-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AIZgl+uCzDpAQzKSng1SJ9rnY5crs1uJg9oOd98mJlurSxS2czSxTlK70WxQODW9 C8bwAybw9JcHnVexKZ0pZA== 0000016918-04-000006.txt : 20040114 0000016918-04-000006.hdr.sgml : 20040114 20040114172800 ACCESSION NUMBER: 0000016918-04-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20031130 FILED AS OF DATE: 20040114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSTELLATION BRANDS INC CENTRAL INDEX KEY: 0000016918 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 160716709 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08495 FILM NUMBER: 04525718 BUSINESS ADDRESS: STREET 1: 300 WILLOWBROOK OFFICE PARK CITY: FAIRPORT STATE: NY ZIP: 14450 BUSINESS PHONE: 5852183600 MAIL ADDRESS: STREET 1: 300 WILLOWBROOK OFFICE PARK CITY: FAIRPORT STATE: NY ZIP: 14450 FORMER COMPANY: FORMER CONFORMED NAME: CANANDAIGUA BRANDS INC DATE OF NAME CHANGE: 19970902 FORMER COMPANY: FORMER CONFORMED NAME: CANANDAIGUA WINE CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 doc1.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 30, 2003 ----------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------- -------------- COMMISSION FILE NUMBER 001-08495 CONSTELLATION BRANDS, INC. -------------------------- (Exact name of registrant as specified in its charter) DELAWARE 16-0716709 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) (585) 218-3600 ----------------------------------------------------- (Registrant's telephone number, including area code) ----------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- --- The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of December 31, 2003, is set forth below: CLASS NUMBER OF SHARES OUTSTANDING ----- ---------------------------- Class A Common Stock, Par Value $.01 Per Share 93,809,404 Class B Common Stock, Par Value $.01 Per Share 12,064,130 PART I - FINANCIAL INFORMATION Item 1. Financial Statements - ------- --------------------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except share and per share data) (unaudited) November 30, February 28, 2003 2003 ------------ ------------ ASSETS ------ CURRENT ASSETS: Cash and cash investments $ 38,375 $ 13,810 Accounts receivable, net 768,096 399,095 Inventories, net 1,291,979 819,912 Prepaid expenses and other 117,946 97,284 ------------ ------------ Total current assets 2,216,396 1,330,101 PROPERTY, PLANT AND EQUIPMENT, net 1,047,982 602,469 GOODWILL 1,546,380 722,223 INTANGIBLE ASSETS, net 701,267 382,428 OTHER ASSETS 112,255 159,109 ------------ ------------ Total assets $ 5,624,280 $ 3,196,330 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: Notes payable to banks $ 168,041 $ 2,623 Current maturities of long-term debt 65,833 71,264 Accounts payable 340,070 171,073 Accrued excise taxes 63,877 36,421 Other accrued expenses and liabilities 475,503 303,827 ------------ ------------ Total current liabilities 1,113,324 585,208 ------------ ------------ LONG-TERM DEBT, less current maturities 1,970,819 1,191,631 ------------ ------------ DEFERRED INCOME TAXES 169,462 145,239 ------------ ------------ OTHER LIABILITIES 165,738 99,268 ------------ ------------ STOCKHOLDERS' EQUITY: Preferred Stock, $.01 par value- Authorized, 1,000,000 shares; Issued, 170,500 shares at November 30, 2003, and none at February 28, 2003 (Aggregate liquidation preference of $173,794 at November 30, 2003) 2 - Class A Common Stock, $.01 par value- Authorized, 275,000,000 shares; Issued, 96,333,605 shares at November 30, 2003, and 81,435,135 shares at February 28, 2003 963 814 Class B Convertible Common Stock, $.01 par value- Authorized, 30,000,000 shares; Issued, 14,569,630 shares at November 30, 2003, and 14,578,490 shares at February 28, 2003 146 146 Additional paid-in capital 998,214 469,724 Retained earnings 949,824 795,525 Accumulated other comprehensive income (loss) 286,626 (59,257) ------------ ------------ 2,235,775 1,206,952 ------------ ------------ Less-Treasury stock- Class A Common Stock, 2,653,112 shares at November 30, 2003, and 2,749,384 shares at February 28, 2003, at cost (28,556) (29,610) Class B Convertible Common Stock, 2,502,900 shares at November 30, 2003, and February 28, 2003, at cost (2,207) (2,207) ------------ ------------ (30,763) (31,817) ------------ ------------ Less-Unearned compensation-restricted stock awards (75) (151) ------------ ------------ Total stockholders' equity 2,204,937 1,174,984 ------------ ------------ Total liabilities and stockholders' equity $ 5,624,280 $ 3,196,330 ============ ============ The accompanying notes are an integral part of these statements.
1
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (in thousands, except per share data) For the Nine Months Ended November 30, For the Three Months Ended November 30, -------------------------------------- --------------------------------------- 2003 2002 2003 2002 --------------- --------------- --------------- --------------- (unaudited) (unaudited) (unaudited) (unaudited) SALES $ 3,354,298 $ 2,729,219 $ 1,213,541 $ 969,759 Less - Excise taxes (683,184) (650,641) (226,293) (231,380) --------------- --------------- --------------- --------------- Net sales 2,671,114 2,078,578 987,248 738,379 COST OF PRODUCT SOLD (1,938,881) (1,495,096) (704,632) (524,885) --------------- --------------- --------------- --------------- Gross profit 732,233 583,482 282,616 213,494 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (348,428) (263,847) (113,333) (85,470) RESTRUCTURING AND RELATED CHARGES (27,487) - (8,088) - --------------- --------------- --------------- --------------- Operating income 356,318 319,635 161,195 128,024 GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS 1,181 - - - EQUITY IN EARNINGS OF JOINT VENTURES 965 10,093 126 4,182 INTEREST EXPENSE, net (112,230) (80,494) (31,889) (26,202) --------------- --------------- --------------- --------------- Income before income taxes 246,234 249,234 129,432 106,004 PROVISION FOR INCOME TAXES (88,641) (97,949) (46,592) (41,660) --------------- --------------- --------------- --------------- NET INCOME 157,593 151,285 82,840 64,344 Dividends on preferred stock (3,294) - (2,450) - --------------- --------------- --------------- --------------- INCOME AVAILABLE TO COMMON STOCKHOLDERS $ 154,299 $ 151,285 $ 80,390 $ 64,344 =============== =============== =============== =============== SHARE DATA: Earnings per common share: Basic $ 1.56 $ 1.69 $ 0.76 $ 0.71 =============== =============== =============== =============== Diluted $ 1.51 $ 1.63 $ 0.73 $ 0.69 =============== =============== =============== =============== Weighted average common shares outstanding: Basic 98,902 89,617 105,323 90,323 Diluted 104,559 92,669 114,196 93,083 The accompanying notes are an integral part of these statements.
2
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) For the Nine Months Ended November 30, -------------------------------------- 2003 2002 -------------- -------------- (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 157,593 $ 151,285 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation of property, plant and equipment 58,666 41,174 Amortization of intangible and other assets 18,713 4,409 Deferred tax provision 4,622 4,062 Loss on extinguishment of debt 800 - Loss on sale of assets 2,108 1,956 Stock-based compensation expense 208 75 Amortization of discount on long-term debt 59 46 Gain on change in fair value of derivative instruments (1,181) - Equity in earnings of joint ventures (965) (10,093) Change in operating assets and liabilities, net of effects from purchases of businesses: Accounts receivable, net (218,730) (81,470) Inventories, net 32,305 (102,901) Prepaid expenses and other current assets 13,417 (14,029) Accounts payable 23,615 57,198 Accrued excise taxes 23,845 (8,972) Other accrued expenses and liabilities 39,989 100,812 Other assets and liabilities, net 24,458 3,712 -------------- -------------- Total adjustments 21,929 (4,021) -------------- -------------- Net cash provided by operating activities 179,522 147,264 -------------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of businesses, net of cash acquired (1,070,074) - Purchases of property, plant and equipment (70,584) (51,833) Payment of accrued earn-out amount (2,035) (1,674) Proceeds from sale of assets 11,085 977 Proceeds from sale of business 4,431 - Proceeds from sale of marketable equity securities 790 - -------------- -------------- Net cash used in investing activities (1,126,387) (52,530) -------------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term debt 1,600,000 10,000 Proceeds from equity offerings, net of fees 426,069 - Net proceeds from (repayments of) notes payable 165,209 (49,429) Exercise of employee stock options 23,756 25,539 Proceeds from employee stock purchases 1,822 1,319 Principal payments of long-term debt (1,240,395) (62,519) Payment of issuance costs of long-term debt (34,147) (10) -------------- -------------- Net cash provided by (used in) financing activities 942,314 (75,100) -------------- -------------- Effect of exchange rate changes on cash and cash investments 29,116 1,341 -------------- -------------- NET INCREASE IN CASH AND CASH INVESTMENTS 24,565 20,975 CASH AND CASH INVESTMENTS, beginning of period 13,810 8,961 -------------- -------------- CASH AND CASH INVESTMENTS, end of period $ 38,375 $ 29,936 ============== ============== SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES: Fair value of assets acquired, including cash acquired $ 1,790,142 $ - Liabilities assumed (633,356) - -------------- -------------- Net assets acquired 1,156,786 - Less - stock issuance (77,243) - Less - direct acquisition costs accrued or previously paid (7,964) - Less - cash acquired (1,505) - -------------- -------------- Net cash paid for purchases of businesses $ 1,070,074 $ - ============== ============== The accompanying notes are an integral part of these statements.
3 CONSTELLATION BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 2003 1) MANAGEMENT'S REPRESENTATIONS: The accompanying unaudited consolidated financial statements included herein have been prepared by Constellation Brands, Inc. and its subsidiaries (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2003. Results of operations for interim periods are not necessarily indicative of annual results. 2) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS: Effective March 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143 ("SFAS No. 143"), "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The adoption of SFAS No. 143 did not have a material impact on the Company's consolidated financial statements. Effective March 1, 2003, the Company completed its adoption of Statement of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds Statement of Financial Accounting Standards No. 4 ("SFAS No. 4"), "Reporting Gains and Losses from Extinguishment of Debt," Statement of Financial Accounting Standards No. 44, "Accounting for Intangible Assets of Motor Carriers," and Statement of Financial Accounting Standards No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." In addition, SFAS No. 145 amends Statement of Financial Accounting Standards No. 13, "Accounting for Leases," to eliminate an inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Lastly, SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The adoption of the provisions rescinding SFAS No. 4 will result in a reclassification of the extraordinary loss related to the extinguishment of debt recorded in the fourth quarter of Fiscal 2002 ($1.6 million, net of income taxes), by increasing selling, general and administrative expenses ($2.6 million) and decreasing the provision for income taxes ($1.0 million). The adoption of the remaining provisions of SFAS No. 145 did not have a material impact on the Company's consolidated financial statements. Effective March 1, 2003, the Company completed its adoption of Statement of Financial Accounting Standards No. 148 ("SFAS No. 148"), "Accounting for Stock-Based Compensation--Transition and Disclosure." SFAS No. 148 amends Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"), "Accounting for Stock-Based Compensation," to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Lastly, SFAS No. 148 amends Accounting Principles Board Opinion No. 28 ("APB Opinion No. 28"), "Interim Financial Reporting," to 4 require disclosure about those effects in interim financial information. Accordingly, the following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
For the Nine Months For the Three Months Ended November 30, Ended November 30, --------------------- ---------------------- 2003 2002 2003 2002 --------- --------- --------- --------- (in thousands, except per share data) Net income, as reported $ 157,593 $ 151,285 $ 82,840 $ 64,344 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects 133 46 16 15 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects (7,296) (10,131) (2,490) (3,377) --------- --------- --------- --------- Pro forma net income $ 150,430 $ 141,200 $ 80,366 $ 60,982 ========= ========= ========= ========= Pro forma income available to common stockholders $ 147,135 $ 141,200 $ 77,916 $ 60,982 ========= ========= ========= ========= Earnings per common share: Basic--as reported $ 1.56 $ 1.69 $ 0.76 $ 0.71 Basic--pro forma $ 1.49 $ 1.58 $ 0.74 $ 0.68 Diluted--as reported $ 1.51 $ 1.63 $ 0.73 $ 0.69 Diluted--pro forma $ 1.44 $ 1.51 $ 0.70 $ 0.65
Effective July 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 149 ("SFAS No. 149"), "Amendment of Statement 133 on Derivative Instruments and Hedging Activities," in its entirety. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. The adoption of SFAS No. 149 did not have a material impact on the Company's consolidated financial statements. Effective August 1, 2003, the Company adopted EITF Issue No. 00-21 ("EITF No. 00-21"), "Revenue Arrangements with Multiple Deliverables." EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF No. 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. The adoption of EITF No. 00-21 did not have a material impact on the Company's consolidated financial statements. Effective September 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 150 ("SFAS No. 150"), "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within the scope of SFAS No. 150 as a liability. The adoption of SFAS No. 150 did not have a material impact on the Company's consolidated financial statements. 3) ACQUISITIONS: On March 27, 2003, the Company acquired control of BRL Hardy Limited, now known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company completed its acquisition of all of Hardy's outstanding capital stock. As a result of the acquisition of Hardy, the Company also acquired the 5 remaining 50% ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the Company established with Hardy in July 2001. The acquisition of Hardy along with the remaining interest in PWP is referred to together as the "Hardy Acquisition." Hardy is Australia's largest wine producer with interests in wineries and vineyards in most of Australia's major wine regions as well as New Zealand and the United States. In addition, Hardy has significant marketing and sales operations in the United Kingdom. Total consideration paid in cash and Class A Common Stock to the Hardy shareholders was $1,137.4 million. Additionally, the Company recorded direct acquisition costs of $20.0 million. The acquisition date for accounting purposes is March 27, 2003. The Company has recorded a $1.6 million reduction in the purchase price to reflect imputed interest between the accounting acquisition date and the final payment of consideration. This charge is included as interest expense in the Consolidated Statement of Income for the nine months ended November 30, 2003. The cash portion of the purchase price paid to the Hardy shareholders and optionholders ($1,060.2 million) was financed with $660.2 million of borrowings under the Company's March 2003 Credit Agreement (as defined in Note 10) and $400.0 million of borrowings under the Company's Bridge Agreement (as defined in Note 10). Additionally, the Company issued 3,288,913 shares of the Company's Class A Common Stock, which were valued at $77.2 million based on the simple average of the closing market price of the Company's Class A Common Stock beginning two days before and ending two days after April 4, 2003, the day the Hardy shareholders elected the form of consideration they wished to receive. The purchase price was based primarily on a discounted cash flow analysis that contemplated, among other things, the value of a broader geographic distribution in strategic international markets and a presence in the important Australian winemaking regions. The Company and Hardy have complementary businesses that share a common growth orientation and operating philosophy. The Hardy Acquisition supports the Company's strategy of growth and breadth across categories and geographies, and strengthens its competitive position in its core markets. The purchase price and resulting goodwill were primarily based on the growth opportunities of the brand portfolio of Hardy. In particular, the Company believes there are growth opportunities for Australian wines in the United Kingdom, United States and other wine markets. This acquisition supports the Company's strategy of driving long-term growth and positions the Company to capitalize on the growth opportunities in "new world" wine markets. The results of operations of Hardy and PWP are reported in the Constellation Wines segment and have been included in the Consolidated Statements of Income since the accounting acquisition date. The following table summarizes the estimated fair values of the Hardy Acquisition assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining third-party valuations of certain assets; thus, the allocation of the purchase price is subject to refinement. Estimated fair values at March 27, 2003, are as follows: (in thousands) Current assets $ 532,412 Property, plant and equipment 332,260 Other assets 33,403 Trademarks 246,398 Goodwill 643,300 ----------- Total assets acquired 1,787,773 Current liabilities 294,766 Long-term liabilities 337,234 ----------- Total liabilities assumed 632,000 ----------- Net assets acquired $ 1,155,773 =========== 6 The trademarks are not subject to amortization. None of the goodwill is expected to be deductible for tax purposes. The following table sets forth the unaudited pro forma results of operations of the Company for the nine months and three months ended November 30, 2003, and November 30, 2002. The unaudited pro forma results of operations for the nine months ended November 30, 2003, and November 30, 2002, and the three months ended November 30, 2002, give effect to the Hardy Acquisition as if it occurred on March 1, 2002. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of deferred financing costs, interest expense on the acquisition financing and related income tax effects. The unaudited pro forma results of operations are based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations for the nine months ended November 30, 2002, do not reflect total pretax nonrecurring charges of $30.3 million ($0.22 per share on a diluted basis) related to transaction costs, primarily for the payment of stock options, which were incurred by Hardy prior to the acquisition. The unaudited pro forma results of operations do not purport to present what the Company's results of operations would actually have been if the aforementioned transaction had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company's financial position or results of operations at any future date or for any future period.
