the Company's Class A
Common Stock beginning two days before and ending two days after April 4, 2003,
the day the Hardy shareholders elected the form of consideration they wished to
receive. The purchase price was based primarily on a discounted cash flow
analysis that contemplated, among other things, the value of a broader
geographic distribution in strategic international markets and a presence in the
important Australian winemaking regions. The Company and Hardy have
complementary businesses that share a common growth orientation and operating
philosophy. The Hardy Acquisition supports the Company's strategy of growth and
breadth across categories and geographies, and strengthens its competitive
position in its core markets. The purchase price and resulting goodwill were
primarily based on the growth opportunities of the brand portfolio of Hardy. In
particular, the Company believes there are growth opportunities for Australian
wines in the United Kingdom, United States and other wine markets. This
acquisition supports the Company's strategy of driving long-term growth and
positions the Company to capitalize on the growth opportunities in "new world"
wine markets.
The results of operations of Hardy and PWP are reported in the
Constellation Wines segment and have been included in the Consolidated
Statements of Income since the accounting acquisition date.
The following table summarizes the estimated fair values of the Hardy
Acquisition assets acquired and liabilities assumed at the date of acquisition.
The 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 $ 532,412
Property, plant and equipment 332,260
Other assets 33,403
Trademarks 246,398
Goodwill 643,300
-----------
Total assets acquired 1,787,773
Current liabilities 294,766
Long-term liabilities 337,234
-----------
Total liabilities assumed 632,000
-----------
Net assets acquired $ 1,155,773
===========
6
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 nine months and three months ended November
30, 2003, and November 30, 2002. The unaudited pro forma results of operations
for the nine months ended November 30, 2003, and November 30, 2002, and the
three months ended November 30, 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 nine months ended November
30, 2002, do not reflect total pretax nonrecurring charges of $30.3 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.
For the Nine Months For the Three Months
Ended November 30, Ended November 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands, except per share data)
Net sales $ 2,703,454 $ 2,481,395 $ 987,248 $ 888,375
Income before income taxes $ 249,210 $ 243,420 $ 129,432 $ 101,664
Net income $ 160,033 $ 155,223 $ 82,840 $ 65,192
Income available to common stockholders $ 156,739 $ 155,223 $ 80,390 $ 65,192
Earnings per common share:
Basic $ 1.58 $ 1.67 $ 0.76 $ 0.70
=========== =========== =========== ===========
Diluted $ 1.52 $ 1.62 $ 0.73 $ 0.68
=========== =========== =========== ===========
Weighted average common shares outstanding:
Basic 99,368 92,906 105,323 93,612
Diluted 105,025 95,958 114,196 96,372
4) INVENTORIES:
Inventories are stated at the lower of cost (computed in accordance with
the first-in, first-out method) or market. Elements of cost include materials,
labor and overhead and consist of the following:
November 30, February 28,
2003 2003
------------ ------------
(in thousands)
Raw materials and supplies $ 83,526 $ 26,472
In-process inventories 785,740 534,073
Finished case goods 422,713 259,367
------------ ------------
$ 1,291,979 $ 819,912
============ ============
7
5) PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
November 30, February 28,
2003 2003
------------ ------------
(in thousands)
Land and land improvements $ 148,698 $ 84,758
Vineyards 116,165 37,394
Buildings and improvements 274,370 173,943
Machinery and equipment 757,157 551,271
Motor vehicles 12,731 5,468
Construction in progress 72,811 32,839
------------ ------------
1,381,932 885,673
Less - Accumulated depreciation (333,950) (283,204)
------------ ------------
$ 1,047,982 $ 602,469
============ ============
6) GOODWILL:
The changes in the carrying amount of goodwill for the nine months ended
November 30, 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 678,512 - 678,512
Foreign currency translation
adjustments 142,232 1,664 143,896
Purchase price earn-out 1,749 - 1,749
------------ ------------- ------------
Balance, November 30, 2003 $ 1,412,756 $ 133,624 $ 1,546,380
============ ============= ============
7) INTANGIBLE ASSETS:
The major components of intangible assets are:
November 30, 2003 February 28, 2003
----------------------- -----------------------
Gross Net Gross Net
Carrying Carrying Carrying Carrying
Amount Amount Amount Amount
---------- ---------- ---------- ----------
(in thousands)
Amortizable intangible assets:
Distribution agreements $ 11,323 $ 3,999 $ 10,158 $ 4,434
Other 4,184 419 3,978 345
---------- ---------- ---------- ----------
Total $ 15,507 4,418 $ 14,136 4,779
========== ==========
Nonamortizable intangible assets:
Trademarks 677,181 357,166
Agency relationships 19,640 20,458
Other 28 25
---------- ----------
Total 696,849 377,649
---------- ----------
Total intangible assets $ 701,267 $ 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 $1.5 million and $1.7 million for
the nine months ended November 30, 2003, and November 30, 2002,
8
respectively, and $0.6 million and $0.6 million for the three months ended
November 30, 2003, and November 30, 2002, respectively. Estimated amortization
expense for the remaining three months of fiscal 2004 and for each of the five
succeeding fiscal years is as follows:
(in thousands)
2004 $ 559
2005 $ 1,982
2006 $ 1,449
2007 $ 390
2008 $ 38
2009 $ -
8) OTHER ASSETS:
The major components of other assets are as follows:
November 30, February 28,
2003 2003
------------ ------------
(in thousands)
Deferred financing costs $ 54,585 $ 28,555
Derivative assets 42,499 -
Investment in marketable equity securities 13,438 -
Investment in joint ventures 8,227 123,064
Other 13,775 18,418
------------ ------------
132,524 170,037
Less - Accumulated amortization (20,269) (10,928)
------------ ------------
$ 112,255 $ 159,109
============ ============
The Company's investment in marketable equity securities is classified as
an available-for-sale security. As such, gross unrealized losses of $1.0
million are included, net of applicable income taxes, within accumulated other
comprehensive income as of November 30, 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 nine months and three
months ended November 30, 2003, are immaterial.
Amortization expense for other assets was included in selling, general and
administrative expenses and was $17.2 million and $2.7 million for the nine
months ended November 30, 2003, and November 30, 2002, respectively, and $4.1
million and $0.9 million for the three months ended November 30, 2003, and
November 30, 2002, respectively. Amortization expense for the nine months ended
November 30, 2003, includes $8.2 million related to amortization of the deferred
financing costs associated with the Bridge Loans (as defined in Note 10). As of
November 30, 2003, the deferred financing costs associated with the Bridge Loans
have been fully amortized.
9
9) OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
November 30, February 28,
2003 2003
------------ ------------
(in thousands)
Advertising and promotions $ 131,976 $ 63,155
Income taxes payable 72,197 58,347
Salaries and commissions 41,030 35,769
Adverse grape contracts 33,427 10,244
Interest 27,321 22,019
Other 169,552 114,293
----------- ------------
$ 475,503 $ 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
entered into a new credit agreement (as subsequently amended and restated as of
March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the
Company entered into a Second Amended and Restated Credit Agreement (the "Credit
Agreement") that (i) refinanced the then outstanding principal balance under the
Tranche B Term Loan facility on essentially the same terms as the Tranche B Term
Loan facility under the March 2003 Credit Agreement, but at a lower Applicable
Rate (as such term is defined in the Credit Agreement) and (ii) otherwise
restated the terms of the March 2003 Credit Agreement, as amended. The March
2003 Credit Agreement provided for aggregate credit facilities of $1.6 billion
consisting of a $400.0 million Tranche A Term Loan facility due in February
2008, an $800.0 million Tranche B Term Loan facility due in November 2008 and a
$400.0 million Revolving Credit facility (including an Australian Dollar
revolving sub-facility of up to A$10.0 million and a sub-facility for letters of
credit of up to $40.0 million) which expires on February 29, 2008. Proceeds of
the March 2003 Credit Agreement were used to pay off the Company's obligations
under its prior senior credit facility, to fund a portion of the cash required
to pay the former Hardy shareholders and to pay indebtedness outstanding under
certain of Hardy's credit facilities. The Company intends to use the remaining
availability under the 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. As of November 30, 2003, the Company has
made $26.6 million of scheduled and required payments on the Tranche A Term Loan
facility. In August 2003, the Company prepaid $100.0 million of the Tranche B
Term Loan facility. In October 2003, the Company prepaid an additional $200.0
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 $54.4 million in fiscal 2006, $54.4 million in fiscal 2007,
$119.1 million in fiscal 2008 and $272.1 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 Credit Agreement) and, with respect to LIBOR borrowings, ranges
between 1.50% and 2.50%. As of November 30, 2003, the LIBOR margin for the
Revolving Credit facility and the Tranche A Term Loan facility is 1.75%, while
the LIBOR margin on the Tranche B Term Loan facility is 2.00%.
