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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2002
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 001-08495
CONSTELLATION BRANDS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-0716709
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 WillowBrook Office Park, Fairport, New York 14450
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (585) 218-2169
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock New York Stock Exchange
(par value $.01 per share)
Class B Common Stock New York Stock Exchange
(par value $.01 per share)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
Constellation Brands, Inc., as of May 15, 2002, was $2,127,752,903.
The number of shares outstanding with respect to each of the classes of common
stock of Constellation Brands, Inc., as of May 15, 2002, is set forth below:
Class Number of Shares Outstanding
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Class A Common Stock, par value $.01 per share 76,910,506
Class B Common Stock, par value $.01 per share 12,100,290
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement of Constellation Brands, Inc. to be issued for the Annual
Meeting of Stockholders to be held July 23, 2002 is incorporated by reference in
Part III.
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PART I
ITEM 1. BUSINESS
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INTRODUCTION
Unless the context otherwise requires, the term "Company" refers to
Constellation Brands, Inc. and its subsidiaries, and all references to "net
sales" refer to gross revenue less excise taxes and returns and allowances to
conform with the Company's method of classification. All references to "Fiscal
2002", "Fiscal 2001" and "Fiscal 2000" shall refer to the Company's fiscal year
ended the last day of February of the indicated year.
During Fiscal 2001, the Company changed its name from Canandaigua Brands,
Inc. to Constellation Brands, Inc. The new name better reflects the Company's
dynamic growth, promising potential and diversified portfolio as well as
provides a clear distinction between the corporate parent and its operating
divisions.
Market share and industry data disclosed in this Annual Report on Form 10-K
have been obtained from the following industry and government publications: The
Gomberg-Fredrikson Report; Adams Liquor Handbook; Adams Wine Handbook; Adams
Beer Handbook; Adams Media Handbook Advance; The U.S. Wine Market: Impact
Databank Review and Forecast; The U.S. Beer Market: Impact Databank Review and
Forecast; The U.S. Spirits Market: Impact Databank Review and Forecast; NACM; AC
Nielsen; The Zenith Guide; Beer Marketer's Insights; and The Drink Pocketbook
2001. The Company has not independently verified these data. Unless otherwise
noted, all references to market share data are based on unit volume and unless
otherwise noted, the most recent complete industry data available are for 2000.
The Company is a leader in the production and marketing of beverage alcohol
brands in North America and the United Kingdom. As the second largest supplier
of wine, the second largest marketer of imported beer and the third largest
supplier of distilled spirits, the Company is the largest single-source supplier
of these products in the United States. In the United Kingdom, the Company is a
leading marketer of wine, the second largest producer and marketer of cider and
a leading independent drinks wholesaler. With its broad product portfolio, the
Company believes it is distinctly positioned to satisfy an array of consumer
preferences across all beverage alcohol categories. Leading brands in the
Company's portfolio include: Franciscan Oakville Estate, Simi, Estancia,
Ravenswood, Corona Extra, Modelo Especial, St. Pauli Girl, Almaden, Arbor Mist,
Talus, Vendange, Alice White, Black Velvet, Fleischmann's, Schenley, Ten High,
Stowells of Chelsea, Blackthorn and K.
The Company's products are distributed by more than 1,000 wholesale
distributors in North America. In the United Kingdom, the Company distributes
its branded products and those of other companies to more than 16,500 customers.
The Company operates 29 production facilities throughout the world. In addition
to producing and marketing its own brands, the Company also purchases products
for resale from other producers.
The Company is a Delaware corporation incorporated on December 4, 1972, as
the successor to a business founded in 1945. Since the Company's founding in
1945 as a producer and marketer of wine products, the Company has grown through
a combination of internal growth and acquisitions. The Company's internal growth
has been driven by leveraging the Company's existing portfolio of leading
brands, developing new products, new packaging and line extensions, and focusing
on the faster growing sectors of the beverage alcohol industry. The acquisitions
of Ravenswood Winery, Inc. ("Ravenswood"), the Corus Assets (as defined below),
the Turner Road Vintners Assets (as defined below), Forth Wines Limited ("Forth
Wines"), Franciscan Vineyards, Inc. ("Franciscan Estates"), Simi Winery, Inc.
("Simi"),
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the Black Velvet Assets (as defined below) and Matthew Clark plc ("Matthew
Clark") continued a series of strategic acquisitions made since 1991 by which
the Company has broadened its portfolio and increased its market share, net
sales and cash flow.
COMMON STOCK SPLIT
During April 2002, the Board of Directors of the Company approved a
two-for-one stock split of both the Company's Class A Common Stock and Class B
Common Stock, which was distributed in the form of a stock dividend on May 13,
2002, to stockholders of record on April 30, 2002. Pursuant to the terms of the
stock dividend, each holder of Class A Common Stock received one additional
share of Class A stock for each share of Class A stock held, and each holder of
Class B Common Stock received one additional share of Class B stock for each
share of Class B stock held. All share and per share amounts have been
retroactively restated to give effect to the common stock split.
ACQUISITIONS IN FISCAL 2002, FISCAL 2001 AND FISCAL 2000 AND JOINT VENTURE
Through the acquisitions described below and prior acquisitions, the
Company has become more competitive by: diversifying its portfolio; developing
strong market positions in the growing beverage alcohol product categories of
varietal table wine and imported beer; strengthening its relationships with
wholesalers; expanding its distribution and enhancing its production
capabilities; and acquiring additional management, operational, marketing, and
research and development expertise.
ACQUISITION OF RAVENSWOOD WINERY
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"), a leading premium wine producer based
in Sonoma, California. Ravenswood produces, markets and sells super-premium and
ultra-premium California wine primarily under the Ravenswood brand name. The
preliminary purchase price of Ravenswood, including assumption of indebtedness,
was $151.8 million. The Ravenswood acquisition was consistent with the Company's
strategy of further penetrating the higher gross profit margin super-premium and
ultra-premium wine categories. The acquired operations have been integrated into
the Fine Wine segment (as defined below).
ACQUISITION OF THE CORUS ASSETS
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. The preliminary purchase price of the Corus
Assets, including assumption of indebtedness, was $52.3 million plus an earn-out
over six years based on the performance of the brands. In connection with the
transaction, the Company also entered into long-term grape supply agreements
with affiliates of Corus Brands, Inc. covering more than 1,000 acres of
Washington and Idaho vineyards.
ACQUISITION OF THE TURNER ROAD VINTNERS ASSETS
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The preliminary purchase
price of the Turner Road Vintners Assets, including assumption of indebtedness,
was $289.8 million.
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The acquisition of the Corus Assets, along with the acquisition of the
Turner Road Vintners Assets, has strengthened the Company's portfolio in the
higher margin and growing premium table wine category. The acquired operations
have been integrated into the Popular and Premium Wine segment (as defined
below).
ACQUISITION OF FORTH WINES
On October 27, 2000, the Company acquired all of the issued Ordinary Shares
and Preference Shares of Forth Wines Limited ("Forth Wines"). The purchase
price of the shares was $4.5 million. The addition of Forth Wines further
strengthened Matthew Clark's position as one of the United Kingdom's leading
drinks wholesalers, and made Matthew Clark the leading provider of wine to the
on-premise market in Scotland. The acquired operations have been integrated
into the U.K. Brands and Wholesale segment (as defined below).
ACQUISITIONS OF FRANCISCAN ESTATES AND SIMI
On June 4, 1999, the Company purchased all of the outstanding capital stock
of Franciscan Estates and, in related transactions, purchased vineyards,
equipment and other vineyard related assets located in Northern California
(collectively the "Franciscan Acquisition"). The purchase price of the shares,
including the assumption of indebtedness, net of cash acquired, was $243.2
million. Franciscan Estates is one of the foremost super-premium and
ultra-premium wine companies in California.
Also on June 4, 1999, the Company purchased all of the outstanding capital
stock of Simi. (The acquisition of the capital stock of Simi is hereafter
referred to as the "Simi Acquisition".) The purchase price of the shares was
$57.5 million. The Simi Acquisition included the Simi winery (located in
Healdsburg, California), equipment, vineyards, inventory and worldwide ownership
of the Simi brand name. Founded in 1876, Simi is one of the oldest and best
known wineries in California, combining a strong super-premium and ultra-premium
brand with a flexible and well-equipped facility and high quality vineyards in
the key Sonoma appellation. On February 29, 2000, Simi was merged into
Franciscan Estates.
The Franciscan and Simi Acquisitions established the Company as a leading
producer and marketer of super-premium and ultra-premium wine. Together,
Franciscan Estates, Simi and Ravenswood represent one of the largest
super-premium and ultra-premium wine companies in the United States. The Company
operates Franciscan Estates, Simi and Ravenswood, and their properties, together
as a separate business segment (collectively, "Fine Wine").
ACQUISITION OF THE BLACK VELVET ASSETS
On April 9, 1999, in an asset acquisition, the Company acquired several
well-known Canadian whisky brands, including Black Velvet, the third best
selling Canadian whisky and the 16th best selling distilled spirits brand in the
United States, production facilities located in Alberta and Quebec, Canada, case
goods and bulk whisky inventories and other related assets from affiliates of
Diageo plc (collectively, the "Black Velvet Assets"). Other principal brands
acquired in the transaction were Golden Wedding, OFC, MacNaughton, McMaster's
and Triple Crown. In connection with the transaction, the Company also entered
into multi-year agreements with affiliates of Diageo plc to provide packaging
and distilling services for various brands retained by the Diageo plc
affiliates. The purchase price of the Black Velvet Assets was $183.6 million.
The addition of the Canadian whisky brands from this transaction
strengthened the Company's position in the North American distilled spirits
category, and enhanced the Company's portfolio of brands
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and category participation. The acquired operations have been integrated into
the Imported Beer and Spirits segment (as defined below).
PACIFIC WINE PARTNERS
On July 31, 2001, the Company and BRL Hardy Limited completed the formation
of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the
Company and BRL Hardy Limited, the second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports. PWP has exclusive distribution
rights in the United States and the Caribbean to seven brands - Banrock Station,
Hardys, Leasingham, Barossa Valley Estate and Chateau Reynella from Australia;
Nobilo from New Zealand; and La Baume from France. The joint venture also owns
Farallon, a premium California coastal wine. In addition, PWP owns a winery and
controls 1,400 acres of vineyards, all located in Monterey County, California.
The Company contributed to PWP assets with a carrying amount of $30.0
million plus $5.5 million of cash. The Company sold assets with a carrying
amount of $31.2 million to BRL Hardy (USA) Inc. ("Hardy") and received $34.9
million in cash. Hardy contributed these assets plus $5.5 million of cash to
PWP. The Company and PWP are parties to the following agreements: crushing,
wine production, bottling, storage, and related services agreement; inventory
supply agreement; sublease and assumption agreements pertaining to certain
vineyards, which agreements include a market value adjustment provision; and a
market value adjustment agreement relating to a certain vineyard lease held by
PWP.
On October 16, 2001, the Company announced that PWP completed the purchase
of certain assets of Blackstone Winery, including the Blackstone brand and the
Codera wine business in Sonoma County (the "Blackstone Assets"). The
preliminary purchase price of the Blackstone Assets was $138.1 million and was
financed equally by the Company and Hardy.
The investment in PWP is accounted for using the equity method;
accordingly, the results of operations of PWP since July 31, 2001, have been
included in the equity in earnings of joint venture line in the Consolidated
Statements of Income of the Company.
BUSINESS SEGMENTS
The Company operates primarily in the beverage alcohol industry in North
America and the United Kingdom. The Company reports 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, cider,
distilled spirits, beer and soft drinks); Fine Wine (primarily branded
super-premium and ultra-premium wine) and Corporate Operations and Other
(primarily corporate related items).
Information regarding net sales, operating income and total assets of each
of the Company's business segments and information regarding geographic areas is
set forth in Note 19 to the Company's consolidated financial statements located
in Item 8 of this Annual Report on Form 10-K.
POPULAR AND PREMIUM WINE
The Popular and Premium Wine segment produces, bottles, imports and markets
wine and brandy in the United States. It is the second largest supplier of wine
in the United States and exports wine to approximately 60 countries from the
United States. This segment sells table wine, dessert wine, sparkling
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wine and brandy. Its leading brands include Alice White, Almaden, Arbor Mist,
Covey Run, Dunnewood, Estate Cellars, Inglenook, Manischewitz, Marcus James,
Paul Masson, Talus, Taylor, Vendange, Vina Santa Carolina, Cook's, J. Roget,
Richards Wild Irish Rose, and Paul Masson Grande Amber Brandy. Most of its wine
is marketed in the $3.00 to $7.00 per 750 ml bottle price range.
As a related part of its U.S. wine business, the Popular and Premium Wine
segment is a leading grape juice concentrate producer in the United States.
Grape juice concentrate competes with other domestically produced and imported
fruit-based concentrates. Its other wine-related products and services include
bulk wine, cooking wine, grape juice and St. Regis, a leading de-alcoholized
line of wine in the United States.
IMPORTED BEER AND SPIRITS
The Imported Beer and Spirits segment imports and markets a diversified
line of beer and produces, bottles, imports and markets a diversified line of
distilled spirits. It is the second largest marketer of imported beer in the
United States and distributes six of the top 25 imported beer brands in the
United States: Corona Extra, Modelo Especial, Corona Light, Pacifico, St. Pauli
Girl, and Negra Modelo. Corona Extra is the best selling imported beer in the
United States. Its other imported beer brands include Tsingtao from China,
Peroni from Italy and Double Diamond and Tetley's English Ale from the United
Kingdom.
The Imported Beer and Spirits segment is the third largest supplier of
distilled spirits in the United States and exports distilled spirits to
approximately 25 countries from the United States. Its principal distilled
spirits brands include Black Velvet, Fleischmann's, Mr. Boston, Canadian LTD,
Chi-Chi's prepared cocktails, Ten High, Montezuma, Barton, Monte Alban and Inver
House. Substantially all of this segment's distilled spirits unit volume
consists of products marketed in the value and mid-premium priced category. The
Imported Beer and Spirits segment also sells distilled spirits in bulk and
provides contract production and bottling services for third parties.
U.K. BRANDS AND WHOLESALE
The U.K. Brands and Wholesale segment is a leading producer and marketer of
wine, cider and bottled water. In addition, it is the leading independent
on-premise drinks wholesaler throughout the United Kingdom. This segment also
exports its branded products to approximately 45 countries from the United
Kingdom.
The U.K. Brands and Wholesale segment's Stowells of Chelsea brand is the
best selling branded table wine in the United Kingdom. This segment is the
largest supplier of branded wine to the on-premise trade and a leading supplier
to the off-premise trade in the United Kingdom. It maintains a leading market
share position in fortified British wine through its QC and Stone's brand names
and a strong market position in the wine style drinks category through Babycham,
Country Manor and Arbor Mist.
The U.K. Brands and Wholesale segment is the second largest producer and
marketer of cider in the United Kingdom. This segment distributes its cider
brands in both the on-premise and off-premise markets. Its leading cider brands
include Blackthorn, the number two cider brand in the United Kingdom, Gaymer's
Olde English, the United Kingdom's second largest cider brand in the take-home
market, Diamond White and K. It also produces and markets Strathmore bottled
water in the United Kingdom, the fourth largest bottled water brand and a
leading sparkling water brand.
The U.K. Brands and Wholesale segment is the leading independent beverage
wholesaler to the on-premise trade in the United Kingdom and has one of the
largest customer bases in the United Kingdom, with more than 16,000 on-premise
accounts. Its wholesaling business involves the distribution
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of branded wine, distilled spirits, cider, beer and soft drinks. While these
products are primarily produced by third parties, they also include the U.K.
Brands and Wholesale segment's branded wine, cider and water products.
FINE WINE
The Fine Wine segment is a major player in the super-premium and
ultra-premium wine market. The Fine Wine segment includes Estancia, Ravenswood,
Franciscan Oakville Estate, Simi, Veramonte, Mt. Veeder and Quintessa wines. The
portfolio of fine wines is supported by the segment's winery and vineyard
holdings in California and Chile. These brands are marketed by a dedicated sales
force, primarily focusing on high-end restaurants and fine wine shops. The Fine
Wine segment also exports its products to approximately 25 countries from the
United States.
CORPORATE OPERATIONS AND OTHER
The Corporate Operations and Other segment includes traditional corporate
related items and the results of an immaterial operation.
MARKETING AND DISTRIBUTION
NORTH AMERICA
The Company's products are distributed and sold throughout North America
through over 1,000 wholesalers, as well as through state and provincial
alcoholic beverage control agencies. The Popular and Premium Wine, Imported Beer
and Spirits and Fine Wine segments employ full-time, in-house marketing, sales
and customer service organizations to develop and service their sales to
wholesalers and state agencies.
The Company believes that the organization of its sales force into separate
segments positions it to maintain a high degree of focus on each of its
principal product categories. However, where appropriate, the Company leverages
its sales and marketing skills across the organization, particularly in national
accounts.
The Company's marketing strategy places primary emphasis upon promotional
programs directed at its broad national distribution network, and at the
retailers served by that network. The Company has extensive marketing programs
for its brands including promotional programs on both a national basis and
regional basis in accordance with the strength of the brands, point-of-sale
materials, consumer media advertising, event sponsorship, market research, trade
advertising and public relations.
UNITED KINGDOM
The Company's U.K.-produced branded products are distributed throughout the
United Kingdom by the U.K. Brands and Wholesale segment. The products are
packaged at one of three production facilities. Shipments of cider and wine are
then made to the U.K. Brands and Wholesale segment's national distribution
center for branded products. All branded products are then distributed to either
the on-premise or off-premise markets with some of the sales to on-premise
customers made through the U.K. Brands and Wholesale segment's wholesale
business. This segment's wholesale products are distributed through 11 depots
located throughout the United Kingdom. On-premise distribution channels include
hotels, restaurants, pubs, wine bars and clubs. The off-premise distribution
channels include grocers, convenience retail and cash-and-carry outlets.
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The U.K. Brands and Wholesale segment employs full-time, in-house marketing
and sales organizations that separately target or service the off-premise
customers and the on-premise market in the United Kingdom for the U.K. Brands
and Wholesale segment's branded products and the customers of its wholesale
business.
TRADEMARKS AND DISTRIBUTION AGREEMENTS
Trademarks are an important aspect of the Company's business. The Company
sells its products under a number of trademarks, most of which the Company owns.
Throughout its segments, the Company also has various licenses and distribution
agreements, for the production and/or sale of its products, as well as for the
sale of products of third parties. These licenses and distribution agreements
have varying terms and durations. Agreements include, among others, a long-term
license agreement with Hiram Walker & Sons, Inc., which expires in 2116, for the
Ten High, Crystal Palace, Northern Light and Imperial Spirits brands; and a
long-term license agreement with the B. Manischewitz Company, which expires in
2042, for the Manischewitz brand of kosher wine. On September 30, 1998, under
the provisions of an existing long-term license agreement, Nabisco Brands
Company agreed to transfer to Barton all of its right, title and interest to the
corporate name "Fleischmann Distilling Company" and worldwide trademark rights
to the "Fleischmann" mark for alcoholic beverages. Pending the completion of the
assignment of such interests, the license will remain in effect.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products. These
agreements have terms that vary and prohibit us from importing other beer from
other producers from the same country. The Company's agreement to distribute
Corona Extra and other Mexican beer brands exclusively throughout 25 primarily
western U.S. states expires in December 2006 and, subject to compliance with
certain performance criteria, continued retention of certain Company personnel
and other terms under the agreement, will be automatically renewed for
additional terms of five years. Changes in control of the Company or of its
subsidiaries involved in importing the Mexican beer brands, changes in the
position of the Chief Executive Officer of Barton Beers, Ltd., including by
death or disability, or the termination of the President of Barton Incorporated,
may be a basis for the supplier, unless it consents to such changes, to
terminate the agreement. The supplier's consent to such changes may not be
unreasonably withheld. The Company's agreement for the importation of St. Pauli
Girl expires in December 2007. Prior to their expiration, these agreements may
be terminated if the Company fails to meet certain performance criteria. The
Company believes it is currently in compliance with its material imported beer
distribution agreements. From time to time, the Company has failed, and may in
the future fail, to satisfy certain performance criteria in its distribution
agreements. Although there can be no assurance that the Company's beer
distribution agreements will be renewed, given the Company's long-term
relationships with its suppliers, the Company expects that such agreements will
be renewed prior to their expiration and does not believe that these agreements
will be terminated.
COMPETITION
The beverage alcohol industry is highly competitive. The Company competes
on the basis of quality, price, brand recognition and distribution. The
Company's beverage alcohol products compete with other alcoholic and
nonalcoholic beverages for consumer purchases, as well as shelf space in retail
stores, a presence in restaurants and marketing focus by the Company's
wholesalers. The Company competes with numerous multinational producers and
distributors of beverage alcohol products, some of which may have greater
resources than the Company. In the United States, the Popular and Premium Wine
segment's principal competitors include E & J Gallo Winery and The Wine Group.
The Imported Beer and Spirits segment's principal competitors include Heineken
USA, Molson Breweries USA, Labatt's USA, Guinness Bass Import Company,
Brown-Forman Beverages, Jim Beam Brands and Heaven Hill Distilleries, Inc. The
Fine Wine segment's principal competitors include Beringer Blass,
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Robert Mondavi Corp., and Kendall-Jackson. In the United Kingdom, the U.K.
Brands and Wholesale segment's principal competitors include H.P. Bulmer,
Halewood Vintners, Waverley Vintners and Volvic. In connection with its
wholesale business, the U.K. Brands and Wholesale segment distributes the
branded wine of third parties that compete directly against its own wine brands.
PRODUCTION
In the United States, the Company's wine is produced from several varieties
of wine grapes grown principally in California. The grapes are crushed at the
Company's wineries and stored as wine, grape juice or concentrate. Such grape
products may be made into wine for sale under the Company's brand names, sold to
other companies for resale under their own labels, or shipped to customers in
the form of juice, juice concentrate, unfinished wine, high-proof grape spirits
or brandy. Most of the Company's wine is bottled and sold within 18 months after
the grape crush. The Company's inventories of wine, grape juice and concentrate
are usually at their highest levels in November and December immediately after
the crush of each year's grape harvest, and are substantially reduced prior to
the subsequent year's crush.
The bourbon whiskeys, domestic blended whiskeys and light whiskeys marketed
by the Company are primarily produced and aged by the Company at its distillery
in Bardstown, Kentucky. Following the Black Velvet Assets acquisition, the
majority of the Company's Canadian whisky requirements are produced and aged at
its Canadian distilleries in Lethbridge, Alberta, and Valleyfield, Quebec. At
its Albany, Georgia, facility, the Company produces all of the neutral grain
spirits and whiskeys it uses in the production of vodka, gin and blended whiskey
it sells to customers in the state of Georgia. The Company's requirements of
Scotch whisky, tequila, mezcal and the neutral grain spirits it uses in the
production of gin and vodka for sale outside of Georgia, and other spirits
products, are purchased from various suppliers.
The Company operates three facilities in the United Kingdom that produce,
bottle and package cider, wine and water. To produce Stowells of Chelsea, wine
is imported in bulk from various countries such as Australia, Chile, Germany,
France, Spain, South Africa and the United States, which is then packaged at the
Company's facility at Bristol and distributed under the Stowells of Chelsea
brand name. The Bristol facility also produces fortified British wine and wine
style drinks. All cider production takes place at the Company's facility at
Shepton Mallet, where apples of many different varieties are purchased from U.K.
growers and crushed. This juice, along with European-sourced concentrate, is
then fermented into cider, blended and then packaged. The Strathmore brand of
bottled water (which is available in still, sparkling, and flavored varieties)
is sourced and bottled in Forfar, Scotland.
The Company operates one winery in Chile that crushes, vinifies, cellars
and bottles wine.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal components in the production of the Company's branded
beverage alcohol products are packaging materials (primarily glass) and
agricultural products, such as grapes and grain. The Company utilizes glass and
polyethylene terephthalate ("PET") bottles and other materials such as caps,
corks, capsules, labels and cardboard cartons in the bottling and packaging of
its products. Glass bottle costs are one of the largest components of the
Company's cost of product sold. The glass bottle industry is highly
concentrated with only a small number of producers. The Company has
traditionally obtained, and continues to obtain, its glass requirements from a
limited number of producers. The Company has not experienced difficulty in
satisfying its requirements with respect to any of the foregoing and considers
its sources of supply to be adequate. However, the inability of any of the
Company's glass bottle suppliers to satisfy the Company's requirements could
adversely affect the Company's operations.
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Most of the Company's annual grape requirements are satisfied by purchases
from each year's harvest which normally begins in August and runs through
October. The Company believes that it has adequate sources of grape supplies to
meet its sales expectations. However, in the event demand for certain wine
products exceeds expectations, the Company could experience shortages.
The Company purchases grapes from approximately 800 independent growers,
principally in the San Joaquin Valley and Central and North Coast regions of
California. The Company enters into written purchase agreements with a majority
of these growers on a year-to-year basis. The Company currently owns or leases
approximately 6,500 acres of land and vineyards, either fully bearing or under
development, in California, New York and Chile. This acreage supplies only a
small percentage of the Company's total needs. The Company continues to consider
the purchase or lease of additional vineyards, and additional land for vineyard
plantings, to supplement its grape supply.
The distilled spirits manufactured by the Company require various
agricultural products, neutral grain spirits and bulk spirits. The Company
fulfills its requirements through purchases from various sources through
contractual arrangements and through purchases on the open market. The Company
believes that adequate supplies of the aforementioned products are available at
the present time.
In the United Kingdom, the Company manufactures wine and cider from
materials that are purchased either on a contracted basis or on the open market.
In particular, supplies of cider apples are sourced through long-term supply
arrangements with owners of apple orchards. There are adequate supplies of the
various raw materials at this particular time.
GOVERNMENT REGULATION
The Company's operations in the United States are subject to extensive
federal and state regulation. These regulations cover, among other matters,
sales promotion, advertising and public relations, labeling and packaging,
changes in officers or directors, ownership or control, distribution methods and
relationships, and requirements regarding brand registration and the posting of
prices and price changes. All of the Company's operations and facilities are
also subject to federal, state, foreign and local environmental laws and
regulations and the Company is required to obtain permits and licenses to
operate its facilities.
In the United Kingdom, the Company has secured a Customs and Excise License
to carry on its excise trade. Licenses are required for all premises where wine
is produced. The Company holds a license to act as an excise warehouse
operator. Registrations have been secured for the production of cider and
bottled water. Formal approval of product labeling is not required.
In Canada, the Company's operations are also subject to extensive federal
and provincial regulation. These regulations cover, among other matters,
advertising and public relations, labeling and packaging, environmental matters
and customs and duty requirements. The Company is also required to obtain
licenses and permits to operate its facilities.
The Company believes that it is in compliance in all material respects with
all applicable governmental laws and regulations and that the cost of
administration and compliance with, and liability under, such laws and
regulations does not have, and is not expected to have, a material adverse
impact on the Company's financial condition, results of operations or cash
flows.
9
EMPLOYEES
The Company had approximately 2,960 full-time employees in the United
States at the end of April 2002, of which approximately 840 were covered by
collective bargaining agreements. Additional workers may be employed by the
Company during the grape crushing season.
The Company had approximately 1,900 full-time employees in the United
Kingdom at the end of April 2002, of which approximately 420 were covered by
collective bargaining agreements. Additional workers may be employed during the
peak season.
The Company had approximately 220 full-time employees in Canada at the end
of April 2002, of which approximately 170 were covered by collective bargaining
agreements.
