CONSTELLATION BRANDS, INC. - 10-Q Quarterly Report

Comprehensive income consists of net income, foreign currency translation adjustments, net unrealized gains or losses on derivative instruments, net unrealized gains or losses on available-for-sale marketable equity securities and minimum pension liability adjustments. The reconciliation of net income to comprehensive income is as follows:

	For the Nine Months Ended November 30,						For the Three Months Ended November 30,
	2004			2003			2004			2003
(in thousands)
Net income	$	228,836		$	157,593		$	96,893		$	82,840
Other comprehensive income, net of tax:
Foreign currency translation adjustments		55,077			320,237			179,322			214,120
Cash flow hedges:
Net derivative (losses) gains, net of tax benefit (expense) of $7,920, ($13,936), ($2,027) and ($4,787), respectively		(17,997	)		32,432			5,100			11,137
Reclassification adjustments, net of tax (expense) benefit of ($2,603), $886, ($1,944) and $275, respectively		5,989			(1,939	)		4,555			(596	)
Net cash flow hedges		(12,008	)		30,493			9,655			10,541
Unrealized gains (losses) on marketable equity securities, net of tax (expense) benefit of ($278), $303, ($262) and ($44), respectively		649			(708	)		610			102
Minimum pension liability adjustment, net of tax benefit of $741, $1,838, $1,554 and $1,690, respectively		(1,546	)		(4,139	)		(3,467	)		(3,868	)
Total comprehensive income	$	271,008		$	503,476		$	283,013		$	303,735


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Accumulated other comprehensive income (loss) ("AOCI"), net of tax effects, includes the following components:

	Foreign Currency Translation Adjustments		Net Unrealized Gains on Derivatives			Unrealized (Loss) Gain on Marketable Equity Securities			Minimum Pension Liability Adjustment			Accumulated Other Comprehensive Income (Loss)
(in thousands)
Balance, February 29, 2004	$	393,972	$	36,949		$	(432	)	$	(58,187	)	$	372,302
Current period change		55,077		(12,008	)		649			(1,546	)		42,172
Balance, November 30, 2004	$	449,049	$	24,941		$	217		$	(59,733	)	$	414,474

The Company has an investment in marketable equity securities with an aggregate fair value of $15.8 million and $14.8 million as of November 30, 2004, and February 29, 2004, respectively. The investment is classified as an available-for-sale security and is included in prepaid expenses and other on the Company's Consolidated Balance Sheet as of November 30, 2004, and February 29, 2004. As such, gross unrealized gains of $0.3 million and $0.6 million as of November 30, 2004, and February 29, 2004, respectively, are included, net of applicable income taxes, within AOCI. 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 nin e months and three months ended November 30, 2004. Realized gains on sales of securities during the nine months and three months ended November 30, 2003, are immaterial.

13)	RESTRUCTURING AND RELATED CHARGES:

For the nine months ended November 30, 2004, the Company recorded $4.4 million of restructuring and related charges associated with the restructuring plan of the Constellation Wines segment. Restructuring and related charges resulted from (i) the further realignment of business operations as previously announced in fiscal 2004, and (ii) the Company’s July 2003 decision to exit the commodity concentrate product line in the U.S., and included $1.6 million of employee termination benefit costs (net of reversal of prior accruals of $0.2 million), $0.6 million of grape contract termination costs, $0.9 million of facility consolidation and relocation costs, and other related charges of $1.3 million. For the nine months ended November 30, 2003, the Company recorded $27.5 mil lion of restructuring and related charges associated with the restructuring plan of the Constellation Wines segment. In addition, in connection with the Company’s decision to exit the commodity concentrate product line in the U.S., the Company recorded a write-down of commodity concentrate inventory of $16.8 million for the three months ended August 31, 2003, which was recorded in cost of product sold.

The Company recorded restructuring and related charges of $1.6 million for the three months ended May 31, 2004, including $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 recorded restructuring and related charges of $1.2 million for the three months ended August 31, 2004, including $0.2 million of employee termination benefit costs (net of reversal of prior accruals of $0.2 million), $0.3 million of facility consolidation and relocation costs, and other related charges of $0.7 million. For the three months ended August 31, 2003, the Company recorded $17.1 million of restructuring and related charges associated with the restructuring plan of the Constellation Wines segment.


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The Company recorded restructuring and related charges of $1.6 million for the three months ended November 30, 2004, including $0.2 million of employee termination benefit costs, $0.6 million of grape contract termination costs, $0.3 million of facility consolidation and relocation costs, and other related charges of $0.5 million. For the three months ended November 30, 2003, the Company recorded $8.1 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 $9.2 million of employee termination benefit costs through February 28, 2005, of which $8.4 million has been incurred through November 30, 2004, (ii) a total of $18.3 million of grape contract termination costs through February 28, 2005, of which $18.3 million has been incurred through November 30, 2004, and (iii) a total of $3.9 million of facility consolidation and relocation costs through February 28, 2005, of which $2.8 million has been incurred through November 30, 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 Compa ny expects to incur additional costs of realigning the business operations of $2.3 million during the year ending February 28, 2005, of which $1.3 million has been incurred through November 30, 2004.

The following table illustrates the changes in the restructuring liability balance since February 29, 2004:

	Employee Termination Benefit Costs			Grape Contract Termination Costs			Facility Consolidation/ Relocation 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
Restructuring charges		382			-			358			740
Reversal of prior accruals		(228	)		-			-			(228	)
Cash expenditures		(373	)		-			(358	)		(731	)
Foreign currency adjustments		(11	)		-			-			(11	)
Balance, August 31, 2004		910			1,048			-			1,958
Restructuring charges		211			599			294			1,104
Cash expenditures		(642	)		(1,282	)		(294	)		(2,218	)
Foreign currency adjustments		(27	)		-			-			(27	)
Balance, November 30, 2004	$	452		$	365		$	-		$	817


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14)	CONDENSED CONSOLIDATING FINANCIAL INFORMATION:

Subsequent to February 29, 2004, four subsidiaries of the Company which were previously included as Subsidiary Nonguarantors (as defined below) became Subsidiary Guarantors (as defined below) under the Company’s existing indentures. As such, the following information sets forth the condensed consolidating balance sheets of the Company as of November 30, 2004, and February 29, 2004, the condensed consolidating statements of income for the nine months and three months ended November 30, 2004, and November 30, 2003, and the condensed consolidating statements of cash flows for the nine months ended November 30, 2004, and November 30, 2003, for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company’s senior notes and seni or 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"), as if the new Subsidiary Guarantors had been in place as of and for all periods presented. 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 sa me 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 Current Report on Form 8-K dated August 19, 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 Company			Subsidiary Guarantors			Subsidiary Nonguarantors		Eliminations			Consolidated
(in thousands)
Condensed Consolidating Balance Sheet at November 30, 2004
Current assets:
Cash and cash investments	$	2,313		$	2,206		$	8,235	$	-		$	12,754
Accounts receivable, net		136,735			229,574			540,008		-			906,317
Inventories		29,830			765,238			660,514		(12,152	)		1,443,430
Prepaid expenses and other		12,394			125,941			47,291		-			185,626
Intercompany (payable) receivable		(479,614	)		(115,333	)		594,947		-			-
Total current assets		(298,342	)		1,007,626			1,850,995		(12,152	)		2,548,127
Property, plant and equipment, net		36,280			430,145			657,645		-			1,124,070
Investments in subsidiaries		4,475,606			1,845,149			-		(6,320,755	)		-
Goodwill		-			636,117			926,645		-			1,562,762
Intangible assets, net		-			396,677			351,429		-			748,106
Other assets, net		31,531			2,338			62,950		-			96,819
Total assets	$	4,245,075		$	4,318,052		$	3,849,664	$	(6,332,907	)	$	6,079,884

Current liabilities:
Notes payable to banks	$	160,000		$	-		$	66,058	$	-		$	226,058
Current maturities of long-term debt		78,816			3,546			3,476		-			85,838
Accounts payable		2,856			161,328			219,232		-			383,416
Accrued excise taxes		9,056			28,470			36,053		-			73,579
Other accrued expenses and liabilities		115,347			108,294			334,212		829			558,682
Total current liabilities		366,075			301,638			659,031		829			1,327,573
Long-term debt, less current maturities		1,681,821			6,490			28,374		-			1,716,685
Deferred income taxes		(14,978	)		188,880			32,527		-			206,429
Other liabilities		968			25,598			133,388		-			159,954


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	Parent Company			Subsidiary Guarantors			Subsidiary Nonguarantors		Eliminations			Consolidated
(in thousands)
Stockholders’ equity:
Preferred stock		2			-			-		-			2
Class A and Class B common stock		1,133			6,443			141,573		(148,016	)		1,133
Additional paid-in capital		1,051,022			1,952,158			2,415,934		(4,368,092	)		1,051,022
Retained earnings		1,246,133			1,661,140			143,507		(1,819,104	)		1,231,676
Accumulated other comprehensive (loss) income		(58,037	)		175,705			295,330		1,476			414,474
Treasury stock and other		(29,064	)		-			-		-			(29,064	)
Total stockholders’ equity		2,211,189			3,795,446			2,996,344		(6,333,736	)		2,669,243
Total liabilities and stockholders’ equity	$	4,245,075		$	4,318,052		$	3,849,664	$	(6,332,907	)	$	6,079,884