10
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 Credit Agreement, ceased to apply. Certain
foreign subsidiaries of the Company have guaranteed debt, including debt of a
joint venture in the maximum amount of $3.9 million and debt of a partnership in
the maximum amount of $1.0 million as of November 30, 2003. 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 November 30, 2003, the Company is in compliance with all of its covenants
under its Credit Agreement.
As of November 30, 2003, under the Credit Agreement, the Company had
outstanding Tranche A Term Loans of $373.4 million bearing a weighted average
interest rate of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted
average interest rate of 3.1%, $166.6 million of revolving loans bearing a
weighted average interest rate of 3.0%, undrawn revolving letters of credit of
$18.4 million, and $215.1 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 "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:
November 30, February 28,
2003 2003
------------ ------------
(in thousands)
Adverse grape contracts $ 79,680 $ 22,550
Accrued pension liability 40,009 36,351
Other 46,049 40,367
------------ ------------
$ 165,738 $ 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 $261.2 million. In
addition, the Company also completed a public offering of 170,500
11
shares of its 5.75% Series A Mandatory Convertible Preferred Stock ("Preferred
Stock") resulting in net proceeds to the Company, after deducting underwriting
discounts and expenses, of $164.9 million. The Class A Common Stock offering and
the Preferred Stock offering are referred to together as the "2003 Equity
Offerings." The net proceeds from the 2003 Equity Offerings were used to repay
the Bridge Loans that were incurred to partially finance the Hardy Acquisition.
The remaining proceeds were used to repay term loan borrowings under the March
2003 Credit Agreement.
As of November 30, 2003, 170,500 shares of Preferred Stock were outstanding
and $3.3 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. The dividends
accrued as of November 30, 2003, were subsequently paid on December 1, 2003. On
September 1, 2006, the automatic conversion date, each share of Preferred Stock
will automatically convert into, subject to certain anti-dilution adjustments,
between 29.276 and 35.716 shares of the Company's Class A Common Stock,
depending on the then applicable market price of the Company's Class A Common
Stock, in accordance with the following table:
Applicable market price Conversion rate
----------------------- ---------------
Less than or equal to $28.00 35.716 shares
Between $28.00 and $34.16 35.716 to 29.276 shares
Equal to or greater than $34.16 29.276 shares
The applicable market price is the average of the closing prices per share
of the Company's Class A Common Stock on each of the 20 consecutive trading days
ending on the third trading day immediately preceding the applicable conversion
date. At any time prior to September 1, 2006, holders may elect to convert each
share of Preferred Stock, subject to certain anti-dilution adjustments, into
29.276 shares of the Company's Class A Common Stock. If the closing market
price of the Company's Class A Common Stock exceeds $51.24 for at least 20
trading days within a period of 30 consecutive trading days, the Company may
elect, subject to certain limitations and anti-dilution adjustments, to cause
the conversion of all, but not less than all, of the then outstanding shares of
Preferred Stock into shares of the Company's Class A Common Stock at a
conversion rate of 29.276 shares of the Company's Class A Common Stock. In
order for the Company to cause the early conversion of the Preferred Stock, the
Company must pay all accrued and unpaid dividends on the Preferred Stock as well
as the present value of all remaining dividend payments through and including
September 1, 2006. If the Company is involved in a merger in which at least 30%
of the consideration for all or any class of the Company's common stock consists
of cash or cash equivalents, then on or after the date of such merger, each
holder will have the right to convert each share of Preferred Stock into the
number of shares of the Company's Class A Common Stock applicable on the
automatic conversion date. The Preferred Stock ranks senior in right of payment
to all of the Company's common stock and has a liquidation preference of $1,000
per share, plus accrued and unpaid dividends.
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 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.
12
The computation of basic and diluted earnings per common share is as
follows:
For the Nine Months For the Three Months
Ended November 30, Ended November 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands, except per share data)
Net income $ 157,593 $ 151,285 $ 82,840 $ 64,344
Dividends on preferred stock (3,294) - (2,450) -
---------- ---------- ---------- ----------
Income available to common stockholders $ 154,299 $ 151,285 $ 80,390 $ 64,344
========== ========== ========== ==========
Weighted average common shares
outstanding - basic 98,902 89,617 105,323 90,323
Stock options 3,227 3,052 3,484 2,760
Preferred stock 2,430 - 5,389 -
---------- ---------- ---------- ----------
Weighted average common shares
outstanding - diluted 104,559 92,669 114,196 93,083
========== ========== ========== ==========
Earnings per common share - basic $ 1.56 $ 1.69 $ 0.76 $ 0.71
========== ========== ========== ==========
Earnings per common share - diluted $ 1.51 $ 1.63 $ 0.73 $ 0.69
========== ========== ========== ==========
Stock options to purchase 0.1 million and 1.1 million shares of Class A
Common Stock at a weighted average price per share of $30.82 and $27.43 were
outstanding during the nine months ended November 30, 2003, and November 30,
2002, respectively, but were not included in the computation of the diluted
earnings per common share because the stock options' exercise price was greater
than the average market price of the Class A Common Stock for the period. Stock
options to purchase 0.1 million and 1.1 million shares of Class A Common Stock
at a weighted average price per share of $31.01 and $27.41 were outstanding
during the three months ended November 30, 2003, and November 30, 2002,
respectively, but were not included in the computation of the diluted earnings
per common share because the stock options' exercise price was greater than the
average market price of the Class A Common Stock for the period.
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 Nine Months For the Three Months
Ended November 30, Ended November 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
(in thousands)
Net income $ 157,593 $ 151,285 $ 82,840 $ 64,344
Other comprehensive income, net of tax:
Foreign currency translation adjustments 320,237 14,659 214,120 1,520
Cash flow hedges:
Net derivative gains, net of tax effect of
($13,936) and ($4,787), respectively 32,432 - 11,137 -
Reclassification adjustments, net of tax effect
of $886, $13, and $275, respectively (1,939) (21) (596) -
---------- ---------- ---------- ----------
Net cash flow hedges 30,493 (21) 10,541 -
Unrealized loss on marketable equity securities, net
of tax effect of $303 and ($44), respectively (708) - 102 -
Minimum pension liability adjustment, net of tax
effect of $1,838, $254, $1,690 and ($1),
respectively (4,139) (380) (3,868) 2
---------- ---------- ---------- ----------
Total comprehensive income $ 503,476 $ 165,543 $ 303,735 $ 65,866
========== ========== ========== ==========
13
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 320,237 30,493 (708) (4,139) 345,883
----------- ----------- ------------ ------------ -------------
Balance, November 30, 2003 $ 303,515 $ 30,493 $ (708) $ (46,674) $ 286,626
=========== =========== ============ ============ =============
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.
In the third quarter of fiscal 2004, the Company revised its accounting
policy with regard to the income statement presentation of the reclassification
adjustments of cash flow hedges of certain sales transactions. These cash flow
hedges are used to reduce the risk of foreign currency exchange rate
fluctuations resulting from the sale of product denominated in various foreign
currencies. As such, the Company's revised accounting policy is to report the
reclassification adjustments from accumulated other comprehensive income (loss)
to sales. Previously, the Company reported such reclassification adjustments in
selling, general and administrative expenses. This change in accounting policy
resulted in a reclassification which increased selling, general and
administrative expenses and sales by $1.2 million and $2.3 million for the three
months ended May 31, 2003, and August 31, 2003, respectively. No such
reclassification was required for the comparable prior year periods. This
reclassification did not affect operating income or net income.
15) RESTRUCTURING AND RELATED CHARGES:
For the nine months ended November 30, 2003, the Company recorded $27.5
million of restructuring and related charges associated with the restructuring
plan of the Constellation Wines segment. Restructuring and related charges
resulted from (i) the realignment of business operations 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.