For the Nine Months For the Three Months Ended November 30, Ended November 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- (in thousands, except per share data) Net sales $ 2,703,454 $ 2,481,395 $ 987,248 $ 888,375 Income before income taxes $ 249,210 $ 243,420 $ 129,432 $ 101,664 Net income $ 160,033 $ 155,223 $ 82,840 $ 65,192 Income available to common stockholders $ 156,739 $ 155,223 $ 80,390 $ 65,192 Earnings per common share: Basic $ 1.58 $ 1.67 $ 0.76 $ 0.70 =========== =========== =========== =========== Diluted $ 1.52 $ 1.62 $ 0.73 $ 0.68 =========== =========== =========== =========== Weighted average common shares outstanding: Basic 99,368 92,906 105,323 93,612 Diluted 105,025 95,958 114,196 96,372
4) INVENTORIES: Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following: November 30, February 28, 2003 2003 ------------ ------------ (in thousands) Raw materials and supplies $ 83,526 $ 26,472 In-process inventories 785,740 534,073 Finished case goods 422,713 259,367 ------------ ------------ $ 1,291,979 $ 819,912 ============ ============ 7 5) PROPERTY, PLANT AND EQUIPMENT: The major components of property, plant and equipment are as follows: November 30, February 28, 2003 2003 ------------ ------------ (in thousands) Land and land improvements $ 148,698 $ 84,758 Vineyards 116,165 37,394 Buildings and improvements 274,370 173,943 Machinery and equipment 757,157 551,271 Motor vehicles 12,731 5,468 Construction in progress 72,811 32,839 ------------ ------------ 1,381,932 885,673 Less - Accumulated depreciation (333,950) (283,204) ------------ ------------ $ 1,047,982 $ 602,469 ============ ============ 6) GOODWILL: The changes in the carrying amount of goodwill for the nine months ended November 30, 2003, are as follows:
Constellation Constellation Beers and Wines Spirits Consolidated ------------- ------------- ------------ (in thousands) Balance, February 28, 2003 $ 590,263 $ 131,960 $ 722,223 Purchase accounting allocations 678,512 - 678,512 Foreign currency translation adjustments 142,232 1,664 143,896 Purchase price earn-out 1,749 - 1,749 ------------ ------------- ------------ Balance, November 30, 2003 $ 1,412,756 $ 133,624 $ 1,546,380 ============ ============= ============
7) INTANGIBLE ASSETS: The major components of intangible assets are:
November 30, 2003 February 28, 2003 ----------------------- ----------------------- Gross Net Gross Net Carrying Carrying Carrying Carrying Amount Amount Amount Amount ---------- ---------- ---------- ---------- (in thousands) Amortizable intangible assets: Distribution agreements $ 11,323 $ 3,999 $ 10,158 $ 4,434 Other 4,184 419 3,978 345 ---------- ---------- ---------- ---------- Total $ 15,507 4,418 $ 14,136 4,779 ========== ========== Nonamortizable intangible assets: Trademarks 677,181 357,166 Agency relationships 19,640 20,458 Other 28 25 ---------- ---------- Total 696,849 377,649 ---------- ---------- Total intangible assets $ 701,267 $ 382,428 ========== ==========
The difference between the gross carrying amount and net carrying amount for each item presented is attributable to accumulated amortization. Amortization expense for intangible assets was $1.5 million and $1.7 million for the nine months ended November 30, 2003, and November 30, 2002, 8 respectively, and $0.6 million and $0.6 million for the three months ended November 30, 2003, and November 30, 2002, respectively. Estimated amortization expense for the remaining three months of fiscal 2004 and for each of the five succeeding fiscal years is as follows: (in thousands) 2004 $ 559 2005 $ 1,982 2006 $ 1,449 2007 $ 390 2008 $ 38 2009 $ - 8) OTHER ASSETS: The major components of other assets are as follows:
November 30, February 28, 2003 2003 ------------ ------------ (in thousands) Deferred financing costs $ 54,585 $ 28,555 Derivative assets 42,499 - Investment in marketable equity securities 13,438 - Investment in joint ventures 8,227 123,064 Other 13,775 18,418 ------------ ------------ 132,524 170,037 Less - Accumulated amortization (20,269) (10,928) ------------ ------------ $ 112,255 $ 159,109 ============ ============
The Company's investment in marketable equity securities is classified as an available-for-sale security. As such, gross unrealized losses of $1.0 million are included, net of applicable income taxes, within accumulated other comprehensive income as of November 30, 2003. The Company uses the average cost method as its basis on which cost is determined in computing realized gains or losses. Realized gains on sales of securities during the nine months and three months ended November 30, 2003, are immaterial. Amortization expense for other assets was included in selling, general and administrative expenses and was $17.2 million and $2.7 million for the nine months ended November 30, 2003, and November 30, 2002, respectively, and $4.1 million and $0.9 million for the three months ended November 30, 2003, and November 30, 2002, respectively. Amortization expense for the nine months ended November 30, 2003, includes $8.2 million related to amortization of the deferred financing costs associated with the Bridge Loans (as defined in Note 10). As of November 30, 2003, the deferred financing costs associated with the Bridge Loans have been fully amortized. 9 9) OTHER ACCRUED EXPENSES AND LIABILITIES: The major components of other accrued expenses and liabilities are as follows: November 30, February 28, 2003 2003 ------------ ------------ (in thousands) Advertising and promotions $ 131,976 $ 63,155 Income taxes payable 72,197 58,347 Salaries and commissions 41,030 35,769 Adverse grape contracts 33,427 10,244 Interest 27,321 22,019 Other 169,552 114,293 ----------- ------------ $ 475,503 $ 303,827 =========== ============ 10) BORROWINGS: Senior credit facility- ---------------------- In connection with the Hardy Acquisition, on January 16, 2003, the Company, certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and administrative agent (the "Administrative Agent"), and certain other lenders entered into a new credit agreement (as subsequently amended and restated as of March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement") that (i) refinanced the then outstanding principal balance under the Tranche B Term Loan facility on essentially the same terms as the Tranche B Term Loan facility under the March 2003 Credit Agreement, but at a lower Applicable Rate (as such term is defined in the Credit Agreement) and (ii) otherwise restated the terms of the March 2003 Credit Agreement, as amended. The March 2003 Credit Agreement provided for aggregate credit facilities of $1.6 billion consisting of a $400.0 million Tranche A Term Loan facility due in February 2008, an $800.0 million Tranche B Term Loan facility due in November 2008 and a $400.0 million Revolving Credit facility (including an Australian Dollar revolving sub-facility of up to A$10.0 million and a sub-facility for letters of credit of up to $40.0 million) which expires on February 29, 2008. Proceeds of the March 2003 Credit Agreement were used to pay off the Company's obligations under its prior senior credit facility, to fund a portion of the cash required to pay the former Hardy shareholders and to pay indebtedness outstanding under certain of Hardy's credit facilities. The Company intends to use the remaining availability under the Credit Agreement to fund its working capital needs on an ongoing basis. The Tranche A Term Loan facility and the Tranche B Term Loan facility were fully drawn on March 27, 2003. The required annual repayments of the Tranche A Term Loan facility are $40.0 million in fiscal 2004 and increase by $20.0 million each year through fiscal 2008. As of November 30, 2003, the Company has made $26.6 million of scheduled and required payments on the Tranche A Term Loan facility. In August 2003, the Company prepaid $100.0 million of the Tranche B Term Loan facility. In October 2003, the Company prepaid an additional $200.0 million of the Tranche B Term Loan facility. After this prepayment, the required annual repayments of the Tranche B Term Loan, which is backend loaded, were revised to $54.4 million in fiscal 2006, $54.4 million in fiscal 2007, $119.1 million in fiscal 2008 and $272.1 million in fiscal 2009. The rate of interest payable, at the Company's option, is a function of LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as defined in the Credit Agreement) and, with respect to LIBOR borrowings, ranges between 1.50% and 2.50%. As of November 30, 2003, the LIBOR margin for the Revolving Credit facility and the Tranche A Term Loan facility is 1.75%, while the LIBOR margin on the Tranche B Term Loan facility is 2.00%. 10 The Company's obligations are guaranteed by certain subsidiaries of the Company ("Guarantors") and the Company has pledged collateral of (i) 100% of the capital stock of all of the Company's U.S. subsidiaries and (ii) 65% of the voting capital stock of certain foreign subsidiaries of the Company. The Company and its subsidiaries are subject to customary lending covenants including those restricting additional liens, the incurrence of additional indebtedness (including guarantees of indebtedness), the sale of assets, the payment of dividends, transactions with affiliates and the making of certain investments, in each case subject to baskets, exceptions and thresholds. As a result of the prepayment of the Bridge Loans (as defined below) with the proceeds from the 2003 Equity Offerings, the requirement under certain circumstances for the Company and the Guarantors to pledge certain assets consisting of, among other things, inventory, accounts receivable and trademarks to secure the obligations under the Credit Agreement, ceased to apply. Certain foreign subsidiaries of the Company have guaranteed debt, including debt of a joint venture in the maximum amount of $3.9 million and debt of a partnership in the maximum amount of $1.0 million as of November 30, 2003. The primary financial covenants require the maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed charges ratio and an interest coverage ratio. As of November 30, 2003, the Company is in compliance with all of its covenants under its Credit Agreement. As of November 30, 2003, under the Credit Agreement, the Company had outstanding Tranche A Term Loans of $373.4 million bearing a weighted average interest rate of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted average interest rate of 3.1%, $166.6 million of revolving loans bearing a weighted average interest rate of 3.0%, undrawn revolving letters of credit of $18.4 million, and $215.1 million in revolving loans available to be drawn. Bridge facility - --------------- On January 16, 2003, the Company, certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and Administrative Agent, and certain other lenders (such other lenders, together with the Administrative Agent, are collectively referred to herein as the "Bridge Lenders") entered into a bridge loan agreement which was amended and restated as of March 26, 2003, containing commitments of the Bridge Lenders to make bridge loans (the "Bridge Loans") of up to, in the aggregate, $450.0 million (the "Bridge Agreement"). On April 9, 2003, the Company used $400.0 million of the Bridge Loans to fund a portion of the cash required to pay the former Hardy shareholders. The rate of interest payable on the Bridge Loans was equal to LIBOR plus an initial margin of 3.75%. On July 30, 2003, the Company used proceeds from the 2003 Equity Offerings to prepay the $400.0 million Bridge Loans in their entirety. 11) OTHER LIABILITIES: The major components of other liabilities are as follows: November 30, February 28, 2003 2003 ------------ ------------ (in thousands) Adverse grape contracts $ 79,680 $ 22,550 Accrued pension liability 40,009 36,351 Other 46,049 40,367 ------------ ------------ $ 165,738 $ 99,268 ============ ============ 12) STOCKHOLDERS' EQUITY: During July 2003, the Company completed a public offering of 9,800,000 shares of its Class A Common Stock resulting in net proceeds to the Company, after deducting underwriting discounts and expenses, of $261.2 million. In addition, the Company also completed a public offering of 170,500 11 shares of its 5.75% Series A Mandatory Convertible Preferred Stock ("Preferred Stock") resulting in net proceeds to the Company, after deducting underwriting discounts and expenses, of $164.9 million. The Class A Common Stock offering and the Preferred Stock offering are referred to together as the "2003 Equity Offerings." The net proceeds from the 2003 Equity Offerings were used to repay the Bridge Loans that were incurred to partially finance the Hardy Acquisition. The remaining proceeds were used to repay term loan borrowings under the March 2003 Credit Agreement. As of November 30, 2003, 170,500 shares of Preferred Stock were outstanding and $3.3 million of dividends were accrued. Dividends are cumulative and payable quarterly, if declared, in cash, shares of the Company's Class A Common Stock, or a combination thereof, at the discretion of the Company. Dividends are payable, if declared, on the first business day of March, June, September, and December of each year, commencing on December 1, 2003. The dividends accrued as of November 30, 2003, were subsequently paid on December 1, 2003. On September 1, 2006, the automatic conversion date, each share of Preferred Stock will automatically convert into, subject to certain anti-dilution adjustments, between 29.276 and 35.716 shares of the Company's Class A Common Stock, depending on the then applicable market price of the Company's Class A Common Stock, in accordance with the following table: Applicable market price Conversion rate ----------------------- --------------- Less than or equal to $28.00 35.716 shares Between $28.00 and $34.16 35.716 to 29.276 shares Equal to or greater than $34.16 29.276 shares The applicable market price is the average of the closing prices per share of the Company's Class A Common Stock on each of the 20 consecutive trading days ending on the third trading day immediately preceding the applicable conversion date. At any time prior to September 1, 2006, holders may elect to convert each share of Preferred Stock, subject to certain anti-dilution adjustments, into 29.276 shares of the Company's Class A Common Stock. If the closing market price of the Company's Class A Common Stock exceeds $51.24 for at least 20 trading days within a period of 30 consecutive trading days, the Company may elect, subject to certain limitations and anti-dilution adjustments, to cause the conversion of all, but not less than all, of the then outstanding shares of Preferred Stock into shares of the Company's Class A Common Stock at a conversion rate of 29.276 shares of the Company's Class A Common Stock. In order for the Company to cause the early conversion of the Preferred Stock, the Company must pay all accrued and unpaid dividends on the Preferred Stock as well as the present value of all remaining dividend payments through and including September 1, 2006. If the Company is involved in a merger in which at least 30% of the consideration for all or any class of the Company's common stock consists of cash or cash equivalents, then on or after the date of such merger, each holder will have the right to convert each share of Preferred Stock into the number of shares of the Company's Class A Common Stock applicable on the automatic conversion date. The Preferred Stock ranks senior in right of payment to all of the Company's common stock and has a liquidation preference of $1,000 per share, plus accrued and unpaid dividends. 13) EARNINGS PER COMMON SHARE: Basic earnings per common share exclude the effect of common stock equivalents and are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period for Class A Common Stock and Class B Common Stock. Diluted earnings per common share reflect the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per common share assume the exercise of stock options using the treasury stock method and the conversion of the Preferred Stock using the if-converted method. 12 The computation of basic and diluted earnings per common share is as follows:
For the Nine Months For the Three Months Ended November 30, Ended November 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (in thousands, except per share data) Net income $ 157,593 $ 151,285 $ 82,840 $ 64,344 Dividends on preferred stock (3,294) - (2,450) - ---------- ---------- ---------- ---------- Income available to common stockholders $ 154,299 $ 151,285 $ 80,390 $ 64,344 ========== ========== ========== ========== Weighted average common shares outstanding - basic 98,902 89,617 105,323 90,323 Stock options 3,227 3,052 3,484 2,760 Preferred stock 2,430 - 5,389 - ---------- ---------- ---------- ---------- Weighted average common shares outstanding - diluted 104,559 92,669 114,196 93,083 ========== ========== ========== ========== Earnings per common share - basic $ 1.56 $ 1.69 $ 0.76 $ 0.71 ========== ========== ========== ========== Earnings per common share - diluted $ 1.51 $ 1.63 $ 0.73 $ 0.69 ========== ========== ========== ==========
Stock options to purchase 0.1 million and 1.1 million shares of Class A Common Stock at a weighted average price per share of $30.82 and $27.43 were outstanding during the nine months ended November 30, 2003, and November 30, 2002, respectively, but were not included in the computation of the diluted earnings per common share because the stock options' exercise price was greater than the average market price of the Class A Common Stock for the period. Stock options to purchase 0.1 million and 1.1 million shares of Class A Common Stock at a weighted average price per share of $31.01 and $27.41 were outstanding during the three months ended November 30, 2003, and November 30, 2002, respectively, but were not included in the computation of the diluted earnings per common share because the stock options' exercise price was greater than the average market price of the Class A Common Stock for the period. 14) COMPREHENSIVE INCOME: Comprehensive income consists of net income, foreign currency translation adjustments, net unrealized gains or losses on derivative instruments, net unrealized gains or losses on available-for-sale marketable equity securities and minimum pension liability adjustments. The reconciliation of net income to comprehensive income is as follows:
For the Nine Months For the Three Months Ended November 30, Ended November 30, ----------------------- ----------------------- 2003 2002 2003 2002 ---------- ---------- ---------- ---------- (in thousands) Net income $ 157,593 $ 151,285 $ 82,840 $ 64,344 Other comprehensive income, net of tax: Foreign currency translation adjustments 320,237 14,659 214,120 1,520 Cash flow hedges: Net derivative gains, net of tax effect of ($13,936) and ($4,787), respectively 32,432 - 11,137 - Reclassification adjustments, net of tax effect of $886, $13, and $275, respectively (1,939) (21) (596) - ---------- ---------- ---------- ---------- Net cash flow hedges 30,493 (21) 10,541 - Unrealized loss on marketable equity securities, net of tax effect of $303 and ($44), respectively (708) - 102 - Minimum pension liability adjustment, net of tax effect of $1,838, $254, $1,690 and ($1), respectively (4,139) (380) (3,868) 2 ---------- ---------- ---------- ---------- Total comprehensive income $ 503,476 $ 165,543 $ 303,735 $ 65,866 ========== ========== ========== ==========
13 Accumulated other comprehensive income (loss), net of tax effects, includes the following components:
Unrealized Foreign Net Loss on Minimum Accumulated Currency Unrealized Marketable Pension Other Translation Gains on Equity Liability Comprehensive Adjustments Derivatives Securities Adjustment Income (Loss) ----------- ----------- ------------ ------------ ------------- (in thousands) Balance, February 28, 2003 $ (16,722) $ - $ - $ (42,535) $ (59,257) Current period change 320,237 30,493 (708) (4,139) 345,883 ----------- ----------- ------------ ------------ ------------- Balance, November 30, 2003 $ 303,515 $ 30,493 $ (708) $ (46,674) $ 286,626 =========== =========== ============ ============ =============
Hardy utilized derivative instruments to a more extensive degree than did the Company prior to the Hardy Acquisition. These derivative instruments are used to reduce the risk of foreign currency exchange rate fluctuation resulting from the sale of product denominated in various foreign currencies. These instruments have been qualified and are being accounted for as cash flow hedges in accordance with the Company's pre-existing accounting policies. In the third quarter of fiscal 2004, the Company revised its accounting policy with regard to the income statement presentation of the reclassification adjustments of cash flow hedges of certain sales transactions. These cash flow hedges are used to reduce the risk of foreign currency exchange rate fluctuations resulting from the sale of product denominated in various foreign currencies. As such, the Company's revised accounting policy is to report the reclassification adjustments from accumulated other comprehensive income (loss) to sales. Previously, the Company reported such reclassification adjustments in selling, general and administrative expenses. This change in accounting policy resulted in a reclassification which increased selling, general and administrative expenses and sales by $1.2 million and $2.3 million for the three months ended May 31, 2003, and August 31, 2003, respectively. No such reclassification was required for the comparable prior year periods. This reclassification did not affect operating income or net income. 15) RESTRUCTURING AND RELATED CHARGES: For the nine months ended November 30, 2003, the Company recorded $27.5 million of restructuring and related charges associated with the restructuring plan of the Constellation Wines segment. Restructuring and related charges resulted from (i) the realignment of business operations in the Company's wine segment and (ii) the Company's decision to exit the commodity concentrate product line in the U.S. and sell its winery located in Escalon, California. In addition, in connection with the Company's decision to exit the commodity concentrate product line in the U.S., the Company recorded a write-down of concentrate inventory of $16.8 million, which was recorded in cost of product sold. The Company recorded restructuring and related charges of $2.3 million for the three months ended May 31, 2003, including $2.2 million of employee termination benefit costs and $0.1 million of other related charges. The Company recorded restructuring and related charges of $17.1 million for the three months ended August 31, 2003, including $1.7 million of employee termination benefit costs, $10.6 million of grape contract termination costs, $1.0 million of facility consolidation and relocation costs, and other related charges of $3.7 million, which consisted of a $1.9 million loss on the sale of the Escalon facility and $1.8 million of other costs related to the realignment of the business operations in the Constellation Wines segment. 14 The Company recorded restructuring and related charges of $8.1 million for the three months ended November 30, 2003, including $0.7 million of employee termination benefit costs, $6.6 million of grape contract termination costs, $0.8 million of facility consolidation and relocation costs. The Company estimates that the completion of the restructuring plan will include a total of $6.0 million of employee termination benefit costs through February 29, 2004, of which $4.6 million has been incurred through November 30, 2003. The Company estimates that the completion of the restructuring plan will include a total of $22.6 million of grape contract termination costs through February 28, 2005, of which $17.2 million has been incurred through November 30, 2003. The Company estimates that the completion of the restructuring plan will include a total of $2.3 million of facility consolidation and relocation costs through February 28, 2005, of which $1.8 million has been incurred through November 30, 2003. The Company has incurred other costs related to the restructuring plan for the disposal of fixed assets and other costs of realigning the business operations of the Constellation Wines segment and expects to incur additional costs during the year ending February 29, 2004. The following table illustrates the changes in the restructuring liability balance since February 28, 2003:
Employee Grape Facility Termination Contract Consolidation/ Benefit Termination Relocation Costs Costs Costs Total ----------- ----------- -------------- --------- (in thousands) Balance, February 28, 2003 $ - $ - $ - $ - Restructuring charges 2,183 - - 2,183 Cash expenditures (1,554) - - (1,554) ----------- ----------- -------------- --------- Balance, May 31, 2003 629 - - 629 Restructuring charges 1,743 10,642 1,024 13,409 Cash expenditures (1,542) (2,063) (1,024) (4,629) ----------- ----------- -------------- --------- Balance, August 31, 2003 830 8,579 - 9,409 Restructuring charges 686 6,563 786 8,035 Cash expenditures (381) - (786) (1,167) ----------- ----------- -------------- --------- Balance, November 30, 2003 $ 1,135 $ 15,142 $ - $ 16,277 =========== =========== ============== =========
16) CONDENSED CONSOLIDATING FINANCIAL INFORMATION: The following information sets forth the condensed consolidating balance sheets of the Company as of November 30, 2003, and February 28, 2003, and the condensed consolidating statements of income for the nine months and three months ended November 30, 2003, and November 30, 2002, and the condensed consolidating statements of cash flows for the nine months ended November 30, 2003, and November 30, 2002, for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company's senior notes and senior subordinated notes ("Subsidiary Guarantors") and the combined subsidiaries of the Company which are not Subsidiary Guarantors, primarily Matthew Clark and Hardy and their subsidiaries, which are included in the Constellation Wines segment ("Subsidiary Nonguarantors"). The Subsidiary Guarantors are wholly owned and the guarantees are full, unconditional, joint and several obligations of each of the Subsidiary Guarantors. Separate financial statements for the Subsidiary Guarantors of the Company are not presented because the Company has determined that such financial statements would not be material to investors. The accounting policies of the parent company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2003, and include the recently adopted accounting pronouncements described in Note 2 herein. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances. 15
Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ (in thousands) Condensed Consolidating Balance Sheet - ------------------------------------- at November 30, 2003 - -------------------- Current assets: Cash and cash investments $ 100 $ 6,632 $ 31,643 $ - $ 38,375 Accounts receivable, net 167,889 161,108 439,099 - 768,096 Inventories, net 32,215 638,186 628,505 (6,927) 1,291,979 Prepaid expenses and other 9,607 51,232 57,107 - 117,946 Intercompany (payable) receivable (294,338) (588,769) 883,107 - - ----------- ----------- ------------- ------------ ------------ Total current assets (84,527) 268,389 2,039,461 (6,927) 2,216,396 Property, plant and equipment, net 49,627 351,395 646,960 - 1,047,982 Investments in subsidiaries 4,306,531 2,309,174 - (6,615,705) - Goodwill 47,530 498,216 1,000,634 - 1,546,380 Intangible assets, net 10,844 313,749 376,674 - 701,267 Other assets 42,334 2,246 67,675 - 112,255 ----------- ----------- ------------- ------------ ------------ Total assets $ 4,372,339 $ 3,743,169 $ 4,131,404 $ (6,622,632) $ 5,624,280 =========== =========== ============= ============ ============ Current liabilities: Notes payable to banks $ 166,600 $ - $ 1,441 $ - $ 168,041 Current maturities of long-term debt 58,460 3,789 3,584 - 65,833 Accounts payable 32,881 118,987 188,202 - 340,070 Accrued excise taxes 8,486 18,908 36,483 - 63,877 Other accrued expenses and liabilities 171,892 38,466 265,145 - 475,503 ----------- ----------- ------------- ------------ ------------ Total current liabilities 438,319 180,150 494,855 - 1,113,324 Long-term debt, less current maturities 1,931,585 8,288 30,946 - 1,970,819 Deferred income taxes 54,368 79,655 35,439 - 169,462 Other liabilities 7,127 28,544 130,067 - 165,738 Stockholders' equity: Preferred stock 2 - - - 2 Class A and Class B common stock 1,109 6,434 64,867 (71,301) 1,109 Additional paid-in capital 998,214 1,859,311 2,956,146 (4,815,457) 998,214 Retained earnings 956,751 1,540,771 188,176 (1,735,874) 949,824 Accumulated other comprehensive income 15,702 40,016 230,908 - 286,626 Treasury stock and other (30,838) - - - (30,838) ----------- ----------- ------------- ------------ ------------ Total stockholders' equity 1,940,940 3,446,532 3,440,097 (6,622,632) 2,204,937 ----------- ----------- ------------- ------------ ------------ Total liabilities and stockholders' equity $ 4,372,339 $ 3,743,169 $ 4,131,404 $ (6,622,632) $ 5,624,280 =========== =========== ============= ============ ============ Condensed Consolidating Balance Sheet - ------------------------------------- at February 28, 2003 - -------------------- Current assets: Cash and cash investments $ 1,426 $ 1,248 $ 11,136 $ - $ 13,810 Accounts receivable, net 120,554 141,156 137,385 - 399,095 Inventories, net 20,378 654,945 144,664 (75) 819,912 Prepaid expenses and other 31,452 52,411 13,421 - 97,284 Intercompany (payable) receivable (177,332) 136,002 41,330 - - ----------- ----------- ------------- ------------ ------------ Total current assets (3,522) 985,762 347,936 (75) 1,330,101 Property, plant and equipment, net 46,379 358,180 197,910 - 602,469 Investments in subsidiaries 2,590,889 601,156 - (3,192,045) - Goodwill 51,172 495,636 175,415 - 722,223 Intangible assets, net 10,918 315,952 55,558 - 382,428 Other assets 31,599 126,375 1,135 - 159,109 ----------- ----------- ------------- ------------ ------------ Total assets $ 2,727,435 $ 2,883,061 $ 777,954 $ (3,192,120) $ 3,196,330 =========== =========== ============= ============ ============ 16 Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ (in thousands) Current liabilities: Notes payable to banks $ 2,000 $ - $ 623 $ - $ 2,623 Current maturities of long-term debt 67,137 3,470 657 - 71,264 Accounts payable 37,567 58,843 74,663 - 171,073 Accrued excise taxes 7,447 15,711 13,263 - 36,421 Other accrued expenses and liabilities 138,963 46,664 118,200 - 303,827 ----------- ----------- ------------- ------------ ------------ Total current liabilities 253,114 124,688 207,406 - 585,208 Long-term debt, less current maturities 1,171,694 10,810 9,127 - 1,191,631 Deferred income taxes 48,475 79,656 17,108 - 145,239 Other liabilities 8,718 29,446 61,104 - 99,268 Stockholders' equity: Class A and Class B common stock 960 6,434 64,867 (71,301) 960 Additional paid-in capital 469,724 1,221,076 436,466 (1,657,542) 469,724 Retained earnings 795,600 1,363,379 99,823 (1,463,277) 795,525 Accumulated other comprehensive income (loss) 11,118 47,572 (117,947) - (59,257) Treasury stock and other (31,968) - - - (31,968) ----------- ----------- ------------- ------------ ------------ Total stockholders' equity 1,245,434 2,638,461 483,209 (3,192,120) 1,174,984 ----------- ----------- ------------- ------------ ------------ Total liabilities and stockholders' equity $ 2,727,435 $ 2,883,061 $ 777,954 $ (3,192,120) $ 3,196,330 =========== =========== ============= ============ ============ Condensed Consolidating Statement of Income - ------------------------------------------- for the Nine Months Ended November 30, 2003 - ------------------------------------------- Gross sales $ 603,162 $ 1,536,886 $ 1,433,848 $ (219,598) $ 3,354,298 Less - excise taxes (106,045) (325,692) (251,447) - (683,184) ----------- ----------- ------------- ------------ ------------ Net sales 497,117 1,211,194 1,182,401 (219,598) 2,671,114 Cost of product sold (428,529) (804,290) (918,808) 212,746 (1,938,881) ----------- ----------- ------------- ------------ ------------ Gross profit 68,588 406,904 263,593 (6,852) 732,233 Selling, general and administrative expenses (92,452) (124,276) (131,700) - (348,428) Restructuring and related charges - (26,061) (1,426) - (27,487) ----------- ----------- ------------- ------------ ------------ Operating (loss) income (23,864) 256,567 130,467 (6,852) 356,318 Gain on change in fair value of derivative instruments 1,181 - - - 1,181 Equity in earnings of subsidiary/joint venture 177,392 88,893 425 (265,745) 965 Interest income (expense), net 9,256 (116,673) (4,813) - (112,230) ----------- ----------- ------------- ------------ ------------ Income before income taxes 163,965 228,787 126,079 (272,597) 246,234 Provision for income taxes 480 (51,395) (37,726) - (88,641) ----------- ----------- ------------- ------------ ------------ Net income 164,445 177,392 88,353 (272,597) 157,593 Dividends on preferred stock (3,294) - - - (3,294) ----------- ----------- ------------- ------------ ------------ Income available to common stockholders $ 161,151 $ 177,392 $ 88,353 $ (272,597) $ 154,299 =========== =========== ============= ============ ============ 17 Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ (in thousands) Condensed Consolidating Statement of Income - ------------------------------------------- for the Nine Months Ended November 30, 2002 - ------------------------------------------- Gross sales $ 611,053 $ 1,482,454 $ 862,956 $ (227,244) $ 2,729,219 Less - excise taxes (110,952) (315,651) (224,038) - (650,641) ----------- ----------- ------------- ------------ ------------ Net sales 500,101 1,166,803 638,918 (227,244) 2,078,578 Cost of product sold (381,128) (828,517) (512,704) 227,253 (1,495,096) ----------- ----------- ------------- ------------ ------------ Gross profit 118,973 338,286 126,214 9 583,482 Selling, general and administrative expenses (79,921) (110,749) (73,177) - (263,847) ----------- ----------- ------------- ------------ ------------ Operating income 39,052 227,537 53,037 9 319,635 Equity in earnings of subsidiary/joint venture 123,362 19,892 - (133,161) 10,093 Interest income (expense), net 6,935 (52,151) (35,278) - (80,494) ----------- ----------- ------------- ------------ ------------ Income before income taxes 169,349 195,278 17,759 (133,152) 249,234 Provision for income taxes (18,073) (71,916) (7,960) - (97,949) ----------- ----------- ------------- ------------ ------------ Net income $ 151,276 $ 123,362 $ 9,799 $ (133,152) $ 151,285 =========== =========== ============= ============ ============ Condensed Consolidating Statement of Income - ------------------------------------------- for the Three Months Ended November 30, 2003 - -------------------------------------------- Gross sales $ 223,249 $ 477,418 $ 531,243 $ (18,369) $ 1,213,541 Less - excise taxes (40,841) (111,789) (73,663) - (226,293) ----------- ----------- ------------- ------------ ------------ Net sales 182,408 365,629 457,580 (18,369) 987,248 Cost of product sold (150,233) (220,506) (345,602) 11,709 (704,632) ----------- ----------- ------------- ------------ ------------ Gross profit 32,175 145,123 111,978 (6,660) 282,616 Selling, general and administrative expenses (29,467) (34,145) (49,721) - (113,333) Restructuring and related charges - (7,966) (122) - (8,088) ----------- ----------- ------------- ------------ ------------ Operating income 2,708 103,012 62,135 (6,660) 161,195 Equity in earnings of subsidiary/joint venture 84,296 44,479 126 (128,775) 126 Interest income (expense), net 8,089 (40,155) 177 - (31,889) ----------- ----------- ------------- ------------ ------------ Income before income taxes 95,093 107,336 62,438 (135,435) 129,432 Provision for income taxes (5,593) (23,040) (17,959) - (46,592) ----------- ----------- ------------- ------------ ------------ Net income 89,500 84,296 44,479 (135,435) 82,840 Dividends on preferred stock (2,450) - - - (2,450) ----------- ----------- ------------- ------------ ------------ Income available to common stockholders $ 87,050 $ 84,296 $ 44,479 $ (135,435) $ 80,390 =========== =========== ============= ============ ============ Condensed Consolidating Statement of Income - ------------------------------------------- for the Three Months Ended November 30, 2002 - -------------------------------------------- Gross sales $ 234,370 $ 525,027 $ 315,653 $ (105,291) $ 969,759 Less - excise taxes (43,019) (106,846) (81,515) - (231,380) ----------- ----------- ------------- ------------ ------------ Net sales 191,351 418,181 234,138 (105,291) 738,379 Cost of product sold (142,016) (303,118) (185,147) 105,396 (524,885) ----------- ----------- ------------- ------------ ------------ Gross profit 49,335 115,063 48,991 105 213,494 Selling, general and administrative expenses (26,512) (36,308) (22,650) - (85,470) ----------- ----------- ------------- ------------ ------------ Operating income 22,823 78,755 26,341 105 128,024 Equity in earnings of subsidiary/joint venture 48,687 13,216 - (57,721) 4,182 Interest income (expense), net 2,798 (17,066) (11,934) - (26,202) ----------- ----------- ------------- ------------ ------------ Income before income taxes 74,308 74,905 14,407 (57,616) 106,004 Provision for income taxes (10,069) (26,218) (5,373) - (41,660) ----------- ----------- ------------- ------------ ------------ Net income $ 64,239 $ 48,687 $ 9,034 $ (57,616) $ 64,344 =========== =========== ============= ============ ============ 18 Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ (in thousands) Condensed Consolidating Statement of Cash Flows - ----------------------------------------------- for the Nine Months Ended November 30, 2003 - ------------------------------------------- Net cash provided by (used in) operating activities $ 86,143 $ (79,713) $ 173,092 $ - $ 179,522 Cash flows from investing activities: Purchases of businesses, net of cash - (1,070,074) - - (1,070,074) Purchases of property, plant and equipment (6,216) (25,114) (39,254) - (70,584) Payment of accrued earn-out amount - (2,035) - - (2,035) Proceeds from sale of assets - 5,001 6,084 - 11,085 Proceeds from sale of business - - 4,431 - 4,431 Proceeds from sale of marketable equity securities - - 790 - 790 ----------- ----------- ------------- ------------ ------------ Net cash used in investing activities (6,216) (1,092,222) (27,949) - (1,126,387) ----------- ----------- ------------- ------------ ------------ Cash flows from financing activities: Proceeds from issuance of long-term debt, net of discount 1,600,000 - - - 1,600,000 Proceeds from equity offerings, net of fees 426,069 - - - 426,069 Net proceeds of notes payable 164,600 - 609 - 165,209 Exercise of employee stock options 23,756 - - - 23,756 Proceeds from employee stock purchases 1,822 - - - 1,822 Intercompany financing activities, net (1,419,182) 1,070,074 349,108 - - Principal payments of long-term debt (871,959) (2,430) (366,006) - (1,240,395) Payment of issuance costs of long-term debt (34,147) - - - (34,147) ----------- ----------- ------------- ------------ ------------ Net cash (used in) provided by financing activities (109,041) 1,067,644 (16,289) - 942,314 ----------- ----------- ------------- ------------ ------------ Effect of exchange rate changes on cash and cash investments 27,788 109,675 (108,347) - 29,116 ----------- ----------- ------------- ------------ ------------ Net (decrease) increase in cash and cash investments (1,326) 5,384 20,507 - 24,565 Cash and cash investments, beginning of period 1,426 1,248 11,136 - 13,810 ----------- ----------- ------------- ------------ ------------ Cash and cash investments, end of period $ 100 $ 6,632 $ 31,643 $ - $ 38,375 =========== =========== ============= ============ ============ Condensed Consolidating Statement of Cash Flows - ----------------------------------------------- for the Nine Months Ended November 30, 2002 - ------------------------------------------- Net cash provided by operating activities $ 59,057 $ 56,694 $ 31,513 $ - $ 147,264 Cash flows from investing activities: Purchases of property, plant and equipment (9,161) (30,801) (11,871) - (51,833) Other - (1,274) 577 - (697) ----------- ----------- ------------- ------------ ------------ Net cash used in investing activities (9,161) (32,075) (11,294) - (52,530) ----------- ----------- ------------- ------------ ------------ 19 Parent Subsidiary Subsidiary Company Guarantors Nonguarantors Eliminations Consolidated ----------- ----------- ------------- ------------ ------------ (in thousands) Cash flows from financing activities: Net repayments of notes payable (45,500) - (3,929) - (49,429) Principal payments of long-term debt (53,987) (2,387) (6,145) - (62,519) Payment of issuance costs of long-term debt (10) - - - (10) Exercise of employee stock options 25,539 - - - 25,539 Proceeds from long-term debt - - 10,000 - 10,000 Proceeds from employee stock purchase 1,319 - - - 1,319 ----------- ----------- ------------- ------------ ------------ Net cash (used in) provided by financing activities (72,639) (2,387) (74) - (75,100) ----------- ----------- ------------- ------------ ------------ Effect of exchange rate changes on cash and cash investments 23,372 (22,593) 562 - 1,341 ----------- ----------- ------------- ------------ ------------ Net increase (decrease) in cash and cash investments 629 (361) 20,707 - 20,975 Cash and cash investments, beginning of period 838 2,084 6,039 - 8,961 ----------- ----------- ------------- ------------ ------------ Cash and cash investments, end of period $ 1,467 $ 1,723 $ 26,746 $ - $ 29,936 =========== =========== ============= ============ ============
17) BUSINESS SEGMENT INFORMATION: As a result of the Hardy Acquisition, the Company has changed the structure of its internal organization to consist of two business divisions, Constellation Wines and Constellation Beers and Spirits. Separate division chief executives report directly to the Company's chief operating officer. Consequently, the Company now reports its operating results in three segments: Constellation Wines (branded wine, and U.K. wholesale and other), Constellation Beers and Spirits (imported beers and distilled spirits) and Corporate Operations and Other (primarily corporate related items and other). Amounts included in the Corporate Operations and Other segment consist of general corporate administration and finance expenses. These amounts include costs of executive management, investor relations, internal audit, treasury, tax, corporate development, legal, financial reporting, professional fees and public relations. Any costs incurred at the corporate office that are applicable to the segments are allocated to the appropriate segment. The amounts included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are therefore not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in the chief operating decision maker's evaluation of the operating income performance of the other operating segments. The new business segments reflect how the Company's operations are now being managed, how operating performance within the Company is now being evaluated by senior management and the structure of its internal financial reporting. In addition, the Company changed its definition of operating income for segment purposes to exclude restructuring and related charges and unusual costs that affect comparability. Accordingly, the financial information for the nine months ended November 30, 2002, and three months ended November 30, 2002, has been restated to conform to the new segment presentation. For the nine months ended November 30, 2003, restructuring and unusual costs consist of the flow through of inventory step-up and financing costs associated with the Hardy Acquisition of $17.3 million and $11.6 million, respectively, and restructuring and related charges of $44.3 million, including a write-down of commodity concentrate inventory of $16.8 million. For the three months ended November 30, 2003, restructuring and unusual costs consist of the flow through of inventory step-up and financing costs associated with the Hardy Acquisition of $2.7 million and $2.3 million, respectively, and restructuring and related charges of $8.1 million. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting 20 Policies in Note 1 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2003, and include the recently adopted accounting pronouncements described in Note 2 herein. Segment information is as follows:
For the Nine Months For the Three Months Ended November 30, Ended November 30, ------------------------- ------------------------- 2003 2002 2003 2002 ----------- ----------- ----------- ----------- (in thousands) Constellation Wines: - -------------------- Net sales: Branded wine $ 1,155,170 $ 733,450 $ 460,805 $ 282,320 Wholesale and other 611,854 510,649 219,740 179,979 ----------- ----------- ----------- ----------- Net sales $ 1,767,024 $ 1,244,099 $ 680,545 $ 462,299 Segment operating income $ 258,208 $ 166,512 $ 112,772 $ 75,433 Equity in earnings of joint ventures $ 965 $ 10,093 $ 126 $ 4,182 Long-lived assets $ 951,317 $ 510,791 $ 951,317 $ 510,791 Investment in joint ventures $ 8,227 $ 120,613 $ 8,227 $ 120,613 Total assets $ 4,834,279 $ 2,596,072 $ 4,834,279 $ 2,596,072 Capital expenditures $ 61,900 $ 42,639 $ 20,839 $ 13,572 Depreciation and amortization $ 51,374 $ 34,691 $ 17,361 $ 10,894 Constellation Beers and Spirits: - -------------------------------- Net sales: Imported beers $ 684,216 $ 615,098 $ 229,538 $ 195,585 Spirits 219,874 219,381 77,165 80,495 ----------- ----------- ----------- ----------- Net sales $ 904,090 $ 834,479 $ 306,703 $ 276,080 Segment operating income $ 202,228 $ 175,548 $ 72,228 $ 59,572 Long-lived assets $ 82,416 $ 77,391 $ 82,416 $ 77,391 Total assets $ 740,226 $ 710,495 $ 740,226 $ 710,495 Capital expenditures $ 5,981 $ 6,054 $ 2,748 $ 2,024 Depreciation and amortization $ 7,529 $ 7,691 $ 2,363 $ 2,586 Corporate Operations and Other: - ------------------------------- Net sales $ - $ - $ - $ - Segment operating loss $ (30,978) $ (22,425) $ (10,669) $ (6,981) Long-lived assets $ 14,249 $ 10,971 $ 14,249 $ 10,971 Total assets $ 49,775 $ 33,836 $ 49,775 $ 33,836 Capital expenditures $ 2,703 $ 3,141 $ 553 $ 2,019 Depreciation and amortization $ 18,476 $ 3,201 $ 4,712 $ 1,102 Restructuring and Related Charges - --------------------------------- and Unusual Costs: ------------------ Operating loss $ (73,140) $ - $ (13,136) $ - Consolidated: - ------------- Net sales $ 2,671,114 $ 2,078,578 $ 987,248 $ 738,379 Operating income $ 356,318 $ 319,635 $ 161,195 $ 128,024 Equity in earnings of joint ventures $ 965 $ 10,093 $ 126 $ 4,182 Long-lived assets $ 1,047,982 $ 599,153 $ 1,047,982 $ 599,153 Investment in joint ventures $ 8,227 $ 120,613 $ 8,227 $ 120,613 Total assets $ 5,624,280 $ 3,340,403 $ 5,624,280 $ 3,340,403 Capital expenditures $ 70,584 $ 51,834 $ 24,140 $ 17,615 Depreciation and amortization $ 77,379 $ 45,583 $ 24,436 $ 14,582
21 18) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED: In December 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (revised December 2003) ("FIN No. 46(R)"), "Consolidation of Variable Interest Entities--an interpretation of ARB No. 51." FIN No. 46(R) replaces FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities," and requires all variable interest entities to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the variable interest entity. In addition, the interpretation expands disclosure requirements for both variable interest entities that are consolidated as well as variable interest entities from which the entity is the holder of a significant amount of the beneficial interests, but not the majority. The Company is required to adopt FIN No. 46(R) in its entirety on March 1, 2004. The Company is currently assessing the financial impact of FIN No. 46(R) on its consolidated financial statements. In December 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 (revised 2003) ("SFAS No. 132(R)"), "Employers' Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132(R) supercedes Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by revising employers' disclosures about pension plans and other postretirement benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS No. 132 regarding the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28 ("APB Opinion No. 28"), "Interim Financial Reporting," to require additional disclosures for interim periods. The Company is required to adopt certain of the annual disclosure provisions of SFAS No. 132(R), primarily those related to its U.S. postretirement plan, for the fiscal year ending February 29, 2004. The Company is required to adopt the remaining annual disclosure provisions, primarily those related to its foreign plans, for the fiscal year ending February 28, 2005. The Company is required to adopt the amendment to APB Opinion No. 28 for financial reports containing condensed financial statements for interim periods beginning March 1, 2004. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- ----------------------------------------------------------------------- OF OPERATIONS ------------- INTRODUCTION - ------------ The Company is a leading international producer and marketer of beverage alcohol brands with a broad portfolio across the wine, spirits and imported beer categories. The Company has the largest wine business in the world and is the largest multi-category supplier of beverage alcohol in the United States; a leading producer and exporter of wine from Australia and New Zealand; and both a major producer and independent drinks wholesaler in the United Kingdom. Through February 28, 2003, the Company reported its operating results in five segments: Popular and Premium Wine (branded popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider, and bottled water, and wholesale wine, distilled spirits, cider, beer, RTDs and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine); and Corporate Operations and Other (primarily corporate related items). As a result of the Hardy Acquisition (as defined below), the Company has changed the structure of its internal organization to consist of two business divisions, Constellation Wines and Constellation Beers and Spirits. Separate division chief executives report directly to the Company's chief operating officer. Consequently, the Company now reports its operating results in three segments: Constellation Wines (branded wine, and U.K. wholesale and other), Constellation Beers and Spirits (imported beer and distilled spirits) and Corporate Operations and Other (primarily corporate related items and other). Amounts included in the Corporate Operations and Other segment consist of general corporate administration and finance expenses. These amounts 22 include costs of executive management, investor relations, internal audit, treasury, tax, corporate development, legal, financial reporting, professional fees and public relations. Any costs incurred at the corporate office that are applicable to the segments are allocated to the appropriate segment. The amounts included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are therefore not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in the chief operating decision maker's evaluation of the operating income performance of the other operating segments. The new business segments reflect how the Company's operations are now being managed, how operating performance within the Company is now being evaluated by senior management and the structure of its internal financial reporting. In addition, the Company changed its definition of operating income for segment purposes to exclude restructuring and related charges and unusual costs that affect comparability. Accordingly, the financial information for Third Quarter 2003 and Nine Months 2003 (as defined below) have been restated to conform to the new segment presentation. The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for the three months ended November 30, 2003 ("Third Quarter 2004"), compared to the three months ended November 30, 2002 ("Third Quarter 2003"), and for the nine months ended November 30, 2003 ("Nine Months 2004"), compared to the nine months ended November 30, 2002 ("Nine Months 2003"), and (ii) financial liquidity and capital resources for Nine Months 2004. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included herein and in the Company's Current Report on Form 8-K dated November 24, 2003. ACQUISITION OF HARDY On March 27, 2003, the Company acquired control of BRL Hardy Limited, now known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company completed its acquisition of all of Hardy's outstanding capital stock. As a result of the acquisition of Hardy, the Company also acquired the remaining 50% ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the Company established with Hardy in July 2001. The acquisition of Hardy along with the remaining interest in PWP is referred to together as the "Hardy Acquisition." Hardy is Australia's largest wine producer with interests in wineries and vineyards in most of Australia's major wine regions as well as New Zealand and the United States. In addition, Hardy has significant marketing and sales operations in the United Kingdom. Hardy has a comprehensive portfolio of wine products across all price points with a strong focus on premium wine production. Hardy's wines are distributed worldwide through a network of marketing and sales operations, with the majority of sales generated in Australia, the United Kingdom and the United States. Total consideration paid in cash and Class A Common Stock to the Hardy shareholders was $1,137.4 million. Additionally, the Company recorded direct acquisition costs of $20.0 million. The acquisition date for accounting purposes is March 27, 2003. The Company has recorded a $1.6 million reduction in the purchase price to reflect imputed interest between the accounting acquisition date and the final payment of consideration. This charge is included as interest expense in the Consolidated Statement of Income for the nine months ended November 30, 2003. The cash portion of the purchase price paid to the Hardy shareholders and optionholders ($1,060.2 million) was financed with $660.2 million of borrowings under the Company's March 2003 Credit Agreement (as defined below) and $400.0 million of borrowings under the Company's Bridge Agreement (as defined below). Additionally, the Company issued 3,288,913 shares of the Company's Class A Common Stock, which were valued at $77.2 million based on the simple average of the closing market price of the Company's Class A Common Stock beginning two days before and ending two days after April 4, 2003, the day the Hardy shareholders elected the form of consideration they wished to receive. The purchase price was based primarily on a discounted cash flow analysis that contemplated, among other things, the value of a broader geographic distribution in strategic international markets and a presence in the important Australian winemaking 23 regions. The Company and Hardy have complementary businesses that share a common growth orientation and operating philosophy. The Hardy Acquisition supports the Company's strategy of growth and breadth across categories and geographies, and strengthens its competitive position in its core markets. The purchase price and resulting goodwill were primarily based on the growth opportunities of the brand portfolio of Hardy. In particular, the Company believes there are growth opportunities for Australian wines in the United Kingdom, United States and other wine markets. This acquisition supports the Company's strategy of driving long-term growth and positions the Company to capitalize on the growth opportunities in "new world" wine markets. The results of operations of Hardy and PWP have been reported in the Company's Constellation Wines segment as of March 27, 2003. The Hardy Acquisition is significant and the Company expects it to have a material impact on the Company's future results of operations, financial position and cash flows. RESULTS OF OPERATIONS - --------------------- THIRD QUARTER 2004 COMPARED TO THIRD QUARTER 2003 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Third Quarter 2004 and Third Quarter 2003.
Third Quarter 2004 Compared to Third Quarter 2003 ------------------------------------------------- Net Sales ------------------------------------------------- %Increase 2004 2003 (Decrease) ---------- ---------- --------- Constellation Wines: Branded wine $ 460,805 $ 282,320 63.2 % Wholesale and other 219,740 179,979 22.1 % ---------- ---------- Constellation Wines net sales $ 680,545 $ 462,299 47.2 % ---------- ---------- Constellation Beers and Spirits: Imported beers $ 229,538 $ 195,585 17.4 % Spirits 77,165 80,495 (4.1)% ---------- ---------- Constellation Beers and Spirits net sales $ 306,703 $ 276,080 11.1 % ---------- ---------- Corporate Operations and Other $ - $ - N/A ---------- ---------- Consolidated Net Sales $ 987,248 $ 738,379 33.7 % ========== ==========
Net sales for Third Quarter 2004 increased to $987.2 million from $738.4 million for Third Quarter 2003, an increase of $248.9 million, or 33.7%. This increase resulted primarily from the inclusion of $182.9 million of net sales of products acquired in the Hardy Acquisition as well as increases in imported beer sales of $34.0 million and U.K. wholesale sales of $20.0 million (on a local currency basis). In addition, net sales benefited from a favorable foreign currency impact of $14.4 million. Constellation Wines ------------------- Net sales for Constellation Wines increased to $680.5 million for Third Quarter 2004 from $462.3 million in Third Quarter 2003, an increase of $218.2 million, or 47.2%. Branded wine net sales increased $178.5 million, primarily due to the addition of $176.3 million of net sales of branded wine acquired in the Hardy Acquisition. Wholesale and other net sales increased $39.8 million primarily due to growth in the U.K. wholesale business of $20.0 million (on a local currency basis) and a favorable foreign currency impact of $10.4 million. The net sales increase in the U.K. Wholesale business on a local currency basis is primarily due to the addition of new accounts and increased average delivery sizes as the Company's 24 national accounts business continues to grow. The Company continues to face competitive discounting within select markets and geographies driven in part by excess grape supplies. The Company believes that the grape supply/demand cycle should come into balance over the next couple of years. The Company has taken a strategy of preserving the long-term brand equity of its portfolio and investing its marketing dollars in the higher growth sectors of the wine business. Constellation Beers and Spirits ------------------------------- Net sales for Constellation Beers and Spirits increased to $306.7 million for Third Quarter 2004 from $276.1 million for Third Quarter 2003, an increase of $30.6 million, or 11.1%. This increase resulted primarily from volume gains on the Company's imported beer portfolio, which increased $34.0 million, or 17.4%, as a result of continued consumer demand and strong wholesaler demand of Mexican beers prior to the Company's previously announced January 2004 price increase. Spirits net sales decreased $3.3 million due to a decrease in bulk whisky and contract production sales as a result of a large spot bulk whisky sale in Third Quarter 2003. This decrease was partially offset by an increase in branded spirits sales due to a favorable mix toward higher priced spirits brands as well as slight volume increases. As discussed in the prior quarter, the Company was notified by its Mexican beer supplier of a cost increase on certain brands representing the majority of its portfolio. The effective date of the increase to the Company was January 1, 2004. The Company is passing on the full amount of the cost increase to its distributors. As noted above, the Company's net sales for Third Quarter 2004 benefited from strong wholesaler demand in advance of this price increase. The Company expects above average volume growth during the first half of the fourth quarter of fiscal 2004 to be offset by below average volume growth in the second half of the fourth quarter of fiscal 2004. The Company anticipates continued wholesaler and retailer inventory reductions in the distribution channel in early fiscal 2005 to be offset by the price increase. GROSS PROFIT The Company's gross profit increased to $282.6 million for Third Quarter 2004 from $213.5 million for Third Quarter 2003, an increase of $69.1 million, or 32.4%. The Constellation Wines segment's gross profit increased $60.3 million primarily due to gross profit on the sales of branded wine acquired in the Hardy Acquisition. The Constellation Beers and Spirits segment's gross profit increased $11.6 million primarily due to the volume growth in the segment's imported beer portfolio. These increases were partially offset by $2.7 million of unusual costs which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment. These costs represent the flow through of inventory step-up associated with the Hardy Acquisition. Gross profit as a percent of net sales decreased slightly to 28.6% for Third Quarter 2004 from 28.9% for Third Quarter 2003 as an increase in gross profit margin from sales of higher margin wine brands acquired in the Hardy Acquisition was more than offset by the flow through of the inventory step-up associated with the Hardy Acquisition and a decrease in gross profit margin on the Constellation Wines' U.K. wholesale business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $113.3 million for Third Quarter 2004 from $85.5 million for Third Quarter 2003, an increase of $27.9 million, or 32.6%. The Constellation Wines segment's selling, general and administrative expenses increased $25.0 million primarily from increased selling, general and administrative expenses from the addition of the Hardy and PWP businesses, partially offset by favorable foreign currency gains. The Constellation Beers and Spirits segment's selling, general and administrative expenses decreased $1.1 million due to favorable foreign currency gains partially offset by increased imported beer and spirits advertising expenses to support the growth across this segment's businesses. The Corporate Operations and Other segment's selling, general 25 and administrative expenses increased $3.9 million primarily due to increased general and administrative expenses to support the Company's growth. Selling, general and administrative expenses as a percent of net sales decreased slightly to 11.5% for Third Quarter 2004 as compared to 11.6% for Third Quarter 2003 due primarily to the foreign currency gains recognized within the Constellation Beers and Spirits segment and the Constellation Wines segment as discussed above offset by (i) an increase in the Constellation Wines segment's selling, general and administrative expenses as a percent of net sales due to the Hardy Acquisition, which has a higher percentage of selling, general and administrative expenses than the segment's base business and (ii) increased general and administrative expenses within the Corporate Operations and Other segment to support the Company's growth. RESTRUCTURING AND RELATED CHARGES Restructuring and related charges resulted from (i) the realignment of business operations in the Constellation Wines segment, as previously announced in the Company's fourth quarter of fiscal 2003, and (ii) the Company's decision to exit the commodity concentrate product line in the U.S. and sell its winery located in Escalon, California, as previously announced in the Company's first quarter of fiscal 2004. The Company recorded restructuring and related charges of $1.4 million in Third Quarter 2004 related to the realignment of business operations in the Constellation Wines segment and expects to incur additional charges of approximately $1.9 million for the previously announced actions over the remainder of fiscal 2004. The Company recorded restructuring and related charges of $6.7 million in Third Quarter 2004 related to exiting the commodity concentrate product line and selling the Escalon facility. The Company expects to incur additional restructuring and related charges of $5.4 million, beginning with an estimated $1.1 million in the fourth quarter of fiscal 2004 and $4.3 million in fiscal 2005. All of the remaining charges will be recorded as Restructuring and Related Charges on the Company's consolidated statement of income. The remaining charges result from renegotiating existing grape contracts associated with commodity concentrate and the Escalon facility, asset write-offs and severance-related costs. More than half of the total charges to be recorded in connection with exiting the commodity concentrate product line and selling the Escalon facility are non-cash charges. OPERATING INCOME The following table sets forth the operating income (loss) (in thousands of dollars) by operating segment of the Company for Third Quarter 2004 and Third Quarter 2003.
Third Quarter 2004 Compared to Third Quarter 2003 ------------------------------------------------- Operating Income (Loss) ------------------------------------------------- 2004 2003 %Increase ---------- ---------- --------- Constellation Wines $ 112,772 $ 75,433 49.5 % Constellation Beers and Spirits 72,228 59,572 21.2 % Corporate Operations and Other (10,669) (6,981) 52.8 % ---------- ---------- Total Reportable Segments 174,331 128,024 36.2 % Restructuring and Related Charges and Unusual Costs (13,136) - N/A ---------- ---------- Consolidated Operating Income $ 161,195 $ 128,024 25.9 % ========== ==========
Restructuring and related charges and unusual costs of $13.1 million for Third Quarter 2004 consist of certain costs that are excluded by management in their evaluation of the results of each operating segment. These costs represent the flow through of inventory step-up and the amortization of deferred financing costs associated with the Hardy Acquisition of $2.7 million and $2.3 million, respectively, and restructuring and related charges associated with exiting the commodity concentrate 26 product line and the Company's realignment of its business operations in the wine segment of $8.1 million. As a result of these costs and the factors discussed above, consolidated operating income increased to $161.2 million for Third Quarter 2004 from $128.0 million for Third Quarter 2003, an increase of $33.2 million, or 25.9%. INTEREST EXPENSE, NET Interest expense, net of interest income of $0.9 million and $0.5 million for Third Quarter 2004 and Third Quarter 2003, respectively, increased to $31.9 million for Third Quarter 2004 from $26.2 million for Third Quarter 2003, an increase of $5.7 million, or 21.7%. The increase resulted from higher average borrowings due to the financing of the Hardy Acquisition, partially offset by a lower average borrowing rate. PROVISION FOR INCOME TAXES The Company's effective tax rate decreased to 36.0% for Third Quarter 2004 as compared to 39.3% for Third Quarter 2003 as a result of the Hardy Acquisition, which significantly increases the allocation of income to jurisdictions with lower income tax rates. NET INCOME As a result of the above factors, net income increased to $82.8 million for Third Quarter 2004 from $64.3 million for Third Quarter 2003, an increase of $18.5 million, or 28.7%. NINE MONTHS 2004 COMPARED TO NINE MONTHS 2003 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for Nine Months 2004 and Nine Months 2003.
Nine Months 2004 Compared to Nine Months 2003 --------------------------------------------- Net Sales --------------------------------------------- 2004 2003 %Increase ------------ ------------ --------- Constellation Wines: Branded wine $ 1,155,170 $ 733,450 57.5 % Wholesale and other 611,854 510,649 19.8 % ------------ ------------ Constellation Wines net sales $ 1,767,024 $ 1,244,099 42.0 % ------------ ------------ Constellation Beers and Spirits: Imported beers $ 684,216 $ 615,098 11.2 % Spirits 219,874 219,381 0.2 % ------------ ------------ Constellation Beers and Spirits net sales $ 904,090 $ 834,479 8.3 % ------------ ------------ Corporate Operations and Other $ - $ - N/A ------------ ------------ Consolidated Net Sales $ 2,671,114 $ 2,078,578 28.5 % ============ ============
Net sales for Nine Months 2004 increased to $2,671.1 million from $2,078.6 million for Nine Months 2003, an increase of $592.5 million, or 28.5%. This increase resulted primarily from the inclusion of $428.0 million of net sales of products acquired in the Hardy Acquisition as well as increases in imported beer sales of $69.1 million and U.K. wholesale sales of $41.3 million (on a local currency basis). In addition, net sales benefited from a favorable foreign currency impact of $47.0 million. 27 Constellation Wines ------------------- Net sales for Constellation Wines increased to $1,767.0 million for Nine Months 2004 from $1,244.1 million in Nine Months 2003, an increase of $522.9 million, or 42.0%. Branded wine net sales increased $421.7 million, primarily due to the addition of $416.1 million of net sales of branded wine acquired in the Hardy Acquisition. Wholesale and other net sales increased $101.2 million primarily due to growth in the U.K. wholesale business of $41.3 million (on a local currency basis), a favorable foreign currency impact of $34.1 million, and the addition of $12.1 million of net sales of bulk wine acquired in the Hardy Acquisition. The Company continues to face competitive discounting within select markets and geographies driven in part by excess grape supplies. The Company believes that the grape supply/demand cycle should come into balance over the next couple of years. The Company has taken a strategy of preserving the long-term brand equity of its portfolio and investing its marketing dollars in the higher growth sectors of the wine business. Constellation Beers and Spirits ------------------------------- Net sales for Constellation Beers and Spirits increased to $904.1 million for Nine Months 2004 from $834.5 million for Nine Months 2003, an increase of $69.6 million, or 8.3%. This increase resulted primarily from volume gains on the Company's imported beer portfolio, which increased $69.1 million. Spirits net sales remained relatively flat as increased branded spirits sales were offset by lower bulk whisky and contract production sales. GROSS PROFIT The Company's gross profit increased to $732.2 million for Nine Months 2004 from $583.5 million for Nine Months 2003, an increase of $148.7 million, or 25.5%. The Constellation Wines segment's gross profit increased $153.2 million primarily due to gross profit on the sales of branded wine acquired in the Hardy Acquisition. The Constellation Beers and Spirits segment's gross profit increased $29.6 million primarily due to the volume growth in the segment's imported beer portfolio. These increases were partially offset by $34.1 million of unusual costs which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment. These costs represent the flow through of inventory step-up associated with the Hardy Acquisition of $17.3 million and the write-down of concentrate inventory recorded in connection with the Company's decision to exit the commodity concentrate product line of $16.8 million (see additional discussion under "Restructuring and Related Charges" below). Gross profit as a percent of net sales decreased slightly to 27.4% for Nine Months 2004 from 28.1% for Nine Months 2003 as an increase in gross profit margin from sales of higher margin wine brands acquired in the Hardy Acquisition was more than offset by the flow through of the inventory step-up associated with the Hardy Acquisition, the write-down of the concentrate inventory and a decrease in gross profit margin on the Constellation Wines' U.K. wholesale business. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $348.4 million for Nine Months 2004 from $263.8 million for Nine Months 2003, an increase of $84.6 million, or 32.1%. The Constellation Wines segment's selling, general and administrative expenses increased $61.7 million primarily from increased selling, general and administrative expenses from the addition of the Hardy and PWP businesses. The Constellation Beers and Spirits segment's selling, general and administrative expenses increased $2.9 million due to increased imported beer and spirits advertising and selling expenses to support the growth across this segment's businesses, partially offset by foreign currency gains. The Corporate Operations and Other segment's selling, general and administrative expenses increased $20.0 million primarily due to (i) additional amortized deferred financing costs associated with the bridge financing in connection with the Hardy Acquisition, (ii) additional deferred financing costs associated with the Company's new bank credit facility, and (iii) increased general and administrative expenses to 28 support the Company's growth. Selling, general and administrative expenses as a percent of net sales increased slightly to 13.0% for Nine Months 2004 as compared to 12.7% for Nine Months 2003 due primarily to the increased general and administrative expenses within the Corporate Operations and Other segment as a result of the factors discussed above. RESTRUCTURING AND RELATED CHARGES Restructuring and related charges resulted from (i) the realignment of business operations in the Constellation Wines segment, as previously announced in the Company's fourth quarter of fiscal 2003, and (ii) the Company's decision to exit the commodity concentrate product line in the U.S. and sell its winery located in Escalon, California, as previously announced in the Company's first quarter of fiscal 2004. The Company recorded restructuring and related charges of $7.0 million in Nine Months 2004 related to the realignment of business operations in the Constellation Wines segment and expects to incur additional charges of approximately $1.9 million for the previously announced actions over the remainder of fiscal 2004. The Company recorded restructuring and related charges of $20.5 million in Nine Months 2004 related to exiting the commodity concentrate product line and selling the Escalon facility. In total, the Company recorded $37.3 million of costs allocated between cost of product sold and restructuring and related charges associated with these actions. The Company expects to incur additional restructuring and related charges of $5.4 million, beginning with an estimated $1.1 million in the fourth quarter of fiscal 2004 and $4.3 million in fiscal 2005. All of the remaining charges will be recorded as Restructuring and Related Charges on the Company's consolidated statement of income. The remaining charges result from renegotiating existing grape contracts associated with commodity concentrate and the Escalon facility, asset write-offs and severance-related costs. More than half of the total charges to be recorded in connection with exiting the commodity concentrate product line and selling the Escalon facility are non-cash charges. OPERATING INCOME The following table sets forth the operating income (loss) (in thousands of dollars) by operating segment of the Company for Nine Months 2004 and Nine Months 2003.
Nine Months 2004 Compared to Nine Months 2003 --------------------------------------------- Operating Income (Loss) --------------------------------------------- 2004 2003 %Increase ------------ ------------ --------- Constellation Wines $ 258,208 $ 166,512 55.1 % Constellation Beers and Spirits 202,228 175,548 15.2 % Corporate Operations and Other (30,978) (22,425) 38.1 % ------------ ------------ Total Reportable Segments 429,458 319,635 34.4 % Restructuring and Related Charges and Unusual Costs (73,140) - N/A ------------ ------------ Consolidated Operating Income $ 356,318 $ 319,635 11.5 % ============ ============
Restructuring and related charges and unusual costs of $73.1 million for Nine Months 2004 consist of certain costs that are excluded by management in their evaluation of the results of each operating segment. These costs represent the flow through of inventory step-up and the amortization of deferred financing costs associated with the Hardy Acquisition of $17.3 million and $11.6 million, respectively, and costs associated with exiting the commodity concentrate product line and the Company's realignment of its business operations in the wine segment, including the write-down of concentrate inventory of $16.8 million and restructuring and related charges of $27.5 million. As a result 29 of these costs and the above factors, consolidated operating income increased to $356.3 million for Nine Months 2004 from $319.6 million for Nine Months 2003, an increase of $36.7 million, or 11.5%. INTEREST EXPENSE, NET Interest expense, net of interest income of $2.4 million and $0.8 million for Nine Months 2004 and Nine Months 2003, respectively, increased to $112.2 million for Nine Months 2004 from $80.5 million for Nine Months 2003, an increase of $31.7 million, or 39.4%. The increase resulted from higher average borrowings due to the financing of the Hardy Acquisition, partially offset by a lower average borrowing rate, and $1.7 million of imputed interest expense related to the Hardy Acquisition. PROVISION FOR INCOME TAXES The Company's effective tax rate decreased to 36.0% for Nine Months 2004 as compared to 39.3% for Nine Months 2003 as a result of the Hardy Acquisition, which significantly increases the allocation of income to jurisdictions with lower income tax rates. NET INCOME As a result of the above factors, net income decreased to $157.6 million for Nine Months 2004 from $151.3 million for Nine Months 2003, an increase of $6.3 million, or 4.2%. FINANCIAL LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------- GENERAL The Company's principal use of cash in its operating activities is for purchasing and carrying inventories. The Company's primary source of liquidity has historically been cash flow from operations, except during the annual Fall grape harvests when the Company has relied on short-term borrowings. In the United States, the annual grape crush normally begins in August and runs through October. In Australia, the annual grape crush normally begins in February and runs through May. The Company generally begins purchasing grapes at the beginning of the crush season with payments for such grapes beginning to come due one month later. The Company's short-term borrowings to support such purchases generally reach their highest levels one to two months after the crush season has ended. Historically, the Company has used cash flow from operating activities to repay its short-term borrowings. The Company will continue to use its short-term borrowings to support its working capital requirements. The Company believes that cash provided by operating activities and its financing activities, primarily short-term borrowings, will provide adequate resources to satisfy its working capital, liquidity and anticipated capital expenditure requirements for both its short-term and long-term capital needs. NINE MONTHS 2004 CASH FLOWS OPERATING ACTIVITIES Net cash provided by operating activities for Nine Months 2004 was $179.5 million, which resulted from $157.6 million of net income, plus $83.0 million of net non-cash items charged to the Consolidated Statement of Income, less $61.1 million representing the net change in the Company's operating assets and liabilities. The net non-cash items consisted primarily of depreciation of property, plant & equipment and amortization of intangible and other assets. The net change in operating assets and liabilities resulted primarily from a seasonal increase in accounts receivable, partially offset by a 30 decrease in inventories and increases in accounts payable, excise taxes, accrued grape purchases, income taxes payable and accrued advertising and promotion. INVESTING ACTIVITIES Net cash used in investing activities for Nine Months 2004 was $1,126.4 million, which resulted primarily from net cash paid of $1,070.1 million for the purchases of businesses and $70.6 million of capital expenditures. FINANCING ACTIVITIES Net cash provided by financing activities for Nine Months 2004 was $942.3 million resulting primarily from proceeds of $1,600.0 million from issuance of long-term debt, including $1,060.2 million of long-term debt incurred to acquire Hardy, plus net proceeds from the 2003 Equity Offerings (as defined below) of $426.1 million. This amount was partially offset by principal payments of long-term debt of $1,240.4 million. During June 1998, the Company's Board of Directors authorized the repurchase of up to $100.0 million of its Class A Common Stock and Class B Common Stock. The repurchase of shares of common stock will be accomplished, from time to time, in management's discretion and depending upon market conditions, through open market or privately negotiated transactions. The Company may finance such repurchases through cash generated from operations or through the senior credit facility. The repurchased shares will become treasury shares. As of January 14, 2004, the Company had purchased 4,075,344 shares of Class A Common Stock at an aggregate cost of $44.9 million, or at an average cost of $11.01 per share. No shares were repurchased during Nine Months 2004. DEBT Total debt outstanding as of November 30, 2003, amounted to $2,204.7 million, an increase of $939.2 million from February 28, 2003. The ratio of total debt to total capitalization decreased to 50.0% as of November 30, 2003, from 51.9% as of February 28, 2003. SENIOR CREDIT FACILITY Credit Agreement ----------------- In connection with the Hardy Acquisition, on January 16, 2003, the Company, certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and administrative agent (the "Administrative Agent"), and certain other lenders entered into a new credit agreement (as subsequently amended and restated as of March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the Company entered into a Second Amended and Restated Credit Agreement (the "Credit Agreement") that (i) refinanced the then outstanding principal balance under the Tranche B Term Loan facility on essentially the same terms as the Tranche B Term Loan facility under the March 2003 Credit Agreement, but at a lower Applicable Rate (as such term is defined in the Credit Agreement) and (ii) otherwise restated the terms of the March 2003 Credit Agreement, as amended. The March 2003 Credit Agreement provided for aggregate credit facilities of $1.6 billion consisting of a $400.0 million Tranche A Term Loan facility due in February 2008, an $800.0 million Tranche B Term Loan facility due in November 2008 and a $400.0 million Revolving Credit facility (including an Australian Dollar revolving sub-facility of up to A$10.0 million and a sub-facility for letters of credit of up to $40.0 million) which expires on February 29, 2008. Proceeds of the March 2003 Credit Agreement were used to pay off the Company's obligations under its prior senior credit facility, to fund a portion of the cash required to pay the former 31 Hardy shareholders and to pay indebtedness outstanding under certain of Hardy's credit facilities. The Company intends to use the remaining availability under the Credit Agreement to fund its working capital needs on an ongoing basis. The Tranche A Term Loan facility and the Tranche B Term Loan facility were fully drawn on March 27, 2003. The required annual repayments of the Tranche A Term Loan facility are $40.0 million in fiscal 2004 and increase by $20.0 million each year through fiscal 2008. As of November 30, 2003, the Company has made $26.6 million of scheduled and required payments on the Tranche A Term Loan facility. In August 2003, the Company prepaid $100.0 million of the Tranche B Term Loan facility. In October 2003, the Company prepaid an additional $200.0 million of the Tranche B Term Loan facility. After this prepayment, the required annual repayments of the Tranche B Term Loan, which is backend loaded, were revised to $54.4 million in fiscal 2006, $54.4 million in fiscal 2007, $119.1 million in fiscal 2008 and $272.1 million in fiscal 2009. The rate of interest payable, at the Company's option, is a function of LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as defined in the Credit Agreement) and, with respect to LIBOR borrowings, ranges between 1.50% and 2.50%. As of November 30, 2003, the LIBOR margin for the Revolving Credit facility and the Tranche A Term Loan facility is 1.75%, while the LIBOR margin on the Tranche B Term Loan facility is 2.00%. The Company's obligations are guaranteed by certain subsidiaries of the Company ("Guarantors") and the Company has pledged collateral of (i) 100% of the capital stock of all of the Company's U.S. subsidiaries and (ii) 65% of the voting capital stock of certain foreign subsidiaries of the Company. The Company and its subsidiaries are subject to customary lending covenants including those restricting additional liens, the incurrence of additional indebtedness (including guarantees of indebtedness), the sale of assets, the payment of dividends, transactions with affiliates and the making of certain investments, in each case subject to baskets, exceptions and thresholds. As a result of the prepayment of the Bridge Loans (as defined below) with the proceeds from the 2003 Equity Offerings, the requirement under certain circumstances for the Company and the Guarantors to pledge certain assets consisting of, among other things, inventory, accounts receivable and trademarks to secure the obligations under the Credit Agreement, ceased to apply. Certain foreign subsidiaries of the Company have guaranteed debt, including debt of a joint venture in the maximum amount of $3.9 million and debt of a partnership in the maximum amount of $1.0 million as of November 30, 2003. The primary financial covenants require the maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed charges ratio and an interest coverage ratio. As of November 30, 2003, the Company is in compliance with all of its covenants under its Credit Agreement. As of November 30, 2003, under the Credit Agreement, the Company had outstanding Tranche A Term Loans of $373.4 million bearing a weighted average interest rate of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted average interest rate of 3.1%, $166.6 million of revolving loans bearing a weighted average interest rate of 3.0%, undrawn revolving letters of credit of $18.4 million, and $215.1 million in revolving loans available to be drawn. Bridge Agreement ---------------- On January 16, 2003, the Company, certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and Administrative Agent, and certain other lenders (such other lenders, together with the Administrative Agent, are collectively referred to herein as the "Bridge Lenders") entered into a bridge loan agreement which was amended and restated as of March 26, 2003, containing commitments of the Bridge Lenders to make bridge loans (the "Bridge Loans") of up to, in the aggregate, $450.0 million (the 32 "Bridge Agreement"). On April 9, 2003, the Company used $400.0 million of the Bridge Loans to fund a portion of the cash required to pay the former Hardy shareholders. The rate of interest payable on the Bridge Loans was equal to LIBOR plus an initial margin of 3.75%. On July 30, 2003, the Company used proceeds from the 2003 Equity Offerings to prepay the $400.0 million Bridge Loans in their entirety. SENIOR NOTES As of November 30, 2003, the Company had outstanding $200.0 million aggregate principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior Notes"). The Senior Notes are currently redeemable, in whole or in part, at the option of the Company. As of November 30, 2003, the Company had outstanding (pound) 1.0 million ($1.7 million) aggregate principal amount of 8 1/2% Series B Senior Notes due November 2009 (the "Sterling Series B Senior Notes"). In addition, as of November 30, 2003, the Company had outstanding (pound) 154.0 million ($265.7 million, net of $0.5 million unamortized discount) aggregate principal amount of 8 1/2% Series C Senior Notes due November 2009 (the "Sterling Series C Senior Notes"). The Sterling Series B Senior Notes and Sterling Series C Senior Notes are currently redeemable, in whole or in part, at the option of the Company. Also, as of November 30, 2003, the Company had outstanding $200.0 million aggregate principal amount of 8% Senior Notes due February 2008 (the "February 2001 Senior Notes"). The February 2001 Senior Notes are currently redeemable, in whole or in part, at the option of the Company. SENIOR SUBORDINATED NOTES As of November 30, 2003, the Company had outstanding $200.0 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009 (the "Senior Subordinated Notes"). The Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 2004. Also, as of November 30, 2003, the Company had outstanding $250.0 million aggregate principal amount of 8 1/8% Senior Subordinated Notes due January 2012 (the "January 2002 Senior Subordinated Notes"). The January 2002 Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after January 15, 2007. The Company may also redeem up to 35% of the January 2002 Senior Subordinated Notes using the proceeds of certain equity offerings completed before January 15, 2005. EQUITY OFFERINGS During July 2003, the Company completed a public offering of 9,800,000 shares of its Class A Common Stock resulting in net proceeds to the Company, after deducting underwriting discounts and expenses, of $261.2 million. In addition, the Company also completed a public offering of 170,500 shares of its 5.75% Series A Mandatory Convertible Preferred Stock ("Preferred Stock") resulting in net proceeds to the Company, after deducting underwriting discounts and expenses, of $164.9 million. The Class A Common Stock offering and the Preferred Stock offering are referred to together as the "2003 Equity Offerings." The net proceeds from the 2003 Equity Offerings were used to repay the Bridge Loans that were incurred to partially finance the Hardy Acquisition. The remaining proceeds were used to repay term loan borrowings under the March 2003 Credit Agreement. 33 ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED In December 2003, the Financial Accounting Standards Board issued FASB Interpretation No. 46 (revised December 2003) ("FIN No. 46(R)"), "Consolidation of Variable Interest Entities--an interpretation of ARB No. 51." FIN No. 46(R) replaces FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities," and requires all variable interest entities to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the variable interest entity. In addition, the interpretation expands disclosure requirements for both variable interest entities that are consolidated as well as variable interest entities from which the entity is the holder of a significant amount of the beneficial interests, but not the majority. The Company is required to adopt FIN No. 46(R) in its entirety on March 1, 2004. The Company is currently assessing the financial impact of FIN No. 46(R) on its consolidated financial statements. In December 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132 (revised 2003) ("SFAS No. 132(R)"), "Employers' Disclosures about Pensions and Other Postretirement Benefits--an amendment of FASB Statements No. 87, 88, and 106." SFAS No. 132(R) supercedes Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by revising employers' disclosures about pension plans and other postretirement benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS No. 132 regarding the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28 ("APB Opinion No. 28"), "Interim Financial Reporting," to require additional disclosures for interim periods. The Company is required to adopt certain of the annual disclosure provisions of SFAS No. 132(R), primarily those related to its U.S. postretirement plan, for the fiscal year ending February 29, 2004. The Company is required to adopt the remaining annual disclosure provisions, primarily those related to its foreign plans, for the fiscal year ending February 28, 2005. The Company is required to adopt the amendment to APB Opinion No. 28 for financial reports containing condensed financial statements for interim periods beginning March 1, 2004. INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including statements regarding the Company's future financial position and prospects, are forward-looking statements. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In addition to the risks and uncertainties of ordinary business operations, the forward-looking statements of the Company contained in this Form 10-Q are also subject to the following risks and uncertainties: the on-going assimilation of the Hardy business; final management determinations and independent appraisals vary materially from current management estimates and preliminary independent appraisals of the fair value of the assets acquired and the liabilities assumed in the Hardy acquisition; the Company achieving certain sales projections and meeting certain cost targets; wholesalers and retailers may give higher priority to products of the Company's competitors; raw material supply, production or shipment difficulties could adversely affect the Company's ability to supply its customers; increased competitive activities in the form of pricing, advertising and promotions could adversely impact consumer demand for the Company's products and/or result in higher than expected selling, general and administrative expenses; a general decline in alcohol consumption; increases in excise and other taxes on beverage alcohol products; and changes in foreign exchange rates. For additional information about risks 34 and uncertainties that could adversely affect the Company's forward-looking statements, please refer to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2003. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- The Company, as a result of its global operating activities, is exposed to changes in foreign currency exchange rates and interest rates, which may adversely affect its results of operations and financial position. In seeking to minimize the risks and/or costs associated with such activities, the Company may enter into derivative contracts. The Company does not utilize financial instruments for trading or other speculative purposes. Foreign currency forward contracts and foreign currency options are used to hedge existing foreign currency denominated assets and liabilities, as well as forecasted foreign currency denominated sales. Using a sensitivity analysis based on estimated fair value of open contracts using available forward rates, if the U.S. dollar had been 10% weaker at November 30, 2003, and November 30, 2002, the fair value of open contracts would have increased $17.9 million and $1.0 million, respectively. Such gains or losses would be substantially offset by losses or gains from the revaluation or settlement of the related underlying positions. The Company is exposed to interest rate risk primarily through its borrowing activities. The Company utilizes U.S. dollar denominated and foreign currency denominated borrowings to fund its working capital and investment needs. Using a sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates at November 30, 2003, and November 30, 2002, would result in an approximate increase in cash required for interest of $8.9 million and $2.6 million, respectively. The Company's policy is to use only counterparties with an investment-grade or better rating and to monitor market risk and exposure for each counterparty. The Company has procedures to monitor the credit exposure amounts. The maximum credit exposure at November 30, 2003, was not significant to the Company. ITEM 4. CONTROLS AND PROCEDURES - ------- ----------------------- The Company's Chief Executive Officer and its Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company's "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. In connection with that evaluation, no changes were identified in the Company's "internal control over financial reporting" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) that occurred during the Company's fiscal quarter ended November 30, 2003 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. 35 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- (a) The following Exhibits are furnished as part of this Form 10-Q: Exhibit Number Description - -------------- ----------- (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.1 Implementation Deed dated 17 January 2003 between Constellation Brands, Inc. and BRL Hardy Limited. 2.2 Transaction Compensation Agreement dated 17 January 2003 between Constellation Brands, Inc. and BRL Hardy Limited. 2.3 No Solicitation Agreement dated 13 January 2003 between Constellation Brands, Inc. and BRL Hardy Limited. 2.4 Backstop Fee Agreement dated 13 January 2003 between Constellation Brands, Inc. and BRL Hardy Limited. 2.5 Letter Agreement dated 6 February 2003 between Constellation Brands, Inc. and BRL Hardy Limited. (3) ARTICLES OF INCORORATION AND BY-LAWS. 3.1 Restated Certificate of Incorporation of the Company. 3.2 Certificate of Designations of 5.75% Series A Mandatory Convertible Preferred Stock of the Company. 3.3 By-Laws of the Company. (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. 4.1 Indenture, dated as of February 25, 1999, among the Company, as issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee. 4.2 Supplemental Indenture No. 1, with respect to 8 1/2% Senior Subordinated Notes due 2009, dated as of February 25, 1999, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee. 4.3 Supplemental Indenture No. 2, with respect to 8 5/8% Senior Notes due 2006, dated as of August 4, 1999, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee. 4.4 Supplemental Indenture No. 3, dated as of August 6, 1999, by and among the Company, Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc., Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee. 36 4.5 Supplemental Indenture No. 4, with respect to 8 1/2% Senior Notes due 2009, dated as of May 15, 2000, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee. 4.6 Supplemental Indenture No. 5, dated as of September 14, 2000, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to The Bank of New York), as Trustee. 4.7 Supplemental Indenture No. 6, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company (successor trustee to Harris Trust and Savings Bank and The Bank of New York, as applicable), as Trustee. 4.8 Supplemental Indenture No. 7, dated as of January 23, 2002, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company, as Trustee. 4.9 Supplemental Indenture No. 8, dated as of March 27, 2003, by and among the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299), Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest Trust Company, as Trustee. 4.10 Indenture, with respect to 8 1/2% Senior Notes due 2009, dated as of November 17, 1999, among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee. 4.11 Supplemental Indenture No. 1, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee. 4.12 Supplemental Indenture No. 2, dated as of March 27, 2003, among the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299), Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee. 4.13 Indenture, with respect to 8% Senior Notes due 2008, dated as of February 21, 2001, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors and BNY Midwest Trust Company, as Trustee. 4.14 Supplemental Indenture No. 1, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company, as Trustee. 4.15 Supplemental Indenture No. 2, dated as of March 27, 2003, among the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299), Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest Trust Company, as Trustee. 4.16 Amended and Restated Credit Agreement, dated as of March 19, 2003, among the Company and certain of its subsidiaries, the lenders named therein, JPMorgan Chase Bank, as Administrative Agent, and JPMorgan Europe Limited, as London Agent. 4.17 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as of July 18, 2003, among the Company, certain of its subsidiaries, and JPMorgan Chase Bank, as Administrative Agent. 4.18 Second Amended and Restated Credit Agreement, dated as of October 31, 2003, among the Company and certain of its subsidiaries, the lenders named therein, JP Morgan Chase Bank, as Administrative Agent, and J.P. Morgan Europe Limited, as London Agent. 37 4.19 Amended and Restated Bridge Loan Agreement, dated as of January 16, 2003 and amended and restated as of March 26, 2003, among the Company and certain of its subsidiaries, the lenders named therein, and JPMorgan Chase Bank, as Administrative Agent. 4.20 Certificate of Designations of 5.75% Series A Mandatory Convertible Preferred Stock of the Company. 4.21 Deposit Agreement by and among the Company, Mellon Investor Services LLC and all holders from time to time of Depositary Receipts evidencing Depositary Shares Representing 5.75% Series A Mandatory Convertible Preferred Stock of the Company. (10) MATERIAL CONTRACTS. 10.1 Amended and Restated Credit Agreement, dated as of March 19, 2003, among the Company and certain of its subsidiaries, the lenders named therein, JPMorgan Chase Bank, as Administrative Agent, and JPMorgan Europe Limited, as London Agent. 10.2 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as of July 18, 2003, among the Company, certain of its subsidiaries, and JPMorgan Chase Bank, as Administrative Agent. 10.3 Second Amended and Restated Credit Agreement, dated as of October 31, 2003, among the Company and certain of its subsidiaries, the lenders named therein, JPMorgan Chase Bank, as Administrative Agent, and J.P. Morgan Europe Limited, as London Agent. (11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS. 11.1 Computation of per share earnings. (31) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS. 31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. 31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended. (32) SECTION 1350 CERTIFICATIONS. 32.1 Certification of Chief Executive Officer pursuant to Section 18 U.S.C. 1350. 32.2 Certification of Chief Financial Officer pursuant to Section 18 U.S.C. 1350. (b) The following Reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended November 30, 2003: (i) Form 8-K dated November 24, 2003 and filed as of November 24, 2003. This Form 8-K reported information under Items 5 and 7, and included selected business and financial information reflecting the Company's new basis of segment reporting and the audited consolidated financial statements of the Company for the fiscal year ended February 28, 2003, together with the notes to those consolidated financial statements, conformed to reflect the Company's new basis of segment reporting: (i) the Company's Condensed Consolidated Balance 38 Sheets as of February 28, 2003 and February 28, 2002; (ii) the Company's Consolidated Statements of Income for the years ended February 28, 2003, February 28, 2002 and February 28, 2001; (iii) the Company's Consolidated Statements of Changes in Stockholders' Equity; and (iv) the Company's Consolidated Statements of Cash Flows for the years ended February 28, 2003, February 28, 2002 and February 28, 2001. (ii) Form 8-K dated November 4, 2003 and filed as of November 4, 2003. This Form 8-K reported information under Items 7 and 9, and included the Company's Reconciliation of Reported and Comparable Diluted Earnings Per Share Guidance.* (iii) Form 8-K dated September 30, 2003 and filed as of September 30, 2003. This Form 8-K reported information under Items 7, 9 and 12, and included (i) the Company's Condensed Consolidated Balance Sheets as of August 31, 2003 and February 28, 2003; (ii) the Company's Consolidated Statements of Income on a Reported Basis for the six months ended August 31, 2003 and August 31, 2002; (iii) the Company's Supplemental Consolidated Statements of Income on a Comparable Basis for the six months ended August 31, 2003 and August 31, 2002; (iv) the Company's Consolidated Statements of Income on a Reported Basis for the three months ended August 31, 2003 and August 31, 2002; (v) the Company's Supplemental Consolidated Statements of Income on a Comparable Basis for the three months ended August 31, 2003 and August 31, 2002; (vi) the Company's Reconciliation of Reported and Comparable Historical Information for the three months ended August 31, 2003 and August 31, 2002 and the six months ended August 31, 2003 and August 31, 2002; and (vii) the Company's Reconciliation of Reported and Comparable Diluted Earnings Per Share Guidance.* *Designates Form 8-K was furnished rather than filed. 39 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSTELLATION BRANDS, INC. Dated: January 14, 2004 By: /s/ Thomas F. Howe ---------------------------------- Thomas F. Howe, Senior Vice President, Controller Dated: January 14, 2004 By: /s/ Thomas S. Summer ---------------------------------- Thomas S. Summer, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 40 INDEX TO EXHIBITS (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.1 Implementation Deed dated 17 January 2003 between Constellation Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated January 21, 2003 and incorporated herein by reference). 2.2 Transaction Compensation Agreement dated 17 January 2003 between Constellation Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K dated January 21, 2003 and incorporated herein by reference). 2.3 No Solicitation Agreement dated 13 January 2003 between Constellation Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.3 to the Company's Current Report on Form 8-K dated January 21, 2003 and incorporated herein by reference). 2.4 Backstop Fee Agreement dated 13 January 2003 between Constellation Brands, Inc. and BRL Hardy Limited (filed as Exhibit 99.4 to the Company's Current Report on Form 8-K dated January 21, 2003 and incorporated herein by reference). 2.5 Letter Agreement dated 6 February 2003 between Constellation Brands, Inc. and BRL Hardy Limited (filed as Exhibit 2.5 to the Company's Current Report on Form 8-K dated March 27, 2003 and incorporated herein by reference). (3) ARTICLES OF INCORPORATION AND BY-LAWS. 3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2002 and incorporated herein by reference). 3.2 Certificate of Designations of 5.75% Series A Mandatory Convertible Preferred Stock of the Company (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 24, 2003, filed July 30, 2003 and incorporated herein by reference). 3.3 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2002 and incorporated herein by reference). (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. 4.1 Indenture, dated as of February 25, 1999, among the Company, as issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 99.1 to the Company's Current Report on Form 8-K dated February 25, 1999 and incorporated herein by reference). 4.2 Supplemental Indenture No. 1, with respect to 8 1/2% Senior Subordinated Notes due 2009, dated as of February 25, 1999, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K dated February 25, 1999 and incorporated herein by reference). 4.3 Supplemental Indenture No. 2, with respect to 8 5/8% Senior Notes due 2006, dated as of August 4, 1999, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee 41 (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 28, 1999 and incorporated herein by reference). 4.4 Supplemental Indenture No. 3, dated as of August 6, 1999, by and among the Company, Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc., Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.20 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999 and incorporated herein by reference). 4.5 Supplemental Indenture No. 4, with respect to 8 1/2% Senior Notes due 2009, dated as of May 15, 2000, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.17 to the Company's Annual Report on Form 10-K for the fiscal year ended February 29, 2000 and incorporated herein by reference). 4.6 Supplemental Indenture No. 5, dated as of September 14, 2000, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to The Bank of New York), as Trustee (filed as Exhibit 4.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2000 and incorporated herein by reference). 4.7 Supplemental Indenture No. 6, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company (successor trustee to Harris Trust and Savings Bank and The Bank of New York, as applicable), as Trustee (filed as Exhibit 4.6 to the Company's Registration Statement on Form S-3 (Pre-effective Amendment No. 1) (Registration No. 333-63480) and incorporated herein by reference). 4.8 Supplemental Indenture No. 7, dated as of January 23, 2002, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K dated January 17, 2002 and incorporated herein by reference). 4.9 Supplemental Indenture No. 8, dated as of March 27, 2003, by and among the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299), Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.9 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2003 and incorporated herein by reference). 4.10 Indenture, with respect to 8 1/2% Senior Notes due 2009, dated as of November 17, 1999, among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.1 to the Company's Registration Statement on Form S-4 (Registration No. 333-94369) and incorporated herein by reference). 4.11 Supplemental Indenture No. 1, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.4 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2001 and incorporated herein by reference). 4.12 Supplemental Indenture No. 2, dated as of March 27, 2003, among the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299), Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.18 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2003 and incorporated herein by reference). 42 4.13 Indenture, with respect to 8% Senior Notes due 2008, dated as of February 21, 2001, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.1 to the Company's Registration Statement filed on Form S-4 (Registration No. 333-60720) and incorporated herein by reference). 4.14 Supplemental Indenture No. 1, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.7 to the Company's Pre-effective Amendment No. 1 to its Registration Statement on Form S-3 (Registration No. 333-63480) and incorporated herein by reference). 4.15 Supplemental Indenture No. 2, dated as of March 27, 2003, among the Company, CBI Australia Holdings Pty Limited (ACN 103 359 299), Constellation Australia Pty Limited (ACN 103 362 232) and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.21 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2003 and incorporated herein by reference). 4.16 Amended and Restated Credit Agreement, dated as of March 19, 2003, among the Company and certain of its subsidiaries, the lenders named therein, JPMorgan Chase Bank, as Administrative Agent, and JPMorgan Europe Limited, as London Agent (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated March 27, 2003 and incorporated herein by reference). 4.17 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as of July 18, 2003, among the Company, certain of its subsidiaries, and JPMorgan Chase Bank, as Administrative Agent (filed as Exhibit 4.17 to the Company's Report on Form 10-Q for the fiscal quarter ended August 31, 2003 and incorporated herein by reference). 4.18 Second Amended and Restated Credit Agreement, dated as of October 31, 2003, among the Company and certain of its subsidiaries, the lenders named therein, JP Morgan Chase Bank, as Administrative Agent, and J.P. Morgan Europe Limited, as London Agent (filed herewith). 4.19 Amended and Restated Bridge Loan Agreement, dated as of January 16, 2003 and amended and restated as of March 26, 2003, among the Company and certain of its subsidiaries, the lenders named therein, and JPMorgan Chase Bank, as Administrative Agent (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K dated March 27, 2003 and incorporated herein by reference). 4.20 Certificate of Designations of 5.75% Series A Mandatory Convertible Preferred Stock of the Company (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated July 24, 2003, filed July 30, 2003 and incorporated herein by reference). 4.21 Deposit Agreement, dated as of July 30, 2003, by and among the Company, Mellon Investor Services LLC and all holders from time to time of Depositary Receipts evidencing Depositary Shares Representing 5.75% Series A Mandatory Convertible Preferred Stock of the Company (filed as Exhibit 4.2 to the Company's Current Report on Form 8-K dated July 24, 2003, filed July 30, 2003 and incorporated herein by reference). (10) MATERIAL CONTRACTS. 10.1 Amended and Restated Credit Agreement, dated as of March 19, 2003, among the Company and certain of its subsidiaries, the lenders named therein, JPMorgan Chase Bank, as Administrative Agent, and JPMorgan Europe Limited, as London Agent (filed as Exhibit 4.1 to the Company's Current Report on Form 8-K dated March 27, 2003 and incorporated herein by reference). 10.2 Amendment No. 1 to the Amended and Restated Credit Agreement, dated as of July 18, 2003, among the Company, certain of its subsidiaries, and JPMorgan Chase Bank, as Administrative 43 Agent (filed as Exhibit 4.17 to the Company's Report on Form 10-Q for the fiscal quarter ended August 31, 2003 and incorporated herein by reference). 10.3 Second Amended and Restated Credit Agreement, dated as of October 31, 2003, among the Company and certain of its subsidiaries, the lenders named therein, JPMorgan Chase Bank, as Administrative Agent, and J.P. Morgan Europe Limited, as London Agent (filed as Exhibit 4.18 to the Company's Report on Form 10-Q for the fiscal quarter ended November 30, 2003 and incorporated herein by reference). (11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS. 11.1 Computation of per share earnings (filed herewith). (15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION. Not applicable. (18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES. Not applicable. (19) REPORT FURNISHED TO SECURITY HOLDERS. Not applicable. (22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS. Not applicable. (23) CONSENTS OF EXPERTS AND COUNSEL. Not applicable. (24) POWER OF ATTORNEY. Not applicable. (31) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS. 31.1 Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). 31.2 Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). (32) SECTION 1350 CERTIFICATIONS. 32.1 Certificate of Chief Executive Officer pursuant to Section 18 U.S.C. 1350 (filed herewith). 32.2 Certificate of Chief Financial Officer pursuant to Section 18 U.S.C. 1350 (filed herewith). (99) ADDITIONAL EXHIBITS. Not applicable. 44 EX-4.18 3 doc2.txt EXHIBIT 4.18 ------------ EXECUTION COPY SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of October 31, 2003 Between CONSTELLATION BRANDS, INC., The SUBSIDIARY GUARANTORS Party Hereto, The LENDERS Party Hereto JPMORGAN CHASE BANK, as Administrative Agent and J.P. MORGAN EUROPE LIMITED, as London Agent J.P. MORGAN SECURITIES INC., as Sole and Exclusive Advisor, Arranger and Bookrunner U.S.$1,286,700,000 SECOND AMENDED AND RESTATED CREDIT AGREEMENT dated as of October 31, 2003 between CONSTELLATION BRANDS, INC. (the "Borrower"), the SUBSIDIARY GUARANTORS party hereto, certain LENDERS party to the Existing Credit Agreement referred to below, the LENDERS referred to below as "New Tranche B Term Loan Lenders", JPMORGAN CHASE BANK, as Administrative Agent and J.P. MORGAN EUROPE LIMITED, as London Agent. W I T N E S S E T H: The Borrower, certain subsidiaries of the Borrower, certain lenders, JPMorgan Chase Bank, as administrative agent, and J.P. Morgan Europe Limited, as London agent, are party to the Amended and Restated Credit Agreement dated as of March 19, 2003 (as in effect immediately before giving effect to the amendment and restatement contemplated hereby, the "Existing Credit Agreement"). Capitalized terms used but not otherwise defined herein have the meanings given them in the Existing Credit Agreement. The parties hereto wish to amend and restate the Existing Credit Agreement (as so amended and restated, the "Credit Agreement") to provide for a refinancing of the Tranche B Term Loans with the proceeds of new loans (the "New Tranche B Term Loans") to be made by a group of lenders ("New Tranche B Term Loan Lenders") under the Credit Agreement having the same terms as the terms of the Tranche B Term Loans as in effect immediately before the effectiveness of this Agreement (other than as to Applicable Rate). Accordingly, the parties hereto hereby agree that the Existing Credit Agreement shall, with effect as of the Tranche B Refinancing Effective Date (as defined below), but subject to the execution and delivery of this Second Amended and Restated Credit Agreement (in the case of the Revolving Lenders and the Tranche A Term Loan Lenders) or the Lender Addenda (in the case of the New Tranche B Term Loan Lenders as defined below), as applicable, by the Required Lenders, be amended and restated to read in its entirety as set forth in the Existing Credit Agreement, which is hereby incorporated herein by reference, with the amendments set forth in Section 1 below: Section 1. AMENDMENTS. Subject to Section 3 hereof, the Existing Credit Agreement is hereby amended as follows: A. GENERAL. Direct and indirect references in the Existing Credit Agreement to the Existing Credit Agreement shall be deemed to be references to the Credit Agreement (as defined above). B. DEFINITIONS. Section 1.01 of the Existing Credit Agreement is amended by adding the following new defined terms in their appropriate alphabetical locations: "CONTINUING TRANCHE B TERM LOAN LENDER" means a New Tranche B Term Loan Lender that was also a Tranche B Term Loan Lender before the Tranche B Refinancing Effective Date. - 2 - "NEW LENDER ADDENDUM" means a New Lender Addendum, substantially in the form of Exhibit L, to be executed and delivered by any New Tranche B Term Loan Lender and accepted and agreed by the Borrower and the Administrative Agent on or before the Tranche B Refinancing Effective Date. "NEW TRANCHE B TERM LOAN" means a Loan made pursuant to the last sentence of Section 2.01(d), which may be an ABR Loan and/or a Eurocurrency Loan. "NEW TRANCHE B TERM LOAN LENDER" means a Person identified as a New Tranche B Term Loan Lender in a New Lender Addendum (each of whom shall be deemed a Tranche B Term Loan Lender upon and after the making of the New Tranche B Term Loans). "SECOND AMENDED AND RESTATED CREDIT AGREEMENT" means the Second Amended and Restated Credit Agreement dated as of October 31, 2003 amending and restating this Agreement. "TRANCHE B TERM LOAN REFINANCING COMMITMENT" means, for each New Tranche B Term Loan Lender, the amount set forth opposite the name of such New Tranche B Term Loan Lender on its New Lender Addendum under the caption "Tranche B Term Loan Refinancing Commitment". "TRANCHE B REFINANCING EFFECTIVE DATE" means (a) if the New Tranche B Term Loans are initially made as ABR Borrowings (as specified in the Borrowing Request given by the Borrower pursuant to Section 3(a)(v) of the Second Amended and Restated Credit Agreement), the first Business Day after the Administrative Agent shall have received such Borrowing Request or (b) otherwise, the third Business Day after the Administrative Agent shall have received such Borrowing Request, in each of the cases referred to in the preceding clauses (a) and (b) regardless of whether the Administrative Agent shall have received such Borrowing Request before the satisfaction of the conditions to effectiveness set forth in Section 3 of the Second Amended and Restated Credit Agreement. C. APPLICABLE RATE FOR NEW TRANCHE B TERM LOANS. Clauses (x) and (y) of the definition of "Applicable Rate" in Section 1.01 of the Credit Agreement shall be amended to read as follows: "(x) before the Tranche B Refinancing Effective Date, (i) 1.75% in the case of any Tranche B Term Loan ABR Borrowing, and 2.75% per annum in the case of any Tranche B Term Loan Eurocurrency Borrowing, in each case applicable when the Debt Ratio as of the most recent determination date is greater than 3.50 to 1, and (ii) 1.50% in the case of any Tranche B Term Loan ABR Borrowing, and 2.50% per annum in the case of any Tranche B Term Loan Eurocurrency Borrowing, in each case applicable when the Debt Ratio as of the most recent determination date is less than or equal to 3.50 to 1, (y) on and after the Tranche B Refinancing Effective Date, (i) 1.00% in the case of any ABR Borrowing of New Tranche B Term Loans, and 2.00% per annum in the case of any Eurocurrency Borrowing of New - 3 - Tranche B Term Loans, in each case applicable when the Debt Ratio as of the most recent determination date is greater than or equal to 3.00 to 1, and (ii) 0.75% in the case of any ABR Borrowing of New Tranche B Term Loans, and 1.75% per annum in the case of any Eurocurrency Borrowing of New Tranche B Term Loans, in each case applicable when the Debt Ratio as of the most recent determination date is less than 3.00 to 1, and" D. NEW TRANCHE B TERM LOANS. Section 2.01(d) shall be amended by adding at the end thereof: "In addition, on the Tranche B Refinancing Effective Date: (i) subject to the conditions set forth in paragraph (v) below in this Section 2.01(d), each New Tranche B Term Loan Lender shall make a loan to the Borrower in U.S. Dollars in a principal amount equal to its Tranche B Term Loan Refinancing Commitment; (ii) (x) the proceeds of the New Tranche B Term Loans and the amount received by the Administrative Agent pursuant to clause (y)(1) below shall be directly applied by the Administrative Agent to the prepayment in full of the principal amount of the Tranche B Term Loans then outstanding and (y) the Borrower shall pay to the Administrative Agent for the account of the Tranche B Term Loan Lenders (1) the excess, if any, of the principal amount of the Tranche B Term Loans then outstanding over the proceeds of the New Tranche B Term Loans to be applied by the Administrative Agent as provided in the immediately preceding clause (x) such that the principal amount of the Tranche B Term Loans then outstanding shall be prepaid in full plus (2) all accrued and unpaid interest on the Tranche B Term Loans, all amounts (if any) required by Section 2.15 to be paid to the Tranche B Term Loan Lenders as a result of such prepayment and all other amounts owing by it to the Tranche B Term Loan Lenders under the Loan Documents; (iii) each Continuing Tranche B Term Loan Lender shall, with respect to an amount equal to the aggregate principal amount of its Tranche B Term Loans then outstanding, make its New Tranche B Term Loans under paragraph (i) above and receive prepayment under clause (x) of paragraph (ii) above by continuing its Tranche B Term Loans rather than by disbursing and receiving new funds, and, as applicable, (a) such Continuing Tranche B Term Loan Lender shall only be required to disburse new funds under said paragraph (i) in an amount equal to the excess of its Tranche B Term Loan Refinancing Commitment over the aggregate outstanding principal amount of its Tranche B Term Loan or (b) such Continuing Tranche B Term Loan Lender shall only be entitled to receive a repayment of its Tranche B Term Loans under said clause (x) in an amount equal to the excess of the aggregate outstanding principal amount of its Tranche B Term Loans over its Tranche B Term Loan Refinancing Commitment; (iv) subject to the satisfaction of the requirements set forth in paragraphs (i) and (ii) above, and for all purposes of the Loan Documents, (x) the New Tranche B Term Loans shall be treated as and deemed to be Tranche B Term Loans, (y) the New Tranche B Term - 4 - Loan Lenders shall be treated as and deemed to be Tranche B Term Loan Lenders and (z) the Tranche B Term Loan Lenders that are not New Tranche B Term Loan Lenders shall cease to be Tranche B Term Loan Lenders; (v) the obligation of each New Tranche B Term Loan Lender to make a New Tranche B Term Loan is subject to the satisfaction of the following conditions: (a) the representations and warranties of the Borrower set forth in this Agreement, and of each Obligor in each of the other Loan Documents to which it is a party (but as to such other Loan Documents, in all material respects), shall be true and correct on and as of the Tranche B Refinancing Effective Date (or, if any such representation or warranty is expressly stated to have been made as of a specific date, as of such specific date); (b) at the time of and immediately after giving effect to such New Tranche B Term Loan, no Default shall have occurred and be continuing; and (c) the Borrower shall have remitted to the Administrative Agent sufficient funds for the satisfaction of its obligations under clause (y) of paragraph (ii) above; and (vi) the Borrower shall be deemed to have made a representation and warranty as to the matters specified in the preceding clause (v)." E. AMORTIZATION OF NEW TRANCHE B TERM LOANS. Section 2.09(a)(iv) shall be amended in its entirety to read as follows: "(iv) to the Administrative Agent for account of the New Tranche B Term Loan Lenders the outstanding principal amount of the New Tranche B Term Loans on each Principal Payment Date set forth below in the aggregate principal amount set forth opposite such Principal Payment Date (subject to adjustment pursuant to the first sentence of paragraph (b) of this Section): Principal Payment Date Amount (U.S.$) ---------------------- -------------- May 31, 2005 13,605,442.18 August 31, 2005 13,605,442.18 November 30, 2005 13,605,442.18 February 28, 2006 13,605,442.18 - 5 - May 31, 2006 13,605,442.18 August 31, 2006 13,605,442.18 November 30, 2006 13,605,442.18 February 28, 2007 13,605,442.18 May 31, 2007 29,761,904.76 August 31, 2007 29,761,904.76 November 30, 2007 29,761,904.76 February 29, 2008 29,761,904.76 May 31, 2008 90,680,272.10 August 31, 2008 90,680,272.10 November 30, 2008 90,748,299.32" F. NEW LENDER ADDENDUM. A new Exhibit L is added to the Existing Credit Agreement reading as set forth in Exhibit L hereto. Section 2. REPRESENTATIONS AND WARRANTIES. The Borrower represents and warrants to the Lenders and the Administrative Agent that (i) the representations and warranties set forth in the Credit Agreement, and of each Obligor in each of the other Loan Documents to which it is party (but as to such other Loan Documents, in all material respects), are true and correct on and as of the date hereof as if made on and as of the date hereof (or, if any such representation or warranty is expressly stated to have been made as of a specific date, such representation or warranty shall be true and correct as of such specific date) and as if each reference to the "Credit Agreement", or similar words of import, included reference to this Second Amended and Restated Credit Agreement and (ii) at the time of and immediately after giving effect to this Second Amended and Restated Credit Agreement, no Default has occurred and is continuing. Section 3. CONDITIONS PRECEDENT. The amendments to the Existing Credit Agreement contemplated by Section 1 hereof shall become effective on the date (the "Effective Date") on which each of the following conditions has been satisfied: (a) DOCUMENTS. The Administrative Agent shall have received each of the following documents, each of which shall be satisfactory to the Administrative Agent in form and substance: (i) EXECUTED COUNTERPARTS. From the Obligors and the Required Lenders either (i) counterparts of this Agreement signed on their behalf or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page to this Agreement) that they have signed counterparts of this Agreement or have otherwise agreed to the terms and conditions hereof and to be bound hereby. (ii) EXECUTED NEW LENDER ADDENDA. From the New Tranche B Term Loan Lenders, New Lender Addenda signed on their behalf representing, in the aggregate, Tranche B Term Loan Refinancing Commitments of $500,000,000. (iii) OPINION OF COUNSEL TO THE OBLIGORS. A favorable written opinion (addressed to the Administrative Agent and the Lenders and dated the Effective Date) of Nixon Peabody LLP, U.S. counsel for the Obligors (and each such Obligor - 6 - hereby instructs such counsel to deliver such opinion to the Lenders and the Administrative Agent). (iv) CORPORATE DOCUMENTS. Such documents and certificates as the Administrative Agent or its counsel may reasonably request relating to the borrowings in respect of the Tranche B Term Loans and any other legal matters relating to the Obligors. (v) NOTICES. A duly completed notice of prepayment for the Tranche B Term Loans and a duly completed Borrowing Request for the New Tranche B Term Loans. (vi) OTHER DOCUMENTS. Such other documents as the Administrative Agent or any Lender or special New York counsel to JPMorgan Chase may reasonably request. (b) PAYMENT OF FEES AND EXPENSES. The payment by the Borrower to the Administrative Agent for the account of J.P. Morgan Securities Inc. of such fees and expenses (including the reasonable fees and expenses of counsel to the extent that statements for such fees and expenses have been delivered to the Borrower) as have been agreed to be paid in connection with this Second Amended and Restated Credit Agreement. Section 4. RATIFICATION. The Obligors hereby confirm their obligations and the Liens granted by them under the respective Loan Documents to which they are parties and hereby represent, warrant and confirm that, subject to the effectiveness of the amendment and restatement contemplated hereby of the Existing Credit Agreement, all references in such Loan Documents to the Existing Credit Agreement fully and effectively mean the Credit Agreement without impairing any such obligations or Liens in any respect. Section 5. MISCELLANEOUS. Except as herein provided, the Existing Credit Agreement shall remain unchanged and in full force and effect. This Second Amended and Restated Credit Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same amendatory instrument and any of the parties hereto may execute this Second Amended and Restated Credit Agreement by signing any such counterpart and sending the same by telecopier, mail messenger or courier to the Administrative Agent or counsel to the Administrative Agent. This Second Amended and Restated Credit Agreement shall be governed by, and construed in accordance with, the law of the State of New York. - 7 - IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. CONSTELLATION BRANDS, INC. By /s/ Thomas S. Summer --------------------------------------- Name: Thomas S. Summer Title: Executive Vice President and Chief Financial Officer - 8 - SUBSIDIARY GUARANTORS --------------------- ALLBERRY, INC. CLOUD PEAK CORPORATION FRANCISCAN VINEYARDS, INC. MT. VEEDER CORPORATION By /s/ Thomas S. Summer --------------------------------------- Name: Thomas S. Summer Title: Vice President and Treasurer ROBERTS TRADING CORP. By /s/ Thomas S. Summer --------------------------------------- Name: Thomas S. Summer Title: President and Treasurer CONSTELLATION INTERNATIONAL HOLDINGS LIMITED CANANDAIGUA WINE COMPANY, INC. By /s/ Thomas S. Summer --------------------------------------- Name: Thomas S. Summer Title: Treasurer - 9 - BARTON INCORPORATED BARTON BRANDS, LTD. BARTON BEERS, LTD. BARTON BEERS OF WISCONSIN, LTD. BARTON BRANDS OF CALIFORNIA, INC. BARTON BRANDS OF GEORGIA, INC. BARTON CANADA, LTD. BARTON DISTILLERS IMPORT CORP. MONARCH IMPORT COMPANY BARTON FINANCIAL CORPORATION By /s/ Thomas S. Summer --------------------------------------- Name: Thomas S. Summer Title: Vice President CANANDAIGUA LIMITED By /s/ Thomas S. Summer --------------------------------------- Name: Vice President Title: CBI AUSTRALIA HOLDINGS PTY LIMITED By /s/ Thomas S. Summer --------------------------------------- Name: Thomas S. Summer Title: Authorized Signatory CONSTELLATION AUSTRALIA PTY LIMITED By /s/ Thomas S. Summer --------------------------------------- Name: Thomas S. Summer Title: Authorized Signatory - 10 - JPMORGAN CHASE BANK, as Swingline Lender, Issuing Lender and Administrative Agent By /s/ Laura T. Cumming --------------------------------------- Name: Laura T. Cumming Title: Vice President J.P. MORGAN EUROPE LIMITED, as London Agent By /s/ Bruce Borden --------------------------------------- Name: Bruce Borden Title: Vice President - 11 - AMERICAN AGCREDIT, PCA By /s/ James Coppel --------------------------------------- Name: James Coppel Title: Vice President - 12 - BANK ONE, NA (Chicago) By /s/ Joseph Pinzone --------------------------------------- Name: Joseph Pinzone Title: Director - 13 - BANK OF AMERICA, N.A. By /s/ William F. Sweeney --------------------------------------- Name: William F. Sweeney Title: Managing Director - 14 - HARRIS TRUST & SAVINGS BANK By /s/ Edwin A. Adams Jr. --------------------------------------- Name: Edwin A. Adams Jr. Title: Vice President - 15 - BANK OF NEW YORK By /s/ David Csatari --------------------------------------- Name: David Csatari Title: Vice President - 16 - THE BANK OF NOVA SCOTIA By /s/ Todd S. Meller --------------------------------------- Name: Todd S. Meller Title: Managing Director - 17 - BARCLAYS BANK PLC By /s/ Nicholas A. Bell --------------------------------------- Name: Nicholas A. Bell Title: Director Loan Transaction Management - 18 - CITICORP NORTH AMERICA, INC. By /s/ Robert J. Kane --------------------------------------- Name: Robert J. Kane Title: Director - 19 - COBANK, ACB By /s/ Brian J. Klatt --------------------------------------- Name: Brian J. Klatt Title: Senior Vice President - 20 - COMMERZBANK, AG NEW YORK AND GRAND CAYMAN BRANCHES By /s/ Douglas I. Glickman --------------------------------------- Name: Douglas I. Glickman Title: Vice President By /s/ Isabel S. Zeissig --------------------------------------- Name: Isabel S. Zeissig Title: Assistant Vice President - 21 - COMMONWEALTH BANK OF AUSTRALIA By /s/ Roger Knott --------------------------------------- Name: Roger Knott Title: Head of Risk Management, Americas - 22 - CREDIT INDUSTRIEL ET COMMERCIAL By /s/ Anthony Rock Brian O'Leary --------------------------------------- Name: Anthony Rock Brian O'Leary Title: Vice President Vice President - 23 - ERSTE BANK By /s/ Paul Judicke Bryan J. Lynch --------------------------------------- Name: Paul Judicke Bryan J. Lynch Title: Vice President First Vice President Erste Bank New York Branch - 24 - FARM CREDIT SERVICES OF MID AMERICA, PCA By /s/ Steven R. Kluemper --------------------------------------- Name: Steven R. Kluemper Title: Agribusiness Account Executive - 25 - FLEET NATIONAL BANK By /s/ John M. Pitton --------------------------------------- Name: John M. Pitton Title: Senior Vice President - 26 - HSBC BANK USA By /s/ John Carroll --------------------------------------- Name: John Carroll Title: Vice President - 28 - KEYBANK NATIONAL ASSOCIATION By /s/ David J. Wechter --------------------------------------- Name: David J. Wechter Title: Vice President - 29 - MANUFACTURERS AND TRADERS TRUST COMPANY By /s/ Philip M. Smith --------------------------------------- Name: Philip M. Smith Title: Administrative Vice President - 30 - NORINCHUKIN BANK By /s/ Fumiaki Ono --------------------------------------- Name: Fumiaki Ono Title: General Manager - 31 - COOPERATIVE CENTRALE Raiffeisen-Boerenleenbank B.A. "Rabobank International", New York Branch By /s/ Kimberly English --------------------------------------- Name: Kimberly English Title: Vice President By /s/ Ian Reece --------------------------------------- Name: Ian Reece Title: Managing Director - 32 - SUNTRUST BANK By /s/ Gregory L. Cannon --------------------------------------- Name: Gregory L. Cannon Title: Director - 33 - U.S. BANK NATIONAL ASSOCIATION By /s/ John W. Ball --------------------------------------- Name: John W. Ball Title: VP - 34 - UBS AG, Stamford Branch By /s/ Wilfred V. Saint --------------------------------------- Name: Wilfred V. Saint Title: Associate Director Banking Products Services, US By /s/ Anthony N. Joseph --------------------------------------- Name: Anthony N. Joseph Title: Associate Director Banking Products Services, US - 36 - WELLS FARGO BANK By /s/ Michelle Saenz --------------------------------------- Name: Michelle Saenz Title: VP EXHIBIT L [Form of New Lender Addendum] NEW LENDER ADDENDUM Reference is made to the Second Amended and Restated Credit Agreement dated as of October 31, 2003 (as in effect on the date hereof, the "Credit Agreement") between Constellation Brands, Inc. (the "Borrower"), the Subsidiary Guarantors party thereto, the lenders party thereto (the "Lenders") and JPMorgan Chase Bank as Administrative Agent and J.P. Morgan Europe Limited, as London Agent. Capitalized terms used and not defined herein have the respective meanings assigned thereto in the Credit Agreement. Upon execution and delivery of this New Lender Addendum by the parties hereto, the undersigned, (x) if and to the extent it is a Tranche B Term Loan Lender under the existing Tranche B Term Loans (the "Existing Tranche B Term Loans"), agrees to continue as a New Tranche B Term Loan Lender thereunder and hereby agrees to the terms and conditions of the Credit Agreement and to be bound thereby and (y) if and to the extent it is not a Tranche B Term Loan Lender under the Existing Tranche B Term Loans, agrees to become a New Tranche B Term Loan Lender under the Credit Agreement, in the case of either (x) or (y), having the Tranche B Term Loan Refinancing Commitment set forth opposite its signature below, effective as of the Tranche B Refinancing Effective Date. This New Lender Addendum shall be construed in accordance with and governed by the law of the State of New York. This New Lender Addendum may be executed by one or more of the parties hereto on any number of separate counterparts, and all of said counterparts taken together shall be deemed to constitute one and the same instrument. Delivery of an executed signature page hereof by facsimile transmission shall be effective as delivery of a manually executed counterpart hereof. IN WITNESS WHEREOF, the parties hereto have caused this New Lender Addendum to be duly executed and delivered by their proper and duly authorized officers as of this day of , 2003. --- --------------- Tranche B Term Loan [NAME OF LENDER] Refinancing Commitment: By --------------------------------------- Name: Title: Accepted and agreed: CONSTELLATION BRANDS, INC. By: ----------------------------- Name: Title: New Lender Addendum ------------------- JPMORGAN CHASE BANK, as Administrative Agent By: ---------------------------- Name: Title: Lender Addendum --------------- The preceding form of Lender Addendum had been entered into with the Lenders listed below on or prior to October 31, 2003, the date of funding of the Tranche B term loan under the Credit Agreement. The Lender Addendum with respect to each Lender contains the Tranche B term loan commitment set forth opposite such Lender's name below. Subsequent to October 31, 2003, certain of the Lenders listed below have assigned all or a portion of their Tranche B term loans under the Credit Agreement pursuant to the terms of the Credit Agreement. Such assignments may also occur in the future.
Lender Amount - ------ --------------- American Agcredit, PCA $1,250,000.00 APEX (IDM) CDO I, LTD $2,731,328.65 Babson CLO Ltd. 2003-I $1,666,666.67 Bangkok Bank PCL $3,125,000.00 Bank of Montreal $1,250,000.00 The Bank of Nova Scotia $2,083,333.33 Bank One, NA $2,500,000.00 Big Sky Senior Loan Fund, Ltd $1,406,250.00 Bill & Melinda Gates Foundation $833,333.33 CoBank, ACB $28,125,000.00 Columbia Floating Rate Advantage Fund - fka Liberty $916,666.66 Columbia Floating Rate Limited Liability Company $1,416,666.67 Commerzbank AG, New York and Grand Cayman Branches $6,250,000.00 Cooperative Centrale Raiffeisen-Boerenleenbank B.A. "Rabobank International", New York Branch $3,125,000.00 Credit Industriel et Commercial $5,000,000.00 Denali Capital CLO II, Ltd $1,875,000.00 Denali Capital CLO III, Ltd $1,875,000.00 Eaton Vance Limited Duration Income Fund $1,093,750.00 Eaton Vance VT Floating-Rate Income Fund $843,750.00 ELC (Cayman) Ltd. $1,250,000.00 ELC (Cayman) Ltd. 1999-III $1,458,333.33 ELC (Cayman) Ltd. 2000-I $1,458,333.33 ELC (Cayman) Ltd. CDO Series 1999-I $1,458,333.33 Erste Bank $625,000.00 Farm Credit Services of Mid America, PCA $1,562,500.00 Fleet National Bank $3,333,333.33 Galaxy CLO 1999-1, Ltd. $2,660,000.00 Galaxy CLO 2003-1, Ltd. $2,120,000.00 General Electric Capital Corporation $25,000,000.00 Grayson & Co. $2,685,338.02 Hamilton CDO Ltd. $2,500,000.00 Hamilton Floating Rate Funding, LLC $3,125,000.00 Harbour Town Funding LLC $1,250,000.00 JPMorgan Chase Bank $266,697,916.69 Jupiter Loan Funding LLC $1,875,000.00 KZH Crescent-2 LLC $1,250,000.00 KZH Crescent-3 LLC $625,000.00 KZH Cypress Tree-1 LLC $3,750,000.00 KZH ING-2 LLC $3,750,000.00 KZH Riverside LLC $1,271,250.00 KZH Soleil LLC $1,316,250.00 KZH Soleil-2 LLC $2,632,500.00 KZH Sterling LLC $2,187,500.00 KZH Waterside LLC $2,500,000.00 Maplewood (Cayman) Limited $4,285,714.29 Massachusetts Mutual Life Insurance Company $2,930,873.73 Metropolitan Life Insurance Company $15,625,000.00 MONY Life Insurance Company $9,375,000.00 Morgan Stanley Prime Income Trust $2,500,000.00 Muirfield Trading LLC $937,500.00 Olympic Funding Trust, Series 1999-1 $1,875,000.00 Pinehurst Trading LLC $1,875,000.00 Riviera Funding, LLC $3,125,000.00 Sawgrass Trading LLC $2,500,000.00 Simsbury CLO, Limited $1,250,000.00 SRF 2000, Inc. $2,120,332.17 SRF Trading, Inc. $1,770,833.33 Stanfield Arbitrage CDO, Ltd. $3,125,000.00 Stanfield Carrera CLO, Ltd. $1,250,000.00 Stanfield CLO, Ltd. $3,125,000.00 Stanfield Quattro CLO, Ltd. $1,562,500.00 Stanfield\RMF Transatlantic CDO,Ltd $1,875,000.00 Stanwich Loan Funding LLC $1,250,000.00 Suffield CLO, Limited $2,500,000.00 The Sumitomo Trust & Banking Co., Ltd. $3,125,000.00 SunAmerica Life Insurance Company $2,985,996.48 SunTrust Bank $2,083,333.33 Tolli & Co. $406,250.00 Tryon CLO Ltd. 2000-I $1,458,333.33 Wachovia Bank, N.A. $6,250,000.00 Wells Fargo Bank $6,250,000.00 Windsor Loan Funding, Limited $3,125,000.00 Winged Foot Funding Trust $3,750,000.00 --------------- TOTAL $500,000,000.00 ===============
EX-11 4 doc3.txt EXHIBIT 11 ----------
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER COMMON SHARE (in thousands, except per share data) For the Nine Months Ended November 30, ----------------------------------------------- 2003 2002 ---------------------- ---------------------- Basic Diluted Basic Diluted --------- --------- --------- --------- Net income $ 157,593 $ 157,593 $ 151,285 $ 151,285 Dividends on preferred stock (3,294) - - - --------- --------- --------- --------- Income available to common stockholders $ 154,299 $ 157,593 $ 151,285 $ 151,285 ========= ========= ========= ========= Shares: Weighted average common shares outstanding 98,902 98,902 89,617 89,617 Adjustments: Stock options - 3,227 - 3,052 Preferred stock - 2,430 - - --------- --------- --------- --------- Adjusted weighted average common shares outstanding 98,902 104,559 89,617 92,669 ========= ========= ========= ========= Earnings per common share $ 1.56 $ 1.51 $ 1.69 $ 1.63 ========= ========= ========= ========= For the Three Months Ended November 30, ----------------------------------------------- 2003 2002 ---------------------- ---------------------- Basic Diluted Basic Diluted --------- --------- --------- --------- Net income $ 82,840 $ 82,840 $ 64,344 $ 64,344 Dividends on preferred stock (2,450) - - - --------- --------- --------- --------- Income available to common stockholders $ 80,390 $ 82,840 $ 64,344 $ 64,344 ========= ========= ========= ========= Shares: Weighted average common shares outstanding 105,323 105,323 90,323 90,323 Adjustments: Stock options - 3,484 - 2,760 Preferred stock - 5,389 - - --------- --------- --------- --------- Adjusted weighted average common shares outstanding 105,323 114,196 90,323 93,083 ========= ========= ========= ========= Earnings per common share $ 0.76 $ 0.73 $ 0.71 $ 0.69 ========= ========= ========= =========
EX-31.1 5 doc4.txt EXHIBIT 31.1 ------------ RULE 13a-14(a)/15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER Constellation Brands, Inc. Form 10-Q for Fiscal Quarter Ended November 30, 2003 I, Richard Sands, certify that: 1. I have reviewed this report on Form 10-Q of Constellation Brands, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 14, 2004 /s/ Richard Sands - ------------------ Richard Sands Chairman of the Board and Chief Executive Officer EX-31.2 6 doc5.txt EXHIBIT 31.2 ------------ RULE 13a-14(a)/15d-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER Constellation Brands, Inc. Form 10-Q for Fiscal Quarter Ended November 30, 2003 I, Thomas S. Summer, certify that: 1. I have reviewed this report on Form 10-Q of Constellation Brands, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: January 14, 2004 /s/ Thomas S. Summer - --------------------- Thomas S. Summer Executive Vice President and Chief Financial Officer EX-32.1 7 doc6.txt EXHIBIT 32.1 ------------ SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER CONSTELLATION BRANDS, INC. FORM 10-Q FOR FISCAL QUARTER ENDED NOVEMBER 30, 2003 In connection with the Constellation Brands, Inc. Quarterly Report on Form 10-Q for the Fiscal Quarter Ended November 30, 2003, I, Richard Sands, certify that, to the best of my knowledge: 1. The quarterly report on Form 10-Q for the Fiscal Quarter Ended November 30, 2003 of Constellation Brands, Inc. fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the periodic report on Form 10-Q for the Fiscal Quarter Ended November 30, 2003 of Constellation Brands, Inc. fairly presents, in all material respects, the financial condition and results of operations of Constellation Brands, Inc. Dated: January 14, 2004 /s/ Richard Sands ---------------------------- Richard Sands, Chairman of the Board and Chief Executive Officer A signed original of this written statement required by 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Constellation Brands, Inc., and will be retained by Constellation Brands, Inc., and furnished to the Securities and Exchange Commission or its staff upon request. EX-32.2 8 doc7.txt EXHIBIT 32.2 ------------ SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER CONSTELLATION BRANDS, INC. FORM 10-Q FOR FISCAL QUARTER ENDED NOVEMBER 30, 2003 In connection with the Constellation Brands, Inc. Quarterly Report on Form 10-Q for the Fiscal Quarter Ended November 30, 2003, I, Thomas S. Summer, certify that, to the best of my knowledge: 1. The quarterly report on Form 10-Q for the Fiscal Quarter Ended November 30, 2003 of Constellation Brands, Inc. fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and 2. The information contained in the periodic report on Form 10-Q for the Fiscal Quarter Ended November 30, 2003 of Constellation Brands, Inc. fairly presents, in all material respects, the financial condition and results of operations of Constellation Brands, Inc. Dated: January 14, 2004 /s/ Thomas S. Summer ------------------------------ Thomas S. Summer, Executive Vice President and Chief Financial Officer A signed original of this written statement required by 18 U.S.C. 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to Constellation Brands, Inc., and will be retained by Constellation Brands, Inc., and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----