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		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		(304,555	)		(253,680	)		558,235		-			-
Total current assets		(147,429	)		665,852			1,560,420		(7,372	)		2,071,471
Property, plant and equipment, net		33,722			426,152			637,488		-			1,097,362
Investments in subsidiaries		4,270,871			1,757,700			-		(6,028,571	)		-
Goodwill		-			636,597			904,040		-			1,540,637
Intangible assets, net		-			396,153			348,825		-			744,978
Other assets, net		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

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


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	Parent Company			Subsidiary Guarantors			Subsidiary Nonguarantors			Eliminations			Consolidated
(in thousands)
Condensed Consolidating Statement of Income for the Nine Months Ended November 30, 2004
Sales	$	600,787		$	1,642,333		$	1,927,756		$	(335,888	)	$	3,834,988
Less - excise taxes		(107,996	)		(335,072	)		(341,963	)		-			(785,031	)
Net sales		492,791			1,307,261			1,585,793			(335,888	)		3,049,957
Cost of product sold		(398,265	)		(834,829	)		(1,291,857	)		328,803			(2,196,148	)
Gross profit		94,526			472,432			293,936			(7,085	)		853,809
Selling, general and administrative expenses		(106,653	)		(156,631	)		(137,832	)		-			(401,116	)
Restructuring and related charges		-			(2,313	)		(2,113	)		-			(4,426	)
Operating (loss) income		(12,127	)		313,488			153,991			(7,085	)		448,267
Gain on change in fair value of derivative instruments		-			-			-			-			-
Equity in earnings of equity method investees and subsidiaries		229,756			90,129			621			(319,885	)		621
Interest income (expense), net		16,199			(82,701	)		(24,830	)		-			(91,332	)
Income before income taxes		233,828			320,916			129,782			(326,970	)		357,556
Benefit from (provision for) income taxes		2,093			(91,160	)		(39,653	)		-			(128,720	)
Net income		235,921			229,756			90,129			(326,970	)		228,836
Dividends on preferred stock		(7,353	)		-			-			-			(7,353	)
Income available to common stockholders	$	228,568		$	229,756		$	90,129		$	(326,970	)	$	221,483

Condensed Consolidating Statement of Income for the Nine Months Ended November 30, 2003
Sales	$	603,162		$	1,625,571		$	1,345,163		$	(219,598	)	$	3,354,298
Less - excise taxes		(106,045	)		(328,476	)		(248,663	)		-			(683,184	)
Net sales		497,117			1,297,095			1,096,500			(219,598	)		2,671,114
Cost of product sold		(428,529	)		(859,180	)		(863,918	)		212,746			(1,938,881	)
Gross profit		68,588			437,915			232,582			(6,852	)		732,233
Selling, general and administrative expenses		(92,452	)		(138,051	)		(117,925	)		-			(348,428	)
Restructuring and related charges		-			(26,061	)		(1,426	)		-			(27,487	)
Operating (loss) income		(23,864	)		273,803			113,231			(6,852	)		356,318
Gain on change in fair value of derivative instruments		1,181			-			-			-			1,181
Equity in earnings of equity method investees and subsidiaries		177,392			75,395			425			(252,247	)		965
Interest income (expense), net		9,256			(116,730	)		(4,756	)		-			(112,230	)
Income before income taxes		163,965			232,468			108,900			(259,099	)		246,234
Benefit from (provision for) income taxes		480			(55,076	)		(34,045	)		-			(88,641	)
Net income		164,445			177,392			74,855			(259,099	)		157,593
Dividends on preferred stock		(3,294	)		-			-			-			(3,294	)
Income available to common stockholders	$	161,151		$	177,392		$	74,855		$	(259,099	)	$	154,299


	16

	Parent Company			Subsidiary Guarantors			Subsidiary Nonguarantors			Eliminations			Consolidated
(in thousands)
Condensed Consolidating Statement of Income for the Three Months Ended November 30, 2004
Sales	$	214,773		$	598,643		$	705,673		$	(158,658	)	$	1,360,431
Less - excise taxes		(41,661	)		(110,187	)		(122,872	)		-			(274,720	)
Net sales		173,112			488,456			582,801			(158,658	)		1,085,711
Cost of product sold		(105,962	)		(347,639	)		(473,854	)		155,408			(772,047	)
Gross profit		67,150			140,817			108,947			(3,250	)		313,664
Selling, general and administrative expenses		(33,666	)		(54,492	)		(42,175	)		-			(130,333	)
Restructuring and related charges		-			(778	)		(866	)		-			(1,644	)
Operating income		33,484			85,547			65,906			(3,250	)		181,687
Gain on change in fair value of derivative instruments		-			-			-			-			-
Equity in earnings of equity method investees and subsidiaries		72,982			43,656			359			(116,638	)		359
Interest income (expense), net		5,403			(27,105	)		(8,949	)		-			(30,651	)
Income before income taxes		111,869			102,098			57,316			(119,888	)		151,395
Provision for income taxes		(11,726	)		(29,116	)		(13,660	)		-			(54,502	)
Net income		100,143			72,982			43,656			(119,888	)		96,893
Dividends on preferred stock		(2,451	)		-			-			-			(2,451	)
Income available to common stockholders	$	97,692		$	72,982		$	43,656		$	(119,888	)	$	94,442

Condensed Consolidating Statement of Income for the Three Months Ended November 30, 2003
Sales	$	223,249		$	515,574		$	493,087		$	(18,369	)	$	1,213,541
Less - excise taxes		(40,841	)		(113,168	)		(72,284	)		-			(226,293	)
Net sales		182,408			402,406			420,803			(18,369	)		987,248
Cost of product sold		(150,233	)		(242,357	)		(323,751	)		11,709			(704,632	)
Gross profit		32,175			160,049			97,052			(6,660	)		282,616
Selling, general and administrative expenses		(29,467	)		(39,450	)		(44,416	)		-			(113,333	)
Restructuring and related charges		-			(7,966	)		(122	)		-			(8,088	)
Operating income		2,708			112,633			52,514			(6,660	)		161,195
Gain on change in fair value of derivative instruments		-			-			-			-			-
Equity in earnings of equity method investees and subsidiaries		84,296			36,796			126			(121,092	)		126
Interest income (expense), net		8,089			(40,199	)		221			-			(31,889	)
Income before income taxes		95,093			109,230			52,861			(127,752	)		129,432
Provision for income taxes		(5,593	)		(24,934	)		(16,065	)		-			(46,592	)
Net income		89,500			84,296			36,796			(127,752	)		82,840
Dividends on preferred stock		(2,450	)		-			-			-			(2,450	)
Income available to common stockholders	$	87,050		$	84,296		$	36,796		$	(127,752	)	$	80,390


	17

	Parent Company			Subsidiary Guarantors			Subsidiary Nonguarantors			Eliminations		Consolidated
(in thousands)
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended November 30, 2004
Net cash (used in) provided by operating activities	$	(70,924	)	$	177,290		$	(24,944	)	$	-	$	81,422

Cash flows from investing activities:
Purchases of property, plant and equipment		(5,111	)		(30,534	)		(42,711	)		-		(78,356	)
Purchases of businesses, net of cash acquired		-			-			(8,899	)		-		(8,899	)
Payment of accrued earn-out amount		-			(2,617	)		-			-		(2,617	)
Proceeds from sale of assets		-			7			1,218			-		1,225
Proceeds from sale of business		-			-			-			-		-
Proceeds from sale of marketable equity securities		-			-			-			-		-
Net cash used in investing activities		(5,111	)		(33,144	)		(50,392	)		-		(88,647	)

Cash flows from financing activities:
Principal payments of long-term debt		(245,046	)		(3,545	)		(6,015	)		-		(254,606	)
Payment of preferred stock dividends		(7,353	)		-			-			-		(7,353	)
Payment of issuance costs of long-term debt		(901	)		-			-			-		(901	)
Net proceeds from notes payable		160,000			-			59,953			-		219,953
Intercompany financing activities, net		143,156			(143,156	)		-			-		-
Exercise of employee stock options		25,257			-			-			-		25,257
Proceeds from employee stock purchases		2,441			-			-			-		2,441
Proceeds from issuance of long-term debt		-			-			-			-		-
Proceeds from equity offerings, net of fees		-			-			-			-		-
Net cash provided by (used in) financing activities		77,554			(146,701	)		53,938			-		(15,209	)
Effect of exchange rate changes on cash and cash investments		(254	)		97			(1,791	)		-		(1,948	)

Net increase (decrease) in cash and cash investments		1,265			(2,458	)		(23,189	)		-		(24,382	)
Cash and cash investments, beginning of period		1,048			4,664			31,424			-		37,136
Cash and cash investments, end of period	$	2,313		$	2,206		$	8,235		$	-	$	12,754


	18

	Parent Company			Subsidiary Guarantors			Subsidiary Nonguarantors			Eliminations		Consolidated
(in thousands)
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended November 30, 2003
Net cash provided by (used in) operating activities	$	86,143		$	(80,917	)	$	174,296		$	-	$	179,522