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 Constellation Wines segment.
14
The Company recorded restructuring and related charges of $8.1 million for
the three months ended November 30, 2003, including $0.7 million of employee
termination benefit costs, $6.6 million of grape contract termination costs,
$0.8 million of facility consolidation and relocation costs.
The Company estimates that the completion of the restructuring plan will
include a total of $6.0 million of employee termination benefit costs through
February 29, 2004, of which $4.6 million has been incurred through November 30,
2003. The Company estimates that the completion of the restructuring plan will
include a total of $22.6 million of grape contract termination costs through
February 28, 2005, of which $17.2 million has been incurred through November 30,
2003. The Company estimates that the completion of the restructuring plan will
include a total of $2.3 million of facility consolidation and relocation costs
through February 28, 2005, of which $1.8 million has been incurred through
November 30, 2003. The Company has incurred other costs related to the
restructuring plan for the disposal of fixed assets and other costs of
realigning the business operations of the Constellation Wines segment and
expects to incur additional costs 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
Restructuring charges 686 6,563 786 8,035
Cash expenditures (381) - (786) (1,167)
----------- ----------- -------------- ---------
Balance, November 30, 2003 $ 1,135 $ 15,142 $ - $ 16,277
=========== =========== ============== =========
16) CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets of the Company as of November 30, 2003, and February 28, 2003, and the
condensed consolidating statements of income for the nine months and three
months ended November 30, 2003, and November 30, 2002, and the condensed
consolidating statements of cash flows for the nine months ended November 30,
2003, and November 30, 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 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.
15
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at November 30, 2003
- --------------------
Current assets:
Cash and cash investments $ 100 $ 6,632 $ 31,643 $ - $ 38,375
Accounts receivable, net 167,889 161,108 439,099 - 768,096
Inventories, net 32,215 638,186 628,505 (6,927) 1,291,979
Prepaid expenses and other 9,607 51,232 57,107 - 117,946
Intercompany (payable) receivable (294,338) (588,769) 883,107 - -
----------- ----------- ------------- ------------ ------------
Total current assets (84,527) 268,389 2,039,461 (6,927) 2,216,396
Property, plant and equipment, net 49,627 351,395 646,960 - 1,047,982
Investments in subsidiaries 4,306,531 2,309,174 - (6,615,705) -
Goodwill 47,530 498,216 1,000,634 - 1,546,380
Intangible assets, net 10,844 313,749 376,674 - 701,267
Other assets 42,334 2,246 67,675 - 112,255
----------- ----------- ------------- ------------ ------------
Total assets $ 4,372,339 $ 3,743,169 $ 4,131,404 $ (6,622,632) $ 5,624,280
=========== =========== ============= ============ ============
Current liabilities:
Notes payable to banks $ 166,600 $ - $ 1,441 $ - $ 168,041
Current maturities of long-term debt 58,460 3,789 3,584 - 65,833
Accounts payable 32,881 118,987 188,202 - 340,070
Accrued excise taxes 8,486 18,908 36,483 - 63,877
Other accrued expenses and liabilities 171,892 38,466 265,145 - 475,503
----------- ----------- ------------- ------------ ------------
Total current liabilities 438,319 180,150 494,855 - 1,113,324
Long-term debt, less current maturities 1,931,585 8,288 30,946 - 1,970,819
Deferred income taxes 54,368 79,655 35,439 - 169,462
Other liabilities 7,127 28,544 130,067 - 165,738
Stockholders' equity:
Preferred stock 2 - - - 2
Class A and Class B common stock 1,109 6,434 64,867 (71,301) 1,109
Additional paid-in capital 998,214 1,859,311 2,956,146 (4,815,457) 998,214
Retained earnings 956,751 1,540,771 188,176 (1,735,874) 949,824
Accumulated other comprehensive
income 15,702 40,016 230,908 - 286,626
Treasury stock and other (30,838) - - - (30,838)
----------- ----------- ------------- ------------ ------------
Total stockholders' equity 1,940,940 3,446,532 3,440,097 (6,622,632) 2,204,937
----------- ----------- ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 4,372,339 $ 3,743,169 $ 4,131,404 $ (6,622,632) $ 5,624,280
=========== =========== ============= ============ ============
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
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
=========== =========== ============= ============ ============
16
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
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 Nine Months Ended November 30, 2003
- -------------------------------------------
Gross sales $ 603,162 $ 1,536,886 $ 1,433,848 $ (219,598) $ 3,354,298
Less - excise taxes (106,045) (325,692) (251,447) - (683,184)
----------- ----------- ------------- ------------ ------------
Net sales 497,117 1,211,194 1,182,401 (219,598) 2,671,114
Cost of product sold (428,529) (804,290) (918,808) 212,746 (1,938,881)
----------- ----------- ------------- ------------ ------------
Gross profit 68,588 406,904 263,593 (6,852) 732,233
Selling, general and administrative
expenses (92,452) (124,276) (131,700) - (348,428)
Restructuring and related charges - (26,061) (1,426) - (27,487)
----------- ----------- ------------- ------------ ------------
Operating (loss) income (23,864) 256,567 130,467 (6,852) 356,318
Gain on change in fair value of
derivative instruments 1,181 - - - 1,181
Equity in earnings of
subsidiary/joint venture 177,392 88,893 425 (265,745) 965
Interest income (expense), net 9,256 (116,673) (4,813) - (112,230)
----------- ----------- ------------- ------------ ------------
Income before income taxes 163,965 228,787 126,079 (272,597) 246,234
Provision for income taxes 480 (51,395) (37,726) - (88,641)
----------- ----------- ------------- ------------ ------------
Net income 164,445 177,392 88,353 (272,597) 157,593
Dividends on preferred stock (3,294) - - - (3,294)
----------- ----------- ------------- ------------ ------------
Income available to common
stockholders $ 161,151 $ 177,392 $ 88,353 $ (272,597) $ 154,299
=========== =========== ============= ============ ============
17
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Nine Months Ended November 30, 2002
- -------------------------------------------
Gross sales $ 611,053 $ 1,482,454 $ 862,956 $ (227,244) $ 2,729,219
Less - excise taxes (110,952) (315,651) (224,038) - (650,641)
----------- ----------- ------------- ------------ ------------
Net sales 500,101 1,166,803 638,918 (227,244) 2,078,578
Cost of product sold (381,128) (828,517) (512,704) 227,253 (1,495,096)
----------- ----------- ------------- ------------ ------------
Gross profit 118,973 338,286 126,214 9 583,482
Selling, general and administrative
expenses (79,921) (110,749) (73,177) - (263,847)
----------- ----------- ------------- ------------ ------------
Operating income 39,052 227,537 53,037 9 319,635
Equity in earnings of
subsidiary/joint venture 123,362 19,892 - (133,161) 10,093
Interest income (expense), net 6,935 (52,151) (35,278) - (80,494)
----------- ----------- ------------- ------------ ------------
Income before income taxes 169,349 195,278 17,759 (133,152) 249,234
Provision for income taxes (18,073) (71,916) (7,960) - (97,949)
----------- ----------- ------------- ------------ ------------
Net income $ 151,276 $ 123,362 $ 9,799 $ (133,152) $ 151,285
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended November 30, 2003
- --------------------------------------------
Gross sales $ 223,249 $ 477,418 $ 531,243 $ (18,369) $ 1,213,541
Less - excise taxes (40,841) (111,789) (73,663) - (226,293)
----------- ----------- ------------- ------------ ------------
Net sales 182,408 365,629 457,580 (18,369) 987,248
