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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, 2003
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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) 218-3600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock New York Stock Exchange
(par value $.01 per share)
Class B Common Stock New York Stock Exchange
(par value $.01 per share)
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
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The aggregate market value of the voting common equity held by non-affiliates of
the Registrant, based upon the closing sales prices of the Registrant's Class A
and Class B Common Stock as reported on the New York Stock Exchange as of the
last business day of the Registrant's most recently completed second fiscal
quarter was $2,217,632,633. The Registrant has no non-voting common equity.
The number of shares outstanding with respect to each of the classes of common
stock of Constellation Brands, Inc., as of April 30, 2003, is set forth below:
Class Number of Shares Outstanding
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Class A Common Stock, par value $.01 per share 82,284,141
Class B Common Stock, par value $.01 per share 12,071,070
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement of Constellation Brands, Inc. to be issued for the Annual
Meeting of Stockholders to be held July 15, 2003 is incorporated by reference in
Part III to the extent described therein.
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This Annual Report on Form 10-K contains forward-looking statements. In
connection therewith, please see the cautionary statements and risk factors
contained in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Cautionary Information Regarding
Forward-Looking Statements" and elsewhere in this Report which identify
important factors which could cause actual results to differ materially from any
such forward-looking statements.
PART I
ITEM 1. BUSINESS
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INTRODUCTION
Unless the context otherwise requires, the term "Company" refers to
Constellation Brands, Inc. and its subsidiaries, and all references to "net
sales" refer to gross sales less promotions, returns and allowances, and excise
taxes to conform with the Company's method of classification. All references to
"Fiscal 2003", "Fiscal 2002" and "Fiscal 2001" shall refer to the Company's
fiscal year ended the last day of February of the indicated year. All
references to "Fiscal 2004" shall refer to the Company's fiscal year ending
February 29, 2004.
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
2003. The Company has not independently verified this data. Unless otherwise
noted, all references to market share data are based on unit volume and unless
otherwise noted, the most recent complete industry data available are for
calendar 2002.
The Company is a leading international producer and marketer of beverage
alcohol in North America, Europe and Australia with a broad portfolio of brands
across the wine, imported beer and distilled spirits categories. The Company
has the largest wine business in the world and is the largest multi-category
supplier of beverage alcohol brands in the United States. In the United
Kingdom, the Company is the largest marketer of wine, the second largest
producer and marketer of cider and a leading independent drinks wholesaler. The
Company is the leading producer of wine in Australia and the second largest
producer of wine in New Zealand. The Company's strong market positions increase
its purchasing power and make the Company a supplier of choice to its customers.
With its broad product portfolio, the Company believes it is distinctly
positioned to satisfy an array of consumer preferences across all beverage
alcohol categories and price points. Many of the Company's products are
recognized leaders in their respective categories. Leading brands in the
Company's portfolio include Corona Extra, Modelo Especial, Pacifico, St. Pauli
Girl, Franciscan Oakville Estate, Simi, Estancia, Ravenswood, Blackstone,
Banrock Station, Hardys, Nobilo, Houghton, Leasingham, Almaden, Inglenook, Arbor
Mist, Vendange, Alice White, Stowells of Chelsea, Black Velvet, Fleischmann's,
Schenley, Ten High and Blackthorn.
The Company is a Delaware corporation incorporated on December 4, 1972, as
the successor to a business founded in 1945. Since the Company's founding in
1945 as a producer and marketer of wine products, the Company has grown through
a combination of internal growth and acquisitions. The
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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.
Since 1991, the Company has successfully integrated a number of major
acquisitions that have broadened its portfolio and increased its market share,
net sales, operating income and cash flow. Through these acquisitions, the
Company has become more competitive by: diversifying its portfolio; developing
strong market positions in the growing beverage alcohol product categories of
varietal table wine and imported beer; strengthening its relationships with
wholesalers; expanding its distribution and enhancing its production
capabilities; and acquiring additional management, operational, marketing, and
research and development expertise.
In April 2003, the Company completed the acquisition of BRL Hardy Limited,
now known as Hardy Wine Company Limited ("Hardy") (the "Hardy Acquisition"),
Australia's largest producer of wine, which enhanced the Company's overall
growth prospects and gave the Company an immediate presence in the Australian
domestic and export markets. Well known brands in Hardy's portfolio include
Banrock Station, Hardys Nottage Hill, Hardys Stamp and VR, Eileen Hardy, Sir
James, Omni, Leasingham and Houghton. Other recent acquisitions include: the
acquisition in July 2001 of the Ravenswood brand, a leading premium wine from
Sonoma, California; the acquisition in March 2001 of the Covey Run, Columbia,
Ste. Chapelle, Alice White and other premium wine brands; the acquisition in
March 2001 of the Vendange, Nathanson Creek, Heritage, Talus and other premium
wine brands; and the formation in July 2001 of Pacific Wine Partners LLC
("PWP"), a joint venture owned equally by the Company and Hardy that produces,
markets and sells a global portfolio of premium wine in the United States,
including a range of Australian imports. As a result of the Hardy Acquisition,
the Company acquired the remaining 50% ownership of PWP. For more information
about these acquisitions, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in Item 7 of this Annual Report on Form
10-K.
BUSINESS SEGMENTS
As a result of the Hardy Acquisition, the Company has changed the structure
of its internal organization to consist of two business divisions, Constellation
Wines and Constellation Beers and Spirits. Separate division chief executives
report directly to the Company's chief operating officer. As a result of such
changes, beginning with the first quarter of Fiscal 2004, the Company will
report its operating results in three segments: Constellation Wines (branded
wine, and U.K. wholesale and other), Constellation Beers and Spirits (imported
beer and distilled spirits) and Corporate Operations and Other. The new business
segments, described more fully below, reflect how the Company's operations are
now being managed, how operating performance within the Company is now being
evaluated by senior management and the availability and structure of internal
financial reporting.
PREVIOUS BUSINESS SEGMENTS
For Fiscal 2003, Fiscal 2002 and Fiscal 2001, the Company has reported its
operating results in the five segments described below:
The Popular and Premium Wine segment produces, bottles, imports and markets
wine and brandy in the United States and exports its wine to other major wine
consuming markets. Most of its wine is marketed in the under $10.00 per 750 ml
bottle price range. This segment also produces and sells bulk wine, grape juice
concentrate and other related products and services.
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The Imported Beer and Spirits segment imports and markets a diversified
line of imported beer, produces, bottles, imports and markets a diversified line
of distilled spirits and sells bulk distilled spirits and other related products
and services.
The U.K. Brands and Wholesale segment is a leading producer and marketer of
wine, cider and bottled water and is the leading independent on-premise drinks
wholesaler in the United Kingdom. This segment also exports its branded products
from the United Kingdom.
The Fine Wine segment participates in the super-premium and ultra-premium
wine market in the United States and exports its products to other major wine
consuming markets.
The Corporate Operations and Other segment includes traditional corporate-
related items.
Results of operations of the Company's previous business segments is set
forth in "Management's Discussion and Analysis of Financial Condition and
Results of Operation" in Item 7 of this Annual Report on Form 10-K. Information
regarding net sales, operating income and total assets of each of the Company's
previous business segments and information regarding geographic areas is set
forth in Note 21 to the Company's consolidated financial statements located in
Item 8 of this Annual Report on Form 10-K.
POST-FISCAL 2003 BUSINESS SEGMENTS
CONSTELLATION WINES
Constellation Wines is the leading producer and marketer of wine in the
world. It sells a large number of wine brands across all categories - table
wine, dessert wine and sparkling wine - and across all price points - popular,
premium, super-premium and ultra-premium. The portfolio of super-premium and
ultra-premium wines is supported by vineyard holdings in California, Australia,
New Zealand and Chile. As the largest producer and marketer of wine in the
world, Constellation Wines has leading market positions in several countries. It
is the second largest supplier of wine in the United States and New Zealand and
the largest supplier of wine in Australia and the United Kingdom. In addition,
Constellation Wines exports its wine products to the major wine consuming
markets of the world.
In the United States, Constellation Wines sells 20 of the top 100 wine
brands and has one of the largest super-premium and ultra-premium wine
portfolios. In the United Kingdom, it has eight of the top 20 selling table
wine brands to the off-premise market, four of the top 10 brands in the
on-premise market and the best selling brand of fortified British wine. In
Australia, it has wine brands across all price points and varieties, including
the most comprehensive range of premium wine brands, and is the largest producer
of cask wines.
Constellation Wines' leading wine brands include Franciscan Oakville
Estate, Simi, Estancia, Ravenswood, Blackstone, Banrock Station, Hardys, Nobilo,
Houghton, Leasingham, Almaden, Inglenook, Arbor Mist, Vendange, Alice White and
Stowells of Chelsea.
Constellation Wines is also the leading independent beverage wholesaler to
the on-premise trade in the United Kingdom and has more than 16,000 on-premise
accounts. The wholesaling business is wine led, but also involves the
distribution of branded distilled spirits, cider, beer, RTDs and soft drinks.
While these products are primarily produced by other major drinks companies,
they also include Constellation Wines' branded wine, cider and water products.
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Constellation Wines is also the second largest producer and marketer of
cider in the United Kingdom, with leading cider brands Blackthorn and Gaymer's
Olde English, and produces and markets Strathmore, the leading bottled water
brand in the United Kingdom on-premise market.
In conjunction with its wine production, Constellation Wines produces and
sells bulk wine, grape juice concentrate and other related products and
services.
CONSTELLATION BEERS AND SPIRITS
Constellation Beers and Spirits imports and markets a diversified line of
beer and produces, bottles, imports and markets a diversified line of distilled
spirits. It is the largest marketer of imported beer in 25 primarily western
U.S. states, where it has exclusive rights to distribute the Mexican brands in
its portfolio. Constellation Beers and Spirits has exclusive rights to the
entire United States for its non-Mexican brands. It 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 and the seventh best selling
beer overall 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.
Constellation Beers and Spirits is the third largest producer and marketer
of distilled spirits in North America and exports its distilled spirits to other
major distilled spirits consuming markets. 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. Constellation
Beers and Spirits also sells bulk distilled spirits and other related products
and services.
CORPORATE OPERATIONS AND OTHER
The Corporate Operations and Other segment includes traditional corporate-
related items.
MARKETING AND DISTRIBUTION
The Company employs full-time, in-house marketing, sales and customer
service organizations within its segments to maintain a high degree of focus on
each of its product categories. The organizations use a range of marketing
strategies and tactics to build brand equity and increase sales, including
market research, consumer and trade advertising, price promotions, point-of-sale
materials, event sponsorship and public relations. Where opportunities exist,
particularly with national accounts, the Company leverages its sales and
marketing skills across the organization.
In North America, the Company's products are primarily distributed by more
than 1,000 wholesale distributors as well as state and provincial alcoholic
beverage control agencies. In the Company's other markets, products are
primarily distributed either directly to retailers or through wholesalers and
importers. In Australia, distribution is dominated by a small number of
industry leaders. Its U.K. wholesaling business sells and distributes the
Company's branded products and those of other major drinks companies through a
network of depots located throughout the United Kingdom.
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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
or has the right to use. Throughout its segments, the Company also has various
licenses and distribution agreements, for the sale and the production and 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, Lauder's and Imperial Spirits brands.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products. These
agreements have terms that vary and prohibit the Company from importing other
beer from other producers from the same country. The Company's agreement to
distribute Corona Extra and other Mexican beer brands exclusively throughout 25
primarily western U.S. states expires in December 2006 and, subject to
compliance with certain performance criteria, continued retention of certain
Company personnel and other terms under the agreement, will be automatically
renewed for additional terms of five years. Changes in control of the Company or
of its subsidiaries involved in importing the Mexican beer brands, changes in
the position of the Chief Executive Officer of Barton Beers, Ltd., including by
death or disability, or the termination of the President of Barton Incorporated,
may be a basis for the supplier, unless it consents to such changes, to
terminate the agreement. The supplier's consent to such changes may not be
unreasonably withheld. Prior to their expiration, all of the Company's imported
beer distribution agreements may be terminated if the Company fails to meet
certain performance criteria. The Company believes it is currently in compliance
with its material imported beer distribution agreements. From time to time, the
Company has failed, and may in the future fail, to satisfy certain performance
criteria in its distribution agreements. Although there can be no absolute
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 strength.
The Company's beverage alcohol products compete with other alcoholic and
nonalcoholic beverages for consumer purchases, as well as shelf space in retail
stores, restaurant presence and wholesaler attention. The Company competes with
numerous multinational producers and distributors of beverage alcohol products,
some of which may have greater resources than the Company.
Constellation Wines' principal wine competitors include: E & J Gallo
Winery, The Wine Group, Beringer Blass, The Robert Mondavi Corporation and
Kendall-Jackson in the United States; Southcorp Wines, Orlando Wyndham and
Beringer Blass in Australia; and E & J Gallo Winery, Southcorp Wines, Western
Wines, Halewood Vintners and Pernod-Ricard in the United Kingdom. Its wholesale
business competes with major brewers who also have wholesale operations, in
particular, Scottish Courage, Coors, Interbrew and Carlsberg Tetley, and other
independent national and regional wholesalers. Constellation Wines' principal
cider competitor is H.P. Bulmer.
Constellation Beers and Spirits' principal competitors include:
Heineken USA, Molson, Labatt USA and Guinness Import Company in the
imported beer category as well as domestic producers such as
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Anheuser Busch, Coors and SAB-Miller; and Diageo, Brown-Forman Beverages, Jim
Beam Brands and Heaven Hill Distilleries in the distilled spirits category.
PRODUCTION
In the United States, the Company operates 20 wineries where wine is
produced from many varieties of grapes grown principally in the Napa, Sonoma,
Monterey and San Joaquin regions of California. In Australia, the Company
operates 10 wineries where wine is produced from many varieties of grapes grown
in most of the major viticultural regions of Australia. Grapes are crushed at
the Company's wineries and stored as wine until packaged for sale under the
Company's brand names or sold in bulk. Most of the Company's wine is bottled
and sold within 18 months after the grape crush. In the United States, the
Company's inventories of wine are usually at their highest levels in November
and December immediately after the crush of each year's grape harvest, and are
substantially reduced prior to the subsequent year's crush. Similarly, in
Australia, the Company's inventories of wine are usually at their highest levels
in April and May immediately after the crush of each year's grape harvest, and
are substantially reduced prior to the subsequent year's crush. The Company
also operates one winery in Chile and two wineries in New Zealand.
The bourbon whiskeys, domestic blended whiskeys and light whiskeys marketed
by the Company are primarily produced and aged by the Company at its distillery
in Bardstown, Kentucky. The Company's primary distilled spirits bottling
facility in the United States is in Owensboro, Kentucky. The majority of the
Company's Canadian whisky requirements are produced and aged at its Canadian
distilleries in Lethbridge, Alberta, and Valleyfield, Quebec. The Company's
requirements of Scotch whisky, tequila, mezcal and the neutral grain spirits it
uses in the production of gin, vodka and other spirits products, are primarily
purchased from various suppliers.
The Company operates three facilities in the United Kingdom that produce,
bottle and package cider, wine and water. To produce Stowells of Chelsea, wine
is imported in bulk from various countries and packaged at the Company's
facility at Bristol. The Bristol facility also produces fortified British wine
and wine style drinks. All cider production takes place at the Company's
facility at Shepton Mallet. The Strathmore brand of bottled water is sourced
and bottled in Forfar, Scotland.
SOURCES AND AVAILABILITY OF PRODUCTION MATERIALS
The principal components in the production of the Company's branded
beverage alcohol products are agricultural products, such as grapes and grain,
and packaging materials (primarily glass).
Most of the Company's annual grape requirements are satisfied by purchases
from each year's harvest which normally begins in August and runs through
October in the United States and begins in February and runs through May in
Australia. The Company believes that it has adequate sources of grape supplies
to meet its sales expectations. However, in the event demand for certain wine
products exceeds expectations, the Company could experience shortages.
The Company purchases grapes from approximately 800 independent growers in
the United States and 1,450 growers in Australia. The Company enters into
written purchase agreements with a majority of these growers and pricing
generally varies year-to-year based on current market prices. In Australia,
approximately 800 of the 1,450 growers belong to a grape growers cooperative.
The Company purchases the majority of its Australian grape requirements from
this cooperative under a long-term arrangement. In the United Kingdom, the
Company produces wine from materials purchased either on a contract basis or on
the open market.
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The Company currently owns or leases approximately 16,080 acres of land and
vineyards, either fully bearing or under development, in California (U.S.), New
York (U.S.), Australia, Chile and New Zealand. This acreage supplies only a
small percentage of the Company's overall total wine needs. However, most of
this acreage is used to supply a large portion of the grapes used for the
production of the Company's super-premium and ultra-premium wines. The Company
continues to consider the purchase or lease of additional vineyards, and
additional land for vineyard plantings, to supplement its grape supply.
The distilled spirits manufactured by the Company require various
agricultural products, neutral grain spirits and bulk spirits. The Company
fulfills its requirements through purchases from various sources by contractual
arrangement and through purchases on the open market. The Company believes that
adequate supplies of the aforementioned products are available at the present
time.
In the United Kingdom, the Company sources apples for cider production
primarily through long-term supply arrangements with owners of apple orchards.
There are adequate supplies of apples at this particular time.
The Company utilizes glass and polyethylene terephthalate ("PET") bottles
and other materials such as caps, corks, capsules, labels and cardboard cartons
in the bottling and packaging of its products. Glass bottle costs are one of the
largest components of the Company's cost of product sold. In the United States
and Australia, the glass bottle industry is highly concentrated with only a
small number of producers. The Company has traditionally obtained, and continues
to obtain, its glass requirements from a limited number of producers. Currently,
substantially all of the Company's glass container requirements for its United
States operations are supplied by one producer and substantially all of the
Company's glass container requirements for its Australia operations are supplied
by another producer. The Company has not experienced difficulty in satisfying
its requirements with respect to any of the foregoing and considers its sources
of supply to be adequate. However, the inability of any of the Company's glass
bottle suppliers to satisfy the Company's requirements could adversely affect
the Company's operations.
GOVERNMENT REGULATION
The Company is subject to a range of regulations in the countries in which
it operates. Where it produces products, the Company is subject to environmental
laws and regulations and may be required to obtain permits and licenses to
operate its facilities. Where it markets and sells products, it may be subject
to laws and regulations on trademark and brand registration, packaging and
labeling, distribution methods and relationships, pricing and price changes,
sales promotions, advertising and public relations. The Company is also subject
to rules and regulations relating to changes in officers or directors, ownership
or control.
The Company believes it is in compliance in all material respects with all
applicable governmental laws and regulations in the countries in which it
operates. The Company also believes that the cost of administration and
compliance with, and liability under, such laws and regulations does not have,
and is not expected to have, a material adverse impact on its financial
condition, results of operations or cash flows.
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SEASONALITY
The beverage alcohol industry is subject to seasonality in each major
category. As a result, in response to wholesaler and retailer demand which
precedes consumer purchases, the Company's wine and spirits sales are typically
highest during the third quarter of its fiscal year, primarily due to seasonal
holiday buying, and its imported beer sales are typically highest during the
first and second quarters of the Company's fiscal year, which correspond to the
Spring and Summer periods in the United States.
EMPLOYEES
As of the end of March 2003, including the impact of the Hardy Acquisition,
the Company had approximately 7,680 full-time employees throughout the world.
Approximately 3,030 full-time employees were in the United States and
approximately 4,650 full-time employees were outside of the United States, in
countries including Australia, the United Kingdom, Canada, New Zealand and
France. Additional workers may be employed by the Company during the peak and
grape crushing seasons. The Company considers its employee relations generally
to be good.
COMPANY INFORMATION
The Company's internet address is http://www.cbrands.com. The Company's
filings with the Securities and Exchange Commission ("SEC"), including its
annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports, filed or furnished pursuant to Section
13(a) or 15 (d) of the Securities Exchange Act of 1934, are accessible free of
charge at http://www.cbrands.com as soon as reasonably practicable after the
Company electronically files such material with, or furnishes it to, the SEC.
Alternatively, such reports may be accessed at the internet address of the SEC,
which is http://www.sec.gov. Also, the public may read and copy any materials
that the Company files with the SEC at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
ITEM 2. PROPERTIES
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During Fiscal 2003, the Company consisted of five business segments.
Through its business segments, the Company operated wineries, distilling plants,
bottling plants, and cider and water producing facilities, most of which
included warehousing and distribution facilities on the premises. The Company
also operated separate distribution centers under the U.K. Brands and Wholesale
segment's wholesaling business.
As a result of the Hardy Acquisition, the Company modified its business
segmentation and will report its operating results in three segments:
Constellation Wines, Constellation Beers and Spirits and Corporate Operations
and Other. Set forth below under the title "Hardy Acquisition" is a general
description of the production properties acquired by virtue of the Hardy
Acquisition.
The Company believes that its facilities, taken as a whole, are in good
condition and working order and have adequate capacity to meet its needs for the
foreseeable future.
The following discussion details the properties associated with the five
business segments as reported in Fiscal 2003.
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POPULAR AND PREMIUM WINE
The Popular and Premium Wine segment maintained its headquarters in owned
and leased offices in Canandaigua, New York. It operated three wineries in New
York, located in Canandaigua, Naples and Batavia; seven wineries in California,
located in Escalon, Fresno, Ukiah, two in Lodi and two in Madera; two wineries
in Washington, located in Woodinville and Sunnyside; and one winery in Caldwell,
Idaho. All of these wineries are owned, except for the wineries in Batavia (New
York), Caldwell (Idaho) and Woodinville (Washington), which are leased. This
segment considered 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 wine and
produces grape juice concentrate. The Canandaigua winery crushes grapes and
produces, bottles and distributes wine. This segment plans to close two of its
wineries located in Batavia (New York) and Fresno (California) in Fiscal 2004.
This segment owned or leased 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 maintained its headquarters in leased
offices in Chicago, Illinois. It owned and operated four distilling plants, two
in the United States and two in Canada. The two distilling plants in the United
States are located in Bardstown, Kentucky and Albany, Georgia. The two
distilling plants in Canada are located in Valleyfield, Quebec and Lethbridge,
Alberta. This segment considered 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 operated
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 considered 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 maintained its headquarters in owned
offices in Bristol, England. It owned and operated two facilities in England,
located in Bristol and Shepton Mallet and one facility in Scotland, located in
Forfar. This segment considered 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 operated 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 as well as products imported from other wine suppliers. To
support its wholesaling business, this segment operated 11 distribution
centers located throughout the United
9
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 maintained its headquarters in offices owned in
Rutherford, California. Through this segment, the Company owned and operated
five wineries in the United States, one of which is on land that is leased, and,
through a majority owned subsidiary, operated one winery in Chile. All five
wineries in the United States are located in the state of California, in
Rutherford, Healdsburg, Monterey County and two in Sonoma County. The winery in
Chile is located in the Casablanca Valley. This segment considered its principal
wineries to be one of its wineries in Sonoma County (California) and its
wineries located in Rutherford (California), Healdsburg (California), Monterey
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 owned and leased approximately 2,700 plantable acres of
vineyards in California and approximately 1,000 plantable acres of vineyards in
Chile.
CORPORATE OPERATIONS AND OTHER
The Company's corporate headquarters are located in offices leased in
Fairport, New York.
HARDY ACQUISITION
During the first quarter of Fiscal 2004, the Company acquired Hardy, an
Australian company based in Reynella, South Australia. Hardy owns ten
Australian wineries, five of which are in South Australia, two in Western
Australia and the other three in New South Wales, Australian Capital Territory
and Tasmania. Hardy also owns two wineries in New Zealand and one winery in
France. All of these wineries crush, vinify and cellar wine. In addition, four
of these wineries include bottling and/or packaging operations. Hardy also owns
a bottling facility in Reynella, South Australia which bottles a significant
portion of the wine produced by Hardy. The Company considers Hardy's principal
facilities to be the Berri Estates and the Renmano wineries located in South
Australia, the Stanley winery located in New South Wales, the Houghton winery
located in Western Australia, the Nobilo winery located in New Zealand, and the
bottling facility located in Reynella.
Hardy owns or has interests in approximately 6,200 plantable acres of
vineyards in South Australia, the Australian Capital Territory, Western
Australia, Victoria, and Tasmania, approximately 1,900 plantable acres of
vineyards in New Zealand and approximately 80 plantable acres of vineyards in
France.
As a result of the Hardy Acquisition, the Company acquired the remaining
50% ownership of PWP. PWP owns and operates two wineries in California, one
located in Monterey County and the other in Sonoma County. These wineries crush,
vinify and cellar wine. In addition, the winery in Monterey County includes
bottling operations and distribution facilities. PWP also owns or has interests
in approximately 1,400 plantable acres of vineyards in California.