Cash flows from investing activities:
Purchases of property, plant and equipment		(6,216	)		(27,023	)		(37,345	)		-		(70,584	)
Purchases of businesses, net of cash acquired		-			(1,070,074	)		-			-		(1,070,074	)
Payment of accrued earn-out amount		-			(2,035	)		-			-		(2,035	)
Proceeds from sale of assets		-			9,501			1,584			-		11,085
Proceeds from sale of business		-			-			4,431			-		4,431
Proceeds from sale of marketable equity securities		-			-			790			-		790
Net cash used in investing activities		(6,216	)		(1,089,631	)		(30,540	)		-		(1,126,387	)

Cash flows from financing activities:
Principal payments of long-term debt		(871,959	)		(2,825	)		(365,611	)		-		(1,240,395	)
Payment of preferred stock dividend		-			-			-			-		-
Payment of issuance costs of long-term debt		(34,147	)		-			-			-		(34,147	)
Net proceeds from notes payable		164,600			-			609			-		165,209
Intercompany financing activities, net		(1,419,182	)		1,070,085			349,097			-		-
Exercise of employee stock options		23,756			-			-			-		23,756
Proceeds from employee stock purchases		1,822			-			-			-		1,822
Proceeds from issuance of long-term debt		1,600,000			-			-			-		1,600,000
Proceeds from equity offerings, net of fees		426,069			-			-			-		426,069
Net cash (used in) provided by financing activities		(109,041	)		1,067,260			(15,905	)		-		942,314

Effect of exchange rate changes on cash and cash investments		27,788			109,675			(108,347	)		-		29,116

Net (decrease) increase in cash and cash investments		(1,326	)		6,387			19,504			-		24,565
Cash and cash investments, beginning of period		1,426			1,248			11,136			-		13,810
Cash and cash investments, end of period	$	100		$	7,635		$	30,640		$	-	$	38,375


	19

15)	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, corporate development, corporate finance, human resources, internal audit, investor relations, legal 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 genera l 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 nine months ended November 30, 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 $4.4 million, and the flow through of inventory step-up associated with the Hardy Acquisition of $4.2 million. For the nine months ended November 30, 2003, Restructuring and Unusual Costs consist of the flow through of inventory step-up and financing costs associated with the Hardy Acquisition of $17.3 million and $11.6 million, respectively, and restructuring and related charges of $44.3 million, including write-down of commodity concentrate inventory of $16.8 million. For the three months ended November 30, 2004, Restructuring and Unusual Costs consist of restructuring and related charges of $1.6 million and the flow through of inventory step-up associated with the Hardy Acquisition of $1.9 million. For the three months ended November 30, 2003, Restructuring and Unusual Costs consist of the flow through of inventory step-up and financing costs associated with the Hardy Acquisition of $2.7 million and $2.3 million, respectively, and restructuring and related charges of $8.1 million. The Company evaluates performance based on operating incom e 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 Current Report on Form 8-K dated August 19, 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 Nine Months Ended November 30,				For the Three Months Ended November 30,
	2004		2003		2004		2003
(in thousands)
Constellation Wines:
Net sales:
Branded wine	$	1,286,966	$	1,155,170	$	509,520	$	460,805
Wholesale and other		769,720		611,854		264,324		219,740
Net sales	$	2,056,686	$	1,767,024	$	773,844	$	680,545
Segment operating income	$	283,104	$	258,208	$	127,700	$	112,772
Equity in earnings of equity method investees	$	621	$	965	$	359	$	126
Long-lived assets	$	1,027,897	$	951,317	$	1,027,897	$	951,317
Investment in equity method investees	$	6,454	$	8,227	$	6,454	$	8,227
Total assets	$	5,217,548	$	4,834,279	$	5,217,548	$	4,834,279
Capital expenditures	$	71,946	$	61,900	$	25,588	$	20,839
Depreciation and amortization	$	57,944	$	51,374	$	19,372	$	17,361


	20

	For the Nine Months Ended November 30,						For the Three Months Ended November 30,
	2004			2003			2004			2003
(in thousands)
Constellation Beers and Spirits:
Net sales:
Imported beers	$	751,879		$	684,216		$	225,846		$	229,538
Spirits		241,392			219,874			86,021			77,165
Net sales	$	993,271		$	904,090		$	311,867		$	306,703
Segment operating income	$	223,023		$	202,228		$	71,360		$	72,228
Long-lived assets	$	82,590		$	82,416		$	82,590		$	82,416
Total assets	$	801,497		$	740,226		$	801,497		$	740,226
Capital expenditures	$	4,051		$	5,981		$	958		$	2,748
Depreciation and amortization	$	8,303		$	7,529		$	2,825		$	2,363

Corporate Operations and Other:
Net sales	$	-		$	-		$	-		$	-
Segment operating loss	$	(38,964	)	$	(30,978	)	$	(13,839	)	$	(10,669	)
Long-lived assets	$	13,583		$	14,249		$	13,583		$	14,249
Total assets	$	60,839		$	49,775		$	60,839		$	49,775
Capital expenditures	$	2,359		$	2,703		$	900		$	553
Depreciation and amortization	$	7,365		$	18,476		$	2,348		$	4,712

Restructuring and Unusual Costs:
Operating loss	$	(18,896	)	$	(73,140	)	$	(3,534	)	$	(13,136	)

Consolidated:
Net sales	$	3,049,957		$	2,671,114		$	1,085,711		$	987,248
Operating income	$	448,267		$	356,318		$	181,687		$	161,195
Equity in earnings of equity method investees	$	621		$	965		$	359		$	126
Long-lived assets	$	1,124,070		$	1,047,982		$	1,124,070		$	1,047,982
Investment in equity method investees	$	6,454		$	8,227		$	6,454		$	8,227
Total assets	$	6,079,884		$	5,624,280		$	6,079,884		$	5,624,280
Capital expenditures	$	78,356		$	70,584		$	27,446		$	24,140
Depreciation and amortization	$	73,612		$	77,379		$	24,545		$	24,436

16)	ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:

In December 2003, the Financial Accounting Standards Board ("FASB") 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 nine months and three months ended November 30, 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.


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In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 ("SFAS No. 151"), "Inventory Costs - an amendment of ARB No. 43, Chapter 4." SFAS No. 151 amends the guidance in Accounting Research Bulletin No. 43 ("ARB No. 43"), "Restatement and Revision of Accounting Research Bulletins," Chapter 4, "Inventory Pricing," to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). SFAS No. 151 requires that those items be recognized as current period charges. In addition, SFAS No. 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The Company is required to adopt SFAS No. 151 for fiscal ye ars beginning March 1, 2006. The Company is currently assessing the financial impact of SFAS No. 151 on its consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123 (revised 2004) ("SFAS No. 123(R)"), "Share-Based Payment." SFAS No. 123(R) replaces Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," and supersedes Accounting Principles Board Opinion No. 25 ("APB Opinion No. 25"), "Accounting for Stock Issued to Employees." SFAS No. 123(R) requires the cost resulting from all share-based payment transactions be recognized in the financial statements. In addition, SFAS No. 123(R) establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a grant date fair-value-based measurement method in accounting for share-based payment transactions. SFAS No. 123(R) also amends Statement of Financial Accounting Standards No. 95 ("SFAS No. 95"), "Statement of Cash Flows," to require that excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes paid. SFAS No. 123(R) applies to all awards granted, modified, repurchased, or cancelled after the required effective date (see below). In addition, SFAS No. 123(R) requires entities that used the fair-value-based method for either recognition or disclosure under SFAS No. 123 to apply SFAS No. 123(R) using a modified version of prospective application. This application requires compensation cost to be recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered based on the grant date fair value of those awards as calculated under SFAS No. 123 for either recognition or pro forma disclosures. For periods before the required effective date, those entities may elect to apply a modified version of retrospective application under which financial statements for prior periods are adjusted on a basis consistent with the pro forma disclosures required for those periods by SFAS No. 123. The Company is required to adopt SFAS No. 123(R) for interim periods beginning September 1, 2005. The Company is currently assessing the financial impact of SFAS No. 123(R) on its consolidated financial statements.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 ("SFAS No. 153"), "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29." SFAS No. 153 amends Accounting Principles Board Opinion No. 29 ("APB No. 29"), "Accounting for Nonmonetary Transactions," to eliminate the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replace it with a general exception from fair value measurement for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Company is required to adopt SFAS No. 153 for fiscal years begin ning March 1, 2006. The Company is currently assessing the financial impact of SFAS No. 153 on its consolidated financial statements.


	22

On October 22, 2004, the American Jobs Creation Act ("AJCA") was signed into law. The AJCA includes a special one-time 85 percent dividends received deduction for certain foreign earnings that are repatriated. In December 2004, the FASB issued FASB Staff Position No. FAS 109-2 ("FSP FAS 109-2"), "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004." FSP FAS 109-2 provides accounting and disclosure guidance for this repatriation provision. The Company has begun its evaluation of the effects of this provision. Although FSP FAS 109-2 is effective immediately, the Company will not be able to complete its evaluation until after Congress or the Treasury Department provides additional clarifying language on key elements of the provision. The Company expects to complete its evaluation of the effects of the repatriation provision within a reasonable period of time following the publication of the additional clarifying language.