Cost of product sold (150,233) (220,506) (345,602) 11,709 (704,632)
----------- ----------- ------------- ------------ ------------
Gross profit 32,175 145,123 111,978 (6,660) 282,616
Selling, general and administrative
expenses (29,467) (34,145) (49,721) - (113,333)
Restructuring and related charges - (7,966) (122) - (8,088)
----------- ----------- ------------- ------------ ------------
Operating income 2,708 103,012 62,135 (6,660) 161,195
Equity in earnings of
subsidiary/joint venture 84,296 44,479 126 (128,775) 126
Interest income (expense), net 8,089 (40,155) 177 - (31,889)
----------- ----------- ------------- ------------ ------------
Income before income taxes 95,093 107,336 62,438 (135,435) 129,432
Provision for income taxes (5,593) (23,040) (17,959) - (46,592)
----------- ----------- ------------- ------------ ------------
Net income 89,500 84,296 44,479 (135,435) 82,840
Dividends on preferred stock (2,450) - - - (2,450)
----------- ----------- ------------- ------------ ------------
Income available to common
stockholders $ 87,050 $ 84,296 $ 44,479 $ (135,435) $ 80,390
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended November 30, 2002
- --------------------------------------------
Gross sales $ 234,370 $ 525,027 $ 315,653 $ (105,291) $ 969,759
Less - excise taxes (43,019) (106,846) (81,515) - (231,380)
----------- ----------- ------------- ------------ ------------
Net sales 191,351 418,181 234,138 (105,291) 738,379
Cost of product sold (142,016) (303,118) (185,147) 105,396 (524,885)
----------- ----------- ------------- ------------ ------------
Gross profit 49,335 115,063 48,991 105 213,494
Selling, general and administrative
expenses (26,512) (36,308) (22,650) - (85,470)
----------- ----------- ------------- ------------ ------------
Operating income 22,823 78,755 26,341 105 128,024
Equity in earnings of
subsidiary/joint venture 48,687 13,216 - (57,721) 4,182
Interest income (expense), net 2,798 (17,066) (11,934) - (26,202)
----------- ----------- ------------- ------------ ------------
Income before income taxes 74,308 74,905 14,407 (57,616) 106,004
Provision for income taxes (10,069) (26,218) (5,373) - (41,660)
----------- ----------- ------------- ------------ ------------
Net income $ 64,239 $ 48,687 $ 9,034 $ (57,616) $ 64,344
=========== =========== ============= ============ ============
18
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Nine Months Ended November 30, 2003
- -------------------------------------------
Net cash provided by (used in)
operating activities $ 86,143 $ (79,713) $ 173,092 $ - $ 179,522
Cash flows from investing activities:
Purchases of businesses, net of cash - (1,070,074) - - (1,070,074)
Purchases of property, plant and
equipment (6,216) (25,114) (39,254) - (70,584)
Payment of accrued earn-out amount - (2,035) - - (2,035)
Proceeds from sale of assets - 5,001 6,084 - 11,085
Proceeds from sale of business - - 4,431 - 4,431
Proceeds from sale of marketable
equity securities - - 790 - 790
----------- ----------- ------------- ------------ ------------
Net cash used in investing activities (6,216) (1,092,222) (27,949) - (1,126,387)
----------- ----------- ------------- ------------ ------------
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 426,069 - - - 426,069
Net proceeds of notes payable 164,600 - 609 - 165,209
Exercise of employee stock options 23,756 - - - 23,756
Proceeds from employee stock
purchases 1,822 - - - 1,822
Intercompany financing activities, net (1,419,182) 1,070,074 349,108 - -
Principal payments of long-term debt (871,959) (2,430) (366,006) - (1,240,395)
Payment of issuance costs of
long-term debt (34,147) - - - (34,147)
----------- ----------- ------------- ------------ ------------
Net cash (used in) provided by
financing activities (109,041) 1,067,644 (16,289) - 942,314
----------- ----------- ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments 27,788 109,675 (108,347) - 29,116
----------- ----------- ------------- ------------ ------------
Net (decrease) increase in cash and
cash investments (1,326) 5,384 20,507 - 24,565
Cash and cash investments, beginning
of period 1,426 1,248 11,136 - 13,810
----------- ----------- ------------- ------------ ------------
Cash and cash investments, end of
period $ 100 $ 6,632 $ 31,643 $ - $ 38,375
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Nine Months Ended November 30, 2002
- -------------------------------------------
Net cash provided by
operating activities $ 59,057 $ 56,694 $ 31,513 $ - $ 147,264
Cash flows from investing activities:
Purchases of property, plant and
equipment (9,161) (30,801) (11,871) - (51,833)
Other - (1,274) 577 - (697)
----------- ----------- ------------- ------------ ------------
Net cash used in investing activities (9,161) (32,075) (11,294) - (52,530)
----------- ----------- ------------- ------------ ------------
19
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Cash flows from financing activities:
Net repayments of notes payable (45,500) - (3,929) - (49,429)
Principal payments of long-term debt (53,987) (2,387) (6,145) - (62,519)
Payment of issuance costs of
long-term debt (10) - - - (10)
Exercise of employee stock options 25,539 - - - 25,539
Proceeds from long-term debt - - 10,000 - 10,000
Proceeds from employee
stock purchase 1,319 - - - 1,319
----------- ----------- ------------- ------------ ------------
Net cash (used in) provided by
financing activities (72,639) (2,387) (74) - (75,100)
----------- ----------- ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments 23,372 (22,593) 562 - 1,341
----------- ----------- ------------- ------------ ------------
Net increase (decrease) in cash
and cash investments 629 (361) 20,707 - 20,975
Cash and cash investments, beginning
of period 838 2,084 6,039 - 8,961
----------- ----------- ------------- ------------ ------------
Cash and cash investments, end of
period $ 1,467 $ 1,723 $ 26,746 $ - $ 29,936
=========== =========== ============= ============ ============
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). Amounts included in the
Corporate Operations and Other segment consist of general corporate
administration and finance expenses. These amounts include costs of executive
management, investor relations, internal audit, treasury, tax, corporate
development, legal, financial reporting, professional fees and public relations.
Any costs incurred at the corporate office that are applicable to the segments
are allocated to the appropriate segment. The amounts included in the Corporate
Operations and Other segment are general costs that are applicable to the
consolidated group and are therefore not allocated to the other reportable
segments. All costs reported within the Corporate Operations and Other segment
are not included in the chief operating decision maker's evaluation of the
operating income performance of the other operating segments. The new business
segments reflect how the Company's operations are 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 nine months ended
November 30, 2002, and three months ended November 30, 2002, has been restated
to conform to the new segment presentation. For the nine months ended November
30, 2003, restructuring and unusual costs consist of the flow through of
inventory step-up and financing costs associated with the Hardy Acquisition of
$17.3 million and $11.6 million, respectively, and restructuring and related
charges of $44.3 million, including a write-down of commodity concentrate
inventory of $16.8 million. For the three months ended November 30, 2003,
restructuring and unusual costs consist of the flow through of inventory step-up
and financing costs associated with the Hardy Acquisition of $2.7 million and
$2.3 million, respectively, and restructuring and related charges of $8.1
million. The accounting policies of the segments are the same as those
described for the Company in the Summary of Significant Accounting
20
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.
