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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended May 31, 2004
------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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COMMISSION FILE NUMBER 001-08495
CONSTELLATION BRANDS, INC.
--------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 16-0716709
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 WOODCLIFF DRIVE, SUITE 300, FAIRPORT, NEW YORK 14450
--------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(585) 218-3600
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
The number of shares outstanding with respect to each of the classes of common
stock of Constellation Brands, Inc., as of June 30, 2004, is set forth
below:
CLASS NUMBER OF SHARES OUTSTANDING
----- ----------------------------
Class A Common Stock, Par Value $.01 Per Share 95,218,145
Class B Common Stock, Par Value $.01 Per Share 12,049,730
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ------- --------------------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
May 31, February 29,
2004 2004
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 11,443 $ 37,136
Accounts receivable, net 711,847 635,910
Inventories, net 1,315,356 1,261,378
Prepaid expenses and other 141,589 137,047
------------ ------------
Total current assets 2,180,235 2,071,471
PROPERTY, PLANT AND EQUIPMENT, net 1,060,706 1,097,362
GOODWILL 1,501,912 1,540,637
INTANGIBLE ASSETS, net 723,887 744,978
OTHER ASSETS 82,334 104,225
------------ ------------
Total assets $ 5,549,074 $ 5,558,673
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 243,552 $ 1,792
Current maturities of long-term debt 108,927 267,245
Accounts payable 361,506 270,291
Accrued excise taxes 55,377 48,465
Other accrued expenses and liabilities 397,979 442,009
------------ ------------
Total current liabilities 1,167,341 1,029,802
------------ ------------
LONG-TERM DEBT, less current maturities 1,736,159 1,778,853
------------ ------------
DEFERRED INCOME TAXES 178,258 187,410
------------ ------------
OTHER LIABILITIES 156,633 184,989
------------ ------------
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, 170,500 shares at
May 31, 2004, and February 29, 2004
(Aggregate liquidation preference of
$172,951 at May 31, 2004) 2 2
Class A Common Stock, $.01 par value-
Authorized, 275,000,000 shares;
Issued, 97,577,903 shares at
May 31, 2004, and 97,150,219 shares
at February 29, 2004 976 971
Class B Convertible Common Stock,
$.01 par value-
Authorized, 30,000,000 shares;
Issued, 14,557,530 shares at
May 31, 2004, and 14,564,630 shares
at February 29, 2004 146 146
Additional paid-in capital 1,030,121 1,024,048
Retained earnings 1,059,071 1,010,193
Accumulated other comprehensive
income 250,385 372,302
------------ ------------
2,340,701 2,407,662
------------ ------------
Less-Treasury stock-
Class A Common Stock, 2,583,541 shares
at May 31, 2004, and 2,583,608
shares at February 29, 2004, at cost (27,786) (27,786)
Class B Convertible Common Stock,
2,502,900 shares at May 31, 2004,
and February 29, 2004, at cost (2,207) (2,207)
------------ ------------
(29,993) (29,993)
------------ ------------
Less-Unearned compensation-restricted
stock awards (25) (50)
------------ ------------
Total stockholders' equity 2,310,683 2,377,619
------------ ------------
Total liabilities and stockholders' equity $ 5,549,074 $ 5,558,673
============ ============
The accompanying notes are an integral part of these statements.
1
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
For the Three Months Ended May 31,
----------------------------------
2004 2003
------------ ------------
SALES $ 1,174,315 $ 990,240
Less - Excise taxes (247,010) (217,438)
------------ ------------
Net sales 927,305 772,802
COST OF PRODUCT SOLD (676,843) (563,717)
------------ ------------
Gross profit 250,462 209,085
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES (138,428) (107,802)
RESTRUCTURING AND RELATED CHARGES (1,613) (2,316)
------------ ------------
Operating income 110,421 98,967
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS - 1,181
EQUITY IN EARNINGS OF EQUITY
METHOD INVESTEES 62 328
INTEREST EXPENSE, net (30,281) (39,243)
------------ ------------
Income before income taxes 80,202 61,233
PROVISION FOR INCOME TAXES (28,873) (22,044)
------------ ------------
NET INCOME 51,329 39,189
Dividends on preferred stock (2,451) -
------------ ------------
INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 48,878 $ 39,189
============ ============
SHARE DATA:
Earnings per common share:
Basic $ 0.46 $ 0.42
============ ============
Diluted $ 0.45 $ 0.41
============ ============
Weighted average common shares outstanding:
Basic 106,778 92,880
Diluted 115,062 95,661
The accompanying notes are an integral part of these statements.
2
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
For the Three Months Ended May 31,
----------------------------------
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51,329 $ 39,189
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation of property, plant and equipment 21,194 17,828
Deferred tax provision 6,259 4,650
Amortization of intangible and other assets 3,061 5,966
Noncash portion of loss on extinguishment of debt 1,799 800
Loss (gain) on sale of assets 693 (2,003)
Stock-based compensation expense 25 158
Amortization of discount on long-term debt 13 20
Equity in earnings of equity method investees (62) (328)
Gain on change in fair value of derivative instruments - (1,181)
Change in operating assets and liabilities, net of effects
from purchases of businesses:
Accounts receivable, net (85,132) (39,765)
Inventories, net (113,885) (15,169)
Prepaid expenses and other current assets 12,566 15,571
Accounts payable 112,745 (28,400)
Accrued excise taxes 7,449 5,461
Other accrued expenses and liabilities (56,971) (9,494)
Other assets and liabilities, net (7,541) 334
------------ ------------
Total adjustments (97,787) (45,552)
------------ ------------
Net cash used in operating activities (46,458) (6,363)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (22,113) (18,091)
Payment of accrued earn-out amount (1,338) (978)
Proceeds from sale of assets 445 4,896
Purchases of businesses, net of cash acquired - (1,067,694)
------------ ------------
Net cash used in investing activities (23,006) (1,081,867)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from notes payable 265,891 15,735
Exercise of employee stock options 5,814 7,571
Proceeds from employee stock purchases 1 -
Principal payments of long-term debt (217,204) (492,701)
Payment of preferred stock dividends (2,451) -
Proceeds from issuance of long-term debt - 1,600,000
Payment of issuance costs of long-term debt - (32,547)
------------ ------------
Net cash provided by financing activities 52,051 1,098,058
------------ ------------
Effect of exchange rate changes on cash and cash investments (8,280) 22,370
------------ ------------
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS (25,693) 32,198
CASH AND CASH INVESTMENTS, beginning of period 37,136 13,810
------------ ------------
CASH AND CASH INVESTMENTS, end of period $ 11,443 $ 46,008
============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ - $ 1,893,029
Liabilities assumed - (736,244)
------------ ------------
Net assets acquired - 1,156,785
Less - stock issuance - (77,243)
Less - direct acquisition costs accrued or previously paid - (10,343)
Less - cash acquired - (1,505)
------------ ------------
Net cash paid for purchases of businesses $ - $ 1,067,694
============ ============
The accompanying notes are an integral part of these statements.
3
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2004
1) MANAGEMENT'S REPRESENTATIONS:
The consolidated financial statements included herein have been prepared by
Constellation Brands, Inc. and its subsidiaries (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of
the Company, all adjustments necessary to present fairly the financial
information for the Company. All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted as permitted by such rules and
regulations. These consolidated financial statements and related notes should
be read in conjunction with the consolidated financial statements and related
notes included in the Company's Annual Report on Form 10-K for the fiscal year
ended February 29, 2004. Results of operations for interim periods are not
necessarily indicative of annual results.
2) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
In December 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46 (revised December 2003) ("FIN No. 46(R)"), "Consolidation
of Variable Interest Entities--an interpretation of ARB No. 51". FIN No. 46(R)
supersedes FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable
Interest Entities". FIN No. 46(R) retains many of the basic concepts introduced
in FIN No. 46; however, it also introduces a new scope exception for certain
types of entities that qualify as a business as defined in FIN No. 46(R) and
revises the method of calculating expected losses and residual returns for
determination of primary beneficiaries, including new guidance for assessing
variable interests. The adoption of FIN No. 46(R) did not have a material
impact on the Company's consolidated financial statements.
3) ACQUISITIONS:
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company
completed its acquisition of all of Hardy's outstanding capital stock. As a
result of the acquisition of Hardy, the Company also acquired the remaining 50%
ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the Company
established with Hardy in July 2001. The acquisition of Hardy along with the
remaining interest in PWP is referred to together as the "Hardy Acquisition."
Through this acquisition, the Company acquired Australia's largest wine producer
with interests in wineries and vineyards in most of Australia's major wine
regions as well as New Zealand and the United States. In addition, Hardy has
significant marketing and sales operations in the United Kingdom.
Total consideration paid in cash and Class A Common Stock to the Hardy
shareholders was $1,137.4 million. Additionally, the Company recorded direct
acquisition costs of $17.4 million. The acquisition date for accounting purposes
is March 27, 2003. The Company has recorded a $1.6 million reduction in the
purchase price to reflect imputed interest between the accounting acquisition
date and the final payment of consideration. This charge is included as interest
expense in the Consolidated Statement of Income for the three months ended May
31, 2003. The cash portion of the purchase price paid to the Hardy shareholders
and optionholders ($1,060.2 million) was financed with $660.2 million of
borrowings under the Company's March 2003 Credit Agreement (as defined in Note
7) and $400.0 million of borrowings under the Company's then existing bridge
loan agreement. Additionally, the Company issued 3,288,913 shares of the
Company's Class A Common Stock, which were valued at $77.2 million based on the
simple average of the closing market price of the Company's Class A Common Stock
beginning two
4
days before and ending two days after April 4, 2003, the day the Hardy
shareholders elected the form of consideration they wished to receive. The
purchase price was based primarily on a discounted cash flow analysis that
contemplated, among other things, the value of a broader geographic distribution
in strategic international markets and a presence in the important Australian
winemaking regions. The Company and Hardy have complementary businesses that
share a common growth orientation and operating philosophy. The Hardy
Acquisition supports the Company's strategy of growth and breadth across
categories and geographies, and strengthens its competitive position in its core
markets. The purchase price and resulting goodwill were primarily based on the
growth opportunities of the brand portfolio of Hardy. In particular, the Company
believes there are growth opportunities for Australian wines in the United
Kingdom, United States and other wine markets. This acquisition supports the
Company's strategy of driving long-term growth and positions the Company to
capitalize on the growth opportunities in "new world" wine markets.
The results of operations of Hardy and PWP are reported in the
Constellation Wines segment and have been included in the Consolidated
Statements of Income since the accounting acquisition date.
The following table summarizes the fair values of the assets acquired and
liabilities assumed in the Hardy Acquisition at March 27, 2003, as adjusted for
the final appraisal:
(in thousands)
Current assets $ 535,374
Property, plant and equipment 332,125
Other assets 27,672
Trademarks 265,583
Goodwill 613,900
----------
Total assets acquired 1,774,654
Current liabilities 294,787
Long-term liabilities 326,646
----------
Total liabilities acquired 621,433
----------
Net assets acquired $1,153,221
==========
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 historical and unaudited pro
forma results of operations of the Company for the three months ended May 31,
2004, and May 31, 2003, respectively. The unaudited pro forma results of
operations for the three months ended May 31, 2003, give effect to the Hardy
Acquisition as if it occurred on March 1, 2003. The unaudited pro forma results
of operations are presented after giving effect to certain adjustments for
depreciation, amortization of deferred financing costs, interest expense on the
acquisition financing and related income tax effects. The unaudited pro forma
results of operations are based upon currently available information and certain
assumptions that the Company believes are reasonable under the circumstances.
The unaudited pro forma results of operations for the three months ended May 31,
2003, do not reflect total pretax nonrecurring charges of $30.3 million ($0.23
per share on a diluted basis) related to transaction costs, primarily for the
payment of stock options, which were incurred by Hardy prior to the acquisition,
partially offset by the one-time benefit resulting from the application of new
Australian tax consolidation rules effective for Hardy March 27, 2003, related
to acquisition basis adjustments to fair value of $10.6 million ($0.11 per share
on a diluted basis). The unaudited pro forma results of operations do not
purport to present what the Company's results of operations would actually have
been if the aforementioned transaction had in fact occurred on March 1, 2003,
nor do they project the Company's financial position or results of operations at
any future date or for any future period.
5
For the Three Months
Ended May 31,
-------------------------
2004 2003
----------- -----------
(in thousands, except per share data)
Net sales $ 927,305 $ 802,162
Income before income taxes $ 80,202 $ 51,904
Net income $ 51,329 $ 33,829
Income available to common stockholders $ 48,878 $ 33,829
Earnings per common share:
Basic $ 0.46 $ 0.36
=========== ===========
Diluted $ 0.45 $ 0.35
=========== ===========
Weighted average common shares outstanding:
Basic 106,778 94,274
Diluted 115,062 97,055
4) INVENTORIES:
Inventories are stated at the lower of cost (computed in accordance with
the first-in, first-out method) or market. Elements of cost include materials,
labor and overhead and consist of the following:
May 31, February 29,
2004 2004
------------- -------------
(in thousands)
Raw materials and supplies $ 43,990 $ 49,633
In-process inventories 845,523 803,200
Finished case goods 425,843 408,545
------------- -------------
$ 1,315,356 $ 1,261,378
============= =============
5) GOODWILL:
The changes in the carrying amount of goodwill for the three months ended
May 31, 2004, are as follows:
Constellation
Constellation Beers and
Wines Spirits Consolidated
------------- ------------- ------------
(in thousands)
Balance, February 29, 2004 $ 1,407,350 $ 133,287 $ 1,540,637
Purchase accounting allocations (1,910) - (1,910)
Foreign currency translation
adjustments (37,082) (270) (37,352)
Purchase price earn-out 537 - 537
------------- ------------- ------------
Balance, May 31, 2004 $ 1,368,895 $ 133,017 $ 1,501,912
============= ============= ============
6
6) INTANGIBLE ASSETS:
The major components of intangible assets are:
May 31, 2004 February 29, 2004
----------------------- -----------------------
Gross Net Gross Net
Carrying Carrying Carrying Carrying
Amount Amount Amount Amount
---------- ---------- ---------- ----------
(in thousands)
Amortizable intangible assets:
Distribution agreements $ 12,883 $ 3,611 $ 12,883 $ 4,455
Other 4,021 57 4,021 64
---------- ---------- ---------- ----------
Total $ 16,904 3,668 $ 16,904 4,519
========== ==========
Nonamortizable intangible assets:
Trademarks 701,807 722,047
Agency relationships 18,412 18,412
---------- ----------
Total 720,219 740,459
---------- ----------
Total intangible assets $ 723,887 $ 744,978
========== ==========
The difference between the gross carrying amount and net carrying amount
for each item presented is attributable to accumulated amortization.