10
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 OR POSITION HELD
- ---- --- -----------------------
Richard Sands 52 Chairman of the Board, and Chief Executive Officer
Robert Sands 44 President and Chief Operating Officer
Alexander L. Berk 53 Chief Executive Officer, Constellation Beers and
Spirits, and President and Chief Executive
Officer, Barton Incorporated
Stephen B. Millar 59 Chief Executive Officer, Constellation Wines
Thomas J. Mullin 51 Executive Vice President and General Counsel
Thomas S. Summer 49 Executive Vice President and Chief Financial Officer
W. Keith Wilson 52 Executive Vice President and Chief Human Resources
Officer
Richard Sands, Ph.D., is the Chairman of the Board and Chief Executive
Officer of the Company. He has been employed by the Company in various
capacities since 1979. He was elected Chief Executive Officer in October 1993
and has served as a director since 1982. In September 1999, Mr. Sands was
elected Chairman of the Board. He served as Executive Vice President from 1982
to May 1986, as President from May 1986 to December 2002 and as Chief Operating
Officer from May 1986 to October 1993. He is the brother of Robert Sands.
Robert Sands was appointed President and Chief Operating Officer of the
Company in December 2002 and has served as a director since January 1990. Mr.
Sands also had served as Group President from April 2000 through December 2002,
as Chief Executive Officer, International from December 1998 through April 2000,
as Executive Vice President from October 1993 through April 2000, as General
Counsel from June 1986 through May 2000, and as Vice President from June 1990
through October 1993. He is the brother of Richard Sands.
Alexander L. Berk is the Chief Executive Officer of Constellation Beers and
Spirits and the President and Chief Executive Officer of Barton Incorporated.
Since 1990 and prior to becoming Chief Executive Officer of Barton Incorporated
in March 1998, Mr. Berk was President and Chief Operating Officer of Barton
Incorporated and from 1988 to 1990, he was the President and Chief Executive
Officer of Schenley Industries. Mr. Berk has been in the beverage alcohol
industry for most of his career, serving in various positions.
11
Stephen B. Millar is the Chief Executive Officer of Constellation Wines and
has held this position since the closing of the Hardy Acquisition. Prior to the
Company's acquisition of Hardy, Mr. Millar was Hardy's Managing Director and had
held this position since 1991. Mr. Millar currently serves in leadership roles
in numerous industry organizations. He is an Executive Council Member, Chairman
of the Audit Committee and Deputy Chairman of the International Trade Advisory
Committee of the Winemakers' Federation of Australia. He also serves as the
President of the Australian Wine and Brandy Producers' Association and is the
Deputy Chairman of the Australian Wine Export Council and Director of Business
SA.
Thomas J. Mullin joined the Company as Executive Vice President and General
Counsel in May 2000. Prior to joining the Company, Mr. Mullin served as
President and Chief Executive Officer of TD Waterhouse Bank, NA since February
2000, of CT USA, F.S.B. since September 1998, and of CT USA, Inc. since March
1997. He also served as Executive Vice President, Business Development and
Corporate Strategy of C.T. Financial Services, Inc. from March 1997 through
February 2000. From 1985 through 1997, Mr. Mullin served as Vice Chairman and
Senior Executive Vice President of First Federal Savings and Loan Association of
Rochester, New York and from 1982 through 1985, he was a partner in the law firm
of Phillips, Lytle, Hitchcock, Blaine & Huber.
Thomas S. Summer joined the Company in April l997 as Senior Vice President
and Chief Financial Officer and in April 2000 was elected Executive Vice
President. From November 1991 to April 1997, Mr. Summer served as Vice
President, Treasurer of Cardinal Health, Inc., a large national health care
services company, where he was responsible for directing financing strategies
and treasury matters. Prior to that, from November 1987 to November 1991, Mr.
Summer held several positions in corporate finance and international treasury
with PepsiCo, Inc.
W. Keith Wilson joined the Company in January 2002 as Senior Vice
President, Human Resources, and in September 2002, he was elected Chief Human
Resources Officer and in April 2003 he was elected Executive Vice President.
From 1999 to 2001, Mr. Wilson served as Senior Vice President, Global Human
Resources of Xerox Engineering Systems, a subsidiary of Xerox Corporation, that
engineers, manufactures and sells hi-tech reprographics equipment and software
worldwide. From 1990 to 1999, he served in various senior human resource
positions with the banking, marketing and real estate and relocation businesses
of Prudential Life Insurance of America, an insurance company that also provides
other financial products.
Executive officers of the Company are generally chosen or elected to their
positions annually and hold office until the earlier of their removal or
resignation or until their successors are chosen and qualified.
12
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- ----------------------------------------------------------------------
MATTERS
-------
The Company's Class A Common Stock (the "Class A Stock") and Class B Common
Stock (the "Class B Stock") trade on the New York Stock Exchange (Registered)
("NYSE") under the symbols STZ and STZ.B, respectively. The following tables set
forth for the periods indicated the high and low sales prices of the Class A
Stock and the Class B Stock as reported on the NYSE.
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 was
distributed in the form of a stock dividend on May 13, 2002, to stockholders of
record on April 30, 2002. During April 2001, 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 was distributed in the form of a stock dividend on May 14, 2001, to
stockholders of record on April 30, 2001. Prices in the following tables have
been adjusted to give effect to these common stock splits.
CLASS A STOCK
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Fiscal 2002
High $ 20.00 $ 23.25 $ 22.50 $ 27.18
Low $ 15.65 $ 18.40 $ 17.38 $ 19.01
Fiscal 2003
High $ 31.62 $ 32.00 $ 29.80 $ 26.26
Low $ 25.25 $ 24.10 $ 21.99 $ 22.30
CLASS B STOCK
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Fiscal 2002
High $ 19.95 $ 23.00 $ 21.63 $ 26.67
Low $ 16.08 $ 19.50 $ 19.75 $ 19.93
Fiscal 2003
High $ 31.50 $ 32.50 $ 30.05 $ 26.10
Low $ 25.50 $ 25.29 $ 21.64 $ 22.55
At April 30, 2003, the number of holders of record of Class A Stock and
Class B Stock of the Company were 985 and 245, 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, its bridge loan agreement, its 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
indenture (pound) 154 million 8 1/2% Series C Senior Notes due November 2009
restrict the payment of cash dividends.
13
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
For the Years Ended
------------------------------------------------------------------------
February 28, February 28, February 28, February 29, February 28,
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
Gross sales $ 3,583,082 $ 3,420,213 $ 2,983,629 $ 2,909,954 $ 1,872,048
Less-excise taxes (851,470) (813,455) (757,609) (748,230) (487,458)
------------ ------------ ------------ ------------ ------------
Net sales 2,731,612 2,606,758 2,226,020 2,161,724 1,384,590
Cost of product sold (1,970,897) (1,911,598) (1,647,081) (1,626,804) (1,051,331)
------------ ------------ ------------ ------------ ------------
Gross profit 760,715 695,160 578,939 534,920 333,259
Selling, general and
administrative expenses (350,993) (352,679) (308,071) (294,369) (184,751)
Restructuring charges (4,764) - - - -
Nonrecurring charges - - - (5,510) (2,616)
------------ ------------ ------------ ------------ ------------
Operating income 404,958 342,481 270,868 235,041 145,892
Gain on change in fair value of
derivative instruments 23,129 - - - -
Equity in earnings
of joint venture 12,236 1,667 - - -
Interest expense, net (105,387) (114,189) (108,631) (106,082) (41,462)
------------ ------------ ------------ ------------ ------------
Income before income taxes
and extraordinary item 334,936 229,959 162,237 128,959 104,430
Provision for income taxes (131,630) (91,984) (64,895) (51,584) (42,521)
------------ ------------ ------------ ------------ ------------
Income before
extraordinary item 203,306 137,975 97,342 77,375 61,909
Extraordinary item, net of
income taxes - (1,554) - - (11,437)
------------ ------------ ------------ ------------ ------------
Net income $ 203,306 $ 136,421 $ 97,342 $ 77,375 $ 50,472
============ ============ ============ ============ ============
Earnings per common share (1):
Basic:
Income before
extraordinary item $ 2.26 $ 1.62 $ 1.33 $ 1.07 $ 0.85
Extraordinary item - (0.02) - - (0.16)
------------ ------------ ------------ ------------ ------------
Earnings per common
share - basic $ 2.26 $ 1.60 $ 1.33 $ 1.07 $ 0.69
============ ============ ============ ============ ============
Diluted:
Income before
extraordinary item $ 2.19 $ 1.57 $ 1.30 $ 1.05 $ 0.82
Extraordinary item - (0.02) - - (0.15)
------------ ------------ ------------ ------------ ------------
Earnings per common
share - diluted $ 2.19 $ 1.55 $ 1.30 $ 1.05 $ 0.67
============ ============ ============ ============ ============
Supplemental data restated for
effect of SFAS No. 142:
Adjusted operating income $ 404,958 $ 369,780 $ 290,372 $ 254,833 $ 154,647
============ ============ ============ ============ ============
Adjusted income before
extraordinary item $ 203,306 $ 156,921 $ 111,635 $ 91,793 $ 67,594
============ ============ ============ ============ ============
Adjusted net income $ 203,306 $ 155,367 $ 111,635 $ 91,793 $ 56,157
============ ============ ============ ============ ============
14
For the Years Ended
------------------------------------------------------------------------
February 28, February 28, February 28, February 29, February 28,
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
Adjusted earnings per common share:
Basic:
Income before
extraordinary item $ 2.26 $ 1.84 $ 1.52 $ 1.27 $ 0.93
============ ============ ============ ============ ============
Earnings per common
share - basic $ 2.26 $ 1.82 $ 1.52 $ 1.27 $ 0.77
============ ============ ============ ============ ============
Diluted:
Income before
extraordinary item $ 2.19 $ 1.79 $ 1.49 $ 1.24 $ 0.90
============ ============ ============ ============ ============
Earnings per common
share - diluted $ 2.19 $ 1.77 $ 1.49 $ 1.24 $ 0.75
============ ============ ============ ============ ============
Total assets $ 3,196,330 $ 3,069,385 $ 2,512,169 $ 2,348,791 $ 1,793,776
============ ============ ============ ============ ============
Long-term debt, including
current maturities $ 1,262,895 $ 1,374,792 $ 1,361,613 $ 1,289,788 $ 837,694
============ ============ ============ ============ ============
(1) All per share data have been adjusted to effect to the two-for-one splits
of the Company's two classes of common stock in each of May 2002 and May 2001.
For the years ended February 28, 2003, and February 28, 2002, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 of this Annual Report on Form 10-K and the Consolidated
Financial Statements and notes thereto under Item 8 of this Annual Report on
Form 10-K.
Effective March 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed at least
annually for impairment. Intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives and are
subject to review for impairment. Upon adoption of SFAS No. 142, the Company
determined that certain of its intangible assets met the criteria to be
considered indefinite lived and, accordingly, ceased their amortization
effective March 1, 2002. These intangible assets consisted principally of
trademarks. The Company's trademarks relate to well established brands owned by
the Company which were previously amortized over 40 years. Intangible assets
determined to have a finite life, primarily distribution agreements, continue to
be amortized over their estimated useful lives which were not modified as a
result of adopting SFAS No. 142. The supplemental data section above presents
operating income, income before extraordinary item, net income and earnings per
share information for the comparative periods as if the nonamortization
provisions of SFAS No. 142 had been applied as of March 1, 1998.
Effective March 1, 2002, the Company adopted 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
15
revenue when recognized in the vendor's income statement. The Company previously
reported such costs as selling, general and administrative expenses. As a result
of adopting EITF No. 01-09 on March 1, 2002, the Company has restated net sales,
cost of product sold, and selling, general and administrative expenses for the
years ended February 28, 2002, February 28, 2001, February 29, 2000, and
February 28, 1999. Net sales were reduced by $213.8 million, $170.7 million,
$178.7 million and $112.8 million, respectively; cost of product sold was
increased by $10.1 million, $7.8 million, $8.8 million and $2.0 million,
respectively; and selling, general and administrative expenses were reduced by
$223.9 million, $178.5 million, $187.5 million and $114.8 million, respectively.
This reclassification did not affect operating income or net income.
The consolidated financial statements for the year ended February 28, 2003,
were audited by KPMG LLP. The consolidated financial statements for the years
ended February 28, 2002, February 28, 2001, February 29, 2000, and February 28,
1999, were audited by Arthur Andersen LLP and the reports for those years have
not been reissued by Arthur Andersen LLP.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
INTRODUCTION
- ------------
The Company is a leading international producer and marketer of beverage
alcohol in North America, Europe and Australia with a broad portfolio of brands
across the wine, imported beer and distilled spirits categories. The Company is
the largest wine company in the world and the largest multi-category supplier of
beverage alcohol brands in the United States. In the United Kingdom, the Company
is the largest marketer of wine, the second largest producer and marketer of
cider and a leading independent drinks wholesaler. The Company is the leading
producer of wine in Australia and the second largest producer of wine in New
Zealand.
Through February 28, 2003, the Company reported its operating results in
five segments: Popular and Premium Wine (branded popular and premium wine and
brandy, and other, primarily grape juice concentrate and bulk wine); Imported
Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands
and Wholesale (branded wine, cider, and bottled water, and wholesale wine,
distilled spirits, cider, beer, RTDs and soft drinks); Fine Wine (primarily
branded super-premium and ultra-premium wine); and Corporate Operations and
Other (primarily corporate related items). As a result of the Hardy Acquisition
(as defined below), the Company has changed the structure of its internal
organization to consist of two business divisions, Constellation Wines and
Constellation Beers and Spirits. Separate division chief executives report
directly to the Company's chief operating officer. As a result of such changes,
beginning with the first quarter of Fiscal 2004, the Company will report its
operating results in three segments: Constellation Wines (branded wine, and U.K.
wholesale and other), Constellation Beers and Spirits (imported beer and
distilled spirits) and Corporate Operations and Other. The new business segments
reflect how the Company's operations are now being managed, how operating
performance within the Company is now being evaluated by senior management and
the availability and structure of internal financial reporting.
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the year
ended February 28, 2003 ("Fiscal 2003"), compared to the year ended February 28,
2002 ("Fiscal 2002"), and Fiscal 2002 compared to the year ended February 28,
2001 ("Fiscal 2001"), and (ii) financial liquidity and capital resources for
Fiscal 2003. This discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
herein.
16
As discussed in Note 1 to the financial statements, the Company adopted
SFAS No. 142 on March 1, 2002. Upon the adoption of SFAS No. 142, the Company
ceased amortization of goodwill and indefinite lived intangible assets.
Retroactive application of SFAS No. 142 is not permitted. As discussed in Note
2 to the financial statements, the Company adopted EITF No. 01-09 on March 1,
2002. EITF No. 01-09 requires that certain consideration given by a vendor to a
customer be characterized as a reduction of revenue. The Company previously
reported such costs as selling, general and administrative expenses. As a
result of adopting EITF No. 01-09, the Company has restated net sales, cost of
product sold, and selling, general and administrative expenses for the years
ended February 28, 2002, and February 28, 2001. This reclassification did not
affect operating income or net income.
RECENT DEVELOPMENTS
ACQUISITION OF HARDY
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company
completed its acquisition of all of Hardy's outstanding capital stock (the
"Hardy Acquisition"). Hardy is Australia's largest wine producer with interests
in wineries and vineyards in most of Australia's major wine regions as well as
New Zealand, France and the United States. In addition, Hardy has significant
marketing and sales operations in the United Kingdom. This acquisition supports
the Company's strategy of driving long-term growth and positions the Company to
capitalize on the growth opportunities in "new world" wine markets. Hardy has a
comprehensive portfolio of wine products across all price points with a strong
focus on premium wine production. Hardy's wines are distributed worldwide
through a network of marketing and sales operations, with the majority of sales
generated in Australia, the United Kingdom and the United States.
Total consideration paid in cash and Class A Common Stock to the Hardy
shareholders was $1,137.4 million. Additionally, the Company expects to incur
direct acquisition costs of $20.0 million. The acquisition date for accounting
purposes is March 27, 2003. The Company expects to record an approximate $2
million reduction in the purchase price to reflect imputed interest between the
accounting acquisition date and the final payment of consideration. The cash
portion of the purchase price ($1,060.2 million) was financed with $660.2
million of borrowings under the Company's 2003 Credit Agreement (as defined
below) and $400.0 million of borrowings under the Company's Bridge Agreement (as
defined below). Additionally, the Company issued 3,288,913 shares of the
Company's Class A Common Stock, which were valued at $77.2 million based on the
simple average of the closing market price of the Company's Class A Common Stock
beginning two days before and ending two days after April 4, 2003, the day the
Hardy shareholders elected the form of consideration they wished to receive. As
a result of the Hardy Acquisition, the Company also acquired the remaining 50%
ownership of PWP (as defined below), the joint venture the Company established
with Hardy in July 2001.
The results of operations of the Hardy business will be reported in the
Company's new Constellation Wines segment as of March 27, 2003. The Hardy
Acquisition is significant and the Company expects it to have a material impact
on the Company's future results of operations, financial position and cash
flows.
17
ACQUISITIONS IN FISCAL 2003, FISCAL 2002 AND FISCAL 2001 AND JOINT VENTURE
ACQUISITION OF RAVENSWOOD WINERY
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. (the "Ravenswood Acquisition"), a leading premium
wine producer based in Sonoma, California. On June 30, 2002, Ravenswood Winery,
Inc. was merged into Franciscan Vineyards, Inc. (a wholly-owned subsidiary of
the Company). The Ravenswood business produces, markets and sells super-premium
and ultra-premium California wine, primarily under the Ravenswood brand name.
The vast majority of the wine the Ravenswood business produces and sells is red
wine, including the number one super-premium Zinfandel in the United States.
The results of operations of the Ravenswood business are reported in the Fine
Wine segment for Fiscal 2003 and Fiscal 2002 and have been included in the
consolidated results of operations of the Company since the date of acquisition.
Beginning in Fiscal 2004, the results of operations of the Ravenswood business
will be reported in the Company's new Constellation Wines segment.
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 for Fiscal 2003 and Fiscal 2002 and have been included in
the consolidated results of operations of the Company since the date of
acquisition. Beginning in Fiscal 2004, the results of operations of the Corus
Assets will be reported in the Company's new Constellation Wines segment.
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 for Fiscal 2003 and Fiscal 2002 and have been included in the
consolidated results of operations of the Company since the date of acquisition.
Beginning in Fiscal 2004, the results of operations of the Turner Road Vintners
Assets will be reported in the Company's new Constellation Wines segment.
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
for Fiscal 2003 and Fiscal 2002 and have been included in the consolidated
results of operations of the Company since the date of acquisition. Beginning
in Fiscal 2004, the results of operations of Forth Wines will be reported in the
Company's new Constellation Wines segment.
18
PACIFIC WINE PARTNERS
Pacific Wine Partners LLC ("PWP") produces, markets and sells a global
portfolio of premium wine in the United States, including a range of Australian
imports. As a result of the Hardy Acquisition, PWP became a wholly-owned
subsidiary of the Company. Accordingly, its results of operations will be
consolidated and reported in the Company's new Constellation Wines segment.
On July 31, 2001, the Company and Hardy completed the formation of PWP, a
joint venture owned equally by the Company and Hardy. In connection with the
initial formation of the joint venture, PWP was given the exclusive distribution
rights in the United States and the Caribbean to 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 2003 COMPARED TO FISCAL 2002
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2003 and Fiscal 2002.
Fiscal 2003 Compared to Fiscal 2002
-------------------------------------
Net Sales
-------------------------------------
%Increase
2003 2002 (Decrease)
------------ ----------- ----------
Popular and Premium Wine:
Branded:
External customers $ 684,094 $ 696,901 (1.8)%
Intersegment 8,570 9,669 (11.4)%
------------ -----------
Total Branded 692,664 706,570 (2.0)%
------------ -----------
Other:
External customers 45,223 57,718 (21.6)%
Intersegment 11,537 13,751 (16.1)%
------------ -----------
Total Other 56,760 71,469 (20.6)%
------------ -----------
Popular and Premium Wine net sales $ 749,424 $ 778,039 (3.7)%
------------ -----------
Imported Beer and Spirits:
Beer $ 776,006 $ 726,953 6.7 %
Spirits 282,307 274,702 2.8 %
------------ -----------
Imported Beer and Spirits net sales $ 1,058,313 $ 1,001,655 5.7 %
------------ -----------
19
Fiscal 2003 Compared to Fiscal 2002
-------------------------------------
Net Sales
-------------------------------------
%Increase
2003 2002 (Decrease)
------------ ----------- ----------
U.K. Brands and Wholesale:
Branded:
External customers $ 229,283 $ 223,791 2.5 %
Intersegment 189 574 (67.1)%
------------ -----------
Total Branded 229,472 224,365 2.3 %
Wholesale 560,346 495,532 13.1 %
------------ -----------
U.K. Brands and Wholesale net sales $ 789,818 $ 719,897 9.7 %
------------ -----------
Fine Wine:
External customers $ 154,353 $ 131,161 17.7 %
Intersegment 1,405 753 86.6 %
------------ -----------
Fine Wine net sales $ 155,758 $ 131,914 18.1 %
------------ -----------
Corporate Operations and Other $ - $ - N/A
------------ -----------
Intersegment eliminations $ (21,701) $ (24,747) (12.3)%
------------ -----------
Consolidated Net Sales $ 2,731,612 $ 2,606,758 4.8 %
============ ===========
Net sales for Fiscal 2003 increased to $2,731.6 million from $2,606.8
million for Fiscal 2002, an increase of $124.9 million, or 4.8%. This increase
resulted primarily from increased sales of imported beer and impact of foreign
currency changes of $50.7 million in the U.K. Brands and Wholesale segment. Also
contributing to the sales growth were increased sales in U.K. wholesale (on a
local currency basis), fine wine and spirits, offset by lower bulk wine, grape
juice concentrate, Popular and Premium branded wine and U.K. branded sales (on a
local currency basis).
POPULAR AND PREMIUM WINE
Net sales for the Popular and Premium Wine segment for Fiscal 2003
decreased to $749.4 million from $778.0 million for Fiscal 2002, a decrease of
$28.6 million, or (3.7)%. Other sales declined $14.7 million, or (20.6)%, on
lower bulk wine and grape juice concentrate sales. Branded sales declined $13.9
million, or (2.0)%, on lower volume offset slightly by higher average selling
prices. Volumes were negatively impacted as a result of increased promotional
spending in the industry, which the Company did not participate in heavily. In
this competitive pricing environment, the Company continues to be selective in
its promotional activities, focusing instead on growth areas, long-term brand
building initiatives and increased profitability.
IMPORTED BEER AND SPIRITS
Net sales for the Imported Beer and Spirits segment for Fiscal 2003
increased to $1,058.3 million from $1,001.7 million for Fiscal 2002, an increase
of $56.7 million, or 5.7%. This increase resulted primarily from a $49.1
million increase in imported beer sales. The growth in imported beer sales was
due to a price increase on the Company's Mexican beer portfolio, which took
effect in the first quarter of Fiscal 2003. Spirits sales increased $7.6
million due primarily to increased bulk whiskey sales, along with a slight
increase in branded sales.
U.K. BRANDS AND WHOLESALE
Net sales for the U.K. Brands and Wholesale segment for Fiscal 2003
increased to $789.8 million from $719.9 million for Fiscal 2002, an increase of
$69.9 million, or 9.7%. This increase resulted from the impact of foreign
currency changes of $50.7 million and a $28.6 million local currency
increase in
20
wholesale sales due to the addition of new accounts and increased average
delivery sizes, partially offset by a $9.4 million local currency decline in
branded sales as a decrease in cider sales was partially offset by increases in
wine sales.
FINE WINE
Net sales for the Fine Wine segment for Fiscal 2003 increased to $155.8
million from $131.9 million for Fiscal 2002, an increase of $23.8 million, or
18.1%. This increase resulted from an additional four months of sales of the
brands acquired in the Ravenswood Acquisition, completed in July 2001, of $14.1
million, as well as growth in the Ravenswood, Simi, Estancia and Franciscan
brands. The growth was due to higher sales volumes led by Ravenswood and Simi,
partially offset by higher promotional costs and a shift towards lower priced
brands.
GROSS PROFIT
The Company's gross profit increased to $760.7 million for Fiscal 2003 from
$695.2 million for Fiscal 2002, an increase of $65.6 million, or 9.4%. The
dollar increase in gross profit resulted from higher imported beer sales, the
additional four months of sales of the brands acquired in the Ravenswood
Acquisition (completed in July 2001), a favorable mix of sales towards higher
margin products, particularly popular and premium wine and tequila, lower
average wine and spirits costs, and a favorable foreign currency impact. These
increases were partially offset by higher average imported beer costs and lower
concentrate and bulk wine sales. As a result of the foregoing, gross profit as
a percent of net sales increased to 27.8% for Fiscal 2003 from 26.7% for Fiscal
2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $351.0 million
for Fiscal 2003 from $352.7 million for Fiscal 2002, a decrease of $1.7 million,
or (0.5)%. The Company adopted SFAS No. 142 on March 1, 2002, and, accordingly,
stopped amortizing goodwill and other indefinite lived intangible assets.
Therefore, the decrease of $1.7 million consists of a decrease of $27.3 million
of amortization expense from Fiscal 2002 offset by an increase of $25.6 million.
The increase resulted primarily from increased personnel costs to support the
Company's growth, higher selling costs to support the growth in the U.K.
wholesale business, and increased advertising costs on certain popular and
premium wine brands and imported beer brands. Selling, general and
administrative expenses as a percent of net sales decreased to 12.8% for Fiscal
2003 as compared to 13.5% for Fiscal 2002. This decrease was due to the reduced
amortization expense noted above partially offset by (i) the percent increase in
general and administrative expenses growing at a faster rate than the percent
change in the Corporate Operations and Other, Popular and Premium Wine and U.K.
Brands and Wholesale segments' net sales, and (ii) the percent increase in the
U.K. Brands and Wholesale segment's selling costs being greater than the percent
increase in U.K. Brands and Wholesale segment's net sales.
RESTRUCTURING CHARGES
The Company's Popular and Premium Wine segment recorded a property, plant
and equipment impairment of $4.8 million in Fiscal 2003 in connection with the
planned closure of two of its production facilities in Fiscal 2004. The Company
has begun the realignment of its business operations within the Popular and
Premium Wine segment to further improve productivity. This realignment is not
expected to have an impact on brand sales. As part of this realignment, the
Company expects to incur an additional $6.7 million in charges, primarily in
cash, during Fiscal 2004 within the Constellation Wine segment. No such charges
were incurred in Fiscal 2002.
21
In connection with the Hardy Acquisition, the Company expects to record a
restructuring charge related to the integration of Hardy in the amount of $3.2
million in Fiscal 2004. In addition, the Company expects to record a one-time
charge in the amount of $8.2 million in Fiscal 2004 for the write-off of bank
fees related to the repayment of the Company's senior credit facility.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2003 and Fiscal 2002.
Fiscal 2003 Compared to Fiscal 2002
-------------------------------------
Operating Income (Loss)
-------------------------------------
2003 2002 %Increase
--------- --------- ---------
Popular and Premium Wine $ 107,715 $ 104,781 2.8%
Imported Beer and Spirits 217,963 178,805 21.9%
U.K. Brands and Wholesale 56,577 47,270 19.7%
Fine Wine 55,515 39,169 41.7%
Corporate Operations and Other (32,812) (27,544) 19.1%
--------- ---------
Consolidated Operating Income $ 404,958 $ 342,481 18.2%
========= =========
As a result of the above factors, operating income increased to $405.0
million for Fiscal 2003 from $342.5 million for Fiscal 2002, an increase of
$62.5 million, or 18.2%. Fiscal 2002 operating income for Popular and Premium
Wine, Imported Beer and Spirits, U.K. Brands and Wholesale and Fine Wine
included amortization expense of $8.9 million, $8.2 million, $5.9 million, and
$4.3 million, respectively.
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
In February 2003, the Company entered into a foreign currency collar
contract in connection with the Hardy Acquisition to lock in a range for the
cost of the acquisition in U.S. dollars. As of February 28, 2003, this
derivative instrument had a fair value of $23.1 million. Under SFAS No. 133, a
transaction that involves a business combination is not eligible for hedge
accounting treatment. As such, the derivative was recorded on the balance sheet
at its fair value with the change in the fair value recognized separately on the
Company's Consolidated Statement of Income.
In the first quarter of Fiscal 2004, the Company will record an additional
gain of $4.1 million related to the settlement of the foreign currency
derivative instruments entered into in conjunction with the Hardy Acquisition.
INTEREST EXPENSE, NET
Net interest expense decreased to $105.4 million for Fiscal 2003 from
$114.2 million for Fiscal 2002, a decrease of $8.8 million, or (7.7)%. The
decrease resulted from both a decrease in the average borrowings for the year
and a decrease in the average interest rate.
PROVISIONS FOR INCOME TAXES
The Company's effective tax rate for Fiscal 2003 was 39.3% as compared to
40.0% for Fiscal 2002 as a result of the adoption of SFAS No. 142 on March 1,
2002.
22
NET INCOME
As a result of the above factors, net income increased to $203.3 million
for Fiscal 2003 from $136.4 million for Fiscal 2002, an increase of $66.9
million, or 49.0%.
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 $ 696,901 $ 546,211 27.6 %
Intersegment 9,669 6,451 49.9 %
----------- -----------
Total Branded 706,570 552,662 27.8 %
----------- -----------
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 $ 778,039 $ 634,023 22.7 %
----------- -----------
Imported Beer and Spirits:
Beer $ 726,953 $ 633,833 14.7 %
Spirits 274,702 262,933 4.5 %
----------- -----------
Imported Beer and Spirits net sales $ 1,001,655 $ 896,766 11.7 %
----------- -----------
U.K. Brands and Wholesale:
Branded:
External customers $ 223,791 $ 225,550 (0.8)%
Intersegment 574 1,193 (51.9)%
----------- -----------
Total Branded 224,365 226,743 (1.0)%
Wholesale 495,532 404,208 22.6 %
----------- -----------
U.K. Brands and Wholesale net sales $ 719,897 $ 630,951 14.1 %
----------- -----------
Fine Wine:
External customers $ 131,161 $ 88,486 48.2 %
Intersegment 753 217 247.0 %
----------- -----------
Fine Wine net sales $ 131,914 $ 88,703 48.7 %
----------- -----------
Corporate Operations and Other $ - $ - N/A
----------- -----------
Intersegment eliminations $ (24,747) $ (24,423) 1.3 %
----------- -----------
Consolidated Net Sales $ 2,606,758 $ 2,226,020 17.1 %
=========== ===========
Net sales for Fiscal 2002 increased to $2,606.8 million from $2,226.0
million for Fiscal 2001, an increase of $380.7 million, or 17.1%.
POPULAR AND PREMIUM WINE
Net sales for the Popular and Premium Wine segment for Fiscal 2002
increased to $778.0 million from $634.0 million for Fiscal 2001, an increase of
$144.0 million, or 22.7%. This increase resulted primarily from $158.5 million
of sales of the newly acquired brands from the Turner Road Vintners
23
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 $1,001.7 million from $896.8 million for Fiscal 2001, an increase
of $104.9 million, or 11.7%. This increase resulted primarily from a 14.7%
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 $719.9 million from $631.0 million for Fiscal 2001, an increase of
$88.9 million, or 14.1%. This increase resulted from a 27.1% local currency
basis increase in wholesale sales, with the majority of this growth coming from
organic sales, and a 7.4% local currency basis increase in branded sales, with
an increase in wine sales being partially offset by a decrease in cider sales,
partially offset by a 22.9% adverse foreign currency impact.
FINE WINE
Net sales for the Fine Wine segment for Fiscal 2002 increased to $131.9
million from $88.7 million for Fiscal 2001, an increase of $43.2 million, or
48.7%. This increase resulted primarily from $30.4 million of net 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.
GROSS PROFIT
The Company's gross profit increased to $695.2 million for Fiscal 2002 from
$578.9 million for Fiscal 2001, an increase of $116.2 million, or 20.1%. 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 26.7% for Fiscal 2002 from 26.0%
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 $352.7 million
for Fiscal 2002 from $308.1 million for Fiscal 2001, an increase of $44.6
million, or 14.5%. The dollar increase in selling, general and administrative
expenses resulted primarily from an increase in advertising, selling, general
and administrative expenses associated with the brands acquired in the March
Acquisitions and the Ravenswood Acquisition. In addition, there were increases
in selling, general and administrative expenses associated with the Imported
Beer and Spirits segment's Mexican beer portfolio volume growth,
24
and the U.K. Brands and Wholesale segment's wholesale volume growth, and
increased personnel costs to support the Company's growth within the Corporate
Operations and Other segment. Selling, general and administrative expenses as a
percent of net sales decreased slightly to 13.5% for Fiscal 2002 as compared to
13.8% for Fiscal 2001 due to higher sales growth from the March Acquisitions and
the Ravenswood Acquisition than the related selling, general and administrative
expense growth.
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.
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%.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------
GENERAL
The Company's principal use of cash in its operating activities is for
purchasing and carrying inventories. The Company's primary source of liquidity
has historically been cash flow from operations, except during the annual fall
grape harvests when the Company has relied on short-term borrowings. In the
United States, the annual grape crush normally begins in August and runs through
October. In Australia, the annual grape crush normally begins in March and runs
through May. The Company generally begins purchasing grapes at the beginning of
the crush season with payments for such grapes beginning to come due one month
later. The Company's short-term borrowings to support such purchases generally
reach their highest levels one to two months after the crush season has ended.
Historically, the Company has used cash flow from operating activities
to repay its short-term
25
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 2003 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Fiscal 2003 was $236.1
million, which resulted from $256.5 million in net income adjusted for noncash
items, less $20.4 million representing the net change in the Company's operating
assets and liabilities. The net change in operating assets and liabilities
resulted primarily from an increase in inventories and a reduction in accrued
excise taxes and adverse grape contracts partially offset by increases in
accrued income taxes payable and accrued advertising and promotion expenses.
INVESTING ACTIVITIES
Net cash used in investing activities for Fiscal 2003 was $72.0 million,
which resulted primarily from $71.6 million of capital expenditures (including
$7.0 million for vineyards).
FINANCING ACTIVITIES
Net cash used in financing activities for Fiscal 2003 was $161.5 million
resulting primarily from $151.1 million of principal payments of long-term debt
and $51.9 million of net repayments of notes payable. These debt payments were
partially funded by $28.7 million of proceeds from employee stock option
exercises and $10.0 million of proceeds from long-term debt which was used for
the repayment of debt at one of the Company's Chilean subsidiaries.
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
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.
26
FINANCING ACTIVITIES
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 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.
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 12, 2003, the Company had purchased 4,075,344 shares of Class
A Common Stock at an aggregate cost of $44.9 million, or at an average cost of
$11.01 per share. No shares were repurchased during Fiscal 2003, Fiscal 2002
or Fiscal 2001.
DEBT
Total debt outstanding as of February 28, 2003, amounted to $1,265.5
million, a decrease of $164.0 million from February 28, 2002. The ratio of
total debt to total capitalization decreased to 51.9% as of February 28, 2003,
from 59.9% as of February 28, 2002.
SENIOR CREDIT FACILITIES
2000 Credit Agreement
---------------------
As of February 28, 2003, under the 2000 Credit Agreement (as defined
below), the Company had outstanding term loans of $145.4 million bearing a
weighted average interest rate of 3.1%, $2.0 million of outstanding revolving
loans bearing a weighted average interest rate of 3.1%, undrawn letters of
credit of $15.1 million, and $282.9 million available to be drawn under the
Revolving Credit facility. The 2000 Credit Agreement was a senior credit
facility originally entered into between the Company, certain of its principal
operating subsidiaries and a syndicate of banks, for which The Chase Manhattan
Bank acted as administrative agent, on October 6, 1999, and subsequently
amended (the "2000 Credit Agreement").
2003 Credit Agreement
---------------------
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
the U.S. subsidiaries of the Company (excluding certain inactive subsidiaries)
and Canandaigua Limited ("Guarantors"), JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
(such other lenders, together with the Administrative Agent, are collectively
referred to herein as the "Lenders") entered into a new credit agreement, which
was subsequently amended and restated on March 19, 2003 (the "2003 Credit
Agreement"). The 2003 Credit Agreement provides for aggregate credit facilities
of $1.6 billion consisting of a $400.0 million Tranche A Term Loan facility due
in February 2008, an $800.0 million Tranche B Term Loan facility due in
November 2008 and a $400.0 million Revolving Credit facility (including an
Australian Dollar revolving
27
sub-facility of up to A$10.0 million and a sub-facility for letters of credit of
up to $40.0 million) which expires on the fifth anniversary of the first date on
which the Lenders' obligation to make loans under the 2003 Credit Agreement
commences.
The required annual repayments of the Tranche A Term Loan facility is $40.0
million in Fiscal 2004 and increases by $20.0 million each year through fiscal
2008. The required annual repayments of the Tranche B Term Loan, which is
backend loaded, is $10.0 million in Fiscal 2004 and increases to $400.0 million
in fiscal 2009.
The rate of interest payable, at the Company's option, is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate
plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the 2003 Credit Agreement) and, with respect to LIBOR borrowings,
ranges between 1.75% and 2.75%. The initial LIBOR margin for the Revolving
Credit facility and the Tranche A Term Loan facility is 2.25%, while the initial
LIBOR margin on the Tranche B Term Loan facility is 2.75%.
The Company's obligations are guaranteed by the Guarantors and the Company
has pledged collateral of (i) 100% of the capital stock of all of the Company's
U.S. subsidiaries and (ii) 65% of the voting capital stock of Canandaigua
Limited, Matthew Clark plc, Hardy, Constellation Australia Pty Limited and
certain other foreign subsidiaries of the Company. In addition, under certain
circumstances, the Company and the Guarantors are required to pledge certain of
their assets consisting of, among other things, inventory, accounts receivable
and trademarks to secure the obligations under the 2003 Credit Agreement.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, the incurrence of additional
indebtedness, the sale of assets, the payment of dividends, transactions with
affiliates and the making of certain investments, in each case subject to
baskets, exceptions and thresholds. 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.
The Company used the proceeds of the Tranche A Term Loan facility, the
Tranche B Term Loan facility and a portion of the Revolving Credit facility
under the 2003 Credit Agreement to payoff its obligations under the 2000 Credit
Agreement, to fund a portion of the cash required to pay the Hardy shareholders
and to pay indebtedness outstanding under certain of Hardy's credit facilities.
The Company intends to use the remaining availability under the 2003 Credit
Agreement to fund its working capital needs on an ongoing basis.
Bridge Agreement
----------------
On January 16, 2003, the Company, the Guarantors, JPMorgan Chase Bank, as a
lender and Administrative Agent, and certain other lenders (such other lenders,
together with the Administrative Agent, are collectively referred to herein as
the "Bridge Lenders") entered into a bridge loan agreement which was amended and
restated as of March 26, 2003, containing commitments of the Bridge Lenders to
make bridge loans (the "Bridge Loans") of up to, in the aggregate, $450.0
million (the "Bridge Agreement"). On April 9, 2003, the Company used $400.0
million of the Bridge Loans to fund a portion of the cash required to pay the
former Hardy shareholders. The Bridge Loans are due on the first anniversary of
the date of the funding of the Bridge Loans ("Bridge Loan Maturity Date"). The
rate of interest payable on the Bridge Loans is equal to LIBOR plus a margin.
The initial margin on the Bridge Loans is 3.75%.
28
If the Bridge Loans are not repaid on the Bridge Loan Maturity Date, the
Bridge Lenders have committed to make certain term loans in an amount
corresponding to the then-outstanding amount of the Bridge Loans ("Term Loans").
The Term Loans are due on the seventh anniversary of the date on which the
Bridge Loans are funded ("Term Loan Maturity Date"). The rate of interest
payable on the Term Loans is equal to LIBOR plus a margin. If the Term Loans
are not repaid on the date that is three months after the Bridge Loan Maturity
Date, then the margin will increase on a quarterly basis thereafter until the
Term Loans are refinanced, exchanged or otherwise repaid in full. The rate of
interest payable on any of the Bridge Loans or the Term Loans is capped at
11.50% ("Rate Cap").
The Lenders have the right to exchange on or after the Bridge Loan Maturity
Date all or a portion of their respective Bridge Loans or Term Loans for notes
("Exchange Notes") that will be issued pursuant to an indenture to be entered
into among the Company, as issuer, certain subsidiaries of the Company, as
guarantors, and an indenture trustee on behalf of the holders of the Exchange
Notes. The Exchange Notes indenture will be in a form to be agreed between the
Company and the Administrative Agent and will contain terms and a final maturity
date that are substantially consistent with the terms and the maturity date of
the Term Loans. The Exchange Notes will bear interest at a fixed rate as
determined by the exchanging holder that will not exceed the Rate Cap.
The Guarantors have guaranteed the Company's obligations under the Bridge
Agreement.
The Company and the Guarantors have made certain representations and
warranties in the Bridge Agreement which are substantially the same as the
representations and warranties in the 2003 Credit Agreement. The Bridge
Agreement also contains covenants and events of default that are similar to the
covenants and events of default in the indentures pursuant to which the Company
issued its senior notes and senior subordinated notes.
SENIOR NOTES
On August 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 5/8% Senior Notes due August 2006 (the "August 1999 Senior Notes").
Interest on the August 1999 Senior Notes is payable semiannually on February 1
and August 1. 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"). Interest on the Sterling Senior
Notes is payable semiannually on May 15 and November 15. 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.
29
As of February 28, 2003, the Company had outstanding (pound) 1.0 million ($1.6
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 then existing
senior credit facility. Interest on the Sterling Series C Senior Notes is
payable semiannually on May 15 and November 15. 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, 2003, the Company had outstanding (pound) 154.0
million ($241.7 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. 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 March 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated
Notes"). Interest on the Senior Subordinated Notes is payable semiannually on
March 1 and September 1. The Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after March 1,
2004. 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 primarily to repay the Company's $195.0 million aggregate principal
amount of 8 3/4% Senior Subordinated Notes due in December 2003. In connection
with this repayment, the Company incurred an extraordinary loss of $2.6 million
($1.6 million, net of income taxes of $1.0 million) related to the write-off of
the remaining deferred financing costs and unamortized discount. The remaining
net proceeds of the offering were used to repay a portion of the outstanding
indebtedness under the Company's then existing senior credit facility. Interest
on the January 2002 Senior Subordinated Notes is payable semiannually on
January 15 and July 15. The January 2002
30
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 following table sets forth information about the Company's long-term
contractual obligations outstanding at February 28, 2003. It brings together
data for easy reference from the consolidated balance sheet and from individual
notes to the Company's consolidated financial statements. See Note 9 and Note 14
to the Company's consolidated financial statements located in Item 8 of this
Annual Report on Form 10-K for detailed discussion of items noted in the table
below.
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 3-5 years 5 years
----------- ----------- ----------- ----------- -----------
(in thousands)
Contractual obligations
- -----------------------
Notes payable to banks $ 2,623 $ 2,623 $ - $ - $ -
Long-term debt (excluding
unamortized discount) 1,248,799 67,682 81,081 404,400 695,636
Capital lease obligations 14,590 3,582 5,870 3,465 1,673
Operating leases 192,898 24,612 39,992 28,229 100,065
Unconditional purchase
obligations 605,748 176,412 242,104 119,827 67,405
----------- ----------- ----------- ----------- -----------
Total contractual cash
obligations $ 2,064,658 $ 274,911 $ 369,047 $ 555,921 $ 864,779
=========== =========== =========== =========== ===========
The above table includes the payments due by period as of February 28,
2003, and includes the required payments under the then existing 2000 Credit
Agreement. Subsequent to February 28, 2003, the Company drew down $8.0 million
in revolving debt and $1,200.0 million in term loan debt under the 2003 Credit
Agreement and $400.0 million under the Bridge Agreement. The Company used these
proceeds to payoff the Company's obligations under the 2000 Credit Agreement, to
fund the cash required to pay the Hardy shareholders and to pay indebtedness
outstanding under certain of Hardy's credit facilities. Consequently, the
following table gives the payments due by period taking into account these
changes:
PAYMENTS DUE BY PERIOD
-----------------------------------------------------------------------
Less than After
Total 1 year 1-3 years 3-5 years 5 years
----------- ----------- ----------- ----------- -----------
(in thousands)
Contractual obligations
- -----------------------
Notes payable to banks $ 8,623 $ 8,623 $ - $ - $ -
Long-term debt (excluding
unamortized discount) 2,303,436 50,600 677,800 879,400 695,636
Capital lease obligations 14,590 3,582 5,870 3,465 1,673
Operating leases 192,898 24,612 39,992 28,229 100,065
Unconditional purchase
obligations 605,748 176,412 242,104 119,827 67,405
----------- ----------- ----------- ----------- -----------
Total contractual cash
obligations $ 3,125,295 $ 263,829 $ 965,766 $ 1,030,921 $ 864,779
=========== =========== =========== =========== ===========
31
In addition, in connection with the formation of the Company's joint
venture, PWP, in July 2001, the Company transferred certain of its vineyard
lease and vineyard management agreements to PWP. The agreements have terms that
expire between 2012 and 2026. The Company guaranteed PWP's payment and
performance under these agreements. The estimated maximum amount of the
Company's exposure is $42.6 million in undiscounted future payments. The
Company has not recorded a liability for these guarantees and does not have any
collateral from PWP.
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 2003, the Company incurred $71.6 million for capital
expenditures, including $7.0 million related to vineyards. The Company plans to
spend approximately $120 million for capital expenditures, exclusive of
vineyards, in Fiscal 2004. 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 Fiscal 2003 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, 2003. 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; lease
a vineyard consisting of 67 acres to the Fine Wine segment pursuant to a 5-year
lease contract; 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 amounts to the
Huneeus Interests pursuant to these transactions and arrangements totaled $6.5
million, $4.8 million, and $5.0 million for the years ended February 28, 2003,
February 28, 2002, and February 28, 2001, respectively. In addition, the Fine
Wine segment performs certain wine processing services for the Huneeus
Interests. Total fees earned from the Huneeus Interests to the Fine Wine
segment for these services totaled $0.2 million, $0.4 million, and $0.6 million
for the years ended February 28, 2003, February 28, 2002, and February 28, 2001,
respectively. As of February 28, 2003, and February 28, 2002, the net amounts
due to/from the Huneeus Interests under these agreements are insignificant.
32
EFFECTS OF INFLATION AND CHANGING PRICES
The Company's results of operations and financial condition have not been
significantly affected by inflation and changing prices. The Company has been
able, subject to normal competitive conditions, to pass along rising costs
through increased selling prices. There can be no assurances, however, that the
Company will continue to be able to pass along rising costs through increased
selling prices.
CRITICAL ACCOUNTING POLICIES
The Company's significant accounting policies are more fully described in
Note 1 to the Company's consolidated financial statements located in Item 8 of
this Annual Report on Form 10-K. However, certain of the Company's accounting
policies are particularly important to the portrayal of the Company's financial
position and results of operations and require the application of significant
judgment by the Company's management; as a result they are subject to an
inherent degree of uncertainty. In applying those policies, the Company's
management uses its judgment to determine the appropriate assumptions to be used
in the determination of certain estimates. Those estimates are based on the
Company's historical experience, the Company's observance of trends in the
industry, information provided by the Company's customers and information
available from other outside sources, as appropriate. On an ongoing basis, the
Company reviews its estimates to ensure that they appropriately reflect changes
in the Company's business. The Company's critical accounting policies include:
- Accounting for promotional activities. Gross sales reflect reductions
attributable to consideration given to customers in various customer
incentive programs, including pricing discounts on single transactions,
volume discounts, promotional and advertising allowances, coupons, and
rebates. Certain customer incentive programs require management to
estimate the cost of those programs. The accrued liability for these
programs is determined through analysis of programs offered, historical
trends, expectations regarding customer and consumer participation,
sales and payment trends, and experience with payment patterns
associated with similar programs that had been previously offered. If
assumptions included in the Company's estimates were to change or market
conditions were to change, then material incremental reductions to
revenue could be required, which would have a material adverse impact on
the Company's financial statements. Promotional costs were $231.6
million, $223.9 million and $178.5 million for Fiscal 2003, Fiscal 2002
and Fiscal 2001, respectively.
- Inventory valuation. Inventories are stated at the lower of cost or
market, cost being determined on the first-in, first-out method. The
Company assesses the valuation of its inventories and reduces the
carrying value of those inventories that are obsolete or in excess of
the Company's forecasted usage to their estimated net realizable value.
The Company estimates the net realizable value of such inventories based
on analyses and assumptions including, but not limited to, historical
usage, future demand and market requirements. Reductions to the carrying
value of inventories are recorded in cost of goods sold. If the future
demand for the Company's products is less favorable than the Company's
forecasts, then the value of the inventories may be required to be
reduced, which could result in material additional expense to the
Company and have a material adverse impact on the Company's financial
statements.
- Accounting for business combinations. The acquisition of businesses is
an important element of the Company's strategy. Under the purchase
method, the Company is required to record
33
the net assets acquired at the estimated fair value at the date of
acquisition. The determination of the fair value of the assets acquired
and liabilities assumed requires the Company to make estimates and
assumptions that affect the Company's financial statements. For example,
the Company's acquisitions typically result in goodwill and other
intangible assets; the value and estimated life of those assets may
affect the amount of future period amortization expense for intangible
assets with finite lives as well as possible impairment charges that may
be incurred.
- Impairment of goodwill and intangible assets with indefinite lives.
Intangible assets with indefinite lives consist primarily of trademarks
as well as distributor and agency relationships. The Company is required
to analyze its goodwill and other intangible assets with indefinite
lives for impairment on an annual basis as well as when events and
circumstances indicate that an impairment may have occurred. Certain
factors that may occur and indicate that an impairment exists include,
but are not limited to, operating results that are lower than expected
and adverse industry or market economic trends. The impairment testing
requires management to estimate the fair value of the assets or
reporting unit and record an impairment loss for the excess of the
carrying value over the fair value. The estimate of fair value of the
assets is generally determined on the basis of discounted future cash
flows. The estimate of fair value of the reporting unit is generally
determined on the basis of discounted future cash flows supplemented by
the market approach. In estimating the fair value, management must make
assumptions and projections regarding such items as future cash flows,
future revenues, future earnings and other factors. The assumptions used
in the estimate of fair value are generally consistent with the past
performance of each reporting unit and other intangible assets and are
also consistent with the projections and assumptions that are used in
current operating plans. Such assumptions are subject to change as a
result of changing economic and competitive conditions. If these
estimates or their related assumptions change in the future, the Company
may be required to record an impairment loss for these assets. The
recording of any resulting impairment loss could have a material adverse
impact on the Company's financial statements.
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In 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. As required, the Company adopted
SFAS No. 143 on March 1, 2003. The adoption of SFAS No. 143 did not have a
material impact on the Company's 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
34
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 were effective for fiscal years beginning March 1,
2002. The adoption of the applicable provisions of SFAS No. 145 did not have a
material impact on the Company's financial statements. The adoption of the
provisions rescinding SFAS No. 4 will result in a reclassification of the
extraordinary loss related to the extinguishment of debt recorded in the fourth
quarter of Fiscal 2002 ($1.6 million, net of income taxes), by increasing
selling, general and administrative expenses ($2.6 million) and decreasing the
provision for income taxes ($1.0 million).
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with
Multiple Deliverables." EITF No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. EITF No. 00-21 also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The Company is required to adopt EITF No. 00-21
for all revenue arrangements entered into beginning August 1, 2003. The Company
is currently assessing the financial impact of EITF No. 00-21 on its financial
statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation -
Transition and Disclosure." SFAS No. 148 amends Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based
Compensation," to provide alternative methods of transition for an entity that
voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Lastly, SFAS No. 148 amends Accounting
Principles Board Opinion No. 28 ("APB Opinion No. 28"), "Interim Financial
Reporting," to require disclosure about those effects in interim financial
information. The Company has adopted the disclosure provisions of SFAS No. 148
for the fiscal year ended February 28, 2003. The Company is required to adopt
the amendment to APB Opinion No. 28 for financial reports containing condensed
financial statements for interim periods beginning March 1, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51."
FIN No. 46 requires all variable interest entities to be consolidated by the
primary beneficiary. The primary beneficiary is the entity that holds the
majority of the beneficial interests in the variable interest entity. In
addition, the interpretation expands disclosure requirements for both variable
interest entities that are consolidated as well as variable interest entities
from which the entity is the holder of a significant amount of the beneficial
interests, but not the majority. Since the Company has no transactions with
variable interest entities, the Company does not expect the adoption of FIN No.
46 in its entirety to have a significant impact on the Company's financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149
is effective for contracts entered into or modified after June 30, 2003,
and hedging relationships designated after June 30, 2003, except for
those provisions of SFAS No. 149 which relate to SFAS No. 133 Implementation
Issues that have been effective for fiscal quarters that began prior to
June 15, 2003. For these issues, the provisions that are currently in
effect should continue to be applied in accordance with their respective
effective dates. In addition, certain
35
provisions of SFAS No. 149, which relate to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The Company is currently assessing the financial impact of SFAS No. 149 on
its financial statements.
CAUTIONARY INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause actual results to differ materially from
those set forth in, or implied by, such forward-looking statements. All
statements other than statements of historical facts included in this Annual
Report on Form 10-K, including the statements under Item 1 "Business" and Item 7
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" regarding the Company's business strategy, future financial
position, prospects, plans and objectives of management, as well as information
concerning expected actions of third parties are forward-looking statements.
When used in this Annual Report on Form 10-K, the words "anticipate," "intend,"
"expect," and similar expressions are intended to identify forward-looking
statements, although not all forward-looking statements contain such identifying
words. All forward-looking statements speak only as of the date of this Annual
Report on Form 10-K. The Company undertakes no obligation to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to the
risks and uncertainties of ordinary business operations, important factors that
could cause actual results to differ materially from those set forth in, or
implied, by the Company's forward-looking statements contained in this Annual
Report on Form 10-K are as follows:
THE COMPANY'S INDEBTEDNESS COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS FINANCIAL
HEALTH.
The Company has incurred substantial indebtedness to finance its
acquisitions and may incur substantial additional indebtedness in the future to
finance further acquisitions or for other purposes. The Company's ability to
satisfy its 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 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 consequences include, or may include,
the following:
- the Company's ability to obtain financing for future working capital
needs or acquisitions or other purposes may be limited;
- a significant portion of the Company's cash flow from operations
will be dedicated to the payment of principal and interest on its
indebtedness, thereby reducing funds available for operations,
expansion or distributions;
- the Company is subject to restrictive covenants that could limit its
ability to conduct its business; and
36
- 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,
its bridge loan agreement and its indentures include, among others, restrictions
in relation to additional borrowings, 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
and the bridge loan agreement also contain 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, the
bridge loan agreement, its indentures or in follow-on financings could result in
an event of default under such agreements, which could require the Company to
immediately repay the related debt and also debt under other agreements that may
contain cross-acceleration or cross-default provisions.
THE COMPANY'S ACQUISITION OR JOINT VENTURE STRATEGIES MAY NOT BE SUCCESSFUL.
The Company has made a number of mergers and acquisitions, including the
recent acquisitions of Hardy, Ravenswood, the Turner Road Vintners Assets, and
the Corus Assets, and anticipates that it may, from time to time, acquire
additional businesses, assets or securities of companies that the Company
believes would provide a strategic fit with its business. In addition, the
Company has entered joint ventures and may enter into additional joint ventures.
Acquired businesses will need to be integrated with the Company's existing
operations. There can be no assurance that the Company will effectively
assimilate the business or product offerings of acquired companies into its
business or product offerings. Acquisitions are accompanied by risks such as
potential exposure to unknown liabilities of acquired companies and the possible
loss of key employees and customers of the acquired business. Acquisitions are
subject to risks associated with the difficulty and expense of integrating the
operations and personnel of the acquired companies, the potential disruption to
the Company's business and the diversion of management time and attention. The
Company shares control of its existing joint ventures and may not have majority
interest or control of future joint ventures, and, therefore, there is the risk
that the Company's joint venture partners may at any time have economic,
business or legal interests or goals that are inconsistent with those of the
joint venture or the Company. There is also risk that the Company's joint
venture partners may be unable to meet their economic or other obligations and
that the Company may be required to fulfill those obligations alone. The
Company's failure or the failure of an entity in which the Company has a joint
venture interest to adequately manage the risks associated with any acquisitions
or joint ventures could have a material adverse effect on the Company's
financial condition or results of operations.
COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The Company is in a highly competitive industry and the dollar amount and
unit volume of its sales could be negatively affected by its inability to
maintain or increase prices, changes in geographic or product mix, a general
decline in beverage alcohol consumption or the decision of the Company's
wholesale customers, retailers or consumers to purchase competitive products
instead of the Company's products. Wholesaler, retailer and consumer purchasing
decisions are influenced by, among other things, the perceived absolute or
relative overall value of the Company's products, including their quality or
pricing, compared to competitive products. Unit volume and dollar sales could
also be affected by pricing, purchasing, financing, operational, advertising
or promotional decisions made by wholesalers 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
37
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.
INCREASE IN EXCISE TAXES AND GOVERNMENT REGULATIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
In the United States, the United Kingdom, Australia and other countries in
which the Company operates, the Company is subject to imposition of excise taxes
and other 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 federal, state, local and foreign
governmental agencies. For example, in the United States, the Alcohol and
Tobacco Tax and Trade Bureau of the U.S. Department of the Treasury and the
various state liquor authorities regulate such matters as licensing, trade and
pricing practices, permitted and required labeling, advertising and relations
with wholesalers and retailers. Certain federal and state regulations also
require warning labels and signage.
Increases in excise taxes on beverage alcohol products in the United
States, the United Kingdom or Australia, if enacted, could materially and
adversely affect the Company's financial condition or results of operations.
New or revised regulations or increased licensing fees, requirements or taxes
could also have a material adverse effect on the Company's financial condition
or results of operations.
THE COMPANY RELIES ON THE PERFORMANCE OF WHOLESALE DISTRIBUTORS, MAJOR RETAILERS
AND CHAINS FOR THE SUCCESS OF ITS BUSINESS.
In the United States, the Company sells its products principally to
wholesalers for resale to retail outlets including grocery stores, package
liquor stores, club and discount stores and restaurants. In the United Kingdom
and Australia, the Company sells its products principally to wholesalers and
directly to major retailers and chains. The replacement or poor performance of
the Company's major wholesalers, retailers and chains, or the Company's
inability to collect accounts receivable from the Company's major wholesalers,
retailers and chains could materially and adversely affect the Company's results
of operations and financial condition. Distribution channels for beverage
alcohol products have been consolidating in recent years. In addition,
wholesalers and retailers of the Company's products offer products which compete
directly with the Company's products for retail shelf space and consumer
purchases. Accordingly, there is a risk that wholesalers or retailers may give
higher priority to products of the Company's competitors. In the future, the
Company's wholesalers and retailers may not continue to purchase the Company's
products or provide the Company's products with adequate levels of promotional
support.
THE COMPANY'S BUSINESS COULD BE ADVERSELY AFFECTED BY DECLINES IN THE
CONSUMPTION OF PRODUCTS THE COMPANY SELLS.
Although since 1995 there have been modest increases in consumption of
beverage alcohol in most of the Company's product categories, there have been
periods in the past few decades in which there were substantial declines in the
overall per capita consumption of beverage alcohol products in the United States
and other markets in which the Company participates. A limited or general
decline in consumption in one or more of the Company's product categories could
occur in the future due to a variety of factors, including:
- a general decline or lack of improvement in economic conditions;
- increased concern about the health consequences of consuming
beverage alcohol products and about drinking and driving;
38
- a trend toward a healthier diet including lighter, lower calorie
beverages such as diet soft drinks, juices and water products;
- increased activity of anti-alcohol consumer groups; and
- increased federal, state or foreign excise taxes.
THE COMPANY GENERALLY PURCHASES RAW MATERIALS UNDER SHORT-TERM SUPPLY CONTRACTS
AND THE COMPANY IS SUBJECT TO SUBSTANTIAL PRICE FLUCTUATIONS FOR GRAPES AND
GRAPE-RELATED MATERIALS; THE COMPANY HAS A LIMITED GROUP OF SUPPLIERS OF GLASS
BOTTLES.
The Company's business is heavily dependent upon raw materials, such as
grapes, grape juice concentrate, grains, alcohol and packaging materials from
third-party suppliers. The Company could experience raw material supply,
production or shipment difficulties that could adversely affect the Company's
ability to supply goods to its customers. The Company is also directly affected
by increases in the costs of 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, in the United States and Australia, have
only a small number of producers. Currently, substantially all of the Company's
glass container requirements for its United States operations are supplied by
one producer and substantially all of the Company's glass container requirements
for its Australian operations are supplied by another producer. The inability of
any of the Company's glass bottle suppliers to satisfy its requirements could
adversely affect the Company's business.
THE COMPANY'S GLOBAL OPERATIONS SUBJECT IT TO RISKS RELATED TO CURRENCY RATE
FLUCTUATIONS AND GEOPOLITICAL UNCERTAINTY.
The Company has operations in different countries and, therefore, is
subject to the risks associated with currency fluctuations. Subsequent to the
Hardy Acquisition, the Company's exposure to foreign currency risk has increased
significantly as a result of having additional international subsidiaries in
Australia, New Zealand and France. The Company could experience changes in its
ability to obtain or hedge against fluctuations in exchange rates. The Company
could also be affected by nationalizations or unstable governments or legal
systems or intergovernmental disputes. These currency, economic and political
uncertainties may 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 global operations or imported beer products.
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.
As of February 28, 2003, goodwill represented approximately $722.2 million,
or 22.6% of the Company's total assets. It is expected that this balance will
increase once the allocation of the purchase price for the Hardy Acquisition is
completed. Goodwill is the amount by which the costs of an acquisition
accounted for using the purchase method exceeds the fair value of the net assets
acquired. The Company adopted Statement of Financial Accounting Standard No.
142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets," in its entirety,
on March 1, 2002. Under SFAS No. 142, goodwill is no longer amortized, but
instead is subject to a periodic impairment evaluation based on the fair value
of the reporting unit. Reductions in the Company's net income caused by a
write-down of goodwill could materially and adversely affect the Company's
results of operations.
39
THE TERMINATION OR NON-RENEWAL OF IMPORTED BEER DISTRIBUTION AGREEMENTS COULD
HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products and
are subject to renewal from time to time. The Company's agreements to distribute
Corona Extra and its other Mexican beer brands in 25 primarily western U.S.
states expires in December 2006 and, subject to compliance with certain
performance criteria, continued retention of certain personnel and other terms
of the agreement, will be automatically renewed for additional terms of five
years. Changes in control of the Company or its subsidiaries involved in
importing the Mexican beer brands, or changes in the chief executive officer of
such subsidiaries, may be a basis for the supplier, unless it consents to such
changes, to terminate the agreement. The supplier's consent to such changes may
not be unreasonably withheld. Prior to their expiration, all of the Company's
imported beer distribution agreements may be terminated if the Company fails to
meet certain performance criteria. The Company believes that it is currently in
compliance with all of its material imported beer distribution agreements. From
time to time the Company has failed, and may in the future fail, to satisfy
certain performance criteria in the Company's distribution agreements. It is
possible that the Company's beer distribution agreements may not be renewed or
may be terminated prior to expiration.
THE COMPANY'S PRIOR YEARS' FINANCIAL STATEMENTS WERE AUDITED BY ARTHUR ANDERSEN
LLP.
The Company's consolidated financial statements for the years ended
February 28, 2002, and February 28, 2001, were audited by Arthur Andersen LLP,
independent public accountants. On August 31, 2002, Arthur Andersen LLP ceased
to practice before the SEC. Therefore, Arthur Andersen did not participate in
the preparation of this Form 10-K, did not reissue its audit report with respect
to the financial statements included in this Form 10-K, and did not consent to
the inclusion of a copy of its previously issued audit report in this Form 10-K.
As a result, holders of the Company's securities may have no effective remedy
against Arthur Andersen LLP in connection with a material misstatement or
omission in the financial statements to which its audit report relates. In
addition, even if such holders were able to assert such a claim, because it has
ceased operations, Arthur Andersen LLP may fail or otherwise have insufficient
assets to satisfy claims made by holders of the Company's securities that might
arise under federal securities laws or otherwise with respect to the audit
report of Arthur Andersen LLP.
--------------------------
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------- ----------------------------------------------------------
The Company 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 $1,400.8 million and
$1,407.4 million at February 28, 2003, and February 28, 2002, respectively.
A hypothetical 1% increase from
40
prevailing interest rates at February 28, 2003, and February 28, 2002, would
have resulted in a decrease in fair value of fixed interest rate long-term debt
by $151.3 million and $57.6 million, respectively.
Also, a hypothetical 1% increase from prevailing interest rates at February
28, 2003, and 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:
February 28, February 28,
2003 2002
------------ ------------
2003 N/A $2.5 million
2004 $1.1 million $1.7 million
2005 $0.3 million $0.7 million
2006 $ - $ -
2007 $ - $ -
2008 $ - N/A
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, 2003, and February 28, 2002, the Company had no interest rate swap
agreements outstanding.
At February 28, 2003, 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, 2003, 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, 2003, and 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.
Subsequent to the Hardy Acquisition, the Company's exposure to foreign
currency risk has increased significantly as a result of having additional
international subsidiaries in Australia, New Zealand and France. The Company
also has exposure to foreign currency risk as a result of Hardy's significant
international sales that are denominated in various foreign currencies. In
order to reduce the risk of foreign currency exchange rate fluctuations
resulting from these sales, the Company's involvement with derivative financial
instruments will increase proportionately.
41
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------- -------------------------------------------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
-------------------------------------------
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
FEBRUARY 28, 2003
-----------------
The following information is presented in this Annual Report on Form 10-K:
Page
----
Report of Independent Public Accountants - KPMG LLP 43
Report of Independent Public Accountants - Arthur Andersen LLP 44
Consolidated Balance Sheets - February 28,2003, and
February 28, 2002 45
Consolidated Statements of Income for the years ended
February 28, 2003, February 28, 2002, and February 28, 2001 46
Consolidated Statements of Changes in Stockholders' Equity
for the years ended February 28, 2003, February 28, 2002,
and February 28, 2001 47
Consolidated Statements of Cash Flows for the years ended
February 28, 2003, February 28, 2002, and February 28, 2001 48
Notes to Consolidated Financial Statements 49
Selected Quarterly Financial Information (unaudited) 88
Parent company only 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.
42
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Constellation Brands, Inc.:
We have audited the February 28, 2003 consolidated financial statements of
Constellation Brands, Inc. and subsidiaries as listed in the accompanying index.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit. The February 28, 2002 and 2001
consolidated financial statements of Constellation Brands, Inc. and subsidiaries
were audited by other auditors who have ceased operations. Those auditors
expressed an unqualified opinion on those consolidated financial statements,
before the revisions described in Notes 1 and 2 to the consolidated financial
statements, in their report dated April 9, 2002.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Constellation
Brands, Inc. and subsidiaries as of February 28, 2003, and the results of their
operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
As discussed above, the accompanying consolidated balance sheet of Constellation
Brands, Inc. and subsidiaries as of February 28, 2002, and the related
consolidated statements of income, stockholders' equity and cash flows for the
years ended February 28, 2002 and 2001 were audited by other auditors who have
ceased operations. As described in Note 2, these consolidated financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company as of March 1, 2002. In our
opinion these disclosures for 2002 and 2001 in Note 2 are appropriate.
Additionally, as described in Note 2, the consolidated statements of income for
the years ended February 28, 2002 and 2001 have been revised to reflect
reclassifications of certain consumer and trade promotional expenses as required
by Emerging Issues Task Force Issue No. 01-9, Accounting for Consideration Given
by a Vendor to a Customer (EITF 01-9), which was also adopted by the Company as
of March 1, 2002 and, as described in Note 1, the proforma disclosures of net
income and earnings per common share related to stock-based compensation for the
years ended February 28, 2002 and 2001 have been adjusted from the amounts
originally reported. We audited the adjustments that were applied to restate the
2002 and 2001 consolidated financial statements for the adoption of EITF 01-9
and to restate the disclosure of amounts of pro forma net income and earnings
per share related to stock-based compensation for the years ended February 28,
2002 and 2001. In our opinion, such adjustments are appropriate and have been
properly applied. However, we were not engaged to audit, review, or apply any
procedures to the February 28, 2002 and 2001 consolidated financial statements
of Constellation Brands, Inc. and subsidiaries, other than with respect to such
disclosures and adjustments; accordingly, we do not express an opinion or any
other form of assurance on the February 28, 2002 and 2001 consolidated financial
statements taken as a whole.
/s/ KPMG LLP
Rochester, New York
April 9, 2003
43
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. AS DESCRIBED IN NOTE 2 TO
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS, THE COMPANY ADOPTED THE
PROVISIONS OF EMERGING ISSUES TASK FORCE ISSUE NO. 01-9, ACCOUNTING FOR
CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER, WHICH REQUIRES RECLASSIFICATION
OF CERTAIN CONSUMER AND TRADE PROMOTIONAL EXPENSES IN CONSOLIDATED STATEMENTS OF
INCOME FOR THE YEARS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28, 2001. ALSO, IN
THE YEAR ENDED FEBRUARY 28, 2003, THE COMPANY ADOPTED STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS NO.
142). INCLUDED IN NOTE 2 ARE TRANSITIONAL DISCLOSURES FOR FISCAL 2002 AND
FISCAL 2001 THAT ARE REQUIRED BY SFAS NO. 142. ALSO, THE COMPANY ADJUSTED THE
PROFORMA DISCLOSURE OF NET INCOME AND EARNINGS PER COMMON SHARE RELATED TO
STOCK-BASED COMPENSATION FOR THE YEARS ENDED FEBRUARY 28, 2002 AND FEBRUARY 28,
2001, INCLUDED IN NOTE 1, FROM THE AMOUNTS ORIGINALLY REPORTED. THE ARTHUR
ANDERSEN LLP REPORT DOES NOT EXTEND TO THESE CHANGES IN THE 2002 AND 2001
CONSOLIDATED FINANCIAL STATEMENTS. THE TRANSITIONAL DISCLOSURES IN AND THE
ADJUSTMENTS TO THE FISCAL 2002 AND FISCAL 2001 CONSOLIDATED FINANCIAL STATEMENTS
WERE REPORTED ON BY KPMG LLP AS STATED IN THEIR REPORT APPEARING HEREIN.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation
Brands, Inc. (a Delaware corporation) and subsidiaries as of February 28, 2002
and February 28, 2001, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended February 28, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Constellation Brands, Inc. and
subsidiaries as of February 28, 2002 and February 28, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended February 28, 2002 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Rochester, New York
April 9, 2002
44
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
February 28, February 28,
2003 2002
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 13,810 $ 8,961
Accounts receivable, net 399,095 383,922
Inventories, net 819,912 777,586
Prepaid expenses and other 97,284 60,779
------------ ------------
Total current assets 1,330,101 1,231,248
PROPERTY, PLANT AND EQUIPMENT, net 602,469 578,764
GOODWILL 722,223 668,083
INTANGIBLE ASSETS, net 382,428 425,987
OTHER ASSETS 159,109 165,303
------------ ------------
Total assets $ 3,196,330 $ 3,069,385
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 2,623 $ 54,775
Current maturities of long-term debt 71,264 81,609
Accounts payable 171,073 153,433
Accrued excise taxes 36,421 60,238
Other accrued expenses and liabilities 303,827 245,155
------------ ------------
Total current liabilities 585,208 595,210
------------ ------------
LONG-TERM DEBT, less current maturities 1,191,631 1,293,183
------------ ------------
DEFERRED INCOME TAXES 145,239 163,146
------------ ------------
OTHER LIABILITIES 99,268 62,110
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 14)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, none at February 28, 2003,
and February 28, 2002 - -
Class A Common Stock, $.01 par value-
Authorized, 275,000,000 shares;
Issued, 81,435,135 shares at
February 28, 2003, and 79,309,174 shares
at February 28, 2002 814 793
Class B Convertible Common Stock,
$.01 par value-
Authorized, 30,000,000 shares;
Issued, 14,578,490 shares at
February 28, 2003, and 14,608,390 shares
at February 28, 2002 146 146
Additional paid-in capital 469,724 431,216
Retained earnings 795,525 592,219
Accumulated other comprehensive loss (59,257) (35,222)
------------ ------------
1,206,952 989,152
------------ ------------
Less - Treasury stock-
Class A Common Stock, 2,749,384 shares at
February 28, 2003, and 2,895,526 shares at
February 28, 2002, at cost (29,610) (31,159)
Class B Convertible Common Stock, 2,502,900 shares
at February 28, 2003, and February 28, 2002, at cost (2,207) (2,207)
------------ ------------
(31,817) (33,366)
------------ ------------
Less - Unearned compensation - restricted stock awards (151) (50)
------------ ------------
Total stockholders' equity 1,174,984 955,736
------------ ------------
Total liabilities and stockholders' equity $ 3,196,330 $ 3,069,385
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
45
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
----------------------------------------------
February 28, February 28, February 28,
2003 2002 2001
-------------- -------------- --------------
GROSS SALES $ 3,583,082 $ 3,420,213 $ 2,983,629
Less - Excise taxes (851,470) (813,455) (757,609)
-------------- -------------- --------------
Net sales 2,731,612 2,606,758 2,226,020
COST OF PRODUCT SOLD (1,970,897) (1,911,598) (1,647,081)
-------------- -------------- --------------
Gross profit 760,715 695,160 578,939
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (350,993) (352,679) (308,071)
RESTRUCTURING CHARGES (4,764) - -
-------------- -------------- --------------
Operating income 404,958 342,481 270,868
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS 23,129 - -
EQUITY IN EARNINGS OF JOINT VENTURE 12,236 1,667 -
INTEREST EXPENSE, net (105,387) (114,189) (108,631)
-------------- -------------- --------------
Income before income taxes 334,936 229,959 162,237
PROVISION FOR INCOME TAXES (131,630) (91,984) (64,895)
-------------- -------------- --------------
Income before extraordinary item 203,306 137,975 97,342
EXTRAORDINARY ITEM, net of income taxes - (1,554) -
-------------- -------------- --------------
NET INCOME $ 203,306 $ 136,421 $ 97,342
============== ============== ==============
SHARE DATA:
Earnings per common share:
Basic:
Income before extraordinary item $ 2.26 $ 1.62 $ 1.33
Extraordinary item, net of income taxes - (0.02) -
-------------- -------------- --------------
Earnings per common share - basic $ 2.26 $ 1.60 $ 1.33
============== ============== ==============
Diluted:
Income before extraordinary item $ 2.19 $ 1.57 $ 1.30
Extraordinary item, net of income taxes - (0.02) -
-------------- -------------- --------------
Earnings per common share - diluted $ 2.19 $ 1.55 $ 1.30
============== ============== ==============
Weighted average common shares outstanding:
Basic 89,856 85,505 73,446
Diluted 92,746 87,825 74,751
SUPPLEMENTAL DATA RESTATED FOR
EFFECT OF SFAS NO. 142:
Adjusted operating income $ 404,958 $ 369,780 $ 290,372
============== ============== ==============
Adjusted income before extraordinary item $ 203,306 $ 156,921 $ 111,635
============== ============== ==============
Adjusted net income $ 203,306 $ 155,367 $ 111,635
============== ============== ==============
Adjusted earnings per common share:
Basic:
Income before extraordinary item $ 2.26 $ 1.84 $ 1.52
============== ============== ==============
Earnings per common share - basic $ 2.26 $ 1.82 $ 1.52
============== ============== ==============
Diluted:
Income before extraordinary item $ 2.19 $ 1.79 $ 1.49
============== ============== ==============
Earnings per common share - diluted $ 2.19 $ 1.77 $ 1.49
============== ============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
46
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 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,
net of tax (9,218)
----------
Comprehensive income 127,203
Conversion of 196,798 Class B
Convertible Common shares to
Class A Common shares 2 (2) - - - - - -
Exercise of 4,234,440 Class A
stock options 42 - 45,602 - - - - 45,644
Employee stock purchases of 120,674
treasury shares - - 639 - - 1,347 - 1,986
Amortization of unearned restricted
stock compensation - - - - - - 101 101
Issuance of 9,385,000 treasury
shares, net of fees - - 104,714 - - 46,765 - 151,479
Tax benefit on Class A
stock options exercised - - 12,836 - - - - 12,836
Tax benefit on disposition of
employee stock purchases - - 65 - - - - 65
Other - - 154 - - - - 154
------- ------- ---------- --------- ------------- --------- ------------ ----------
BALANCE, February 28, 2002 793 146 431,216 592,219 (35,222) (33,366) (50) 955,736
Comprehensive income:
Net income for Fiscal 2003 - - - 203,306 - - - 203,306
Other comprehensive (loss) income,
net of tax:
Foreign currency translation
adjustments - - - - 18,521 - - 18,521
Reclassification adjustments
for net derivative gains,
net of tax effect of $13 - - - - (21) - - (21)
Minimum pension liability
adjustment, net of tax
effect of $18,681 - - - - (42,535) - - (42,535)
----------
Other comprehensive loss,
net of tax (24,035)
----------
Comprehensive income 179,271
Conversion of 29,900 Class B
Convertible Common shares to
Class A Common shares - - - - - - - -
Exercise of 2,096,061 Class A
stock options 21 - 28,148 - - - - 28,169
Employee stock purchases of 139,062
treasury shares - - 1,410 - - 1,475 - 2,885
Issuance of 7,080 restricted
Class A Common shares - - 127 - - 74 (201) -
Amortization of unearned restricted
stock compensation - - - - - - 100 100
Tax benefit on Class A
stock options exercised - - 8,440 - - - - 8,440
Tax benefit on disposition of
employee stock purchases - - 74 - - - - 74
Other - - 309 - - - - 309
------- ------- ---------- --------- ------------- --------- ------------ ----------
BALANCE, February 28, 2003 $ 814 $ 146 $ 469,724 $ 795,525 $ (59,257) $ (31,817) $ (151) $1,174,984
======= ======= ========== ========= ============= ========= ============ ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
47
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
------------------------------------------
February 28, February 28, February 28,
2003 2002 2001
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 203,306 $ 136,421 $ 97,342
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation of property, plant and equipment 54,147 51,873 44,613
Deferred tax provision 21,050 3,675 6,677
Loss on sale of assets and restructuring charges 7,263 324 2,356
Amortization of goodwill and intangible assets 5,942 33,531 25,770
Stock-based compensation expense 100 101 280
Amortization of discount on long-term debt 60 516 503
Extraordinary item, net of income taxes - 1,554 -
Gain on change in fair value of derivative instrument (23,129) - -
Equity in earnings of joint venture (12,236) (1,667) -
Change in operating assets and liabilities, net of
effects from purchases of businesses:
Accounts receivable, net 6,164 (44,804) (27,375)
Inventories, net (40,676) (19,130) (57,126)
Prepaid expenses and other current assets (11,612) 566 (6,443)
Accounts payable 10,135 19,069 (11,354)
Accrued excise taxes (25,029) 4,502 26,519
Other accrued expenses and liabilities 42,882 30,996 4,333
Other assets and liabilities, net (2,314) (4,228) (2,320)
------------ ------------ ------------
Total adjustments 32,747 76,878 6,433
------------ ------------ ------------
Net cash provided by operating activities 236,053 213,299 103,775
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (71,575) (71,148) (68,217)
Payment of accrued earn-out amount (1,674) - -
Proceeds from sale of assets 1,288 35,815 2,009
Purchases of businesses, net of cash acquired - (472,832) (4,459)
Investment in joint venture - (77,282) -
------------ ------------ ------------
Net cash used in investing activities (71,961) (585,447) (70,667)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt (151,134) (260,982) (221,908)
Net (repayment of) proceeds from notes payable (51,921) 51,403 (23,615)
Payment of issuance costs of long-term debt (20) (4,537) (5,794)
Exercise of employee stock options 28,706 45,027 13,806
Proceeds from issuance of long-term debt 10,000 252,539 319,400
Proceeds from employee stock purchases 2,885 1,986 1,547
Proceeds from equity offerings, net of fees - 151,479 -
------------ ------------ ------------
Net cash (used in) provided by financing activities (161,484) 236,915 83,436
------------ ------------ ------------
Effect of exchange rate changes on cash and cash investments 2,241 (1,478) (5,180)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS 4,849 (136,711) 111,364
CASH AND CASH INVESTMENTS, beginning of year 8,961 145,672 34,308
------------ ------------ ------------
CASH AND CASH INVESTMENTS, end of year $ 13,810 $ 8,961 $ 145,672
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 103,161 $ 122,121 $ 105,644
============ ============ ============
Income taxes $ 67,187 $ 75,054 $ 54,427
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ - $ 617,487 $ 15,115
Liabilities assumed - (138,913) (10,656)
------------ ------------ ------------
Cash paid - 478,574 4,459
Less - cash acquired - (5,742) -
------------ ------------ ------------
Net cash paid for purchases of businesses $ - $ 472,832 $ 4,459
============ ============ ============
Property, plant and equipment contributed to joint venture $ - $ 30,020 $ -
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
48
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2003
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS -
Constellation Brands, Inc. and its subsidiaries (the "Company") operate
primarily in the beverage alcohol industry. The Company is a leading producer
and marketer of beverage alcohol brands, with a broad portfolio of wine, spirits
and imported beer. The Company is the largest single-source supplier of these
products in the United States ("U.S."), and both a major producer and
independent drinks wholesaler in the United Kingdom ("U.K."). In North America,
the Company distributes its products through wholesale distributors. In the
U.K., the Company distributes its products directly to off-premise accounts,
such as major retail chains, and to other wholesalers. Through the Company's
U.K. wholesale business, the Company distributes its branded products and those
of other major drinks companies to on-premise accounts: pubs, clubs, hotels and
restaurants.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements of the Company include the accounts
of Constellation Brands, Inc. and all of its subsidiaries. All intercompany
accounts and transactions have been eliminated.
MANAGEMENT'S USE OF ESTIMATES -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION -
Sales are recognized when title passes to the customer, which is generally
when the product is shipped. Amounts billed to customers for shipping and
handling are classified as gross sales. Gross sales reflect reductions
attributable to consideration given to customers in various customer incentive
programs, including pricing discounts on single transactions, volume discounts,
promotional and advertising allowances, coupons, and rebates.
FOREIGN CURRENCY TRANSLATION -
The "functional currency" for translating the accounts of the Company's
operations outside the U.S. is the local currency. The translation from the
applicable foreign currencies to U.S. dollars is performed for balance sheet
accounts using exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange rate during the
period. The resulting translation adjustments are recorded as a component of
accumulated other comprehensive income/loss ("AOCI"). Gains or losses resulting
from foreign currency 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, 2003, and February 28,
2002, are not significant.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The Company records an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
majority of the accounts receivable balance is
49
generated from sales to independent distributors with whom the Company has a
predetermined collection date arranged through electronic funds transfer. The
allowance for doubtful accounts was $13.8 million and $10.4 million as of
February 28, 2003, and February 28, 2002, respectively. In Fiscal 2003, the
allowance for doubtful accounts was increased by $6.1 million for provisions and
decreased by $2.7 million primarily for write-offs of uncollectible accounts.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments," the
Company calculates the fair value of financial instruments using quoted market
prices whenever available. When quoted market prices are not available, the
Company uses standard pricing models for various types of financial instruments
(such as forwards, options, swaps, etc.) which take into account the present
value of estimated future cash flows.
The carrying amount and estimated fair value of the Company's financial
instruments are summarized as follows:
February 28, 2003 February 28, 2002
------------------------- --------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(in thousands)
Assets:
- -------
Cash and cash investments $ 13,810 $ 13,810 $ 8,961 $ 8,961
Accounts receivable $ 399,095 $ 399,095 $ 383,922 $ 383,922
Currency forward contracts $ 35,132 $ 35,132 $ 6 $ 6
Liabilities:
- ------------
Notes payable to banks $ 2,623 $ 2,623 $ 54,775 $ 54,775
Accounts payable $ 171,073 $ 171,073 $ 153,433 $ 153,433
Long-term debt, including
current portion $ 1,262,895 $ 1,400,794 $ 1,374,792 $ 1,407,374
Currency forward contracts $ - $ - $ 105 $ 105
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH INVESTMENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: The
carrying amounts approximate fair value due to the short maturity of these
instruments.
NOTES PAYABLE TO BANKS: These instruments are variable interest rate
bearing notes for which the carrying value approximates the fair value.
LONG-TERM DEBT: The senior credit facility is subject to variable interest
rates which are frequently reset; accordingly, the carrying value of this debt
approximates its fair value. The fair value of the remaining long-term debt,
which is all fixed rate, is estimated by discounting cash flows using interest
rates currently available for debt with similar terms and maturities.
CURRENCY FORWARD CONTRACTS: The fair value of currency forward contracts is
estimated based on quoted market prices.
DERIVATIVE INSTRUMENTS -
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
50
measure those instruments at fair value. The cash flows from derivative
instruments accounted for as hedges are classified in the same category as the
items being hedged. 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 use of derivative instruments exposes the Company to credit risk.
However, the Company mitigates the credit risk associated with the
non-performance of counterparties by using major financial institutions with
high credit ratings.
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.
In the past, certain of these derivative contracts have been designated to hedge
the exposure to variable cash flows of a forecasted transaction and have been
classified as cash flow hedges. As such, the effective portion of the change in
the fair value of the derivatives has been recorded each period in the balance
sheet in AOCI, and has been 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. If the Company
determines that the hedging relationship no longer qualifies as an effective
cash flow hedge, then the derivative will continue to be carried on the balance
sheet at its fair value, with changes in fair value recorded in earnings. If
hedge accounting is discontinued because it is probable that a forecasted
transaction will not occur, then the derivative will continue to be recorded on
the balance sheet at its fair value, changes in the fair value will be recorded
in earnings, and any amounts previously recorded in AOCI will immediately be
recorded in earnings. As of February 28, 2003, the entire balance in AOCI
related to cash flow hedges has been reclassified to the statement of income.
The Company also uses 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, the
resulting gains or losses from changes in the fair value of these agreements
which are not significant, are recognized in earnings.
In connection with the Hardy Acquisition (as defined in Note 23), the
Company entered into a foreign currency collar contract in February 2003 to lock
in a range for the cost of the acquisition in U.S. dollars. As of February 28,
2003, this derivative instrument had a fair value of $23.1 million. Under SFAS
No. 133, a transaction that involves a business combination is not eligible for
hedge accounting treatment. As such, this derivative was recorded on the balance
sheet at its fair value with the change in the fair value recognized separately
on the Company's Consolidated Statements of Income.
The Company has exposure to foreign currency risk as a result of having
international subsidiaries, primarily in the U.K. The Company uses British pound
sterling borrowings to hedge a portion of its exposure to adverse changes in
foreign currency exchange rates related to its investments in these U.K.
subsidiaries. Such borrowings are designated as a hedge of the foreign currency
exposure of the net investment in these foreign operations. Accordingly, foreign
currency gain or loss on this instrument is reported in AOCI as part of the
foreign currency translation adjustments. For years ended February 28, 2003,
February 28, 2002, and February 28, 2001, net (losses) gains of ($29.5) million,
$5.4 million and $20.0 million, respectively, are included in foreign currency
translation adjustments within AOCI.
51
INVENTORIES -
Inventories are stated at the lower of cost (computed in accordance with
the first-in, first-out method) or market. Elements of cost include materials,
labor and overhead and are classified as follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Raw materials and supplies $ 26,472 $ 34,126
In-process inventories 534,073 524,373
Finished case goods 259,367 219,087
------------ ------------
$ 819,912 $ 777,586
============ ============
A substantial portion of barreled whiskey and brandy will not be sold
within one year because of the duration of the aging process. All barreled
whiskey and brandy are classified as in-process inventories and are included in
current assets, in accordance with industry practice. Bulk wine inventories are
also included as in-process inventories within current assets, in accordance
with the general practices of the wine industry, although a portion of such
inventories may be aged for periods greater than one year. Warehousing,
insurance, ad valorem taxes and other carrying charges applicable to barreled
whiskey and brandy held for aging are included in inventory costs.
The Company assesses the valuation of its inventories and reduces the
carrying value of those inventories that are obsolete or in excess of the
Company's forecasted usage to their estimated net realizable value. The Company
estimates the net realizable value of such inventories based on analyses and
assumptions including, but not limited to, historical usage, future demand and
market requirements. Reductions to the carrying value of inventories are
recorded in cost of goods sold. If the future demand for the Company's products
is less favorable than the Company's forecasts, then the value of the
inventories may be required to be reduced, which would result in additional
expense to the Company and affect its results of operations.
PROPERTY, PLANT AND EQUIPMENT -
Property, plant and equipment is stated at cost. Major additions and
betterments are charged to property accounts, while maintenance and repairs are
charged to operations as incurred. The cost of properties sold or otherwise
disposed of and the related accumulated depreciation are eliminated from the
accounts at the time of disposal and resulting gains and losses are included as
a component of operating income.
DEPRECIATION -
Depreciation is computed primarily using the straight-line method over the
following estimated useful lives:
Depreciable Life in Years
-------------------------
Land improvements 15
Vineyards 26
Buildings and improvements 10 to 33
Machinery and equipment 3 to 15
Motor vehicles 3 to 7
GOODWILL AND OTHER INTANGIBLE ASSETS -
Effective March 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed at least
annually for impairment. Additionally, in the year of adoption, a transitional
impairment test is also required. The Company uses
52
December 31 as its annual impairment test measurement date. Intangible assets
that are not deemed to have an indefinite life will continue to be amortized
over their useful lives and are also subject to review for impairment. Upon
adoption of SFAS No. 142, the Company determined that certain of its intangible
assets met the criteria to be considered indefinite lived and, accordingly,
ceased their amortization effective March 1, 2002. These intangible assets
consisted principally of trademarks. The Company's trademarks relate to well
established brands owned by the Company which were previously amortized over 40
years. Intangible assets determined to have a finite life, primarily
distribution agreements, continue to be amortized over their estimated useful
lives which did not require modification as a result of adopting SFAS No. 142.
Nonamortizable intangible assets are tested for impairment in accordance with
the provisions of SFAS No. 142 and amortizable intangible assets are tested for
impairment in accordance with the provisions of SFAS No. 144 (as defined below).
Note 5 provides a summary of intangible assets segregated between amortizable
and nonamortizable amounts.
The Company has completed its impairment testing for goodwill and
nonamortizable intangible assets pursuant to the requirements of SFAS No. 142.
No instances of impairment were noted as a result of these processes.
OTHER ASSETS -
Other assets, include an investment in joint venture which is carried under
the equity method of accounting (see Note 7) and deferred financing costs which
are stated at cost, net of accumulative amortization, and are amortized on an
effective interest basis over the term of the related debt.
LONG-LIVED ASSETS IMPAIRMENT -
Effective March 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business
(as previously defined in that Opinion). In accordance with SFAS No. 144, the
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized for
the amount by which the carrying amount of the asset exceeds its fair value.
Assets to be disposed of would be reported at the lower of the carrying amount
or fair value less costs to sell and are no longer depreciated.
Pursuant to this policy, during the fourth quarter of Fiscal 2003, the
Company's Popular and Premium Wine segment recorded an asset impairment charge
of $4.8 million in connection with two of its production facilities. One of the
facilities, which is to be held and used for a short period prior to its planned
closing in fiscal 2004, has been written down to its appraised value and
comprised most of the impairment charge. The other facility, which is held for
sale in fiscal 2004, was written down to a value based on the Company's estimate
of salvage value. This impairment charge is included in restructuring charges on
the Company's Consolidated Statements of Income since it is part of a
realignment of its business operations that is expected to be completed in
fiscal 2004. The impaired assets consist primarily of buildings, machinery and
equipment located at the two production facilities. The charge resulted from the
determination that the assets' undiscounted future cash flows were less than
their carrying values. The Company recorded an asset impairment charge of $1.4
million in Fiscal 2002 in connection with the
53
sale of the Stevens Point Brewery in March 2002. This charge has been included
in selling, general and administrative expenses. The Company did not record any
asset impairment charge in Fiscal 2001.
ADVERTISING COSTS -
The Company expenses advertising costs as incurred, shown or distributed.
Prepaid advertising costs at February 28, 2003, and February 28, 2002, were not
material. Advertising expense for the years ended February 28, 2003, February
28, 2002, and February 28, 2001, was $89.6 million, $87.0 million and $85.9
million, respectively.
INCOME TAXES -
The Company uses the asset and liability method of accounting for income
taxes. This method accounts for deferred income taxes by applying statutory
rates in effect at the balance sheet date to the difference between the
financial reporting and tax bases of assets and liabilities.
ENVIRONMENTAL -
Environmental expenditures that relate to current operations or to an
existing condition caused by past operations, and which do not contribute to
current or future revenue generation, are expensed. Liabilities for environment
risks or components thereof are recorded when environmental assessments and/or
remedial efforts are probable, and the cost can be reasonably estimated.
Generally, the timing of these accruals coincides with the completion of a
feasibility study or the Company's commitment to a formal plan of action.
Liabilities for environmental costs were not material at February 28, 2003, and
February 28, 2002.
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.
STOCK-BASED EMPLOYEE COMPENSATION PLANS -
As of February 28, 2003, the Company has four stock-based employee
compensation plans, which are described more fully in Note 15. The Company
applies the intrinsic value method described in Accounting Principles Board
Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations in accounting for these plans. In accordance with APB
No. 25, the compensation cost for stock options is recognized in income based on
the excess, if any, of the quoted market price of the stock at the grant date of
the award or other measurement date over the amount an employee must pay to
acquire the stock. The Company utilizes the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," as amended. Options granted under the
Company's plans have an exercise price equal to the market value of the
underlying common stock on the date of grant; therefore, no incremental
compensation expense has been recognized for grants made to employees under the
Company's stock option plans. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
54
For the Years Ended February 28,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
Net income, as reported $ 203,306 $ 136,421 $ 97,342
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (13,447) (25,456) (12,913)
---------- ---------- ----------
Pro forma net income $ 189,859 $ 110,965 $ 84,429
========== ========== ==========
Earnings per common share:
Basic-as reported $ 2.26 $ 1.60 $ 1.33
Basic-pro forma $ 2.11 $ 1.30 $ 1.15
Diluted-as reported $ 2.19 $ 1.55 $ 1.30
Diluted-pro forma $ 2.03 $ 1.25 $ 1.13
Pro forma net income for the years ended February 28, 2002, and February
28, 2001, has been adjusted from the amounts previously reported to properly
reflect the increased expense, net of income tax benefits, primarily
attributable to the accelerated vesting of certain options during those years.
The accelerated vesting was attributable to the attainment of preexisting
performance rights set forth in the stock option grants. The impact of the
accelerated vesting was not reflected in the Fiscal 2002 and Fiscal 2001 amounts
originally reported. The pro forma net income amounts reflected above for Fiscal
2002 and Fiscal 2001 have been reduced by $12.9 million and $2.4 million,
respectively, for this matter. Basic pro forma earnings per common share have
been reduced by $0.15 and $0.03 in Fiscal 2002 and Fiscal 2001, respectively.
Diluted pro forma earnings per common share have been reduced by $0.16 and $0.03
for these periods.
OTHER -
Certain February 28, 2002, balances have been reclassified to conform to
current year presentation.
2. ACCOUNTING CHANGES:
Effective March 1, 2002, the Company completed its adoption of Statement of
Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business
Combinations," resulting in a reclassification of $46.8 million of previously
identified separable intangible assets to goodwill and an elimination of $16.6
million of deferred tax liabilities previously associated with those intangible
assets with a corresponding deduction from goodwill. The reclassified assets,
from a 1993 acquisition, relate to non-specific customer relationships that were
neither contractual nor separable. The adoption of SFAS No. 141 did not have any
other material impact on the Company's financial statements.
As discussed in Note 1, effective March 1, 2002, the Company adopted SFAS
No. 142. The following table presents earnings and earnings per share
information for the comparative periods as if SFAS No. 141 and the
nonamortization provisions of SFAS No. 142 had been applied beginning March 1,
2000:
55
For the Years Ended February 28,
------------------------------------
2003 2002 2001
---------- ---------- ----------
(in thousands, except per share data)
Reported net income $ 203,306 $ 136,421 $ 97,342
Add back: amortization of goodwill - 16,114 11,282
Add back: amortization of intangibles
reclassified to goodwill - 2,147 2,174
Add back: amortization of indefinite
lived intangible assets - 9,038 6,048
Less: income tax effect - (8,353) (5,211)
---------- ---------- ----------
Adjusted net income $ 203,306 $ 155,367 $ 111,635
========== ========== ==========
BASIC EARNINGS PER COMMON SHARE:
Reported net income $ 2.26 $ 1.60 $ 1.33
Add back: amortization of goodwill - 0.19 0.15
Add back: amortization of intangibles
reclassified to goodwill - 0.02 0.03
Add back: amortization of indefinite
lived intangible assets - 0.11 0.08
Less: income tax effect - (0.10) (0.07)
---------- ---------- ----------
Adjusted net income $ 2.26 $ 1.82 $ 1.52
========== ========== ==========
DILUTED EARNINGS PER COMMON SHARE:
Reported net income $ 2.19 $ 1.55 $ 1.30
Add back: amortization of goodwill - 0.18 0.15
Add back: amortization of intangibles
reclassified to goodwill - 0.03 0.03
Add back: amortization of indefinite
lived intangible assets - 0.10 0.08
Less: income tax effect - (0.09) (0.07)
---------- ---------- ----------
Adjusted net income $ 2.19 $ 1.77 $ 1.49
========== ========== ==========
The changes in the carrying amount of goodwill for the year ended February
28, 2003, are as follows:
Popular
and Imported U.K.
Premium Beer and Brands and Fine
Wine Spirits Wholesale Wine Consolidated
----------- ----------- ----------- ----------- -----------
(in thousands)
Balance, February 28, 2002 $ 226,798 $ 105,680 $ 143,321 $ 192,284 $ 668,083
Impact of Adopting SFAS No. 141:
Intangible assets reclassified to
goodwill at March 1, 2002 - 40,030 6,765 - 46,795
Elimination of deferred tax
liabilities - (14,611) (2,030) - (16,641)
Purchase accounting allocations 4,155 - - 145 4,300
Foreign currency translation
adjustments - 860 16,191 - 17,051
Purchase price earn-out 2,635 - - - 2,635
----------- ----------- ----------- ----------- -----------
Balance, February 28, 2003 $ 233,588 $ 131,959 $ 164,247 $ 192,429 $ 722,223
=========== =========== =========== =========== ===========
Also, effective March 1, 2002, the Company adopted 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)," which codified
various issues related to certain promotional payments under EITF Issue No.
00-14, "Accounting for Certain Sales Incentives," EITF Issue No. 00-22,
"Accounting for 'Points' and
56
Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for
Free Products or Services to Be Delivered in the Future," and EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products." EITF No. 01-09 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 previously reported such costs as
selling, general and administrative expenses. As a result of adopting EITF No.
01-09, the Company has restated net sales, cost of product sold, and selling,
general and administrative expenses for the years ended February 28, 2002, and
February 28, 2001. Net sales were reduced by $213.8 million and $170.7 million,
respectively; cost of product sold was increased by $10.1 million and $7.8
million, respectively; and selling, general and administrative expenses
were reduced by $223.9 million and $178.5 million, respectively. This
reclassification did not affect operating income or net income.
The Company adopted EITF Issue No. 02-16 ("EITF No. 02-16"), "Accounting by
a Customer (Including a Reseller) for Certain Consideration Received from a
Vendor" for new arrangements, including modifications of existing arrangements,
entered into after November 21, 2002, or December 31, 2002, as appropriate. EITF
No. 02-16 addresses how a vendor should characterize consideration given to a
customer, including a reseller, and, to a limited extent, when to recognize that
consideration in the income statement. The adoption of EITF No. 02-16 did not
have a material impact on the Company's financial statements.
Effective January 1, 2003, the Company adopted Statement of Financial
Accounting Standards No. 146 ("SFAS No. 146"), "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." The adoption of SFAS No. 146 did not have
a material impact on the Company's financial statements.
Effective January 1, 2003, the Company adopted Financial Accounting
Standards Board ("FASB") Interpretation No. 45 ("FIN No. 45"), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others -- an Interpretation of FASB Statements No.
5, 57, and 107 and Rescission of FASB Interpretation No. 34." FIN No. 45
addresses the disclosures to be made by a guarantor in its interim and annual
financial statements about its obligations under guarantees. FIN No. 45 also
clarifies the requirements related to the recognition of a liability by a
guarantor at the inception of a guarantee for the obligations the guarantor has
undertaken in issuing that guarantee. Lastly, FIN No. 45 supersedes FASB
Interpretation No. 34, "Disclosure of Indirect Guarantees of Indebtedness of
Others (An Interpretation of FASB Statement No. 5)." The initial recognition and
initial measurement provisions of FIN No. 45 have been applied on a prospective
basis to guarantees issued or modified after December 31, 2002 and have not had
a material impact on the Company's financial statements. Additionally, the
Company has adopted the disclosure requirements of FIN No. 45 for the fiscal
year ended February 28, 2003 (see Note 14).
3. ACQUISITIONS:
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 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 no longer being amortized, but
is tested for impairment at least annually in accordance
57
with the provisions of SFAS No. 142. 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 purchase price of the
Turner Road Vintners Assets, including direct acquisition costs, was $279.4
million. In addition, the Company assumed indebtedness of $9.4 million. The
acquisition was financed by the proceeds from the sale of the February 2001
Senior Notes (as defined in Note 9) and revolving loan borrowings under the
senior credit facility. The Turner Road Vintners Assets acquisition was
accounted for using the purchase method; accordingly, the acquired net assets
were recorded at fair value at the date of acquisition. The excess of the
purchase price over the fair value of the net assets acquired (goodwill), $146.2
million, is no longer being amortized, but is tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. The results of
operations of the Turner Road Vintners Assets are reported in the 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 purchase price of the Corus Assets, including
direct acquisition costs, was $48.9 million plus an earn-out over six years
based on the performance of the brands. In addition, the Company assumed
indebtedness of $3.0 million. As of February 28, 2003, the Company has paid an
earn-out in the amount of $1.7 million. In connection with the transaction, the
Company also entered into long-term grape supply agreements with affiliates of
Corus Brands, Inc. covering more than 1,000 acres of Washington and Idaho
vineyards. The acquisition was financed with revolving loan borrowings under the
senior credit facility. The Corus Assets acquisition was accounted for using the
purchase method; accordingly, the acquired net assets were recorded at fair
value at the date of acquisition. The excess of the purchase price over the fair
value of the net assets acquired (goodwill), $48.5 million, is no longer being
amortized, but is tested for impairment at least annually in accordance with the
provisions of SFAS No. 142. The results of operations of the Corus Assets are
reported in the 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. (the "Ravenswood Acquisition"). The Ravenswood
business produces, markets and sells super-premium and ultra-premium California
wine, primarily under the Ravenswood brand name. The purchase price of the
Ravenswood Acquisition, including direct acquisition costs, was $149.7 million.
In addition, the Company assumed indebtedness of $2.8 million. The purchase
price was financed with revolving loan borrowings under the senior credit
facility. The Ravenswood Acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair value at the
date of acquisition. The excess of the purchase price over the fair value of the
net assets acquired (goodwill), $99.8 million, is not amortizable and is tested
for impairment at least annually in accordance with the provisions of SFAS No.
142. The Ravenswood Acquisition was consistent with the Company's strategy of
further penetrating the higher gross profit margin super-premium and
ultra-premium wine categories. The results of operations of the Ravenswood
business are reported in the Fine Wine segment and have been included in the
Consolidated Statements of Income since the date of acquisition.
58
The following table summarizes the fair values of the assets acquired and
liabilities assumed in the Ravenswood Acquisition at July 2, 2001, as adjusted
for the final appraisal:
Current assets $ 34,396
Property, plant and equipment 14,994
Goodwill 99,756
Trademarks 45,600
Other assets 26
---------
Total assets acquired 194,772
Current liabilities 12,523
Long-term liabilities 32,593
---------
Total liabilities assumed 45,116
---------
Net assets acquired $ 149,656
=========
The trademarks are not subject to amortization. None of the goodwill is
expected to be deductible for tax purposes.
The following table sets forth the unaudited pro forma results of
operations of the Company for the years ended February 28, 2002, and February
28, 2001, respectively. The unaudited pro forma results of operations give
effect to the acquisitions of the Turner Road Vintners Assets, the Corus Assets
and the Ravenswood Acquisition as if they occurred on March 1, 2000. 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 are based upon certain assumptions that the Company
believes are reasonable under the circumstances. The unaudited pro forma results
of operations for the year ended February 28, 2002, do not reflect total
nonrecurring charges of $12.6 million ($0.10 per share on a diluted basis)
related to transaction costs, primarily for the acceleration of vesting of stock
options, which were incurred by Ravenswood Winery, Inc. prior to the
acquisition. The unaudited pro forma results of operations do not purport to
present what the Company's results of operations would actually have been if the
aforementioned transactions had in fact occurred on March 1, 2000, nor do they
project the Company's financial position or results of operations at any future
date or for any future period.
59
For the Years Ended
February 28,
-------------------------
2002 2001
----------- -----------
(in thousands, except per share data)
Net sales $ 2,622,117 $ 2,485,112
Income before extraordinary item $ 136,971 $ 80,710
Extraordinary item, net of income taxes $ (1,554) $ -
Net income $ 135,417 $ 80,710
Earnings per common share:
Basic:
Income before extraordinary item $ 1.60 $ 1.10
Extraordinary item, net of income taxes (0.02) -
----------- -----------
Earnings per common share - basic $ 1.58 $ 1.10
=========== ===========
Diluted:
Income before extraordinary item $ 1.56 $ 1.08
Extraordinary item, net of income taxes (0.02) -
----------- -----------
Earnings per common share - diluted $ 1.54 $ 1.08
=========== ===========
Weighted average common shares outstanding:
Basic 85,505 73,446
Diluted 87,825 74,751
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, had
acquired all of Hardy's outstanding capital stock (the "Hardy Acquisition"). See
Note 23 for discussion.
4. PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Land and land improvements $ 84,758 $ 92,193
Vineyards 37,394 32,828
Buildings and improvements 173,943 153,643
Machinery and equipment 551,271 486,881
Motor vehicles 5,468 7,046
Construction in progress 32,839 38,071
------------ ------------
885,673 810,662
Less - Accumulated depreciation (283,204) (231,898)
------------ ------------
$ 602,469 $ 578,764
============ ============
60
5. INTANGIBLE ASSETS:
The major components of intangible assets are:
February 28, 2003 February 28, 2002
---------------------- ----------------------
Gross Net Gross Net
Carrying Carrying Carrying Carrying
Amount Amount Amount Amount
---------- ---------- ---------- ----------
(in thousands)
Amortizable intangible assets:
Distribution agreements $ 10,158 $ 4,434 $ 10,158 $ 5,960
Other 3,978 345 4,049 1,067
---------- ---------- ---------- ----------
Total $ 14,136 4,779 $ 14,207 7,027
========== ==========
Nonamortizable intangible assets:
Trademarks 357,166 351,707
Distributor and agency
relationships 20,458 60,488
Other 25 6,765
---------- ----------
Total 377,649 418,960
---------- ----------
Total intangible assets $ 382,428 $ 425,987
========== ==========
The difference between the gross carrying amount and net carrying amount
for each item presented is attributable to accumulated amortization.
Amortization expense for intangible assets was $2.2 million, $13.4 million and
$10.4 million for the years ended February 28, 2003, February 28, 2002 and
February 28, 2001, respectively. Estimated amortization expense for each of the
five succeeding fiscal years is as follows:
(in thousands)
2004 $ 1,625
2005 $ 1,427
2006 $ 1,362
2007 $ 365
2008 $ -
6. OTHER ASSETS:
The major components of other assets are as follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Investment in joint venture $ 123,064 $ 110,520
Deferred financing costs 28,555 27,104
Other 18,418 9,674
Prepaid pension benefits - 25,394
------------ ------------
170,037 172,692
Less - Accumulated amortization (10,928) (7,389)
------------ ------------
$ 159,109 $ 165,303
============ ============
Amortization expense for other assets was included in selling, general and
administrative expenses and was $3.7 million, $4.0 million and $4.1 million for
the years ended February 28, 2003, February 28, 2002, and February 28, 2001,
respectively.
61
7. INVESTMENT IN JOINT VENTURE:
On July 31, 2001, the Company and Hardy (as defined in Note 23) completed
the formation of Pacific Wine Partners LLC ("PWP"), a joint venture owned
equally by the Company and Hardy. 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 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, 2003, amounts related to the above agreements were not material.
On October 16, 2001, 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 purchase price of the Blackstone
Assets was $138.0 million and was financed equally by the Company and Hardy. The
Company used revolving loan borrowings under its senior credit facility to fund
the Company's portion of the transaction.
As of February 28, 2003, the Company's investment balance, which is
accounted for under the equity method, was $123.1 million. The carrying amount
of the investment is less than the Company's equity in the underlying net assets
of PWP by $3.9 million. This amount is included in earnings as the assets are
used by PWP. Subsequent to February 28, 2003, the Company acquired Hardy (see
Note 23). Consequently, PWP will become a wholly-owned subsidiary of the Company
and its results of operations will be included in the Consolidated Statements of
Income beginning March 26, 2003.
8. OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Advertising and promotions $ 63,155 $ 46,664
Income taxes payable 58,347 22,120
Salaries and commissions 35,769 33,481
Interest 22,019 21,503
Adverse grape contracts 10,244 22,447
Other 114,293 98,940
------------ ------------
$ 303,827 $ 245,155
============ ============
62
9. BORROWINGS:
Borrowings consist of the following:
February 28,
February 28, 2003 2002
--------------------------------------- ------------
Current Long-term Total Total
--------- ----------- ----------- ------------
(in thousands)
Notes Payable to Banks:
- ----------------------
Senior Credit Facility -
Revolving Credit Loans $ 2,000 $ - $ 2,000 $ 50,000
Other 623 - 623 4,775
--------- ----------- ----------- ------------
$ 2,623 $ - $ 2,623 $ 54,775
========= =========== =========== ============
Long-term Debt:
- --------------
Senior Credit Facility - Term Loans $ 67,082 $ 78,281 $ 145,363 $ 281,292
Senior Notes - 643,229 643,229 619,205
Senior Subordinated Notes - 450,000 450,000 450,000
Other Long-term Debt 4,182 20,121 24,303 24,295
--------- ----------- ----------- -----------
$ 71,264 $ 1,191,631 $ 1,262,895 $ 1,374,792
========= =========== =========== ===========
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. Subsequent to
February 28, 2003, the Company entered into a new senior credit facility (see
Note 23).
The 2000 Credit Agreement provides for a $380.0 million Tranche I Term Loan
facility, a $320.0 million Tranche II Term Loan facility available for borrowing
in British pound sterling, and a $300.0 million Revolving Credit facility
(including letters of credit up to a maximum of $20.0 million). 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 $75.0
million 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 15) to prepay $6.0 million of the $380.0 million
Tranche I Term Loan facility. During Fiscal 2003, the Company used proceeds from
operating activities to prepay $24.0 of the $380.0 million Tranche I Term Loan
facility. On November 17, 1999, proceeds from the Sterling Senior Notes (as
defined below) were used to prepay 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
prepay an additional portion of the $320.0 million Tranche II Term Loan facility
((pound) 78.8 million, or $118.2 million). During Fiscal 2003, the Company used
proceeds from operating activities to prepay an additional portion of the $320.0
million Tranche II Term Loan facility ((pound) 29.0 million, or $45.6 million).
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
63
Credit loans and 1.00% and 1.75% for Term Loans. As of February 28, 2003, the
margin was 1.00% for Revolving Credit loans and 1.50% 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, 2003. 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 has as collateral (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.
As of February 28, 2003, under the 2000 Credit Agreement, the Company had
outstanding term loans of $145.4 million bearing a weighted average interest
rate of 3.1% and $2.0 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 $15.1 million and
$13.2 million, were $282.9 million and $236.8 million at February 28, 2003, and
February 28, 2002, respectively. The Company had average outstanding Revolving
Credit Loans of $11.3 million, $84.4 million, and $47.6 million for the years
ended February 28, 2003, February 28, 2002, and February 28, 2001, respectively.
The average interest rate on the Revolving Credit Loans was 3.2%, 4.8%, and 7.8%
for Fiscal 2003, Fiscal 2002, and Fiscal 2001, respectively.
SENIOR NOTES -
On August 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 5/8% Senior Notes due August 2006 (the "August 1999 Senior Notes").
Interest on the August 1999 Senior Notes is payable semiannually on February 1
and August 1. 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"). Interest on the Sterling Senior
Notes is payable semiannually on May 15 and November 15. 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, 2003, the Company had
outstanding (pound) 1.0 million ($1.6 million) aggregate principal amount of
Sterling Series B Senior Notes.
64
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 then existing
senior credit facility. Interest on the Sterling Series C Senior Notes is
payable semiannually on May 15 and November 15. 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, 2003, the Company had outstanding (pound) 154.0
million ($241.7 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. 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 March 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated
Notes"). Interest on the Senior Subordinated Notes is payable semiannually on
March 1 and September 1. The Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after March 1,
2004. 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 primarily to repay the Company's $195.0 million aggregate principal
amount of 8 3/4% Senior Subordinated Notes due in December 2003. In connection
with this repayment, the Company incurred an extraordinary loss of $2.6 million
($1.6 million, net of income taxes of $1.0 million) related to the write-off of
the remaining deferred financing costs and unamortized discount. The remaining
net proceeds of the offering were used to repay a portion of the outstanding
indebtedness under the Company's then existing senior credit facility. Interest
on the January 2002 Senior Subordinated Notes is payable semiannually on January
15 and July 15. The January 2002 Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after January 15,
2007. The Company may also redeem up to 35% of the January 2002 Senior
Subordinated Notes using the proceeds of certain equity offerings completed
before January 15, 2005. The January 2002 Senior Subordinated Notes are
unsecured and subordinated to the prior payment in full of all senior
indebtedness of the Company, which includes the senior credit facility.
The January 2002
65
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 -
Prior to the payoff of the 2000 Credit Agreement as described in Note 23,
principal payments required under long-term debt obligations (excluding
unamortized discount) during the next five fiscal years and thereafter are as
follows:
(in thousands)
2004 $ 71,264
2005 82,777
2006 4,174
2007 203,918
2008 203,947
Thereafter 697,309
-----------
$ 1,263,389
===========
10. INCOME TAXES:
Income before income taxes was generated as follows:
For the Years Ended February 28,
----------------------------------
2003 2002 2001
---------- ---------- ----------
(in thousands)
Domestic $ 294,557 $ 202,190 $ 127,608
Foreign 40,379 27,769 34,629
---------- ---------- ----------
$ 334,936 $ 229,959 $ 162,237
========== ========== ==========
66
The income tax provision consisted of the following:
For the Years Ended February 28,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Current:
Federal $ 79,472 $ 64,823 $ 39,082
State 13,807 10,930 7,934
Foreign 17,301 12,556 11,202
------------ ------------ ------------
Total current 110,580 88,309 58,218
------------ ------------ ------------
Deferred:
Federal 16,290 (492) (2,017)
State 2,502 (251) 402
Foreign 2,258 4,418 8,292
------------ ------------ ------------
Total deferred 21,050 3,675 6,677
------------ ------------ ------------
Income tax provision $ 131,630 $ 91,984 $ 64,895
============ ============ ============
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.
Significant components of deferred tax (liabilities) assets consist of the
following:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Property, plant and equipment $ (161,062) $ (174,485)
Derivative instruments (9,081) -
Inventories (2,105) (2,232)
Insurance accruals 6,061 5,415
Restructuring accruals 1,198 1,004
Effect of fiscal 1999 change in
accounting method - (1,699)
Other accruals 27,018 18,974
------------ ------------
$ (137,971) $ (153,023)
============ ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some or all of the deferred tax assets
will not be realized. Management considers the reversal of deferred tax
liabilities and projected future taxable income in making this assessment. Based
upon this assessment, management believes it is more likely than not that the
Company will realize the benefits of these deductible differences.
67
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,
-------------------------------------------------------------------------
2003 2002 2001
----------------------- ---------------------- -----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Income tax provision at statutory rate $ 117,228 35.0 $ 80,486 35.0 $ 56,783 35.0
State and local income taxes, net of
federal income tax benefit 10,601 3.2 6,942 3.0 5,022 3.1
Earnings of subsidiaries taxed at
other than U.S. statutory rate 1,838 0.5 1,105 0.5 616 0.4
Miscellaneous items, net 1,963 0.6 3,451 1.5 2,474 1.5
--------- ---------- ---------- ---------- ---------- ----------
$ 131,630 39.3 $ 91,984 40.0 $ 64,895 40.0
========= ========== ========== ========== ========== ==========
11. OTHER LIABILITIES:
The major components of other liabilities are as follows:
February 28, February 28,
2003 2002
------------- -------------
(in thousands)
Accrued pension liability $ 36,351 $ 1,605
Adverse grape contracts (Note 14) 22,550 30,119
Other 40,367 30,386
------------- -------------
$ 99,268 $ 62,110
============= =============
12. 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 $10.9 million, $10.5
million, and $8.2 million for the years ended February 28, 2003, February 28,
2002, and February 28, 2001, respectively.
The Company has defined benefit pension plans which cover substantially all
of its U.K. and Canadian employees. Net periodic benefit (income) cost reported
in the Consolidated Statements of Income for these plans includes the following
components:
68
For the Years Ended February 28,
--------------------------------
2003 2002 2001
-------- -------- --------
(in thousands)
Service cost $ 4,245 $ 4,298 $ 4,380
Interest cost 12,055 11,549 11,254
Expected return on plan assets (14,639) (15,867) (16,164)
Amortization of prior service cost 8 8 -
Recognized net actuarial gain 843 (33) (95)
-------- -------- --------
Net periodic benefit cost (income) $ 2,512 $ (45) $ (625)
======== ======== ========
The following table summarizes the funded status of the Company's defined
benefit pension plans and the related amounts included in the Consolidated
Balance Sheets:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 186,722 $ 193,516
Service cost 4,245 4,298
Interest cost 12,055 11,549
Plan participants' contributions 1,638 1,420
Plan amendment - 39
Actuarial loss (gain) 3,423 (12,785)
Benefits paid (7,706) (7,274)
Foreign currency exchange rate changes 20,309 (4,041)
------------ ------------
Benefit obligation as of last day of February $ 220,686 $ 186,722
============ ============
Change in plan assets:
Fair value of plan assets as of March 1 $ 181,815 $ 207,711
Actual return on plan assets (19,794) (16,555)
Plan participants' contributions 1,638 1,420
Employer contribution 979 554
Benefits paid (7,706) (7,274)
Foreign currency exchange rate changes 18,887 (4,041)
------------ ------------
Fair value of plan assets as of last day of February $ 175,819 $ 181,815
============ ============
Funded status of the plan as of last day of February:
Funded status $ (44,867) $ (4,907)
Unrecognized prior service cost 24 30
Unrecognized actuarial loss 69,732 28,666
------------ ------------
Net amount recognized $ 24,889 $ 23,789
============ ============
Amounts recognized in the Consolidated Balance Sheets
consist of:
Prepaid benefit cost $ - $ 25,394
Accrued benefit liability (36,351) (1,605)
Intangible asset 24 -
Deferred tax asset 18,681 -
Accumulated other comprehensive loss 42,535 -
------------ ------------
Net amount recognized $ 24,889 $ 23,789
============ ============
69
As of February 28, 2003, the aggregate accumulated benefit obligation was
$212.2 million. The following table sets forth the principal assumptions used in
developing the benefit obligation and the net periodic pension expense:
February 28, 2003 February 28, 2002
----------------- -----------------
Rate of return on plan assets 7.50% - 8.00% 7.75% - 8.00%
Discount rate 5.75% - 6.40% 6.00% - 7.00%
Rate of compensation increase 0.00% - 3.50% 0.00% - 3.75%
13. POSTRETIREMENT BENEFITS:
The Company currently sponsors multiple unfunded postretirement benefit
plans for certain of its Imported Beer and Spirits segment employees.
The status of the plans is as follows:
February 28, February 28,
2003 2002
------------ ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 4,676 $ 4,185
Service cost 135 155
Interest cost 260 305
Benefits paid (145) (193)
Plan amendment - 184
Actuarial loss (gain) (566) 87
Foreign currency exchange rate changes 111 (47)
------------ ------------
Benefit obligation as of the last day of February $ 4,471 $ 4,676
============ ============
Funded status as of the last day of February:
Funded status $ (4,471) $ (4,676)
Unrecognized prior service cost 323 352
Unrecognized net loss (gain) (168) 349
------------ ------------
Accrued benefit liability $ (4,316) $ (3,975)
============ ============
Net periodic benefit cost reported in the Consolidated Statements of Income
includes the following components:
For the Years Ended February 28,
----------------------------------
2003 2002 2001
-------- -------- --------
(in thousands)
Service cost $ 135 $ 155 $ 136
Interest cost 260 305 261
Amortization of prior service cost 41 41 22
Recognized net actuarial loss (gain) (20) 9 -
-------- -------- -------
Net periodic benefit cost $ 416 $ 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, 2003 February 28, 2002
----------------- -----------------
Discount rate 6.40% - 6.50% 6.50%
Rate of compensation increase 0.00% - 4.00% 0.00% - 4.00%
At February 28, 2003, a 10.3% annual rate of increase and a 6.2% 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,
70
respectively. These rates were assumed to decrease gradually to 4.7% over seven
years and 4.0% over two 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 rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
(in thousands)
Effect on total service and interest cost components $ 52 $ (44)
Effect on postretirement benefit obligation $ 475 $ (412)
14. 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)
2004 $ 24,612
2005 22,048
2006 17,944
2007 19,422
2008 8,807
Thereafter 100,065
---------
$ 192,898
=========
Rental expense was $25.3 million, $24.0 million, and $19.6 million for
Fiscal 2003, Fiscal 2002, and Fiscal 2001, respectively.
In connection with the formation of PWP, the Company transferred certain of
its vineyard lease and vineyard management agreements to PWP. The agreements
have terms that expire between 2012 and 2026. The Company guaranteed PWP's
payment and performance under these agreements. The estimated maximum amount of
the Company's exposure is $42.6 million in undiscounted future payments. The
Company has not recorded a liability for these guarantees and does not have any
collateral from PWP.
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, 2003, aggregate $24.4 million for contracts
expiring through December 2007.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements from the suppliers of these products. The
Company's agreement to distribute Corona Extra and its other Mexican beer brands
exclusively throughout 25 primarily western U.S. states expires in December
2006, with automatic five year renewals thereafter, subject to compliance with
certain performance criteria and other terms under the agreement. The remaining
agreements expire through December 2007. Prior to their expiration, these
agreements may be terminated if the Company fails to meet certain performance
criteria. At February 28, 2003, 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
71
certain growers and suppliers. In addition, the Company has entered into
other grape purchase contracts with various growers and suppliers in the normal
course of business. Under the grape purchase contracts, the Company is committed
to purchase all grape production yielded from a specified number of acres for a
period of time from one to fifteen years. The actual tonnage and price of grapes
that must be purchased by the Company will vary each year depending on certain
factors, including weather, time of harvest, overall market conditions and the
agricultural practices and location of the growers and suppliers under contract.
The Company purchased $166.6 million and $177.0 million of grapes under
contracts during Fiscal 2003 and Fiscal 2002, respectively. Based on current
production yields and published grape prices, the Company estimates that the
aggregate purchases under these contracts over the remaining terms of the
contracts will be $564.0 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. As of
February 28, 2003, the remaining balance on this reserve is $32.8 million.
The Company's aggregate obligations under bulk wine purchase contracts will
be $17.3 million over the remaining terms of the contracts which expire through
fiscal 2007.
EMPLOYMENT CONTRACTS -
The Company has employment contracts with certain of its executive officers
and certain other management personnel with automatic one year renewals unless
terminated by either party. These agreements provide for minimum salaries, as
adjusted for annual increases, and may include incentive bonuses based upon
attainment of specified management goals. In addition, these agreements provide
for severance payments in the event of specified termination of employment. As
of February 28, 2003, the aggregate commitment for future compensation and
severance, excluding incentive bonuses, was $5.1 million, none of which was
accruable at that date.
EMPLOYEES COVERED BY COLLECTIVE BARGAINING AGREEMENTS -
Approximately 28% of the Company's full-time employees are covered by
collective bargaining agreements at February 28, 2003. Agreements expiring
within one year cover approximately 19% 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.
15. STOCKHOLDERS' EQUITY:
COMMON STOCK -
The Company has two classes of common stock: Class A Common Stock and Class
B Convertible Common Stock. Class B Convertible Common Stock shares are
convertible into shares of Class A Common Stock on a one-to-one basis at any
time at the option of the holder. Holders of Class B Convertible Common Stock
are entitled to ten votes per share. Holders of Class A Common Stock are
entitled to one vote per share and a cash dividend premium. If the Company pays
a cash dividend on Class B Convertible Common Stock, each share of Class A
Common Stock will receive an amount at least ten percent greater than the amount
of the cash dividend per share paid on Class B Convertible Common Stock. In
addition, the Board of Directors may declare and pay a dividend on Class A
Common Stock without paying any dividend on Class B Convertible Common Stock.
However, the Company's 2000 Credit Agreement restricts the payment of a cash
dividend.
72
In July 2002, the stockholders of the Company approved an increase in the
number of authorized shares of Class A Common Stock from 120,000,000 shares to
275,000,000 shares and Class B Convertible Common Stock from 20,000,000 shares
to 30,000,000 shares, thereby increasing the aggregate number of authorized
shares of the Company to 306,000,000 shares.
At February 28, 2003, there were 78,685,751 shares of Class A Common Stock
and 12,075,590 shares of Class B Convertible Common Stock outstanding, net of
treasury stock.
COMMON STOCK SPLIT -
During May 2002, a two-for-one stock split was distributed in the form of a
stock dividend 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.
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 2003, Fiscal 2002 and Fiscal
2001.
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.
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 2003, Fiscal 2002 and Fiscal 2001, no
stock appreciation rights were granted. During Fiscal 2003, 7,080 shares of
restricted Class A Common Stock were granted at a weighted average grant date
fair value of $28.41 per share. No restricted stock was granted during Fiscal
2002. 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
73
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 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
Options granted 1,243,200 $ 27.20
Options exercised (2,096,061) $ 13.44
Options forfeited/canceled (217,016) $ 20.06
-----------
Balance, February 28, 2003 11,407,931 $ 15.55 8,345,855 $ 13.58
===========
The following table summarizes information about stock options outstanding
at February 28, 2003:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ----------- ---------- ------------ ---------
$ 4.25 - $10.25 1,982,941 3.5 years $ 7.24 1,982,941 $ 7.24
$11.19 - $17.74 6,258,140 7.0 years $ 14.36 5,351,164 $ 14.58
$18.75 - $27.50 3,166,850 8.7 years $ 23.12 1,011,750 $ 20.70
----------- ------------
11,407,931 6.8 years $ 15.55 8,345,855 $ 13.58
=========== ============
The weighted average fair value of options granted during Fiscal 2003,
Fiscal 2002 and Fiscal 2001 was $12.18, $8.99 and $5.45, 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 5.0% for Fiscal 2003, 4.7% for Fiscal 2002 and 6.2% for Fiscal
2001; volatility of 36.7% for Fiscal 2003, 41.0% for Fiscal 2002 and 38.8% for
Fiscal 2001; and expected option life of 6.0 years for Fiscal 2003, 6.0 years
for Fiscal 2002 and 4.7 years for Fiscal 2001. The dividend yield was 0% for
Fiscal 2003, Fiscal 2002 and Fiscal 2001. 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 2003,
Fiscal 2002 and Fiscal 2001, employees purchased 138,304 shares, 120,674 shares
and 147,776 shares, respectively.
74
The weighted average fair value of purchase rights granted during Fiscal
2003, Fiscal 2002 and Fiscal 2001 was $7.02, $5.59 and $3.78, respectively. The
fair value of purchase rights is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rate of 1.4% for Fiscal 2003, 2.6% for Fiscal
2002 and 5.7% for Fiscal 2001; volatility of 40.3% for Fiscal 2003, 33.2% for
Fiscal 2002 and 36.8% for Fiscal 2001; and expected purchase right life of 0.5
years for Fiscal 2003, Fiscal 2002 and Fiscal 2001. The dividend yield was 0%
for Fiscal 2003, Fiscal 2002 and Fiscal 2001.
The Company has a stock purchase plan under which 2,000,000 shares of the
Company's Class A Common Stock may be issued to eligible employees and directors
of the Company's United Kingdom subsidiaries. Under the terms of the plan,
participants may purchase shares of the Company's Class A Common Stock through
payroll deductions. The purchase price may be no less than 80% of the closing
price of the stock on the day the purchase price is fixed by the committee
administering the plan. During Fiscal 2003, employees purchased 758 shares.
During Fiscal 2002 and Fiscal 2001, there were no shares purchased under this
plan.
The weighted average fair value of purchase rights granted during Fiscal
2002 and Fiscal 2001 was $6.26 and $5.18, respectively. There were no purchase
rights granted during Fiscal 2003. The fair value of purchase rights is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted average assumptions: risk-free interest rate of 4.9% for
Fiscal 2002 and 6.7% for Fiscal 2001; volatility of 36.2% for Fiscal 2002 and
39.2% for Fiscal 2001; and expected purchase right life of 3.8 years for Fiscal
2002 and 4.3 years for Fiscal 2001. The dividend yield was 0% for Fiscal 2002
and Fiscal 2001.
16. EARNINGS PER COMMON SHARE:
Earnings per common share are as follows:
For the Years Ended February 28,
--------------------------------------
2003 2002 2001
---------- ---------- ----------
(in thousands, except per share data)
Income before extraordinary item $ 203,306 $ 137,975 $ 97,342
Extraordinary item, net of income taxes - (1,554) -
---------- ---------- ----------
Income applicable to common shares $ 203,306 $ 136,421 $ 97,342
========== ========== ==========
Weighted average common shares outstanding - basic 89,856 85,505 73,446
Stock options 2,890 2,320 1,305
---------- ---------- ----------
Weighted average common shares outstanding - diluted 92,746 87,825 74,751
========== ========== ==========
Earnings per common share:
Basic:
Income before extraordinary item $ 2.26 $ 1.62 $ 1.33
Extraordinary item, net of income taxes - (0.02) -
---------- ---------- ----------
Earnings per common share - basic $ 2.26 $ 1.60 $ 1.33
========== ========== ==========
Diluted:
Income before extraordinary item $ 2.19 $ 1.57 $ 1.30
Extraordinary item, net of income taxes - (0.02) -
---------- ---------- ----------
Earnings per common share - diluted $ 2.19 $ 1.55 $ 1.30
========== ========== ==========
Stock options to purchase 1.1 million, 2.2 million and 1.1 million shares
of Class A Common Stock at a weighted average price per share of $27.41, $20.70
and $13.93 were outstanding during the years ended February 28, 2003, February
28, 2002, and February 28, 2001, respectively, but were not
75
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.
17. ACCUMULATED OTHER COMPREHENSIVE LOSS:
Accumulated other comprehensive loss, net of tax effects, includes the
following components:
Foreign Net Minimum Accumulated
Currency Unrealized Pension Other
Translation Gains on Liability Comprehensive
Adjustments Derivatives Adjustment Loss
----------- ----------- ---------- -------------
Balance, February 28, 2002 $ (35,243) $ 21 $ - $ (35,222)
Current period change 18,521 (21) (42,535) (24,035)
----------- ----------- ---------- -------------
Balance, February 28, 2003 $ (16,722) $ - $ (42,535) $ (59,257)
=========== =========== ========== =============
18. 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, 2003. 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; lease
a vineyard consisting of 67 acres to the Fine Wine segment pursuant to a 5-year
lease contract; participate as joint owners 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 amounts paid or
payable to the Huneeus Interests pursuant to these transactions and arrangements
totaled $6.5 million, $4.8 million and $5.0 million for the years ended February
28, 2003, February 28, 2002, and February 28, 2001, respectively. In addition,
the Fine Wine segment performs certain wine processing services for the Huneeus
Interests. Total fees earned from the Huneeus Interests to the Fine Wine segment
for these services totaled $0.2 million, $0.4 million and $0.6 million for the
years ended February 28, 2003, February 28, 2002, and February 28, 2001,
respectively. As of February 28, 2003, and February 28, 2002, the net amounts
due to/from the Huneeus Interests under these agreements are insignificant.
19. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
Gross sales to the five largest customers represented 21.2%, 19.1% and
17.6% of the Company's gross sales for the years ended February 28, 2003,
February 28, 2002, and February 28, 2001, respectively. No single customer was
responsible for greater than 10% of gross sales during these years. Accounts
receivable from the Company's largest customer, Southern Wine and Spirits,
represented 11.4%, 10.0% and 9.8% of the Company's total accounts receivable as
of February 28, 2003, February 28, 2002, and February 28, 2001, 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.
The Company purchases the majority of its glass inventories from a limited
number of suppliers. Glass bottle costs are one of the largest components of the
Company's cost of product sold. The glass bottle industry is highly concentrated
with only a small number of producers. The inability of any of the
76
Company's glass bottle suppliers to satisfy the Company's requirements could
adversely affect the Company's operations.
20. CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets as of February 28, 2003, and February 28, 2002, the condensed
consolidating statements of income and cash flows for each of the three years in
the period ended February 28, 2003, for the Company, the parent company, the
combined subsidiaries of the Company which guarantee the Company's senior notes
and senior subordinated notes ("Subsidiary Guarantors") and the combined
subsidiaries of the Company which are not Subsidiary Guarantors, primarily
Matthew Clark, 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 parent company, the Subsidiary
Guarantors and the Subsidiary Nonguarantors are the same as those described for
the Company in the Summary of Significant Accounting Policies in Note 1 and
include the accounting changes described in Note 2. There are no restrictions
on the ability of the Subsidiary Guarantors to transfer funds to the Company in
the form of cash dividends, loans or advances.
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at February 28, 2003
- --------------------
Current assets:
Cash and cash investments $ 1,426 $ 1,248 $ 11,136 $ - $ 13,810
Accounts receivable, net 120,554 141,156 137,385 - 399,095
Inventories, net 20,378 654,945 144,664 (75) 819,912
Prepaid expenses and other
current assets 31,452 52,411 13,421 - 97,284
Intercompany (payable) receivable (177,332) 136,002 41,330 - -
----------- ------------ --------------- -------------- ------------
Total current assets (3,522) 985,762 347,936 (75) 1,330,101
Property, plant and equipment, net 46,379 358,180 197,910 - 602,469
Investments in subsidiaries 2,590,889 601,156 - (3,192,045) -
Goodwill 51,172 495,636 175,415 - 722,223
Intangible assets, net 10,918 315,952 55,558 - 382,428
Other assets 31,599 126,375 1,135 - 159,109
----------- ------------ --------------- -------------- ------------
Total assets $ 2,727,435 $ 2,883,061 $ 777,954 $ (3,192,120) $ 3,196,330
=========== ============ =============== ============== ============
Current liabilities:
Notes payable to banks $ 2,000 $ - $ 623 $ - $ 2,623
Current maturities of long-term debt 67,137 3,470 657 - 71,264
Accounts payable 37,567 58,843 74,663 - 171,073
Accrued excise taxes 7,447 15,711 13,263 - 36,421
Other accrued expenses and liabilities 138,963 46,664 118,200 - 303,827
----------- ------------ --------------- -------------- ------------
Total current liabilities 253,114 124,688 207,406 - 585,208
Long-term debt, less current maturities 1,171,694 10,810 9,127 - 1,191,631
Deferred income taxes 48,475 79,656 17,108 - 145,239
Other liabilities 8,718 29,446 61,104 - 99,268
77
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Stockholders' equity:
Class A and Class B common stock 960 6,434 64,867 (71,301) 960
Additional paid-in capital 469,724 1,221,076 436,466 (1,657,542) 469,724
Retained earnings 795,600 1,363,379 99,823 (1,463,277) 795,525
Accumulated other comprehensive
income (loss) 11,118 47,572 (117,947) - (59,257)
Treasury stock and other (31,968) - - - (31,968)
----------- ------------ --------------- -------------- ------------
Total stockholders' equity 1,245,434 2,638,461 483,209 (3,192,120) 1,174,984
----------- ------------ --------------- -------------- ------------
Total liabilities and
stockholders' equity $ 2,727,435 $ 2,883,061 $ 777,954 $ (3,192,120) $ 3,196,330
=========== ============ =============== ============== ============
Condensed Consolidating 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 (64,061) (288) 64,349 - -
----------- ------------ --------------- -------------- ------------
Total current assets 47,902 840,085 343,321 (60) 1,231,248
Property, plant and equipment, net 36,834 354,431 187,499 - 578,764
Investments in subsidiaries 2,404,282 558,263 - (2,962,545) -
Goodwill 51,172 462,676 154,235 - 668,083
Intangible assets, net 11,016 361,039 53,932 - 425,987
Other assets 22,598 111,892 30,813 - 165,303
----------- ------------ --------------- -------------- ------------
Total assets $ 2,573,804 $ 2,688,386 $ 769,800 $ (2,962,605) $ 3,069,385
=========== ============ =============== ============== ============
Current liabilities:
Notes payable to banks $ 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 1,220,917 436,466 (1,657,383) 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 2,401,762 523,961 (2,962,605) 955,736
----------- ------------ --------------- -------------- ------------
Total liabilities and
stockholders' equity $ 2,573,804 $ 2,688,386 $ 769,800 $ (2,962,605) $ 3,069,385
=========== ============ =============== ============== ============
78
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 28, 2003
- ------------------------------------
Gross sales $ 817,458 $ 1,989,490 $ 1,145,520 $ (369,386) $ 3,583,082
Less - excise taxes (148,129) (412,022) (291,319) - (851,470)
----------- ------------ --------------- -------------- ------------
Net sales 669,329 1,577,468 854,201 (369,386) 2,731,612
Cost of product sold (558,811) (1,088,899) (692,558) 369,371 (1,970,897)
----------- ------------ --------------- -------------- ------------
Gross profit 110,518 488,569 161,643 (15) 760,715
Selling, general and administrative
expenses (109,576) (146,037) (95,380) - (350,993)
Restructuring charges - (4,764) - - (4,764)
----------- ------------ --------------- -------------- ------------
Operating income 942 337,768 66,263 (15) 404,958
Gain on change in fair value of
derivative instruments 23,129 - - - 23,129
Equity in earnings of
subsidiary/joint venture 186,448 55,129 - (229,341) 12,236
Interest expense, net 11,648 (114,051) (2,984) - (105,387)
----------- ------------ --------------- -------------- ------------
Income before income taxes 222,167 278,846 63,279 (229,356) 334,936
Provision for income taxes (18,846) (92,398) (20,386) - (131,630)
----------- ------------ --------------- -------------- ------------
Net income $ 203,321 $ 186,448 $ 42,893 $ (229,356) $ 203,306
=========== ============ =============== ============== ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 28, 2002
- ------------------------------------
Gross sales $ 832,065 $ 1,954,585 $ 1,032,130 $ (398,567) $ 3,420,213
Less - excise taxes (147,446) (408,532) (257,477) - (813,455)
----------- ------------ --------------- -------------- ------------
Net sales 684,619 1,546,053 774,653 (398,567) 2,606,758
Cost of product sold (511,714) (1,172,935) (625,522) 398,573 (1,911,598)
----------- ------------ --------------- -------------- ------------
Gross profit 172,905 373,118 149,131 6 695,160
Selling, general and administrative
expenses (90,301) (167,521) (94,857) - (352,679)
----------- ------------ --------------- -------------- ------------
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
=========== ============ =============== ============== ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Year Ended February 28, 2001
- -------------------------------------------
Gross sales $ 683,930 $ 1,706,609 $ 919,341 $ (326,251) $ 2,983,629
Less - excise taxes (131,997) (396,773) (228,839) - (757,609)
----------- ------------ --------------- -------------- ------------
Net sales 551,933 1,309,836 690,502 (326,251) 2,226,020
Cost of product sold (474,913) (955,893) (542,548) 326,273 (1,647,081)
----------- ------------ --------------- -------------- ------------
Gross profit 77,020 353,943 147,954 22 578,939
Selling, general and administrative
expenses (83,019) (97,482) (127,570) - (308,071)
----------- ------------ --------------- -------------- ------------
Operating (loss) 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 (loss) $ 97,320 $ 120,937 $ (3,825) $ (117,090) $ 97,342
=========== ============ =============== ============== ============
79
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 28, 2003
- ------------------------------------------
Net cash provided by operating
activities $ 135,057 $ 83,491 $ 17,505 $ - $ 236,053
Cash flows from investing activities:
Purchases of property, plant and
equipment (15,541) (39,452) (16,583) - (71,575)
Payment of accrued earn-out amount - (1,674) - - (1,674)
Proceeds from sale of assets 1 409 878 - 1,288
----------- ------------ --------------- -------------- ------------
Net cash used in investing activities (15,540) (40,716) (15,705) - (71,961)
----------- ------------ --------------- -------------- ------------
Cash flows from financing activities:
Principal payments of long-term debt (141,423) (3,458) (6,253) - (151,134)
Net repayment of notes payable (48,000) - (3,921) - (51,921)
Payment of issuance costs of
long-term debt (20) - - - (20)
Exercise of employee stock options 28,706 - - - 28,706
Proceeds from issuance of long-term
debt, net of discount - - 10,000 - 10,000
Proceeds from employee stock
purchases 2,885 - - - 2,885
Other - 142 (142) - -
----------- ------------ --------------- -------------- ------------
Net cash used in financing activities (157,852) (3,316) (316) - (161,484)
----------- ------------ --------------- -------------- ------------
Effect of exchange rate changes on
cash and cash investments 38,923 (40,295) 3,613 - 2,241
----------- ------------ --------------- -------------- ------------
Net increase (decrease) in cash
and cash investments 588 (836) 5,097 - 4,849
Cash and cash investments, beginning
of year 838 2,084 6,039 - 8,961
----------- ------------ --------------- -------------- ------------
Cash and cash investments, end of year $ 1,426 $ 1,248 $ 11,136 $ - $ 13,810
=========== ============ =============== ============== ============
Condensed Consolidating Statement of Cash
- -----------------------------------------
Flows for the Year Ended February 28, 2002
- ------------------------------------------
Net cash provided by operating
activities $ 110,056 $ 82,669 $ 20,574 $ - $ 213,299
Cash flows from investing activities:
Purchases of businesses, net of
cash acquired (478,574) 5,742 - - (472,832)
Investment in joint venture - (77,282) - - (77,282)
Purchases of property, plant and
equipment (11,544) (43,812) (15,792) - (71,148)
Proceeds from sale of assets - 35,466 349 - 35,815
----------- ------------ --------------- -------------- ------------
Net cash used in investing activities (490,118) (79,886) (15,443) - (585,447)
----------- ------------ --------------- -------------- ------------
80
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)
----------- ------------ --------------- -------------- ------------
81
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
=========== ============ =============== ============== ============
21. 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, distilled spirits, cider, beer and
RTDs 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 availability of separate financial results. The accounting
policies of the segments are the same as those described for the Company in the
Summary of Significant Accounting Policies in Note 1 and include the accounting
changes described in Note 2. Transactions between segments consist mainly of
sales of products and are accounted for at cost plus an applicable margin. The
Company evaluates performance based on operating income of the respective
business units.
Segment information is as follows:
For the Years Ended February 28,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Popular and Premium Wine:
- ------------------------
Net sales:
Branded:
External customers $ 684,094 $ 696,901 $ 546,211
Intersegment 8,570 9,669 6,451
------------ ------------ ------------
Total branded 692,664 706,570 552,662
------------ ------------ ------------
Other:
External customers 45,223 57,718 64,799
Intersegment 11,537 13,751 16,562
------------ ------------ ------------
Total other 56,760 71,469 81,361
------------ ------------ ------------
Net sales $ 749,424 $ 778,039 $ 634,023
Operating income $ 107,715 $ 104,781 $ 50,390
Equity in earnings of joint venture $ 12,236 $ 1,667 $ -
Long-lived assets $ 191,771 $ 197,353 $ 191,500
Investment in joint venture $ 123,064 $ 110,520 $ -
Total assets $ 1,142,551 $ 1,116,515 $ 650,554
Capital expenditures $ 23,394 $ 22,523 $ 18,043
Depreciation and amortization $ 23,358 $ 30,902 $ 23,223
82
For the Years Ended February 28,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Imported Beer and Spirits:
- -------------------------
Net sales:
Beer $ 776,006 $ 726,953 $ 633,833
Spirits 282,307 274,702 262,933
------------ ------------ ------------
Net sales $ 1,058,313 $ 1,001,655 $ 896,766
Operating income $ 217,963 $ 178,805 $ 167,680
Long-lived assets $ 79,757 $ 78,516 $ 76,777
Total assets $ 700,545 $ 711,484 $ 724,511
Capital expenditures $ 8,722 $ 8,350 $ 6,589
Depreciation and amortization $ 9,732 $ 17,940 $ 16,069
U.K. Brands and Wholesale:
- -------------------------
Net sales:
Branded:
External customers $ 229,283 $ 223,791 $ 225,550
Intersegment 189 574 1,193
------------ ------------ ------------
Total branded 229,472 224,365 226,743
Wholesale 560,346 495,532 404,208
------------ ------------ ------------
Net sales $ 789,818 $ 719,897 $ 630,951
Operating income $ 56,577 $ 47,270 $ 48,961
Long-lived assets $ 148,453 $ 138,109 $ 145,794
Total assets $ 610,509 $ 578,320 $ 583,203
Capital expenditures $ 12,530 $ 12,397 $ 15,562
Depreciation and amortization $ 14,367 $ 19,291 $ 17,322
Fine Wine:
- ---------
Net sales:
External customers $ 154,353 $ 131,161 $ 88,486
Intersegment 1,405 753 217
------------ ------------ ------------
Net sales $ 155,758 $ 131,914 $ 88,703
Operating income $ 55,515 $ 39,169 $ 24,495
Long-lived assets $ 169,174 $ 156,790 $ 130,375
Total assets $ 676,845 $ 628,454 $ 394,740
Capital expenditures $ 21,627 $ 23,696 $ 27,780
Depreciation and amortization $ 8,442 $ 12,850 $ 10,296
Corporate Operations and Other:
- ------------------------------
Net sales $ - $ - $ -
Operating loss $ (32,812) $ (27,544) $ (20,658)
Long-lived assets $ 13,114 $ 7,996 $ 4,168
Total assets $ 65,880 $ 34,612 $ 159,161
Capital expenditures $ 5,302 $ 4,182 $ 243
Depreciation and amortization $ 4,190 $ 4,421 $ 3,473
Intersegment eliminations:
- -------------------------
Net sales $ (21,701) $ (24,747) $ (24,423)
83
For the Years Ended February 28,
------------------------------------------
2003 2002 2001
------------ ------------ ------------
(in thousands)
Consolidated:
- ------------
Net sales $ 2,731,612 $ 2,606,758 $ 2,226,020
Operating income $ 404,958 $ 342,481 $ 270,868
Equity in earnings of joint venture $ 12,236 $ 1,667 $ -
Long-lived assets $ 602,469 $ 578,764 $ 548,614
Investment in joint venture $ 123,064 $ 110,520 $ -
Total assets $ 3,196,330 $ 3,069,385 $ 2,512,169
Capital expenditures $ 71,575 $ 71,148 $ 68,217
Depreciation and amortization $ 60,089 $ 85,404 $ 70,383
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.
22. ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
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. As required, the Company adopted
SFAS No. 143 on March 1, 2003. The adoption of SFAS No. 143 did not have a
material impact on the Company's 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 adoption of the
applicable provisions of SFAS No. 145 did not have a material impact on the
Company's financial statements. The adoption of the provisions rescinding SFAS
No. 4 provisions will result in a reclassification of the extraordinary loss
related to the extinguishment of debt recorded in the fourth quarter of Fiscal
2002 ($1.6 million, net of income taxes), by increasing selling, general and
administrative expenses ($2.6 million) and decreasing the provision for income
taxes ($1.0 million).
In November 2002, the Emerging Issues Task Force ("EITF") reached a
consensus on EITF Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with
Multiple Deliverables." EITF No. 00-21 addresses certain aspects of the
accounting by a vendor for arrangements under which it will perform multiple
revenue-generating activities. EITF No. 00-21 also addresses how arrangement
consideration should be measured and allocated to the separate units of
accounting in the arrangement. The Company is
84
required to adopt EITF No. 00-21 for all revenue arrangements entered into
beginning August 1, 2003. The Company is currently assessing the financial
impact of EITF No. 00-21 on its financial statements.
In December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 amends Statement of
Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for
Stock-Based Compensation," to provide alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting for
stock-based employee compensation. SFAS No. 148 also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock-based employee compensation. Lastly, SFAS No. 148 amends Accounting
Principles Board Opinion No. 28 ("APB Opinion No. 28"), "Interim Financial
Reporting," to require disclosure about those effects in interim financial
information. The Company has adopted the disclosure provisions of SFAS No. 148
for the fiscal year ended February 28, 2003. The Company is required to adopt
the amendment to APB Opinion No. 28 for financial reports containing condensed
financial statements for interim periods beginning March 1, 2003.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"),
"Consolidation of Variable Interest Entities - an interpretation of ARB No. 51."
FIN No. 46 requires all variable interest entities to be consolidated by the
primary beneficiary. The primary beneficiary is the entity that holds the
majority of the beneficial interests in the variable interest entity. In
addition, the interpretation expands disclosure requirements for both variable
interest entities that are consolidated as well as variable interest entities
from which the entity is the holder of a significant amount of the beneficial
interests, but not the majority. Since the Company has no transactions with
variable interest entities, the Company does not expect the adoption of FIN No.
46 in its entirety to have a significant impact on the Company's financial
statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities." SFAS No. 149 amends and clarifies financial accounting
and reporting for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and
hedging relationships designated after June 30, 2003, except for those
provisions of SFAS No. 149 which relate to SFAS No. 133 Implementation Issues
that have been effective for fiscal quarters that began prior to June 15, 2003.
For these issues, the provisions that are currently in effect should continue to
be applied in accordance with their respective effective dates. In addition,
certain provisions of SFAS No. 149, which relate to forward purchases or sales
of when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The Company is currently assessing the financial impact of SFAS No. 149
on its financial statements.
23. SUBSEQUENT EVENTS
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company
completed its acquisition of all of Hardy's outstanding capital stock (the
"Hardy Acquisition"). Hardy is Australia's largest wine producer with interests
in wineries and vineyards in most of Australia's major wine regions as well as
New Zealand, France and the United States. In addition, Hardy has significant
marketing and sales operations in the United Kingdom. This acquisition supports
the Company's strategy of driving long-term growth and positions the Company to
capitalize on the growth opportunities in "new world" wine markets. As a result
of the Hardy Acquisition, the Company also acquired the remaining 50% ownership
of PWP, the joint venture the Company established with Hardy in July 2001.
Total consideration paid in cash and
85
Class A Common Stock to the Hardy shareholders was $1,137.4 million.
Additionally, the Company expects to incur direct acquisition costs of $20.0
million. The acquisition date for accounting purposes is March 27, 2003. The
Company expects to record an approximate $2 million reduction in the purchase
price to reflect imputed interest between the accounting acquisition date and
the final payment of consideration. The cash portion of the purchase price
($1,060.2 million) was financed with $660.2 million of borrowings under the
Company's 2003 Credit Agreement (as defined below) and $400.0 million of
borrowings under the Company's Bridge Agreement (as defined below).
Additionally, the Company issued 3,288,913 shares of the Company's Class A
Common Stock, which were valued at $77.2 million based on the simple average of
the closing market price of the Company's Class A Common Stock beginning two
days before and ending two days after April 4, 2003, the day the Hardy
shareholders elected the form of consideration they wished to receive. In
accordance with the purchase method of accounting, the acquired net assets are
recorded at fair value at the date of acquisition. The results of operations of
the Hardy business will be included in the Consolidated Statements of Income
beginning on the date of acquisition. The purchase price allocation, including
the third-party appraisal, is in progress.
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
the U.S. subsidiaries of the Company (excluding certain inactive subsidiaries)
and Canandaigua Limited ("Guarantors"), JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
(such other lenders, together with the Administrative Agent, are collectively
referred to herein as the "Lenders") entered into a new credit agreement, which
was subsequently amended and restated on March 19, 2003 (the "2003 Credit
Agreement"). The 2003 Credit Agreement provides for aggregate credit facilities
of $1.6 billion consisting of a $400.0 million Tranche A Term Loan facility due
in February 2008, an $800.0 million Tranche B Term Loan facility due in November
2008 and a $400.0 million Revolving Credit facility (including an Australian
Dollar revolving sub-facility of up to A$10.0 million and a sub-facility for
letters of credit of up to $40.0 million) which expires on the fifth anniversary
of the first date on which the Lenders' obligation to make loans under the 2003
Credit Agreement commences.
The required annual repayments of the Tranche A Term Loan facility is $40.0
million in Fiscal 2004 and increases by $20.0 million each year through Fiscal
2008. The required annual repayments of the Tranche B Term Loan, which is
backend loaded, is $10.0 million in Fiscal 2004 and increases to $400.0 million
in Fiscal 2009.
The rate of interest payable, at the Company's option, is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate
plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the 2003 Credit Agreement) and, with respect to LIBOR borrowings,
ranges between 1.75% and 2.75%. The initial LIBOR margin for the Revolving
Credit facility and the Tranche A Term Loan facility is 2.25%, while the initial
LIBOR margin on the Tranche B Term Loan facility is 2.75%.
The Company's obligations are guaranteed by the Guarantors and the Company
has pledged collateral of (i) 100% of the capital stock of all of the Company's
U.S. subsidiaries and (ii) 65% of the voting capital stock of Canandaigua
Limited, Matthew Clark plc, Hardy, Constellation Australia Pty Limited and
certain other foreign subsidiaries of the Company. In addition, under certain
circumstances, the Company and the Guarantors are required to pledge certain of
their assets consisting of, among other things, inventory, accounts receivable
and trademarks to secure the obligations under the 2003 Credit Agreement.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, the incurrence of additional
indebtedness, the sale of assets, the payment of dividends, transactions with
affiliates and the making of certain investments, in each case subject to
86
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.
On January 16, 2003, the Company, the Guarantors, JPMorgan Chase Bank, as a
lender and Administrative Agent, and certain other lenders (such other lenders,
together with the Administrative Agent, are collectively referred to herein as
the "Bridge Lenders") entered into a bridge loan agreement which was amended and
restated as of March 26, 2003, containing commitments of the Bridge Lenders to
make bridge loans (the "Bridge Loans") of up to, in the aggregate, $450.0
million (the "Bridge Agreement"). The Bridge Loans are due on the first
anniversary of the date of the funding of the Bridge Loans ("Bridge Loan
Maturity Date"). The rate of interest payable on the Bridge Loans is equal to
LIBOR plus a margin. The initial margin on the Bridge Loans is 3.75%.
If the Bridge Loans are not repaid on the Bridge Loan Maturity Date, the
Bridge Lenders have committed to make certain term loans in an amount
corresponding to the then-outstanding amount of the Bridge Loans ("Term Loans").
The Term Loans are due on the seventh anniversary of the date on which the
Bridge Loans are funded ("Term Loan Maturity Date"). The rate of interest
payable on the Term Loans is equal to LIBOR plus a margin. If the Term Loans
are not repaid on the date that is three months after the Bridge Loan Maturity
Date, then the margin will increase on a quarterly basis thereafter until the
Term Loans are refinanced, exchanged or otherwise repaid in full. The rate of
interest payable on any of the Bridge Loans or the Term Loans is capped at
11.50% ("Rate Cap").
The Lenders have the right to exchange on or after the Bridge Loan Maturity
Date all or a portion of their respective Bridge Loans or Term Loans for notes
("Exchange Notes") that will be issued pursuant to an indenture to be entered
into among the Company, as issuer, certain subsidiaries of the Company, as
guarantors, and an indenture trustee on behalf of the holders of the Exchange
Notes. The Exchange Notes indenture will be in a form to be agreed between the
Company and the Administrative Agent and will contain terms and a final maturity
date that are substantially consistent with the terms and the maturity date of
the Term Loans. The Exchange Notes will bear interest at a fixed rate as
determined by the exchanging holder that will not exceed the Rate Cap.
The Guarantors have guaranteed the Company's obligations under the Bridge
Agreement.
The Company and the Guarantors have made certain representations and
warranties in the Bridge Agreement which are substantially the same as the
representations and warranties in the 2003 Credit Agreement. The Bridge
Agreement also contains covenants and events of default that are similar to the
covenants and events of default in the indentures pursuant to which the Company
issued its senior notes and senior subordinated notes.
The Company used the proceeds of the Tranche A Term Loan facility, the
Tranche B Term Loan facility and a portion of the Revolving Credit facility
under the 2003 Credit Agreement to payoff its obligations under the 2000 Credit
Agreement, to fund a portion of the cash required to pay the Hardy shareholders
and to pay indebtedness outstanding under certain of Hardy's credit facilities.
The Company also used $400.0 million of the Bridge Loans to fund the remaining
portion of the cash required to pay the former Hardy shareholders.
87
24. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of selected quarterly financial information is as follows:
QUARTER ENDED
------------------------------------------------------
May 31, August 31, November 30, February 28,
Fiscal 2003 2002 2002 2002 2003 Full Year
- ------------------------------------- ----------- ---------- ------------ ------------ -----------
(in thousands, except per share data)
Net sales $ 650,393 $ 689,806 $ 738,379 $ 653,034 $ 2,731,612
Gross profit $ 176,726 $ 193,262 $ 213,494 $ 177,233 $ 760,715
Net income $ 37,369 $ 49,572 $ 64,344 $ 52,021 $ 203,306
Earnings per common share (1):
Basic $ 0.42 $ 0.55 $ 0.71 $ 0.57 $ 2.26
=========== ========== ============ ============ ===========
Diluted $ 0.40 $ 0.53 $ 0.69 $ 0.56 $ 2.19
=========== ========== ============ ============ ===========
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 (2) $ 598,432 $ 689,127 $ 701,854 $ 617,345 $ 2,606,758
Gross profit (2) $ 155,890 $ 183,285 $ 193,114 $ 162,871 $ 695,160
Income before extraordinary item $ 23,843 $ 35,934 $ 49,643 $ 28,555 $ 137,975
Extraordinary item, net of income taxes (3) $ - $ - $ - $ (1,554) $ (1,554)
Net income $ 23,843 $ 35,934 $ 49,643 $ 27,001 $ 136,421
Earnings per common share (1):
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
=========== ========== ============ ============ ===========
(1) The sum of the quarterly earnings per common share in Fiscal 2003 and Fiscal
2002 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.
(2) Net sales and gross profit have been restated to reflect the adoption of
EITF 01-09. See Note 2 to the consolidated financial statements. Net sales
by quarter before the adoption of EITF 01-09 were $642.1 million, $740.8
million, $764.1 million and $673.5 million, respectively. Gross profit by
quarter before the adoption of EITF 01-09 were $202.0 million, $237.7
million, $258.4 million and $221.0 million, respectively. Net income was not
affected by this adoption.
(3) Represents the write-off of capitalized fees related to the extinguishment
of the Company's 8 3/4% Senior Subordinated Notes.
88
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------- ----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Information required by this item has been previously reported in the
Company's Current Report on Form 8-K dated April 4, 2002, and Form 8-K/A filed
May 24, 2002.
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 15,
2003, 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 15, 2003, 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 15, 2003, under those
sections of the proxy statement titled "Beneficial Ownership" and "Stock
Ownership of Management". Additional information required by this item is as
follows:
SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS
The following table sets forth information with respect to the Company's
compensation plans under which its equity securities may be issued, as of
February 28, 2003. The equity compensation plans approved by security holders
include the Company's Long-Term Stock Incentive Plan, Incentive Stock Option
Plan and 1989 Employee Stock Purchase Plan. The equity compensation plans not
approved by security holders include the Company's UK Sharesave Scheme (the "UK
Plan"). Under the UK Plan, 2,000,000 shares of Class A Stock may be issued to
eligible United Kingdom employees and directors of the Company in offerings that
typically extend from three to five years. Under the terms of the UK Plan,
participants may purchase shares of Class A Stock at the end of the offering
period through payroll deductions made during the offering period. The payroll
deductions are kept in interest bearing accounts until the participant either
exercises the option at the end of the offering or withdraws from the offering.
89
The exercise price for each offering is fixed at the beginning of the offering
by the committee administering the plan and may be no less than 80% of the
closing price of the stock on the day the exercise price is fixed. If a
participant ceases to be employed by the Company, that participant may exercise
the option during a period of time specified in the UK Plan or may withdraw from
the offering. During the year ended February 28, 2003, an aggregate of 758
shares were issued pursuant to the UK Plan.
EQUITY COMPENSATION PLAN INFORMATION
(a) (b) (c)
Number of securities
Number of securities remaining available for
to be issued upon Weighted-average future issuance under
exercise of exercise price of equity compensation plans
outstanding options, outstanding options, (excluding securities
Plan Category warrants and rights warrants and rights reflected in column (a))
- ------------- -------------------- ------------------- -------------------------
Equity compensation
plans approved by
security holders 11,407,931 $ 15.63 12,055,786
Equity compensation
plans not approved by
security holders (1) - - 1,999,242
Total 11,407,931 $ 15.63 14,055,082
- ----------------------
(1) There are currently two ongoing offerings under the UK Plan. The
exercise prices for shares that may be purchased at the end of these offerings
are $12.6093 and $14.21, respectively. The number of options outstanding that
represent the right to purchase shares at the end of the offerings is not
determinable because the exchange rate is not known and because the Company
cannot predict the level of participation by employees during the remaining term
of the offerings.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------- ----------------------------------------------
The information required by this Item is incorporated herein by reference
to the Company's proxy statement to be issued in connection with the Annual
Meeting of Stockholders of the Company to be held on July 15, 2003, 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.
ITEM 14. CONTROLS AND PROCEDURES
- -------- -----------------------
The Company's Chief Executive Officer and Chief Financial Officer have
concluded, based on their evaluation within 90 days prior to the filing date of
this report, that the Company's disclosure controls and procedures (as defined
in Securities Exchange Act Rules 13a-14(c) and 15d-14(c)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported, within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect these controls subsequent to the date of the
foregoing evaluation.
90
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- -------- ----------------------------------------------------------------
(a) 1. Financial Statements
The following consolidated financial statements of the Company are
submitted herewith:
Reports of Independent Public Accountants - KPMG LLP and Arthur
Andersen LLP
Consolidated Balance Sheets - February 28, 2003, and February 28,
2002
Consolidated Statements of Income for the years ended February
28, 2003, February 28, 2002, and February 28, 2001
Consolidated Statements of Changes in Stockholders' Equity for
the years ended February 28, 2003, February 28, 2002, and
February 28, 2001
Consolidated Statements of Cash Flows for the years ended
February 28, 2003, February 28, 2002, and February 28, 2001
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedules are not submitted because they are not applicable or not required
under Regulation S-X or because the required information is included in the
financial statements or notes thereto.
Parent company financial statements of the Registrant have been omitted because
the Registrant is primarily an operating company and no subsidiary included in
the consolidated financial statements has minority equity interests and/or
noncurrent indebtedness, not guaranteed by the Registrant, in excess of 5% of
total consolidated assets.
3. Exhibits required to be filed by Item 601 of Regulation S-K
For the exhibits that are filed herewith or incorporated herein by
reference, see the Index to Exhibits located on Page 96 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, 2003:
(i) Form 8-K dated January 6, 2003. This Form 8-K reported information
under Item 5 and included (i) the Company's Condensed Consolidated
Balance Sheets as of November 30, 2002 and February 28, 2002; (ii)
the Company's Condensed Consolidated Statements of Income for the
three months ended November 30, 2002 and November 30, 2001; and
(iii)
91
the Company's Condensed Consolidated Statements of Income for the
nine months ended November 30, 2002 and November 30, 2001.
(ii) Form 8-K dated January 13, 2003. This Form 8-K reported information
under Item 5.
(iii) Form 8-K dated January 16, 2003. This Form 8-K reported information
under Items 5, 7 and 9.
(iv) Form 8-K dated January 21, 2003. This Form 8-K reported information
under Items 5 and 7.
(v) Form 8-K dated February 10, 2003. This Form 8-K reported information
under Item 9.
(vi) Form 8-K dated February 13, 2003. This Form 8-K reported information
under Items 7 and 9.
(vii) Form 8-K dated February 26, 2003. This Form 8-K reported information
under Item 5.
92
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 13, 2003 CONSTELLATION BRANDS, INC.
By: /s/ Richard Sands
-----------------------------------
Richard Sands, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Richard Sands /s/ Thomas S. Summer
- -------------------------------- -----------------------------------
Richard Sands, Chairman of the Thomas S. Summer, Executive Vice
Board and Chief Executive Officer President and Chief Financial
(Principal Executive Officer) Officer (Principal Financial
Dated: May 13, 2003 Officer and Principal Accounting
Officer)
Dated: May 13, 2003
/s/ Robert Sands /s/ George Bresler
- -------------------------------- -----------------------------------
Robert Sands, Director George Bresler, Director
Dated: May 13, 2003 Dated: May 13, 2003
/s/ James A. Locke III /s/ Thomas C. McDermott
- -------------------------------- -----------------------------------
James A. Locke III, Director Thomas C. McDermott, Director
Dated: May 13, 2003 Dated: May 13, 2003
/s/ Paul L. Smith /s/ Jeananne K. Hauswald
- -------------------------------- -----------------------------------
Paul L. Smith, Director Jeananne K. Hauswald, Director
Dated: May 13, 2003 Dated: May 13, 2003
93
CERTIFICATIONS
I, Richard Sands, certify that:
1. I have reviewed this annual report on Form 10-K of Constellation Brands,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Richard Sands
- ------------------------------
Richard Sands
Chairman of the Board and
Chief Executive Officer
94
I, Thomas S. Summer, certify that:
1. I have reviewed this annual report on Form 10-K of Constellation Brands,
Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the period presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: May 13, 2003
/s/ Thomas S. Summer
- ---------------------------------
Thomas S. Summer
Executive Vice President and
Chief Financial Officer
95
INDEX TO EXHIBITS
EXHIBIT NO.
- -----------
2.1 Purchase Agreement dated as of January 30, 2001, by and among
Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and
Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the
Company) (filed as Exhibit 2.5 to the Company's Annual Report on Form
10-K for the fiscal year ended February 28, 2001 and incorporated herein
by reference).
2.2 First Amendment to Purchase Agreement and Pro Forma Closing Balance
Sheet, dated as of March 5, 2001, by and among Sebastiani Vineyards,
Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc.
(filed as Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended November 30, 2001 and incorporated herein by
reference).
2.3 Second Amendment to Purchase Agreement, dated as of March 5, 2001, by
and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and
Canandaigua Wine Company, Inc. (filed as Exhibit 2.6 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended November 30,
2001 and incorporated herein by reference).
2.4 Agreement and Plan of Merger by and among Constellation Brands, Inc.,
VVV Acquisition Corp. and Ravenswood Winery, Inc. dated as of April 10,
2001 (filed as Exhibit 2.5 to the Company's Quarterly Report on Form
10-Q for the fiscal quarter ended May 31, 2001 and incorporated herein
by reference).
2.5 Implementation Deed dated 17 January 2003 between Constellation Brands,
Inc. and BRL Hardy Limited (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated January 21, 2003 and incorporated
herein by reference).
2.6 Transaction Compensation Agreement dated 17 January 2003 between
Constellation Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.2
to the Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.7 No Solicitation Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.3 to the
Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.8 Backstop Fee Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.4 to the
Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.9 Letter Agreement dated 6 February 2003 between Constellation Brands,
Inc. and BRL Hardy Limited (filed as Exhibit 2.5 to the Company's
Current Report on Form 8-K dated March 27, 2003 and incorporated herein
by reference).
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2002 and incorporated herein by reference).
3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 2002 and
incorporated herein by reference).
96
4.1 Indenture, dated as of February 25, 1999, among the Company, as issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated
February 25, 1999 and incorporated herein by reference).
4.2 Supplemental Indenture No. 1, with respect to 8 1/2% Senior
Subordinated Notes due 2009, dated as of February 25, 1999, by and among
the Company, as Issuer, certain principal subsidiaries, as Guarantors,
and BNY Midwest Trust Company (successor Trustee to Harris Trust and
Savings Bank), as Trustee (filed as Exhibit 99.2 to the Company's
Current Report on Form 8-K dated February 25, 1999 and incorporated
herein by reference).
4.3 Supplemental Indenture No. 2, with respect to 8 5/8% Senior Notes due
2006, dated as of August 4, 1999, by and among the Company, as Issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated
July 28, 1999 and incorporated herein by reference).
4.4 Supplemental Indenture No. 3, dated as of August 6, 1999, by and among
the Company, Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc.,
Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak
Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and BNY
Midwest Trust Company (successor Trustee to Harris Trust and Savings
Bank), as Trustee (filed as Exhibit 4.20 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 1999 and
incorporated herein by reference).
4.5 Supplemental Indenture No. 4, with respect to 8 1/2% Senior Notes due
2009, dated as of May 15, 2000, by and among the Company, as Issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 4.17 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 29, 2000 and incorporated herein by
reference).
4.6 Supplemental Indenture No. 5, dated as of September 14, 2000, by and
among the Company, as Issuer, certain principal subsidiaries, as
Guarantors, and BNY Midwest Trust Company (successor Trustee to The Bank
of New York), as Trustee (filed as Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended August 31,
2000 and incorporated herein by reference).
4.7 Supplemental Indenture No. 6, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor trustee to Harris Trust and Savings Bank and The Bank of New
York, as applicable), as Trustee (filed as Exhibit 4.6 to the Company's
Registration Statement on Form S-3 (Pre-effective Amendment No. 1)
(Registration No. 333-63480) and incorporated herein by reference).
4.8 Supplemental Indenture No. 7, dated as of January 23, 2002, by and
among the Company, as Issuer, certain principal subsidiaries, as
Guarantors, and BNY Midwest Trust Company, as Trustee (filed as Exhibit
4.2 to the Company's Current Report on Form 8-K dated January 17, 2002
and incorporated herein by reference).
4.9 Supplemental Indenture No. 8, dated as of March 27, 2003, by and among
the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company, as Trustee (filed herewith).
4.10 Credit Agreement, dated as of October 6, 1999, between the Company,
certain principal subsidiaries, and certain banks for which JPMorgan
Chase Bank (formerly known as The Chase Manhattan Bank) acts as
Administrative Agent, The Bank of Nova Scotia acts as
97
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).
4.11 Amendment No. 1 to Credit Agreement, dated as of February 13, 2001,
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2001 and
incorporated herein by reference).
4.12 Amendment No. 2 to the Credit Agreement, dated as of May 16, 2001
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.1 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended May 31, 2001 and
incorporated herein by reference).
4.13 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).
4.14 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).
4.15 Amendment No. 4 to the Credit Agreement, dated as of January 15, 2002
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2002 and
incorporated herein by reference).
4.16 Indenture, with respect to 8 1/2% Senior Notes due 2009, dated as of
November 17, 1999, among the Company, as Issuer, certain principal
subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor to
Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (Registration No.
333-94369) and incorporated herein by reference).
4.17 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor to Harris Trust and Savings Bank), as Trustee (filed as
Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
4.18 Supplemental Indenture No. 2, dated as of March 27, 2003, among the
Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company (successor to Harris Trust and Savings Bank), as Trustee
(filed herewith).
4.19 Indenture, with respect to 8% Senior Notes due 2008, dated as of
February 21, 2001, by and among the Company, as Issuer, certain
principal subsidiaries, as Guarantors and BNY Midwest Trust Company, as
Trustee (filed as Exhibit 4.1 to the Company's Registration
98
Statement filed on Form S-4 (Registration No. 333-60720) and
incorporated herein by reference).
4.20 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company, as
Trustee (filed as Exhibit 4.7 to the Company's Pre-effective Amendment
No. 1 to its Registration Statement on Form S-3 (Registration No.
333-63480) and incorporated herein by reference).
4.21 Supplemental Indenture No. 2, dated as of March 27, 2003, among the
Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company, as Trustee (filed herewith).
4.22 Amended and Restated Credit Agreement, dated as of March 19, 2003,
among the Company and certain of its subsidiaries, the lenders named
therein, JPMorgan Chase Bank, as Administrative Agent, and JPMorgan
Europe Limited, as London Agent (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 27, 2003 and incorporated herein
by reference).
4.23 Amended and Restated Bridge Loan Agreement, dated as of January 16,
2003 and amended and restated as of March 26, 2003, among the Company
and certain of its subsidiaries, the lenders named therein, and JPMorgan
Chase Bank, as Administrative Agent (filed as Exhibit 4.2 to the
Company's Current Report on Form 8-K dated March 27, 2003 and
incorporated herein by reference).
10.1 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 (Commission File No. 001-08495) 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 (Commission File No. 001-08495) 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 Barton Incorporated and Alexander L. Berk
dated November 11, 1996 (filed as Exhibit 10.7 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 1998
(Commission File No. 001-08495) and incorporated herein by reference).*
10.4 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 (Commission File No.
001-08495) 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 (Commission File No.
001-08495) and incorporated herein by reference).*
99
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 (Commission File No. 001-08495) 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 (Commission File No.
001-08495) 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 (Commission File No. 001-08495) 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 (Commission File No.
001-08495) and incorporated herein by reference).*
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).*
100
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 the Credit Agreement, dated as of February 13, 2001,
between the Company, certain principal subsidiaries, and JPMorgan Chase
Bank (formerly known as The Chase Manhattan Bank), as administrative
agent for certain banks (filed as Exhibit 4.20 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2001 and
incorporated herein by reference).
10.23 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).
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 as Exhibit 4.14 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2002 and
incorporated herein by reference).
10.27 Amended and Restated Credit Agreement, dated as of March 19, 2003,
among the Company and certain of its subsidiaries, the lenders named
therein, JPMorgan Chase Bank, as Administrative Agent, and JPMorgan
Europe Limited, as London Agent (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 27, 2003 and incorporated herein
by reference).
10.28 Amended and Restated Bridge Loan Agreement, dated as of January 16,
2003 and amended and restated as of March 26, 2003, among the Company
and certain of its subsidiaries, the lenders named therein, and JPMorgan
Chase Bank, as Administrative Agent (filed as Exhibit
101
4.2 to the Company's Current Report on Form 8-K dated March 27, 2003 and
incorporated herein by reference).
10.29 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).*
10.30 The Constellation Brands UK Sharesave Scheme, as amended (filed as
Exhibit 10.29 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 28, 2002 and incorporated herein by reference).
10.31 Letter Agreement between the Company and Thomas J. Mullin, dated
February 18, 2000, addressing compensation (filed herewith).*
11.1 Statement re Computation of Per Share Earnings (filed herewith).
21.1 Subsidiaries of Company (filed herewith).
23.1 Consent of KPMG LLP (filed herewith).
23.2 Information Regarding Consent of Arthur Andersen (filed herewith).
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 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
* Designates management contract or compensatory plan or arrangement.
102