Segment information is as follows:
For the Nine Months For the Three Months
Ended November 30, Ended November 30,
------------------------- -------------------------
2003 2002 2003 2002
----------- ----------- ----------- -----------
(in thousands)
Constellation Wines:
- --------------------
Net sales:
Branded wine $ 1,155,170 $ 733,450 $ 460,805 $ 282,320
Wholesale and other 611,854 510,649 219,740 179,979
----------- ----------- ----------- -----------
Net sales $ 1,767,024 $ 1,244,099 $ 680,545 $ 462,299
Segment operating income $ 258,208 $ 166,512 $ 112,772 $ 75,433
Equity in earnings of joint ventures $ 965 $ 10,093 $ 126 $ 4,182
Long-lived assets $ 951,317 $ 510,791 $ 951,317 $ 510,791
Investment in joint ventures $ 8,227 $ 120,613 $ 8,227 $ 120,613
Total assets $ 4,834,279 $ 2,596,072 $ 4,834,279 $ 2,596,072
Capital expenditures $ 61,900 $ 42,639 $ 20,839 $ 13,572
Depreciation and amortization $ 51,374 $ 34,691 $ 17,361 $ 10,894
Constellation Beers and Spirits:
- --------------------------------
Net sales:
Imported beers $ 684,216 $ 615,098 $ 229,538 $ 195,585
Spirits 219,874 219,381 77,165 80,495
----------- ----------- ----------- -----------
Net sales $ 904,090 $ 834,479 $ 306,703 $ 276,080
Segment operating income $ 202,228 $ 175,548 $ 72,228 $ 59,572
Long-lived assets $ 82,416 $ 77,391 $ 82,416 $ 77,391
Total assets $ 740,226 $ 710,495 $ 740,226 $ 710,495
Capital expenditures $ 5,981 $ 6,054 $ 2,748 $ 2,024
Depreciation and amortization $ 7,529 $ 7,691 $ 2,363 $ 2,586
Corporate Operations and Other:
- -------------------------------
Net sales $ - $ - $ - $ -
Segment operating loss $ (30,978) $ (22,425) $ (10,669) $ (6,981)
Long-lived assets $ 14,249 $ 10,971 $ 14,249 $ 10,971
Total assets $ 49,775 $ 33,836 $ 49,775 $ 33,836
Capital expenditures $ 2,703 $ 3,141 $ 553 $ 2,019
Depreciation and amortization $ 18,476 $ 3,201 $ 4,712 $ 1,102
Restructuring and Related Charges
- ---------------------------------
and Unusual Costs:
------------------
Operating loss $ (73,140) $ - $ (13,136) $ -
Consolidated:
- -------------
Net sales $ 2,671,114 $ 2,078,578 $ 987,248 $ 738,379
Operating income $ 356,318 $ 319,635 $ 161,195 $ 128,024
Equity in earnings of joint ventures $ 965 $ 10,093 $ 126 $ 4,182
Long-lived assets $ 1,047,982 $ 599,153 $ 1,047,982 $ 599,153
Investment in joint ventures $ 8,227 $ 120,613 $ 8,227 $ 120,613
Total assets $ 5,624,280 $ 3,340,403 $ 5,624,280 $ 3,340,403
Capital expenditures $ 70,584 $ 51,834 $ 24,140 $ 17,615
Depreciation and amortization $ 77,379 $ 45,583 $ 24,436 $ 14,582
21
18) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) ("FIN No. 46(R)"), "Consolidation
of Variable Interest Entities--an interpretation of ARB No. 51." FIN No. 46(R)
replaces FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable
Interest Entities," and 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(R) in its entirety on March 1, 2004. The Company is currently assessing
the financial impact of FIN No. 46(R) on its consolidated financial statements.
In December 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (revised 2003) ("SFAS No. 132(R)"),
"Employers' Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132(R) supercedes
Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by
revising employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS
No. 132 regarding the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28
("APB Opinion No. 28"), "Interim Financial Reporting," to require additional
disclosures for interim periods. The Company is required to adopt certain of the
annual disclosure provisions of SFAS No. 132(R), primarily those related to its
U.S. postretirement plan, for the fiscal year ending February 29, 2004. The
Company is required to adopt the remaining annual disclosure provisions,
primarily those related to its foreign plans, for the fiscal year ending
February 28, 2005. The Company is required to adopt the amendment to APB Opinion
No. 28 for financial reports containing condensed financial statements for
interim periods beginning March 1, 2004.
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
(primarily corporate related items and other). Amounts included in the
Corporate Operations and Other segment consist of general corporate
administration and finance expenses. These amounts
22
include costs of executive management, investor relations, internal audit,
treasury, tax, corporate development, legal, financial reporting, professional
fees and public relations. Any costs incurred at the corporate office that are
applicable to the segments are allocated to the appropriate segment. The amounts
included in the Corporate Operations and Other segment are general costs that
are applicable to the consolidated group and are therefore not allocated to the
other reportable segments. All costs reported within the Corporate Operations
and Other segment are not included in the chief operating decision maker's
evaluation of the operating income performance of the other operating segments.
The new business segments reflect how the Company's operations are 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 Third Quarter
2003 and Nine 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 November 30, 2003 ("Third Quarter 2004"), compared to the three
months ended November 30, 2002 ("Third Quarter 2003"), and for the nine months
ended November 30, 2003 ("Nine Months 2004"), compared to the nine months ended
November 30, 2002 ("Nine Months 2003"), and (ii) financial liquidity and capital
resources for Nine 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 Current Report on Form 8-K dated
November 24, 2003.
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. 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 nine months ended
November 30, 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 March 2003 Credit Agreement (as
defined below) and $400.0 million of borrowings under the Company's Bridge
Agreement (as defined below). Additionally, the Company issued 3,288,913 shares
of the Company's Class A Common Stock, which were valued at $77.2 million based
on the simple average of the closing market price of the Company's Class A
Common Stock beginning two days before and ending two days after April 4, 2003,
the day the Hardy shareholders elected the form of consideration they wished to
receive. The purchase price was based primarily on a discounted cash flow
analysis that contemplated, among other things, the value of a broader
geographic distribution in strategic international markets and a presence in the
important Australian winemaking
23
regions. The Company and Hardy have complementary businesses that share a common
growth orientation and operating philosophy. The Hardy Acquisition supports the
Company's strategy of growth and breadth across categories and geographies, and
strengthens its competitive position in its core markets. The purchase price and
resulting goodwill were primarily based on the growth opportunities of the brand
portfolio of Hardy. In particular, the Company believes there are growth
opportunities for Australian wines in the United Kingdom, United States and
other wine markets. This acquisition supports the Company's strategy of driving
long-term growth and positions the Company to capitalize on the growth
opportunities in "new world" wine markets.
The results of operations of Hardy and PWP have been reported in the
Company's Constellation Wines segment as of March 27, 2003. 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.
RESULTS OF OPERATIONS
- ---------------------
THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Third Quarter 2004 and Third Quarter 2003.
Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------
Net Sales
-------------------------------------------------
%Increase
2004 2003 (Decrease)
---------- ---------- ---------
Constellation Wines:
Branded wine $ 460,805 $ 282,320 63.2 %
Wholesale and other 219,740 179,979 22.1 %
---------- ----------
Constellation Wines net sales $ 680,545 $ 462,299 47.2 %
---------- ----------
Constellation Beers and Spirits:
Imported beers $ 229,538 $ 195,585 17.4 %
Spirits 77,165 80,495 (4.1)%
---------- ----------
Constellation Beers and Spirits net sales $ 306,703 $ 276,080 11.1 %
---------- ----------
Corporate Operations and Other $ - $ - N/A
---------- ----------
Consolidated Net Sales $ 987,248 $ 738,379 33.7 %
========== ==========
Net sales for Third Quarter 2004 increased to $987.2 million from $738.4
million for Third Quarter 2003, an increase of $248.9 million, or 33.7%. This
increase resulted primarily from the inclusion of $182.9 million of net sales of
products acquired in the Hardy Acquisition as well as increases in imported beer
sales of $34.0 million and U.K. wholesale sales of $20.0 million (on a local
currency basis). In addition, net sales benefited from a favorable foreign
currency impact of $14.4 million.
Constellation Wines
-------------------
Net sales for Constellation Wines increased to $680.5 million for Third
Quarter 2004 from $462.3 million in Third Quarter 2003, an increase of $218.2
million, or 47.2%. Branded wine net sales increased $178.5 million, primarily
due to the addition of $176.3 million of net sales of branded wine acquired in
the Hardy Acquisition. Wholesale and other net sales increased $39.8 million
primarily due to growth in the U.K. wholesale business of $20.0 million (on a
local currency basis) and a favorable foreign currency impact of $10.4 million.
The net sales increase in the U.K. Wholesale business on a local currency basis
is primarily due to the addition of new accounts and increased average delivery
sizes as the Company's
24
national accounts business continues to grow. The Company continues to face
competitive discounting within select markets and geographies driven in part by
excess grape supplies. The Company believes that the grape supply/demand cycle
should come into balance over the next couple of years. The Company has taken a
strategy of preserving the long-term brand equity of its portfolio and investing
its marketing dollars in the higher growth sectors of the wine business.
Constellation Beers and Spirits
-------------------------------
Net sales for Constellation Beers and Spirits increased to $306.7 million
for Third Quarter 2004 from $276.1 million for Third Quarter 2003, an increase
of $30.6 million, or 11.1%. This increase resulted primarily from volume gains
on the Company's imported beer portfolio, which increased $34.0 million, or
17.4%, as a result of continued consumer demand and strong wholesaler demand of
Mexican beers prior to the Company's previously announced January 2004 price
increase. Spirits net sales decreased $3.3 million due to a decrease in bulk
whisky and contract production sales as a result of a large spot bulk whisky
sale in Third Quarter 2003. This decrease was partially offset by an increase
in branded spirits sales due to a favorable mix toward higher priced spirits
brands as well as slight volume increases.