In December 2004, the FASB issued FASB Staff Position No. FAS109-1 ("FSP FAS 109-1"), "Application of FASB Statement No. 109, Accounting for Income Taxes, for the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004." FSP FAS 109-1 clarifies that the deduction will be treated as a "special deduction" as described in Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." As such, the special deduction has no effect on deferred tax assets and liabilities existing at the date of enactment. The impact of the deduction will be reported in the period in which the deduction is claimed. The Company is currently assessing the financial impact of FSP FAS 109-1 on its consolidated financial statements.

17)	SUBSEQUENT EVENTS:

Acquisition of Robert Mondavi -

On December 22, 2004, the Company acquired all of the outstanding capital stock of The Robert Mondavi Corporation ("Robert Mondavi"), a leading premium wine producer based in Napa, California. In connection with the production of its products, Robert Mondavi owns, operates and has an interest in certain wineries and controls certain vineyards. Robert Mondavi produces, markets and sells premium, super premium and fine California wines under the Woodbridge and Robert Mondavi brand names. Woodbridge and Robert Mondavi Private Selection rank among the top two premium and top three super premium wine brands, respectively, in the United States.

The acquisition of Robert Mondavi supports the Company’s strategy of strengthening the breadth of its portfolio across price segments to capitalize on the overall growth in the wine industry. The vast majority of Robert Mondavi’s sales are generated in the United States. The acquisition strengthens the Company’s position as the largest wine company in the world and makes the Company the largest premium wine company in the United States.

Total consideration paid in cash to the Robert Mondavi shareholders was $1,030.7 million. Additionally, the Company expects to incur direct acquisition costs of $10.0 million. The purchase price was financed with borrowings under the Company’s 2004 Credit Agreement (as defined below). In accordance with the purchase method of accounting, the acquired net assets are recorded at fair value at the date of acquisition. The results of operations of the Robert Mondavi business will be included in the Consolidated Statements of Income beginning on the date of acquisition. The purchase price allocation, including the third-party appraisal, is in progress.


	23

In connection with the acquisition of Robert Mondavi, on December 22, 2004, the Company and its U.S. subsidiaries (excluding certain inactive subsidiaries), together with certain of its subsidiaries organized in foreign jurisdictions, JPMorgan Chase Bank, N.A. as a lender and administrative agent and certain other agents, lenders, and financial institutions entered into a new credit agreement (the "2004 Credit Agreement"). The 2004 Credit Agreement provides for aggregate credit facilities of $2.9 billion, consisting of a $600.0 million tranche A term loan facility due in November 2010, a $1.8 billion tranche B term loan facility due in November 2011, and a $500.0 million revolving credit facility (including a sub-facility for letters of credit of up to $60.0 million) which terminates in December 2010.

As of December 22, 2004, the required principal repayments of the tranche A term loan and the tranche B term loan are as follows:

	Tranche A Term Loan		Tranche B Term Loan		Total
(in thousands)
2005	$	15,000	$	4,500	$	19,500
2006		60,000		18,000		78,000
2007		67,500		18,000		85,500
2008		97,500		18,000		115,500
2009		120,000		18,000		138,000
2010		127,500		18,000		145,500
Thereafter		112,500		1,705,500		1,818,000
	$	600,000	$	1,800,000	$	2,400,000

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 2004 Credit Agreement) and, with respect to LIBOR borrowings, ranges between 1.00% and 1.75%. The initial LIBOR margin for the revolving credit facility and the tranche A term loan facility is 1.50%, while the initial LIBOR margin on the tranche B term loan facility is 1.75%.

The Company’s obligations are guaranteed by its U.S. subsidiaries (excluding certain inactive subsidiaries) and by certain of its foreign subsidiaries. These obligations are also secured by a pledge of (i) 100% of the ownership interests in most of the Company’s U.S. subsidiaries and (ii) 65% of the voting capital stock of certain of the Company’s foreign subsidiaries.

The Company and its subsidiaries are also 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, the disposition and acquisition of property and the making of certain investments, in each case subject to numerous baskets, exceptions and thresholds. The financial covenants are limited to maximum total debt and senior debt coverage ratios and minimum fixed charges and interest coverage ratios.

The Company used the proceeds of borrowings under the 2004 Credit Agreement to repay the outstanding obligations under its Credit Agreement (as defined above), to fund the cash merger consideration payable in connection with its acquisition of Robert Mondavi, and to pay certain obligations of Robert Mondavi, including indebtedness outstanding under its bank facility and unsecured notes. The Company intends to use the remaining availability under the 2004 Credit Agreement to fund its working capital needs on an ongoing basis.

As of December 22, 2004, under the 2004 Credit Agreement, the Company had outstanding tranche A term loans of $600.0 million bearing an interest rate of 5.75%, outstanding tranche B term loans of $1.8 billion bearing an interest rate of 6.0%, no outstanding revolving loans, undrawn revolving letters of credit of $37.5 million, and $462.5 million in revolving loans available to be drawn.


	24

On December 22, 2004, the Company also entered into five year interest rate swap agreements to minimize interest rate volatility. The swap agreements fix LIBOR interest rates on $1.2 billion of the Company’s floating rate debt at an average rate of 4.0% over the five year term.

Investment in Ruffino -

On December 3, 2004, the Company purchased a 40 percent interest in Ruffino S.r.l. ("Ruffino"), the well-known Italian fine wine company, for a preliminary purchase price of $81.7 million. The purchase price is subject to final closing adjustments which the Company does not expect to be material. The Constellation Wines segment expects to assume the distribution of Ruffino's products in the United States by the beginning of fiscal 2006. The Company expects to account for the investment under the equity method.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

The Company is a leading international producer and marketer of beverage alcohol brands with a broad portfolio across the wine, imported beer and spirits 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.

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, imported 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 is designed to deliver long-term profitable growth. This strategy allows the Company more investment choices, provides flexibility to address c hanging market conditions and creates stronger routes-to-market.


	25

Marketing, sales and distribution of the Company’s products, particularly the Constellation Wines segment’s products, are managed on a geographic basis in order to fully leverage leading market positions within each geographic market. Market dynamics and consumer trends vary significantly across the Company’s three core geographic markets - the U.S., Europe (primarily the U.K.) and Australasia (Australia/New Zealand). Within the U.S. market, the Company offers a wide range of beverage alcohol products across the Constellation Wines segment and the Constellation Beers and Spirits segment. In Europe, the Company leverages its position as the largest wine supplier in the U.K. In addition, the Company leverages its U.K. wholesale business as a strategic route-to - -market for its imported wine portfolio and as a key supplier of a full range of beverage alcohol products to large national accounts. Within Australasia, where consumer trends favor domestic wine products, the Company leverages its position as one of the largest wine producers in Australia.

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 Third Quarter 2005 (as defined below), the Company’s net sales increased 10.0% over Third Quarter 2004 (as defined below) primarily from increases in branded wine net sales, U.K. wholesale net sales and a favorable foreign currency impact. Operating income increased 12.7% over the comparable prior year period primarily due to a reduction in unusual costs (see below under Operating Income discussion), partially offset by increased selling and advertising expenses, as the Company continues to invest behind certain wine brands to drive growth and broader distribution. Lastly, as a result of the above factors and lower interest expense for Third Quarter 2005, net income increased 17.0% over the comparable prior year period.

In Nine Months 2005 (as defined below), the Company’s net sales increased 14.2% over Nine Months 2004 (as defined below) primarily from increases in U.K. wholesale net sales, imported beer net sales, the inclusion of an additional one month of net sales of products acquired in the Hardy Acquisition, increases in branded wines net sales and a favorable foreign currency impact. Operating income increased 25.8% over the comparable prior year period primarily due to a reduction in unusual costs (see below under Operating Income discussion), partially offset by increased selling and advertising expenses, as the Company continues to invest behind the imported beer portfolio and certain wine brands to drive growth and broader distribution. Lastly, as a result of the above fa ctors and lower interest expense for Nine Months 2005, net income increased 45.2% over the comparable prior year period.

The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for the three months ended November 30, 2004 ("Third Quarter 2005"), compared to the three months ended November 30, 2003 ("Third Quarter 2004"), and for the nine months ended November 30, 2004 ("Nine Months 2005"), compared to the nine months ended November 30, 2003 ("Nine Months 2004"), and (ii) financial liquidity and capital resources for Nine Months 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 conjuncti on with the Company’s consolidated financial statements and notes thereto included herein and in the Company’s Current Report on Form 8-K dated August 19, 2004.


	26

Recent Developments

Acquisition of Robert Mondavi

The results of operations of the Robert Mondavi business will be reported in the Constellation Wines segment and will be included in the consolidated results of operations of the Company from the date of acquisition. The acquisition of Robert Mondavi is significant and the Company expects it to have a material impact on the Company’s future results of operations, financial position and cash flows. In particular, the Company expects its future results of operations to be significantly impacted by, among other things, the flow through of anticipated inventory step-up, the write-off of bank fees related to the repayment of the Company’s senior credit facility (as discussed below), restructuring, integration and related charges, and interest expense associated with t he 2004 Credit Agreement (as defined below). The Company is currently evaluating the impact of the acquisition of Robert Mondavi on its effective tax rate.