The Company considers its employee relations generally to be good.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause actual results to differ materially from
those set forth in, or implied by, such forward-looking statements. All
statements other than statements of historical facts included in this Annual
Report on Form 10-K, including the statements under this Item 1 "Business" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" regarding our business strategy, future financial position,
prospects, plans and objectives of management, as well as information concerning
expected actions of third parties are forward-looking statements. All
forward-looking statements speak only as of the date of this Annual Report on
Form 10-K. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to the
risks and uncertainties of ordinary business operations, important factors that
could cause actual results to differ materially from those set forth in, or
implied by the Company's forward-looking statements contained in this Annual
Report on Form 10-K are as follows:
COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The Company is in a highly competitive industry and the dollar amount, and
unit volume, of its sales could be negatively affected by its inability to
maintain or increase prices, changes in geographic or product mix, a general
decline in beverage alcohol consumption or the decision of our wholesale
customers, retailers or consumers to purchase competitive products instead of
the Company's products. Wholesaler, retailer and consumer purchasing decisions
are influenced by, among other things, the perceived absolute or relative
overall value of the Company's products, including their quality or pricing,
compared to competitive products. Unit volume and dollar sales could also be
affected by pricing, purchasing, financing, operational, advertising or
promotional decisions made by wholesalers and retailers which could affect their
supply of, or consumer demand for, the Company's products. The Company could
also experience higher than expected selling, general and administrative
expenses if the Company finds it necessary to increase the number of its
personnel or advertising or promotional expenditures to maintain its competitive
position or for other reasons.
10
INCREASE IN EXCISE TAXES AND GOVERNMENT RESTRICTIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
In the United States, the federal government and individual states impose excise
taxes on beverage alcohol products in varying amounts which have been subject to
change. In addition, the beverage alcohol products industry is subject to
extensive regulation by state and federal agencies. The federal U.S. Bureau of
Alcohol, Tobacco and Firearms and the various state liquor authorities regulate
such matters as licensing requirements, trade and pricing practices, permitted
and required labeling, advertising and relations with wholesalers and retailers.
Certain federal and state regulations also require warning labels and signage.
In the United Kingdom, Matthew Clark carries on its operations under a Customs
and Excise License. Licenses are required for all premises where wine is
produced. Matthew Clark holds a license to act as an excise warehouse operator
and registrations have been secured for the production of cider and bottled
water. Increases in excise taxes on beverage alcohol products in the United
States or the United Kingdom, if enacted, could materially and adversely affect
the Company's financial condition or results of operations. New or revised
regulations or increased licensing fees and requirements could also have a
material adverse effect on the Company's financial condition or results of
operations.
THE COMPANY RELIES ON THE PERFORMANCE OF WHOLESALE DISTRIBUTORS FOR THE SUCCESS
OF ITS BUSINESS.
In the United States, the Company sells its products principally to
wholesalers for resale to retail outlets including grocery stores, package
liquor stores, club and discount stores and restaurants. The replacement or poor
performance of the Company's major wholesalers or the Company's inability to
collect accounts receivable from the Company's major wholesalers could
materially and adversely affect the Company's results of operations and
financial condition. Distribution channels for beverage alcohol products have
been characterized in recent years by rapid change, including consolidations of
certain wholesalers. In addition, wholesalers and retailers of the Company's
products offer products which compete directly with the Company's products for
retail shelf space and consumer purchases. Accordingly, there is a risk that
these wholesalers or retailers may give higher priority to products of the
Company's competitors. In the future, the Company's wholesalers and retailers
may not continue to purchase the Company's products or provide the Company's
products with adequate levels of promotional support.
THE COMPANY'S BUSINESS COULD BE ADVERSELY AFFECTED BY A GENERAL DECLINE IN THE
CONSUMPTION OF PRODUCTS THE COMPANY SELLS.
In the United States, notwithstanding the fact that there have been modest
increases in consumption of beverage alcohol in the most recent few years, the
overall per capita consumption of beverage alcohol products by adults (ages 21
and over) has declined substantially over the past 20 years. A general decline
in consumption could be caused by a variety of factors, including:
- a general decline in economic conditions;
- increased concern about the health consequences of consuming beverage
alcohol products and about drinking and driving;
- a trend toward a healthier diet including lighter, lower calorie
beverages such as diet soft drinks, juices and water products;
- the increased activity of anti-alcohol consumer groups; and
- increased federal and state excise taxes.
11
THE COMPANY GENERALLY DOES NOT HAVE LONG-TERM SUPPLY CONTRACTS AND THE COMPANY
IS SUBJECT TO SUBSTANTIAL PRICE FLUCTUATIONS FOR GRAPES AND GRAPE-RELATED
MATERIALS; THE COMPANY HAS A LIMITED GROUP OF SUPPLIERS OF GLASS BOTTLES.
The Company's business is heavily dependent upon raw materials, such as
grapes, grape juice concentrate, grains, alcohol and packaging materials from
third-party suppliers. The Company could experience raw material supply,
production or shipment difficulties which could adversely affect the Company's
ability to supply goods to its customers. The Company is also directly affected
by increases in the costs of such raw materials. In the past, the Company has
experienced dramatic increases in the cost of grapes. Although the Company
believes it has adequate sources of grape supplies, in the event demand for
certain wine products exceeds expectations, the Company could experience
shortages. In addition, one of the Company's largest components of cost of goods
sold is that of glass bottles, which have only a small number of producers. The
inability of any of the Company's glass bottle suppliers to satisfy its
requirements could adversely affect the Company's business.
CURRENCY RATE FLUCTUATIONS/FOREIGN OPERATIONS.
The Company has operations in different countries and, therefore, is
subject to the risks associated with currency fluctuations. The Company could
experience changes in its ability to obtain or hedge against foreign currency,
foreign exchange rates and fluctuations in those rates. The Company could also
be affected by nationalizations or unstable governments or legal systems or
intergovernmental disputes. These currency, economic and political
uncertainties may affect the Company's results, especially to the extent these
matters, or the decisions, policies or economic strength of the Company's
suppliers, affect the Company's foreign operations or imported beer products.
THE COMPANY'S ACQUISITION OR JOINT VENTURE STRATEGIES MAY NOT BE SUCCESSFUL.
The Company has made a number of acquisitions, including the recent
acquisitions of Ravenswood, the Turner Road Vintners Assets and the Corus
Assets, and anticipates that it may, from time to time, acquire additional
businesses, assets or securities of companies that the Company believes would
provide a strategic fit with its business. In addition, the Company recently
entered into a joint venture, PWP, with BRL Hardy. Also, PWP completed its
acquisition of the Blackstone Assets and may acquire other businesses. The
Company may enter into additional joint ventures. Acquired business will need to
be integrated with the Company's existing operations. There can be no assurance
that the Company will effectively assimilate the business or product offerings
of acquired companies into its business or product offerings. Any acquisitions
will also be accompanied by risks such as potential exposure to unknown
liabilities of acquired companies and the possible loss of key employees and
customers of the acquired business. Acquisitions are subject to risks associated
with the difficulty and expense of integrating the operations and personnel of
the acquired companies, the potential disruption to the Company's business and
the diversion of management time and attention. The Company shares control of
PWP equally with BRL Hardy, and may not have majority interest or control of any
future joint venture. There is the risk that our joint venture partners may at
any time have economic, business or legal interests or goals that are
inconsistent with those of the joint venture or the Company. There is also risk
that the Company's joint venture partners may be unable to meet their economic
or other obligations and that the Company may be required to fulfill those
obligations alone. The Company's failure or the failure of an entity in which
the Company has a joint venture interest to adequately manage the risks
associated with any acquisitions or joint ventures could have a material adverse
effect on the Company's financial condition or results of operations.
12
THE COMPANY HAS A MATERIAL AMOUNT OF GOODWILL, AND IF THE COMPANY IS REQUIRED TO
WRITE DOWN GOODWILL DUE TO IMPAIRMENT, IT WOULD REDUCE THE COMPANY'S NET INCOME,
WHICH IN TURN COULD MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S RESULTS OF
OPERATIONS.
Approximately $675.2 million (net of accumulated amortization), or 22.0%,
of our total assets as of February 28, 2002, represented unamortized goodwill.
Goodwill is the amount by which the costs of an acquisition accounted for using
the purchase method exceeds the fair market value of the net assets acquired.
The Company was required to record goodwill as an intangible asset on the
balance sheet and to amortize it over a period of years. The Company has
historically amortized goodwill on a straight-line basis over a period of 40
years. Even though it reduced the Company's net income for accounting purposes,
a portion of the amortization of goodwill is deductible for tax purposes. Prior
to March 1, 2002, the Company was required to evaluate periodically whether the
Company could recover its remaining goodwill from the undiscounted future cash
flows that the Company expected to receive from the operations of acquired
businesses. If these undiscounted cash flows were less than the carrying value
of the associated goodwill, the goodwill was deemed to be impaired and the
Company would have reduced the carrying value of the goodwill to equal the
discounted future cash flows and recorded the amount of the reduction as a
charge against net income.
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 142 became effective on July 1, 2001, for
acquisitions occurring on or after that date and has been adopted by the Company
on March 1, 2002, for acquisitions that occurred prior to July 1, 2001. SFAS No.
142 results in goodwill no longer being amortized. Instead, goodwill is subject
to a periodic impairment evaluation based on the fair value of the reporting
unit. Reductions in the Company's net income caused by a write-down of goodwill
could materially and adversely affect the Company's results of operations.
THE TERMINATION OR NON-RENEWAL OF IMPORTED BEER DISTRIBUTION AGREEMENTS COULD
HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products which
are subject to renewal from time to time. Our exclusive agreement to distribute
Corona Extra and our other Mexican beer brands in 25 primarily western U.S.
states expires in December 2006 and, subject to compliance with certain
performance criteria, continued retention of certain personnel and other terms
of the agreement, will be automatically renewed for additional terms of five
years. Changes in control of the Company or its subsidiaries involved in
importing the Mexican beer brands, or changes in the chief executive officer of
such subsidiaries, may be a basis for the supplier, unless it consents to such
changes, to terminate the agreement. The supplier's consent to such changes may
not be unreasonably withheld. Prior to their expiration, these agreements may be
terminated if the Company fails to meet certain performance criteria. The
Company believes that it is currently in compliance with all of its material
imported beer distribution agreements. From time to time the Company has failed,
and may in the future fail, to satisfy certain performance criteria in the
Company's distribution agreements. It is possible that the Company's beer
distribution agreements may not be renewed or may be terminated prior to
expiration.
THE COMPANY'S INDEBTEDNESS COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS FINANCIAL
HEALTH.
The Company has incurred substantial indebtedness to finance its
acquisitions and may incur substantial additional indebtedness in the future to
finance further acquisitions. The Company's ability to satisfy its financial
obligations under the Company's indebtedness outstanding from time to time will
depend upon the Company's future operating performance, which is subject to
prevailing economic conditions, levels of interest rates and financial, business
and other factors, many of which are beyond the
13
Company's control. Therefore, there can be no assurance that the Company's cash
flow from operations will be sufficient to meet all of its debt service
requirements and to fund its capital expenditure requirements.
The Company's current and future debt service obligations and covenants
could have important consequences. Such obligations and covenants, include and
may include the following:
- the Company's ability to obtain financing for future working capital
needs or acquisitions or other purposes may be limited;
- a significant portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness,
thereby reducing funds available for operations;
- the Company is subject to restrictive covenants that could limit its
ability to conduct its business; and
- the Company may be more vulnerable to adverse economic conditions than
less leveraged competitors and, thus, may be limited in its ability to
withstand competitive pressures.
The restrictive covenants included in the Company's senior credit facility
and its indentures include, among others, those restricting additional liens,
additional borrowing, the sale of assets, changes of control, the payment of
dividends, transactions with affiliates, the making of investments and certain
other fundamental changes. The senior credit facility also contains restrictions
on acquisitions and certain financial ratio tests including a debt coverage
ratio, a senior debt coverage ratio, a fixed charges ratio and an interest
coverage ratio. These restrictions could limit the Company's ability to conduct
business. A failure to comply with the obligations contained in the senior
credit facility or its indentures could result in an event of default under such
agreements, which could require the Company to immediately repay the related
debt and also debt under other agreements that may contain cross-acceleration or
cross-default provisions.
-----------------------------
ITEM 2. PROPERTIES
- ------- ----------
The Company consists of four business operating segments. Through these
business segments, the Company currently operates wineries, distilling plants,
bottling plants, and cider and water producing facilities, most of which include
warehousing and distribution facilities on the premises. The Company also
operates separate distribution centers under the U.K. Brands and Wholesale
segment's wholesaling business. The Company believes that all of its facilities
are in good condition and working order and have adequate capacity to meet its
needs for the foreseeable future. The Company's corporate headquarters are
located in offices leased in Fairport, New York.
POPULAR AND PREMIUM WINE
The Popular and Premium Wine segment maintains its headquarters in owned
and leased offices in Canandaigua, New York. It operates three wineries in New
York, located in Canandaigua, Naples and Batavia, six wineries in California,
located in Madera, Lodi, Escalon, Fresno and Ukiah, two wineries in Washington,
located in Woodinville and Sunnyside, and one winery in Caldwell, Idaho. All of
the facilities in which these wineries operate are owned, except for the
wineries in Batavia (New York), Caldwell (Idaho) and Woodinville (Washington),
which are leased. This segment considers its principal wineries to be the
Mission Bell winery in Madera (California) and the Canandaigua winery in
Canandaigua (New York). The Mission Bell winery crushes grapes, produces,
bottles and distributes
14
wine and produces grape juice concentrate. The Canandaigua winery crushes grapes
and produces, bottles and distributes wine.
This segment currently owns or leases approximately 2,800 acres of
vineyards, either fully bearing or under development, in California and New
York.
IMPORTED BEER AND SPIRITS
The Imported Beer and Spirits segment maintains its headquarters in leased
offices in Chicago, Illinois. It owns and operates four distilling plants, two
in the United States and two in Canada. The two distilling plants in the United
States are located in Bardstown, Kentucky and Albany, Georgia. The two
distilling plants in Canada, which were acquired in connection with the Black
Velvet Acquisition, are located in Valleyfield, Quebec and Lethbridge, Alberta.
This segment considers its principal distilling plants to be the facilities
located in Bardstown (Kentucky), Valleyfield (Quebec) and Lethbridge (Alberta).
The Bardstown facility distills, bottles and warehouses distilled spirits
products for the Company and, on a contractual basis, for other industry
members. The two Canadian facilities distill, bottle and store Canadian whisky
for the segment, and distill and/or bottle and store Canadian whisky, vodka,
rum, gin and liqueurs for third parties.
In the United States, the Imported Beer and Spirits segment also operates
three bottling plants, located in Georgia, Kentucky and California. The
facilities located in Atlanta, Georgia and Owensboro, Kentucky are owned, while
the facility in Carson, California is operated and leased through an arrangement
involving an ongoing management contract. This segment considers the bottling
plant located in Owensboro (Kentucky) to be one of its principal facilities.
The Owensboro facility bottles and warehouses distilled spirits products for the
segment and is also utilized for contract bottling.
U.K. BRANDS AND WHOLESALE
The U.K. Brands and Wholesale segment maintains its headquarters in owned
offices in Bristol, England. It currently owns and operates two facilities in
England, located in Bristol and Shepton Mallet and one facility in Scotland,
located in Forfar. This segment considers all three facilities to be its
principal facilities. The Bristol facility produces, bottles and packages wine;
the Shepton Mallet facility produces, bottles and packages cider; and the Forfar
facility produces, bottles and packages water products. The U.K. Brands and
Wholesale segment also owns another facility in Taunton, England, which it plans
to sell since the operations have been consolidated into the Shepton Mallet
facility.
The U.K. Brands and Wholesale segment operates a National Distribution
Centre, located at a leased facility in Severnside, England to distribute its
products that are produced at the Bristol and Shepton Mallet facilities. To
support its wholesaling business, this segment operates 11 distribution centers
located throughout the United Kingdom, 10 of which are leased. These 11
distribution centers are used to distribute products produced by third parties,
as well as by the Company. This segment has been and will continue
consolidating the operations of its wholesaling distribution centers.
FINE WINE
The Fine Wine segment maintains its headquarters in offices owned in
Rutherford, California. Through this segment, the Company owns and operates six
wineries in the United States, one of which is on land that is leased, and,
through a majority owned subsidiary, operates one winery in Chile. All six
wineries in the United States are located in the state of California, in
Rutherford, Healdsburg, Monterey County, Napa County and two in Sonoma County.
The winery in Chile is located in the Casablanca Valley. This segment considers
its principal wineries to be one of its wineries in Sonoma County (California)
and its wineries located in Rutherford (California), Healdsburg (California),
Monterey
15
County (California), and the Casablanca Valley (Chile). The winery in Monterey
County crushes, vinifies and cellars wine. The other principal wineries crush
grapes, vinify, cellar and bottle wine.
This segment also owns and leases approximately 2,700 plantable acres of
vineyards in California and approximately 1,000 plantable acres of vineyards in
Chile.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company and its subsidiaries are subject to litigation from time to
time in the ordinary course of business. Although the amount of any liability
with respect to such litigation cannot be determined, in the opinion of
management such liability will not have a material adverse effect on the
Company's financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
Not Applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to the current executive officers of the Company
is as follows:
NAME AGE OFFICE HELD
- ---- --- -----------
Richard Sands 51 Chairman of the Board, President and Chief
Executive Officer
Robert Sands 43 Group President
Alexander L. Berk 52 President and Chief Executive Officer of
Barton Incorporated
Agustin Francisco Huneeus 36 President and Chief Executive Officer of
Franciscan Vineyards, Inc.
Tim Kelly 44 Chief Operating Officer, Constellation
International
Jon Moramarco 45 President and Chief Executive Officer of
Canandaigua Wine Company, Inc.
Thomas J. Mullin 50 Executive Vice President and General Counsel
George H. Murray 55 Executive Vice President and Chief Human
Resources Officer
Richard Peters 42 Chief Operating Officer of Matthew Clark plc
Thomas S. Summer 48 Executive Vice President and Chief Financial
Officer
Richard Sands, Ph.D., has been employed by the Company in various
capacities since 1979. He was elected Executive Vice President and a director
in 1982, became President and Chief Operating Officer in May 1986 and was
elected Chief Executive Officer in October 1993. In September 1999, Mr. Sands
was elected Chairman of the Board. He is the brother of Robert Sands.
Robert Sands was appointed Group President in April 2000 and has served as
a director since January 1990. Mr. Sands also had served as Chief Executive
Officer, International from December 1998 through April 2000, as Executive Vice
President from October 1993 through April 2000, as General Counsel from June
1986 through May 2000 and as Vice President from June 1990 through October 1993.
He is the brother of Richard Sands.
Alexander L. Berk is the President and Chief Executive Officer of Barton
Incorporated, a wholly owned subsidiary of the Company. In this capacity, Mr.
Berk is in charge of the Imported Beer and Spirits segment. Since 1990 and prior
to becoming Chief Executive Officer in March 1998, Mr. Berk was President and
Chief Operating Officer of Barton and from 1988 to 1990, he was the President
and Chief
16
Executive Officer of Schenley Industries. Mr. Berk has been in the beverage
alcohol industry for most of his career, serving in various positions.
Agustin Francisco Huneeus is the President and Chief Executive Officer of
Franciscan Vineyards, Inc., a wholly owned subsidiary of the Company. In this
capacity, Mr. Huneeus is in charge of the Fine Wine segment. Since December 1995
and prior to becoming President in May 2000, he served in various positions with
Franciscan, the last of which was Senior Vice President, Sales and Marketing.
From June 1994 to December 1995, he was an associate in the branded consumer
venture group of Hambrecht & Quist.
Tim Kelly joined the Company as Chief Operating Officer, Constellation
International in February 2002. Prior to joining the Company, he was employed by
Diageo plc and served as President of Guinness-Bass Import Company (a U.S.
Subsidiary of Diageo) from 1998 to 2001 and as Vice President Marketing,
Guinness Ireland from 1995 to 1998. For the previous nine years, Mr. Kelly
served in various marketing and sales positions at Coca Cola & Schweppes
Beverages.
Jon Moramarco joined Canandaigua Wine Company, Inc., a wholly owned
subsidiary of the Company, in November 1999 as its President and Chief Executive
Officer. In this capacity, Mr. Moramarco is in charge of the Popular and Premium
Wine segment. Prior to joining Canandaigua Wine Company, Inc., he served as
President and Chief Executive Officer of Allied Domecq Wines, USA since 1992.
Mr. Moramarco has more than 15 years of diverse experience in the wine industry,
including prior service as Chairman of the American Vintners Association, a
national wine trade organization.
Thomas J. Mullin joined the Company as Executive Vice President and General
Counsel in May 2000. Prior to joining the Company, Mr. Mullin served as
President and Chief Executive Officer of TD Waterhouse Bank, NA since February
2000, of CT USA, F.S.B. since September 1998, and of CT USA, Inc. since March
1997. He also served as Executive Vice President, Business Development and
Corporate Strategy of C.T. Financial Services, Inc. from March 1997 through
February 2000. From 1985 through 1997, Mr. Mullin served as Vice Chairman and
Senior Executive Vice President of First Federal Savings and Loan Association of
Rochester, New York and from 1982 through 1985, he was a partner in the law firm
of Phillips, Lytle, Hitchcock, Blaine & Huber.
George H. Murray joined the Company in April 1997 as Senior Vice President
and Chief Human Resources Officer and in April 2000 was elected Executive Vice
President. From August 1994 to April 1997, Mr. Murray served as Vice President
- - Human Resources and Corporate Communications of ACC Corp., an international
long distance reseller. For eight and a half years prior to that, he served in
various senior management positions with First Federal Savings and Loan
Association of Rochester, New York, including the position of Senior Vice
President of Human Resources and Marketing from 1991 to 1994.
Richard Peters is the Chief Operating Officer of Matthew Clark plc, a
wholly owned subsidiary of the Company. Since May 1, 2002, in this capacity, he
is in charge of the U.K. Brands and Wholesale segment. Mr. Peters has been
employed by Matthew Clark since 1994 in various management positions, including
positions in production and operations. Prior to his employment at Matthew
Clark, for three years, he was a Management Consultant with AT Kearney,
responsible for marketing and strategy projects for a wide range of clients.
Thomas S. Summer joined the Company in April l997 as Senior Vice President
and Chief Financial Officer and in April 2000 was elected Executive Vice
President. From November 1991 to April 1997, Mr. Summer served as Vice
President, Treasurer of Cardinal Health, Inc., a large national health care
services company, where he was responsible for directing financing strategies
and treasury matters. Prior to that, from November 1987 to November 1991, Mr.
Summer held several positions in corporate finance and international treasury
with PepsiCo, Inc.
17
Executive officers of the Company hold office until the next Annual Meeting
of the Board of Directors and until their successors are chosen and qualify.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- ----------------------------------------------------------------------
MATTERS
-------
On September 19, 2000, when the Company changed its name to Constellation
Brands, Inc., the Company's Class A Common Stock (the "Class A Stock") and Class
B Common Stock (the "Class B Stock") began trading on the New York Stock
Exchange (R) ("NYSE") under the symbols STZ and STZ.B, respectively. From
October 12, 1999, to September 18, 2000, the Company's Class A Stock and Class B
Stock traded on the NYSE under the symbols CDB and CDB.B, respectively. Prior to
October 12, 1999, the Company's Class A Stock and Class B Stock traded on the
Nasdaq Stock Market (R) ("NASDAQ") under the symbols CBRNA and CBRNB,
respectively. (The Company delisted voluntarily its securities from NASDAQ in
order to list its Class A Stock and Class B Stock on the NYSE.)
The following tables set forth for the periods indicated the high and low
sales prices of the Class A Stock and the Class B Stock, as adjusted to give
retroactive effect to the May 13, 2002, two-for-one stock split. For all
periods of Fiscal 2002 and Fiscal 2001, the high and low sales prices of the
Class A Stock and Class B Stock reflect trades on the NYSE.
CLASS A STOCK
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Fiscal 2001
High $ 13.94 $ 13.89 $ 14.61 $ 17.15
Low $ 10.09 $ 10.95 $ 11.47 $ 11.75
Fiscal 2002
High $ 20.00 $ 23.25 $ 22.50 $ 27.18
Low $ 15.65 $ 18.40 $ 17.38 $ 19.01
CLASS B STOCK
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Fiscal 2001
High $ 13.50 $ 13.75 $ 14.03 $ 16.75
Low $ 10.63 $ 12.06 $ 12.00 $ 12.25
Fiscal 2002
High $ 19.95 $ 23.00 $ 21.63 $ 26.67
Low $ 16.08 $ 19.50 $ 19.75 $ 19.93
At May 15, 2002, the number of holders of record of Class A Stock and Class
B Stock of the Company were 954 and 249, respectively.
The Company's policy is to retain all of its earnings to finance the
development and expansion of its business, and the Company has not paid any cash
dividends since its initial public offering in 1973. In addition, the Company's
current senior credit facility, the Company's indenture for its $200 million 8
5/8% Senior Notes due August 2006, its indenture for its $200 million 8% Senior
Notes due February 2008, its indenture for its $200 million 8 1/2% Senior
Subordinated Notes due March 2009, its indenture for its $250 million 8 1/8%
Senior Subordinated Notes due January 2012, its indenture for its (pound) 1
million 8 1/2% Series B Senior Notes due November 2009 and its (pound) 154
million 8 1/2% Series C Senior Notes due November 2009 restrict the payment of
cash dividends. During April 2002, the Company's Board of Directors approved a
two-for-one split of both the Company's Class A Stock and Class B Stock, which
18
was distributed in the form of a stock dividend on May 13, 2002, to stockholders
of record on April 30, 2002. All share and per share amounts have been
retroactively restated to give effect to the common stock split.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
FOR THE YEARS ENDED
----------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
Gross sales $ 3,633,958 $ 3,154,294 $ 3,088,699 $ 1,984,801 $ 1,632,357
Less-excise taxes (813,455) (757,609) (748,230) (487,458) (419,569)
------------ ------------ ------------ ------------ ------------
Net sales 2,820,503 2,396,685 2,340,469 1,497,343 1,212,788
Cost of product sold (1,901,462) (1,639,230) (1,618,009) (1,049,309) (869,038)
------------ ------------ ------------ ------------ ------------
Gross profit 919,041 757,455 722,460 448,034 343,750
Selling, general and
administrative expenses (576,560) (486,587) (481,909) (299,526) (231,680)
Nonrecurring charges - - (5,510) (2,616) -
------------ ------------ ------------ ------------ ------------
Operating income 342,481 270,868 235,041 145,892 112,070
Equity in earnings
of joint venture 1,667 - - - -
Interest expense, net (114,189) (108,631) (106,082) (41,462) (32,189)
------------ ------------ ------------ ------------ ------------
Income before income taxes
and extraordinary item 229,959 162,237 128,959 104,430 79,881
Provision for income taxes (91,984) (64,895) (51,584) (42,521) (32,751)
------------ ------------ ------------ ------------ ------------
Income before
extraordinary item 137,975 97,342 77,375 61,909 47,130
Extraordinary item, net of
income taxes (1,554) - - (11,437) -
------------ ------------ ------------ ------------ ------------
Net income $ 136,421 $ 97,342 $ 77,375 $ 50,472 $ 47,130
============ ============ ============ ============ ============
Earnings per common share:
Basic:
Income before
extraordinary item $ 1.62 $ 1.33 $ 1.07 $ 0.85 $ 0.63
Extraordinary item (0.02) - - (0.16) -
------------ ------------ ------------ ------------ ------------
Earnings per common
share - basic $ 1.60 $ 1.33 $ 1.07 $ 0.69 $ 0.63
============ ============ ============ ============ ============
Diluted:
Income before
extraordinary item $ 1.57 $ 1.30 $ 1.05 $ 0.82 $ 0.62
Extraordinary item (0.02) - - (0.15) -
------------ ------------ ------------ ------------ ------------
Earnings per common
share - diluted $ 1.55 $ 1.30 $ 1.05 $ 0.67 $ 0.62
============ ============ ============ ============ ============
Total assets $ 3,069,385 $ 2,512,169 $ 2,348,791 $ 1,793,776 $ 1,090,555
============ ============ ============ ============ ============
Long-term debt $ 1,293,183 $ 1,307,437 $ 1,237,135 $ 831,689 $ 309,218
============ ============ ============ ============ ============
For the fiscal years ended February 28, 2002, and February 28, 2001, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 of this Annual Report on Form 10-K and Notes to
Consolidated Financial Statements as of February 28, 2002, under Item 8 of this
Annual Report on Form 10-K.