As discussed in the prior quarter, the Company was 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 was January 1,
2004. The Company is passing on the full amount of the cost increase to its
distributors. As noted above, the Company's net sales for Third Quarter 2004
benefited from strong wholesaler demand in advance of this price increase. The
Company expects above average volume growth during the first half of the fourth
quarter of fiscal 2004 to be offset by below average volume growth in the second
half of the fourth quarter of fiscal 2004. The Company anticipates continued
wholesaler and retailer inventory reductions in the distribution channel in
early fiscal 2005 to be offset by the price increase.
GROSS PROFIT
The Company's gross profit increased to $282.6 million for Third Quarter
2004 from $213.5 million for Third Quarter 2003, an increase of $69.1 million,
or 32.4%. The Constellation Wines segment's gross profit increased $60.3
million primarily due to gross profit on the sales of branded wine acquired in
the Hardy Acquisition. The Constellation Beers and Spirits segment's gross
profit increased $11.6 million primarily due to the volume growth in the
segment's imported beer portfolio. These increases were partially offset by
$2.7 million of unusual costs which consist of certain 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 associated with the
Hardy Acquisition. Gross profit as a percent of net sales decreased slightly to
28.6% for Third Quarter 2004 from 28.9% for Third Quarter 2003 as an increase in
gross profit margin from sales of higher margin wine brands acquired in the
Hardy Acquisition was more than offset by the flow through of the inventory
step-up associated with the Hardy Acquisition and a decrease in gross profit
margin on the Constellation Wines' U.K. wholesale business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $113.3 million
for Third Quarter 2004 from $85.5 million for Third Quarter 2003, an increase of
$27.9 million, or 32.6%. The Constellation Wines segment's selling, general and
administrative expenses increased $25.0 million primarily from increased
selling, general and administrative expenses from the addition of the Hardy and
PWP businesses, partially offset by favorable foreign currency gains. The
Constellation Beers and Spirits segment's selling, general and administrative
expenses decreased $1.1 million due to favorable foreign currency gains
partially offset by increased imported beer and spirits advertising expenses to
support the growth across this segment's businesses. The Corporate Operations
and Other segment's selling, general
25
and administrative expenses increased $3.9 million primarily due to increased
general and administrative expenses to support the Company's growth. Selling,
general and administrative expenses as a percent of net sales decreased slightly
to 11.5% for Third Quarter 2004 as compared to 11.6% for Third Quarter 2003 due
primarily to the foreign currency gains recognized within the Constellation
Beers and Spirits segment and the Constellation Wines segment as discussed above
offset by (i) an increase in the Constellation Wines segment's selling, general
and administrative expenses as a percent of net sales due to the Hardy
Acquisition, which has a higher percentage of selling, general and
administrative expenses than the segment's base business and (ii) increased
general and administrative expenses within the Corporate Operations and Other
segment to support the Company's growth.
RESTRUCTURING AND RELATED CHARGES
Restructuring and related charges resulted from (i) the realignment of
business operations in the Constellation Wines 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 $1.4 million in
Third Quarter 2004 related to the realignment of business operations in the
Constellation Wines segment and expects to incur additional charges of
approximately $1.9 million for the previously announced actions over the
remainder of fiscal 2004.
The Company recorded restructuring and related charges of $6.7 million in
Third Quarter 2004 related to exiting the commodity concentrate product line and
selling the Escalon facility. The Company expects to incur additional
restructuring and related charges of $5.4 million, beginning with an estimated
$1.1 million in the fourth quarter of fiscal 2004 and $4.3 million in fiscal
2005. All of the remaining charges will be recorded as Restructuring and
Related Charges on the Company's consolidated statement of income. 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 Third Quarter 2004 and Third
Quarter 2003.
Third Quarter 2004 Compared to Third Quarter 2003
-------------------------------------------------
Operating Income (Loss)
-------------------------------------------------
2004 2003 %Increase
---------- ---------- ---------
Constellation Wines $ 112,772 $ 75,433 49.5 %
Constellation Beers and Spirits 72,228 59,572 21.2 %
Corporate Operations and Other (10,669) (6,981) 52.8 %
---------- ----------
Total Reportable Segments 174,331 128,024 36.2 %
Restructuring and Related Charges
and Unusual Costs (13,136) - N/A
---------- ----------
Consolidated Operating Income $ 161,195 $ 128,024 25.9 %
========== ==========
Restructuring and related charges and unusual costs of $13.1 million for
Third Quarter 2004 consist of certain 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 $2.7 million and $2.3 million,
respectively, and restructuring and related charges associated with exiting the
commodity concentrate
26
product line and the Company's realignment of its business operations in the
wine segment of $8.1 million. As a result of these costs and the factors
discussed above, consolidated operating income increased to $161.2 million for
Third Quarter 2004 from $128.0 million for Third Quarter 2003, an increase of
$33.2 million, or 25.9%.
INTEREST EXPENSE, NET
Interest expense, net of interest income of $0.9 million and $0.5 million
for Third Quarter 2004 and Third Quarter 2003, respectively, increased to $31.9
million for Third Quarter 2004 from $26.2 million for Third Quarter 2003, an
increase of $5.7 million, or 21.7%. 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 Third Quarter 2004
as compared to 39.3% for Third 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 increased to $82.8 million for
Third Quarter 2004 from $64.3 million for Third Quarter 2003, an increase of
$18.5 million, or 28.7%.
NINE MONTHS 2004 COMPARED TO NINE MONTHS 2003
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Nine Months 2004 and Nine Months 2003.
Nine Months 2004 Compared to Nine Months 2003
---------------------------------------------
Net Sales
---------------------------------------------
2004 2003 %Increase
------------ ------------ ---------
Constellation Wines:
Branded wine $ 1,155,170 $ 733,450 57.5 %
Wholesale and other 611,854 510,649 19.8 %
------------ ------------
Constellation Wines net sales $ 1,767,024 $ 1,244,099 42.0 %
------------ ------------
Constellation Beers and Spirits:
Imported beers $ 684,216 $ 615,098 11.2 %
Spirits 219,874 219,381 0.2 %
------------ ------------
Constellation Beers and Spirits net sales $ 904,090 $ 834,479 8.3 %
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Consolidated Net Sales $ 2,671,114 $ 2,078,578 28.5 %
============ ============
Net sales for Nine Months 2004 increased to $2,671.1 million from $2,078.6
million for Nine Months 2003, an increase of $592.5 million, or 28.5%. This
increase resulted primarily from the inclusion of $428.0 million of net sales of
products acquired in the Hardy Acquisition as well as increases in imported beer
sales of $69.1 million and U.K. wholesale sales of $41.3 million (on a local
currency basis). In addition, net sales benefited from a favorable foreign
currency impact of $47.0 million.
27
Constellation Wines
-------------------
Net sales for Constellation Wines increased to $1,767.0 million for Nine
Months 2004 from $1,244.1 million in Nine Months 2003, an increase of $522.9
million, or 42.0%. Branded wine net sales increased $421.7 million, primarily
due to the addition of $416.1 million of net sales of branded wine acquired in
the Hardy Acquisition. Wholesale and other net sales increased $101.2 million
primarily due to growth in the U.K. wholesale business of $41.3 million (on a
local currency basis), a favorable foreign currency impact of $34.1 million, and
the addition of $12.1 million of net sales of bulk wine acquired in the Hardy
Acquisition. 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 $904.1 million
for Nine Months 2004 from $834.5 million for Nine Months 2003, an increase of
$69.6 million, or 8.3%. This increase resulted primarily from volume gains on
the Company's imported beer portfolio, which increased $69.1 million. Spirits
net sales remained relatively flat as increased branded spirits sales were
offset by lower bulk whisky and contract production sales.