Amortization expense for intangible assets was $0.8 million and $0.4 million for
the three months ended May 31, 2004, and May 31, 2003, respectively. Estimated
amortization expense for the remaining nine months of fiscal 2005 and for each
of the five succeeding fiscal years is as follows:
(in thousands)
2005 $ 1,972
2006 $ 1,318
2007 $ 341
2008 $ 25
2009 $ 12
2010 $ -
7) BORROWINGS:
Senior credit facility -
----------------------
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
entered into a new credit agreement (as subsequently amended and restated as of
March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the
Company entered into a Second Amended and Restated Credit Agreement (the
"October Credit Agreement") that (i) refinanced the then outstanding principal
balance under the Tranche B Term Loan facility on essentially the same terms as
the Tranche B Term Loan facility under the March 2003 Credit Agreement, but at a
lower Applicable Rate (as such term is defined in the October Credit Agreement)
and (ii) otherwise restated the terms of the March 2003 Credit Agreement, as
amended. The October Credit Agreement was further amended during February 2004
(the "Credit Agreement"). The March 2003 Credit Agreement provided for
aggregate credit facilities of $1.6 billion consisting of a $400.0 million
Tranche A Term Loan facility due in February 2008, an $800.0 million Tranche B
Term Loan facility due in November 2008 and a $400.0 million Revolving Credit
facility (including an Australian Dollar revolving sub-facility of up to A$10.0
million and a sub-facility for letters of credit of up to $40.0 million) which
expires on February 29, 2008. Proceeds of the March 2003 Credit Agreement were
used to pay off the Company's obligations under its prior senior credit
facility, to fund a portion of the cash required to pay the former Hardy
shareholders and to pay indebtedness outstanding under certain of
7
Hardy's credit facilities. The Company uses the remaining availability under the
Credit Agreement to fund its working capital needs on an on-going basis.
The Tranche A Term Loan facility and the Tranche B Term Loan facility were
fully drawn on March 27, 2003. As of May 31, 2004, the Company has made $55.0
million of scheduled and required payments on the Tranche A Term Loan facility,
including $15.0 million during the three months ended May 31, 2004. In August
2003, the Company paid $100.0 million of the Tranche B Term Loan facility. In
October 2003, the Company paid an additional $200.0 million of the Tranche B
Term Loan facility. As of May 31, 2004, the required repayments of the Tranche A
Term Loan and the Tranche B Term Loan are as follows:
Tranche A Tranche B
Term Loan Term Loan Total
----------- ----------- -----------
(in thousands)
2005 $ 45,000 $ - $ 45,000
2006 80,000 54,420 134,420
2007 100,000 54,420 154,420
2008 120,000 119,048 239,048
2009 - 272,112 272,112
----------- ----------- -----------
$ 345,000 $ 500,000 $ 845,000
=========== =========== ===========
The rate of interest payable, at the Company's option, is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate
plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the Credit Agreement) and, with respect to LIBOR borrowings, ranges
between 1.50% and 2.50%. As of May 31, 2004, the LIBOR margin for the Revolving
Credit facility and the Tranche A Term Loan facility is 1.75%, while the LIBOR
margin on the Tranche B Term Loan facility is 2.00%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company is obligated to pledge collateral of (i)
100% of the capital stock of all of the Company's U.S. subsidiaries and certain
foreign subsidiaries and (ii) 65% of the voting capital stock of certain other
foreign subsidiaries of the Company.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, the incurrence of additional
indebtedness (including guarantees of indebtedness), the sale of assets, the
payment of dividends, transactions with affiliates and the making of certain
investments, in each case subject to baskets, exceptions and/or thresholds. The
primary financial covenants require the maintenance of a debt coverage ratio, a
senior debt coverage ratio, a fixed charge ratio and an interest coverage ratio.
As of May 31, 2004, the Company is in compliance with all of its covenants under
its Credit Agreement.
As of May 31, 2004, under the Credit Agreement, the Company had outstanding
Tranche A Term Loans of $345.0 million bearing a weighted average interest rate
of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted average
interest rate of 3.2%, $235.0 million of revolving loans bearing a weighted
average interest rate of 2.9%, undrawn revolving letters of credit of $18.4
million, and $146.7 million in revolving loans available to be drawn.
Subsidiary facilities -
---------------------
The Company has additional line of credit facilities totaling $101.9
million as of May 31, 2004. These lines support the borrowing needs of certain
of the Company's foreign subsidiary operations. Interest rates and other terms
of these borrowings vary from country to country, depending on local market
conditions. As of May 31, 2004, amounts outstanding under the subsidiary
revolving credit facilities were $8.4 million.
8
Redemption of senior subordinated notes -
---------------------------------------
On March 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated
Notes"). The Senior Subordinated Notes were redeemable at the option of the
Company, in whole or in part, at any time on or after March 1, 2004. As of
February 29, 2004, the Company had outstanding $200.0 million aggregate
principal amount of Senior Subordinated Notes. On February 10, 2004, the Company
issued a Notice of Redemption for its Senior Subordinated Notes. The Senior
Subordinated Notes were redeemed with proceeds from the Revolving Credit
facility on March 11, 2004, at 104.25% of par plus accrued interest. During the
three months ended May 31, 2004, in connection with this redemption, the Company
recorded a charge of $10.3 million in selling, general and administrative
expenses for the call premium and the remaining unamortized financing fees
associated with the original issuance of the Senior Subordinated Notes.
Guarantees -
----------
A foreign subsidiary of the Company has guaranteed debt of a joint venture
in the maximum amount of $3.9 million as of May 31, 2004. The liability for
this guarantee is not material and the Company does not have any collateral from
this entity.
8) RETIREMENT SAVINGS PLANS AND POSTRETIREMENT BENEFIT PLANS:
Net periodic benefit costs reported in the Consolidated Statements of
Income for the Company's defined benefit pension plans and unfunded
postretirement benefit plans include the following components:
Defined Benefit Unfunded Postretirement
Pension Plans Benefit Plans
---------------------------- ----------------------------
For the Three Months Ended For the Three Months Ended
---------------------------- ----------------------------
May 31, May 31, May 31, May 31,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(in thousands)
Service cost $ 543 $ 551 $ 52 $ 37
Interest cost 3,975 3,618 83 71
Expected return on plan assets (4,201) (3,789) - -
Amortization of prior service cost 573 2 2 1
Recognized net actuarial loss 50 505 5 5
----------- ----------- ----------- -----------
Net periodic benefit cost $ 940 $ 887 $ 142 $ 114
=========== =========== =========== ===========
For the three months ended May 31, 2004, $0.8 million of contributions had
been made by the Company to fund its pension plans. The Company presently
anticipates contributing an additional $2.6 million to fund its pension plans in
Fiscal 2005, resulting in total employer contributions of $3.4 million for
Fiscal 2005.
9) EARNINGS PER COMMON SHARE:
Basic earnings per common share exclude the effect of common stock
equivalents and are computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period
for Class A Common Stock and Class B Common Stock. Diluted earnings per common
share reflect the potential dilution that could result if securities or other
contracts to issue common stock were exercised or converted into common stock.
Diluted earnings per common share assume the exercise of stock options using the
treasury stock method and the conversion of Preferred Stock using the
if-converted method.
9
The computation of basic and diluted earnings per common share is as
follows:
For the Three Months
Ended May 31,
---------------------
2004 2003
--------- ---------
(in thousands, except per share data)
Net income $ 51,329 $ 39,189
Dividends on preferred stock (2,451) -
--------- ---------
Income available to common stockholders $ 48,878 $ 39,189
========= =========
Weighted average common shares outstanding - basic 106,778 92,880
Stock options 3,292 2,781
Preferred stock 4,992 -
--------- ---------
Weighted average common shares outstanding - diluted 115,062 95,661
========= =========
Earnings per common share - basic $ 0.46 $ 0.42
========= =========
Earnings per common share - diluted $ 0.45 $ 0.41
========= =========
Stock options to purchase 2.5 million and 0.9 million shares of Class A
Common Stock at a weighted average price per share of $33.26 and $27.39 were
outstanding during the three months ended May 31, 2004, and May 31, 2003,
respectively, but were not included in the computation of the diluted earnings
per common share because the stock options' exercise price was greater than the
average market price of the Class A Common Stock for the period.
10) STOCK-BASED COMPENSATION:
The Company applies the intrinsic value method described in Accounting
Principles Board Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
employee compensation plans. In accordance with APB No. 25, the compensation
cost for stock options is recognized in income based on the excess, if any, of
the quoted market price of the stock at the grant date of the award or other
measurement date over the amount an employee must pay to acquire the stock.
Options granted under the Company's plans have an exercise price equal to the
market value of the underlying common stock on the date of grant; therefore, no
incremental compensation expense has been recognized for grants made to
employees under the Company's stock option plans. The Company utilizes the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," as amended.
(See Note 15 for additional discussion regarding a proposed statement dealing
with Share Based Payments.) The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
10
For the Three Months
Ended May 31,
--------------------
2004 2003
-------- --------
(in thousands, except per share data)
Net income, as reported $ 51,329 $ 39,189
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 15 105
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (2,634) (2,465)
-------- --------
Pro forma net income $ 48,710 $ 36,829
======== ========
Earnings per common share:
Basic--as reported $ 0.46 $ 0.42
Basic--pro forma $ 0.43 $ 0.40
Diluted--as reported $ 0.45 $ 0.41
Diluted--pro forma $ 0.42 $ 0.38
11) COMPREHENSIVE INCOME:
Comprehensive income consists of net income, foreign currency translation
adjustments, net unrealized gains or losses on derivative instruments, net
unrealized gains or losses on available-for-sale marketable equity securities
and minimum pension liability adjustments. The reconciliation of net income to
comprehensive income is as follows:
For the Three Months
Ended May 31,
------------------------
2004 2003
---------- ----------
(in thousands)
Net income $ 51,329 $ 39,189
Other comprehensive income, net of tax:
Foreign currency translation adjustments (104,745) 127,771
Cash flow hedges:
Net derivative (losses) gains, net of tax benefit
(expense) of $9,464 and ($7,021), respectively (21,896) 12,482
Reclassification adjustments, net of tax expense
of $1,503 3,411 -
---------- ----------
Net cash flow hedges (18,485) 12,482
Unrealized gain on marketable equity securities,
net of tax expense of $78 182 -
Minimum pension liability adjustment, net of tax
(expense) benefit of $498 and $1,022, respectively 1,131 (1,818)
---------- ----------
Total comprehensive (loss) income $ (70,588) $ 177,624
========== ==========
11
Accumulated other comprehensive income (loss) ("AOCI"), net of tax effects,
includes the following components:
Unrealized
Foreign Net Loss On Minimum Accumulated
Currency Unrealized Marketable Pension Other
Translation Gains on Equity Liability Comprehensive
Adjustments Derivatives Securities Adjustment Income (Loss)
----------- ----------- ---------- ---------- -------------
(in thousands)
Balance, February 29, 2004 $ 393,972 $ 36,949 $ (432) $ (58,187) $ 372,302
Current period change (104,745) (18,485) 182 1,131 (121,917)
----------- ----------- ---------- ---------- -------------
Balance, May 31, 2004 $ 289,227 $ 18,464 $ (250) $ (57,056) $ 250,385
=========== =========== ========== ========== =============
The Company has an investment in marketable equity securities with an
aggregate fair value of $13.9 million and $14.8 million as of May 31, 2004, and
February 29, 2004, respectively, which is classified as an available-for-sale
security. As such, gross unrealized losses of $0.4 million and $0.6 million as
of May 31, 2004, and February 29, 2004, respectively, are included, net of
applicable income taxes, within AOCI as of February 29, 2004. The Company uses
the average cost method as its basis on which cost is determined in computing
realized gains or losses. There were no realized gains or losses on sales of
securities during the three months ended May 31, 2004. Realized gains on sales
of securities during the three months ended May 31, 2003, are immaterial.
12) RESTRUCTURING AND RELATED CHARGES:
For the three months ended May 31, 2004, the Company recorded $1.6 million
of restructuring and related charges associated with the restructuring plan of
the Constellation Wines segment. Restructuring and related charges resulted
from the further realignment of business operations as previously announced in
fiscal 2004, and included $1.2 million of employee termination benefit costs,
$0.3 million of facility consolidation and relocation costs, and other related
charges of $0.1 million. For the three months ended May 31, 2003, the Company
recorded $2.3 million of restructuring and related charges associated with the
restructuring plan of the Constellation Wines segment.