During April 2002, the Board of Directors of the Company approved a
two-for-one stock split of both the Company's Class A Common Stock and Class B
Common Stock, which was distributed in the
19
form of a stock dividend on May 13, 2002, to stockholders of record on April 30,
2002. All share and per share amounts have been retroactively restated to give
effect to the common stock split.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
INTRODUCTION
- ------------
The Company is a leader in the production and marketing of beverage alcohol
brands in North America and the United Kingdom. As the second largest supplier
of wine, the second largest marketer of imported beer and the third largest
supplier of distilled spirits, the Company is the largest single-source supplier
of these products in the United States. In the United Kingdom, the Company is a
leading marketer of wine, the second largest producer and marketer of cider and
a leading independent drinks wholesaler.
The Company reports 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, cider, distilled spirits, beer and
soft drinks); Fine Wine (primarily branded super-premium and ultra-premium
wine); and Corporate Operations and Other (primarily corporate related items).
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the year
ended February 28, 2002 ("Fiscal 2002"), compared to the year ended February 28,
2001 ("Fiscal 2001"), and Fiscal 2001 compared to the year ended February 29,
2000 ("Fiscal 2000"), and (ii) financial liquidity and capital resources for
Fiscal 2002. This discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
herein.
COMMON STOCK SPLIT
During April 2002, the Board of Directors of the Company approved a
two-for-one stock split of both the Company's Class A Common Stock and Class B
Common Stock, which was distributed in the form of a stock dividend on May 13,
2002, to stockholders of record on April 30, 2002. All share and per share
amounts have been retroactively restated to give effect to the common stock
split.
ACQUISITIONS IN FISCAL 2002, FISCAL 2001 AND FISCAL 2000 AND JOINT VENTURE
ACQUISITION OF RAVENSWOOD WINERY
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"), a leading premium wine producer based
in Sonoma, California. Ravenswood produces, markets and sells super-premium and
ultra-premium California wine primarily under the Ravenswood brand name. The
vast majority of the wine Ravenswood produces and sells is red wine, including
the number one super-premium Zinfandel in the United States. The results of
operations of Ravenswood are reported in the Fine Wine segment and have been
included in the consolidated results of operations of the Company since the date
of acquisition.
20
ACQUISITION OF THE CORUS ASSETS
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. In connection with the transaction, the Company
also entered into long-term grape supply agreements with affiliates of Corus
Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards.
The results of operations of the Corus Assets are reported in the Popular and
Premium Wine segment and have been included in the consolidated results of
operations of the Company since the date of acquisition.
ACQUISITION OF THE TURNER ROAD VINTNERS ASSETS
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The results of operations
of the Turner Road Vintners Assets are reported in the Popular and Premium Wine
segment and have been included in the consolidated results of operations of the
Company since the date of acquisition. The acquisition of the Turner Road
Vintners Assets is significant.
ACQUISITION OF FORTH WINES
On October 27, 2000, the Company acquired all of the issued Ordinary Shares
and Preference Shares of Forth Wines Limited ("Forth Wines"). The results of
operations of Forth Wines are reported in the U.K. Brands and Wholesale segment
and have been included in the consolidated results of operations of the Company
since the date of acquisition.
ACQUISITIONS OF FRANCISCAN ESTATES AND SIMI
On June 4, 1999, the Company purchased all of the outstanding capital stock
of Franciscan Estates and, in related transactions, purchased vineyards,
equipment and other vineyard related assets located in Northern California
(collectively the "Franciscan Acquisition"). Also on June 4, 1999, the Company
purchased all of the outstanding capital stock of Simi. (The acquisition of the
capital stock of Simi is hereafter referred to as the "Simi Acquisition".) The
Simi Acquisition included the Simi winery (located in Healdsburg, California),
equipment, vineyards, inventory and worldwide ownership of the Simi brand name.
The results of operations from the Franciscan and Simi Acquisitions
(collectively, "Franciscan") are reported together in the Fine Wine segment and
have been included in the consolidated results of operation of the Company since
the date of acquisition. On February 29, 2000, Simi was merged into Franciscan
Estates.
ACQUISITION OF THE BLACK VELVET ASSETS
On April 9, 1999, in an asset acquisition, the Company acquired several
well-known Canadian whisky brands, including Black Velvet, production facilities
located in Alberta and Quebec, Canada, case goods and bulk whisky inventories
and other related assets from affiliates of Diageo plc (collectively, the "Black
Velvet Assets"). In connection with the transaction, the Company also entered
into multi-year agreements with affiliates of Diageo plc to provide packaging
and distilling services for various brands retained by the Diageo plc
affiliates. The results of operations from the Black Velvet Assets are reported
in the Imported Beer and Spirits segment and have been included in the
consolidated results of operations of the Company since the date of acquisition.
21
PACIFIC WINE PARTNERS
On July 31, 2001, the Company and BRL Hardy Limited completed the formation
of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the
Company and BRL Hardy Limited, the second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports. PWP has exclusive distribution
rights in the United States and the Caribbean to seven brands - Banrock Station,
Hardys, Leasingham, Barossa Valley Estate and Chateau Reynella from Australia;
Nobilo from New Zealand; and La Baume from France. The joint venture also owns
Farallon, a premium California coastal wine. In addition, PWP owns a winery and
controls 1,400 acres of vineyards, all located in Monterey County, California.
On October 16, 2001, the Company announced that PWP completed the purchase
of certain assets of Blackstone Winery, including the Blackstone brand and the
Codera wine business in Sonoma County.
The investment in PWP is accounted for using the equity method;
accordingly, the results of operations of PWP since July 31, 2001, have been
included in the equity in earnings of joint venture line in the Consolidated
Statements of Income of the Company.
RESULTS OF OPERATIONS
- ---------------------
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2002 and Fiscal 2001.
Fiscal 2002 Compared to Fiscal 2001
-------------------------------------
Net Sales
-------------------------------------
%Increase
2002 2001 (Decrease)
----------- ----------- ----------
Popular and Premium Wine:
Branded:
External customers $ 781,662 $ 603,948 29.4 %
Intersegment 9,669 6,451 49.9 %
----------- -----------
Total Branded 791,331 610,399 29.6 %
----------- -----------
Other:
External customers 57,718 64,799 (10.9)%
Intersegment 13,751 16,562 (17.0)%
----------- -----------
Total Other 71,469 81,361 (12.2)%
----------- -----------
Popular and Premium Wine net sales $ 862,800 $ 691,760 24.7 %
----------- -----------
Imported Beer and Spirits:
Beer $ 758,800 $ 659,371 15.1 %
Spirits 288,568 285,743 1.0 %
----------- -----------
Imported Beer and Spirits net sales $ 1,047,368 $ 945,114 10.8 %
----------- -----------
U.K. Brands and Wholesale:
Branded:
External customers $ 296,770 $ 285,717 3.9 %
Intersegment 574 1,193 (51.9)%
----------- -----------
Total Branded 297,344 286,910 3.6 %
Wholesale 495,549 404,209 22.6 %
----------- -----------
U.K. Brands and Wholesale net sales $ 792,893 $ 691,119 14.7 %
----------- -----------
22
Fiscal 2002 Compared to Fiscal 2001
-------------------------------------
Net Sales
-------------------------------------
%Increase
2002 2001 (Decrease)
----------- ----------- ----------
Fine Wine:
External customers $ 141,436 $ 92,898 52.2 %
Intersegment 753 217 247.0 %
----------- -----------
Fine Wine net sales $ 142,189 $ 93,115 52.7 %
----------- -----------
Corporate Operations and Other $ - $ - N/A
----------- -----------
Intersegment eliminations $ (24,747) $ (24,423) 1.3 %
------------ -----------
Consolidated Net Sales $ 2,820,503 $ 2,396,685 17.7 %
============ ===========
Net sales for Fiscal 2002 increased to $2,820.5 million from $2,396.7
million for Fiscal 2001, an increase of $423.8 million, or 17.7%.
POPULAR AND PREMIUM WINE
Net sales for the Popular and Premium Wine segment for Fiscal 2002
increased to $862.8 million from $691.8 million for Fiscal 2001, an increase of
$171.0 million, or 24.7%. This increase resulted primarily from $188.1 million
of sales of the newly acquired brands from the Turner Road Vintners Assets and
Corus Assets acquisitions (the "March Acquisitions"), both completed in March
2001. This increase was partially offset by declines in the Popular and Premium
Wine segment's grape juice concentrate business and certain other wine brands.
IMPORTED BEER AND SPIRITS
Net sales for the Imported Beer and Spirits segment for Fiscal 2002
increased to $1,047.4 million from $945.1 million for Fiscal 2001, an increase
of $102.3 million, or 10.8%. This increase resulted primarily from a 15.1%
increase in imported beer sales, led by volume growth in the Mexican beer
portfolio. Spirits sales increased slightly primarily from an increase in bulk
whiskey sales, partially offset by slightly lower branded spirits sales as a
result of lower net selling prices from the implementation of a net pricing
strategy in the third quarter of Fiscal 2001, which also resulted in lower
promotion costs.
U.K. BRANDS AND WHOLESALE
Net sales for the U.K. Brands and Wholesale segment for Fiscal 2002
increased to $792.9 million from $691.1 million for Fiscal 2001, an increase of
$101.8 million, or 14.7%. Excluding an adverse foreign currency impact of $28.9
million, net sales increased $130.7 million, or 18.9%. This local currency basis
increase resulted primarily from a 27.1% increase in wholesale sales, with the
majority of this growth coming from organic sales. Additionally, branded sales
increased 7.4% with an increase in wine sales being partially offset by a
decrease in cider sales.
FINE WINE
Net sales for the Fine Wine segment for Fiscal 2002 increased to $142.2
million from $93.1 million for Fiscal 2001, an increase of $49.1 million, or
52.7%. This increase resulted primarily from $32.9 million of sales of the newly
acquired brands from the Ravenswood acquisition and organic sales growth
primarily due to volume increases in the Estancia, Veramonte, and Franciscan
brands.
23
GROSS PROFIT
The Company's gross profit increased to $919.0 million for Fiscal 2002 from
$757.5 million for Fiscal 2001, an increase of $161.6 million, or 21.3%. The
dollar increase in gross profit resulted primarily from sales of the newly
acquired brands from the March Acquisitions and the Ravenswood acquisition,
volume growth in the Imported Beer and Spirits segment's Mexican beer portfolio,
volume growth in the Fine Wine segment's portfolio, and volume growth in the
U.K. Brands and Wholesale segment's wholesale business and branded business.
These increases were partially offset by a decrease in the Imported Beer and
Spirits segment's spirits sales and an adverse foreign currency impact. As a
percent of net sales, gross profit increased to 32.6% for Fiscal 2002 from 31.6%
for Fiscal 2001, resulting primarily from sales of higher-margin wine brands
acquired in the March Acquisitions and the Ravenswood acquisition.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $576.6 million
for Fiscal 2002 from $486.6 million for Fiscal 2001, an increase of $90.0
million, or 18.5%. The dollar increase in selling, general and administrative
expenses resulted primarily from an increase in advertising, promotion, selling,
and general and administrative expenses associated with the brands acquired in
the March Acquisitions and the Ravenswood acquisition. In addition, there were
increases in promotion and advertising expenses associated with the Imported
Beer and Spirits segment's Mexican beer portfolio volume growth, the U.K. Brands
and Wholesale segment's branded business volume growth, and the Fine Wine
segment's portfolio volume growth. Selling, general and administrative expenses
as a percent of net sales remained virtually unchanged at 20.4% for Fiscal 2002
as compared to 20.3% for Fiscal 2001.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands
of dollars) by operating segment of the Company for Fiscal 2002 and Fiscal 2001.
Fiscal 2002 Compared to Fiscal 2001
-----------------------------------
Operating Income (Loss)
-----------------------------------
% Increase
2002 2001 (Decrease)
--------- --------- ----------
Popular and Premium Wine $ 104,781 $ 50,390 107.9 %
Imported Beer and Spirits 178,805 167,680 6.6 %
U.K. Brands and Wholesale 47,270 48,961 (3.5)%
Fine Wine 39,169 24,495 59.9 %
Corporate Operations and Other (27,544) (20,658) 33.3 %
--------- ---------
Consolidated Operating Income $ 342,481 $ 270,868 26.4 %
========= =========
As a result of the above factors, operating income increased to $342.5
million for Fiscal 2002 from $270.9 million for Fiscal 2001, an increase of
$71.6 million, or 26.4%.
INTEREST EXPENSE, NET
Net interest expense increased to $114.2 million for Fiscal 2002 from
$108.6 million for Fiscal 2001, an increase of $5.6 million, or 5.1%. The
increase resulted primarily from an increase in the average borrowings primarily
due to the financing of the March Acquisitions and the Ravenswood acquisition,
partially offset by a decrease in the average interest rate.
24
NET INCOME
As a result of the above factors, net income increased to $136.4 million
for Fiscal 2002 from $97.3 million for Fiscal 2001, an increase of $39.1
million, or 40.1%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Fiscal 2002 were
$429.6 million, an increase of $88.3 million over EBITDA of $341.3 million for
Fiscal 2001. EBITDA should not be construed as an alternative to operating
income or net cash flow from operating activities and should not be construed as
an indication of operating performance or as a measure of liquidity.
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2001 and Fiscal 2000.
Fiscal 2001 Compared to Fiscal 2000
--------------------------------------
Net Sales
--------------------------------------
%Increase
2001 2000 (Decrease)
----------- ----------- ----------
Popular and Premium Wine:
Branded:
External customers $ 603,948 $ 623,796 (3.2)%
Intersegment 6,451 5,524 16.8 %
----------- -----------
Total Branded 610,399 629,320 (3.0)%
----------- -----------
Other:
External customers 64,799 86,814 (25.4)%
Intersegment 16,562 1,146 1345.2 %
----------- -----------
Total Other 81,361 87,960 (7.5)%
----------- -----------
Popular and Premium Wine net sales $ 691,760 $ 717,280 (3.6)%
----------- -----------
Imported Beer and Spirits:
Beer $ 659,371 $ 570,380 15.6 %
Spirits 285,743 267,762 6.7 %
----------- -----------
Imported Beer and Spirits net sales $ 945,114 $ 838,142 12.8 %
----------- -----------
U.K. Brands and Wholesale:
Branded:
External customers $ 285,717 $ 313,027 (8.7)%
Intersegment 1,193 75 1490.7 %
----------- -----------
Total Branded 286,910 313,102 (8.4)%
Wholesale 404,209 416,644 (3.0)%
----------- -----------
U.K. Brands and Wholesale net sales $ 691,119 $ 729,746 (5.3)%
----------- -----------
Fine Wine:
External customers $ 92,898 $ 62,046 49.7 %
Intersegment 217 73 197.3 %
----------- -----------
Fine Wine net sales $ 93,115 $ 62,119 49.9 %
----------- -----------
Corporate Operations and Other $ - $ - N/A
----------- -----------
Intersegment eliminations $ (24,423) $ (6,818) 258.2 %
----------- -----------
Consolidated Net Sales $ 2,396,685 $ 2,340,469 2.4 %
=========== ===========
Net sales for Fiscal 2001 increased to $2,396.7 million from $2,340.5
million for Fiscal 2000, an increase of $56.2 million, or 2.4%.
25
POPULAR AND PREMIUM WINE
Net sales for the Popular and Premium Wine segment for Fiscal 2001
decreased to $691.8 million from $717.3 million for Fiscal 2000, a decrease of
$25.5 million, or (3.6)%. The decline resulted primarily from a decrease in
table wine sales, a decrease in sparkling wine sales as third quarter 2000
included the impact of sales associated with Millennium activities, and a
decrease in grape juice concentrate sales. These decreases were partially offset
by increases in sales of Paul Masson Grande Amber and Arbor Mist.
IMPORTED BEER AND SPIRITS
Net sales for the Imported Beer and Spirits segment for Fiscal 2001
increased to $945.1 million from $838.1 million for Fiscal 2000, an increase of
$107.0 million, or 12.8%. This increase resulted primarily from volume growth
and selling price increases in the Mexican beer portfolio, selling price
increases on tequila products and the inclusion of $11.3 million of incremental
net sales during the first quarter of Fiscal 2001 from the Canadian whisky
brands acquired as part of the Black Velvet Assets acquisition, which was
completed in April 1999.
U.K. BRANDS AND WHOLESALE
Net sales for the U.K. Brands and Wholesale segment for Fiscal 2001
decreased to $691.1 million from $729.7 million for Fiscal 2000, a decrease of
$38.6 million, or (5.3)%. This decrease resulted primarily from an adverse
foreign currency impact of $58.8 million. On a local currency basis, net sales
increased 2.8% primarily due to an increase in wholesale sales, including sales
from the recent Forth Wines acquisition, an increase in branded table wine
sales, and an increase in packaged cider sales. These increases were partially
offset by decreases in private label cider and draft cider sales.
FINE WINE
Net sales for the Fine Wine segment for Fiscal 2001 increased to $93.1
million from $62.1 million for Fiscal 2000, an increase of $31.0 million, or
49.9%. As the acquisition of Franciscan was completed in June 1999, this
increase resulted primarily from the inclusion of $21.9 million of net sales
from the first quarter of Fiscal 2001 and from selling price increases
instituted during the second quarter of Fiscal 2001.
GROSS PROFIT
The Company's gross profit increased to $757.5 million for Fiscal 2001 from
$722.5 million for Fiscal 2000, an increase of $35.0 million, or 4.8%. The
dollar increase in gross profit was primarily related to volume growth and
selling price increases in the Company's Mexican beer portfolio, sales
attributable to the acquisitions of Franciscan (completed in June 1999) and the
Black Velvet Assets (completed in April 1999), and increases in the Fine Wine
segment's selling prices. These increases were partially offset by an adverse
foreign currency impact. As a percent of net sales, gross profit increased to
31.6% for Fiscal 2001 from 30.9% for Fiscal 2000, resulting primarily from sales
of higher-margin distilled spirits and super-premium and ultra-premium wine
acquired in the acquisitions of the Black Velvet Assets and Franciscan,
respectively, and from improved margins resulting from selling price increases
in the Company's imported beer business and the Fine Wine segment portfolio, as
well as cost improvements in the U.K. Brands and Wholesale segment's cider and
wholesale businesses.
26
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $486.6 million
for Fiscal 2001 from $481.9 million for Fiscal 2000, an increase of $4.7
million, or 1.0%. The dollar increase in selling, general and administrative
expenses resulted primarily from an increase in selling expenses in all
operating segments, the inclusion of the Franciscan business and expenses
related to the brands acquired in the Black Velvet Assets acquisition for a full
year in Fiscal 2001, and an increase in expenses in Corporate Operations. These
increases were partially offset by a decrease in advertising and promotion
expenses, primarily in the Popular and Premium Wine segment, and a favorable
foreign currency impact. Selling, general and administrative expenses as a
percent of net sales decreased to 20.3% for Fiscal 2001 as compared to 20.6% for
Fiscal 2000 as the percent increase in net sales for Fiscal 2001 was greater
than the percent increase in selling, general and administrative expenses for
Fiscal 2001.
NONRECURRING CHARGES
The Company incurred nonrecurring charges of $5.5 million in Fiscal 2000
related to the closure of a cider production facility within the U.K. Brands and
Wholesale operating segment in the United Kingdom ($2.9 million) and to a
management reorganization within the Popular and Premium Wine operating segment
($2.6 million). No such charges were incurred in Fiscal 2001.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2001 and Fiscal 2000.
Fiscal 2001 Compared to Fiscal 2000
-----------------------------------
Operating Income (Loss)
-----------------------------------
2001 2000 % Increase
---------- ---------- ----------
Popular and Premium Wine $ 50,390 $ 47,305 6.5 %
Imported Beer and Spirits 167,680 142,931 17.3 %
U.K. Brands and Wholesale 48,961 48,473 1.0 %
Fine Wine 24,495 12,708 92.8 %
Corporate Operations and Other (20,658) (16,376) 26.1 %
---------- ----------
Consolidated Operating Income $ 270,868 $ 235,041 15.2 %
========== ==========
As a result of the above factors, operating income increased to $270.9
million for Fiscal 2001 from $235.0 million for Fiscal 2000, an increase of
$35.8 million, or 15.2%. Exclusive of the aforementioned $2.6 million in
nonrecurring charges, operating income for the Popular and Premium Wine
operating segment increased 1.0% in Fiscal 2001 from $49.9 million in Fiscal
2000. Operating income for the U.K. Brands and Wholesale operating segment,
excluding the aforementioned nonrecurring charges of $2.9 million, decreased
4.8% in Fiscal 2001 from $51.4 million in Fiscal 2000.
INTEREST EXPENSE, NET
Net interest expense increased to $108.6 million for Fiscal 2001 from
$106.1 million for Fiscal 2000, an increase of $2.5 million, or 2.4%. The
increase resulted primarily from an increase in the average interest rate which
was partially offset by a decrease in average borrowings.
NET INCOME
As a result of the above factors, net income increased to $97.3 million for
Fiscal 2001 from $77.4 million for Fiscal 2000, an increase of $20.0 million, or
25.8%.
27
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Fiscal 2001 were
$341.3 million, an increase of $41.5 million over EBITDA of $299.8 million for
Fiscal 2000. EBITDA should not be construed as an alternative to operating
income or net cash flow from operating activities and should not be construed as
an indication of operating performance or as a measure of liquidity.
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. The annual
grape crush normally begins in August and runs through October. The Company
generally begins purchasing grapes in August with payments for such grapes
beginning to come due in September. The Company's short-term borrowings to
support such purchases generally reach their highest levels in November or
December. 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.
FISCAL 2002 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Fiscal 2002 was $213.3
million, which resulted from $226.3 million in net income adjusted for noncash
items, less $13.0 million representing the net change in the Company's operating
assets and liabilities. The net change in operating assets and liabilities
resulted primarily from increases in accounts receivable and inventories
partially offset by increases in accounts payable, deferred revenue, accrued
salaries and commissions, and accrued advertising and promotions.
INVESTING ACTIVITIES AND FINANCING ACTIVITIES
Net cash used in investing activities for Fiscal 2002 was $585.4 million,
which resulted from net cash paid of $472.8 million for the March Acquisitions
and the Ravenswood acquisition, $77.3 million of equity contributions to PWP and
$71.1 million of capital expenditures (including $10.1 million for vineyards),
partially offset by $35.8 million of proceeds from the sale of assets.
Net cash provided by financing activities for Fiscal 2002 was $236.9
million, which resulted primarily from proceeds of $252.5 million from the
issuance of long-term debt, including $250.0 million of 8 1/8% Senior
Subordinated Notes used to repay $130.0 million of 8 3/4% Senior Subordinated
Notes and $65.0 million of 8 3/4% Series C Senior Subordinated Notes and a
portion of the Company's borrowings under its senior credit facility, net
proceeds of $151.5 million from equity offerings, proceeds of $51.4 million from
net revolving loan borrowings under the senior credit facility, and proceeds of
$45.0 million from exercise of employee stock options. These amounts were
partially offset by principal payments of long-term debt of $261.0 million,
which included the repayments as discussed above and $54.7 million of scheduled
or required principal payments under the Company's senior credit facility.
28
During June 1998, the Company's Board of Directors authorized the
repurchase of up to $100.0 million of its Class A Common Stock and Class B
Common Stock. The repurchase of shares of common stock will be accomplished,
from time to time, in management's discretion and depending upon market
conditions, through open market or privately negotiated transactions. The
Company may finance such repurchases through cash generated from operations or
through the senior credit facility. The repurchased shares will become treasury
shares. As of May 15, 2002, 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 Fiscal 2002, Fiscal 2001 and
Fiscal 2000.
DEBT
Total debt outstanding as of February 28, 2002, amounted to $1,429.6
million, an increase of $63.8 million from February 28, 2001. The ratio of
total debt to total capitalization decreased to 59.9% as of February 28, 2002,
from 68.9% as of February 28, 2001.
SENIOR CREDIT FACILITY
As of February 28, 2002, under the 2000 Credit Agreement (as defined
below), the Company had outstanding term loans of $281.3 million bearing a
weighted average interest rate of 3.9%, $50.0 million of outstanding revolving
loans bearing a weighted average interest rate of 3.1%, undrawn letters of
credit of $13.2 million, and $236.8 million in revolving loans available to be
drawn.
During June 1999, the Company financed the purchase price for the
Franciscan Acquisition primarily through additional term loan borrowings under
its previous senior credit facility. The Company financed the purchase price
for the Simi Acquisition with revolving loan borrowings under the same senior
credit facility. During August 1999, as discussed below, a portion of the
Company's borrowings under that senior credit facility were repaid with the net
proceeds of its Senior Notes (as defined below) offering.
On October 6, 1999, the Company, certain of its principal operating
subsidiaries, and a syndicate of banks (the "Syndicate Banks"), for which The
Chase Manhattan Bank acts as administrative agent, entered into a senior credit
facility (as subsequently amended, the "2000 Credit Agreement"). The 2000
Credit Agreement includes both U.S. dollar and British pound sterling
commitments of the Syndicate Banks of up to, in the aggregate, the equivalent of
$1.0 billion (subject to increase as therein provided to $1.2 billion).
Proceeds of the 2000 Credit Agreement were used to repay all outstanding
principal and accrued interest on all loans under the Company's prior senior
credit facility, and are available to fund permitted acquisitions and ongoing
working capital needs of the Company and its subsidiaries.
The 2000 Credit Agreement provides for a $380.0 million Tranche I Term Loan
facility due in December 2004, a $320.0 million Tranche II Term Loan facility
available for borrowing in British pound sterling due in December 2004, and a
$300.0 million Revolving Credit facility (including letters of credit up to a
maximum of $20.0 million) which expires in December 2004. The Tranche I Term
Loan facility ($380.0 million) and the Tranche II Term Loan facility ((pound)
193.4 million, or $320.0 million) were fully drawn at closing. During Fiscal
2001, the Company used proceeds from operating activities to prepay a portion of
the $380.0 million Tranche I Term Loan facility. During Fiscal 2002, the Company
used proceeds from the sale of 645,000 shares of the Company's Class A Common
Stock (see Note 11) to pay an additional portion of the $380.0 million Tranche I
Term Loan facility. After these repayments, the required quarterly repayments of
the Tranche I Term Loan facility were revised to $17.4 million for each quarter
in 2002, $19.6 million for each quarter in 2003, and $20.0 million for each
quarter in 2004. On November 17, 1999, proceeds from the Sterling Senior Notes
(as defined below) were used to repay a portion of the $320.0 million Tranche II
Term Loan facility ((pound) 73.0 million, or $118.3 million). On May 15, 2000,
proceeds from the Sterling Series C Senior Notes (as defined below) were used to
repay an
29
additional portion of the $320.0 million Tranche II Term Loan facility ((pound)
78.8 million, or $118.2 million). After these repayments, the required quarterly
repayments of the Tranche II Term Loan facility were revised to (pound) 0.4
million ($0.6 million) for each quarter in 2001 and 2002, (pound) 0.5 million
($0.7 million) for each quarter in 2003, and (pound) 8.5 million ($12.0 million)
for each quarter in 2004 (the foregoing U.S. dollar equivalents are as of
February 28, 2002). There are certain mandatory term loan prepayments, including
those based on sale of assets and issuance of debt and equity, in each case
subject to customary baskets, exceptions and thresholds.
The rate of interest payable, at the Company's option, is a function of the
London interbank offering rate ("LIBOR") plus a margin, federal funds rate plus
a margin, or the prime rate plus a margin. The margin is adjustable based upon
the Company's Debt Ratio (as defined in the 2000 Credit Agreement) and, with
respect to LIBOR borrowings, ranges between 0.75% and 1.25% for Revolving Credit
loans and 1.00% and 1.75% for Term Loans. As of February 28, 2002, the margin
was 1.125% for Revolving Credit loans and 1.625% for Term Loans. In addition to
interest, the Company pays a facility fee on the Revolving Credit commitments at
0.50% per annum as of February 28, 2002. This fee is based upon the Company's
quarterly Debt Ratio and can range from 0.25% to 0.50%.