GROSS PROFIT
The Company's gross profit increased to $732.2 million for Nine Months 2004
from $583.5 million for Nine Months 2003, an increase of $148.7 million, or
25.5%. The Constellation Wines segment's gross profit increased $153.2 million
primarily due to gross profit on the sales of branded wine acquired in the Hardy
Acquisition. The Constellation Beers and Spirits segment's gross profit
increased $29.6 million primarily due to the volume growth in the segment's
imported beer portfolio. These increases were partially offset by $34.1 million
of unusual costs which consist of certain 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 associated with the Hardy
Acquisition of $17.3 million and the write-down of concentrate inventory
recorded in connection with the Company's decision to exit the commodity
concentrate product line of $16.8 million (see additional discussion under
"Restructuring and Related Charges" below). Gross profit as a percent of net
sales decreased slightly to 27.4% for Nine Months 2004 from 28.1% for Nine
Months 2003 as an increase in gross profit margin from sales of higher margin
wine brands acquired in the Hardy Acquisition was more than offset by the flow
through of the inventory step-up associated with the Hardy Acquisition, the
write-down of the concentrate inventory and a decrease in gross profit margin on
the Constellation Wines' U.K. wholesale business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $348.4 million
for Nine Months 2004 from $263.8 million for Nine Months 2003, an increase of
$84.6 million, or 32.1%. The Constellation Wines segment's selling, general and
administrative expenses increased $61.7 million primarily from increased
selling, general and administrative expenses from the addition of the Hardy and
PWP businesses. The Constellation Beers and Spirits segment's selling, general
and administrative expenses increased $2.9 million due to increased imported
beer and spirits advertising and selling expenses to support the growth across
this segment's businesses, partially offset by foreign currency gains. The
Corporate Operations and Other segment's selling, general and administrative
expenses increased $20.0 million primarily due to (i) additional amortized
deferred financing costs associated with the bridge financing in connection with
the Hardy Acquisition, (ii) additional deferred financing costs associated with
the Company's new bank credit facility, and (iii) increased general and
administrative expenses to
28
support the Company's growth. Selling, general and administrative expenses as a
percent of net sales increased slightly to 13.0% for Nine Months 2004 as
compared to 12.7% for Nine Months 2003 due primarily to the increased general
and administrative expenses within the Corporate Operations and Other segment as
a result of the factors discussed above.
RESTRUCTURING AND RELATED CHARGES
Restructuring and related charges resulted from (i) the realignment of
business operations in the Constellation Wines 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 $7.0 million in
Nine Months 2004 related to the realignment of business operations in the
Constellation Wines segment and expects to incur additional charges of
approximately $1.9 million for the previously announced actions over the
remainder of fiscal 2004.
The Company recorded restructuring and related charges of $20.5 million in
Nine Months 2004 related to exiting the commodity concentrate product line and
selling the Escalon facility. In total, the Company recorded $37.3 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 $5.4 million, beginning with an estimated
$1.1 million in the fourth quarter of fiscal 2004 and $4.3 million in fiscal
2005. All of the remaining charges will be recorded as Restructuring and
Related Charges on the Company's consolidated statement of income. 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 Nine Months 2004 and Nine
Months 2003.
Nine Months 2004 Compared to Nine Months 2003
---------------------------------------------
Operating Income (Loss)
---------------------------------------------
2004 2003 %Increase
------------ ------------ ---------
Constellation Wines $ 258,208 $ 166,512 55.1 %
Constellation Beers and Spirits 202,228 175,548 15.2 %
Corporate Operations and Other (30,978) (22,425) 38.1 %
------------ ------------
Total Reportable Segments 429,458 319,635 34.4 %
Restructuring and Related Charges
and Unusual Costs (73,140) - N/A
------------ ------------
Consolidated Operating Income $ 356,318 $ 319,635 11.5 %
============ ============
Restructuring and related charges and unusual costs of $73.1 million for
Nine Months 2004 consist of certain 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 $17.3 million and $11.6
million, respectively, and costs associated with exiting the commodity
concentrate product line and the Company's realignment of its business
operations in the wine segment, including the write-down of concentrate
inventory of $16.8 million and restructuring and related charges of $27.5
million. As a result
29
of these costs and the above factors, consolidated operating income increased to
$356.3 million for Nine Months 2004 from $319.6 million for Nine Months 2003, an
increase of $36.7 million, or 11.5%.
INTEREST EXPENSE, NET
Interest expense, net of interest income of $2.4 million and $0.8 million
for Nine Months 2004 and Nine Months 2003, respectively, increased to $112.2
million for Nine Months 2004 from $80.5 million for Nine Months 2003, an
increase of $31.7 million, or 39.4%. 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 Nine Months 2004 as
compared to 39.3% for Nine 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 $157.6 million
for Nine Months 2004 from $151.3 million for Nine Months 2003, an increase of
$6.3 million, or 4.2%.
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 February and
runs through May. The Company generally begins purchasing grapes at the
beginning of the crush season with payments for such grapes beginning to come
due one month later. The Company's short-term borrowings to support such
purchases generally reach their highest levels one to two months after the crush
season has ended. Historically, the Company has used cash flow from operating
activities to repay its short-term borrowings. The Company will continue to use
its short-term borrowings to support its working capital requirements. The
Company believes that cash provided by operating activities and its financing
activities, primarily short-term borrowings, will provide adequate resources to
satisfy its working capital, liquidity and anticipated capital expenditure
requirements for both its short-term and long-term capital needs.
NINE MONTHS 2004 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Nine Months 2004 was $179.5
million, which resulted from $157.6 million of net income, plus $83.0 million of
net non-cash items charged to the Consolidated Statement of Income, less $61.1
million representing the net change in the Company's operating assets and
liabilities. The net non-cash items consisted primarily of depreciation of
property, plant & equipment and amortization of intangible and other assets. The
net change in operating assets and liabilities resulted primarily from a
seasonal increase in accounts receivable, partially offset by a
30
decrease in inventories and increases in accounts payable, excise taxes, accrued
grape purchases, income taxes payable and accrued advertising and promotion.
INVESTING ACTIVITIES
Net cash used in investing activities for Nine Months 2004 was $1,126.4
million, which resulted primarily from net cash paid of $1,070.1 million for the
purchases of businesses and $70.6 million of capital expenditures.
FINANCING ACTIVITIES
Net cash provided by financing activities for Nine Months 2004 was $942.3
million resulting primarily from proceeds of $1,600.0 million from issuance of
long-term debt, including $1,060.2 million of long-term debt incurred to acquire
Hardy, plus net proceeds from the 2003 Equity Offerings (as defined below) of
$426.1 million. This amount was partially offset by principal payments of
long-term debt of $1,240.4 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 January 14, 2004, the Company had purchased 4,075,344 shares of
Class A Common Stock at an aggregate cost of $44.9 million, or at an average
cost of $11.01 per share. No shares were repurchased during Nine Months 2004.
DEBT
Total debt outstanding as of November 30, 2003, amounted to $2,204.7
million, an increase of $939.2 million from February 28, 2003. The ratio of
total debt to total capitalization decreased to 50.0% as of November 30, 2003,
from 51.9% as of February 28, 2003.
SENIOR CREDIT FACILITY
Credit Agreement
-----------------
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
entered into a new credit agreement (as subsequently amended and restated as of
March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the
Company entered into a Second Amended and Restated Credit Agreement (the "Credit
Agreement") that (i) refinanced the then outstanding principal balance under the
Tranche B Term Loan facility on essentially the same terms as the Tranche B Term
Loan facility under the March 2003 Credit Agreement, but at a lower Applicable
Rate (as such term is defined in the Credit Agreement) and (ii) otherwise
restated the terms of the March 2003 Credit Agreement, as amended. The March
2003 Credit Agreement provided for aggregate credit facilities of $1.6 billion
consisting of a $400.0 million Tranche A Term Loan facility due in February
2008, an $800.0 million Tranche B Term Loan facility due in November 2008 and a
$400.0 million Revolving Credit facility (including an Australian Dollar
revolving sub-facility of up to A$10.0 million and a sub-facility for letters of
credit of up to $40.0 million) which expires on February 29, 2008. Proceeds of
the March 2003 Credit Agreement were used to pay off the Company's obligations
under its prior senior credit facility, to fund a portion of the cash required
to pay the former
31
Hardy shareholders and to pay indebtedness outstanding under certain of Hardy's
credit facilities. The Company intends to use the remaining availability under
the 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. As of November 30, 2003, the Company has
made $26.6 million of scheduled and required payments on the Tranche A Term Loan
facility. In August 2003, the Company prepaid $100.0 million of the Tranche B
Term Loan facility. In October 2003, the Company prepaid an additional $200.0
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 $54.4 million in fiscal 2006, $54.4 million in fiscal 2007,
$119.1 million in fiscal 2008 and $272.1 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 Credit Agreement) and, with respect to LIBOR borrowings, ranges
between 1.50% and 2.50%. As of November 30, 2003, the LIBOR margin for the
Revolving Credit facility and the Tranche A Term Loan facility is 1.75%, while
the LIBOR margin on the Tranche B Term Loan facility is 2.00%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company 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 Credit Agreement, ceased to apply. Certain
foreign subsidiaries of the Company have guaranteed debt, including debt of a
joint venture in the maximum amount of $3.9 million and debt of a partnership in
the maximum amount of $1.0 million as of November 30, 2003. 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 November 30, 2003, the Company is in compliance with all of its covenants
under its Credit Agreement.