Investment in Ruffino

On December 3, 2004, the Company purchased a 40 percent interest in Ruffino S.r.l. ("Ruffino"), the well-known Italian fine wine company, for a preliminary purchase price of $81.7 million. The purchase price is subject to final closing adjustments which the Company does not expect to be material. The Constellation Wines segment expects to assume the distribution of Ruffino’s products in the United States by the beginning of fiscal 2006. The Company expects to account for the investment under the equity method; accordingly, the results of operations of Ruffino from December 3, 2004, will be included in the equity in earnings of equity method investees line in the Company’s Consolidated Statements of Income.


	27

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 one of Australia’s largest wine producers 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 nine months ended November 30, 2003. The cash portion of the purchase price paid to the Hardy shareholders and optionholders ($1,060.2 million) was financed with $660.2 million of borrowings under the Company’s then existing credit agreement and $400.0 milli on 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 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 pur chase 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 Nine Months 2005 include the results of operations of Hardy and PWP for the entire period, whereas the results of operations for Nine Months 2004 only include the results of operations of Hardy and PWP from March 27, 2003, to the end of Nine Months 2004.


	28

Results of Operations

Third Quarter 2005 Compared to Third Quarter 2004

Net Sales

The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Third Quarter 2005 and Third Quarter 2004.

	Third Quarter 2005 Compared to Third Quarter 2004
	Net Sales
	2005		2004		% Increase (Decrease)
Constellation Wines:
Branded wine	$	509,520	$	460,805		10.6	%
Wholesale and other		264,324		219,740		20.3	%
Constellation Wines net sales	$	773,844	$	680,545		13.7	%
Constellation Beers and Spirits:
Imported beers	$	225,846	$	229,538		(1.6	)%
Spirits		86,021		77,165		11.5	%
Constellation Beers and Spirits net sales	$	311,867	$	306,703		1.7	%
Corporate Operations and Other	$	-	$	-		N/A
Consolidated Net Sales	$	1,085,711	$	987,248		10.0	%

Net sales for Third Quarter 2005 increased to $1,085.7 million from $987.2 million for Third Quarter 2004, an increase of $98.5 million, or 10.0%. This increase resulted primarily from increases in branded wine net sales of $32.4 million (on a local currency basis) and U.K. wholesale net sales of $27.1 million (on a local currency basis). In addition, net sales benefited from a favorable foreign currency impact of $38.2 million.

Constellation Wines

Net sales for Constellation Wines increased to $773.8 million for Third Quarter 2005 from $680.5 million in Third Quarter 2004, an increase of $93.3 million, or 13.7%. Branded wine net sales increased $48.7 million primarily from increased branded wine net sales in the U.S. and Europe of $37.7 million (on a local currency basis) and a favorable foreign currency impact of $16.3 million, partially offset by decreased branded wine net sales in Australasia of $5.3 million (on a local currency basis). The increases in branded wine net sales in the U.S. and Europe are being driven by volume as the Company continues to benefit from increased distribution and greater consumer demand for premium wines. Wholesale and other net sales increased $44.6 million primarily due to growth in the U.K. wholesale business of $27.1 million (on a local currency basis) and a favorable foreign currency impact of $21.9 million. The net sales increase in the U.K. wholesale business on a local currency basis is primarily due to sales to new national accounts added in the first quarter of fiscal 2005 and increased sales in comparable existing accounts during Third Quarter 2005.

The global wine industry continues to be very competitive. The Company has taken a strategy of preserving the long-term brand equity of its wine portfolio and of making investments in the higher growth sectors of the wine business. In the U.S., the 2003 and 2004 California grape harvests were generally lighter than expected. The lighter than expected harvests should bring certain U.S. wine industry inventories closer into balance. At the same time, open market prices in the U.S. for many types of grapes and bulk wine have increased. These increases are expected to have minimal impact on the Company’s overall product cost.


	29

Constellation Beers and Spirits

Net sales for Constellation Beers and Spirits increased to $311.9 million for Third Quarter 2005 from $306.7 million for Third Quarter 2004, an increase of $5.2 million, or 1.7%. This increase resulted from an increase in spirits net sales of $8.9 million partially offset by a decrease in imported beers net sales of $3.7 million. The growth in spirits net sales is attributable to increases in both the Company’s contract production net sales and branded spirits net sales. The decrease in imported beers net sales was due to decreased volumes on the Company’s imported beer portfolio as a result of the wholesaler buy-in ahead of last year’s price increase on the Company’s Mexican portfolio. The decrease in volume was largely offset by the pricing gains as a result of the price increase that was introduced in January 2004 on the Company’s Mexican beer portfolio.

The Company expects net sales growth for imported beer for Fiscal 2005 to be in the mid to high single digits despite a difficult volume comparison for the fourth quarter of Fiscal 2005. The difficult volume comparison is 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 $313.7 million for Third Quarter 2005 from $282.6 million for Third Quarter 2004, an increase of $31.0 million, or 11.0%. The Constellation Wines segment’s gross profit increased $25.2 million primarily due to volume growth in the segment’s U.S. and U.K. branded wines plus a favorable foreign currency impact. The Constellation Beers and Spirits segment’s gross profit increased $5.0 million due to the price increase in the segment’s imported beer portfolio and volume growth in the spirits contract production sales. 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 $0.8 million in Third Quarter 2 005 versus Third 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 increased to 29.0% for Third Quarter 2005 from 28.6% for Third Quarter 2004 primarily due to higher gross margins on the Company’s imported beer portfolio and increased sales of higher margin branded wine products partially offset by increased sales of lower margin U.K. wholesale products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $130.3 million for Third Quarter 2005 from $113.3 million for Third Quarter 2004, an increase of $17.0 million, or 15.0%. The Constellation Wines segment’s selling, general and administrative expenses increased $10.3 million primarily due to increased advertising and selling expenses as the Company continues to invest behind specific wine brands to drive broader distribution. The Constellation Beers and Spirits segment’s selling, general and administrative expenses increased $5.9 million as Third Quarter 2004 benefited from foreign currency gains. In addition, selling and advertising expenses were increased slightly to support the segment’s sales growth. The Corporate Operations and Other segment’ ;s selling, general and administrative expenses increased $3.2 million primarily due to costs associated with higher professional services fees, including costs incurred in connection with compliance activities associated with the Sarbanes-Oxley Act of 2002, and increased general and administrative expenses to support the Company’s growth. Lastly, there was a decrease of $2.3 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. The Third Quarter 2004 costs consisted of financing costs recorded in connection with the Hardy Acquisition. There were no unusual costs in Third Quarter 2005. Selling, general and administrative expenses as a percent of net sales increased to 12.1% for Third Quarter 2005 as compared to 11.5% for Third Quarter 2004 primarily due to the increased general and administrative expenses within the Corporate Operations and Other segment and the benefit of foreign currency gains within th e Constellation Beers and Spirits segment in Third Quarter 2004.


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Restructuring and Related Charges

The Company recorded $1.6 million of restructuring and related charges for Third Quarter 2005 associated with the restructuring plan of the Constellation Wines segment. Restructuring and related charges resulted from (i) the further realignment of business operations as previously announced in Fiscal 2004, and (ii) the Company’s July 2003 decision to exit the commodity concentrate product line in the U.S., and included $0.2 million of employee termination benefit costs, $0.6 million of grape contract termination costs, $0.3 million of facility consolidation and relocation costs, and other related charges of $0.5 million. The Company recorded $8.1 million of restructuring and related charges for Third Quarter 2004 associated with (i) the Company’s decision to exit the commodity concentrate product line and sell its winery located in Escalon, California, and (ii) the realignment of business operations in the Constellation Wines segment.

For Fiscal 2005, excluding the impact of restructuring and integration charges associated with the acquisition of Robert Mondavi, the Company expects to incur total restructuring and related charges of $7.3 million associated with the restructuring plan of the Constellation Wines segment. These charges are expected to consist of $6.7 million related to the further realignment of business operations in the Constellation Wines segment and $0.6 million related to renegotiating existing grape contracts as a result of exiting the commodity concentrate product line.

Operating Income

The following table sets forth the operating income (loss) (in thousands of dollars) by operating segment of the Company for Third Quarter 2005 and Third Quarter 2004.

	Third Quarter 2005 Compared to Third Quarter 2004
	Operating Income (Loss)
	2005			2004			% Increase/ (Decrease)
Constellation Wines	$	127,700		$	112,772			13.2	%
Constellation Beers and Spirits		71,360			72,228			(1.2	)%
Corporate Operations and Other		(13,839	)		(10,669	)		29.7	%
Total Reportable Segments		185,221			174,331			6.2	%
Restructuring and Related Charges and Unusual Costs		(3,534	)		(13,136	)		(73.1	)%
Consolidated Operating Income	$	181,687		$	161,195			12.7	%

Restructuring and related charges and unusual costs of $3.5 million for Third 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 $1.9 million and restructuring and related charges associated with the Company’s realignment of its business operations in the wine segment of $1.6 million. Restructuring and related charges and unusual costs of $13.1 million for Third Quarter 2004 represent the flow through of inventory step-up and the amortization of deferred financing costs associated with the H ardy Acquisition of $2.7 million and $2.3 million, respectively, and costs associated with exiting the commodity concentrate product line and the Company’s realignment of its business operations in the wine segment and restructuring and related charges of $8.1 million. As a result of these costs and the factors discussed above, consolidated operating income increased to $181.7 million for Third Quarter 2005 from $161.2 million for Third Quarter 2004, an increase of $20.5 million, or 12.7%.