Certain of the Company's principal operating subsidiaries have guaranteed
the Company's obligations under the 2000 Credit Agreement. The 2000 Credit
Agreement is secured by (i) first priority pledges of 100% of the capital stock
of Canandaigua Limited and all of the Company's domestic operating subsidiaries
and (ii) first priority pledges of 65% of the capital stock of Matthew Clark and
certain other foreign subsidiaries.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, incurring additional indebtedness,
the sale of assets, the payment of dividends, transactions with affiliates and
the making of certain investments, in each case subject to customary baskets,
exceptions and thresholds. The primary financial covenants require the
maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed
charges ratio and an interest coverage ratio. Among the most restrictive
covenants contained in the 2000 Credit Agreement is the debt coverage ratio.
On February 13, 2001, the 2000 Credit Agreement was amended to, among other
things, permit the Company to finance the acquisition of the Turner Road
Vintners Assets with revolving loan borrowings, permit the refinancing of the
Original Notes (as defined below) and Series C Notes (as defined below) with
senior notes, and adjust the senior debt coverage ratio covenant.
SENIOR NOTES
On August 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 5/8% Senior Notes due August 2006 (the "August 1999 Senior Notes").
The net proceeds of the offering ($196.0 million) were used to repay a portion
of the Company's borrowings under its senior credit facility. Interest on the
August 1999 Senior Notes is payable semiannually on February 1 and August 1 of
each year, beginning February 1, 2000. The August 1999 Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time. The
August 1999 Senior Notes are unsecured senior obligations and rank equally in
right of payment to all existing and future unsecured senior indebtedness of the
Company. The August 1999 Senior Notes are guaranteed, on a senior basis, by
certain of the Company's significant operating subsidiaries.
On November 17, 1999, the Company issued (pound) 75.0 million ($121.7
million upon issuance) aggregate principal amount of 8 1/2% Senior Notes due
November 2009 (the "Sterling Senior Notes"). The net proceeds of the offering
((pound) 73.0 million, or $118.3 million) were used to repay a portion of the
Company's British pound sterling borrowings under its senior credit facility.
Interest on the Sterling Senior Notes is payable semiannually on May 15 and
November 15 of each year, beginning on May 15,
30
2000. The Sterling Senior Notes are redeemable at the option of the Company, in
whole or in part, at any time. The Sterling Senior Notes are unsecured senior
obligations and rank equally in right of payment to all existing and future
unsecured senior indebtedness of the Company. The Sterling Senior Notes are
guaranteed, on a senior basis, by certain of the Company's significant operating
subsidiaries. In March 2000, the Company exchanged (pound) 75.0 million
aggregate principal amount of 8 1/2% Series B Senior Notes due in November 2009
(the "Sterling Series B Senior Notes") for all of the Sterling Senior Notes. The
terms of the Sterling Series B Senior Notes are identical in all material
respects to the Sterling Senior Notes. In October 2000, the Company exchanged
(pound) 74.0 million aggregate principal amount of Sterling Series C Senior
Notes (as defined below) for (pound) 74.0 million of the Sterling Series B
Notes. The terms of the Sterling Series C Senior Notes are identical in all
material respects to the Sterling Series B Senior Notes. As of February 28,
2002, the Company had outstanding (pound) 1.0 million ($1.4 million) aggregate
principal amount of Sterling Series B Senior Notes.
On May 15, 2000, the Company issued (pound) 80.0 million ($120.0 million
upon issuance) aggregate principal amount of 8 1/2% Series C Senior Notes due
November 2009 at an issuance price of (pound) 79.6 million ($119.4 million upon
issuance, net of $0.6 million unamortized discount, with an effective interest
rate of 8.6%) (the "Sterling Series C Senior Notes"). The net proceeds of the
offering ((pound) 78.8 million, or $118.2 million) were used to repay a portion
of the Company's British pound sterling borrowings under its senior credit
facility. Interest on the Sterling Series C Senior Notes is payable semiannually
on May 15 and November 15 of each year, beginning on November 15, 2000. The
Sterling Series C Senior Notes are redeemable at the option of the Company, in
whole or in part, at any time. The Sterling Series C Senior Notes are unsecured
senior obligations and rank equally in right of payment to all existing and
future unsecured senior indebtedness of the Company. The Sterling Series C
Senior Notes are guaranteed, on a senior basis, by certain of the Company's
significant operating subsidiaries. As of February 28, 2002, the Company had
outstanding (pound) 154.0 million ($218.3 million, net of $0.5 million
unamortized discount) aggregate principal amount of Sterling Series C Senior
Notes.
On February 21, 2001, the Company issued $200.0 million aggregate principal
amount of 8% Senior Notes due February 2008 (the "February 2001 Senior Notes").
The net proceeds of the offering ($197.0 million) were used to partially fund
the acquisition of the Turner Road Vintners Assets. Interest on the February
2001 Senior Notes is payable semiannually on February 15 and August 15 of each
year, beginning August 15, 2001. The February 2001 Senior Notes are redeemable
at the option of the Company, in whole or in part, at any time. The February
2001 Senior Notes are unsecured senior obligations and rank equally in right of
payment to all existing and future unsecured senior indebtedness of the Company.
The February 2001 Senior Notes are guaranteed, on a senior basis, by certain of
the Company's significant operating subsidiaries. In July 2001, the Company
exchanged $200.0 million aggregate principal amount of 8% Series B Senior Notes
due February 2008 (the "February 2001 Series B Senior Notes") for all of the
February 2001 Senior Notes. The terms of the February 2001 Series B Senior Notes
are identical in all material respects to the February 2001 Senior Notes.
SENIOR SUBORDINATED NOTES
On December 27, 1993, the Company issued $130.0 million aggregate principal
amount of 8 3/4% Senior Subordinated Notes due in December 2003 (the "Original
Notes"). On October 29, 1996, the Company issued $65.0 million aggregate
principal amount of 8 3/4% Series B Senior Subordinated Notes due in December
2003, which in February 1997 were exchanged for $65.0 million aggregate
principal amount of 8 3/4% Series C Senior Subordinated Notes due in December
2003 (the "Series C Notes"). In February 2002, the Company redeemed the
Original Notes and the Series C Notes with the proceeds from the January 2002
Senior Subordinated Notes (as defined below). In connection with this
redemption, the Company incurred an extraordinary loss of $2.6 million ($1.6
million, net of income taxes) related to the write-off of the remaining deferred
financing costs and unamortized discount.
31
On March 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated
Notes"). The net proceeds of the offering ($195.0 million) were used to fund the
acquisition of the Black Velvet Assets and to pay the fees and expenses related
thereto with the remainder of the net proceeds used for general corporate
purposes. Interest on the Senior Subordinated Notes is payable semiannually on
March 1 and September 1 of each year, beginning September 1, 1999. The Senior
Subordinated Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after March 1, 2004. The Senior Subordinated Notes are
unsecured and subordinated to the prior payment in full of all senior
indebtedness of the Company, which includes the senior credit facility. The
Senior Subordinated Notes are guaranteed, on a senior subordinated basis, by
certain of the Company's significant operating subsidiaries.
On January 23, 2002, the Company issued $250.0 million aggregate principal
amount of 8 1/8% Senior Subordinated Notes due January 2012 ("January 2002
Senior Subordinated Notes"). The net proceeds of the offering ($247.2 million)
were used to repay the Original Notes and the Series C Notes and to repay a
portion of the outstanding indebtedness under the Company's senior credit
facility. Interest on the January 2002 Senior Subordinated Notes is payable
semiannually on January 15 and July 15 of each year, beginning July 15, 2002.
The January 2002 Senior Subordinated Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after January 15, 2007. The
Company may also redeem up to 35% of the January 2002 Senior Subordinated Notes
using the proceeds of certain equity offerings completed before January 15,
2005. The January 2002 Senior Subordinated Notes are unsecured and subordinated
to the prior payment in full of all senior indebtedness of the Company, which
includes the senior credit facility. The January 2002 Senior Subordinated Notes
are guaranteed, on a senior subordinated basis, by certain of the Company's
significant operating subsidiaries.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The table below sets forth information about the Company's long-term
contractual obligations and other commercial commitments outstanding at February
28, 2002. It brings together data for easy reference from the consolidated
balance sheet and from individual notes to the Company's consolidated financial
statements.
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
----------- ----------- ----------- ----------- -----------
(in thousands)
Contractual obligations
- -----------------------
Notes payable $ 54,775 $ 54,775 $ - $ - $ -
Long-term debt (excluding
unamortized discount) 1,357,015 77,929 209,390 200,000 869,696
Capital lease obligations 18,269 3,680 7,165 4,566 2,858
Operating leases 185,079 20,463 34,154 30,425 100,037
Unconditional purchase
obligations 829,461 230,277 308,814 157,793 132,577
----------- ----------- ----------- ----------- -----------
Total contractual cash
obligations $ 2,444,599 $ 387,124 $ 559,523 $ 392,784 $ 1,105,168
=========== =========== =========== =========== ===========
32
AMOUNT OF COMMITMENT EXPIRATION PER PERIOD
-----------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 4-5 years 5 years
----------- ----------- ----------- ----------- -----------
(in thousands)
Other contractual
commitments
- -----------------
Lines of credit $ 236,838 $ - $ 236,838 $ - $ -
Standby letters of credit 13,162 - 13,162 - -
----------- ----------- ----------- ----------- -----------
Total commercial
commitments $ 250,000 $ - $ 250,000 $ - $ -
=========== =========== =========== =========== ===========
EQUITY OFFERINGS
During March 2001, the Company completed a public offering of 8,740,000
shares of its Class A Common Stock, which was held as treasury stock. This
resulted in net proceeds to the Company, after deducting underwriting discounts
and expenses, of $139.4 million. The net proceeds were used to repay revolving
loan borrowings under the senior credit facility of which a portion was incurred
to partially finance the acquisition of the Turner Road Vintners Assets.
During October 2001, the Company sold 645,000 shares of its Class A Common
Stock, which was held as treasury stock, in connection with a public offering of
Class A Common Stock by stockholders of the Company. The net proceeds to the
Company, after deducting underwriting discounts, of $12.1 million were used to
repay borrowings under the senior credit facility.
CAPITAL EXPENDITURES
During Fiscal 2002, the Company incurred $71.1 million for capital
expenditures, including $10.1 million related to vineyards. The Company plans to
spend $69.0 million for capital expenditures, exclusive of vineyards, in fiscal
2003. In addition, the Company continues to consider the purchase, lease and
development of vineyards and may incur additional expenditures for vineyards if
opportunities become available. See "Business - Sources and Availability of Raw
Materials" under Item 1 of this Annual Report on Form 10-K. Management reviews
the capital expenditure program periodically and modifies it as required to meet
current business needs.
RELATED PARTIES
Agustin Francisco Huneeus, the executive in charge of the Fine Wine
segment, along with other members of his immediate family, through various
family owned entities (the "Huneeus Interests") engaged in certain transactions
with the Fine Wine segment during each of the three years in the period ended
February 28, 2002. The Huneeus Interests engage the Fine Wine segment as the
exclusive distributor of its Quintessa wines under a long-term contract; sell
grapes to the Fine Wine segment pursuant to existing long-term contracts;
participate as partners with the Fine Wine segment in the ownership and
operation of a winery and vineyards in Chile; and render brand management and
other consulting and advisory services in the United States and internationally
to the Fine Wine segment and the Company. Total payments to the Huneeus
Interests pursuant to these transactions and arrangements totaled $4.8 million,
$5.0 million, and $3.2 million for the years ended February 28, 2002, February
28, 2001, and February 29, 2000, respectively. In addition, the Fine Wine
segment performs certain wine processing services for the Huneeus Interests.
Total fees received from the Huneeus Interests to the Fine Wine segment for
these services totaled $0.4 million, $0.6 million, and $0.6 million for the
years ended February 28, 2002, February 28, 2001, and February 29, 2000,
respectively. As of February 28, 2002 and 2001, the net amounts due to/from the
Huneeus Interests under these agreements are insignificant.
33
EFFECTS OF INFLATION AND CHANGING PRICES
The Company's results of operations and financial condition have not been
significantly affected by inflation and changing prices, including rising energy
and tequila costs. The Company has been able, subject to normal competitive
conditions, to pass along rising costs through increased selling prices. There
can be no assurances, however, that the Company will continue to be able to pass
along rising costs through increased selling prices.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in
Note 1 to the Company's consolidated financial statements located in Item 8 of
this Annual Report on Form 10-K. However, certain of the Company's accounting
policies are particularly important to the portrayal of the Company's financial
position and results of operations and require the application of significant
judgment by the Company's management; as a result they are subject to an
inherent degree of uncertainty. In applying those policies, the Company's
management uses its judgment to determine the appropriate assumptions to be used
in the determination of certain estimates. Those estimates are based on the
Company's historical experience, terms of existing contracts, the Company's
observance of trends in the industry, information provided by the Company's
customers and information available from other outside sources, as appropriate.
The Company's critical accounting policies include:
- Inventory valuation. Inventories are stated at the lower of cost or
market, cost being determined on the first-in, first-out method.
Reserves for slow moving and obsolete inventories are provided based on
historical experience and current product demand. The Company evaluates
the adequacy of these reserves quarterly.
- Accounting for acquisitions. Acquisition activities are an important
element of the Company's business strategy. The Company's acquisitions
typically result in goodwill and other intangible assets, which affect
the amount of future period amortization expense and possible impairment
charges that may be incurred. The determination of the fair value of
such intangible assets and other assets acquired and liabilities assumed
requires the Company's management to make estimates and assumptions that
affect the Company's consolidated financial statements.
- Impairment of long-lived assets. The Company's long-lived assets include
goodwill, trademarks and other intangible assets. In assessing the
recoverability of the Company's goodwill and other intangibles, the
Company must make assumptions regarding estimated future cash flows and
other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, the
Company may be required to record impairment charges for these assets.
On March 1, 2002, the Company adopted SFAS No. 142 (as defined below)
and will be required to analyze its goodwill and other intangible
assets with indefinite lives for impairment issues during the first six
months of fiscal 2003 and then on a periodic basis thereafter. The
Company currently expects to complete the initial impairment review
during the first quarter of fiscal 2003. The Company does not expect to
record an impairment charge upon completion of the initial review.
However, there can be no assurance that at the time the review is
completed a material impairment charge will not be recorded. Any
resulting impairment charge could have a material adverse impact on the
Company's financial condition and results of operations.
34
ACCOUNTING PRONOUNCEMENTS
During 2000 and 2001, the Emerging Issues Task Force ("EITF") addressed
various issues related to the income statement classification of certain
promotional payments, including EITF Issue No. 00-14 ("EITF No. 00-14"),
"Accounting for Certain Sales Incentives," EITF Issue No. 00-22 ("EITF No.
00-22"), "Accounting for 'Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered
in the Future," and EITF Issue No. 00-25 ("EITF No. 00-25"), "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products." In November 2001, the EITF codified EITF No. 00-14, EITF No. 00-22,
and EITF No. 00-25 as part of EITF Issue No. 01-09 ("EITF No. 01-09"),
"Accounting for Consideration Given by a Vendor to a Customer (Including a
Reseller of the Vendor's Products)." EITF No. 01-09 addresses the recognition,
measurement and income statement classification of consideration given by a
vendor to a customer (including both a reseller of the vendor's products and an
entity that purchases the vendor's products from a reseller). EITF No. 01-09,
among other things, requires that certain consideration given by a vendor to a
customer be characterized as a reduction of revenue when recognized in the
vendor's income statement. The Company currently reports such costs referred to
in EITF No. 00-14 and EITF No. 00-25 as selling, general and administrative
expenses. The Company is required to adopt EITF No. 01-09 in its financial
statements beginning March 1, 2002. Upon adoption of EITF No. 01-09, financial
statements for prior periods presented for comparative purposes will be
reclassified to comply with the requirements of EITF No. 01-09. For the fiscal
years ended February 28, 2002, February 28, 2001, and February 29, 2000, net
sales will be reduced by $222.4 million, $176.2 million, and $182.5 million,
respectively, cost of product sold will increase by $10.1 million, $7.8 million,
and $8.8 million, respectively, and selling, general and administrative expenses
will decrease by $232.5 million, $184.0 million, and $191.3 million,
respectively. This reclassification will not effect operating income or net
income.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 addresses financial accounting and reporting for
business combinations requiring all business combinations to be accounted for
using one method, the purchase method. In addition, SFAS No. 141 supersedes
Accounting Principles Board Opinion No. 16, "Business Combinations." SFAS No.
141 is effective immediately for all business combinations initiated after June
30, 2001, as well as for all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later. The Company
is required to adopt SFAS No. 141 for all business combinations for which the
acquisition date was before July 1, 2001, for fiscal years beginning March 1,
2002. The adoption of the applicable provisions of SFAS No. 141 has not had a
material impact on the Company's financial statements. The Company believes that
the adoption of the remaining provisions of SFAS No. 141 will not have a
material impact on its financial statements. On March 1, 2002, the Company
reclassified $59.9 million of previously identified separable intangible assets
into goodwill in accordance with the provisions of SFAS No. 141.
In July 2001, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed at least annually for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives. The Company is required to apply the provisions of SFAS No.
142 for all goodwill and intangible assets acquired prior to July 1, 2001, for
fiscal years beginning March 1, 2002. For goodwill and intangible assets
acquired after June 30, 2001, these assets are subject immediately to the
nonamortization and amortization provisions of SFAS No. 142. The Company's
35
assessment of the financial impact of SFAS No. 142 on its financial statements
is that $27.3 million of amortization expense of existing goodwill and other
intangible assets for the fiscal year ending February 28, 2002, will not be
incurred in subsequent fiscal years. The required transition impairment
evaluations are not expected to result in impairment charges.
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company is required to adopt
SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently
assessing the financial impact of SFAS No. 143 on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The Company is
required to adopt SFAS No. 144 for fiscal years beginning March 1, 2002. The
Company believes the financial impact of SFAS No. 144 will not be material on
its financial statements.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds Statement of Financial Accounting Standards
No. 4 ("SFAS No. 4"), "Reporting Gains and Losses from Extinguishment of Debt,"
Statement of Financial Accounting Standards No. 44, "Accounting for Intangible
Assets of Motor Carriers," and Statement of Financial Accounting Standards No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." In
addition, SFAS No. 145 amends Statement of Financial Accounting Standards No.
13, "Accounting for Leases," to eliminate an inconsistency between required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Lastly, SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
is required to adopt the provisions related to the rescission of SFAS No. 4 for
fiscal years beginning March 1, 2003. All other provisions of SFAS No. 145 are
effective for fiscal years beginning March 1, 2002. The Company does not expect
the adoption of SFAS No. 145 to have a material impact on its financial
statements. However, it will result in a reclassification of the previously
reported extraordinary item, net of income taxes, to increase nonoperating
expense ($2.6 million) and to decrease the provision for income taxes ($1.0
million).
EURO CONVERSION ISSUES
Effective January 1, 1999, eleven of the fifteen member countries of the
European Union (the "Participating Countries") established fixed conversion
rates between their existing sovereign currencies and the euro. Effective
January 1, 2002, the euro became the sole currency of the Participating
Countries. The Company does not believe that the effects of the conversion will
have a material adverse effect on the Company's business and operations.
36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
The Company is exposed to market risk associated with changes in interest
rates and foreign currency exchange rates. To manage the volatility relating to
these risks, the Company periodically enters into derivative transactions
including foreign currency exchange contracts and interest rate swap agreements.
The Company has limited involvement with derivative financial instruments and
does not use them for trading purposes. The Company uses derivative instruments
solely to reduce the financial impact of these risks.
The fair value of long-term debt is subject to interest rate risk.
Generally, the fair value of long-term debt will increase as interest rates fall
and decrease as interest rates rise. The estimated fair value of the Company's
total long-term debt, including current maturities, was $1,407.4 million at
February 28, 2002. A hypothetical 1% increase from prevailing interest rates at
February 28, 2002, would result in a decrease in fair value of fixed interest
rate long-term debt by $57.6 million. Also, a hypothetical 1% increase from
prevailing interest rates at February 28, 2002, would result in an approximate
increase in cash required for interest on variable interest rate debt during the
next five fiscal years as follows:
2003 $2.5 million
2004 $1.7 million
2005 $0.7 million
2006 $ -
2007 $ -
The Company has on occasion entered into interest rate swap agreements to
reduce its exposure to interest rate changes relative to its long-term debt. At
February 28, 2002, the Company had no interest rate swap agreements outstanding.
The Company has exposure to foreign currency risk as a result of having
international subsidiaries in the United Kingdom and Canada. For the Company's
operations in the United Kingdom, the Company uses local currency borrowings to
hedge its earnings and cash flow exposure to adverse changes in foreign currency
exchange rates. At February 28, 2002, management believes that a hypothetical
10% adverse change in foreign currency exchange rates would not result in a
material adverse impact on either earnings or cash flow. The Company also has
exposure to foreign currency risk as a result of contracts to purchase inventory
items that are denominated in various foreign currencies. In order to reduce
the risk of foreign currency exchange rate fluctuations resulting from these
contracts, the Company periodically enters into foreign exchange hedging
agreements. At February 28, 2002, the potential loss on outstanding foreign
exchange hedging agreements from a hypothetical 10% adverse change in foreign
currency exchange rates would not be material.
37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
AND
---
SUPPLEMENTARY SCHEDULES
-----------------------
FEBRUARY 28, 2002
-----------------
The following information is presented in this Annual Report on Form 10-K:
Page
----
Report of Independent Public Accountants................................. 39
Consolidated Balance Sheets - February 28, 2002, and February 28, 2001... 40
Consolidated Statements of Income for the years ended February 28, 2002,
February 28, 2001, and February 29, 2000............................... 41
Consolidated Statements of Changes in Stockholders' Equity for the years
ended February 28, 2002, February 28, 2001, and February 29, 2000...... 42
Consolidated Statements of Cash Flows for the years ended
February 28, 2002, February 28, 2001, and February 29, 2000............ 43
Notes to Consolidated Financial Statements............................... 44
Selected Quarterly Financial Information (unaudited)..................... 75
Schedules I through V are not submitted because they are not applicable or not
required under the rules of Regulation S-X.
Individual financial statements of the Registrant have been omitted because the
Registrant is primarily an operating company and no subsidiary included in the
consolidated financial statements has minority equity interest and/or noncurrent
indebtedness, not guaranteed by the Registrant, in excess of 5% of total
consolidated assets.
38
[LOGO]
ANDERSEN
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation
Brands, Inc. (a Delaware corporation) and subsidiaries as of February 28, 2002
and February 28, 2001, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended February 28, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Constellation Brands, Inc. and
subsidiaries as of February 28, 2002 and February 28, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended February 28, 2002 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Rochester, New York
April 9, 2002
39
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
February 28, February 28,
2002 2001
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 8,961 $ 145,672
Accounts receivable, net 383,922 314,262
Inventories, net 777,586 670,018
Prepaid expenses and other current assets 60,779 61,037
------------ ------------
Total current assets 1,231,248 1,190,989
PROPERTY, PLANT AND EQUIPMENT, net 578,764 548,614
OTHER ASSETS 1,259,373 772,566
------------ ------------
Total assets $ 3,069,385 $ 2,512,169
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable $ 54,775 $ 4,184
Current maturities of long-term debt 81,609 54,176
Accounts payable 153,433 114,793
Accrued excise taxes 60,238 55,954
Other accrued expenses and liabilities 245,155 198,053
------------ ------------
Total current liabilities 595,210 427,160
------------ ------------
LONG-TERM DEBT, less current maturities 1,293,183 1,307,437
------------ ------------
DEFERRED INCOME TAXES 163,146 131,974
------------ ------------
OTHER LIABILITIES 62,110 29,330
------------ ------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, none at February 28, 2002,
and February 28, 2001 - -
Class A Common Stock, $.01 par value-
Authorized, 120,000,000 shares;
Issued, 79,309,174 shares at
February 28, 2002, and 74,877,936 shares
at February 28, 2001 793 749
Class B Convertible Common Stock,
$.01 par value-
Authorized, 20,000,000 shares;
Issued, 14,608,390 shares at
February 28, 2002, and 14,805,188 shares
at February 28, 2001 146 148
Additional paid-in capital 431,216 267,206
Retained earnings 592,219 455,798
Accumulated other comprehensive loss (35,222) (26,004)
------------ ------------
989,152 697,897
------------ ------------
Less-Treasury stock-
Class A Common Stock, 2,895,526 shares at
February 28, 2002, and 12,401,200 shares at
February 28, 2001, at cost (31,159) (79,271)
Class B Convertible Common Stock, 2,502,900 shares
at February 28, 2002, and February 28, 2001, at cost (2,207) (2,207)
------------ ------------
(33,366) (81,478)
------------ ------------
Less-Unearned compensation-restricted stock awards (50) (151)
------------ ------------
Total stockholders' equity 955,736 616,268
------------ ------------
Total liabilities and stockholders' equity $ 3,069,385 $ 2,512,169
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
40
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
----------------------------------------------
February 28, February 28, February 29,
2002 2001 2000
-------------- -------------- --------------
GROSS SALES $ 3,633,958 $ 3,154,294 $ 3,088,699
Less - Excise taxes (813,455) (757,609) (748,230)
-------------- ------------- -------------
Net sales 2,820,503 2,396,685 2,340,469
COST OF PRODUCT SOLD (1,901,462) (1,639,230) (1,618,009)
-------------- ------------- -------------
Gross profit 919,041 757,455 722,460
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES (576,560) (486,587) (481,909)
NONRECURRING CHARGES - - (5,510)
-------------- ------------- -------------
Operating income 342,481 270,868 235,041
EQUITY IN EARNINGS OF JOINT VENTURE 1,667 - -
INTEREST EXPENSE, net (114,189) (108,631) (106,082)
-------------- -------------- -------------
Income before income taxes and extraordinary item 229,959 162,237 128,959
PROVISION FOR INCOME TAXES (91,984) (64,895) (51,584)
-------------- ------------- -------------
Income before extraordinary item 137,975 97,342 77,375
EXTRAORDINARY ITEM, net of income taxes (1,554) - -
-------------- ------------- -------------
NET INCOME $ 136,421 $ 97,342 $ 77,375
============== ============= =============
SHARE DATA:
Earnings per common share:
Basic:
Income before extraordinary item $ 1.62 $ 1.33 $ 1.07
Extraordinary item, net of income taxes (0.02) - -
------------- ------------- -------------
Earnings per common share - basic $ 1.60 $ 1.33 $ 1.07
============= ============= =============
Diluted:
Income before extraordinary item $ 1.57 $ 1.30 $ 1.05
Extraordinary item, net of income taxes (0.02) - -
------------- ------------- -------------
Earnings per common share - diluted $ 1.55 $ 1.30 $ 1.05
============= ============= =============
Weighted average common shares outstanding:
Basic 85,505 73,446 72,216
Diluted 87,825 74,751 73,996
The accompanying notes to consolidated financial statements are an integral part of these statements.