As of November 30, 2003, under the Credit Agreement, the Company had
outstanding Tranche A Term Loans of $373.4 million bearing a weighted average
interest rate of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted
average interest rate of 3.1%, $166.6 million of revolving loans bearing a
weighted average interest rate of 3.0%, undrawn revolving letters of credit of
$18.4 million, and $215.1 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
32
"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 November 30, 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 November 30, 2003, the Company had outstanding (pound) 1.0 million
($1.7 million) aggregate principal amount of 8 1/2% Series B Senior Notes due
November 2009 (the "Sterling Series B Senior Notes"). In addition, as of
November 30, 2003, the Company had outstanding (pound) 154.0 million ($265.7
million, net of $0.5 million unamortized discount) aggregate principal amount of
8 1/2% Series C Senior Notes due November 2009 (the "Sterling Series C Senior
Notes"). The Sterling Series B Senior Notes and Sterling Series C Senior Notes
are currently redeemable, in whole or in part, at the option of the Company.
Also, as of November 30, 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 November 30, 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 November 30, 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 expenses, of $261.2 million. In
addition, the Company also completed a public offering of 170,500 shares of its
5.75% Series A Mandatory Convertible Preferred Stock ("Preferred Stock")
resulting in net proceeds to the Company, after deducting underwriting discounts
and expenses, of $164.9 million. The Class A Common Stock offering and the
Preferred Stock offering are referred to together as the "2003 Equity
Offerings." The net proceeds from the 2003 Equity Offerings were used to repay
the Bridge Loans that were incurred to partially finance the Hardy Acquisition.
The remaining proceeds were used to repay term loan borrowings under the March
2003 Credit Agreement.
33
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) ("FIN No. 46(R)"), "Consolidation
of Variable Interest Entities--an interpretation of ARB No. 51." FIN No. 46(R)
replaces FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable
Interest Entities," and 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(R) in its entirety on March 1, 2004. The Company is currently assessing
the financial impact of FIN No. 46(R) on its consolidated financial statements.
In December 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (revised 2003) ("SFAS No. 132(R)"),
"Employers' Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132(R) supercedes
Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by
revising employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS
No. 132 regarding the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28
("APB Opinion No. 28"), "Interim Financial Reporting," to require additional
disclosures for interim periods. The Company is required to adopt certain of the
annual disclosure provisions of SFAS No. 132(R), primarily those related to its
U.S. postretirement plan, for the fiscal year ending February 29, 2004. The
Company is required to adopt the remaining annual disclosure provisions,
primarily those related to its foreign plans, for the fiscal year ending
February 28, 2005. The Company is required to adopt the amendment to APB Opinion
No. 28 for financial reports containing condensed financial statements for
interim periods beginning March 1, 2004.
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
34
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.
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 November 30, 2003, and November 30,
2002, the fair value of open contracts would have increased $17.9 million and
$1.0 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 November 30, 2003, and November 30, 2002, would
result in an approximate increase in cash required for interest of $8.9 million
and $2.6 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 November 30, 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
November 30, 2003 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
35
PART II - OTHER INFORMATION
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.
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.
36
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.
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 Second Amended and Restated Credit Agreement, dated as of October 31,
2003, among the Company and certain of its subsidiaries, the lenders
named therein, JP Morgan Chase Bank, as Administrative Agent, and J.P.
Morgan Europe Limited, as London Agent.
37
4.19 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.
4.20 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company.
4.21 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, certain of its subsidiaries, and
JPMorgan Chase Bank, as Administrative Agent.
10.3 Second Amended and Restated Credit Agreement, dated as of October 31,
2003, among the Company and certain of its subsidiaries, the lenders
named therein, JPMorgan Chase Bank, as Administrative Agent, and J.P.
Morgan Europe Limited, as London Agent.
(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 November 30, 2003:
(i) Form 8-K dated November 24, 2003 and filed as of November
24, 2003. This Form 8-K reported information under Items 5
and 7, and included selected business and financial
information reflecting the Company's new basis of segment
reporting and the audited consolidated financial statements
of the Company for the fiscal year ended February 28, 2003,
together with the notes to those consolidated financial
statements, conformed to reflect the Company's new basis of
segment reporting: (i) the Company's Condensed Consolidated
Balance
38
Sheets as of February 28, 2003 and February 28, 2002;
(ii) the Company's Consolidated Statements of Income for
the years ended February 28, 2003, February 28, 2002 and
February 28, 2001; (iii) the Company's Consolidated
Statements of Changes in Stockholders' Equity; and (iv) the
Company's Consolidated Statements of Cash Flows for the
years ended February 28, 2003, February 28, 2002 and
February 28, 2001.
(ii) Form 8-K dated November 4, 2003 and filed as of November 4,
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 Guidance.*
(iii) Form 8-K dated September 30, 2003 and filed as of September
30, 2003. This Form 8-K reported information under Items 7,
9 and 12, and included (i) the Company's Condensed
Consolidated Balance Sheets as of August 31, 2003 and
February 28, 2003; (ii) the Company's Consolidated
Statements of Income on a Reported Basis for the six months
ended August 31, 2003 and August 31, 2002; (iii) the
Company's Supplemental Consolidated Statements of Income on
a Comparable Basis for the six months ended August 31, 2003
and August 31, 2002; (iv) the Company's Consolidated
Statements of Income on a Reported Basis for the three
months ended August 31, 2003 and August 31, 2002; (v) the
Company's Supplemental Consolidated Statements of Income on
a Comparable Basis for the three months ended August 31,
2003 and August 31, 2002; (vi) the Company's Reconciliation
of Reported and Comparable Historical Information for the
three months ended August 31, 2003 and August 31, 2002 and
the six months ended August 31, 2003 and August 31, 2002;
and (vii) the Company's Reconciliation of Reported and
Comparable Diluted Earnings Per Share Guidance.*
*Designates Form 8-K was furnished rather than filed.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSTELLATION BRANDS, INC.
Dated: January 14, 2004 By: /s/ Thomas F. Howe
----------------------------------
Thomas F. Howe, Senior Vice
President, Controller
Dated: January 14, 2004 By: /s/ Thomas S. Summer
----------------------------------
Thomas S. Summer, Executive Vice
President and Chief Financial
Officer (Principal Financial
Officer and Principal Accounting
Officer)
40
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
41
(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).
42
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 as Exhibit 4.17 to
the Company's Report on Form 10-Q for the fiscal quarter ended August
31, 2003 and incorporated herein by reference).
4.18 Second Amended and Restated Credit Agreement, dated as of October 31,
2003, among the Company and certain of its subsidiaries, the lenders
named therein, JP Morgan Chase Bank, as Administrative Agent, and J.P.
Morgan Europe Limited, as London Agent (filed herewith).
4.19 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).
4.20 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).
4.21 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, certain of its subsidiaries, and
JPMorgan Chase Bank, as Administrative
43
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 Second Amended and Restated Credit Agreement, dated as of October 31,
2003, among the Company and certain of its subsidiaries, the lenders
named therein, JPMorgan Chase Bank, as Administrative Agent, and J.P.
Morgan Europe Limited, as London Agent (filed as Exhibit 4.18 to the
Company's Report on Form 10-Q for the fiscal quarter ended November 30,
2003 and incorporated herein by reference).
(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.
44