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Interest Expense, Net

Interest expense, net of interest income of $0.3 million and $0.9 million for Third Quarter 2005 and Third Quarter 2004, respectively, decreased to $30.7 million for Third Quarter 2005 from $31.9 million for Third Quarter 2004, a decrease of $1.2 million, or (3.9%). The decrease resulted from lower average borrowings in Third Quarter 2005.

Provision for Income Taxes

The Company’s effective tax rate remained the same at 36.0% for Third Quarter 2005 and Third Quarter 2004.

Net Income

As a result of the above factors, net income increased to $96.9 million for Third Quarter 2005 from $82.8 million for Third Quarter 2004, an increase of $14.1 million, or 17.0%.

Nine Months 2005 Compared to Nine Months 2004

Net Sales

The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Nine Months 2005 and Nine Months 2004.

	Nine Months 2005 Compared to Nine Months 2004
	Net Sales
	2005		2004		% Increase
Constellation Wines:
Branded wine	$	1,286,966	$	1,155,170		11.4	%
Wholesale and other		769,720		611,854		25.8	%
Constellation Wines net sales	$	2,056,686	$	1,767,024		16.4	%
Constellation Beers and Spirits:
Imported beers	$	751,879	$	684,216		9.9	%
Spirits		241,392		219,874		9.8	%
Constellation Beers and Spirits net sales	$	993,271	$	904,090		9.9	%
Corporate Operations and Other	$	-	$	-		N/A
Consolidated Net Sales	$	3,049,957	$	2,671,114		14.2	%

Net sales for Nine Months 2005 increased to $3,050.0 million from $2,671.1 million for Nine Months 2004, an increase of $378.8 million, or 14.2%. This increase resulted primarily from an increase in U.K. wholesale net sales of $70.0 million (on a local currency basis), an increase in imported beer net sales of $67.7 million, the inclusion of $48.9 million of net sales of products acquired in the Hardy Acquisition and an increase in branded wines of $35.7 million. In addition, net sales benefited from a favorable foreign currency impact of $134.0 million.


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Constellation Wines

Net sales for Constellation Wines increased to $2,056.7 million for Nine Months 2005 from $1,767.0 million in Nine Months 2004, an increase of $289.7 million, or 16.4%. Branded wine net sales increased $131.8 million. This increase resulted primarily from an additional one month of net sales of $45.7 million of branded wines acquired in the Hardy Acquisition, completed in March 2003, increased branded wine net sales in Europe and the U.S. of $29.8 million (on a local currency basis) and a favorable foreign currency impact of $50.4 million. The increases in branded wine net sales are primarily due to volume growth as the Company continues to benefit from increased distribution and greater consumer demand for premium wines. Wholesale and other net sales increased $157.9 mill ion primarily due to growth in the U.K. wholesale business of $70.0 million (on a local currency basis) and a favorable foreign currency impact of $83.6 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 in the first quarter of fiscal 2005 and increased sales in existing accounts during Nine Months 2005.

Constellation Beers and Spirits

Net sales for Constellation Beers and Spirits increased to $993.3 million for Nine Months 2005 from $904.1 million for Nine Months 2004, an increase of $89.2 million, or 9.9%. This increase resulted from a $67.7 million increase in imported beer sales and an increase in spirits net sales of $21.5 million. The growth in imported beer sales is primarily due to a price increase on the Company’s Mexican beer portfolio, which was introduced in January 2004, and increased volume. The growth in spirits net sales is attributable to increases in both the Company’s contract production net sales as well as branded net sales.

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 $853.8 million for Nine Months 2005 from $732.2 million for Nine Months 2004, an increase of $121.6 million, or 16.6%. The Constellation Wines segment’s gross profit increased $59.8 million primarily due to the additional one month of sales of branded wines acquired in the Hardy Acquisition, volume growth in the branded wine net sales in the U.S., and a favorable foreign currency impact. The Constellation Beers and Spirits segment’s gross profit increased $31.9 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 $29.9 million in Nine Months 2005 versus Nine Months 2004. This decrease resulted from a $16.8 million write-down of commodity concentrate inventory in Nine Months 2004 in connection with the Company’s decision to exit the commodity concentrate product line (see additional discussion under "Restructuring and Related Charges" below) and reduced flow through of inventory step-up associated with the Hardy Acquisition. Gross profit as a percent of net sales increased to 28.0% for Nine Months 2005 from 27.4% for Nine Months 2004 primarily due to the lower unusual costs, partially offset by reduced gross margins in the Constellation Wines segment, driven primarily by increased sales of lower margin U.K. wholesale products.


	33

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased to $401.1 million for Nine Months 2005 from $348.4 million for Nine Months 2004, an increase of $52.7 million, or 15.1%. The Constellation Wines segment’s selling, general and administrative expenses increased $34.9 million primarily due to increased selling and advertising expenses as the Company continues to invest behind specific wine brands to drive broader distribution. The Constellation Beers and Spirits segment’s selling, general and administrative expenses increased $11.1 million due to (i) increased advertising and selling behind its Mexican beer portfolio, (ii) increased general and administrative expenses to support the growth across this segment’s businesses, and (iii) increased general and a dministrative expenses as Nine Months 2004 benefited from foreign currency gains. The Corporate Operations and Other segment’s selling, general and administrative expenses increased $8.0 million primarily due to increased general and administrative expenses to support the Company’s growth and costs associated with higher professional services fees, including costs incurred in connection with compliance activities associated with the Sarbanes-Oxley Act of 2002. Lastly, there was a decrease of $1.3 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 decrease consists of $10.3 million of financing costs recorded in Nine Months 2005 related to the Company’s redemption of its Senior Subordinated Notes (as defined below) as compared to $11.6 million of financing costs recorded in Nine Months 2004 in connection with the Hardy Acquisition. Selling, general and administrative expenses as a percent of net sales increased to 13.2% for Nine Months 2005 as compared to 13.0% for Nine Months 2004 primarily due to the growth in the Corporate Operations and Other segment’s general and administrative expenses.

Restructuring and Related Charges

The Company recorded $4.4 million of restructuring and related charges for Nine Months 2005 associated with the restructuring plan of the Constellation Wines segment. Restructuring and related charges resulted from (i) the further realignment of business operations as previously announced in Fiscal 2004, and (ii) the Company’s July 2003 decision to exit the commodity concentrate product line in the U.S., and included $1.6 million of employee termination benefit costs (net of reversal of prior accruals of $0.2 million), $0.6 million of grape contract termination costs, $0.9 million of facility consolidation and relocation costs, and other related charges of $1.3 million. The Company recorded $27.5 million of restructuring and related charges for Nine Months 2004 associ ated with (i) the Company’s decision to exit the commodity concentrate product line and sell its winery located in Escalon, California, and (ii) the realignment of business operations in the Constellation Wines segment. In total, the Company recorded $44.3 million of costs for Nine Months 2004 allocated between cost of product sold and restructuring and related charges associated with these actions.


	34

Operating Income

The following table sets forth the operating income (loss) (in thousands of dollars) by operating segment of the Company for Nine Months 2005 and Nine Months 2004.

	Nine Months 2005 Compared to Nine Months 2004
	Operating Income (Loss)
	2005			2004			% Increase/ (Decrease)
Constellation Wines	$	283,104		$	258,208			9.6	%
Constellation Beers and Spirits		223,023			202,228			10.3	%
Corporate Operations and Other		(38,964	)		(30,978	)		25.8	%
Total Reportable Segments		467,163			429,458			8.8	%
Restructuring and Related Charges and Unusual Costs		(18,896	)		(73,140	)		(74.2	)%
Consolidated Operating Income	$	448,267		$	356,318			25.8	%

Restructuring and related charges and unusual costs of $18.9 million for Nine Months 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 $4.2 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 Company’s realignment of its business operations in the wine segment of $4.4 million. Restructuring and related charges and unusual costs of $73.1 million for Nine Months 2004 represent the flow through of inventory step-up and the amortization of deferred financing costs associated with the Hardy Acquisition of $17.3 million and $11.6 million, respectively, and costs associated with exiting the commodity concentrate product line and the Company’s realignment of its business operations in the wine segment, including the write-down of commodity concentrate inventory of $16.8 million and restructuring and related charges of $27.5 million. As a result of these costs and the factors discussed above, consolidated operating income increased to $448.3 million for Nine Months 2005 from $356.3 million for Nine Months 2004, an increase of $91.9 million, or 25.8%.

Interest Expense, Net

Interest expense, net of interest income of $1.2 million and $2.4 million for Nine Months 2005 and Nine Months 2004, respectively, decreased to $91.3 million for Nine Months 2005 from $112.2 million for Nine Months 2004, a decrease of $20.9 million, or (18.6%). The decrease resulted from lower average borrowings in Nine Months 2005 as well as slightly lower average borrowing rates. The reduction in debt resulted from the use of proceeds from the Company’s equity offerings in July 2003 to pay down debt incurred to partially finance the Hardy Acquisition combined with on-going principal payments on long-term debt. The reduction in average borrowing rates was attributed in part to the replacement of $200.0 million of higher fixed rate subordinated note debt with lower va riable rate revolver debt.