41
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Common Stock Additional Other
---------------- Paid-in Retained Comprehensive Treasury Unearned
Class A Class B Capital Earnings Loss Stock Compensation Total
------- ------- ---------- --------- ------------- --------- ------------ ---------
BALANCE, February 28, 1999 $ 716 $ 154 $ 239,260 $ 281,081 $ (4,173) $ (81,766) $ - $ 435,272
Comprehensive income:
Net income for Fiscal 2000 - - - 77,375 - - - 77,375
Foreign currency translation
adjustments - - - - 24 - - 24
---------
Comprehensive income 77,399
Conversion of 414,452 Class B
Convertible Common shares to
Class A Common shares 4 (4) - - - - - -
Exercise of 750,760 Class A
stock options 8 - 3,355 - - - - 3,363
Employee stock purchases of
124,248 treasury shares - - 1,298 - - 130 - 1,428
Acceleration of 378,900 Class A
stock options - - 835 - - - - 835
Tax benefit on Class A stock
options exercised - - 2,634 - - - - 2,634
Tax benefit on disposition of
employee stock purchases - - 43 - - - - 43
Other - - (134) - - - - (134)
------- ------- ---------- --------- ------------- --------- ------------ ---------
BALANCE, February 29, 2000 728 150 247,291 358,456 (4,149) (81,636) - 520,840
Comprehensive income:
Net income for Fiscal 2001 - - - 97,342 - - - 97,342
Foreign currency translation
adjustments - - - - (21,855) - - (21,855)
---------
Comprehensive income 75,487
Conversion of 177,052 Class B
Convertible Common shares to
Class A Common shares 2 (2) - - - - - -
Exercise of 1,859,136 Class A
stock options 19 - 13,811 - - - - 13,830
Employee stock purchases of 147,776
treasury shares - - 1,389 - - 158 - 1,547
Acceleration of 63,500 Class A
stock options - - 179 - - - - 179
Issuance of 15,100 restricted
Class A Common shares - - 201 - - - (201) -
Amortization of unearned restricted
stock compensation - - - - - - 50 50
Tax benefit on Class A stock
options exercised - - 4,256 - - - - 4,256
Tax benefit on disposition of
employee stock purchases - - 28 - - - - 28
Other - - 51 - - - - 51
------- ------- ---------- --------- ------------- --------- ------------ ---------
BALANCE, February 28, 2001 749 148 267,206 455,798 (26,004) (81,478) (151) 616,268
Comprehensive income:
Net income for Fiscal 2002 - - - 136,421 - - - 136,421
Other comprehensive (loss) income,
net of tax:
Foreign currency translation
adjustments - - - - (9,239) - - (9,239)
Unrealized gain on cash
flow hedges:
Net derivative gains, net
of tax effect of $105 - - - - 212 - - 212
Reclassification
adjustments, net of tax
effect of $92 - - - - (191) - - (191)
---------
Unrealized gain on cash
flow hedges 21
---------
Other comprehensive (loss) income,
net of tax (9,218)
---------
Comprehensive income 127,203
Conversion of 196,798 Class B
Convertible Common shares to
Class A Common shares 2 (2) - - - - - -
Exercise of 4,234,440 Class A
stock options 42 - 45,602 - - - - 45,644
Employee stock purchases of 120,674
treasury shares - - 639 - - 1,347 - 1,986
Amortization of unearned restricted
stock compensation - - - - - - 101 101
Issuance of 9,385,000 treasury
shares, net of fees - - 104,714 - - 46,765 - 151,479
Tax benefit on Class A
stock options exercised - - 12,836 - - - - 12,836
Tax benefit on disposition of
employee stock purchases - - 65 - - - - 65
Other - - 154 - - - - 154
------- ------- ---------- --------- ------------- --------- ------------ ---------
BALANCE, February 28, 2002 $ 793 $ 146 $ 431,216 $ 592,219 $ (35,222) $ (33,366) $ (50) $ 955,736
======= ======= ========== ========= ============= ========= ============ =========
The accompanying notes to consolidated financial statements are an integral part of these statements.
42
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
-----------------------------------------
February 28, February 28, February 29,
2002 2001 2000
------------ ------------ -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 136,421 $ 97,342 $ 77,375
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 51,873 44,613 40,892
Amortization of intangible assets 33,531 25,770 23,831
Deferred tax provision (benefit) 3,675 6,677 (1,500)
Extraordinary item, net of income taxes 1,554 - -
Amortization of discount on long-term debt 516 503 427
Loss (gain) on sale of assets 324 2,356 (2,003)
Stock-based compensation expense 101 280 856
Equity in earnings of joint venture (1,667) - -
Change in operating assets and liabilities,
net of effects from purchases of businesses:
Accounts receivable, net (44,804) (27,375) (10,812)
Inventories, net (19,130) (57,126) 1,926
Prepaid expenses and other current assets 566 (6,443) 4,663
Accounts payable 19,069 (11,354) (17,070)
Accrued excise taxes 4,502 26,519 (18,719)
Other accrued expenses and liabilities 30,996 4,333 44,184
Other assets and liabilities, net (4,228) (2,320) 4,005
------------ ------------ -----------
Total adjustments 76,878 6,433 70,680
------------ ------------ -----------
Net cash provided by operating activities 213,299 103,775 148,055
------------ ------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (472,832) (4,459) (452,910)
Investment in joint venture (77,282) - -
Purchases of property, plant and equipment (71,148) (68,217) (57,747)
Proceeds from sale of assets 35,815 2,009 14,977
------------ ------------ -----------
Net cash used in investing activities (585,447) (70,667) (495,680)
------------ ------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt, net of discount 252,539 319,400 1,486,240
Proceeds from equity offerings, net of fees 151,479 - -
Net proceeds from (repayment of) notes payable 51,403 (23,615) (60,629)
Exercise of employee stock options 45,027 13,806 3,358
Proceeds from employee stock purchases 1,986 1,547 1,428
Principal payments of long-term debt (260,982) (221,908) (1,059,952)
Payment of issuance costs of long-term debt (4,537) (5,794) (14,888)
------------ ------------ -----------
Net cash provided by financing activities 236,915 83,436 355,557
------------ ------------ -----------
Effect of exchange rate changes on cash and cash investments (1,478) (5,180) (1,269)
------------ ------------ -----------
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS (136,711) 111,364 6,663
CASH AND CASH INVESTMENTS, beginning of year 145,672 34,308 27,645
------------ ------------ -----------
CASH AND CASH INVESTMENTS, end of year $ 8,961 $ 145,672 $ 34,308
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 122,121 $ 105,644 $ 95,004
============ ============ ===========
Income taxes $ 75,054 $ 54,427 $ 35,478
============ ============ ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ 617,487 $ 15,115 $ 562,204
Liabilities assumed (138,913) (10,656) (106,805)
------------ ------------ -----------
Cash paid 478,574 4,459 455,399
Less - cash acquired (5,742) - (2,489)
------------ ------------ -----------
Net cash paid for purchases of businesses $ 472,832 $ 4,459 $ 452,910
============ ============ ===========
Property, plant and equipment contributed to joint venture $ 30,020 $ - $ -
============ ============ ===========
The accompanying notes to consolidated financial statements are an integral part of these statements.
43
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS -
Constellation Brands, Inc. and its subsidiaries (the "Company") operate
primarily in the beverage alcohol industry. The Company is a leader in the
production and marketing of beverage alcohol brands in North America and the
United Kingdom. The Company is the largest single-source supplier of wine,
imported beer and distilled spirits in the United States. In the United Kingdom,
the Company is a leading producer and marketer of wine and cider, and a leading
independent drinks wholesaler. The Company's products are distributed by more
than 1,000 wholesale distributors in North America. In the United Kingdom, the
Company distributes its branded products and those of other companies to more
than 16,500 customers.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements of the Company include the accounts
of Constellation Brands, Inc. and all of its subsidiaries. All intercompany
accounts and transactions have been eliminated.
MANAGEMENT'S USE OF ESTIMATES AND JUDGMENT -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FOREIGN CURRENCY TRANSLATION -
The "functional currency" for translating the accounts of the Company's
operations outside the U.S. is the local currency. The translation from the
applicable foreign currencies to U.S. dollars is performed for balance sheet
accounts using current exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average exchange rate during
the period. The resulting translation adjustments are recorded as a component of
accumulated other comprehensive loss. Gains or losses resulting from foreign
currency transactions are included in selling, general and administrative
expenses.
CASH INVESTMENTS -
Cash investments consist of highly liquid investments with an original
maturity when purchased of three months or less and are stated at cost, which
approximates market value. The amounts at February 28, 2002, were not
significant. At February 28, 2001, cash investments consist of investments in
commercial paper of $141.0 million, which were classified as held-to-maturity.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments," the
Company calculates the fair value of financial instruments using quoted market
prices whenever available. When quoted market prices are not available, the
Company uses standard pricing models for various types of financial instruments
(such as forwards, options, swaps, etc.) which take into account the present
value of estimated future cash flows. The methods and assumptions used to
estimate the fair value of financial instruments are summarized as follows:
44
ACCOUNTS RECEIVABLE: The carrying amount approximates fair value due to
the short maturity of these instruments, the creditworthiness of the customers
and the large number of customers constituting the accounts receivable balance.
NOTES PAYABLE: These instruments are variable interest rate bearing notes
for which the carrying value approximates the fair value.
LONG-TERM DEBT: The carrying value of the debt facilities with short-term
variable interest rates approximates the fair value. The fair value of the
fixed rate debt was estimated by discounting cash flows using interest rates
currently available for debt with similar terms and maturities.
FOREIGN EXCHANGE HEDGING AGREEMENTS: The fair value of currency forward
contracts is estimated based on quoted market prices.
LETTERS OF CREDIT: At February 28, 2002, and February 28, 2001, the Company
had letters of credit outstanding totaling $13.2 million and $12.3 million,
respectively, which guarantee payment for certain obligations. The Company
recognizes expense on these obligations as incurred and no material losses are
anticipated.
The carrying amount and estimated fair value of the Company's financial
instruments are summarized as follows:
February 28, 2002 February 28, 2001
--------------------------------------- --------------------------------------
Notional Carrying Fair Notional Carrying Fair
Amount Amount Value Amount Amount Value
---------- ----------- ----------- ---------- ----------- -----------
(in thousands)
Assets:
- ------
Currency forward contracts $ 2,277 $ 6 $ 6 $ 7,250 $ - $ 353
Liabilities:
- -----------
Notes payable $ - $ 54,775 $ 54,775 $ - $ 4,184 $ 4,184
Long-term debt, including
current portion $ - $ 1,374,792 $ 1,407,374 $ - $ 1,361,613 $ 1,380,050
Currency forward contracts $ 8,810 $ (105) $ (105) $ - $ - $ -
INTEREST RATE FUTURES AND CURRENCY FORWARD CONTRACTS -
From time to time, the Company enters into interest rate futures and a
variety of currency forward contracts in the management of interest rate risk
and foreign currency transaction exposure. The Company has limited involvement
with derivative instruments and does not use them for trading purposes. The
Company uses derivatives solely to reduce the financial impact of the related
risks. Effective March 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended, which establishes accounting
and reporting standards for derivative instruments and hedging activities. SFAS
No. 133 requires that the Company recognize all derivatives as either assets or
liabilities on the balance sheet and measure those instruments at fair value.
The adoption of SFAS No. 133 did not have a material impact on the Company's
consolidated financial position, results of operations, or cash flows.
The Company uses foreign currency exchange agreements to reduce the risk of
foreign currency exchange rate fluctuations resulting primarily from contracts
to purchase inventory items that are denominated in various foreign currencies.
Certain of these derivative contracts are designated to hedge the exposure to
variable cash flows of a forecasted transaction and are classified as cash flow
hedges. As such, the effective portion of the change in the fair value of the
derivatives is recorded each period in the balance sheet in accumulated other
comprehensive income/loss ("AOCI"), and is reclassified into the statement of
income, primarily as a component of cost of product sold, in the same period
during which the hedged transaction affects earnings. The currency forward
exchange contracts used generally have maturity terms of twelve months or less.
The Company expects the entire balance in AOCI related to cash flow hedges to be
reclassified to the statement of income within the next twelve months. The
Company formally documents all relationships between hedging instruments and
hedged items in accordance with SFAS No. 133 requirements.
45
The Company uses the remaining foreign currency exchange agreements to
reduce the risk of foreign currency exchange rate fluctuations resulting
primarily from recorded accounts payable denominated in various foreign
currencies. As these derivative contracts have not been designated as hedging
instruments, all resulting gains or losses are recognized in earnings in the
period of change.
The Company has exposure to foreign currency risk, primarily in the United
Kingdom, as a result of having international subsidiaries. The Company uses
local currency borrowings to hedge its earnings and cash flow exposure to
adverse changes in foreign currency exchange rates. Such borrowings are
designated as a hedge of the foreign currency exposure of the net investment in
the foreign operation. Accordingly, the effective portion of the foreign
currency gain or loss on the hedging debt instrument is reported in AOCI as part
of the foreign currency translation adjustments. For fiscal years ended February
28, 2002, and February 28, 2001, net gains of $5.4 million and $20.0 million,
respectively, are included in foreign currency translation adjustments within
AOCI.
INVENTORIES -
Inventories are stated at the lower of cost (computed in accordance with
the first-in, first-out method) or market. Elements of cost include materials,
labor and overhead and consist of the following:
February 28, February 28,
2002 2001
------------ ------------
(in thousands)
Raw materials and supplies $ 34,126 $ 28,007
In-process inventories 524,373 450,650
Finished case goods 219,087 191,361
------------ ------------
$ 777,586 $ 670,018
============ ============
A substantial portion of barreled whiskey and brandy will not be sold
within one year because of the duration of the aging process. All barreled
whiskey and brandy are classified as in-process inventories and are included in
current assets, in accordance with industry practice. Bulk wine inventories are
also included as in-process inventories within current assets, in accordance
with the general practices of the wine industry, although a portion of such
inventories may be aged for periods greater than one year. Warehousing,
insurance, ad valorem taxes and other carrying charges applicable to barreled
whiskey and brandy held for aging are included in inventory costs.
PROPERTY, PLANT AND EQUIPMENT -
Property, plant and equipment is stated at cost. Major additions and
betterments are charged to property accounts, while maintenance and repairs are
charged to operations as incurred. The cost of properties sold or otherwise
disposed of and the related accumulated depreciation are eliminated from the
accounts at the time of disposal and resulting gains and losses are included as
a component of operating income.
DEPRECIATION -
Depreciation is computed primarily using the straight-line method over the
following estimated useful lives:
Depreciable Life in Years
-------------------------
Buildings and improvements 10 to 33 1/3
Machinery and equipment 3 to 15
Motor vehicles 3 to 7
Amortization of assets capitalized under capital leases is included with
depreciation expense. Amortization is calculated using the straight-line method
over the shorter of the estimated useful life of the asset or the lease term.
46
OTHER ASSETS -
Other assets, which consist of goodwill, distribution rights, trademarks,
agency license agreements, deferred financing costs, prepaid pension benefits
and other amounts, are stated at cost, net of accumulated amortization.
Amortization is calculated on a straight-line or effective interest basis over
the following estimated useful lives:
Useful Life in Years
--------------------
Goodwill 40
Distribution rights 40
Trademarks 40
Agency license agreements 16 to 40
Deferred financing costs 5 to 10
LONG-LIVED ASSETS AND INTANGIBLES -
In accordance with Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of," the Company reviews its long-lived assets and certain
identifiable intangibles for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable on an undiscounted cash flow basis. The statement also requires
that, when an impairment has occurred, long-lived assets and certain
identifiable intangibles to be disposed of be reported at the lower of carrying
amount or fair value less cost to sell. The Company recorded an asset impairment
of $1.4 million in Fiscal 2002 in connection with the sale of the Stevens Point
Brewery in March 2002.
ADVERTISING AND PROMOTION COSTS -
The Company generally expenses advertising and promotion costs as incurred,
shown or distributed. Prepaid advertising costs at February 28, 2002, and
February 28, 2001, were not material. Advertising and promotion expense for the
years ended February 28, 2002, February 28, 2001, and February 29, 2000, were
$310.9 million, $264.4 million, and $279.6 million, respectively.
INCOME TAXES -
The Company uses the liability method of accounting for income taxes. The
liability method accounts for deferred income taxes by applying statutory rates
in effect at the balance sheet date to the difference between the financial
reporting and tax basis of assets and liabilities.
ENVIRONMENTAL -
Environmental expenditures that relate to current operations are expensed
as appropriate. Expenditures that relate to an existing condition caused by past
operations, and which do not contribute to current or future revenue generation,
are expensed. Liabilities are recorded when environmental assessments and/or
remedial efforts are probable, and the cost can be reasonably estimated.
Generally, the timing of these accruals coincides with the completion of a
feasibility study or the Company's commitment to a formal plan of action.
Liabilities for environmental costs were not material at February 28, 2002, and
February 28, 2001.
COMPREHENSIVE INCOME -
Comprehensive income consists of net income, foreign currency translation
adjustments and net unrealized gains on derivative instruments and is presented
in the Consolidated Statements of Changes in Stockholders' Equity. See Note 15
for changes in the components of accumulated other comprehensive loss.
47
EARNINGS PER COMMON SHARE -
Basic earnings per common share excludes the effect of common stock
equivalents and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period
for Class A Common Stock and Class B Convertible Common Stock. Diluted earnings
per common share reflects the potential dilution that could result if securities
or other contracts to issue common stock were exercised or converted into common
stock. Diluted earnings per common share assumes the exercise of stock options
using the treasury stock method and assumes the conversion of convertible
securities, if any, using the "if converted" method.
COMMON STOCK SPLIT -
During April 2002, the Board of Directors approved a two-for-one stock
split of both the Company's Class A Common Stock and Class B Convertible Common
Stock, which will be distributed in the form of a stock dividend on May 13,
2002, to stockholders of record on April 30, 2002. All share and per share
amounts have been retroactively restated to give effect to the common stock
split.
OTHER -
Certain February 28, 2001, and February 29, 2000, balances have been
reclassified to conform to current year presentation.
2. ACQUISITIONS:
BLACK VELVET ASSETS ACQUISITION -
On April 9, 1999, in an asset acquisition, the Company acquired several
well-known Canadian whisky brands, including Black Velvet, production facilities
located in Alberta and Quebec, Canada, case goods and bulk whisky inventories
and other related assets from affiliates of Diageo plc (the "Black Velvet
Assets"). In connection with the transaction, the Company also entered into
multi-year agreements with affiliates of Diageo plc to provide packaging and
distilling services for various brands retained by the Diageo plc affiliates.
The purchase price was $183.6 million and was financed by the proceeds from the
sale of the Senior Subordinated Notes (as defined in Note 7).
The Black Velvet Assets acquisition was accounted for using the purchase
method; accordingly, the acquired assets were recorded at fair market value at
the date of acquisition. The excess of the purchase price over the estimated
fair market value of the net assets acquired (goodwill), $36.0 million, is being
amortized on a straight-line basis over 40 years. The results of operations of
the Black Velvet Assets are reported in the Imported Beer and Spirits segment
and have been included in the Consolidated Statements of Income since the date
of acquisition.
FRANCISCAN AND SIMI ACQUISITIONS -
On June 4, 1999, the Company purchased all of the outstanding capital stock
of Franciscan Vineyards, Inc. ("Franciscan Estates") and, in related
transactions, purchased vineyards, equipment and other vineyard related assets
located in Northern California (collectively, the "Franciscan Acquisition"). The
purchase price was $212.4 million in cash plus assumed debt, net of cash
acquired, of $30.8 million. The purchase price was financed primarily by
additional term loan borrowings under the senior credit facility. Also, on June
4, 1999, the Company purchased all of the outstanding capital stock of Simi
Winery, Inc. ("Simi") (the "Simi Acquisition"). The cash purchase price was
$57.5 million and was financed by revolving loan borrowings under the senior
credit facility. The purchases were accounted for using the purchase method;
accordingly, the acquired assets were recorded at fair market value at the date
of acquisition. The excess of the purchase price over the estimated fair market
value of the net assets acquired (goodwill) for the Franciscan Acquisition and
the Simi Acquisition, $94.5 million and $5.8 million, respectively, is being
amortized on a straight-line basis over 40 years. The Franciscan Estates and
Simi operations, together with Ravenswood (as defined below), are managed as a
separate business
48
segment of the Company ("Fine Wine"). The results of operations of the Fine Wine
segment have been included in the Consolidated Statements of Income since the
date of acquisition.
FORTH WINES ACQUISITION -
On October 27, 2000, the Company purchased all of the issued Ordinary
Shares and Preference Shares of Forth Wines Limited ("Forth Wines"). The
purchase price was $4.5 million and was accounted for using the purchase method;
accordingly, the acquired net assets were recorded at fair market value at the
date of acquisition. The excess of the purchase price over the fair market
value of the net assets acquired (goodwill), $2.2 million, is being amortized on
a straight-line basis over 40 years. The results of operations of Forth Wines
are reported in the U.K. Brands and Wholesale segment and have been included in
the Consolidated Statements of Income since the date of acquisition.
TURNER ROAD VINTNERS ASSETS ACQUISITION -
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The preliminary purchase
price of the Turner Road Vintners Assets, including assumption of indebtedness
of $9.4 million, was $289.8 million. The purchase price is subject to final
closing adjustments which the Company does not expect to be material. The
acquisition was financed by the proceeds from the sale of the February 2001
Senior Notes (as defined in Note 7) and revolving loan borrowings under the
senior credit facility. The Turner Road Vintners Assets acquisition was
accounted for using the purchase method; accordingly, the acquired net assets
were recorded at fair market value at the date of acquisition, subject to final
appraisal. The excess of the purchase price over the estimated fair market value
of the net assets acquired (goodwill), $146.1 million, is being amortized on a
straight-line basis over 40 years. The results of operations of the Turner Road
Vintners Assets are reported in the Popular and Premium Wine segment and have
been included in the Consolidated Statements of Income since the date of
acquisition.
CORUS ASSETS ACQUISITION -
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. The preliminary purchase price of the Corus
Assets, including assumption of indebtedness of $3.0 million, was $52.3 million
plus an earn-out over six years based on the performance of the brands. The
purchase price is subject to final closing adjustments which the Company does
not expect to be material. In connection with the transaction, the Company also
entered into long-term grape supply agreements with affiliates of Corus Brands,
Inc. covering more than 1,000 acres of Washington and Idaho vineyards. The
acquisition was financed with revolving loan borrowings under the senior credit
facility. The Corus Assets acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair market value
at the date of acquisition, subject to final appraisal. The excess of the
purchase price over the estimated fair market value of the net assets acquired
(goodwill), $44.6 million, is being amortized on a straight-line basis over 40
years. The results of operations of the Corus Assets are reported in the
Popular and Premium Wine segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
RAVENSWOOD ACQUISITION -
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. ("Ravenswood"). Ravenswood produces, markets and
sells super-premium and ultra-premium California wine, primarily under the
Ravenswood brand name. The preliminary purchase price of Ravenswood, including
assumption of indebtedness of $2.9 million, was $151.8 million. The purchase
price is subject to final closing adjustments which the Company does not expect
to be material. The
49
purchase price was financed with revolving loan borrowings under the senior
credit facility. The Ravenswood acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair market value
at the date of acquisition, subject to final appraisal. The excess of the
purchase price over the estimated fair market value of the net assets acquired
(goodwill), $98.9 million, is not amortizable and will be tested for impairment
at least annually in accordance with the provisions of SFAS No. 142 (as defined
in Note 21). The Ravenswood acquisition was consistent with the Company's
strategy of further penetrating the higher gross profit margin super-premium and
ultra-premium wine categories. The results of operations of Ravenswood are
reported in the Fine Wine segment and have been included in the Consolidated
Statements of Income since the date of acquisition.
The following table summarizes the estimated fair values of the Ravenswood
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 July 2, 2001, are as follows:
Current assets $ 38,044
Property, plant and equipment 14,994
Other assets 353
Trademarks 50,000
Goodwill 93,948
---------
Total assets acquired 197,339
Current liabilities 14,019
Long-term liabilities 34,396
---------
Total liabilities assumed 48,415
---------
Net assets acquired $ 148,924
=========
The trademarks are not subject to amortization. None of the goodwill is
expected to be deductible for tax purposes.
The following table sets forth unaudited pro forma results of operations of
the Company for the fiscal years ended February 28, 2002, and February 28, 2001.
The unaudited pro forma results of operations give effect to the acquisitions of
the Turner Road Vintners Assets, the Corus Assets and Ravenswood as if they
occurred on March 1, 2000. The unaudited pro forma results of operations for the
fiscal year ended February 28, 2001, does not give pro forma effect to the
acquisition of Forth Wines as if it occurred on March 1, 2000, as it is not
significant. The unaudited pro forma results of operations are presented after
giving effect to certain adjustments for depreciation, amortization of goodwill,
interest expense on the acquisition financing and related income tax effects.
The unaudited pro forma results of operations for Fiscal 2002 (shown in the
table below), reflect total nonrecurring charges of $12.6 million ($0.09 per
share on a diluted basis) related to transaction costs, primarily for the
acceleration of vesting of stock options, which were incurred by Ravenswood
prior to the acquisition.
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 do not purport to present what the Company's results of operations
would actually have been if the aforementioned transactions had in fact occurred
on such date or at the beginning of the period indicated, nor do they project
the Company's financial position or results of operations at any future date or
for any future period.
50
February 28, February 28,
2002 2001
------------ ------------
(in thousands, except per share data)
Net sales $ 2,835,862 $ 2,655,777
Income before extraordinary item $ 129,308 $ 80,348
Extraordinary item, net of income taxes $ (1,554) $ -
Net income $ 127,754 $ 80,348
Earnings per common share:
Basic:
Income before extraordinary item $ 1.51 $ 1.09
Extraordinary item, net of income taxes (0.02) -
------------ ------------
Earnings per common share - basic $ 1.49 $ 1.09
============ ============
Diluted:
Income before extraordinary item $ 1.47 $ 1.07
Extraordinary item, net of income taxes (0.02) -
------------ ------------
Earnings per common share - diluted $ 1.45 $ 1.07
============ ============
Weighted average common shares outstanding:
Basic 85,505 73,446
Diluted 87,825 74,751
3. PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
February 28, February 28,
2002 2001
------------ ------------
(in thousands)
Land $ 92,193 $ 82,976
Vineyards 32,828 47,227
Buildings and improvements 153,643 140,349
Machinery and equipment 486,881 455,197
Motor vehicles 7,046 9,190
Construction in progress 38,071 18,347
------------ ------------
810,662 753,286
Less - Accumulated depreciation (231,898) (204,672)
------------ ------------
$ 578,764 $ 548,614
============ ============
4. OTHER ASSETS:
The major components of other assets are as follows:
February 28, February 28,
2002 2001
------------ ------------
(in thousands)
Goodwill $ 722,393 $ 447,813
Trademarks 376,718 246,989
Investment in joint venture 110,520 -
Distribution rights and agency
license agreements 87,052 87,052
Other 75,223 75,382
------------ ------------
1,371,906 857,236
Less - Accumulated amortization (112,533) (84,670)
------------ ------------
$ 1,259,373 $ 772,566
============ ============
51
5. INVESTMENT IN JOINT VENTURE:
On July 31, 2001, the Company and BRL Hardy Limited completed the formation
of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the
Company and BRL Hardy Limited, the second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports. PWP has exclusive distribution
rights in the United States and the Caribbean to seven brands - Banrock Station,
Hardys, Leasingham, Barossa Valley Estate and Chateau Reynella from Australia;
Nobilo from New Zealand; and La Baume from France. The joint venture also owns
Farallon, a premium California coastal wine. In addition, PWP owns a winery
and controls 1,400 acres of vineyards, all located in Monterey County,
California.
The Company contributed to PWP assets with a carrying amount of $30.0
million plus $5.5 million of cash. The Company sold assets with a carrying
amount of $31.2 million to BRL Hardy (USA) Inc. ("Hardy") and received $34.9
million in cash. Hardy contributed these assets plus $5.5 million of cash to
PWP. The Company and PWP are parties to the following agreements: crushing,
wine production, bottling, storage, and related services agreement; inventory
supply agreement; sublease and assumption agreements pertaining to certain
vineyards, which agreements include a market value adjustment provision; and a
market value adjustment agreement relating to a certain vineyard lease held by
PWP. As of February 28, 2002, amounts related to the above agreements were not
material.
On October 16, 2001, the Company announced that PWP completed the purchase
of certain assets of Blackstone Winery, including the Blackstone brand and the
Codera wine business in Sonoma County ("the Blackstone Assets"). The
preliminary purchase price of the Blackstone Assets was $138.1 million and was
financed equally by the Company and Hardy. The purchase price is subject to
final closing adjustments which the Company does not expect to be material. The
Company used revolving loan borrowings under its senior credit facility to fund
the Company's portion of the transaction.