The Company estimates that the completion of the restructuring actions will
include (i) a total of $9.8 million of employee termination benefit costs
through February 28, 2005, of which $8.1 million has been incurred through May
31, 2004, (ii) a total of $22.1 million of grape contract termination costs
through February 28, 2005, of which $17.7 million has been incurred through May
31, 2004, and (iii) a total of $5.1 million of facility consolidation and
relocation costs through February 28, 2005, of which $2.2 million has been
incurred through May 31, 2004. The Company has incurred other costs related to
the restructuring plan for the disposal of fixed assets and other costs of
realigning the business operations of the Constellation Wines segment. The
Company expects to incur additional costs of realigning the business operations
of $1.3 million during the year ending February 28, 2005, of which $0.1 million
has been incurred through May 31, 2004.
The following table illustrates the changes in the restructuring liability
balance since February 29, 2004:
Employee Grape Facility
Termination Contract Consolidation/
Benefit Termination Relocation
Costs Costs Costs Total
----------- ----------- -------------- ---------
(in thousands)
Balance, February 29, 2004 $ 1,539 $ 1,048 $ - $ 2,587
Restructuring charges 1,231 - 256 1,487
Cash expenditures (1,575) - (256) (1,831)
Foreign currency adjustments (55) - - (55)
----------- ----------- -------------- ---------
Balance, May 31, 2004 $ 1,140 $ 1,048 $ - $ 2,188
=========== =========== ============== =========
12
13) CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance
sheets of the Company as of May 31, 2004, and February 29, 2004, and the
condensed consolidating statements of income and cash flows for the three months
ended May 31, 2004, and May 31, 2003, for the Company, the parent company, the
combined subsidiaries of the Company which guarantee the Company's senior notes
and senior subordinated notes ("Subsidiary Guarantors") and the combined
subsidiaries of the Company which are not Subsidiary Guarantors, primarily
Matthew Clark and Hardy and their subsidiaries, which are included in the
Constellation Wines segment ("Subsidiary Nonguarantors"). The Subsidiary
Guarantors are wholly owned and the guarantees are full, unconditional, joint
and several obligations of each of the Subsidiary Guarantors. Separate
financial statements for the Subsidiary Guarantors of the Company are not
presented because the Company has determined that such financial statements
would not be material to investors. The accounting policies of the parent
company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are the same
as those described for the Company in the Summary of Significant Accounting
Policies in Note 1 to the Company's consolidated financial statements included
in the Company's Annual Report on Form 10-K for the fiscal year ended February
29, 2004, and include the recently adopted accounting pronouncements described
in Note 2 herein. There are no restrictions on the ability of the Subsidiary
Guarantors to transfer funds to the Company in the form of cash dividends, loans
or advances.
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at May 31, 2004
- ---------------
Current assets:
Cash and cash investments $ 3,044 $ 1,526 $ 6,873 $ - $ 11,443
Accounts receivable, net 110,259 168,315 433,273 - 711,847
Inventories, net 9,457 605,182 708,921 (8,204) 1,315,356
Prepaid expenses and other 23,337 70,142 48,110 - 141,589
Intercompany (payable) receivable (363,863) (155,533) 519,396 - -
----------- ----------- ------------- ------------ ------------
Total current assets (217,766) 689,632 1,716,573 (8,204) 2,180,235
Property, plant and equipment, net 49,638 352,074 658,994 - 1,060,706
Investments in subsidiaries 4,316,779 1,873,912 - (6,190,691) -
Goodwill 49,202 494,065 958,645 - 1,501,912
Intangible assets, net 10,572 313,602 399,713 - 723,887
Other assets 32,236 2,176 47,922 - 82,334
----------- ----------- ------------- ------------ ------------
Total assets $ 4,240,661 $ 3,725,461 $ 3,781,847 $ (6,198,895) $ 5,549,074
=========== =========== ============= ============ ============
Current liabilities:
Notes payable to banks $ 235,000 $ - $ 8,552 $ - $ 243,552
Current maturities of long-term debt 78,669 3,270 26,988 - 108,927
Accounts payable 23,613 55,730 282,163 - 361,506
Accrued excise taxes 7,869 20,895 26,613 - 55,377
Other accrued expenses and liabilities 134,573 2,415 260,991 - 397,979
----------- ----------- ------------- ------------ ------------
Total current liabilities 479,724 82,310 605,307 - 1,167,341
Long-term debt, less current maturities 1,700,016 6,761 29,382 - 1,736,159
Deferred income taxes 41,773 95,310 41,175 - 178,258
Other liabilities 4,678 21,764 130,191 - 156,633
13
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Stockholders' equity:
Preferred stock 2 - - - 2
Class A and Class B common stock 1,122 6,434 141,582 (148,016) 1,122
Additional paid-in capital 1,030,121 1,806,948 2,660,583 (4,467,531) 1,030,121
Retained earnings 1,067,275 1,494,167 80,977 (1,583,348) 1,059,071
Accumulated other comprehensive
(loss) income (54,032) 211,767 92,650 - 250,385
Treasury stock and other (30,018) - - - (30,018)
----------- ----------- ------------- ------------ ------------
Total stockholders' equity 2,014,470 3,519,316 2,975,792 (6,198,895) 2,310,683
----------- ----------- ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 4,240,661 $ 3,725,461 $ 3,781,847 $ (6,198,895) $ 5,549,074
=========== =========== ============= ============ ============
Condensed Consolidating Balance Sheet
- -------------------------------------
at February 29, 2004
- --------------------
Current assets:
Cash and cash investments $ 1,048 $ 3,931 $ 32,157 $ - $ 37,136
Accounts receivable, net 137,422 127,004 371,484 - 635,910
Inventories, net 9,922 621,866 636,962 (7,372) 1,261,378
Prepaid expenses and other 8,734 68,596 59,717 - 137,047
Intercompany (payable) receivable (381,765) (150,962) 532,727 - -
----------- ----------- ------------- ------------ ------------
Total current assets (224,639) 670,435 1,633,047 (7,372) 2,071,471
Property, plant and equipment, net 50,022 353,693 693,647 - 1,097,362
Investments in subsidiaries 4,270,871 1,852,036 - (6,122,907) -
Goodwill 50,338 496,691 993,608 - 1,540,637
Intangible assets, net 10,572 314,423 419,983 - 744,978
Other assets 36,041 2,146 66,038 - 104,225
----------- ----------- ------------- ------------ ------------
Total assets $ 4,193,205 $ 3,689,424 $ 3,806,323 $ (6,130,279) $ 5,558,673
=========== =========== ============= ============ ============
Current liabilities:
Notes payable to banks $ - $ - $ 1,792 $ - $ 1,792
Current maturities of long-term debt 260,061 3,542 3,642 - 267,245
Accounts payable 33,631 60,327 176,333 - 270,291
Accrued excise taxes 8,005 15,053 25,407 - 48,465
Other accrued expenses and liabilities 151,534 11,956 278,519 - 442,009
----------- ----------- ------------- ------------ ------------
Total current liabilities 453,231 90,878 485,693 - 1,029,802
Long-term debt, less current maturities 1,739,221 7,510 32,122 - 1,778,853
Deferred income taxes 56,815 98,119 32,476 - 187,410
Other liabilities 6,209 21,646 157,134 - 184,989
Stockholders' equity:
Preferred stock 2 - - - 2
Class A and Class B common stock 1,117 6,434 141,582 (148,016) 1,117
Additional paid-in capital 1,024,048 1,829,418 2,660,711 (4,490,129) 1,024,048
Retained earnings 1,017,565 1,425,789 58,973 (1,492,134) 1,010,193
Accumulated other comprehensive
(loss) income (74,960) 209,630 237,632 - 372,302
Treasury stock and other (30,043) - - - (30,043)
----------- ----------- ------------- ------------ ------------
Total stockholders' equity 1,937,729 3,471,271 3,098,898 (6,130,279) 2,377,619
----------- ----------- ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 4,193,205 $ 3,689,424 $ 3,806,323 $ (6,130,279) $ 5,558,673
=========== =========== ============= ============ ============
14
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended May 31, 2004
- ---------------------------------------
Sales $ 170,540 $ 457,078 $ 617,308 $ (70,611) $ 1,174,315
Less - excise taxes (31,855) (108,264) (106,891) - (247,010)
----------- ----------- ------------- ------------ ------------
Net sales 138,685 348,814 510,417 (70,611) 927,305
Cost of product sold (131,112) (203,998) (411,512) 69,779 (676,843)
----------- ----------- ------------- ------------ ------------
Gross profit 7,573 144,816 98,905 (832) 250,462
Selling, general and administrative
expenses (38,844) (44,438) (55,146) - (138,428)
Restructuring and related charges - (1,301) (312) - (1,613)
----------- ----------- ------------- ------------ ------------
Operating (loss) income (31,271) 99,077 43,447 (832) 110,421
Gain on change in fair value of
derivative instruments - - - - -
Equity in earnings of equity
method investees 68,378 22,004 62 (90,382) 62
Interest income (expense), net 5,499 (27,491) (8,289) - (30,281)
----------- ----------- ------------- ------------ ------------
Income before income taxes 42,606 93,590 35,220 (91,214) 80,202
Benefit from (provision for)
income taxes 9,555 (25,212) (13,216) - (28,873)
----------- ----------- ------------- ------------ ------------
Net income 52,161 68,378 22,004 (91,214) 51,329
Dividends on preferred stock (2,451) - - - (2,451)
----------- ----------- ------------- ------------ ------------
Income available to common
stockholders $ 49,710 $ 68,378 $ 22,004 $ (91,214) $ 48,878
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Income
- ------------------------------------------
for the Three Months Ended May 31, 2003
- ---------------------------------------
Sales $ 172,326 $ 497,302 $ 411,271 $ (90,659) $ 990,240
Less - excise taxes (29,853) (105,280) (82,305) - (217,438)
----------- ----------- ------------- ------------ ------------
Net sales 142,473 392,022 328,966 (90,659) 772,802
Cost of product sold (118,292) (272,615) (263,400) 90,590 (563,717)
----------- ----------- ------------- ------------ ------------
Gross profit 24,181 119,407 65,566 (69) 209,085
Selling, general and administrative
expenses (28,901) (42,685) (36,216) - (107,802)
Restructuring and related charges - (1,991) (325) - (2,316)
----------- ----------- ------------- ------------ ------------
Operating (loss) income (4,720) 74,731 29,025 (69) 98,967
Gain on change in fair value of
derivative instruments 1,181 - - - 1,181
Equity in earnings (loss) of
equity method investees 44,311 21,622 (212) (65,393) 328
Interest expense, net (1,564) (35,771) (1,908) - (39,243)
----------- ----------- ------------- ------------ ------------
Income before income taxes 39,208 60,582 26,905 (65,462) 61,233
Benefit from (provision for)
income taxes 50 (16,271) (5,823) - (22,044)
----------- ----------- ------------- ------------ ------------
Net income 39,258 44,311 21,082 (65,462) 39,189
Dividends on preferred stock - - - - -
----------- ----------- ------------- ------------ ------------
Income available to common
stockholders $ 39,258 $ 44,311 $ 21,082 $ (65,462) $ 39,189
=========== =========== ============= ============ ============
15
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Three Months Ended May 31, 2004
- ---------------------------------------
(in thousands)
Net cash (used in) provided by
operating activities $ (41,380) $ 27,847 $ (32,925) $ - $ (46,458)
Cash flows from investing activities:
Purchases of property, plant and
equipment (2,006) (6,560) (13,547) - (22,113)
Payment of accrued earn-out amount - (1,338) - - (1,338)
Proceeds from sale of assets 5 - 440 - 445
Purchases of businesses, net of
cash acquired - - - - -
----------- ----------- ------------- ------------ ------------
Net cash used in investing activities (2,001) (7,898) (13,107) - (23,006)
----------- ----------- ------------- ------------ ------------
Cash flows from financing activities:
Net proceeds from notes payable 235,000 48 30,843 - 265,891
Intercompany financing activities, net 22,000 (22,000) - - -
Exercise of employee stock options 5,814 - - - 5,814
Proceeds from employee stock
purchases 1 - - - 1
Principal payments of long-term debt (215,014) (1,021) (1,169) - (217,204)
Payment of preferred stock dividends (2,451) - - - (2,451)
Proceeds from issuance of long-term
debt - - - - -
Payment of issuance costs of
long-term debt - - - - -
----------- ----------- ------------- ------------ ------------
Net cash provided by (used in)
financing activities 45,350 (22,973) 29,674 - 52,051
----------- ----------- ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments 27 619 (8,926) - (8,280)
----------- ----------- ------------- ------------ ------------
Net increase (decrease) in cash and
cash investments 1,996 (2,405) (25,284) - (25,693)
Cash and cash investments, beginning
of period 1,048 3,931 32,157 - 37,136
----------- ----------- ------------- ------------ ------------
Cash and cash investments, end of
period $ 3,044 $ 1,526 $ 6,873 $ - $ 11,443
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Three Months Ended May 31, 2003
- ---------------------------------------
Net cash (used in) provided by
operating activities $ (7,108) $ 3,759 $ (3,014) $ - $ (6,363)
Cash flows from investing activities:
Purchases of property, plant and
equipment (3,288) (5,268) (9,535) - (18,091)
Payment of accrued earn-out amount - (978) - - (978)
Proceeds from sale of assets - - 4,896 - 4,896
Purchases of businesses, net of
cash acquired - (1,067,694) - - (1,067,694)
----------- ----------- ------------- ------------ ------------
Net cash used in investing activities (3,288) (1,073,940) (4,639) - (1,081,867)
----------- ----------- ------------- ------------ ------------
16
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Cash flows from financing activities:
Net proceeds from notes payable 13,000 - 2,735 - 15,735
Intercompany financing activities, net (1,418,274) 1,069,166 349,108 - -
Exercise of employee stock options 7,571 - - - 7,571
Proceeds from employee stock
purchases - - - - -
Principal payments of long-term debt (145,363) (840) (346,498) - (492,701)
Payment of preferred stock dividends - - - - -
Proceeds from issuance of long-term
debt 1,600,000 - - - 1,600,000
Payment of issuance costs of
long-term debt (32,547) - - - (32,547)
----------- ----------- ------------- ------------ ------------
Net cash provided by financing
activities 24,387 1,068,326 5,345 - 1,098,058
----------- ----------- ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments 916 2,392 19,062 - 22,370
----------- ----------- ------------- ------------ ------------
Net increase in cash and cash
investments 14,907 537 16,754 - 32,198
Cash and cash investments, beginning
of period 1,426 1,248 11,136 - 13,810
----------- ----------- ------------- ------------ ------------
Cash and cash investments, end of
period $ 16,333 $ 1,785 $ 27,890 $ - $ 46,008
=========== =========== ============= ============ ============
14) BUSINESS SEGMENT INFORMATION:
The Company reports its operating results in three segments: Constellation
Wines (branded wine, and U.K. wholesale and other), Constellation Beers and
Spirits (imported beers and distilled spirits) and Corporate Operations and
Other (primarily corporate related items and other). Amounts included in the
Corporate Operations and Other segment consist of general corporate
administration and finance expenses. These amounts include costs of executive
management, investor relations, internal audit, treasury, tax, corporate
development, legal, financial reporting, professional fees and public relations.
Any costs incurred at the corporate office that are applicable to the segments
are allocated to the appropriate segment. The amounts included in the Corporate
Operations and Other segment are general costs that are applicable to the
consolidated group and are therefore not allocated to the other reportable
segments. All costs reported within the Corporate Operations and Other segment
are not included in the chief operating decision maker's evaluation of the
operating income performance of the other operating segments. The business
segments reflect how the Company's operations are being managed, how operating
performance within the Company is being evaluated by senior management and the
structure of its internal financial reporting. In addition, the Company excludes
restructuring and related charges and unusual costs that affect comparability
from its definition of operating income for segment purposes. For the three
months ended May 31, 2004, Restructuring and Unusual Costs consist of financing
costs associated with the redemption of the Company's Senior Subordinated Notes
(as defined in Note 7) of $10.3 million, restructuring and related charges of
$1.6 million, and the flow through of inventory step-up associated with the
Hardy Acquisition of $1.3 million. For the three months ended May 31, 2003,
Restructuring and Unusual Costs consist of the flow through of inventory step-up
and financing costs associated with the Hardy Acquisition of $5.5 million and
$4.1 million, respectively, and restructuring and related charges of $2.3
million. The Company evaluates performance based on operating income of the
respective business units. The accounting policies of the segments are the same
as those described for the Company in the Summary of Significant Accounting
Policies in Note 1 to the Company's consolidated financial statements included
in the Company's Annual Report on Form 10-K for the fiscal
17
year ended February 29, 2004, and include the recently adopted accounting
pronouncements described in Note 2. Transactions between segments consist mainly
of sales of products and are accounted for at cost plus an applicable margin.
Segment information is as follows:
For the Three Months
Ended May 31,
----------------------------
2004 2003
------------ ------------
(in thousands)
Constellation Wines:
- -------------------
Net sales:
Branded wine $ 363,883 $ 310,480
Wholesale and other 247,235 184,853
------------ ------------
Net sales $ 611,118 $ 495,333
Segment operating income $ 67,659 $ 61,023
Equity in earnings of equity
method investees $ 62 $ 328
Long-lived assets $ 969,046 $ 885,832
Investments in equity method investees $ 7,686 $ 5,459
Total assets $ 4,697,738 $ 4,524,452
Capital expenditures $ 19,529 $ 14,728
Depreciation and amortization $ 18,932 $ 15,550
Constellation Beers and Spirits:
- -------------------------------
Net sales:
Imported beers $ 236,896 $ 207,264
Spirits 79,291 70,205
------------ ------------
Net sales $ 316,187 $ 277,469
Segment operating income $ 67,852 $ 59,883
Long-lived assets $ 79,186 $ 81,564
Total assets $ 778,492 $ 754,543
Capital expenditures $ 1,826 $ 1,783
Depreciation and amortization $ 2,760 $ 2,560
Corporate Operations and Other:
- ------------------------------
Net sales $ - $ -
Segment operating loss $ (11,869) $ (10,071)
Long-lived assets $ 12,474 $ 13,720
Total assets $ 72,844 $ 79,961
Capital expenditures $ 758 $ 1,580
Depreciation and amortization $ 2,563 $ 5,684
Restructuring and Unusual Costs:
- -------------------------------
Operating loss $ (13,221) $ (11,868)
Consolidated:
- ------------
Net sales $ 927,305 $ 772,802
Operating income $ 110,421 $ 98,967
Equity in earnings of equity
method investees $ 62 $ 328
Long-lived assets $ 1,060,706 $ 981,116
Investments in equity method investees $ 7,686 $ 5,459
Total assets $ 5,549,074 $ 5,358,956
Capital expenditures $ 22,113 $ 18,091
Depreciation and amortization $ 24,255 $ 23,794
18
15) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In December 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (revised 2003) ("SFAS No. 132(R)"),
"Employers' Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132(R) supersedes
Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by
revising employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS
No. 132 regarding the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28
("APB Opinion No. 28"), "Interim Financial Reporting," to require additional
disclosures for interim periods. The Company has adopted certain of the annual
disclosure provisions of SFAS No. 132(R), primarily those related to its U.S.
postretirement plan, for the fiscal year ended February 29, 2004. In addition,
the Company has adopted the interim disclosure provisions of SFAS No. 132(R) for
the three months ended May 31, 2004. The Company is required to adopt the
remaining annual disclosure provisions, primarily those related to its foreign
plans, for the fiscal year ending February 28, 2005.
In March 2004, the Financial Accounting Standards Board issued a proposed
statement, "Share-Based Payment, an amendment of FASB Statements No. 123 and
95." The objective of the proposed statement is to require recognition in an
entity's financial statements of the cost of employee services received in
exchange for equity instruments issued, and liabilities incurred, to employees
in share-based payment (or compensation) transactions based on the fair value of
the instruments at the grant date. The proposed statement would eliminate the
alternative of continuing to account for share-based payment arrangements with
employees under APB No. 25 and require that the compensation cost resulting from
all share-based payment transactions be recognized in an entity's financial
statements. If adopted in its current form, the proposed statement would be
effective for awards that are granted, modified, or settled in fiscal years
beginning after December 15, 2004. Also, if adopted in its current form, the
proposed statement could result in a significant charge to the Company's
Consolidated Statement of Income for the fiscal year ended February 28, 2006.
In March 2004, the Emerging Issues Task Force ("EITF") ratified the
consensuses reached in EITF Issue No. 03-6 ("EITF No. 03-6"), "Participating
Securities and the Two-Class Method under FASB Statement No. 128." EITF No. 03-6
clarifies what is meant by a "participating security," provides guidance on
applying the two-class method for computing earnings per share, and requires
affected companies to retroactively restate earnings per share amounts
presented. The Company is required to adopt EITF No. 03-6 for reporting periods
beginning June 1, 2004. The Company is currently assessing the financial impact
of EITF No. 03-6 on its basic earnings per share.
16) SUBSEQUENT EVENT:
Subsequent to May 31, 2004, four subsidiaries of the Company which were
previously included as Subsidiary Nonguarantors, became Subsidiary Guarantors
under the Company's existing indentures. As such, the following information sets
forth the condensed consolidating balance sheets of the Company as of May 31,
2004, and February 29, 2004, and the condensed consolidating statements of
income and cash flows for the three months ended May 31, 2004, and May 31, 2003,
as if the new Subsidiary Guarantors had been in place as of and for all periods
presented.
19
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Balance Sheet
- -------------------------------------
at May 31, 2004
- ---------------
Current assets:
Cash and cash investments $ 3,044 $ 1,983 $ 6,416 $ - $ 11,443
Accounts receivable, net 110,259 194,006 407,582 - 711,847
Inventories, net 9,457 676,782 637,321 (8,204) 1,315,356
Prepaid expenses and other 23,337 75,447 42,805 - 141,589
Intercompany (payable) receivable (363,863) (214,553) 578,416 - -
----------- ----------- ------------- ------------ ------------
Total current assets (217,766) 733,665 1,672,540 (8,204) 2,180,235
Property, plant and equipment, net 49,638 407,551 603,517 - 1,060,706
Investments in subsidiaries 4,316,779 1,778,584 - (6,095,363) -
Goodwill 49,202 581,951 870,759 - 1,501,912
Intangible assets, net 10,572 387,598 325,717 - 723,887
Other assets 32,236 2,244 47,854 - 82,334
----------- ----------- ------------- ------------ ------------
Total assets $ 4,240,661 $ 3,891,593 $ 3,520,387 $ (6,103,567) $ 5,549,074
=========== =========== ============= ============ ============
Current liabilities:
Notes payable to banks $ 235,000 $ - $ 8,552 $ - $ 243,552
Current maturities of long-term debt 78,669 3,649 26,609 - 108,927
Accounts payable 23,613 60,906 276,987 - 361,506
Accrued excise taxes 7,869 21,330 26,178 - 55,377
Other accrued expenses and liabilities 134,573 9,206 254,200 - 397,979
----------- ----------- ------------- ------------ ------------
Total current liabilities 479,724 95,091 592,526 - 1,167,341
Long-term debt, less current maturities 1,700,016 7,380 28,763 - 1,736,159
Deferred income taxes 41,773 119,310 17,175 - 178,258
Other liabilities 4,678 21,834 130,121 - 156,633
Stockholders' equity:
Preferred stock 2 - - - 2
Class A and Class B common stock 1,122 6,443 141,573 (148,016) 1,122
Additional paid-in capital 1,030,121 1,954,709 2,418,486 (4,373,195) 1,030,121
Retained earnings 1,067,275 1,499,762 74,390 (1,582,356) 1,059,071
Accumulated other comprehensive
(loss) income (54,032) 187,064 117,353 - 250,385
Treasury stock and other (30,018) - - - (30,018)
----------- ----------- ------------- ------------ ------------
Total stockholders' equity 2,014,470 3,647,978 2,751,802 (6,103,567) 2,310,683
----------- ----------- ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 4,240,661 $ 3,891,593 $ 3,520,387 $ (6,103,567) $ 5,549,074
=========== =========== ============= ============ ============
Condensed Consolidating Balance Sheet
- -------------------------------------
at February 29, 2004
- --------------------
Current assets:
Cash and cash investments $ 1,048 $ 4,664 $ 31,424 $ - $ 37,136
Accounts receivable, net 137,422 145,152 353,336 - 635,910
Inventories, net 9,922 696,928 561,900 (7,372) 1,261,378
Prepaid expenses and other 8,734 72,788 55,525 - 137,047
Intercompany (payable) receivable (381,765) (176,470) 558,235 - -
----------- ----------- ------------- ------------ ------------
Total current assets (224,639) 743,062 1,560,420 (7,372) 2,071,471
Property, plant and equipment, net 50,022 409,852 637,488 - 1,097,362
Investments in subsidiaries 4,270,871 1,757,700 - (6,028,571) -
Goodwill 50,338 586,259 904,040 - 1,540,637
Intangible assets, net 10,572 385,581 348,825 - 744,978
Other assets 36,041 2,146 66,038 - 104,225
----------- ----------- ------------- ------------ ------------
Total assets $ 4,193,205 $ 3,884,600 $ 3,516,811 $ (6,035,943) $ 5,558,673
=========== =========== ============= ============ ============
20
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Current liabilities:
Notes payable to banks $ - $ - $ 1,792 $ - $ 1,792
Current maturities of long-term debt 260,061 3,949 3,235 - 267,245
Accounts payable 33,631 67,459 169,201 - 270,291
Accrued excise taxes 8,005 15,344 25,116 - 48,465
Other accrued expenses and liabilities 151,534 23,352 267,123 - 442,009
----------- ----------- ------------- ------------ ------------
Total current liabilities 453,231 110,104 466,467 - 1,029,802
Long-term debt, less current maturities 1,739,221 8,510 31,122 - 1,778,853
Deferred income taxes 56,815 119,704 10,891 - 187,410
Other liabilities 6,209 21,646 157,134 - 184,989
Stockholders' equity:
Preferred stock 2 - - - 2
Class A and Class B common stock 1,117 6,443 141,573 (148,016) 1,117
Additional paid-in capital 1,024,048 1,977,179 2,418,614 (4,395,793) 1,024,048
Retained earnings 1,017,565 1,431,384 53,378 (1,492,134) 1,010,193
Accumulated other comprehensive
(loss) income (74,960) 209,630 237,632 - 372,302
Treasury stock and other (30,043) - - - (30,043)
----------- ----------- ------------- ------------ ------------
Total stockholders' equity 1,937,729 3,624,636 2,851,197 (6,035,943) 2,377,619
----------- ----------- ------------- ------------ ------------
Total liabilities and
stockholders' equity $ 4,193,205 $ 3,884,600 $ 3,516,811 $ (6,035,943) $ 5,558,673
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended May 31, 2004
- ---------------------------------------
Sales $ 170,540 $ 488,748 $ 585,638 $ (70,611) $ 1,174,315
Less - excise taxes (31,855) (109,219) (105,936) - (247,010)
----------- ----------- ------------- ------------ ------------
Net sales 138,685 379,529 479,702 (70,611) 927,305
Cost of product sold (131,112) (223,744) (391,766) 69,779 (676,843)
----------- ----------- ------------- ------------ ------------
Gross profit 7,573 155,785 87,936 (832) 250,462
Selling, general and administrative
expenses (38,844) (52,067) (47,517) - (138,428)
Restructuring and related charges - (1,301) (312) - (1,613)
----------- ----------- ------------- ------------ ------------
Operating (loss) income (31,271) 102,417 40,107 (832) 110,421
Gain on change in fair value of
derivative instruments - - - - -
Equity in earnings of equity
method investees 68,378 21,012 62 (89,390) 62
Interest income (expense), net 5,499 (28,408) (7,372) - (30,281)
----------- ----------- ------------- ------------ ------------
Income before income taxes 42,606 95,021 32,797 (90,222) 80,202
Benefit from (provision for) income taxes 9,555 (26,643) (11,785) - (28,873)
----------- ----------- ------------- ------------ ------------
Net income 52,161 68,378 21,012 (90,222) 51,329
Dividends on preferred stock (2,451) - - - (2,451)
----------- ----------- ------------- ------------ ------------
Income available to common
stockholders $ 49,710 $ 68,378 $ 21,012 $ (90,222) $ 48,878
=========== =========== ============= ============ ============
21
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Condensed Consolidating Statement of Income
- -------------------------------------------
for the Three Months Ended May 31, 2003
- ---------------------------------------
Sales $ 172,326 $ 519,597 $ 388,976 $ (90,659) $ 990,240
Less - excise taxes (29,853) (105,914) (81,671) - (217,438)
----------- ----------- ------------- ------------ ------------
Net sales 142,473 413,683 307,305 (90,659) 772,802
Cost of product sold (118,292) (286,713) (249,302) 90,590 (563,717)
----------- ----------- ------------- ------------ ------------
Gross profit 24,181 126,970 58,003 (69) 209,085
Selling, general and administrative
expenses (28,901) (44,563) (34,338) - (107,802)
Restructuring and related charges - (1,991) (325) - (2,316)
----------- ----------- ------------- ------------ ------------
Operating (loss) income (4,720) 80,416 23,340 (69) 98,967
Gain on change in fair value of
derivative instruments 1,181 - - - 1,181
Equity in earnings (loss) of
equity method investees 44,311 16,900 (212) (60,671) 328
Interest expense, net (1,564) (35,763) (1,916) - (39,243)
----------- ----------- ------------- ------------ ------------
Income before income taxes 39,208 61,553 21,212 (60,740) 61,233
Benefit from (provision for) income taxes 50 (17,242) (4,852) - (22,044)
----------- ----------- ------------- ------------ ------------
Net income 39,258 44,311 16,360 (60,740) 39,189
Dividends on preferred stock - - - - -
----------- ----------- ------------- ------------ ------------
Income available to common
stockholders $ 39,258 $ 44,311 $ 16,360 $ (60,740) $ 39,189
=========== =========== ============= ============= ============
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Three Months Ended May 31, 2004
- ---------------------------------------
Net cash (used in) provided by
operating activities $ (41,380) $ 28,259 $ (33,337) $ - $ (46,458)
Cash flows from investing activities:
Purchases of property, plant and
equipment (2,006) (6,842) (13,265) - (22,113)
Payment of accrued earn-out amount - (1,338) - - (1,338)
Proceeds from sale of assets 5 3 437 - 445
Purchases of businesses, net of
cash acquired - - - - -
----------- ----------- ------------- ------------ ------------
Net cash used in investing activities (2,001) (8,177) (12,828) - (23,006)
----------- ----------- ------------- ------------ ------------
Cash flows from financing activities:
Net proceeds from notes payable 235,000 48 30,843 - 265,891
Intercompany financing activities, net 22,000 (22,000) - - -
Exercise of employee stock options 5,814 - - - 5,814
Proceeds from employee stock
purchases 1 - - - 1
Principal payments of long-term debt (215,014) (1,430) (760) - (217,204)
Payment of preferred stock dividends (2,451) - - - (2,451)
Proceeds from issuance of long-term
debt - - - - -
Payment of issuance costs of
long-term debt - - - - -
----------- ----------- ------------- ------------ ------------
Net cash provided by (used in)
financing activities 45,350 (23,382) 30,083 - 52,051
----------- ----------- ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments 27 619 (8,926) - (8,280)
----------- ----------- ------------- ------------ ------------
22
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ----------- ------------- ------------ ------------
(in thousands)
Net increase (decrease) in cash and
cash investments 1,996 (2,681) (25,008) - (25,693)
Cash and cash investments, beginning
of period 1,048 4,664 31,424 - 37,136
----------- ----------- ------------- ------------ ------------
Cash and cash investments, end of
period $ 3,044 $ 1,983 $ 6,416 $ - $ 11,443
=========== =========== ============= ============ ============
Condensed Consolidating Statement of Cash Flows
- -----------------------------------------------
for the Three Months Ended May 31, 2003
- ---------------------------------------
Net cash (used in) provided by
operating activities $ (7,108) $ 116 $ 629 $ - $ (6,363)
Cash flows from investing activities:
Purchases of property, plant and
equipment (3,288) (5,671) (9,132) - (18,091)
Payment of accrued earn-out amount - (978) - - (978)
Proceeds from sale of assets - 4,500 396 - 4,896
Purchases of businesses, net of cash
acquired - (1,067,694) - - (1,067,694)
----------- ----------- ------------- ------------ ------------
Net cash used in investing activities (3,288) (1,069,843) (8,736) - (1,081,867)
----------- ----------- ------------- ------------ ------------
Cash flows from financing activities:
Net proceeds from notes payable 13,000 - 2,735 - 15,735
Intercompany financing activities, net (1,418,274) 1,069,177 349,097 - -
Exercise of employee stock options 7,571 - - - 7,571
Proceeds from employee stock
purchases - - - - -
Principal payments of long-term debt (145,363) (1,138) (346,200) - (492,701)
Payment of preferred stock dividends - - - - -
Proceeds from issuance of long-term
debt 1,600,000 - - - 1,600,000
Payment of issuance costs of
long-term debt (32,547) - - - (32,547)
----------- ----------- ------------- ------------ ------------
Net cash provided by financing
activities 24,387 1,068,039 5,632 - 1,098,058
----------- ----------- ------------- ------------ ------------
Effect of exchange rate changes on
cash and cash investments 916 2,392 19,062 - 22,370
----------- ----------- ------------- ------------ ------------
Net increase in cash and cash
investments 14,907 704 16,587 - 32,198
Cash and cash investments, beginning
of period 1,426 1,248 11,136 - 13,810
----------- ----------- ------------- ------------ ------------
Cash and cash investments, end of
period $ 16,333 $ 1,952 $ 27,723 $ - $ 46,008
=========== =========== ============= ============ ============
23
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
- ------- -----------------------------------------------------------------------
OF OPERATIONS
-------------
OVERVIEW
- --------
The Company generates revenue through the production, marketing and sale of
beverage alcohol products, primarily in North America, Europe and Australia.
The Company has a broad portfolio of brands across the wine, imported beer and
distilled spirits categories, and is the largest wine company in the world.
The Company's business strategy is to remain focused across the beverage
alcohol industry by offering a broad range of products in each of the Company's
three major categories: wine, beer and spirits. The Company intends to keep
its portfolio positioned for superior top-line growth while maximizing the
profitability of its brands. In addition, the Company seeks to increase its
relative importance to key customers in major markets by increasing its share of
their overall purchasing, which is increasingly important in a consolidating
industry. The Company's strategy of breadth across categories and geographies,
and strengthening scale in core markets, is designed to deliver long-term
profitable growth. This strategy allows the Company more investment choices,
provides flexibility to address changing market conditions and creates stronger
routes-to-market.
The Company desires to maintain a balance between growth businesses and
scale businesses. The Company's growth businesses include approximately half of
the Company's branded wine business (specifically premium wines in the U.S. and
wines in the U.K.), imported beer in the U.S. and the U.K. wholesale business.
The scale businesses include spirits, the remaining half of the Company's
branded wine business, cider, and non-branded sales. The scale businesses are
operated to maximize profitability and cash flow and to maintain strong
routes-to-market. With a solid foundation of growth and scale businesses, the
Company expects to continue to be able to leverage sales growth into even higher
growth in earnings and cash flow.
The Company remains committed to its long-term financial model of growing
sales (both organically and through acquisitions), expanding margins and
increasing cash flow to achieve superior earnings per share growth and improve
return on invested capital.
In First Quarter 2005 (as defined below), the Company's net sales increased
20.0% over First Quarter 2004 (as defined below) primarily from the inclusion of
an additional one month of sales of products acquired in the Hardy Acquisition
as well as increases in imported beer sales, U.K. wholesale sales, spirits sales
and a favorable foreign currency impact. Operating income increased 11.6% over
the comparable prior year period as the net sales growth and related gross
profit growth were partially offset by (i) an increase in unusual costs as a
result of the redemption of the Company's Senior Subordinated Notes and (ii)
increased selling and advertising expenses, as the Company continues to invest
dollars behind the imported beer portfolio and certain wine brands to drive
growth and broader distribution. Lastly, as a result of the above factors and
lower interest expense for First Quarter 2005, net income increased 31.0% over
the comparable prior year period.
INTRODUCTION
- ------------
The Company is a leading international producer and marketer of beverage
alcohol brands with a broad portfolio across the wine, spirits and imported beer
categories. The Company has the largest wine business in the world and is the
largest multi-category supplier of beverage alcohol in the United States; a
leading producer and exporter of wine from Australia and New Zealand; and both a
major producer and independent drinks wholesaler in the United Kingdom.
24
The Company reports its operating results in three segments: Constellation
Wines (branded wine, and U.K. wholesale and other), Constellation Beers and
Spirits (imported beer and distilled spirits) and Corporate Operations and Other
(primarily corporate related items and other). Amounts included in the
Corporate Operations and Other segment consist of general corporate
administration and finance expenses. These amounts include costs of executive
management, investor relations, internal audit, treasury, tax, corporate
development, legal, financial reporting, professional fees and public relations.
Any costs incurred at the corporate office that are applicable to the segments
are allocated to the appropriate segment. The amounts included in the Corporate
Operations and Other segment are general costs that are applicable to the
consolidated group and are therefore not allocated to the other reportable
segments. All costs reported within the Corporate Operations and Other segment
are not included in the chief operating decision maker's evaluation of the
operating income performance of the other operating segments. The business
segments reflect how the Company's operations are being managed, how operating
performance within the Company is being evaluated by senior management and the
structure of its internal financial reporting. In addition, the Company
excludes restructuring and related charges and unusual costs that affect
comparability from its definition of operating income for segment purposes.
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the three
months ended May 31, 2004 ("First Quarter 2005"), compared to the three months
ended May 31, 2003 ("First Quarter 2004"), and (ii) financial liquidity and
capital resources for First Quarter 2005. This discussion and analysis also
identifies certain restructuring and related charges expected to affect
consolidated results of operations of the Company for the year ending February
28, 2005 ("Fiscal 2005"). This discussion and analysis should be read in
conjunction with the Company's consolidated financial statements and notes
thereto included herein and in the Company's Annual Report on Form 10-K for the
fiscal year ended February 29, 2004 ("Fiscal 2004").
ACQUISITION IN FISCAL 2004
ACQUISITION OF HARDY
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company
completed its acquisition of all of Hardy's outstanding capital stock. As a
result of the acquisition of Hardy, the Company also acquired the remaining 50%
ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the Company
established with Hardy in July 2001. The acquisition of Hardy along with the
remaining interest in PWP is referred to together as the "Hardy Acquisition."
Through this acquisition, the Company acquired Australia's largest wine producer
with interests in wineries and vineyards in most of Australia's major wine
regions as well as New Zealand and the United States. Hardy has a comprehensive
portfolio of wine products across all price points with a strong focus on
premium wine production. Hardy's wines are distributed worldwide through a
network of marketing and sales operations, with the majority of sales generated
in Australia, the United Kingdom and the United States.
Total consideration paid in cash and Class A Common Stock to the Hardy
shareholders was $1,137.4 million. Additionally, the Company recorded direct
acquisition costs of $17.4 million. The acquisition date for accounting purposes
is March 27, 2003. The Company has recorded a $1.6 million reduction in the
purchase price to reflect imputed interest between the accounting acquisition
date and the final payment of consideration. This charge is included as interest
expense in the Consolidated Statement of Income for the three months ended May
31, 2003. The cash portion of the purchase price paid to the Hardy shareholders
and optionholders ($1,060.2 million) was financed with $660.2 million of
borrowings under the Company's March 2003 Credit Agreement (as defined below)
and $400.0 million of borrowings under the Company's then existing bridge loan
agreement. Additionally, the Company issued 3,288,913 shares of the Company's
Class A Common Stock, which were valued at $77.2 million based on the simple
average of the closing market price of the Company's Class A Common Stock
beginning two
25
days before and ending two days after April 4, 2003, the day the Hardy
shareholders elected the form of consideration they wished to receive. The
purchase price was based primarily on a discounted cash flow analysis that
contemplated, among other things, the value of a broader geographic distribution
in strategic international markets and a presence in the important Australian
winemaking regions. The Company and Hardy have complementary businesses that
share a common growth orientation and operating philosophy. The Hardy
Acquisition supports the Company's strategy of growth and breadth across
categories and geographies, and strengthens its competitive position in its core
markets. The purchase price and resulting goodwill were primarily based on the
growth opportunities of the brand portfolio of Hardy. In particular, the Company
believes there are growth opportunities for Australian wines in the United
Kingdom, United States and other wine markets. This acquisition supports the
Company's strategy of driving long-term growth and positions the Company to
capitalize on the growth opportunities in "new world" wine markets.
The results of operations of Hardy and PWP have been reported in the
Company's Constellation Wines segment since March 27, 2003. Accordingly, the
Company's results of operations for First Quarter 2005 include the results of
operations of Hardy and PWP for the entire period, whereas the results of
operations for First Quarter 2004 only include the results of operations of
Hardy and PWP from March 27, 2003, to the end of First Quarter 2004.
RESULTS OF OPERATIONS
- ---------------------
FIRST QUARTER 2005 COMPARED TO FIRST QUARTER 2004
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for First Quarter 2005 and First Quarter 2004.
First Quarter 2005 Compared to First Quarter 2004
-------------------------------------------------
Net Sales
-------------------------------------------------
2005 2004 %Increase
----------- ----------- ---------
Constellation Wines:
Branded wine $ 363,883 $ 310,480 17.2%
Wholesale and other 247,235 184,853 33.7%
----------- -----------
Constellation Wines net sales $ 611,118 $ 495,333 23.4%
----------- -----------
Constellation Beers and Spirits:
Imported beers $ 236,896 $ 207,264 14.3%
Spirits 79,291 70,205 12.9%
----------- -----------
Constellation Beers and Spirits net sales $ 316,187 $ 277,469 14.0%
----------- -----------
Corporate Operations and Other $ - $ - N/A
----------- -----------
Consolidated Net Sales $ 927,305 $ 772,802 20.0%
=========== ===========
Net sales for First Quarter 2005 increased to $927.3 million from $772.8
million for First Quarter 2004, an increase of $154.5 million, or 20.0%. This
increase resulted primarily from the inclusion of $48.9 million of net sales of
products acquired in the Hardy Acquisition as well as increases in imported beer
sales of $29.6 million, U.K. wholesale sales of $26.5 million (on a local
currency basis) and spirits sales of $9.1 million. In addition, net sales
benefited from a favorable foreign currency impact of $42.1 million.
Constellation Wines
Net sales for Constellation Wines increased to $611.1 million for First
Quarter 2005 from $495.3 million in First Quarter 2004, an increase of $115.8
million, or 23.4%. Branded wine net sales increased
26
$53.4 million. This increase resulted primarily from an additional one month of
sales of $45.7 million of branded wines acquired in the Hardy Acquisition,
completed in March 2003, and a favorable foreign currency impact of $14.3
million. Wholesale and other net sales increased $62.4 million primarily due to
growth in the U.K. wholesale business of $26.5 million (on a local currency
basis) and a favorable foreign currency impact of $27.7 million. The net sales
increase in the U.K. wholesale business on a local currency basis is primarily
due to the addition of new national accounts and increased sales in existing
accounts during First Quarter 2005. The Company continues to face competitive
discounting within select markets and geographies driven in part by excess grape
supplies. The Company believes that the grape supply/demand cycle should come
into balance over the next couple of years. The Company has taken a strategy of
preserving the long-term brand equity of its portfolio and investing its
marketing dollars in the higher growth sectors of the wine business.
Constellation Beers and Spirits
Net sales for Constellation Beers and Spirits increased to $316.2 million
for First Quarter 2005 from $277.5 million for First Quarter 2004, an increase
of $38.7 million, or 14.0%. This increase resulted from both pricing and volume
gains on the Company's imported beer portfolio, which increased $29.6 million,
as well as an increase in spirits net sales of $9.1 million. The pricing gains
are due to the price increase on the Company's Mexican beer portfolio that was
introduced in January 2004. The Company believes the volume gains for First
Quarter 2005 were attributable to several factors, including (i) good acceptance
by beer retailers of the price increase; (ii) the inclusion of Corona in special
product promotions by certain grocery stores in California, the purpose of which
were to attract customers back to those stores following the end of strikes; and
(iii) increased advertising and selling expenses behind the Mexican beer
portfolio. The growth in spirits net sales is attributable to increases in both
the Company's branded sales as well as contract production sales.
The Company's imported beer volume was better than expected for First
Quarter 2005. The Company expects net sales growth for imported beer for Fiscal
2005 to be in the mid to high single digits despite difficult volume comparisons
for the third and fourth quarters of Fiscal 2005. The difficult volume
comparisons are primarily due to the timing of the price increase which resulted
in strong wholesaler and retailer demand in the third and fourth quarters of
Fiscal 2004.
GROSS PROFIT
The Company's gross profit increased to $250.5 million for First Quarter
2005 from $209.1 million for First Quarter 2004, an increase of $41.4 million,
or 19.8%. The Constellation Wines segment's gross profit increased $24.1 million
primarily due to the additional one month of sales of branded wines acquired in
the Hardy Acquisition plus a favorable foreign currency impact. The
Constellation Beers and Spirits segment's gross profit increased $13.1 million
primarily due to the price increase and volume growth in the segment's imported
beer portfolio. In addition, unusual costs, which consist of certain costs that
are excluded by management in their evaluation of the results of each operating
segment, were lower by $4.2 million in First Quarter 2005 versus First Quarter
2004. This decrease resulted from reduced flow through of inventory step-up
associated with the Hardy Acquisition. Gross profit as a percent of net sales
decreased slightly to 27.0% for First Quarter 2005 from 27.1% for First Quarter
2004 as increased gross margins in the Constellation Beers and Spirits segment,
driven primarily by increased sales of higher margin imported beer brands and
reduced flow through of inventory step-up were more than offset by increased
sales of lower margin U.K. wholesale products.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $138.4 million
for First Quarter 2005 from $107.8 million for First Quarter 2004, an increase
of $30.6 million, or 28.4%. The Constellation Wines segment's selling, general
and administrative expenses increased $17.4 million primarily due to
27
the additional one month of selling, general and administrative expenses from
the Hardy and PWP businesses, plus increased selling and advertising expenses as
the Company continues to invest dollars behind specific wine brands to drive
broader distribution. The Constellation Beers and Spirits segment's selling,
general and administrative expenses increased $5.1 million due to increased
advertising and general and administrative expenses to support the growth across
this segment's businesses. The Corporate Operations and Other segment's selling,
general and administrative expenses increased $1.8 million primarily due to
increased general and administrative expenses to support the Company's growth.
Lastly, there was an increase of $6.3 million of net unusual costs which consist
of certain items that are excluded by management in their evaluation of the
results of each operating segment. This increase consists of $10.3 million of
financing costs recorded in First Quarter 2005 related to the Company's
redemption of its Senior Subordinated Notes (as defined below) offset by $4.0
million of financing costs recorded in First Quarter 2004 in connection with the
Hardy Acquisition. Selling, general and administrative expenses as a percent of
net sales increased to 14.9% for First Quarter 2005 as compared to 13.9% for
First Quarter 2004 primarily due to the increase in unusual costs as a result of
the redemption of the Company's Senior Subordinated Notes and increased
advertising and selling expenses discussed above.
RESTRUCTURING AND RELATED CHARGES
The Company recorded $1.6 million of restructuring and related charges for
First Quarter 2005 associated with the restructuring plan of the Constellation
Wines segment. Restructuring and related charges resulted from further
realignment of business operations as previously announced in Fiscal 2004, and
included $1.2 million of employee termination benefit costs, $0.3 million of
facility consolidation and relocation costs, and other related charges of $0.1
million. The Company recorded $2.3 million of restructuring and related charges
for First Quarter 2004 associated with the restructuring plan of the
Constellation Wines segment.
For Fiscal 2005, the Company expects to incur total restructuring and
related charges of $11.8 million associated with the restructuring plan of the
Constellation Wines segment. These charges are expected to consist of $7.4
million related to the further realignment of business operations in the
Constellation Wines segment and $4.4 million related to renegotiating existing
grape contracts as a result of both exiting the commodity concentrate product
line and selling the Escalon facility in Fiscal 2004.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for First Quarter 2005 and First
Quarter 2004.
First Quarter 2005 Compared to First Quarter 2004
-------------------------------------------------
Operating Income (Loss)
-------------------------------------------------
2005 2004 %Increase
---------- ---------- ---------
Constellation Wines $ 67,659 $ 61,023 10.9%
Constellation Beers and Spirits 67,852 59,883 13.3%
Corporate Operations and Other (11,869) (10,071) 17.9%
---------- ----------
Total Reportable Segments 123,642 110,835 11.6%
Restructuring and Related Charges
and Unusual Costs (13,221) (11,868) 11.4%
---------- ----------
Consolidated Operating Income $ 110,421 $ 98,967 11.6%
========== ==========
Restructuring and related charges and unusual costs of $13.2 million for
First Quarter 2005 consist of certain costs that are excluded by management in
their evaluation of the results of each operating segment. These costs
represent the flow through of inventory step-up associated with the Hardy
Acquisition of $1.3 million, financing costs associated with the redemption of
the Company's Senior Subordinated Notes of $10.3 million, and restructuring and
related charges associated with the
28
Company's realignment of its business operations in the wine segment of $1.6
million. Restructuring and related charges and unusual costs of $11.9 million
for First Quarter 2004 represent the flow through of inventory step-up and the
amortization of deferred financing costs associated with the Hardy Acquisition
of $5.5 million and $4.0 million, respectively, and restructuring and related
charges associated with the Company's realignment of its business operations in
the wine segment of $2.3 million. As a result of these costs and the factors
discussed above, consolidated operating income increased to $110.4 million for
First Quarter 2005 from $99.0 million for First Quarter 2004, an increase of
$11.5 million, or 11.6%.
INTEREST EXPENSE, NET
Interest expense, net of interest income of $0.5 million and $1.1 million
for First Quarter 2005 and First Quarter 2004, respectively, decreased to $30.3
million for First Quarter 2005 from $39.2 million for First Quarter 2004, a
decrease of $9.0 million, or (22.8%). The decrease resulted from lower average
borrowings in First Quarter 2005 as well as slightly lower average borrowing
rates. The reduction in debt resulted from the use of proceeds from the July
2003 Equity Offerings to pay down debt incurred to partially finance the Hardy
Acquisition, and the reduced average borrowing rates were attributed in part to
the replacement of $200.0 million of higher fixed rate subordinated note debt
with lower variable rate revolver debt.
PROVISION FOR INCOME TAXES
The Company's effective tax rate remained the same at 36.0% for First
Quarter 2005 and First Quarter 2004.
NET INCOME
As a result of the above factors, net income increased to $51.3 million for
First Quarter 2005 from $39.2 million for First Quarter 2004, an increase of
$12.1 million, or 31.0%.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------
GENERAL
The Company's principal use of cash in its operating activities is for
purchasing and carrying inventories and carrying seasonal accounts receivable.
The Company's primary source of liquidity has historically been cash flow from
operations, except during annual grape harvests when the Company has relied on
short-term borrowings. In the United States, the annual grape crush normally
begins in August and runs through October. In Australia, the annual grape crush
normally begins in February and runs through May. The Company generally begins
taking delivery of grapes at the beginning of the crush season with payments for
such grapes beginning to come due one month later. The Company's short-term
borrowings to support such purchases generally reach their highest levels one to
two months after the crush season has ended. Historically, the Company has used
cash flow from operating activities to repay its short-term borrowings and fund
capital expenditures. 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, scheduled principal and interest payments on debt, preferred
dividend payment requirements, and anticipated capital expenditure requirements
for both its short-term and long-term capital needs.
29
FIRST QUARTER 2005 CASH FLOWS
OPERATING ACTIVITIES
Net cash used in operating activities for First Quarter 2005 was $46.5
million, which resulted from $51.3 million of net income, plus $33.0 million of
net noncash items charged to the Consolidated Statement of Income, less $130.8
million representing the net change in the Company's operating assets and
liabilities. The net noncash items consisted primarily of depreciation of
property, plant and equipment and deferred tax provision. The net change in
operating assets and liabilities resulted primarily from seasonal increases in
inventories (primarily due to the Australian grape harvest) and accounts
receivable, and decreases in income taxes payable and accrued salaries,
partially offset by a seasonal increase in accounts payable.
INVESTING ACTIVITIES
Net cash used in investing activities for First Quarter 2005 was $23.0
million, which resulted primarily from $22.1 million of capital expenditures.
FINANCING ACTIVITIES
Net cash provided by financing activities for First Quarter 2005 was $52.1
million resulting primarily from net proceeds of $265.9 million from notes
payable partially offset by principal payments of long-term debt of $217.2
million.
During June 1998, the Company's Board of Directors authorized the
repurchase of up to $100.0 million of its Class A Common Stock and Class B
Common Stock. The repurchase of shares of common stock will be accomplished,
from time to time, in management's discretion and depending upon market
conditions, through open market or privately negotiated transactions. The
Company may finance such repurchases through cash generated from operations or
through the senior credit facility. The repurchased shares will become treasury
shares. As of July 12, 2004, the Company had purchased 4,075,344 shares of Class
A Common Stock at an aggregate cost of $44.9 million, or at an average cost of
$11.01 per share. No shares were repurchased during First Quarter 2005.
DEBT
Total debt outstanding as of May 31, 2004, amounted to $2,088.6 million, an
increase of $40.7 million from February 29, 2004. The ratio of total debt to
total capitalization increased to 47.5% as of May 31, 2004, from 46.3% as of
February 29, 2004. This increase is due primarily to lower total capitalization
as a result of movements in foreign currency exchange rates.
SENIOR CREDIT FACILITY
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
entered into a new credit agreement (as subsequently amended and restated as of
March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the
Company entered into a Second Amended and Restated Credit Agreement (the
"October Credit Agreement") that (i) refinanced the then outstanding principal
balance under the Tranche B Term Loan facility on essentially the same terms as
the Tranche B Term Loan facility under the March 2003 Credit Agreement, but at a
lower Applicable Rate (as such term is defined in the October Credit Agreement)
and (ii) otherwise restated the terms of the March 2003 Credit Agreement, as
amended. The October Credit Agreement was further amended during February 2004
(the "Credit Agreement"). The March 2003 Credit Agreement provided for
aggregate credit facilities of $1.6 billion consisting of a $400.0 million
30
Tranche A Term Loan facility due in February 2008, an $800.0 million Tranche B
Term Loan facility due in November 2008 and a $400.0 million Revolving Credit
facility (including an Australian Dollar revolving sub-facility of up to A$10.0
million and a sub-facility for letters of credit of up to $40.0 million) which
expires on February 29, 2008. Proceeds of the March 2003 Credit Agreement were
used to pay off the Company's obligations under its prior senior credit
facility, to fund a portion of the cash required to pay the former Hardy
shareholders and to pay indebtedness outstanding under certain of Hardy's credit
facilities. The Company uses the remaining availability under the Credit
Agreement to fund its working capital needs on an on-going basis.
The Tranche A Term Loan facility and the Tranche B Term Loan facility were
fully drawn on March 27, 2003. As of May 31, 2004, the Company has made $55.0
million of scheduled and required payments on the Tranche A Term Loan facility,
including $15.0 million during First Quarter 2005. In August 2003, the Company
paid $100.0 million of the Tranche B Term Loan facility. In October 2003, the
Company paid an additional $200.0 million of the Tranche B Term Loan facility.
As of May 31, 2004, the required repayments of the Tranche A Term Loan and the
Tranche B Term Loan are as follows:
Tranche A Tranche B
Term Loan Term Loan Total
----------- ----------- -----------
(in thousands)
2005 $ 45,000 $ - $ 45,000
2006 80,000 54,420 134,420
2007 100,000 54,420 154,420
2008 120,000 119,048 239,048
2009 - 272,112 272,112
----------- ----------- -----------
$ 345,000 $ 500,000 $ 845,000
=========== =========== ===========
The rate of interest payable, at the Company's option, is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate
plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the Credit Agreement) and, with respect to LIBOR borrowings, ranges
between 1.50% and 2.50%. As of May 31, 2004, the LIBOR margin for the Revolving
Credit facility and the Tranche A Term Loan facility is 1.75%, while the LIBOR
margin on the Tranche B Term Loan facility is 2.00%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company is obligated to pledge collateral of (i)
100% of the capital stock of all of the Company's U.S. subsidiaries and certain
foreign subsidiaries and (ii) 65% of the voting capital stock of certain other
foreign subsidiaries of the Company.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, the incurrence of additional
indebtedness (including guarantees of indebtedness), the sale of assets, the
payment of dividends, transactions with affiliates and the making of certain
investments, in each case subject to baskets, exceptions and/or thresholds. The
primary financial covenants require the maintenance of a debt coverage ratio, a
senior debt coverage ratio, a fixed charge ratio and an interest coverage ratio.
As of May 31, 2004, the Company is in compliance with all of its covenants under
its Credit Agreement.
As of May 31, 2004, under the Credit Agreement, the Company had outstanding
Tranche A Term Loans of $345.0 million bearing a weighted average interest rate
of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted average
interest rate of 3.2%, $235.0 million of revolving loans bearing a weighted
average interest rate of 2.9%, undrawn revolving letters of credit of $18.4
million, and $146.7 million in revolving loans available to be drawn.
31
SUBSIDIARY FACILITIES
The Company has additional line of credit facilities totaling $101.9
million as of May 31, 2004. These lines support the borrowing needs of certain
of the Company's foreign subsidiary operations. Interest rates and other terms
of these borrowings vary from country to country, depending on local market
conditions. As of May 31, 2004, amounts outstanding under the subsidiary
revolving credit facilities were $8.4 million.
SENIOR NOTES
As of May 31, 2004, the Company had outstanding $200.0 million aggregate
principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior Notes").
The Senior Notes are currently redeemable, in whole or in part, at the option of
the Company.
As of May 31, 2004, the Company had outstanding (pound) 1.0 million ($1.8
million) aggregate principal amount of 8 1/2% Series B Senior Notes due November
2009 (the "Sterling Series B Senior Notes"). In addition, as of May 31, 2004,
the Company had outstanding (pound) 154.0 million ($281.7 million, net of $0.5
million unamortized discount) aggregate principal amount of 8 1/2% Series C
Senior Notes due November 2009 (the "Sterling Series C Senior Notes"). The
Sterling Series B Senior Notes and Sterling Series C Senior Notes are currently
redeemable, in whole or in part, at the option of the Company.
Also, as of May 31, 2004, the Company had outstanding $200.0 million
aggregate principal amount of 8% Senior Notes due February 2008 (the "February
2001 Senior Notes"). The February 2001 Senior Notes are currently redeemable,
in whole or in part, at the option of the Company.
SENIOR SUBORDINATED NOTES
On March 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated
Notes"). The Senior Subordinated Notes were redeemable at the option of the
Company, in whole or in part, at any time on or after March 1, 2004. On February
10, 2004, the Company issued a Notice of Redemption for its Senior Subordinated
Notes. The Senior Subordinated Notes were redeemed with proceeds from the
Revolving Credit facility on March 11, 2004, at 104.25% of par plus accrued
interest. During First Quarter 2005, in connection with this redemption, the
Company recorded a charge of $10.3 million in selling, general and
administrative expenses for the call premium and the remaining unamortized
financing fees associated with the original issuance of the Senior Subordinated
Notes.
As of May 31, 2004, the Company had outstanding $250.0 million aggregate
principal amount of 8 1/8% Senior Subordinated Notes due January 2012 (the
"January 2002 Senior Subordinated Notes"). The January 2002 Senior Subordinated
Notes are redeemable at the option of the Company, in whole or in part, at any
time on or after January 15, 2007. The Company may also redeem up to 35% of the
January 2002 Senior Subordinated Notes using the proceeds of certain equity
offerings completed before January 15, 2005.
GUARANTEES
A foreign subsidiary of the Company has guaranteed debt of a joint venture
in the maximum amount of $3.9 million as of May 31, 2004. The liability for
this guarantee is not material and the Company does not have any collateral from
this entity.
32
ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In December 2003, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 (revised 2003) ("SFAS No. 132(R)"),
"Employers' Disclosures about Pensions and Other Postretirement Benefits--an
amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132(R) supersedes
Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by
revising employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS
No. 132 regarding the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28
("APB Opinion No. 28"), "Interim Financial Reporting," to require additional
disclosures for interim periods. The Company has adopted certain of the annual
disclosure provisions of SFAS No. 132(R), primarily those related to its U.S.
postretirement plan, for the fiscal year ended February 29, 2004. In addition,
the Company has adopted the interim disclosure provisions of SFAS No. 132(R) for
the three months ended May 31, 2004. The Company is required to adopt the
remaining annual disclosure provisions, primarily those related to its foreign
plans, for the fiscal year ending February 28, 2005.
In March 2004, the Financial Accounting Standards Board issued a proposed
statement, "Share-Based Payment, an amendment of FASB Statements No. 123 and
95." The objective of the proposed statement is to require recognition in an
entity's financial statements of the cost of employee services received in
exchange for equity instruments issued, and liabilities incurred, to employees
in share-based payment (or compensation) transactions based on the fair value of
the instruments at the grant date. The proposed statement would eliminate the
alternative of continuing to account for share-based payment arrangements with
employees under APB No. 25 and require that the compensation cost resulting from
all share-based payment transactions be recognized in an entity's financial
statements. If adopted in its current form, the proposed statement would be
effective for awards that are granted, modified, or settled in fiscal years
beginning after December 15, 2004. Also, if adopted in its current form, the
proposed statement could result in a significant charge to the Company's
Consolidated Statement of Income for the fiscal year ending February 28, 2006.
In March 2004, the Emerging Issues Task Force ("EITF") ratified the
consensuses reached in EITF Issue No. 03-6 ("EITF No. 03-6"), "Participating
Securities and the Two-Class Method under FASB Statement No. 128." EITF No. 03-6
clarifies what is meant by a "participating security," provides guidance on
applying the two-class method for computing earnings per share, and requires
affected companies to retroactively restate earnings per share amounts
presented. The Company is required to adopt EITF No. 03-6 for reporting periods
beginning June 1, 2004. The Company is currently assessing the financial impact
of EITF No. 03-6 on its basic earnings per share.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933 and Section 21E
of the Securities Exchange Act of 1934. These forward-looking statements are
subject to a number of risks and uncertainties, many of which are beyond the
Company's control, that could cause actual results to differ materially from
those set forth in, or implied by, such forward-looking statements. All
statements other than statements of historical facts included in this Quarterly
Report on Form 10-Q, including statements regarding the Company's future
financial position and prospects, are forward-looking statements. All
forward-looking statements speak only as of the date of this Quarterly Report on
Form 10-Q. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In addition to the risks and uncertainties of ordinary
business operations, the forward-looking statements of the Company contained in
this Form 10-Q are also subject to the following risks and uncertainties: the
Company achieving certain sales projections and meeting certain cost targets;
wholesalers and retailers may give higher priority to products of the Company's
competitors; raw material
33
supply, production or shipment difficulties could adversely affect the Company's
ability to supply its customers; increased competitive activities in the form of
pricing, advertising and promotions could adversely impact consumer demand for
the Company's products and/or result in higher than expected selling, general
and administrative expenses; a general decline in alcohol consumption; increases
in excise and other taxes on beverage alcohol products; and changes in foreign
currency exchange rates. For additional information about risks and
uncertainties that could adversely affect the Company's forward-looking
statements, please refer to the Company's Annual Report on Form 10-K for the
fiscal year ended February 29, 2004.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------- ----------------------------------------------------------
The Company, as a result of its global operating and financing activities,
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 uses
derivative instruments solely to reduce the financial impact of these risks and
does not use derivative instruments for trading purposes.
Foreign currency forward contracts and foreign currency options are used to
hedge existing foreign currency denominated assets and liabilities, forecasted
foreign currency denominated sales both to third parties as well as intercompany
sales, and intercompany principal and interest payments. As of May 31, 2004,
the Company had exposures to foreign currency risk primarily related to the
Australian Dollar, Euro, New Zealand Dollar, British Pound Sterling, Canadian
Dollar and Mexican Peso.
As of May 31, 2004, and May 31, 2003, the Company had outstanding
derivative contracts with a notional value of $705.2 million and $601.1 million,
respectively. Using a sensitivity analysis based on estimated fair value of
open contracts using forward rates, if the U.S. dollar had been 10% weaker as of
May 31, 2004, and May 31, 2003, the fair value of open foreign exchange
contracts would have been increased by $4.0 million and $3.2 million,
respectively. Losses or gains from the revaluation or settlement of the related
underlying positions would substantially offset such gains or losses.
The fair value of fixed rate debt is subject to interest rate risk. The
fair value of fixed rate debt will increase as interest rates fall and decrease
as interest rates rise. The estimated fair value of the Company's total fixed
rate debt, including current maturities, was $1,001.6 million and $1,097.6
million as of May 31, 2004, and May 31, 2003, respectively. A hypothetical 1%
increase from prevailing interest rates as of May 31, 2004, and May 31, 2003,
would have resulted in a decrease in fair value of fixed interest rate long-term
debt by $39.2 million and $51.0 million, respectively.
In addition to the $1.0 billion fair value of fixed rate debt outstanding,
the Company also had variable rate debt outstanding (primarily LIBOR based) as
of May 31, 2004, and May 31, 2003, of $1,080.0 million and $1,615.0 million,
respectively. Using a sensitivity analysis based on a hypothetical 1% increase
in prevailing interest rates at May 31, 2004, and May 31, 2003, would result in
an approximate increase in cash required for interest of $9.5 million and $8.7
million, respectively.
The Company has on occasion entered into interest rate swap agreements to
reduce its exposure to interest rate changes relative to its variable rate debt.
As of May 31, 2004, and May 31, 2003, the Company had no interest rate swap
agreements outstanding.
34
ITEM 4. CONTROLS AND PROCEDURES
- ------- -----------------------
The Company's Chief Executive Officer and its Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by this
report, that the Company's "disclosure controls and procedures" (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. In connection with that
evaluation, no changes were identified in the Company's "internal control over
financial reporting" (as defined in the Securities Exchange Act of 1934 Rules
13a-15(f) and 15d-15(f)) that occurred during the Company's fiscal quarter ended
May 31, 2004 that have materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
35
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ------- --------------------------------
(a) The following Exhibits are furnished as part of this Form 10-Q:
Exhibit Number Description
- -------------- -----------
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 Implementation Deed dated 17 January 2003 between Constellation Brands,
Inc. and BRL Hardy Limited.
2.2 Transaction Compensation Agreement dated 17 January 2003 between
Constellation Brands, Inc. and BRL Hardy Limited.
2.3 No Solicitation Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited.
2.4 Backstop Fee Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited.
2.5 Letter Agreement dated 6 February 2003 between Constellation Brands,
Inc. and BRL Hardy Limited.
(3) ARTICLES OF INCORORATION AND BY-LAWS.
3.1 Restated Certificate of Incorporation of the Company.
3.2 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company.
3.3 By-Laws of the Company.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Indenture, dated as of February 25, 1999, among the Company, as issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as
Trustee.
4.2 Supplemental Indenture No. 1, with respect to 8 1/2% Senior
Subordinated Notes due 2009, dated as of February 25, 1999, by and among
the Company, as Issuer, certain principal subsidiaries, as Guarantors,
and BNY Midwest Trust Company (successor Trustee to Harris Trust and
Savings Bank), as Trustee.
4.3 Supplemental Indenture No. 2, with respect to 8 5/8% Senior Notes due
2006, dated as of August 4, 1999, by and among the Company, as Issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as
Trustee.
4.4 Supplemental Indenture No. 3, dated as of August 6, 1999, by and among
the Company, Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc.,
Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak
Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and BNY
Midwest Trust Company (successor Trustee to Harris Trust and Savings
Bank), as Trustee.
36
4.5 Supplemental Indenture No. 4, with respect to 8 1/2% Senior Notes due
2009, dated as of May 15, 2000, by and among the Company, as Issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as
Trustee.
4.6 Supplemental Indenture No. 5, dated as of September 14, 2000, by and
among the Company, as Issuer, certain principal subsidiaries, as
Guarantors, and BNY Midwest Trust Company (successor Trustee to The Bank
of New York), as Trustee.
4.7 Supplemental Indenture No. 6, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor trustee to Harris Trust and Savings Bank and The Bank of New
York, as applicable), as Trustee.
4.8 Supplemental Indenture No. 7, dated as of January 23, 2002, by and
among the Company, as Issuer, certain principal subsidiaries, as
Guarantors, and BNY Midwest Trust Company, as Trustee.
4.9 Supplemental Indenture No. 8, dated as of March 27, 2003, by and among
the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company, as Trustee.
4.10 Indenture, with respect to 8 1/2% Senior Notes due 2009, dated as of
November 17, 1999, among the Company, as Issuer, certain principal
subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor to
Harris Trust and Savings Bank), as Trustee.
4.11 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor to Harris Trust and Savings Bank), as Trustee.
4.12 Supplemental Indenture No. 2, dated as of March 27, 2003, among the
Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company (successor to Harris Trust and Savings Bank), as Trustee.
4.13 Indenture, with respect to 8% Senior Notes due 2008, dated as of
February 21, 2001, by and among the Company, as Issuer, certain
principal subsidiaries, as Guarantors and BNY Midwest Trust Company, as
Trustee.
4.14 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company, as
Trustee.
4.15 Supplemental Indenture No. 2, dated as of March 27, 2003, among the
Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company, as Trustee.
4.16 Amended and Restated Credit Agreement, dated as of March 19, 2003,
among the Company and certain of its subsidiaries, the lenders named
therein, JPMorgan Chase Bank, as Administrative Agent, and J.P. Morgan
Europe Limited, as London Agent.
4.17 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as
of July 18, 2003, among the Company, certain of its subsidiaries, and
JPMorgan Chase Bank, as Administrative Agent.
4.18 Second Amended and Restated Credit Agreement, dated as of October 31,
2003, among the Company and certain of its subsidiaries, the lenders
named therein, JP Morgan Chase Bank, as Administrative Agent, and J.P.
Morgan Europe Limited, as London Agent.
37
4.19 Amendment No. 1, dated as of February 10, 2004, to the Second Amended
and Restated Credit Agreement, dated as of October 31, 2003, among the
Company, the Subsidiary Guarantors party thereto, the Lenders party
thereto and JPMorgan Chase Bank, as Administrative Agent.
4.20 Amended and Restated Bridge Loan Agreement, dated as of January 16,
2003 and amended and restated as of March 26, 2003, among the Company
and certain of its subsidiaries, the lenders named therein, and JPMorgan
Chase Bank, as Administrative Agent.
4.21 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company.
4.22 Deposit Agreement by and among the Company, Mellon Investor Services LLC
and all holders from time to time of Depositary Receipts evidencing
Depositary Shares Representing 5.75% Series A Mandatory Convertible
Preferred Stock of the Company.
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
11.1 Computation of per share earnings.
(31) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS.
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.
(32) SECTION 1350 CERTIFICATIONS.
32.1 Certification of Chief Executive Officer pursuant to Section 18 U.S.C.
1350.
32.2 Certification of Chief Financial Officer pursuant to Section 18 U.S.C.
1350.
(b) The following Reports on Form 8-K were filed with the Securities
and Exchange Commission during the quarter ended May 31, 2004:
(i) Form 8-K dated April 7, 2004 and filed as of April 7, 2004.
This Form 8-K reported information under Items 7, 9 and 12,
and included (i) the Company's Condensed Consolidated
Balance Sheets as of February 29, 2004 and February 28,
2003; (ii) the Company's Consolidated Statements of Income
on a Reported Basis for the three months ended February 29,
2004 and February 28, 2003; (iii) the Company's
Consolidated Statements of Income on a Reported Basis for
the year ended February 29, 2004 and February 28, 2003;
(iv) the Company's Consolidated Statements of Cash Flows
for the year ended February 29, 2004 and February 28, 2003;
(v) the Company's Reconciliation of Reported and Comparable
Historical Information for the three months ended February
29, 2004 and February 28, 2003 and the year ended February
29, 2004 and February 28, 2003; (vi) the Company's
Reconciliation of Reported and Pro Forma Net Sales for the
three months ended February 29, 2004 and February 28, 2003
and the year ended February 29, 2004 and February 28, 2003;
and (vii) the Company's Reconciliation of Reported and
Comparable Diluted Earnings Per Share Guidance.*
38
(ii) Form 8-K dated May 17, 2004 and filed as of May 17, 2004.
This Form 8-K reported information under Items 7 and 9.*
*Designates Form 8-K was furnished rather than filed.
39
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CONSTELLATION BRANDS, INC.
Dated: July 12, 2004 By:/s/ Thomas F. Howe
--------------------------------------
Thomas F. Howe, Senior Vice President,
Controller
Dated: July 12, 2004 By:/s/ Thomas S. Summer
--------------------------------------
Thomas S. Summer, Executive Vice
President and Chief Financial Officer
(principal financial officer and
principal accounting officer)
40
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
2.1 Implementation Deed dated 17 January 2003 between Constellation Brands,
Inc. and BRL Hardy Limited (filed as Exhibit 99.1 to the Company's
Current Report on Form 8-K dated January 21, 2003 and incorporated
herein by reference).
2.2 Transaction Compensation Agreement dated 17 January 2003 between
Constellation Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.2
to the Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.3 No Solicitation Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.3 to the
Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.4 Backstop Fee Agreement dated 13 January 2003 between Constellation
Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.4 to the
Company's Current Report on Form 8-K dated January 21, 2003 and
incorporated herein by reference).
2.5 Letter Agreement dated 6 February 2003 between Constellation Brands,
Inc. and BRL Hardy Limited (filed as Exhibit 2.5 to the Company's
Current Report on Form 8-K dated March 27, 2003 and incorporated herein
by reference).
(3) ARTICLES OF INCORPORATION AND BY-LAWS.
3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit
3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2002 and incorporated herein by reference).
3.2 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 24, 2003, filed July 30, 2003 and
incorporated herein by reference).
3.3 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 2002 and
incorporated herein by reference).
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING
INDENTURES.
4.1 Indenture, dated as of February 25, 1999, among the Company, as issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated
February 25, 1999 and incorporated herein by reference).
4.2 Supplemental Indenture No. 1, with respect to 8 1/2% Senior
Subordinated Notes due 2009, dated as of February 25, 1999, by and among
the Company, as Issuer, certain principal subsidiaries, as Guarantors,
and BNY Midwest Trust Company (successor Trustee to Harris Trust and
Savings Bank), as Trustee (filed as Exhibit 99.2 to the Company's
Current Report on Form 8-K dated February 25, 1999 and incorporated
herein by reference).
4.3 Supplemental Indenture No. 2, with respect to 8 5/8% Senior Notes due
2006, dated as of August 4, 1999, by and among the Company, as Issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
41
(filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated
July 28, 1999 and incorporated herein by reference).
4.4 Supplemental Indenture No. 3, dated as of August 6, 1999, by and among
the Company, Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc.,
Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak
Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and BNY
Midwest Trust Company (successor Trustee to Harris Trust and Savings
Bank), as Trustee (filed as Exhibit 4.20 to the Company's Quarterly
Report on Form 10-Q for the fiscal quarter ended August 31, 1999 and
incorporated herein by reference).
4.5 Supplemental Indenture No. 4, with respect to 8 1/2% Senior Notes due
2009, dated as of May 15, 2000, by and among the Company, as Issuer,
certain principal subsidiaries, as Guarantors, and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 4.17 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 29, 2000 and incorporated herein by
reference).
4.6 Supplemental Indenture No. 5, dated as of September 14, 2000, by and
among the Company, as Issuer, certain principal subsidiaries, as
Guarantors, and BNY Midwest Trust Company (successor Trustee to The Bank
of New York), as Trustee (filed as Exhibit 4.1 to the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended August 31,
2000 and incorporated herein by reference).
4.7 Supplemental Indenture No. 6, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor trustee to Harris Trust and Savings Bank and The Bank of New
York, as applicable), as Trustee (filed as Exhibit 4.6 to the Company's
Registration Statement on Form S-3 (Pre-effective Amendment No. 1)
(Registration No. 333-63480) and incorporated herein by reference).
4.8 Supplemental Indenture No. 7, dated as of January 23, 2002, by and
among the Company, as Issuer, certain principal subsidiaries, as
Guarantors, and BNY Midwest Trust Company, as Trustee (filed as Exhibit
4.2 to the Company's Current Report on Form 8-K dated January 17, 2002
and incorporated herein by reference).
4.9 Supplemental Indenture No. 8, dated as of March 27, 2003, by and among
the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company, as Trustee (filed as Exhibit 4.9 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2003 and
incorporated herein by reference).
4.10 Indenture, with respect to 8 1/2% Senior Notes due 2009, dated as of
November 17, 1999, among the Company, as Issuer, certain principal
subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor to
Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.1 to the
Company's Registration Statement on Form S-4 (Registration No.
333-94369) and incorporated herein by reference).
4.11 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company
(successor to Harris Trust and Savings Bank), as Trustee (filed as
Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2001 and incorporated herein by
reference).
4.12 Supplemental Indenture No. 2, dated as of March 27, 2003, among the
Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company (successor to Harris Trust and Savings Bank), as Trustee
(filed as Exhibit 4.18 to the Company's Annual Report on Form 10-K for
the fiscal year ended February 28, 2003 and incorporated herein by
reference).
42
4.13 Indenture, with respect to 8% Senior Notes due 2008, dated as of
February 21, 2001, by and among the Company, as Issuer, certain
principal subsidiaries, as Guarantors and BNY Midwest Trust Company, as
Trustee (filed as Exhibit 4.1 to the Company's Registration Statement
filed on Form S-4 (Registration No. 333-60720) and incorporated herein
by reference).
4.14 Supplemental Indenture No. 1, dated as of August 21, 2001, among the
Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company, as
Trustee (filed as Exhibit 4.7 to the Company's Pre-effective Amendment
No. 1 to its Registration Statement on Form S-3 (Registration No.
333-63480) and incorporated herein by reference).
4.15 Supplemental Indenture No. 2, dated as of March 27, 2003, among the
Company, CBI Australia Holdings Pty Limited (ACN 103 359 299),
Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest
Trust Company, as Trustee (filed as Exhibit 4.21 to the Company's Annual
Report on Form 10-K for the fiscal year ended February 28, 2003 and
incorporated herein by reference).
4.16 Amended and Restated Credit Agreement, dated as of March 19, 2003,
among the Company and certain of its subsidiaries, the lenders named
therein, JPMorgan Chase Bank, as Administrative Agent, and J.P. Morgan
Europe Limited, as London Agent (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated March 27, 2003 and incorporated herein
by reference).
4.17 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as
of July 18, 2003, among the Company, certain of its subsidiaries, and
JPMorgan Chase Bank, as Administrative Agent (filed as Exhibit 4.17 to
the Company's Report on Form 10-Q for the fiscal quarter ended August
31, 2003 and incorporated herein by reference).
4.18 Second Amended and Restated Credit Agreement, dated as of October 31,
2003, among the Company and certain of its subsidiaries, the lenders
named therein, JP Morgan Chase Bank, as Administrative Agent, and J.P.
Morgan Europe Limited, as London Agent (filed as Exhibit 4.18 to the
Company's Report on Form 10-Q for the fiscal quarter ended November 30,
2003 and incorporated herein by reference).
4.19 Amendment No. 1, dated as of February 10, 2004, to the Second Amended
and Restated Credit Agreement, dated as of October 31, 2003, among the
Company, the Subsidiary Guarantors party thereto, the Lenders party
thereto and JPMorgan Chase Bank, as Administrative Agent (filed as
Exhibit 4.25 to the Company's Annual Report on Form 10-K for the fiscal
year ended February 29, 2004 and incorporated herein by reference).
4.20 Amended and Restated Bridge Loan Agreement, dated as of January 16,
2003 and amended and restated as of March 26, 2003, among the Company
and certain of its subsidiaries, the lenders named therein, and JPMorgan
Chase Bank, as Administrative Agent (filed as Exhibit 4.2 to the
Company's Current Report on Form 8-K dated March 27, 2003 and
incorporated herein by reference).
4.21 Certificate of Designations of 5.75% Series A Mandatory Convertible
Preferred Stock of the Company (filed as Exhibit 4.1 to the Company's
Current Report on Form 8-K dated July 24, 2003, filed July 30, 2003 and
incorporated herein by reference).
4.22 Deposit Agreement, dated as of July 30, 2003, by and among the Company,
Mellon Investor Services LLC and all holders from time to time of
Depositary Receipts evidencing Depositary Shares Representing 5.75%
Series A Mandatory Convertible Preferred Stock of the Company (filed
as Exhibit 4.2 to the Company's Current Report on Form 8-K dated July
24, 2003, filed July 30, 2003 and incorporated herein by reference).
43
(10) MATERIAL CONTRACTS.
Not applicable.
(11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS.
11.1 Computation of per share earnings (filed herewith).
(15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION.
Not applicable.
(18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES.
Not applicable.
(19) REPORT FURNISHED TO SECURITY HOLDERS.
Not applicable.
(22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY
HOLDERS.
Not applicable.
(23) CONSENTS OF EXPERTS AND COUNSEL.
Not applicable.
(24) POWER OF ATTORNEY.
Not applicable.
(31) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS.
31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed
herewith).
31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or
Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed
herewith).
(32) SECTION 1350 CERTIFICATIONS.
32.1 Certificate of Chief Executive Officer pursuant to Section 18 U.S.C.
1350 (filed herewith).
32.2 Certificate of Chief Financial Officer pursuant to Section 18 U.S.C.
1350 (filed herewith).
(99) ADDITIONAL EXHIBITS.
Not applicable.
44