Provision for Income Taxes

The Company’s effective tax rate remained the same at 36.0% for Nine Months 2005 and Nine Months 2004.

Net Income

As a result of the above factors, net income increased to $228.8 million for Nine Months 2005 from $157.6 million for Nine Months 2004, an increase of $71.2 million, or 45.2%.


	35

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. The Company also has in place an effective shelf registration statement covering the potential sale of up to $750.0 million of debt securities, preferred stock, Class A Common Stock or any combination thereof. As of January 10, 2005, the entire $750.0 million of capacity was available under the shelf registration statement.

Nine Months 2005 Cash Flows

Operating Activities

Net cash provided by operating activities for Nine Months 2005 was $81.4 million, which resulted from $228.8 million of net income, plus $112.7 million of net noncash items charged to the Consolidated Statement of Income, less $260.1 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 accounts receivable and inventories, partially offset by seasonal increases in accounts payable and accrued advertising.

Investing Activities

Net cash used in investing activities for Nine Months 2005 was $88.6 million, which resulted primarily from $78.4 million of capital expenditures.

Financing Activities

Net cash used in financing activities for Nine Months 2005 was $15.2 million resulting primarily from principal payments of long-term debt of $254.6 million partially offset by net proceeds of $220.0 million from notes payable and proceeds of $25.3 million from employee stock option exercises.


	36

During June 1998, the Company’s Board of Directors authorized the repurchase of up to $100.0 million of its Class A Common Stock and Class B Common Stock. The repurchase of shares of common stock will be accomplished, from time to time, in management’s discretion and depending upon market conditions, through open market or privately negotiated transactions. The Company may finance such repurchases through cash generated from operations or through the senior credit facility. The repurchased shares will become treasury shares. As of January 10, 2005, under the share repurchase program, the Company had purchased 4,075,344 shares of Class A Common Stock at an aggregate cost of $44.9 million, or at an average cost of $11.01 per share. No shares were repurchased during Nine Months 2005 under the Company’s share repurchase program.

Debt

Total debt outstanding as of November 30, 2004, amounted to $2,028.6 million, a decrease of $19.3 million from February 29, 2004. The ratio of total debt to total capitalization decreased to 43.2% as of November 30, 2004, from 46.3% as of February 29, 2004.

Senior Credit Facilities

Credit Agreement

As of November 30, 2004, under the Credit Agreement (as defined below), the Company had outstanding Tranche A Term Loans of $315.0 million bearing a weighted average interest rate of 3.3%, Tranche B Term Loans of $500.0 million bearing a weighted average interest rate of 3.5%, $160.0 million of revolving loans bearing a weighted average interest rate of 3.9%, undrawn revolving letters of credit of $23.7 million, and $216.3 million in revolving loans available to be drawn. The Credit Agreement was a senior credit facility originally entered into between the Company, certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and administrative agent, and certain oth er agents, lenders, and financial institutions on January 16, 2003, and subsequently amended (or amended and restated) (the "Credit Agreement").

2004 Credit Agreement

In connection with the acquisition of Robert Mondavi, on December 22, 2004, the Company and its U.S. subsidiaries (excluding certain inactive subsidiaries), together with certain of its subsidiaries organized in foreign jurisdictions, JPMorgan Chase Bank, N.A. as a lender and administrative agent, and certain other agents, lenders and financial institutions entered into a new credit agreement (the "2004 Credit Agreement"). The 2004 Credit Agreement provides for aggregate credit facilities of $2.9 billion, consisting of a $600.0 million tranche A term loan facility due in November 2010, a $1.8 billion tranche B term loan facility due in November 2011, and a $500.0 million revolving credit facility (including a sub-facility for letters of credit of up to $60.0 million) which terminates in December 2010.

As of December 22, 2004, the required principal repayments of the tranche A term loan and the tranche B term loan are as follows:

	Tranche A Term Loan		Tranche B Term Loan		Total
(in thousands)
2005	$	15,000	$	4,500	$	19,500
2006		60,000		18,000		78,000
2007		67,500		18,000		85,500
2008		97,500		18,000		115,500
2009		120,000		18,000		138,000
2010		127,500		18,000		145,500
Thereafter		112,500		1,705,500		1,818,000
	$	600,000	$	1,800,000	$	2,400,000


	37

Subsidiary Facilities

The Company has additional line of credit facilities totaling $203.3 million as of November 30, 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 November 30, 2004, amounts outstanding under the subsidiary revolving credit facilities were $65.7 million.

Senior Notes

As of November 30, 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.


	38

As of November 30, 2004, the Company had outstanding £1.0 million ($1.9 million) aggregate principal amount of 8 1/2% Series B Senior Notes due November 2009 (the "Sterling Series B Senior Notes"). In addition, as of November 30, 2004, the Company had outstanding £154.0 million ($293.6 million, net of $0.5 million unamortized discount) aggregate principal amount of 8 1/2% Series C Senior Notes due November 2009 (the "Sterling Series C Senior Notes"). The Sterling Series B Senior Notes and Sterling Series C Senior Notes are currently redeemable, in whole or in part, at the option of the Company.

Also, as of November 30, 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 Nine Months 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 w ith the original issuance of the Senior Subordinated Notes.

As of November 30, 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.

Contractual Obligations and Commitments

As noted above, on December 22, 2004, the Company drew down $2.4 billion in term loan debt under the 2004 Credit Agreement. The following table provides the payments due by period for the amounts drawn down on the 2004 Credit Agreement as if it had been in place as of November 30, 2004:

	PAYMENTS DUE BY PERIOD
	Total		Less than 1 year		1-3 years		3-5 years		After 5 years
(in thousands)
Contractual obligations
Notes payable to banks	$	-	$	-	$	-	$	-	$	-
Long-term debt (excluding unamortized discount)	$	2,400,000	$	78,000	$	186,000	$	276,000	$	1,860,000


	39

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 November 30, 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.


	40

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 ("SFAS No. 153"), "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29." SFAS No. 153 amends Accounting Principles Board Opinion No. 29 ("APB No. 29"), "Accounting for Nonmonetary Transactions," to eliminate the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replace it with a general exception from fair value measurement for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The Company is required to adopt SFAS No. 153 for fiscal years beginning March 1, 2006. The Company is currently assessing the financial impact of SFAS No. 153 on its consolidated financial statements.


	41

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. Th e 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 successful integration of the Robert Mondavi business into that of the Company; final management determinations and independent appraisals vary materially from current management estimates of the fair value of the assets acquired and the liabilities assumed in the acquisition of Robert Mondavi; the Company achieving certain sales projections and meeting certain cost targets; wholesalers and retailers may give higher priority to products of the Company’s competitors; raw material supply, production or shipment difficulties could adversely affect the Company’s ability to supply its customers; increased competitive activities in the form of pricing, advertising and promotions could adversely impact consumer demand for the Company’s products and/or result in higher than expected selling, general and administrative expenses; a general decline in alcohol consumption; increases in excise and other taxes on beverage alcohol products; and changes in foreign 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 November 30, 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 November 30, 2004, and November 30, 2003, the Company had outstanding derivative contracts with a notional value of $708.6 million and $582.5 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 November 30, 2004, and November 30, 2003, the fair value of open foreign exchange contracts would have been increased by $68.9 million and $67.9 million, respectively. Losses or gains from the revaluation or settlement of the related underlying positions would substantially o ffset such gains or losses.


	42

The fair value of fixed rate debt is subject to interest rate risk, credit risk and foreign currency risk. The estimated fair value of the Company’s total fixed rate debt, including current maturities, was $1,101.0 million and $1,326.8 million as of November 30, 2004, and November 30, 2003, respectively. A hypothetical 1% increase from prevailing interest rates as of November 30, 2004, and November 30, 2003, would have resulted in a decrease in fair value of fixed interest rate long-term debt by $38.9 million and $55.0 million, respectively.

In addition to the $1,101.0 million and $1,326.8 million estimated fair value of fixed rate debt outstanding as of November 30, 2004, and November 30, 2003, respectively, the Company also had variable rate debt outstanding (primarily LIBOR based) as of November 30, 2004, and November 30, 2003, of $1,041.1 million and $1,041.4 million, respectively. Using a sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates at November 30, 2004, and November 30, 2003, would result in an approximate increase in cash required for interest of $9.1 million and $8.9 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 November 30, 2004, and November 30, 2003, the Company had no interest rate swap agreements outstanding. Subsequent to November 30, 2004, the Company entered into five year interest rate swap agreements to minimize interest rate volatility. The swap agreements fix LIBOR interest rates on $1.2 billion of the Company’s floating rate debt at an average rate of 4.0% over the five year term.