As of February 28, 2002, the Company's investment balance, which is
accounted for under the equity method, was $110.5 million and is included on the
Consolidated Balance Sheets in other assets. The carrying amount of the
investment is less than the Company's equity in the underlying net assets of PWP
by $4.1 million. This amount is included in earnings as the assets are used by
PWP.
6. OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
February 28, February 28,
2002 2001
------------ ------------
(in thousands)
Accrued advertising and promotions $ 46,664 $ 44,501
Accrued salaries and commissions 33,481 24,589
Adverse grape contracts 22,447 -
Accrued income taxes payable 22,120 21,122
Accrued interest 21,503 28,542
Other 98,940 79,299
------------ ------------
$ 245,155 $ 198,053
============ ============
52
7. BORROWINGS:
Borrowings consist of the following:
February 28,
February 28, 2002 2001
----------------------------------------- ------------
Current Long-term Total Total
------------- ----------- ----------- ------------
(in thousands)
Notes Payable:
- --------------
Senior Credit Facility -
Revolving Credit Loans $ 50,000 $ - $ 50,000 $ -
Other 4,775 - 4,775 4,184
------------- ----------- ----------- ------------
$ 54,775 $ - $ 54,775 $ 4,184
============= =========== =========== ============
Long-term Debt:
- ---------------
Senior Credit Facility - Term Loans $ 71,902 $ 209,390 $ 281,292 $ 337,595
Senior Notes - 619,205 619,205 623,507
Senior Subordinated Notes - 450,000 450,000 393,418
Other Long-term Debt 9,707 14,588 24,295 7,093
------------- ----------- ----------- ------------
$ 81,609 $ 1,293,183 $ 1,374,792 $ 1,361,613
============= =========== =========== ============
SENIOR CREDIT FACILITY -
On October 6, 1999, the Company, certain of its principal operating
subsidiaries and a syndicate of banks (the "Syndicate Banks"), for which The
Chase Manhattan Bank acts as administrative agent, entered into a senior credit
facility (as subsequently amended, the "2000 Credit Agreement"). The 2000 Credit
Agreement includes both U.S. dollar and British pound sterling commitments of
the Syndicate Banks of up to, in the aggregate, the equivalent of $1.0 billion
(subject to increase as therein provided to $1.2 billion). Proceeds of the 2000
Credit Agreement were used to repay all outstanding principal and accrued
interest on all loans under the Company's prior senior credit facility, and are
available to fund permitted acquisitions and ongoing working capital needs of
the Company and its subsidiaries.
The 2000 Credit Agreement provides for a $380.0 million Tranche I Term Loan
facility due in December 2004, a $320.0 million Tranche II Term Loan facility
available for borrowing in British pound sterling due in December 2004, and a
$300.0 million Revolving Credit facility (including letters of credit up to a
maximum of $20.0 million) which expires in December 2004. The Tranche I Term
Loan facility ($380.0 million) and the Tranche II Term Loan facility ((pound)
193.4 million, or $320.0 million) were fully drawn at closing. During Fiscal
2001, the Company used proceeds from operating activities to prepay a portion of
the $380.0 million Tranche I Term Loan facility. During Fiscal 2002, the Company
used proceeds from the sale of 645,000 shares of the Company's Class A Common
Stock (see Note 13) to pay an additional portion of the $380.0 million Tranche I
Term Loan facility. After these repayments, the required quarterly repayments of
the Tranche I Term Loan facility were revised to $17.4 million for each quarter
in 2002, $19.6 million for each quarter in 2003, and $20.0 million for each
quarter in 2004. On November 17, 1999, proceeds from the Sterling Senior Notes
(as defined below) were used to repay a portion of the $320.0 million Tranche II
Term Loan facility ((pound) 73.0 million, or $118.3 million). On May 15, 2000,
proceeds from the Sterling Series C Senior Notes (as defined below) were used to
repay an additional portion of the $320.0 million Tranche II Term Loan facility
((pound) 78.8 million, or $118.2 million). After these repayments, the required
quarterly repayments of the Tranche II Term Loan facility were revised to
(pound) 0.4 million ($0.6 million) for each quarter in 2001 and 2002, (pound)
0.5 million ($0.7 million) for each quarter in 2003, and (pound) 8.5 million
($12.0 million) for each quarter in 2004 (the foregoing U.S. dollar equivalents
are as of February 28, 2002). There are certain mandatory term loan prepayments,
including those based on sale of assets and issuance of debt and equity, in each
case subject to customary baskets, exceptions and thresholds.
53
The rate of interest payable, at the Company's option, is a function of the
London interbank offering rate ("LIBOR") plus a margin, federal funds rate plus
a margin, or the prime rate plus a margin. The margin is adjustable based upon
the Company's Debt Ratio (as defined in the 2000 Credit Agreement) and, with
respect to LIBOR borrowings, ranges between 0.75% and 1.25% for Revolving Credit
loans and 1.00% and 1.75% for Term Loans. As of February 28, 2002, the margin
was 1.125% for Revolving Credit loans and 1.625% for Term Loans. In addition to
interest, the Company pays a facility fee on the Revolving Credit commitments at
0.50% per annum as of February 28, 2002. This fee is based upon the Company's
quarterly Debt Ratio and can range from 0.25% to 0.50%.
Certain of the Company's principal operating subsidiaries have guaranteed
the Company's obligations under the 2000 Credit Agreement. The 2000 Credit
Agreement is secured by (i) first priority pledges of 100% of the capital stock
of Canandaigua Limited and all of the Company's domestic operating subsidiaries
and (ii) first priority pledges of 65% of the capital stock of Matthew Clark and
certain other foreign subsidiaries.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, incurring additional indebtedness,
the sale of assets, the payment of dividends, transactions with affiliates and
the making of certain investments, in each case subject to customary baskets,
exceptions and thresholds. The primary financial covenants require the
maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed
charges ratio and an interest coverage ratio. Among the most restrictive
covenants contained in the 2000 Credit Agreement is the debt coverage ratio.
On February 13, 2001, the 2000 Credit Agreement was amended to, among other
things, permit the Company to finance the acquisition of the Turner Road
Vintners Assets with revolving loan borrowings, permit the refinancing of the
Original Notes (as defined below) and Series C Notes (as defined below) with
senior notes, and adjust the senior debt coverage ratio covenant.
As of February 28, 2002, under the 2000 Credit Agreement, the Company had
outstanding term loans of $281.3 million bearing a weighted average interest
rate of 3.9% and $50.0 million of revolving loans bearing a weighted average
interest rate of 3.1%. Amounts available to be drawn down under the Revolving
Credit Loans, after deducting undrawn letters of credit of $13.2 million and
$12.3 million, were $236.8 million and $287.7 million at February 28, 2002, and
February 28, 2001, respectively. The Company had average outstanding Revolving
Credit Loans of $84.4 million, $47.6 million, and $73.0 million for the years
ended February 28, 2002, February 28, 2001, and February 29, 2000, respectively.
The average interest rate on the Revolving Credit Loans was 4.8%, 7.8%, and 7.4%
for Fiscal 2002, Fiscal 2001, and Fiscal 2000, respectively.
SENIOR NOTES -
On August 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 5/8% Senior Notes due August 2006 (the "August 1999 Senior Notes").
The net proceeds of the offering ($196.0 million) were used to repay a portion
of the Company's borrowings under its senior credit facility. Interest on the
August 1999 Senior Notes is payable semiannually on February 1 and August 1 of
each year, beginning February 1, 2000. The August 1999 Senior Notes are
redeemable at the option of the Company, in whole or in part, at any time. The
August 1999 Senior Notes are unsecured senior obligations and rank equally in
right of payment to all existing and future unsecured senior indebtedness of the
Company. The August 1999 Senior Notes are guaranteed, on a senior basis, by
certain of the Company's significant operating subsidiaries.
On November 17, 1999, the Company issued (pound) 75.0 million ($121.7
million upon issuance) aggregate principal amount of 8 1/2% Senior Notes due
November 2009 (the "Sterling Senior Notes"). The net proceeds of the offering
((pound) 73.0 million, or $118.3 million) were used to repay a portion of the
Company's British pound sterling borrowings under its senior credit facility.
Interest on the Sterling
54
Senior Notes is payable semiannually on May 15 and November 15 of each year,
beginning on May 15, 2000. The Sterling Senior Notes are redeemable at the
option of the Company, in whole or in part, at any time. The Sterling Senior
Notes are unsecured senior obligations and rank equally in right of payment to
all existing and future unsecured senior indebtedness of the Company. The
Sterling Senior Notes are guaranteed, on a senior basis, by certain of the
Company's significant operating subsidiaries. In March 2000, the Company
exchanged (pound) 75.0 million aggregate principal amount of 8 1/2% Series B
Senior Notes due in November 2009 (the "Sterling Series B Senior Notes") for all
of the Sterling Senior Notes. The terms of the Sterling Series B Senior Notes
are identical in all material respects to the Sterling Senior Notes. In October
2000, the Company exchanged (pound) 74.0 million aggregate principal amount of
Sterling Series C Senior Notes (as defined below) for (pound) 74.0 million of
the Sterling Series B Notes. The terms of the Sterling Series C Senior Notes are
identical in all material respects to the Sterling Series B Senior Notes. As of
February 28, 2002, the Company had outstanding (pound) 1.0 million ($1.4
million) aggregate principal amount of Sterling Series B Senior Notes.
On May 15, 2000, the Company issued (pound) 80.0 million ($120.0 million
upon issuance) aggregate principal amount of 8 1/2% Series C Senior Notes due
November 2009 at an issuance price of (pound) 79.6 million ($119.4 million upon
issuance, net of $0.6 million unamortized discount, with an effective interest
rate of 8.6%) (the "Sterling Series C Senior Notes"). The net proceeds of the
offering ((pound) 78.8 million, or $118.2 million) were used to repay a portion
of the Company's British pound sterling borrowings under its senior credit
facility. Interest on the Sterling Series C Senior Notes is payable semiannually
on May 15 and November 15 of each year, beginning on November 15, 2000. The
Sterling Series C Senior Notes are redeemable at the option of the Company, in
whole or in part, at any time. The Sterling Series C Senior Notes are unsecured
senior obligations and rank equally in right of payment to all existing and
future unsecured senior indebtedness of the Company. The Sterling Series C
Senior Notes are guaranteed, on a senior basis, by certain of the Company's
significant operating subsidiaries. As of February 28, 2002, the Company had
outstanding (pound) 154.0 million ($218.3 million, net of $0.5 million
unamortized discount) aggregate principal amount of Sterling Series C Senior
Notes.
On February 21, 2001, the Company issued $200.0 million aggregate principal
amount of 8% Senior Notes due February 2008 (the "February 2001 Senior Notes").
The net proceeds of the offering ($197.0 million) were used to partially fund
the acquisition of the Turner Road Vintners Assets. Interest on the February
2001 Senior Notes is payable semiannually on February 15 and August 15 of each
year, beginning August 15, 2001. The February 2001 Senior Notes are redeemable
at the option of the Company, in whole or in part, at any time. The February
2001 Senior Notes are unsecured senior obligations and rank equally in right of
payment to all existing and future unsecured senior indebtedness of the Company.
The February 2001 Senior Notes are guaranteed, on a senior basis, by certain of
the Company's significant operating subsidiaries. In July 2001, the Company
exchanged $200.0 million aggregate principal amount of 8% Series B Senior Notes
due February 2008 (the "February 2001 Series B Senior Notes") for all of the
February 2001 Senior Notes. The terms of the February 2001 Series B Senior
Notes are identical in all material respects to the February 2001 Senior Notes.
SENIOR SUBORDINATED NOTES -
On December 27, 1993, the Company issued $130.0 million aggregate principal
amount of 8 3/4% Senior Subordinated Notes due in December 2003 (the "Original
Notes"). On October 29, 1996, the Company issued $65.0 million aggregate
principal amount of 8 3/4% Series B Senior Subordinated Notes due in December
2003, which in February 1997 were exchanged for $65.0 million aggregate
principal amount of 8 3/4% Series C Senior Subordinated Notes due in December
2003 (the "Series C Notes"). In February 2002, the Company redeemed the Original
Notes and the Series C Notes with the proceeds from the January 2002 Senior
Subordinated Notes (as defined below). In connection with this redemption, the
Company incurred an extraordinary loss of $2.6 million ($1.6 million, net of
income taxes) related to the write-off of the remaining deferred financing costs
and unamortized discount.
55
On March 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated
Notes"). The net proceeds of the offering ($195.0 million) were used to fund the
acquisition of the Black Velvet Assets and to pay the fees and expenses related
thereto with the remainder of the net proceeds used for general corporate
purposes. Interest on the Senior Subordinated Notes is payable semiannually on
March 1 and September 1 of each year, beginning September 1, 1999. The Senior
Subordinated Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after March 1, 2004. The Senior Subordinated Notes are
unsecured and subordinated to the prior payment in full of all senior
indebtedness of the Company, which includes the senior credit facility. The
Senior Subordinated Notes are guaranteed, on a senior subordinated basis, by
certain of the Company's significant operating subsidiaries.
On January 23, 2002, the Company issued $250.0 million aggregate principal
amount of 8 1/8% Senior Subordinated Notes due January 2012 ("January 2002
Senior Subordinated Notes"). The net proceeds of the offering ($247.2 million)
were used to repay the Original Notes and the Series C Notes and to repay a
portion of the outstanding indebtedness under the Company's senior credit
facility. Interest on the January 2002 Senior Subordinated Notes is payable
semiannually on January 15 and July 15 of each year, beginning July 15, 2002.
The January 2002 Senior Subordinated Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after January 15, 2007. The
Company may also redeem up to 35% of the January 2002 Senior Subordinated Notes
using the proceeds of certain equity offerings completed before January 15,
2005. The January 2002 Senior Subordinated Notes are unsecured and subordinated
to the prior payment in full of all senior indebtedness of the Company, which
includes the senior credit facility. The January 2002 Senior Subordinated Notes
are guaranteed, on a senior subordinated basis, by certain of the Company's
significant operating subsidiaries.
TRUST INDENTURES -
The Company's various Trust Indentures relating to the senior notes and
senior subordinated notes contain certain covenants, including, but not limited
to: (i) limitation on indebtedness; (ii) limitation on restricted payments;
(iii) limitation on transactions with affiliates; (iv) limitation on senior
subordinated indebtedness; (v) limitation on liens; (vi) limitation on sale of
assets; (vii) limitation on issuance of guarantees of and pledges for
indebtedness; (viii) restriction on transfer of assets; (ix) limitation on
subsidiary capital stock; (x) limitation on dividends and other payment
restrictions affecting subsidiaries; and (xi) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of the
Company to another person. The limitation on indebtedness covenant is governed
by a rolling four quarter fixed charge ratio requiring a specified minimum.
DEBT PAYMENTS -
Principal payments required under long-term debt obligations (excluding
unamortized discount) during the next five fiscal years and thereafter are as
follows:
(in thousands)
2003 $ 81,609
2004 85,047
2005 131,508
2006 2,524
2007 202,042
Thereafter 872,554
------------
$ 1,375,284
============
56
8. INCOME TAXES:
The Company provides for income taxes under the provisions of SFAS No. 109
"Accounting for Income Taxes". SFAS No. 109 requires an asset and liability
based approach to accounting for income taxes.
Deferred income taxes reflect the temporary difference between assets and
liabilities recognized for financial reporting and such amounts recognized for
tax purposes.
The income tax provision consisted of the following:
For the Years Ended
------------------------------------------
February 28, February 28, February 29,
2002 2001 2000
------------ ------------ ------------
(in thousands)
Current:
Federal $ 64,823 $ 39,082 $ 38,588
State 10,930 7,934 6,091
Foreign 12,556 11,202 8,405
------------ ------------ ------------
Total current 88,309 58,218 53,084
Deferred:
Federal (492) (2,017) (10,804)
State (251) 402 2,874
Foreign 4,418 8,292 6,430
------------ ------------ ------------
Total deferred 3,675 6,677 (1,500)
------------ ------------ ------------
Income tax provision $ 91,984 $ 64,895 $ 51,584
============ ============ ============
The foreign provision for income taxes is based on foreign pretax earnings.
Earnings of foreign subsidiaries would be subject to U.S. income taxation on
repatriation to the U.S. The Company's consolidated financial statements fully
provide for any related tax liability on amounts that may be repatriated.
Deferred tax assets and liabilities reflect the future income tax effects
of temporary differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
are measured using enacted tax rates that apply to taxable income.
Significant components of deferred tax (liabilities) assets consist of the
following:
February 28, February 28,
2002 2001
------------ ------------
(in thousands)
Depreciation and amortization $ (174,485) $ (140,864)
Effect of change in accounting method (1,699) (7,928)
Inventory reserves (2,232) (5,791)
Insurance accruals 5,415 4,964
Restructuring 1,004 4,292
Other accruals 18,974 13,995
------------ ------------
$ (153,023) $ (131,332)
============ ============
57
A reconciliation of the total tax provision to the amount computed by
applying the statutory U.S. Federal income tax rate to income before provision
for income taxes is as follows:
For the Years Ended
---------------------------------------------------------------------------------------
February 28, February 28, February 29,
2002 2001 2000
--------------------------- --------------------------- ---------------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
------------ ------------ ------------ ------------ ------------ ------------
(in thousands)
Income tax provision at statutory rate $ 80,486 35.0 $ 56,783 35.0 $ 45,136 35.0
State and local income taxes, net of
federal income tax benefit 6,942 3.0 5,022 3.1 3,077 2.4
Earnings of subsidiaries taxed at
other than U.S. statutory rate 1,105 0.5 616 0.4 1,294 1.0
Miscellaneous items, net 3,451 1.5 2,474 1.5 2,077 1.6
------------ ------------ ------------ ------------ ------------ ------------
$ 91,984 40.0 $ 64,895 40.0 $ 51,584 40.0
============ ============ ============ ============ ============ ============
9. OTHER LIABILITIES:
The major components of other liabilities are as follows:
February 28, February 28,
2002 2001
------------ ------------
(in thousands)
Adverse grape contracts $ 30,119 $ -
Other 31,991 29,330
------------ ------------
$ 62,110 $ 29,330
============ ============
10. PROFIT SHARING AND RETIREMENT SAVINGS PLANS:
The Company's retirement and profit sharing plan, the Constellation Brands,
Inc. 401(k) and Profit Sharing Plan (the "Plan"), covers substantially all
employees, excluding those employees covered by collective bargaining agreements
and U.K. employees. The 401(k) portion of the Plan permits eligible employees
to defer a portion of their compensation (as defined in the Plan) on a pretax
basis. Participants may defer up to 12% of their compensation for the year,
subject to limitations of the Plan. The Company makes a matching contribution
of 50% of the first 6% of compensation a participant defers. The amount of the
Company's contribution under the profit sharing portion of the Plan is in such
discretionary amount as the Board of Directors may annually determine, subject
to limitations of the Plan. Company contributions were $10.5 million, $8.2
million, and $7.3 million, for the years ended February 28, 2002, February 28,
2001, and February 29, 2000, respectively.
The Company has a defined benefit pension plan which covers substantially
all of its U.K. employees, and its assets are held by a Trustee who administers
funds separately from the Company's finances. In addition, the Company has
defined benefit pension plans covering certain of its Canadian employees.
58
Net periodic benefit cost included the following components:
For the For the
Year Ended Year Ended
February 28, February 29,
For the Year Ended February 28, 2002 2001 2000
-------------------------------------- ------------ ------------
U.K. Canadian Total Total Total
----------- ---------- ----------- ------------ ------------
(in thousands)
Service cost $ 3,997 $ 301 $ 4,298 $ 4,380 $ 4,635
Interest cost 10,588 961 11,549 11,254 11,205
Expected return on plan assets (14,812) (1,055) (15,867) (16,164) (16,340)
Amortization of prior service cost - 8 8 - -
Recognized net actuarial gain - (33) (33) (95) -
----------- ---------- ----------- ------------ ------------
Net periodic benefit (income) cost $ (227) $ 182 $ (45) $ (625) $ (500)
=========== ========== =========== ============ ============
The following table summarizes the funded status of the Company's defined
benefit pension plans and the related amounts that are primarily included in
other assets in the Consolidated Balance Sheets.
February 28,
February 28, 2002 2001
------------------------------------ ------------
U.K. Canadian Total Total
---------- ---------- ---------- ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 179,314 $ 14,202 $ 193,516 $ 198,797
Service cost 3,997 301 4,298 4,380
Interest cost 10,588 961 11,549 11,254
Plan participants' contributions 1,420 - 1,420 1,436
Plan amendment - 39 39 -
Actuarial (gain) loss (13,427) 642 (12,785) (159)
Benefits paid (6,461) (813) (7,274) (5,513)
Foreign currency exchange rate changes (3,435) (606) (4,041) (16,679)
----------- ---------- ---------- ------------
Benefit obligation as of last day of February $ 171,996 $ 14,726 $ 186,722 $ 193,516
=========== ========== ========== ============
Change in plan assets:
Fair value of plan assets as of March 1 $ 194,071 $ 13,640 $ 207,711 $ 222,829
Actual return on plan assets (16,185) (370) (16,555) 6,926
Plan participants' contributions 1,420 - 1,420 1,436
Employer contribution - 554 554 573
Benefits paid (6,461) (813) (7,274) (5,513)
Foreign currency exchange rate changes (3,501) (540) (4,041) (18,540)
----------- ---------- ---------- ------------
Fair value of plan assets as of last day of February $ 169,344 $ 12,471 $ 181,815 $ 207,711
=========== ========== ========== ============
Funded status of the plan as of last day of February:
Funded status $ (2,652) $ (2,255) $ (4,907) $ 14,195
Unrecognized prior service cost - 30 30 -
Unrecognized actuarial loss 28,046 620 28,666 9,423
----------- ---------- ---------- ------------
Prepaid (accrued) benefit cost $ 25,394 $ (1,605) $ 23,789 $ 23,618
=========== ========== ========== ============
The following table sets forth the principal assumptions used in developing
the benefit obligation and the net periodic pension expense:
February 28, 2002 February 28, 2001
--------------------------- ---------------------------
U.K. Canadian U.K. Canadian
----------- ------------ ----------- ------------
Rate of return on plan assets 7.75% 8.00% 7.75% 8.50%
Discount rate 6.00% 7.00% 6.00% 7.25%
Rate of compensation increase 3.75% - 4.00% -
59
11. POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS:
The Company currently sponsors multiple non-pension postretirement and
postemployment benefit plans for certain of its Imported Beer and Spirits
segment employees.
The status of the plans is as follows:
February 28,
February 28, 2002 2001
--------------------------------------- ------------
Non-U.S. U.S. Total Total
------------ ---------- ----------- ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 966 $ 3,219 $ 4,185 $ 3,651
Service cost 27 128 155 136
Interest cost 80 225 305 261
Benefits paid (34) (159) (193) (182)
Plan amendment 184 - 184 -
Actuarial loss 75 12 87 366
Foreign currency exchange rate changes (47) - (47) (47)
------------ ---------- ----------- ------------
Benefit obligation as of the last day of February $ 1,251 $ 3,425 $ 4,676 $ 4,185
============ ========== =========== ============
Funded status as of the last day of February:
Funded status $ (1,251) $ (3,425) $ (4,676) $ (4,185)
Unrecognized prior service cost 161 191 352 213
Unrecognized net loss 267 82 349 281
------------ ---------- ----------- ------------
Accrued benefit liability $ (823) $ (3,152) $ (3,975) $ (3,691)
============ ========== =========== ============
Components of net periodic benefit cost for the
twelve months ended the last day of February:
Service cost $ 27 $ 128 $ 155 $ 136
Interest cost 80 225 305 261
Amortization of prior service cost 19 22 41 22
Recognized net actuarial loss 9 - 9 -
------------ ---------- ----------- ------------
Net periodic benefit cost $ 135 $ 375 $ 510 $ 419
============ ========== =========== ============
The following table sets forth the principal assumptions used in developing
the benefit obligation and the net periodic non-pension postretirement and
postemployment expense:
February 28, 2002 February 28, 2001
-------------------------- --------------------------
Non-U.S. U.S. Non-U.S. U.S.
----------- ---------- ----------- ----------
Discount rate 6.50% 6.50% 7.00% 7.00%
Rate of compensation increase 4.00% - 4.00% -
At February 28, 2002, a 10.0% annual rate of increase and a 7.5% annual
rate of increase in the per capita cost of covered health benefits were assumed
for the first year for the Non-U.S. and U.S. plans, respectively. These rates
were assumed to decrease gradually to 4.7% over seven years and 4.0% over 3
years for the Non-U.S. and U.S. plans, respectively, and to remain at this level
thereafter. Assumed healthcare trend rates could have a significant effect on
the amount reported for health care plans. A 1% change in assumed health care
cost trend rate would have the following effects:
1% Increase 1% Decrease
----------- -----------
(in thousands)
Effect on total service and interest cost components $ 60 $ (52)
Effect on postretirement benefit obligation $ 541 $ (468)
60
12. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES -
Future payments under noncancelable operating leases having initial or
remaining terms of one year or more are as follows during the next five fiscal
years and thereafter:
(in thousands)
2003 $ 20,463
2004 18,172
2005 15,982
2006 13,696
2007 16,729
Thereafter 100,037
---------
$ 185,079
=========
Rental expense was $24.0 million, $19.6 million, and $17.4 million for
Fiscal 2002, Fiscal 2001, and Fiscal 2000, respectively.
PURCHASE COMMITMENTS AND CONTINGENCIES -
The Company has agreements with suppliers to purchase various spirits of
which certain agreements are denominated in British pound sterling and Canadian
dollars. The maximum future obligation under these agreements, based upon
exchange rates at February 28, 2002, aggregate $19.1 million for contracts
expiring through December 2006.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements from the suppliers of these products. The
Company's agreement to distribute Corona Extra and its other Mexican beer brands
exclusively throughout 25 primarily western U.S. states expires in December
2006, with automatic five year renewals thereafter, subject to compliance with
certain performance criteria and other terms under the agreement. The remaining
agreements expire through June 2008. Prior to their expiration, these
agreements may be terminated if the Company fails to meet certain performance
criteria. At February 28, 2002, the Company believes it is in compliance with
all of its material distribution agreements and, given the Company's long-term
relationships with its suppliers, the Company does not believe that these
agreements will be terminated.
In connection with previous acquisitions as well as with the Turner Road
Vintners Assets acquisition and the Corus Assets acquisition, the Company has
assumed grape purchase contracts with certain growers and suppliers. In
addition, the Company has entered into other grape purchase contracts with
various growers and suppliers in the normal course of business. Under the grape
purchase contracts, the Company is committed to purchase all grape production
yielded from a specified number of acres for a period of time from one to
sixteen years. The actual tonnage and price of grapes that must be purchased by
the Company will vary each year depending on certain factors, including weather,
time of harvest, overall market conditions and the agricultural practices and
location of the growers and suppliers under contract. The Company purchased
$177.0 million of grapes under these contracts during Fiscal 2002. Based on
current production yields and published grape prices, the Company estimates that
the aggregate purchases under these contracts over the remaining term of the
contracts will be $785.3 million.
In connection with the Turner Road Vintners Assets acquisition and the
Corus Assets acquisition, the Company established a reserve for the estimated
loss on firm purchase commitments assumed at the time of acquisition of $52.6
million.
The Company's aggregate obligations under bulk wine purchase contracts will
be $25.0 million over the remaining term of the contracts which expire through
fiscal 2005.
61
EMPLOYMENT CONTRACTS -
The Company has employment contracts with certain of its executive officers
and certain other management personnel with automatic one year renewals unless
terminated by either party. These agreements provide for minimum salaries, as
adjusted for annual increases, and may include incentive bonuses based upon
attainment of specified management goals. In addition, these agreements provide
for severance payments in the event of specified termination of employment. The
aggregate commitment for future compensation and severance, excluding incentive
bonuses, was $4.8 million as of February 28, 2002, of which none was accrued as
of February 28, 2002.
EMPLOYEES COVERED BY COLLECTIVE BARGAINING AGREEMENTS -
Approximately 29% of the Company's full-time employees are covered by
collective bargaining agreements at February 28, 2002. Agreements expiring
within one year cover approximately 10% of the Company's full-time employees.
LEGAL MATTERS -
The Company is subject to litigation from time to time in the ordinary
course of business. Although the amount of any liability with respect to such
litigation cannot be determined, in the opinion of management such liability
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
13. STOCKHOLDERS' EQUITY:
COMMON STOCK -
The Company has two classes of common stock: Class A Common Stock and Class
B Convertible Common Stock. Class B Convertible Common Stock shares are
convertible into shares of Class A Common Stock on a one-to-one basis at any
time at the option of the holder. Holders of Class B Convertible Common Stock
are entitled to ten votes per share. Holders of Class A Common Stock are
entitled to one vote per share and a cash dividend premium. If the Company pays
a cash dividend on Class B Convertible Common Stock, each share of Class A
Common Stock will receive an amount at least ten percent greater than the amount
of the cash dividend per share paid on Class B Convertible Common Stock. In
addition, the Board of Directors may declare and pay a dividend on Class A
Common Stock without paying any dividend on Class B Convertible Common Stock.
At February 28, 2002, there were 76,413,648 shares of Class A Common Stock
and 12,105,490 shares of Class B Convertible Common Stock outstanding, net of
treasury stock.
STOCK REPURCHASE AUTHORIZATION -
In June 1998, the Company's Board of Directors authorized the repurchase of
up to $100.0 million of its Class A Common Stock and Class B Convertible Common
Stock. The Company may finance such purchases, which will become treasury
shares, through cash generated from operations or through the senior credit
facility. No shares were repurchased during Fiscal 2002, Fiscal 2001 and Fiscal
2000.
EQUITY OFFERINGS -
During March 2001, the Company completed a public offering of 8,740,000
shares of its Class A Common Stock, which was held as treasury stock. This
resulted in net proceeds to the Company, after deducting underwriting discounts
and expenses, of $139.4 million. The net proceeds were used to repay revolving
loan borrowings under the senior credit facility of which a portion was incurred
to partially finance the acquisition of the Turner Road Vintners Assets.
62
During October 2001, the Company sold 645,000 shares of its Class A Common
Stock, which was held as treasury stock, in connection with a public offering of
Class A Common Stock by stockholders of the Company. The net proceeds to the
Company, after deducting underwriting discounts, of $12.1 million were used to
repay borrowings under the senior credit facility.
LONG-TERM STOCK INCENTIVE PLAN -
Under the Company's Long-Term Stock Incentive Plan, nonqualified stock
options, stock appreciation rights, restricted stock and other stock-based
awards may be granted to employees, officers and directors of the Company. At
the Company's Annual Meeting of Stockholders held on July 20, 1999, stockholders
approved the amendment to the Company's Long-Term Stock Incentive Plan to
increase the aggregate number of shares of the Class A Common Stock available
for awards under the plan from 16,000,000 shares to 28,000,000 shares. The
exercise price, vesting period and term of nonqualified stock options granted
are established by the committee administering the plan (the "Committee").
Grants of stock appreciation rights, restricted stock and other stock-based
awards may contain such vesting, terms, conditions and other requirements as the
Committee may establish. During Fiscal 2002 and Fiscal 2001, no stock
appreciation rights were granted. No restricted stock was granted during Fiscal
2002. During Fiscal 2001, 15,100 shares of restricted Class A Common Stock were
granted at a weighted average grant date fair value of $13.31 per share.
INCENTIVE STOCK OPTION PLAN -
Under the Company's Incentive Stock Option Plan, incentive stock options
may be granted to employees, including officers, of the Company. Grants, in the
aggregate, may not exceed 4,000,000 shares of the Company's Class A Common
Stock. The exercise price of any incentive stock option may not be less than
the fair market value of the Company's Class A Common Stock on the date of
grant. The vesting period and term of incentive stock options granted are
established by the Committee. The maximum term of incentive stock options is
ten years.
A summary of stock option activity under the Company's long-term stock
incentive plan and the incentive stock option plan is as follows:
Weighted Weighted
Shares Average Average
Under Exercise Options Exercise
Option Price Exercisable Price
------------ ------------ ------------ ------------
Balance, February 28, 1999 9,019,020 $ 8.32 1,969,140 $ 6.14
Options granted 3,279,200 $ 12.60
Options exercised (750,760) $ 4.48
Options forfeited/canceled (594,460) $ 11.24
------------
Balance, February 29, 2000 10,953,000 $ 9.70 2,949,820 $ 6.76
Options granted 3,860,400 $ 13.01
Options exercised (1,859,136) $ 7.44
Options forfeited/canceled (645,460) $ 11.91
------------
Balance, February 28, 2001 12,308,804 $ 10.97 4,816,884 $ 8.51
Options granted 5,115,100 $ 19.12
Options exercised (4,234,440) $ 11.20
Options forfeited/canceled (711,656) $ 15.49
------------
Balance, February 28, 2002 12,477,808 $ 14.12 7,565,199 $ 12.31
============
63
The following table summarizes information about stock options outstanding
at February 28, 2002:
Options Outstanding Options Exercisable
----------------------------------- ------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- ----------------- ----------- ----------- ---------- ------------ ----------
$ 2.88 - $ 7.50 1,729,116 4.0 years $ 5.82 1,701,916 $ 5.84
$ 7.81 - $ 14.89 6,108,392 7.3 years $ 12.66 4,228,633 $ 12.51
$ 17.74 - $ 24.30 4,640,300 9.3 years $ 19.13 1,634,650 $ 18.54
----------- ------------
12,477,808 7.6 years $ 14.12 7,565,199 $ 12.31
=========== ============
The weighted average fair value of options granted during Fiscal 2002,
Fiscal 2001, and Fiscal 2000 was $8.99, $5.45, and $6.57, respectively. The
fair value of options is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk-free
interest rate of 4.7% for Fiscal 2002, 6.2% for Fiscal 2001, and 5.7% for Fiscal
2000; volatility of 41.0% for Fiscal 2002, 38.8% for Fiscal 2001, and 40.0% for
Fiscal 2000; and expected option life of 6.0 years for Fiscal 2002, 4.7 years
for Fiscal 2001, and 7.0 years for Fiscal 2000. The dividend yield was 0% for
Fiscal 2002, Fiscal 2001, and Fiscal 2000. Forfeitures are recognized as they
occur.
EMPLOYEE STOCK PURCHASE PLANS -
The Company has a stock purchase plan under which 4,500,000 shares of Class
A Common Stock may be issued. Under the terms of the plan, eligible employees
may purchase shares of the Company's Class A Common Stock through payroll
deductions. The purchase price is the lower of 85% of the fair market value of
the stock on the first or last day of the purchase period. During Fiscal 2002,
Fiscal 2001, and Fiscal 2000, employees purchased 120,674 shares, 147,776
shares, and 124,248 shares, respectively.
The weighted average fair value of purchase rights granted during Fiscal
2002, Fiscal 2001, and Fiscal 2000 was $5.59, $3.78, and $3.04, respectively.
The fair value of purchase rights is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rate of 2.6% for Fiscal 2002, 5.7% for Fiscal
2001, and 5.4% for Fiscal 2000; volatility of 33.2% for Fiscal 2002, 36.8% for
Fiscal 2001, and 33.6% for Fiscal 2000; expected purchase right life of 0.5
years for Fiscal 2002, Fiscal 2001, and Fiscal 2000. The dividend yield was 0%
for Fiscal 2002, Fiscal 2001, and Fiscal 2000.
The Company has a stock purchase plan under which 2,000,000 shares of the
Company's Class A Common Stock may be issued to eligible employees and directors
of the Company's United Kingdom subsidiaries. Under the terms of the plan,
participants may purchase shares of the Company's Class A Common Stock through
payroll deductions. The purchase price may be no less than 80% of the closing
price of the stock on the day the purchase price is fixed by the committee
administering the plan. As of February 28, 2002, no shares have been issued.
PRO FORMA DISCLOSURE -
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations in accounting for
its plans. The Company adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123"). Accordingly, no incremental compensation
expense has been recognized for its stock-based compensation plans. Had the
Company recognized the compensation cost based upon the fair value at the date
of grant for awards under its plans consistent with the
64
methodology prescribed by SFAS No. 123, net income and earnings per common share
would have been reduced to the pro forma amounts as follows:
For the Years Ended
---------------------------------------------------------------------
February 28, February 28, February 29,
2002 2001 2000
--------------------- --------------------- ---------------------
As Pro As Pro As Pro
Reported Forma Reported Forma Reported Forma
---------- --------- ---------- --------- ---------- ---------
(in thousands, except per share data)
Net income $ 136,421 $ 123,894 $ 97,342 $ 86,784 $ 77,375 $ 71,474
========== ========= ========== ========= ========== =========
Earnings per common share:
Basic $ 1.60 $ 1.45 $ 1.33 $ 1.18 $ 1.07 $ 0.99
Diluted $ 1.55 $ 1.41 $ 1.30 $ 1.16 $ 1.05 $ 0.97
The pro forma effect on net income may not be representative of that to be
expected in future years.
14. EARNINGS PER COMMON SHARE:
The following table presents earnings per common share as follows:
For the Years Ended
------------------------------------------
February 28, February 28, February 29,
2002 2001 2000
------------ ------------ ------------
(in thousands, except per share data)
Income before extraordinary item $ 137,975 $ 97,342 $ 77,375
Extraordinary item, net of income taxes (1,554) - -
------------ ------------ ------------
Income applicable to common shares $ 136,421 $ 97,342 $ 77,375
============ ============ ============
Weighted average common shares outstanding - basic 85,505 73,446 72,216
Stock options 2,320 1,305 1,780
------------ ------------ ------------
Weighted average common shares outstanding - diluted 87,825 74,751 73,996
============ ============ ============
Earnings per common share:
Basic:
Income before extraordinary item $ 1.62 $ 1.33 $ 1.07
Extraordinary item, net of income taxes (0.02) - -
------------ ------------ ------------
Earnings per common share - basic $ 1.60 $ 1.33 $ 1.07
============ ============ ============
Diluted:
Income before extraordinary item $ 1.57 $ 1.30 $ 1.05
Extraordinary item, net of income taxes (0.02) - -
------------ ------------ ------------
Earnings per common share - diluted $ 1.55 $ 1.30 $ 1.05
============ ============ ============
Stock options to purchase 2.2 million, 1.1 million and 0.3 million shares
of Class A Common Stock at a weighted average price per share of $20.70, $13.93
and $14.82 were outstanding during the years ended February 28, 2002, February
28, 2001, and February 29, 2000, respectively, but were not included in the
computation of the diluted earnings per common share because the stock options'
exercise price was greater than the average market price of the Class A Common
Stock for the respective periods.
65
15. ACCUMULATED OTHER COMPREHENSIVE LOSS:
Accumulated other comprehensive loss includes the following components:
Foreign Net Accumulated
Currency Unrealized Other
Translation Gains on Comprehensive
Adjustments Derivatives Loss
------------- ------------- -------------
Balance, February 28, 2001 $ (26,004) $ - $ (26,004)
Current-period change (9,239) 21 (9,218)
------------- ------------- -------------
Balance, February 28, 2002 $ (35,243) $ 21 $ (35,222)
============= ============= =============
16. RELATED PARTIES:
Agustin Francisco Huneeus, the executive in charge of the Fine Wine
segment, along with other members of his immediate family, through various
family owned entities (the "Huneeus Interests") engaged in certain transactions
with the Fine Wine segment during each of the three years in the period ended
February 28, 2002. The Huneeus Interests engage the Fine Wine segment as the
exclusive distributor of its Quintessa wines under a long-term contract; sell
grapes to the Fine Wine segment pursuant to existing long-term contracts;
participate as partners with the Fine Wine segment in the ownership and
operation of a winery and vineyards in Chile; and render brand management and
other consulting and advisory services in the United States and internationally
to the Fine Wine segment and the Company. Total payments to the Huneeus
Interests pursuant to these transactions and arrangements totaled $4.8 million,
$5.0 million, and $3.2 million for the years ended February 28, 2002, February
28, 2001, and February 29, 2000, respectively. In addition, the Fine Wine
segment performs certain wine processing services for the Huneeus Interests.
Total fees received from the Huneeus Interests to the Fine Wine segment for
these services totaled $0.4 million, $0.6 million, and $0.6 million for the
years ended February 28, 2002, February 28, 2001, and February 29, 2000,
respectively. As of February 28, 2002 and 2001, the net amounts due to/from the
Huneeus Interests under these agreements are insignificant.
17. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
Gross sales to the five largest customers of the Company represented 19.1%,
17.6%, and 17.1% of the Company's gross sales for the fiscal years ended
February 28, 2002, February 28, 2001, and February 29, 2000, respectively. No
single customer was responsible for greater than 10% of gross sales during the
fiscal years ended February 28, 2002, February 28, 2001, and February 29, 2000.
Accounts receivable from the Company's largest customer, Southern Wine and
Spirits, represented 10.0%, 9.8%, and 8.6% of the Company's total accounts
receivable as of February 28, 2002, February 28, 2001, and February 29, 2000,
respectively. Gross sales to the Company's five largest customers are expected
to continue to represent a significant portion of the Company's revenues. The
Company's arrangements with certain of its customers may, generally, be
terminated by either party with prior notice. The Company performs ongoing
credit evaluations of its customers' financial position, and management of the
Company is of the opinion that any risk of significant loss is reduced due to
the diversity of customers and geographic sales area.
18. CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets of the Company as of February 28, 2002, and February 28, 2001, and the
condensed consolidating statements of operations and cash flows for each of the
three years in the period ended February 28, 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
66
subsidiaries of the Company which are not Subsidiary Guarantors, primarily
Matthew Clark, which is included in the U.K. Brands and Wholesale segment
("Subsidiary Nonguarantors"). The Subsidiary Guarantors are wholly owned and the
guarantees are full, unconditional, joint and several obligations of each of the
Subsidiary Guarantors. Separate financial statements for the Subsidiary
Guarantors of the Company are not presented because the Company has determined
that such financial statements would not be material to investors. The
Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of
the Company, other than Matthew Clark, the Company's Canadian subsidiary, and
certain other subsidiaries which individually, and in the aggregate, are
inconsequential. The accounting policies of the subsidiaries are the same as
those described in Note 1 - Summary of Significant Accounting Policies. There
are no restrictions on the ability of the Subsidiary Guarantors to transfer
funds to the Company in the form of cash dividends, loans or advances.
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at February 28, 2002
- --------------------
Current assets:
Cash and cash investments $ 838 $ 2,084 $ 6,039 $ - $ 8,961
Accounts receivable, net 86,315 166,875 130,732 - 383,922
Inventories, net 17,662 631,050 128,934 (60) 777,586
Prepaid expenses and other
current assets 7,148 40,364 13,267 - 60,779
Intercompany (payable) receivable (63,694) (655) 64,349 - -
----------- ------------ --------------- -------------- -------------
Total current assets 48,269 839,718 343,321 (60) 1,231,248
Property, plant and equipment, net 36,834 354,431 187,499 - 578,764
Investments in subsidiaries 2,403,915 558,263 - (2,962,178) -
Other assets 84,786 935,607 238,980 - 1,259,373
----------- ------------ --------------- -------------- -------------
Total assets $ 2,573,804 $ 2,688,019 $ 769,800 $ (2,962,238) $ 3,069,385
=========== ============ =============== ============== =============
Current liabilities:
Notes payable $ 50,000 $ - $ 4,775 $ - $ 54,775
Current maturities of long-term debt 71,953 3,542 6,114 - 81,609
Accounts payable 34,590 50,425 68,418 - 153,433
Accrued excise taxes 12,244 37,033 10,961 - 60,238
Other accrued expenses and liabilities 94,067 51,250 99,838 - 245,155
----------- ------------ --------------- -------------- -------------
Total current liabilities 262,854 142,250 190,106 - 595,210
Long-term debt, less current maturities 1,278,834 14,237 112 - 1,293,183
Deferred income taxes 39,022 91,963 32,161 - 163,146
Other liabilities 476 38,174 23,460 - 62,110
Stockholders' equity:
Class A and class B common stock 939 6,434 64,867 (71,301) 939
Additional paid-in capital 431,216 1,220,550 436,466 (1,657,016) 431,216
Retained earnings 592,279 1,176,931 56,930 (1,233,921) 592,219
Accumulated other comprehensive
income (loss) 1,600 (2,520) (34,302) - (35,222)
Treasury stock and other (33,416) - - - (33,416)
----------- ------------ --------------- -------------- -------------
Total stockholders' equity 992,618 2,401,395 523,961 (2,962,238) 955,736
----------- ------------ --------------- -------------- -------------
Total liabilities and
stockholders' equity $ 2,573,804 $ 2,688,019 $ 769,800 $ (2,962,238) $ 3,069,385
=========== ============ =============== ============== =============
67
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at February 28, 2001
- --------------------
Current assets:
Cash and cash investments $ 142,104 $ 3,239 $ 329 $ - $ 145,672
Accounts receivable, net 80,299 116,784 117,179 - 314,262
Inventories, net 31,845 515,274 122,965 (66) 670,018
Prepaid expenses and other
current assets 6,551 33,565 20,921 - 61,037
Intercompany (payable) receivable (61,783) 54,169 7,614 - -
----------- ------------ --------------- -------------- -------------
Total current assets 199,016 723,031 269,008 (66) 1,190,989
Property, plant and equipment, net 30,554 320,143 197,917 - 548,614
Investments in subsidiaries 1,835,088 525,442 - (2,360,530) -
Other assets 87,764 434,782 250,020 - 772,566
----------- ------------ --------------- -------------- -------------
Total assets $ 2,152,422 $ 2,003,398 $ 716,945 $ (2,360,596) $ 2,512,169
=========== ============ =============== ============== =============
Current liabilities:
Notes payable $ - $ - $ 4,184 $ - $ 4,184
Current maturities of long-term debt 49,218 70 4,888 - 54,176
Accounts payable 24,003 36,824 53,966 - 114,793
Accrued excise taxes 9,411 35,474 11,069 - 55,954
Other accrued expenses and liabilities 87,385 21,624 89,044 - 198,053
----------- ------------ --------------- -------------- -------------
Total current liabilities 170,017 93,992 163,151 - 427,160
Long-term debt, less current maturities 1,305,302 758 1,377 - 1,307,437
Deferred income taxes 33,232 71,619 27,123 - 131,974
Other liabilities 437 2,953 25,940 - 29,330
Stockholders' equity:
Class A and class B common stock 897 6,434 64,867 (71,301) 897
Additional paid-in capital 267,206 742,343 436,466 (1,178,809) 267,206
Retained earnings 455,864 1,086,311 24,109 (1,110,486) 455,798
Accumulated other comprehensive
income (loss) 1,096 (1,012) (26,088) - (26,004)
Treasury stock and other (81,629) - - - (81,629)
----------- ------------ --------------- -------------- -------------
Total stockholders' equity 643,434 1,834,076 499,354 (2,360,596) 616,268
----------- ------------ --------------- -------------- -------------
Total liabilities and
stockholders' equity $ 2,152,422 $ 2,003,398 $ 716,945 $ (2,360,596) $ 2,512,169
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 28, 2002
- ------------------------------------
Gross sales $ 916,826 $ 2,010,573 $ 1,105,126 $ (398,567) $ 3,633,958
Less - excise taxes (147,446) (408,532) (257,477) - (813,455)
----------- ------------ --------------- -------------- -------------
Net sales 769,380 1,602,041 847,649 (398,567) 2,820,503
Cost of product sold (511,714) (1,172,935) (615,386) 398,573 (1,901,462)
----------- ------------ --------------- -------------- -------------
Gross profit 257,666 429,106 232,263 6 919,041
Selling, general and administrative
expenses (175,062) (223,509) (177,989) - (576,560)
----------- ------------ --------------- -------------- -------------
Operating income 82,604 205,597 54,274 6 342,481
Equity in earnings of
subsidiary/joint venture 90,620 34,488 - (123,441) 1,667
Interest expense, net (3,689) (106,610) (3,890) - (114,189)
----------- ------------ --------------- -------------- -------------
Income before income taxes and
extraordinary item 169,535 133,475 50,384 (123,435) 229,959
Provision for income taxes (31,566) (42,855) (17,563) - (91,984)
----------- ------------ --------------- -------------- -------------
Income before extraordinary item 137,969 90,620 32,821 (123,435) 137,975
Extraordinary item, net of income taxes (1,554) - - - (1,554)
----------- ------------ --------------- -------------- -------------
Net income $ 136,415 $ 90,620 $ 32,821 $ (123,435) $ 136,421
=========== ============ =============== ============== =============
68
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 28, 2001
- ------------------------------------
Gross sales $ 741,668 $ 1,759,368 $ 979,509 $ (326,251) $ 3,154,294
Less - excise taxes (131,997) (396,773) (228,839) - (757,609)
----------- ------------ --------------- -------------- -------------
Net sales 609,671 1,362,595 750,670 (326,251) 2,396,685
Cost of product sold (474,913) (955,893) (534,697) 326,273 (1,639,230)
----------- ------------ --------------- -------------- -------------
Gross profit 134,758 406,702 215,973 22 757,455
Selling, general and administrative
expenses (140,757) (150,241) (195,589) - (486,587)
----------- ------------ --------------- -------------- -------------
Operating income (5,999) 256,461 20,384 22 270,868
Equity in earnings of subsidiary 120,937 (3,825) - (117,112) -
Interest expense, net (27,840) (76,076) (4,715) - (108,631)
----------- ------------ --------------- -------------- -------------
Income before income taxes 87,098 176,560 15,669 (117,090) 162,237
Benefit from (provision for) income taxes 10,222 (55,623) (19,494) - (64,895)
----------- ------------ --------------- -------------- -------------
Net income $ 97,320 $ 120,937 $ (3,825) $ (117,090) $ 97,342
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 29, 2000
- ------------------------------------
Gross sales $ 742,375 $ 1,692,070 $ 1,010,526 $ (356,272) $ 3,088,699
Less - excise taxes (135,196) (372,450) (240,584) - (748,230)
----------- ------------ --------------- -------------- -------------
Net sales 607,179 1,319,620 769,942 (356,272) 2,340,469
Cost of product sold (444,993) (983,026) (546,174) 356,184 (1,618,009)
----------- ------------ --------------- -------------- -------------
Gross profit 162,186 336,594 223,768 (88) 722,460
Selling, general and administrative
expenses (150,732) (160,749) (170,428) - (481,909)
Nonrecurring charges - (2,565) (2,945) - (5,510)
----------- ------------ --------------- -------------- -------------
Operating income 11,454 173,280 50,395 (88) 235,041
Equity in earnings of subsidiary 81,776 22,974 - (104,750) -
Interest expense, net (18,701) (82,265) (5,116) - (106,082)
----------- ------------ --------------- -------------- -------------
Income before income taxes 74,529 113,989 45,279 (104,838) 128,959
Benefit from (provision for) income taxes 2,934 (32,213) (22,305) - (51,584)
----------- ------------ --------------- -------------- -------------
Net income $ 77,463 $ 81,776 $ 22,974 $ (104,838) $ 77,375
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 28, 2002
- ------------------------------------------
Net cash provided by operating
activities $ 110,056 $ 82,669 $ 20,574 $ - $ 213,299
Cash flows from investing activities:
Purchases of businesses, net of
cash acquired (478,574) 5,742 - - (472,832)
Investment in joint venture - (77,282) - - (77,282)
Purchases of property, plant and
equipment (11,544) (43,812) (15,792) - (71,148)
Proceeds from sale of assets - 35,466 349 - 35,815
----------- ------------ --------------- -------------- -------------
Net cash used in investing activities (490,118) (79,886) (15,443) - (585,447)
----------- ------------ --------------- -------------- -------------
69
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Cash flows from financing activities:
Proceeds from issuance of long-term
debt, net of discount 250,000 - 2,539 - 252,539
Proceeds from equity offerings,
net of fees 151,479 - - - 151,479
Net proceeds from notes payable 50,000 - 1,403 - 51,403
Exercise of employee stock options 45,027 - - - 45,027
Proceeds from employee stock
purchases 1,986 - - - 1,986
Principal payments of long-term debt (249,720) (9,346) (1,916) - (260,982)
Payment of issuance costs of
long-term debt (4,537) - - - (4,537)
----------- ------------ --------------- -------------- -------------
Net cash provided by (used in)
financing activities 244,235 (9,346) 2,026 - 236,915
----------- ------------ --------------- -------------- -------------
Effect of exchange rate changes on
cash and cash investments (5,439) 5,408 (1,447) - (1,478)
----------- ------------ --------------- -------------- -------------
Net (decrease) increase in cash
and cash investments (141,266) (1,155) 5,710 - (136,711)
Cash and cash investments, beginning
of year 142,104 3,239 329 - 145,672
----------- ------------ --------------- -------------- -------------
Cash and cash investments, end of year $ 838 $ 2,084 $ 6,039 $ - $ 8,961
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 28, 2001
- ------------------------------------------
Net cash provided by (used in)
operating activities $ 92,765 $ 20,479 $ (9,469) $ - $ 103,775
Cash flows from investing activities:
Purchases of property, plant and
equipment (5,609) (42,771) (19,837) - (68,217)
Purchases of businesses, net of
cash acquired - - (4,459) - (4,459)
Other 120 930 959 - 2,009
----------- ------------ --------------- -------------- -------------
Net cash used in investing activities (5,489) (41,841) (23,337) - (70,667)
----------- ------------ --------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt 319,400 - - - 319,400
Exercise of employee stock options 13,806 - - - 13,806
Proceeds from employee stock
purchases 1,547 - - - 1,547
Principal payments of long-term debt (220,888) 639 (1,659) - (221,908)
Net repayments of notes payable (26,800) (704) 3,889 - (23,615)
Payment of issuance costs of
long-term debt (5,794) - - - (5,794)
----------- ------------ --------------- -------------- -------------
Net cash provided by (used in)
financing activities 81,271 (65) 2,230 - 83,436
----------- ------------ --------------- -------------- -------------
Effect of exchange rate changes on
cash and cash investments (26,443) 24,435 (3,172) - (5,180)
----------- ------------ --------------- -------------- -------------
70
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Net increase (decrease) in cash
and cash investments 142,104 3,008 (33,748) - 111,364
Cash and cash investments, beginning
of year - 231 34,077 - 34,308
----------- ------------ --------------- -------------- -------------
Cash and cash investments, end of year $ 142,104 $ 3,239 $ 329 $ - $ 145,672
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 29, 2000
- ------------------------------------------
Net cash (used in) provided by
operating activities $ (137,490) $ 245,989 $ 39,556 $ - $ 148,055
Cash flows from investing activities:
Purchases of property, plant and
equipment (5,163) (42,220) (10,364) - (57,747)
Purchases of businesses, net of
cash acquired - (453,117) 207 - (452,910)
Intercompany equity contributions (269,899) 269,899 - - -
Other 13,000 (2,198) 4,175 - 14,977
----------- ------------ --------------- -------------- -------------
Net cash used in investing activities (262,062) (227,636) (5,982) - (495,680)
----------- ------------ --------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt 1,486,240 - - - 1,486,240
Exercise of employee stock options 3,358 - - - 3,358
Proceeds from employee stock
purchases 1,428 - - - 1,428
Principal payments of long-term debt (1,017,850) (25,550) (16,552) - (1,059,952)
Net repayments of notes payable (56,675) 400 (4,354) - (60,629)
Payment of issuance costs of
long-term debt (14,888) - - - (14,888)
----------- ------------ --------------- -------------- -------------
Net cash provided by (used in)
financing activities 401,613 (25,150) (20,906) - 355,557
----------- ------------ --------------- -------------- -------------
Effect of exchange rate changes on
cash and cash investments (5,820) 5,850 (1,299) - (1,269)
----------- ------------ --------------- -------------- -------------
Net (decrease) increase in cash
and cash investments (3,759) (947) 11,369 - 6,663
Cash and cash investments, beginning
of year 3,759 1,178 22,708 - 27,645
----------- ------------ --------------- -------------- -------------
Cash and cash investments, end of year $ - $ 231 $ 34,077 $ - $ 34,308
=========== ============ =============== ============== =============
19. BUSINESS SEGMENT INFORMATION:
The Company reports 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, cider, distilled spirits, beer and
soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine)
and Corporate Operations and Other (primarily corporate related items). Segment
selection was based upon internal organizational structure, the way in which
these operations are managed and their performance evaluated by management and
the Company's Board of Directors, the availability of separate financial
results, and materiality considerations. The accounting policies of the segments
are the same as those described in
71
Note 1 - Summary of Significant Accounting Policies. The Company evaluates
performance based on operating profits of the respective business units.
Segment information is as follows:
For the Years Ended
--------------------------------------------
February 28, February 28, February 29,
2002 2001 2000
------------ ------------ ------------
(in thousands)
Popular and Premium Wine:
- -------------------------
Net sales:
Branded:
External customers $ 781,662 $ 603,948 $ 623,796
Intersegment 9,669 6,451 5,524
------------ ------------ ------------
Total branded 791,331 610,399 629,320
------------ ------------ ------------
Other:
External customers 57,718 64,799 86,814
Intersegment 13,751 16,562 1,146
------------ ------------ ------------
Total other 71,469 81,361 87,960
------------ ------------ ------------
Net sales $ 862,800 $ 691,760 $ 717,280
Operating income $ 104,781 $ 50,390 $ 47,305
Equity in earnings of joint
venture $ 1,667 $ - $ -
Long-lived assets $ 197,353 $ 191,500 $ 195,061
Investment in joint venture $ 110,520 $ - $ -
Total assets $ 1,116,515 $ 650,554 $ 642,836
Capital expenditures $ 22,523 $ 18,043 $ 20,788
Depreciation and amortization $ 30,902 $ 23,223 $ 21,098
Imported Beer and Spirits:
- --------------------------
Net sales:
Beer $ 758,800 $ 659,371 $ 570,380
Spirits 288,568 285,743 267,762
------------ ------------ ------------
Net sales $ 1,047,368 $ 945,114 $ 838,142
Operating income $ 178,805 $ 167,680 $ 142,931
Long-lived assets $ 78,516 $ 76,777 $ 78,876
Total assets $ 711,484 $ 724,511 $ 684,228
Capital expenditures $ 8,350 $ 6,589 $ 7,218
Depreciation and amortization $ 17,940 $ 16,069 $ 14,452
U.K. Brands and Wholesale:
- --------------------------
Net sales:
Branded:
External customers $ 296,770 $ 285,717 $ 313,027
Intersegment 574 1,193 75
------------ ------------ ------------
Total branded 297,344 286,910 313,102
Wholesale 495,549 404,209 416,644
------------ ------------ ------------
Net sales $ 792,893 $ 691,119 $ 729,746
Operating income $ 47,270 $ 48,961 $ 48,473
Long-lived assets $ 138,109 $ 145,794 $ 158,119
Total assets $ 578,320 $ 583,203 $ 636,807
Capital expenditures $ 12,397 $ 15,562 $ 17,949
Depreciation and amortization $ 19,291 $ 17,322 $ 20,238
72
For the Years Ended
--------------------------------------------
February 28, February 28, February 29,
2002 2001 2000
------------ ------------ ------------
(in thousands)
Fine Wine:
- ----------
Net sales:
External customers $ 141,436 $ 92,898 $ 62,046
Intersegment 753 217 73
------------ ------------ ------------
Net sales $ 142,189 $ 93,115 $ 62,119
Operating income $ 39,169 $ 24,495 $ 12,708
Long-lived assets $ 156,790 $ 130,375 $ 106,956
Total assets $ 628,454 $ 394,740 $ 357,999
Capital expenditures $ 23,696 $ 27,780 $ 10,741
Depreciation and amortization $ 12,850 $ 10,296 $ 6,028
Corporate Operations and Other:
- -------------------------------
Net sales $ - $ - $ -
Operating loss $ (27,544) $ (20,658) $ (16,376)
Long-lived assets $ 7,996 $ 4,168 $ 3,959
Total assets $ 34,612 $ 159,161 $ 26,921
Capital expenditures $ 4,182 $ 243 $ 1,051
Depreciation and amortization $ 4,421 $ 3,473 $ 2,907
Intersegment eliminations:
- --------------------------
Net sales $ (24,747) $ (24,423) $ (6,818)
Consolidated:
- -------------
Net sales $ 2,820,503 $ 2,396,685 $ 2,340,469
Operating income $ 342,481 $ 270,868 $ 235,041
Equity in earnings of joint
venture $ 1,667 $ - $ -
Long-lived assets $ 578,764 $ 548,614 $ 542,971
Investment in joint venture $ 110,520 $ - $ -
Total assets $ 3,069,385 $ 2,512,169 $ 2,348,791
Capital expenditures $ 71,148 $ 68,217 $ 57,747
Depreciation and amortization $ 85,404 $ 70,383 $ 64,723
The Company's areas of operations are principally in the United States.
Operations outside the United States consist of the U.K. Brands and Wholesale
segment's operations, which are primarily in the United Kingdom. No other single
foreign country or geographic area is significant to the consolidated
operations.
20. NONRECURRING CHARGES:
During Fiscal 2000, the Company incurred nonrecurring charges of $5.5
million related to the closure of a cider production facility within the U.K.
Brands and Wholesale operating segment in the United Kingdom ($2.9 million) and
to a management reorganization within the Popular and Premium Wine operating
segment ($2.6 million).
21. ACCOUNTING PRONOUNCEMENTS:
During 2000 and 2001, the Emerging Issues Task Force ("EITF") addressed
various issues related to the income statement classification of certain
promotional payments, including EITF Issue No. 00-14 ("EITF No. 00-14"),
"Accounting for Certain Sales Incentives," EITF Issue No. 00-22 ("EITF No.
00-22"), "Accounting for 'Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered
in the Future," and EITF Issue No. 00-25
73
("EITF No. 00-25"), "Vendor Income Statement Characterization of Consideration
Paid to a Reseller of the Vendor's Products." In November 2001, the EITF
codified EITF No. 00-14, EITF No. 00-22, and EITF No. 00-25 as part of EITF
Issue No. 01-09 ("EITF No. 01-09"), "Accounting for Consideration Given by a
Vendor to a Customer (Including a Reseller of the Vendor's Products)." EITF No.
01-09 addresses the recognition, measurement and income statement classification
of consideration given by a vendor to a customer (including both a reseller of
the vendor's products and an entity that purchases the vendor's products from a
reseller). EITF No. 01-09, among other things, requires that certain
consideration given by a vendor to a customer be characterized as a reduction of
revenue when recognized in the vendor's income statement. The Company currently
reports such costs referred to in EITF No. 00-14 and EITF No. 00-25 as selling,
general and administrative expenses. The Company is required to adopt EITF No.
01-09 in its financial statements beginning March 1, 2002. Upon adoption of EITF
No. 01-09, financial statements for prior periods presented for comparative
purposes will be reclassified to comply with the requirements of EITF No. 01-09.
For the fiscal years ended February 28, 2002, February 28, 2001, and February
29, 2000, net sales will be reduced by $222.4 million, $176.2 million, and
$182.5 million, respectively, cost of product sold will increase by $10.1
million, $7.8 million, and $8.8 million, respectively, and selling, general and
administrative expenses will decrease by $232.5 million, $184.0 million, and
$191.3 million, respectively. This reclassification will not effect operating
income or net income.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations." SFAS No. 141 addresses financial accounting and reporting for
business combinations requiring all business combinations to be accounted for
using one method, the purchase method. In addition, SFAS No. 141 supersedes
Accounting Principles Board Opinion No. 16, "Business Combinations." SFAS No.
141 is effective immediately for all business combinations initiated after June
30, 2001, as well as for all business combinations accounted for by the purchase
method for which the date of acquisition is July 1, 2001, or later. The Company
is required to adopt SFAS No. 141 for all business combinations for which the
acquisition date was before July 1, 2001, for fiscal years beginning March 1,
2002. The adoption of the applicable provisions of SFAS No. 141 has not had a
material impact on the Company's financial statements. The Company believes that
the adoption of the remaining provisions of SFAS No. 141 will not have a
material impact on its financial statements. On March 1, 2002, the Company
reclassified $59.9 million of previously identified separable intangible assets
into goodwill in accordance with the provisions of SFAS No. 141.
In July 2001, the Financial Accounting Standards Board also issued
Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill
and Other Intangible Assets." SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and supersedes
Accounting Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No.
142, goodwill and indefinite lived intangible assets are no longer amortized but
are reviewed at least annually for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives. The Company is required to apply the provisions of SFAS No.
142 for all goodwill and intangible assets acquired prior to July 1, 2001, for
fiscal years beginning March 1, 2002. For goodwill and intangible assets
acquired after June 30, 2001, these assets are subject immediately to the
nonamortization and amortization provisions of SFAS No. 142. The Company's
assessment of the financial impact of SFAS No. 142 on its financial statements
is that $27.3 million of amortization expense of existing goodwill and other
intangible assets for the fiscal year ending February 28, 2002, will not be
incurred in subsequent fiscal years. The required transition impairment
evaluations are not expected to result in impairment charges.
74
In August 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for
Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company is required to adopt
SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently
assessing the financial impact of SFAS No. 143 on its financial statements.
In October 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS No. 144 supersedes Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," and the accounting and reporting provisions of Accounting
Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting
the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual
and Infrequently Occurring Events and Transactions," for the disposal of a
segment of a business (as previously defined in that Opinion). The Company is
required to adopt SFAS No. 144 for fiscal years beginning March 1, 2002. The
Company believes the financial impact of SFAS No. 144 will not be material on
its financial statements.
In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 rescinds Statement of Financial Accounting Standards
No. 4 ("SFAS No. 4"), "Reporting Gains and Losses from Extinguishment of Debt,"
Statement of Financial Accounting Standards No. 44, "Accounting for Intangible
Assets of Motor Carriers," and Statement of Financial Accounting Standards No.
64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." In
addition, SFAS No. 145 amends Statement of Financial Accounting Standards No.
13, "Accounting for Leases," to eliminate an inconsistency between required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. Lastly, SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings, or describe their applicability under changed conditions. The Company
is required to adopt the provisions related to the rescission of SFAS No. 4 for
fiscal years beginning March 1, 2003. All other provisions of SFAS No. 145 are
effective for fiscal years beginning March 1, 2002. The Company does not expect
the adoption of SFAS No. 145 to have a material impact on its financial
statements. However, it will result in a reclassification of the previously
reported extraordinary item, net of income taxes, to increase nonoperating
expense ($2.6 million) and to decrease the provision for income taxes ($1.0
million).
75
22. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of selected quarterly financial information is as follows:
QUARTER ENDED
----------------------------------------------------------
May 31, August 31, November 30, February 28,
Fiscal 2002 2001 2001 2001 2002 Full Year
- ------------------------------------------- ------------- ------------ ------------ ------------ -----------
(in thousands, except per share data)
Net sales $ 642,110 $ 740,775 $ 764,074 $ 673,544 $ 2,820,503
Gross profit $ 201,950 $ 237,676 $ 258,408 $ 221,007 $ 919,041
Income before extraordinary item $ 23,843 $ 35,934 $ 49,643 $ 28,555 $ 137,975
Extraordinary item, net of income taxes (1) $ - $ - $ - $ (1,554) $ (1,554)
Net income $ 23,843 $ 35,934 $ 49,643 $ 27,001 $ 136,421
Earnings per common share: (2)
Basic:
Income before extraordinary item $ 0.29 $ 0.42 $ 0.57 $ 0.33 $ 1.62
Extraordinary item, net of income taxes - - - (0.02) (0.02)
------------- ------------ ------------ ------------ -----------
Earnings per common share - basic $ 0.29 $ 0.42 $ 0.57 $ 0.31 $ 1.60
============= ============ ============ ============ ===========
Diluted:
Income before extraordinary item $ 0.28 $ 0.41 $ 0.55 $ 0.32 $ 1.57
Extraordinary item, net of income taxes - - - (0.02) (0.02)
-------------- ------------ ------------ ------------ -----------
Earnings per common share - diluted $ 0.28 $ 0.41 $ 0.55 $ 0.30 $ 1.55
============== ============ ============ ============ ===========
QUARTER ENDED
----------------------------------------------------------
May 31, August 31, November 30, February 28,
Fiscal 2001 2000 2000 2000 2001 Full Year
- ------------------------------------------- ------------- ------------ ------------ ------------ -----------
(in thousands, except per share data)
Net sales $ 585,580 $ 637,490 $ 629,577 $ 544,038 $ 2,396,685
Gross profit $ 183,873 $ 200,639 $ 208,053 $ 164,890 $ 757,455
Net income $ 17,902 $ 26,110 $ 34,953 $ 18,377 $ 97,342
Earnings per common share: (2)
Basic $ 0.25 $ 0.36 $ 0.48 $ 0.25 $ 1.33
Diluted $ 0.24 $ 0.35 $ 0.47 $ 0.24 $ 1.30
(1) Represents the write-off of capitalized fees related to the extinguishment
of the Company's Original Notes and Series C Notes.
(2) The sum of the quarterly earnings per common share in Fiscal 2002 and
Fiscal 2001 may not equal the total computed for the respective years as the
earnings per common share are computed independently for each of the quarters
presented and for the full year.
76
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Information required by this item has been previously reported in the
Company's Current Report on Form 8-K dated April 4, 2002.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------- --------------------------------------------------
The information required by this Item (except for the information regarding
executive officers required by Item 401 of Regulation S-K which is included in
Part I hereof in accordance with General Instruction G(3)) is incorporated
herein by reference to the Company's proxy statement to be issued in connection
with the Annual Meeting of Stockholders of the Company to be held on July 23,
2002, under those sections of the proxy statement titled "Election of Directors"
and "Section 16(a) Beneficial Ownership Reporting Compliance", which proxy
statement will be filed within 120 days after the end of the Company's fiscal
year.
ITEM 11. EXECUTIVE COMPENSATION
- -------- ----------------------
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on July 23, 2002, under that
section of the proxy statement titled "Executive Compensation" and that caption
titled "Director Compensation" under "Election of Directors", which proxy
statement will be filed within 120 days after the end of the Company's fiscal
year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- -------- ----------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on July 23, 2002, under those
sections of the proxy statement titled "Beneficial Ownership" and "Stock
Ownership of Management", and under Proposal No. 3 of the proxy statement, which
proxy statement will be filed within 120 days after the end of the Company's
fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on July 23, 2002, under that
section of the proxy statement titled "Executive Compensation", which proxy
statement will be filed within 120 days after the end of the Company's fiscal
year.
77
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) 1. Financial Statements
The following consolidated financial statements of the Company are
submitted herewith:
Report of Independent Public Accountants
Consolidated Balance Sheets - February 28, 2002, and February 28,
2001
Consolidated Statements of Income for the years ended February
28, 2002, February 28, 2001, and February 29, 2000
Consolidated Statements of Changes in Stockholders' Equity for the
years ended February 28, 2002, February 28, 2001, and February 29,
2000
Consolidated Statements of Cash Flows for the years ended February
28, 2002, February 28, 2001, and February 29, 2000
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following consolidated financial information is submitted
herewith:
Selected Quarterly Financial Information (unaudited)
All other schedules are not submitted because they are not applicable or not
required under Regulation S-X or because the required information is included in
the financial statements or notes thereto.
Individual financial statements of the Registrant have been omitted because the
Registrant is primarily an operating company and no subsidiary included in the
consolidated financial statements has minority equity interests and/or
noncurrent indebtedness, not guaranteed by the Registrant, in excess of 5% of
total consolidated assets.
3. Exhibits required to be filed by Item 601 of Regulation S-K
For the exhibits that are filed herewith or incorporated herein by
reference, see the Index to Exhibits located on Page 81 of this
Report.
(b) Reports on Form 8-K
The following Reports on Form 8-K were filed by the Company with the
Securities and Exchange Commission during the fourth quarter of the fiscal
year ended February 28, 2002:
(i) Form 8-K dated January 3, 2002. This Form 8-K reported information
under Item 5 and included (i) the Company's Condensed Consolidated
Balance Sheets as of November 30, 2001 and February 28, 2001; (ii)
the Company's Condensed Consolidated Statements of Income for the
three months ended November 30, 2001 and November 30, 2000; and
(iii)
78
the Company's Condensed Consolidated Statements of Income for the
the nine months ended November 30, 2001 and November 30, 2000.
(ii) Form 8-K dated January 17, 2002. This Form 8-K reported
information under Item 7.
(iii) Form 8-K dated February 5, 2002. This Form 8-K reported
information under Item 5.
79
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: May 20, 2002 CONSTELLATION BRANDS, INC.
By: /s/ Richard Sands
-----------------------------------
Richard Sands, Chairman of the
Board, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Richard Sands /s/ Thomas S. Summer
- -------------------------------- -----------------------------------
Richard Sands, Chairman of the Thomas S. Summer, Executive Vice
Board, President, and Chief President and Chief Financial
Executive Officer (Principal Officer (Principal Financial
Executive Officer) Officer and Principal Accounting
Dated: May 20, 2002 Officer)
Dated: May 20, 2002
/s/ Robert Sands /s/ George Bresler
- -------------------------------- -----------------------------------
Robert Sands, Director George Bresler, Director
Dated: May 20, 2002 Dated: May 20, 2002
/s/ James A. Locke III /s/ Thomas C. McDermott
- -------------------------------- -----------------------------------
James A. Locke III, Director Thomas C. McDermott, Director
Dated: May 20, 2002 Dated: May 20, 2002
/s/ Paul L. Smith /s/ Jeananne K. Hauswald
- -------------------------------- -----------------------------------
Paul L. Smith, Director Jeananne K. Hauswald, Director
Dated: May 20, 2002 Dated: May 20, 2002
80
INDEX TO EXHIBITS
Exhibit No.
- ------------
2.1 Asset Purchase Agreement dated as of February 21, 1999 by and among
Diageo Inc., UDV Canada Inc., United Distillers Canada Inc. and the
Company (filed as Exhibit 2 to the Company's Current Report on Form
8-K dated April 9, 1999 and incorporated herein by reference).
2.2 Stock Purchase Agreement, dated April 21, 1999, between Franciscan
Vineyards, Inc., Agustin Huneeus, Agustin Francisco Huneeus,
Jean-Michel Valette, Heidrun Eckes-Chantre Und Kinder
Beteiligungsverwaltung II, GbR, Peter Eugen Eckes Und Kinder
Beteiligungsverwaltung II, GbR, Harald Eckes-Chantre, Christina
Eckes-Chantre, Petra Eckes-Chantre and Canandaigua Brands, Inc. (now
known as Constellation Brands, Inc.) (filed as Exhibit 2.1 to the
Company's Current Report on Form 8-K dated June 4, 1999 and
incorporated herein by reference).
2.3 Stock Purchase Agreement by and between Canandaigua Wine Company, Inc.
(a wholly-owned subsidiary of the Company) and Moet Hennessy, Inc.
dated April 1, 1999 (filed as Exhibit 2.3 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and
incorporated herein by reference).
2.4 Purchase Agreement dated as of January 30, 2001, by and among
Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and
Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the
Company) (filed as Exhibit 2.5 to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 2001 and incorporated
herein by reference).
2.5 First Amendment to Purchase Agreement and Pro Forma Closing Balance
Sheet, dated as of March 5, 2001, by and among Sebastiani Vineyards,
Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc.
(filed as Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended November 30, 2001 and incorporated herein
by reference).
2.6 Second Amendment to Purchase Agreement, date as of March 5, 2001, by
and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group
and Canandaigua Wine Company, Inc. (filed as Exhibit 2.6 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 2001 and incorporated herein by reference).
2.7 Agreement and Plan of Merger by and among Constellation Brands, Inc.,
VVV Acquisition Corp. and Ravenswood Winery, Inc. dated as of April
10, 2001 (filed as Exhibit 2.5 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended May 31, 2001 and incorporated
herein by reference).
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, 2000 and incorporated herein by reference).
3.2 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,
2000 and incorporated herein by reference).
4.1 Indenture, dated as of February 25, 1999, among the Company, as
issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest
Trust Company (successor Trustee to Harris Trust and Savings Bank), as
Trustee (filed as Exhibit 99.1 to the Company's Current Report on Form
8-K dated February 25, 1999 and incorporated herein by reference).
81
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 (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 Credit Agreement, dated as of October 6, 1999, between the Company,
certain principal subsidiaries, and certain banks for which JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank) acts as
Administrative Agent, The Bank of Nova Scotia acts as Syndication
Agent, and Credit Suisse First Boston and Citicorp USA, Inc. acts as
Co-Documentation Agents (filed as Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended November
30, 1999 and incorporated herein by reference).
4.10 Amendment No. 1 to Credit Agreement, dated as of February 13, 2001,
between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed as Exhibit 4.20 to the
Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 2001 and incorporated herein by reference).
82
4.11 Amendment No. 2 to the Credit Agreement, dated as of May 16, 2001
between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed as Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
May 31, 2001 and incorporated herein by reference).
4.12 Guarantee Assumption Agreement, dated as of July 2, 2001, by
Ravenswood Winery, Inc., in favor of JPMorgan Chase Bank (formerly
known as The Chase Manhattan Bank), as administrative agent, pursuant
to the Credit Agreement dated as of October 6, 1999, as amended (filed
as Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
4.13 Amendment No. 3 to the Credit Agreement, dated as of September 7, 2001
between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed as Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 2001 and incorporated herein by reference).
4.14 Amendment No. 4 to the Credit Agreement, dated as of January 15, 2002
between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed herewith).
4.15 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).
4.16 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).
4.17 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).
4.18 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).
10.1 Barton Incorporated Management Incentive Plan (filed as Exhibit 10.6
to the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1993 and incorporated herein by reference).
10.2 Marvin Sands Split Dollar Insurance Agreement (filed as Exhibit 10.9
to the Company's Annual Report on Form 10-K for the fiscal year ended
August 31, 1993 and incorporated herein by reference).
10.3 Employment Agreement between Barton Incorporated and Alexander L. Berk
dated as of September 1, 1990 as amended by Amendment No. 1 to
Employment Agreement between
83
Barton Incorporated and Alexander L. Berk dated November 11, 1996
(filed as Exhibit 10.7 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 1998 and incorporated herein by
reference).
10.4 Amendment No. 2 to Employment Agreement between Barton Incorporated
and Alexander L. Berk dated October 20, 1998 (filed as Exhibit 10.5 to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1999 and incorporated herein by reference).
10.5 Long-Term Stock Incentive Plan, which amends and restates the
Canandaigua Wine Company, Inc. Stock Option and Stock Appreciation
Right Plan (filed as Exhibit 10.1 to the Company's Quarterly Report on
Form 10-Q for the fiscal quarter ended May 31, 1997 and incorporated
herein by reference).
10.6 Amendment Number One to the Company's Long-Term Stock Incentive Plan
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 1997 and incorporated herein
by reference).
10.7 Amendment Number Two to the Company's Long-Term Stock Incentive Plan
(filed as Exhibit 10 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 1999 and incorporated herein
by reference).
10.8 Amendment Number Three to the Company's Long-Term Stock Incentive Plan
(filed as Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 2000 and incorporated herein
by reference).
10.9 Amendment Number Four to the Company's Long-Term Stock Incentive Plan
(filed as Exhibit 10.9 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 2001 and incorporated herein by
reference).
10.10 Incentive Stock Option Plan of the Company (filed as Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 1997 and incorporated herein by reference).
10.11 Amendment Number One to the Company's Incentive Stock Option Plan
(filed as Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 1997 and incorporated herein
by reference).
10.12 Amendment Number Two to the Company's Incentive Stock Option Plan
(filed as Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31, 2000 and incorporated herein
by reference).
10.13 Amendment Number Three to the Company's Incentive Stock Option Plan
(filed as Exhibit 10.13 to the Company's Annual Report on Form 10-K
for the fiscal year ended February 28, 2001 and incorporated herein by
reference).
10.14 Annual Management Incentive Plan of the Company (filed as Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 1997 and incorporated herein by reference).
10.15 Amendment Number One to the Company's Annual Management Incentive
Plan (filed as Exhibit 10.14 to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 1998 and incorporated
herein by reference).
84
10.16 Amendment Number Two to the Company's Annual Management Incentive
Plan (filed as Exhibit 10.16 to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 2001 and incorporated
herein by reference).
10.17 Lease, effective December 25, 1997, by and among Matthew Clark Brands
Limited and Pontsarn Investments Limited (filed as Exhibit 10.13 to
the Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 1999 and incorporated herein by reference).
10.18 Supplemental Executive Retirement Plan of the Company (filed as
Exhibit 10.14 to the Company's Annual Report on Form 10-K for the
fiscal year ended February 28, 1999 and incorporated herein by
reference).
10.19 First Amendment to the Company's Supplemental Executive Retirement
Plan (filed as Exhibit 10 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended May 31, 1999 and incorporated herein
by reference).
10.20 Second Amendment to the Company's Supplemental Executive Retirement
Plan (filed as Exhibit 10.20 to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 2001 and incorporated
herein by reference).
10.21 Credit Agreement, dated as of October 6, 1999, between the Company,
certain principal subsidiaries, and certain banks for which JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank) acts as
Administrative Agent, The Bank of Nova Scotia acts as Syndication
Agent, and Credit Suisse First Boston and Citicorp USA, Inc. acts as
Co-Documentation Agents (filed as Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended November
30, 1999 and incorporated herein by reference).
10.22 Amendment No. 1 to Credit Agreement, dated as of February 13, 2001,
between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed as Exhibit 4.20 to the
Company's Annual Report on Form 10-K for the fiscal year ended
February 28, 2001 and incorporated herein by reference).
10.23 Amendment No. 2 to the Credit Agreement, dated as of May 16, 2001
between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed as Exhibit 4.1 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
May 31, 2001 and incorporated herein by reference).
10.24 Guarantee Assumption Agreement, dated as of July 2, 2001, by
Ravenswood Winery, Inc., in favor of JPMorgan Chase Bank (formerly
known as The Chase Manhattan Bank), as administrative agent, pursuant
to the Credit Agreement dated as of October 6, 1999, as amended (filed
as Exhibit 4.6 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
10.25 Amendment No. 3 to the Credit Agreement, dated as of September 7,
2001 between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed as Exhibit 4.7 to the
Company's Quarterly Report on Form 10-Q for the fiscal quarter ended
August 31, 2001 and incorporated herein by reference).
85
10.26 Amendment No. 4 to the Credit Agreement, dated as of January 15, 2002
between the Company, certain principal subsidiaries, and JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank), as
administrative agent for certain banks (filed herewith as Exhibit
4.14).
10.27 Letter Agreement between the Company and Thomas S. Summer, dated
March 10, 1997, addressing compensation (filed as Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
February 29, 2000 and incorporated herein by reference).
10.28 Service Agreement between Matthew Clark plc and Peter Aikens, dated
September 27, 1991, as amended (filed as Exhibit 10.17 to the
Company's Annual Report on Form 10-K for the fiscal year ended
February 29, 2000 and incorporated herein by reference).
10.29 The Constellation Brands UK Sharesave Scheme, as amended (filed
herewith).
11.1 Statement re Computation of Per Share Earnings (filed herewith).
21.1 Subsidiaries of Company (filed herewith).
23.1 Consent of Arthur Andersen LLP (filed herewith).
99.1 1989 Employee Stock Purchase Plan (Restated June 27, 2001) (filed as
Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
99.2 Letter to the Securities and Exchange Commission pursuant to Temporary
Note 3T to Article 3 of Regulation S-X (filed herewith).
86