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 Exchang e Act of 1934 Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s fiscal quarter ended November 30, 2004 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Delaware		16-0716709
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

370 Woodcliff Drive, Suite 300, Fairport, New York	14450
(Address of principal executive offices)	(Zip Code)

Class		Number of Shares Outstanding
Class A Common Stock, Par Value $.01 Per Share		96,375,153
Class B Common Stock, Par Value $.01 Per Share		11,980,530

(in thousands)
Current assets	$	535,374
Property, plant and equipment		332,125
Other assets		27,672
Trademarks		265,583
Goodwill		613,805
Total assets acquired		1,774,559

Current liabilities		294,692
Long-term liabilities		326,646
Total liabilities acquired		621,338

Net assets acquired	$	1,153,221

	November 30, 2004		February 29, 2004
(in thousands)
Raw materials and supplies	$	109,702	$	49,633
In-process inventories		817,059		803,200
Finished case goods		516,669		408,545
	$	1,443,430	$	1,261,378

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
(unaudited)
	November 30,			February 29,
	2004			2004
ASSETS
CURRENT ASSETS:
Cash and cash investments	$	12,754		$	37,136
Accounts receivable, net		906,317			635,910
Inventories		1,443,430			1,261,378
Prepaid expenses and other		185,626			137,047
Total current assets		2,548,127			2,071,471
PROPERTY, PLANT AND EQUIPMENT, net		1,124,070			1,097,362
GOODWILL		1,562,762			1,540,637
INTANGIBLE ASSETS, net		748,106			744,978
OTHER ASSETS, net		96,819			104,225
Total assets	$	6,079,884		$	5,558,673


LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks	$	226,058		$	1,792
Current maturities of long-term debt		85,838			267,245
Accounts payable		383,416			270,291
Accrued excise taxes		73,579			48,465
Other accrued expenses and liabilities		558,682			442,009
Total current liabilities		1,327,573			1,029,802
LONG-TERM DEBT, less current maturities		1,716,685			1,778,853
DEFERRED INCOME TAXES		206,429			187,410
OTHER LIABILITIES		159,954			184,989
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value- Authorized, 1,000,000 shares; Issued, 170,500 shares at November 30, 2004, and February 29, 2004 (Aggregate liquidation preference of $172,951 at November 30, 2004)		2			2
Class A Common Stock, $.01 par value- Authorized, 275,000,000 shares; Issued, 98,776,349 shares at November 30, 2004, and 97,150,219 shares at February 29, 2004		988			971
Class B Convertible Common Stock, $.01 par value- Authorized, 30,000,000 shares; Issued, 14,484,030 shares at November 30, 2004, and 14,564,630 shares at February 29, 2004		145			146
Additional paid-in capital		1,051,022			1,024,048
Retained earnings		1,231,676			1,010,193
Accumulated other comprehensive income		414,474			372,302
		2,698,307			2,407,662
Less-Treasury stock-
Class A Common Stock, 2,482,058 shares at November 30, 2004, and 2,583,608 shares at February 29, 2004, at cost		(26,774	)		(27,786	)
Class B Convertible Common Stock, 2,502,900 shares at November 30, 2004, and February 29, 2004, at cost		(2,207	)		(2,207	)
		(28,981	)		(29,993	)
Less-Unearned compensation-restricted stock awards		(83	)		(50	)
Total stockholders' equity		2,669,243			2,377,619
Total liabilities and stockholders' equity	$	6,079,884		$	5,558,673

The accompanying notes are an integral part of these statements.

CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)

	For the Nine Months Ended November 30,						For the Three Months Ended November 30,
	2004			2003			2004			2003
SALES	$	3,834,988		$	3,354,298		$	1,360,431		$	1,213,541
Less - Excise taxes		(785,031	)		(683,184	)		(274,720	)		(226,293	)
Net sales		3,049,957			2,671,114			1,085,711			987,248
COST OF PRODUCT SOLD		(2,196,148	)		(1,938,881	)		(772,047	)		(704,632	)
Gross profit		853,809			732,233			313,664			282,616
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE		(401,116	)		(348,428	)		(130,333	)		(113,333	)
RESTRUCTURING AND RELATED CHARGES		(4,426	)		(27,487	)		(1,644	)		(8,088	)
Operating income		448,267			356,318			181,687			161,195
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS		-			1,181			-			-
EQUITY IN EARNINGS OF EQUITY METHOD INVESTEES		621			965			359			126
INTEREST EXPENSE, net		(91,332	)		(112,230	)		(30,651	)		(31,889	)
Income before income taxes		357,556			246,234			151,395			129,432
PROVISION FOR INCOME TAXES		(128,720	)		(88,641	)		(54,502	)		(46,592	)
NET INCOME		228,836			157,593			96,893			82,840
Dividends on preferred stock		(7,353	)		(3,294	)		(2,451	)		(2,450	)
INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	221,483		$	154,299		$	94,442		$	80,390


SHARE DATA:
Earnings per common share:
Basic - Class A Common Stock	$	2.08		$	1.58		$	0.88		$	0.77
Basic - Class B Common Stock	$	1.89		$	1.43		$	0.80		$	0.70
Diluted	$	1.97		$	1.51		$	0.83		$	0.73
Weighted average common shares outstanding:
Basic - Class A Common Stock		95,392			86,832			96,012			93,255
Basic - Class B Common Stock		12,035			12,070			11,997			12,068
Diluted		116,005			104,559			116,726			114,196

The accompanying notes are an integral part of these statements.

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
	For the Nine Months Ended November 30,
	2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	228,836		$	157,593

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment		65,121			58,666
Deferred tax provision		33,524			4,622
Amortization of intangible and other assets		8,491			18,713
Loss on disposal of assets		4,225			2,108
Noncash portion of loss on extinguishment of debt		1,799			800
Stock-based compensation expense		69			208
Amortization of discount on long-term debt		53			59
Equity in earnings of equity method investees		(621	)		(965	)
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		(258,052	)		(218,730	)
Inventories		(189,406	)		32,305
Prepaid expenses and other current assets		(3,400	)		13,417
Accounts payable		108,358			23,615
Accrued excise taxes		24,103			23,845
Other accrued expenses and liabilities		59,966			39,989
Other, net		(1,644	)		24,458
Total adjustments		(147,414	)		21,929
Net cash provided by operating activities		81,422			179,522

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment		(78,356	)		(70,584	)
Purchases of businesses, net of cash acquired		(8,899	)		(1,070,074	)
Payment of accrued earn-out amount		(2,617	)		(2,035	)
Proceeds from sale of assets		1,225			11,085
Proceeds from sale of business		-			4,431
Proceeds from sale of marketable equity securities		-			790
Net cash used in investing activities		(88,647	)		(1,126,387	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments of long-term debt		(254,606	)		(1,240,395	)
Payment of preferred stock dividends		(7,353	)		-
Payment of issuance costs of long-term debt		(901	)		(34,147	)
Net proceeds from notes payable		219,953			165,209
Exercise of employee stock options		25,257			23,756
Proceeds from employee stock purchases		2,441			1,822
Proceeds from issuance of long-term debt		-			1,600,000
Proceeds from equity offerings, net of fees		-			426,069
Net cash (used in) provided by financing activities		(15,209	)		942,314

Effect of exchange rate changes on cash and cash investments		(1,948	)		29,116

NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS		(24,382	)		24,565
CASH AND CASH INVESTMENTS, beginning of period		37,136			13,810
CASH AND CASH INVESTMENTS, end of period	$	12,754		$	38,375

SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired	$	14,906		$	1,790,142
Liabilities assumed		(6,007	)		(633,356	)
Net assets acquired		8,899			1,156,786
Less - stock issuance		-			(77,243	)
Less - direct acquisition costs accrued or previously paid		-			(7,964	)
Less - cash acquired		-			(1,505	)
Net cash paid for purchases of businesses	$	8,899		$	1,070,074

The accompanying notes are an integral part of these statements.

	Constellation Wines		Constellation Beers and Spirits		Consolidated
(in thousands)
Balance, February 29, 2004	$	1,407,350	$	133,287	$	1,540,637
Purchase accounting allocations		4,000		-		4,000
Foreign currency translation adjustments		14,344		1,620		15,964
Purchase price earn-out		2,161		-		2,161
Balance, November 30, 2004	$	1,427,855	$	134,907	$	1,562,762

	November 30, 2004				February 29, 2004
	Gross Carrying Amount		Net Carrying Amount		Gross Carrying Amount		Net Carrying Amount
(in thousands)
Amortizable intangible assets:
Distribution agreements	$	12,883	$	2,128	$	12,883	$	4,455
Other		4,023		47		4,021		64
Total	$	16,906		2,175	$	16,904		4,519

Nonamortizable intangible assets:
Trademarks				727,519				722,047
Agency relationships				18,412				18,412
Total				745,931				740,459
Total intangible assets			$	748,106			$	744,978

Period	Total Number of Shares Purchased		Average Price Paid Per Share		Total Number of Shares Purchased as Part of a Publicly Announced Program		Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program ⁽¹⁾
September 1 - 30, 2004		-	$	-		-	$	55,122,140
October 1 - 31, 2004		-		-		-		55,122,140
November 1 - 30, 2004		-		-		-		55,122,140
Total		-	$	-		-	$	55,122,140

	CONSTELLATION BRANDS, INC.

Dated: January 10, 2005	By:	/s/ Thomas F. Howe

		Thomas F. Howe, Senior Vice President, Controller

Dated: January 10, 2005	By:	/s/ Thomas S. Summer

		Thomas S. Summer, Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer)