UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 19, 2004
---------------
CONSTELLATION BRANDS, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
001-08495
------------------------
(Commission File Number)
Delaware 16-0716709
---------------------------- -------------------
(State or other jurisdiction (IRS Employer
of incorporation) Identification No.)
370 Woodcliff Drive, Suite 300, Fairport, New York 14450
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(585) 218-3600
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
Unless the context otherwise requires, the term "Company" refers to
Constellation Brands, Inc. and its subsidiaries. On May 14, 2004, the Company
filed its Annual Report on Form 10-K for the fiscal year ended February 29,
2004, with the Securities and Exchange Commission. As reported in the Company's
Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2004,
subsequent to May 31, 2004, four subsidiaries of the Company became Subsidiary
Guarantors (as defined below) under the Company's existing indentures.
The information included in this Current Report on Form 8-K does not in any
way restate or revise the financial position, results of operations or cash
flows in any previously reported Consolidated Balance Sheet, Consolidated
Statement of Income or Consolidated Statement of Cash Flows of the Company. As
noted below, the information included herein reflects changes only to the
disclosures related to the condensed consolidating financial information set
forth in Note 21 to the consolidated financial statements.
Consistent with Rule 3-10(f) of Regulation S-X, Note 21 to the Company's
audited consolidated financial statements for the fiscal year ended February 29,
2004 (included as part of Exhibit 99.1 hereto) provides the condensed
consolidating balance sheets as of February 29, 2004, and February 28, 2003, the
condensed consolidating statements of income and cash flows for each of the
three years in the period ended February 29, 2004, for the Company, the parent
company, the combined subsidiaries 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 as if the new
Subsidiary Guarantors had been in place as of and for all periods presented.
This Form 8-K is being filed in order to incorporate the information herein by
reference into the Company's currently effective and filed registration
statements.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
No. Description
---- -----------
23.1 Consent of KPMG LLP.
23.2 Information Regarding Consent of Arthur Andersen LLP.
99.1 Audited consolidated financial statements of the Company for the fiscal
year ended February 29, 2004, conformed to reflect the Company's
condensed consolidating financial information as if the new Subsidiary
Guarantors had been in place as of and for all periods presented.
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, hereunto duly authorized.
CONSTELLATION BRANDS, INC.
Dated: August 19, 2004 By:/s/ Thomas S. Summer
--------------------------------
Thomas S. Summer, Executive Vice
President and Chief Financial
Officer
INDEX TO EXHIBITS
(1) UNDERWRITING AGREEMENT
Not Applicable.
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION
Not Applicable.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
Not Applicable.
(16) LETTER RE CHANGE IN CERTIFYING ACCOUNTANT
Not Applicable.
(17) LETTER RE DIRECTOR RESIGNATION
Not Applicable.
(20) OTHER DOCUMENTS OR STATEMENTS TO SECURITY HOLDERS
Not Applicable.
(23) CONSENTS OF EXPERTS AND COUNSEL
23.1 Consent of KPMG LLP (filed herewith).
23.2 Information regarding consent of Arthur Andersen LLP (filed herewith).
(24) POWER OF ATTORNEY
Not Applicable.
(99) ADDITIONAL EXHIBITS
99.1 Audited consolidated financial statements of the Company for the fiscal
year ended February 29, 2004, conformed to reflect the Company's condensed
consolidating financial information as if the new Subsidiary Guarantors
had been in place as of and for all periods presented (filed herewith).
EXHIBIT 23.1
------------
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
Constellation Brands, Inc.:
We consent to the incorporation by reference in the Registration Statements on
Form S-3 (Nos. 333-63480 and 333-110718) and Form S-8 (Nos. 33-26694, 33-56557,
333-88391, 333-57912 and 333-68180) of Constellation Brands, Inc. of our report
dated April 7, 2004, except as to Note 21, which is as of August 4, 2004, with
respect to the consolidated balance sheets of Constellation Brands, Inc. and
subsidiaries as of February 29, 2004 and February 28, 2003, and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for the years then ended, which report appears in the Form 8-K of
Constellation Brands, Inc. dated August 19, 2004, and to the reference to our
firm under the heading "Experts" in the Registration Statements on Form S-3
(Nos. 333-63480 and 333-110718).
Our report refers to our audit of the disclosures added and reclassifications
and adjustments that were applied to restate the February 28, 2002 consolidated
financial statements, which were applied to reflect the adoption of recent
accounting pronouncements, a change in the Company's reportable segments, and an
adjustment of stock-based compensation disclosures, as more fully described in
Notes 1, 2, 5, 11 and 22 to the consolidated financial statements. However, we
were not engaged to audit, review or apply any procedures to the February 28,
2002 consolidated financial statements other than with respect to such
disclosures, reclassifications and adjustments.
/s/ KPMG LLP
Rochester, New York
August 19, 2004
EXHIBIT 23.2
------------
INFORMATION REGARDING CONSENT OF ARTHUR ANDERSEN LLP
Section 11 (a) of the Securities Act of 1933, as amended (the "Securities Act"),
provides that if part of a registration statement at the time it becomes
effective contains an untrue statement of a material fact, or omits a material
fact required to be stated therein or necessary to make the statements therein
not misleading, any person acquiring a security pursuant to such registration
statement (unless it is proved that at the time of such acquisition such person
knew of such untruth or omission) may assert a claim against, among others, an
accountant who has consented to be named as having certified any part of the
registration statement or as having prepared any report for use in connection
with the registration statement. In August of 2002, Arthur Andersen LLP
("Andersen") ceased operations. Accordingly, Andersen is unable to consent to
the incorporation by reference in the Company's previously filed Registration
Statements on Form S-8 file numbers 33-26694, 33-56557, 333-88391, 333-57912 and
333-68180 and Form S-3 file numbers 333-63480 and 333-110718 (the "Registration
Statements") of Andersen's audit report with respect to Constellation Brands,
Inc.'s consolidated financial statements as of February 28, 2002 and February
28, 2001 and for the three years ended February 28, 2002. Under these
circumstances, Rule 437a under the Securities Act permits Constellation Brands,
Inc. to file its Current Report on Form 8-K dated August 19, 2004 (the "Form
8-K"), of which this Exhibit 23.2 forms a part, which Form 8-K is incorporated
by reference into the Registration Statements, without a written consent from
Andersen. As a result, with respect to transactions in Constellation Brands,
Inc. securities pursuant to the Registration Statements that occur subsequent to
the date the Form 8-K is filed with the Securities and Exchange Commission,
Andersen will not have any liability under Section 11(a) of the Securities Act
for any untrue statements of a material fact contained in the financial
statements audited by Andersen or any omissions of a material fact required to
be stated therein. Accordingly, no one would be able to assert a claim against
Andersen under Section 11(a) of the Securities Act, based upon the incorporation
by reference from this Form 8-K into the Registration Statements, because
Andersen has not consented to the incorporation by reference of its audit report
into the Registration Statements.
EXHIBIT 99.1
------------
AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY
FOR THE FISCAL YEAR ENDED FEBRUARY 29, 2004,
CONFORMED TO REFLECT THE COMPANY'S CONDENSED CONSOLIDATING FINANCIAL INFORMATION
AS IF THE NEW SUBSIDIARY GUARANTORS HAD BEEN IN PLACE
AS OF AND FOR ALL PERIODS PRESENTED
REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM
The Board of Directors and Stockholders
Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation
Brands, Inc. and subsidiaries as of February 29, 2004 and February 28, 2003 and
the related consolidated statements of income, changes in stockholders' equity
and cash flows for the years then ended. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. The February 28, 2002 consolidated statements of income, changes in
stockholders' equity and cash flows of Constellation Brands, Inc. and
subsidiaries were audited by other auditors who have ceased operations. Those
auditors expressed an unqualified opinion on those consolidated financial
statements, before the revisions described in Notes 1, 2, 5, 11 and 22 to the
consolidated financial statements, in their report dated April 9, 2002.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Constellation
Brands, Inc. and subsidiaries as of February 29, 2004 and February 28, 2003, and
the results of their operations and their cash flows for the years then ended,
in conformity with the standards of the Public Company Accounting Oversight
Board (United States).
As discussed above, the accompanying consolidated statements of income, changes
in stockholders' equity and cash flows of Constellation Brands, Inc. and
subsidiaries for the year ended February 28, 2002 were audited by other auditors
who have ceased operations. As described in Note 5, the consolidated financial
statements have been revised to include the transitional disclosures required by
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, which was adopted by the Company as of March 1, 2002. In our
opinion, these disclosures for 2002 in Note 5 are appropriate. Additionally, as
described in Note 2, the consolidated statement of income for the year ended
February 28, 2002 has been revised to reflect reclassifications of certain
consumer and trade promotional expenses as required by Emerging Issues Task
Force Issue No. 01-9, Accounting for Consideration Given by a Vendor to a
Customer (EITF 01-9), which was also adopted by the Company as of March 1, 2002;
as described in Notes 2 and 11, the consolidated statement of income and
disclosure for income taxes for the year ended February 28, 2002 have been
revised to reflect the reclassification of the extraordinary loss, net of income
taxes, related to the extinguishment of debt by increasing selling, general and
administrative expenses and adjusting the provision for income taxes as required
by Statement of Financial Accounting Standards No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections (FASB No. 145), which was fully adopted by the Company as of March
1, 2003; as described in Note 1, the proforma disclosures of net income and
earnings per common share related to stock-based compensation for the year ended
February 28, 2002 have been adjusted from the amounts originally reported; and
as described in Note 22, the Company changed the composition of its reportable
segments, and the amounts in the 2002 consolidated financial statements relating
to reportable segments have been restated to conform to the current composition
of reportable segments. We audited the adjustments that were applied to restate
the 2002 consolidated financial statements for the adoption of EITF 01-9 and
FASB No. 145, to restate the disclosure of amounts of pro forma net income and
earnings per share related to stock-based compensation for the year ended
February 28, 2002 and to restate the disclosures for reportable segments
reflected in the 2002 consolidated financial statements. In our opinion, such
adjustments are appropriate and have been properly applied. However, we were not
engaged to audit, review, or apply any procedures to the February 28, 2002
consolidated statements of income, changes in stockholders' equity and cash
flows of Constellation Brands, Inc. and subsidiaries, other than with respect
to such disclosures and adjustments; accordingly, we do not express an opinion
or any other form of assurance on the February 28, 2002 consolidated financial
statements taken as a whole.
/s/ KPMG LLP
Rochester, New York
April 7, 2004, except as to Note 21,
which is as of August 4, 2004
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN
LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. AS DESCRIBED IN NOTE 2 TO
THE ACCOMPANYING CONSOLIDATED FINANCIAL STATEMENTS, IN THE YEAR ENDED FEBRUARY
28, 2003, THE COMPANY ADOPTED THE PROVISIONS OF EMERGING ISSUES TASK FORCE ISSUE
NO. 01-9, ACCOUNTING FOR CONSIDERATION GIVEN BY A VENDOR TO A CUSTOMER, WHICH
REQUIRED RECLASSIFICATION OF CERTAIN CONSUMER AND TRADE PROMOTIONAL EXPENSES IN
CONSOLIDATED STATEMENTS OF INCOME FOR THE YEAR ENDED FEBRUARY 28, 2002. ALSO,
IN THE YEAR ENDED FEBRUARY 28, 2003, THE COMPANY ADOPTED STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 142, GOODWILL AND OTHER INTANGIBLE ASSETS (SFAS NO.
142). INCLUDED IN NOTE 5 ARE TRANSITIONAL DISCLOSURES FOR THE YEAR ENDED
FEBRUARY 28, 2002 THAT ARE REQUIRED BY SFAS NO. 142. IN THE YEAR ENDED
FEBRUARY 29, 2004, THE COMPANY ADOPTED THE PROVISIONS OF STATEMENT OF FINANCIAL
ACCOUNTING STANDARDS NO. 145, RESCISSION OF FASB STATEMENTS NO. 4, 44, AND 64,
AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL CORRECTIONS, WHICH REQUIRES
THE RECLASSIFICATION OF THE EXTRAORDINARY LOSS RELATED TO THE EXTINGUISHMENT OF
DEBT RECORDED IN THE YEAR ENDED FEBRUARY 28, 2002, BY INCREASING SELLING,
GENERAL AND ADMINISTRATIVE EXPENSES AND DECREASING THE PROVISION FOR INCOME
TAXES. NOTES 2 AND 11 REFLECT THE ADJUSTMENTS TO THE CONSOLIDATED STATEMENT OF
INCOME AND DISCLOSURE FOR INCOME TAXES FOR THE YEAR ENDED FEBRUARY 28, 2002.
ALSO, AS DESCRIBED IN NOTE 1 TO THE ACCOMPANYING CONSOLIDATED FINANCIAL
STATEMENTS, IN THE YEAR ENDED FEBRUARY 28, 2003, THE COMPANY ADJUSTED THE PRO
FORMA DISCLOSURE OF NET INCOME AND EARNINGS PER COMMON SHARE RELATED TO
STOCK-BASED COMPENSATION FOR THE YEAR ENDED FEBRUARY 28, 2002 FROM THE AMOUNTS
ORIGINALLY REPORTED. LASTLY, AS DESCRIBED IN NOTE 22 TO THE ACCOMPANYING
CONSOLIDATED FINANCIAL STATEMENTS, IN THE YEAR ENDED FEBRUARY 29, 2004, THE
COMPANY CHANGED THE COMPOSITION OF ITS REPORTABLE SEGMENTS. AMOUNTS FOR THE
YEAR ENDED FEBRUARY 28, 2002, HAVE BEEN RESTATED TO CONFORM TO THE CURRENT
COMPOSITION OF REPORTABLE SEGMENTS. THE ARTHUR ANDERSEN LLP REPORT DOES NOT
EXTEND TO THESE CHANGES IN THE 2002 CONSOLIDATED FINANCIAL STATEMENTS. THE
TRANSITIONAL DISCLOSURES IN AND THE ADJUSTMENTS TO THE FISCAL 2002 CONSOLIDATED
FINANCIAL STATEMENTS WERE REPORTED ON BY KPMG LLP AS STATED IN THEIR REPORT
APPEARING HEREIN.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation
Brands, Inc. (a Delaware corporation) and subsidiaries as of February 28, 2002
and February 28, 2001, and the related consolidated statements of income,
changes in stockholders' equity and cash flows for each of the three years in
the period ended February 28, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Constellation Brands, Inc. and
subsidiaries as of February 28, 2002 and February 28, 2001, and the results of
their operations and their cash flows for each of the three years in the period
ended February 28, 2002 in conformity with accounting principles generally
accepted in the United States.
/s/ Arthur Andersen LLP
Rochester, New York
April 9, 2002
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
February 29, February 28,
2004 2003
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash investments $ 37,136 $ 13,810
Accounts receivable, net 635,910 399,095
Inventories, net 1,261,378 819,912
Prepaid expenses and other 137,047 97,284
------------ ------------
Total current assets 2,071,471 1,330,101
PROPERTY, PLANT AND EQUIPMENT, net 1,097,362 602,469
GOODWILL 1,540,637 722,223
INTANGIBLE ASSETS, net 744,978 382,428
OTHER ASSETS 104,225 159,109
------------ ------------
Total assets $ 5,558,673 $ 3,196,330
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Notes payable to banks $ 1,792 $ 2,623
Current maturities of long-term debt 267,245 71,264
Accounts payable 270,291 171,073
Accrued excise taxes 48,465 36,421
Other accrued expenses and liabilities 442,009 303,827
------------ ------------
Total current liabilities 1,029,802 585,208
------------ ------------
LONG-TERM DEBT, less current maturities 1,778,853 1,191,631
------------ ------------
DEFERRED INCOME TAXES 187,410 145,239
----------- ------------
OTHER LIABILITIES 184,989 99,268
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 15)
STOCKHOLDERS' EQUITY:
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares;
Issued, 170,500 shares at February 29, 2004, and
none at February 28, 2003 (Aggregate liquidation
preference of $172,951 at February 29, 2004) 2 -
Class A Common Stock, $.01 par value-
Authorized, 275,000,000 shares;
Issued, 97,150,219 shares at February 29, 2004,
and 81,435,135 shares at February 28, 2003 971 814
Class B Convertible Common Stock, $.01 par value-
Authorized, 30,000,000 shares;
Issued, 14,564,630 shares at February 29, 2004,
and 14,578,490 shares at February 28, 2003 146 146
Additional paid-in capital 1,024,048 469,724
Retained earnings 1,010,193 795,525
Accumulated other comprehensive income (loss) 372,302 (59,257)
------------ ------------
2,407,662 1,206,952
------------ ------------
Less-Treasury stock-
Class A Common Stock, 2,583,608 shares at
February 29, 2004, and 2,749,384 shares at
February 28, 2003, at cost (27,786) (29,610)
Class B Convertible Common Stock, 2,502,900 shares
at February 29, 2004, and February 28, 2003, at cost (2,207) (2,207)
------------ ------------
(29,993) (31,817)
------------ ------------
Less-Unearned compensation-restricted stock awards (50) (151)
------------ ------------
Total stockholders' equity 2,377,619 1,174,984
------------ ------------
Total liabilities and stockholders' equity $ 5,558,673 $ 3,196,330
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
For the Years Ended
-----------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------- -------------- --------------
SALES $ 4,469,270 $ 3,583,082 $ 3,420,213
Less - Excise taxes (916,841) (851,470) (813,455)
------------- -------------- --------------
Net sales 3,552,429 2,731,612 2,606,758
COST OF PRODUCT SOLD (2,576,641) (1,970,897) (1,911,598)
------------- -------------- --------------
Gross profit 975,788 760,715 695,160
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (457,277) (350,993) (355,269)
RESTRUCTURING AND RELATED CHARGES (31,154) (4,764) -
------------- -------------- --------------
Operating income 487,357 404,958 339,891
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS 1,181 23,129 -
EQUITY IN EARNINGS OF JOINT VENTURE 542 12,236 1,667
INTEREST EXPENSE, net (144,683) (105,387) (114,189)
------------- -------------- --------------
Income before income taxes 344,397 334,936 227,369
PROVISION FOR INCOME TAXES (123,983) (131,630) (90,948)
------------- -------------- --------------
NET INCOME 220,414 203,306 136,421
Dividends on preferred stock (5,746) - -
------------- -------------- --------------
INCOME AVAILABLE TO COMMON
STOCKHOLDERS $ 214,668 $ 203,306 $ 136,421
============= ============== ==============
SHARE DATA:
Earnings per common share:
Basic $ 2.13 $ 2.26 $ 1.60
============= ============== ==============
Diluted $ 2.06 $ 2.19 $ 1.55
============= ============== ==============
Weighted average common shares outstanding:
Basic 100,702 89,856 85,505
Diluted 106,948 92,746 87,825
SUPPLEMENTAL DATA RESTATED FOR
EFFECT OF SFAS NO. 142:
Adjusted operating income $ 487,357 $ 404,958 $ 367,190
============= ============== ==============
Adjusted net income $ 220,414 $ 203,306 $ 155,367
============= ============== ==============
Adjusted income available to common stockholders $ 214,668 $ 203,306 $ 155,367
============= ============== ==============
Adjusted earnings per common share:
Basic $ 2.13 $ 2.26 $ 1.82
============= ============== ==============
Diluted $ 2.06 $ 2.19 $ 1.77
============= ============== ==============
The accompanying notes to consolidated financial statements
are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands, except share data)
Accumulated
Common Stock Additional Other
Preferred ---------------- Paid-in Retained Comprehensive Treasury Unearned
Stock Class A Class B Capital Earnings Loss Stock Compensation Total
--------- ------- ------- ---------- --------- ------------- -------- ------------ ----------
BALANCE, February 28,
2001 $ - $ 749 $ 148 $ 267,206 $ 455,798 $ (26,004) $(81,478) $ (151) $ 616,268
Comprehensive income:
Net income for
Fiscal 2002 - - - - 136,421 - - - 136,421
Other comprehensive
(loss) income, net
of tax:
Foreign currency
translation
adjustments - - - - - (9,239) - - (9,239)
Unrealized gain on
cash flow hedges:
Net derivative
gains, net of
tax effect
of $105 - - - - - 212 - - 212
Reclassification
adjustments,
net of tax
effect of $92 - - - - - (191) - - (191)
----------
Unrealized gain on
cash flow hedges 21
----------
Other comprehensive
loss, net of tax (9,218)
----------
Comprehensive income 127,203
Conversion of 196,798
Class B Convertible
Common shares to
Class A Common shares - 2 (2) - - - - - -
Exercise of 4,234,440
Class A stock options - 42 - 45,602 - - - - 45,644
Employee stock
purchases of 120,674
treasury shares - - - 639 - - 1,347 - 1,986
Amortization of
unearned restricted
stock compensation - - - - - - - 101 101
Issuance of 9,385,000
treasury shares, net
of fees - - - 104,714 - - 46,765 - 151,479
Tax benefit on Class A
stock options
exercised - - - 12,836 - - - - 12,836
Tax benefit on
disposition of
employee stock
purchases - - - 65 - - - - 65
Other - - - 154 - - - - 154
--------- ------- ------- ---------- --------- ------------- -------- ------------ ----------
BALANCE, February 28,
2002 - 793 146 431,216 592,219 (35,222) (33,366) (50) 955,736
Comprehensive income:
Net income for
Fiscal 2003 - - - - 203,306 - - - 203,306
Other comprehensive
(loss) income, net
of tax:
Foreign currency
translation
adjustments - - - - - 18,521 - - 18,521
Reclassification
adjustments for
net derivative
gains, net of
tax effect on $13 - - - - - (21) - - (21)
Minimum pension
liability
adjustment, net
of tax effect
of $18,681 - - - - - (42,535) - - (42,535)
----------
Other comprehensive
loss, net of tax (24,035)
----------
Comprehensive income 179,271
Conversion of 29,900
Class B Convertible
Common shares to
Class A Common
shares - - - - - - - - -
Exercise of 2,096,061
Class A stock options - 21 - 28,148 - - - - 28,169
Employee stock
purchases of 139,062
treasury shares - - - 1,410 - - 1,475 - 2,885
Issuance of 7,080
restricted Class A
Common shares - - - 127 - - 74 (201) -
Amortization of
unearned restricted
stock compensation - - - - - - - 100 100
Tax benefit on Class A
stock options
exercised - - - 8,440 - - - - 8,440
Tax benefit on
disposition of
employee stock
purchases - - - 74 - - - - 74
Other - - - 309 - - - - 309
--------- ------- ------- ---------- --------- ------------- -------- ------------ ----------
BALANCE, February 28,
2003 - 814 146 469,724 795,525 (59,257) (31,817) (151) 1,174,984
Comprehensive income:
Net income for
Fiscal 2004 - - - - 220,414 - - - 220,414
Other comprehensive
income (loss),
net of tax:
Foreign currency
translation
adjustments,
net of tax effect
of $6,254 - - - - - 410,686 - - 410,686
Unrealized gain on
cash flow hedges:
Net derivative
gains, net of
tax effect
of $15,714 - - - - - 38,199 - - 38,199
Reclassification
adjustments,
met of tax
effect of $507 - - - - - (1,250) - - (1,250)
----------
Unrealized gain on
cash flow hedges 36,949
----------
Unrealized loss on
marketable equity
securities, net
of tax effect
of $185 - - - - - (432) - - (432)
Minimum pension
liability
adjustment, net
of tax effect
of $6,888 - - - - - (15,644) - - (15,644)
----------
Other comprehensive
income, net of tax 431,559
----------
Comprehensive income 651,973
Conversion of 13,860
Class B Convertible
Common shares to
Class A Common shares - - - - - - - - -
Exercise of 2,612,311
Class A stock options - 26 - 36,209 - - - - 36,235
Employee stock
purchases of 165,776
treasury shares - - - 1,658 - - 1,824 - 3,482
Issuance of 9,800,000
Class A Common Shares - 98 - 261,118 - - - - 261,216
Issuance of 170,500
Preferred Shares 2 - - 164,868 - - - - 164,870
Dividend on Preferred
Shares - - - - (5,746) - - - (5,746)
Issuance of 3,288,913
Class A Common
Shares in
connection with
Hardy Acquisition - 33 - 77,210 - - - - 77,243
Amortization of
unearned restricted
stock compensation - - - - - - - 101 101
Tax benefit on Class A
stock options
exercised - - - 13,029 - - - - 13,029
Tax benefit on
disposition of
employee stock
purchases - - - 82 - - - - 82
Other - - - 150 - - - - 150
--------- ------- ------- ---------- --------- ------------- -------- ------------ ----------
BALANCE, February 29,
2004 $ 2 $ 971 $ 146 $1,024,048 $1,010,193 $ 372,302 $(29,993) $ (50) $2,377,619
========= ======= ======= ========== ========== ============= ======== ============ ==========
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 220,414 $ 203,306 $ 136,421
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation of property, plant and equipment 80,079 54,147 51,873
Deferred tax provision 31,398 21,050 3,675
Amortization of goodwill and intangible assets 21,875 5,942 33,531
Loss on sale of assets and restructuring charges 5,127 7,263 324
Loss on extinguishment of debt 800 - 2,590
Stock-based compensation expense 233 100 101
Amortization of discount on long-term debt 93 60 516
Gain on change in fair value of derivative instrument (1,181) (23,129) -
Equity in earnings of joint venture (542) (12,236) (1,667)
Change in operating assets and liabilities, net of effects
from purchases of businesses:
Accounts receivable, net (63,036) 6,164 (44,804)
Inventories, net 96,051 (40,676) (19,130)
Prepaid expenses and other current assets 2,192 (11,612) 566
Accounts payable (61,647) 10,135 19,069
Accrued excise taxes 7,658 (25,029) 4,502
Other accrued expenses and liabilities 11,417 42,882 29,960
Other assets and liabilities, net (10,624) (2,314) (4,228)
------------ ------------ ------------
Total adjustments 119,893 32,747 76,878
------------ ------------ ------------
Net cash provided by operating activities 340,307 236,053 213,299
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of businesses, net of cash acquired (1,069,470) - (472,832)
Purchases of property, plant and equipment (105,094) (71,575) (71,148)
Payment of accrued earn-out amount (2,035) (1,674) -
Proceeds from sale of assets 13,449 1,288 35,815
Proceeds from sale of business 3,814 - -
Proceeds from sale of marketable equity securities 849 - -
Investment in joint venture - - (77,282)
------------ ------------ ------------
Net cash used in investing activities (1,158,487) (71,961) (585,447)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 1,600,000 10,000 252,539
Proceeds from equity offerings, net of fees 426,086 - 151,479
Exercise of employee stock options 36,017 28,706 45,027
Proceeds from employee stock purchases 3,481 2,885 1,986
Principal payments of long-term debt (1,282,274) (151,134) (260,982)
Payment of issuance costs of long-term debt (33,748) (20) (4,537)
Payment of dividends (3,295) - -
Net (repayment of) proceeds from notes payable (1,113) (51,921) 51,403
------------ ------------ ------------
Net cash provided by (used in) financing activities 745,154 (161,484) 236,915
------------ ------------ ------------
Effect of exchange rate changes on cash and cash investments 96,352 2,241 (1,478)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS 23,326 4,849 (136,711)
CASH AND CASH INVESTMENTS, beginning of year 13,810 8,961 145,672
------------ ------------ ------------
CASH AND CASH INVESTMENTS, end of year $ 37,136 $ 13,810 $ 8,961
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 137,359 $ 103,161 $ 122,121
============ ============ ============
Income taxes $ 76,990 $ 67,187 $ 75,054
============ ============ ============
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired $ 1,776,064 $ - $ 617,487
Liabilities assumed (621,578) - (138,913)
------------ ------------ ------------
Net assets acquired 1,154,486 - 478,574
Less - stock issuance (77,243) - -
Less - direct acquisition costs accrued or previously paid (5,939) - -
Less - cash acquired (1,834) - (5,742)
------------ ------------ ------------
Net cash paid for purchases of businesses $ 1,069,470 $ - $ 472,832
============ ============ ============
Property, plant and equipment contributed to joint venture $ - $ - $ 30,020
============ ============ ============
The accompanying notes to consolidated financial statements are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2004
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
DESCRIPTION OF BUSINESS -
Constellation Brands, Inc. and its subsidiaries (the "Company") operate
primarily in the beverage alcohol industry. The Company is a leading
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 ("U.S."); 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 ("U.K."). In North
America, the Company distributes its products through wholesale distributors.
In Australia, the Company distributes its products directly to off-premise
accounts, such as major retail chains, on-premise accounts, such as hotels and
restaurants, and large wholesalers. In the U.K., the Company distributes its
products directly to off-premise accounts, such as major retail chains, and to
other wholesalers. Through the Company's U.K. wholesale business, the Company
distributes its branded products and those of other major drinks companies to
on-premise accounts: pubs, clubs, hotels and restaurants.
PRINCIPLES OF CONSOLIDATION -
The consolidated financial statements of the Company include the accounts
of Constellation Brands, Inc. and all of its subsidiaries. All intercompany
accounts and transactions have been eliminated.
MANAGEMENT'S USE OF ESTIMATES -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION -
Sales are recognized when title passes to the customer, which is generally
when the product is shipped. Amounts billed to customers for shipping and
handling are classified as sales. Sales reflect reductions attributable to
consideration given to customers in various customer incentive programs,
including pricing discounts on single transactions, volume discounts,
promotional and advertising allowances, coupons, and rebates.
COST OF PRODUCT SOLD -
The types of costs included in cost of product sold are raw materials,
packaging materials, manufacturing costs, plant administrative support and
overheads, and freight and warehouse costs (including distribution network
costs). Distribution network costs include inbound freight charges and outbound
shipping and handling costs, purchasing and receiving costs, inspection costs,
warehousing and internal transfer costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES -
The types of costs included in selling, general and administrative expenses
consist predominately of advertising and non-manufacturing administrative and
overhead costs. Distribution network costs are not included in the Company's
selling, general and administrative expenses, but are included in cost of
product sold as described above. The Company expenses advertising costs as
incurred, shown or distributed. Prepaid advertising costs at February 29, 2004
and February 28, 2003, were not material.
Advertising expense for the years ended February 29, 2004, February 28, 2003,
and February 28, 2002, was $116.1 million, $89.6 million and $87.0 million,
respectively.
FOREIGN CURRENCY TRANSLATION -
The "functional currency" for translating the accounts of the Company's
operations outside the U.S. is the local currency. The translation from the
applicable foreign currencies to U.S. dollars is performed for balance sheet
accounts using exchange rates in effect at the balance sheet date and for
revenue and expense accounts using a weighted average exchange rate during the
period. The resulting translation adjustments are recorded as a component of
Accumulated Other Comprehensive Income (Loss) ("AOCI"). Gains or losses
resulting from foreign currency denominated transactions are included in
selling, general and administrative expenses in the Company's Consolidated
Statements of Income. The Company engages in foreign currency denominated
transactions with customers, suppliers and non-U.S. subsidiaries. Aggregate
foreign currency transaction gains were $16.6 million in Fiscal 2004. Aggregate
foreign currency transaction gains were not material in Fiscal 2003 and Fiscal
2002.
CASH INVESTMENTS -
Cash investments consist of highly liquid investments with an original
maturity when purchased of three months or less and are stated at cost, which
approximates market value. The amounts at February 29, 2004, and February 28,
2003, are not significant.
ALLOWANCE FOR DOUBTFUL ACCOUNTS -
The Company records an allowance for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. The
majority of the accounts receivable balance is generated from sales to
independent distributors with whom the Company has a predetermined collection
date arranged through electronic funds transfer. The allowance for doubtful
accounts was $17.2 million and $13.8 million as of February 29, 2004, and
February 28, 2003, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS -
To meet the reporting requirements of Statement of Financial Accounting
Standards No. 107, "Disclosures about Fair Value of Financial Instruments," the
Company calculates the fair value of financial instruments using quoted market
prices whenever available. When quoted market prices are not available, the
Company uses standard pricing models for various types of financial instruments
(such as forwards, options, swaps, etc.) which take into account the present
value of estimated future cash flows.
The carrying amount and estimated fair value of the Company's financial
instruments are summarized as follows:
February 29, 2004 February 28, 2003
------------------------ ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ----------- ----------- -----------
(in thousands)
Assets:
-------
Cash and cash investments $ 37,136 $ 37,136 $ 13,810 $ 13,810
Accounts receivable $ 635,910 $ 635,910 $ 399,095 $ 399,095
Investment in marketable
equity securities $ 14,945 $ 14,945 $ - $ -
Currency forward contracts $ 69,993 $ 69,993 $ 23,573 $ 23,573
Liabilities:
------------
Notes payable to banks $ 1,792 $ 1,792 $ 2,623 $ 2,623
Accounts payable $ 270,291 $ 270,291 $ 171,073 $ 171,073
Long-term debt, including
current portion $ 2,046,098 $ 2,181,782 $ 1,262,895 $ 1,307,976
Currency forward contracts $ 1,839 $ 1,839 $ - $ -
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
CASH AND CASH INVESTMENTS, ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE: The
carrying amounts approximate fair value due to the short maturity of these
instruments.
INVESTMENT IN MARKETABLE EQUITY SECURITIES: The fair value is estimated
based on quoted market prices.
CURRENCY FORWARD CONTRACTS: The fair value is estimated based on quoted
market prices.
NOTES PAYABLE TO BANKS: These instruments are variable interest rate
bearing notes for which the carrying value approximates the fair value.
LONG-TERM DEBT: The senior credit facility is subject to variable interest
rates which are frequently reset; accordingly, the carrying value of this debt
approximates its fair value. The fair value of the remaining long-term debt,
which is all fixed rate, is estimated by discounting cash flows using interest
rates currently available for debt with similar terms and maturities.
DERIVATIVE INSTRUMENTS -
As a multinational company, the Company is exposed to market risk from
changes in foreign currency exchange rates and interest rates that could affect
the Company's results of operations and financial condition. Accordingly, the
Company's results of operations are exposed to some volatility, which is
minimized or eliminated whenever possible. The amount of volatility realized
will vary based upon the effectiveness and level of derivative instruments
outstanding during a particular period of time, as well as the currency and
interest rate market movements during that same period.
The Company enters into derivative instruments, including interest rate
swaps, foreign currency forwards, and/or purchased foreign currency options to
manage interest rate and foreign currency risks. In accordance with Statement of
Financial Standards No. 133 ("SFAS No. 133"), "Accounting for Derivative
Instruments and Hedging Activities", as amended, the Company recognizes all
derivatives as either assets or liabilities on the balance sheet and measures
those instruments at fair value. The fair values of the Company's derivative
instruments change with fluctuations in interest rates and/or currency rates and
are designed so that any changes in their values are offset by changes in the
values of the underlying exposures. The Company's derivative instruments are
held solely to hedge economic exposures. The Company follows strict policies to
manage interest rate and foreign currency risks, including prohibitions on
derivative market-making or other speculative activities. As of February 29,
2004, and February 28, 2003, the Company did not have any interest rate swap
agreements outstanding. As of February 29, 2004, and February 28, 2003, the
Company had foreign exchange contracts outstanding with a notional value of
$735.8 million and $11.6 million, respectively.
To qualify for hedge accounting under SFAS No. 133, the details of the
hedging relationship must be formally documented at inception of the
arrangement, including the risk management objective, hedging strategy, hedged
item, specific risk that is being hedged, the derivative instrument, how
effectiveness is being assessed and how ineffectiveness will be measured. The
derivative must be highly effective in offsetting either changes in the fair
value or cash flows, as appropriate, of the risk being hedged. Effectiveness is
evaluated on a retrospective and prospective basis based on quantitative
measures.
Certain of the Company's derivative instruments do not qualify for SFAS No.
133 hedge accounting treatment; for others, the Company does not maintain the
required documentation to apply hedge accounting treatment. In both of these
instances, the mark to fair value is reported currently through earnings.
Furthermore, when it is determined that a derivative is not, or has ceased to
be, highly effective as a hedge, the Company discontinues hedge accounting
prospectively. The Company discontinues hedge accounting prospectively when (1)
the derivative is no longer highly effective in
offsetting changes in the cash flows of a hedged item; (2) the derivative
expires or is sold, terminated, or exercised; (3) it is no longer probable that
the forecasted transaction will occur; or (4) management determines that
designating the derivative as a hedging instrument is no longer appropriate.
CASH FLOW HEDGES:
The Company is exposed to fluctuations in foreign currency cash flows
related primarily to sales to third parties, intercompany sales, available for
sale securities and intercompany loans and interest payments. Forward and
option contracts are used to hedge some of these risks. Effectiveness is
assessed based on changes in forward rates. Derivatives used to manage cash flow
exposures generally mature within 24 months or less, with a maximum maturity of
five years.
The Company records the fair value of its foreign exchange contracts
qualifying for cash flow hedge accounting treatment in its consolidated balance
sheet with the related gain or loss on those contracts deferred in stockholders'
equity (as a component of AOCI). These deferred gains or losses are recognized
in the Company's Consolidated Statement of Income in the same period in which
the underlying hedged items are recognized, and on the same line item as the
underlying hedged items. However, to the extent that any derivative instrument
is not considered to be perfectly effective in offsetting the change in the
value of the hedged item, the amount related to the ineffective portion of this
derivative instrument is immediately recognized in the Company's Consolidated
Statement of Income.
The Company expects $14.1 million of net gains to be reclassified from AOCI
to earnings within the next 12 months. The amount of hedge ineffectiveness
associated with the Company's designated cash flow hedge instruments recognized
in the Company's Consolidated Statements of Income during the years ended
February 29, 2004, February 28, 2003, and February 28, 2002, was immaterial.
All components of the Company's derivative instruments' gains or losses are
included in the assessment of hedge effectiveness. In addition, the amount of
net gains reclassified into earnings as a result of the discontinuance of cash
flow hedge accounting due to the probability that the original forecasted
transaction would not occur by the end of the originally specified time period
was immaterial for the years ended February 29, 2004, February 28, 2003, and
February 28, 2002.
FAIR VALUE HEDGES:
Fair value hedges are hedges that offset the risk of changes in the fair
values of recorded assets and liabilities, and firm commitments. The Company
records changes in fair value of derivative instruments which are designated and
deemed effective as fair value hedges, in earnings offset by the corresponding
changes in the fair value of the hedged items.
The Company is exposed to fluctuations in the value of foreign currency
denominated receivables and payables, foreign currency investments, primarily
consisting of loans to subsidiaries and cash flows related primarily to
repatriation of those loans/investments. Forward contracts, generally less than
12 months in duration, are used to hedge some of these risks. Effectiveness is
assessed based on changes in forward rates. Gains and losses on the derivative
instruments used to hedge the foreign exchange volatility associated with
foreign currency dominated receivables and payables is recorded within selling,
general and administrative expenses.
The amount of hedge ineffectiveness associated with the Company's
designated fair value hedge instruments recognized in the Company's Consolidated
Statements of Income during the years ended February 29, 2004, February 28,
2003, and February 28, 2002, was immaterial. All components of the Company's
derivative instruments' gains or losses are included in the assessment of hedge
effectiveness. There were no gains or losses recognized in earnings resulting
from a hedged firm commitment no longer qualifying as a fair value hedge.
NET INVESTMENT HEDGES:
Net investment hedges are hedges that use derivative instruments or
non-derivative instruments to hedge the foreign currency exposure of a net
investment in a foreign operation. The Company manages currency exposures
resulting from its net investments in foreign subsidiaries principally with debt
denominated in the related foreign currency. Gains and losses on these
instruments are recorded as foreign currency translation adjustment in AOCI.
Currently, the Company has designated the Sterling Senior Notes and the Sterling
Series C Senior Notes (as defined in Note 10) totaling (pound) 155.0 million
aggregate principal amount as a hedge against the net investment in the
Company's U.K. subsidiary. For the years ended February 29, 2004, February 28,
2003, and February 28, 2002, net (losses) gains of ($45.9) million, ($24.0)
million, and $4.4 million, respectively, are included in foreign currency
translation adjustments within AOCI.
COUNTERPARTY CREDIT RISK:
Counterparty risk relates to losses the Company could incur if a
counterparty defaults on a derivative contract. The Company manages exposure to
counterparty credit risk by requiring specified minimum credit standards and
diversification of counterparties. The Company enters into master agreements
with our counterparties that allow netting of certain exposures in order to
manage this risk. All of the Company's counterpart exposures are with
counterparts that have investment grade ratings. The Company has procedures to
monitor the credit exposure for both mark to market and future potential
exposures.
INVENTORIES -
Inventories are stated at the lower of cost (computed in accordance with
the first-in, first-out method) or market. Elements of cost include materials,
labor and overhead and are classified as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Raw materials and supplies $ 49,633 $ 26,472
In-process inventories 803,200 534,073
Finished case goods 408,545 259,367
------------ ------------
$ 1,261,378 $ 819,912
============ ============
A substantial portion of barreled whiskey and brandy will not be sold
within one year because of the duration of the aging process. All barreled
whiskey and brandy are classified as in-process inventories and are included in
current assets, in accordance with industry practice. Bulk wine inventories are
also included as in-process inventories within current assets, in accordance
with the general practices of the wine industry, although a portion of such
inventories may be aged for periods greater than one year. Warehousing,
insurance, ad valorem taxes and other carrying charges applicable to barreled
whiskey and brandy held for aging are included in inventory costs.
The Company assesses the valuation of its inventories and reduces the
carrying value of those inventories that are obsolete or in excess of the
Company's forecasted usage to their estimated net realizable value. The Company
estimates the net realizable value of such inventories based on analyses and
assumptions including, but not limited to, historical usage, future demand and
market requirements. Reductions to the carrying value of inventories are
recorded in cost of goods sold. If the future demand for the Company's products
is less favorable than the Company's forecasts, then the value of the
inventories may be required to be reduced, which would result in additional
expense to the Company and affect its results of operations.
PROPERTY, PLANT AND EQUIPMENT -
Property, plant and equipment is stated at cost. Major additions and
betterments are charged to property accounts, while maintenance and repairs are
charged to operations as incurred. The cost of
properties sold or otherwise disposed of and the related accumulated
depreciation are eliminated from the accounts at the time of disposal and
resulting gains and losses are included as a component of operating income.
DEPRECIATION -
Depreciation is computed primarily using the straight-line method over the
following estimated useful lives:
Depreciable Life in Years
-------------------------
Land improvements 15 to 32
Vineyards 26
Buildings and improvements 10 to 44
Machinery and equipment 3 to 35
Motor vehicles 3 to 7
GOODWILL AND OTHER INTANGIBLE ASSETS -
Effective March 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and
indefinite lived intangible assets are no longer amortized but are reviewed at
least annually for impairment. Additionally, in the year of adoption, a
transitional impairment test is also required. The Company uses December 31 as
its annual impairment test measurement date. Intangible assets that are not
deemed to have an indefinite life will continue to be amortized over their
useful lives and are also subject to review for impairment. Upon adoption of
SFAS No. 142, the Company determined that certain of its intangible assets met
the criteria to be considered indefinite lived and, accordingly, ceased their
amortization effective March 1, 2002. These intangible assets consisted
principally of trademarks. The Company's trademarks relate to well established
brands owned by the Company which were previously amortized over 40 years.
Intangible assets determined to have a finite life, primarily distribution
agreements, continue to be amortized over their estimated useful lives which did
not require modification as a result of adopting SFAS No. 142. Nonamortizable
intangible assets are tested for impairment in accordance with the provisions of
SFAS No. 142 and amortizable intangible assets are tested for impairment in
accordance with the provisions of SFAS No. 144 (as defined below). Note 6
provides a summary of intangible assets segregated between amortizable and
nonamortizable amounts. No instances of impairment were noted on the Company's
goodwill and other intangible assets for the years ended February 29, 2004,
February 28, 2003, and February 28, 2002.
OTHER ASSETS -
Other assets include the following: (i) deferred financing costs which are
stated at cost, net of accumulated amortization, and are amortized on an
effective interest basis over the term of the related debt; (ii) derivative
assets which are stated at fair value (see discussion above); (iii) investments
in marketable securities which are stated at fair value (see Note 7); and (iv)
investments in joint ventures which are carried under the equity method of
accounting (see Note 8).
LONG-LIVED ASSETS IMPAIRMENT -
Effective March 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS No. 144
supersedes Statement of Financial Accounting Standards No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," and the accounting and reporting provisions of Accounting Principles Board
Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of
Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a segment of a business
(as
previously defined in that Opinion). In accordance with SFAS No. 144, the
Company reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to estimated undiscounted cash
flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized for
the amount by which the carrying amount of the asset exceeds its fair value.
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell and are no longer depreciated.
Pursuant to this policy and in connection with the restructuring plan of
the Constellation Wines segment (see Note 20), the Company recorded losses of
$2.1 million on the disposal of certain property, plant and equipment in Fiscal
2004. These losses are included in restructuring and related charges on the
Company's Consolidated Statements of Income as they are part of the
restructuring plan.
In Fiscal 2003, the Company recorded an asset impairment charge of $4.8
million in connection with two of the production facilities disposed of in
Fiscal 2004 under the Constellation Wines segment's restructuring plan. One of
the facilities, which was held and used prior to its sale in the fourth quarter
of Fiscal 2004, was written down to its appraised value and comprised most of
the impairment charge. The other facility, which was held for sale in Fiscal
2004, was written down to a value based on the Company's estimate of salvage
value. These assets were sold in the second quarter of Fiscal 2004. This
impairment charge is included in restructuring and related charges on the
Company's Consolidated Statements of Income since it is part of the realignment
of its business operations. The impaired assets consist primarily of buildings,
machinery and equipment located at the two production facilities. The charge
resulted from the determination that the assets' undiscounted future cash flows
were less than their carrying values.
The Company recorded an asset impairment charge of $1.4 million in Fiscal
2002 in connection with the sale of the Stevens Point Brewery in March 2002.
This charge has been included in selling, general and administrative expenses.
INCOME TAXES -
The Company uses the asset and liability method of accounting for income
taxes. This method accounts for deferred income taxes by applying statutory
rates in effect at the balance sheet date to the difference between the
financial reporting and tax bases of assets and liabilities.
ENVIRONMENTAL -
Environmental expenditures that relate to current operations or to an
existing condition caused by past operations, and which do not contribute to
current or future revenue generation, are expensed. Liabilities for
environmental risks or components thereof are recorded when environmental
assessments and/or remedial efforts are probable, and the cost can be reasonably
estimated. Generally, the timing of these accruals coincides with the
completion of a feasibility study or the Company's commitment to a formal plan
of action. Liabilities for environmental costs were not material at February
29, 2004, and February 28, 2003.
EARNINGS PER COMMON SHARE -
Basic earnings per common share excludes the effect of common stock
equivalents and is computed by dividing income available to common stockholders
by the weighted average number of common shares outstanding during the period
for Class A Common Stock and Class B Convertible Common Stock. Diluted earnings
per common share reflects the potential dilution that could result if securities
or other contracts to issue common stock were exercised or converted into common
stock. Diluted earnings per common share assumes the exercise of stock options
using the treasury stock method and assumes the conversion of Preferred Stock
(see Note 16) using the "if converted" method.
STOCK-BASED EMPLOYEE COMPENSATION PLANS -
As of February 29, 2004, the Company has four stock-based employee
compensation plans, which are described more fully in Note 16. The Company
applies the intrinsic value method described in Accounting Principles Board
Opinion No. 25 ("APB No. 25"), "Accounting for Stock Issued to Employees," and
related interpretations in accounting for these plans. In accordance with APB
No. 25, the compensation cost for stock options is recognized in income based on
the excess, if any, of the quoted market price of the stock at the grant date of
the award or other measurement date over the amount an employee must pay to
acquire the stock. The Company utilizes the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123 ("SFAS No. 123"),
"Accounting for Stock-Based Compensation," as amended. Options granted under
the Company's plans have an exercise price equal to the market value of the
underlying common stock on the date of grant; therefore, no incremental
compensation expense has been recognized for grants made to employees under the
Company's stock option plans. The following table illustrates the effect on net
income and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands, except per share data)
Net income, as reported $ 220,414 $ 203,306 $ 136,421
Add: Stock-based employee
compensation expense included in
reported net income, net of related
tax effects 160 248 153
Deduct: Total stock-based employee
compensation expense determined
under fair value based method for
all awards, net of related tax effects (16,582) (13,695) (25,609)
------------ ------------ ------------
Pro forma net income $ 203,992 $ 189,859 $ 110,965
============ ============ ============
Earnings per common share:
Basic--as reported $ 2.13 $ 2.26 $ 1.60
Basic--pro forma $ 1.97 $ 2.11 $ 1.30
Diluted--as reported $ 2.06 $ 2.19 $ 1.55
Diluted--pro forma $ 1.90 $ 2.03 $ 1.25
As reported in the Company's Annual Report on Form 10-K for the year ended
February 28, 2003, pro forma net income for the year ended February 28, 2002,
was adjusted from the amount originally reported to properly reflect the
increased expense, net of income tax benefits, primarily attributable to the
accelerated vesting of certain options during Fiscal 2002. The accelerated
vesting was attributable to the attainment of preexisting performance rights set
forth in the stock option grants. The impact of the accelerated vesting was not
reflected in the Fiscal 2002 amount originally reported. The pro forma net
income amount reflected above for Fiscal 2002 was reduced by $12.9 million for
this matter. Basic pro forma earnings per common share and diluted pro forma
earnings per common share for Fiscal 2002 were reduced by $0.15 and $0.16,
respectively.
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 resulted 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 require disclosure about those effects in interim
financial information. The Company has adopted the disclosure provisions only
of SFAS No. 148. The adoption of SFAS No. 148 did not have a material impact on
the Company's consolidated financial statements.
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.
Also, as reported in the Company's Annual Report on Form 10-K for the year
ended February 28, 2003, effective March 1, 2002, the Company adopted EITF Issue
No. 01-9 ("EITF No. 01-9"), "Accounting for Consideration Given by a Vendor to a
Customer (Including a Reseller of the Vendor's Products)," which codified
various issues related to certain promotional payments under EITF Issue No.
00-14, "Accounting for Certain Sales Incentives," EITF Issue No. 00-22,
"Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales
Incentive Offers, and Offers for Free Products or Services to Be Delivered in
the Future," and EITF Issue No. 00-25, "Vendor Income Statement Characterization
of Consideration Paid to a Reseller of the Vendor's Products." EITF No. 01-9
addresses the recognition, measurement and income statement classification of
consideration given by a vendor to a customer (including both a reseller of the
vendor's products and an entity that purchases the vendor's products from a
reseller). EITF No. 01-9, among other things, requires that certain
consideration given by a vendor to a customer be characterized as a reduction of
revenue when recognized in the vendor's income statement. Prior to its adoption
of EITF No. 01-9 effective March 1, 2002, the Company reported such costs as
selling, general and administrative expenses. As a result of adopting EITF No.
01-9, the Company restated the amounts originally reported for net sales, cost
of product sold, and selling, general and administrative expenses for the year
ended February 28, 2002. Net sales were reduced by $213.8 million; cost of
product sold was increased by $10.1 million; and selling, general and
administrative expenses were reduced by $223.9 million. This reclassification
did not affect operating income or net income.
3. ACQUISITIONS:
TURNER ROAD VINTNERS ASSETS ACQUISITION -
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The purchase price of the
Turner Road Vintners Assets, including direct acquisition costs, was $279.4
million. In addition, the Company assumed indebtedness of $9.4 million. The
acquisition was financed by the proceeds from the sale of the February 2001
Senior Notes (as defined in Note 10) and revolving loan borrowings under the
senior credit facility. The Turner Road Vintners Assets acquisition was
accounted for using the purchase method; accordingly, the acquired net assets
were recorded at fair value at the date of acquisition. The excess of the
purchase price over the fair value of the net assets acquired (goodwill), $146.2
million, is no longer being amortized, but is tested for impairment at least
annually in accordance with the provisions of SFAS No. 142. The results of
operations of the Turner Road Vintners Assets are reported in the Constellation
Wines segment and have been included in the Consolidated Statements of Income
since the date of acquisition.
CORUS ASSETS ACQUISITION -
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. The purchase price of the Corus Assets,
including direct acquisition costs, was $48.9 million plus an earn-out over six
years based on the performance of the brands. In addition, the Company assumed
indebtedness of $3.0 million. As of February 29, 2004, the Company has paid an
earn-out in the amount of $3.7 million. In connection with the transaction, the
Company also entered into long-term grape supply agreements with affiliates of
Corus Brands, Inc. covering more than 1,000 acres of Washington
and Idaho vineyards. The acquisition was financed with revolving loan borrowings
under the senior credit facility. The Corus Assets acquisition was accounted for
using the purchase method; accordingly, the acquired net assets were recorded at
fair value at the date of acquisition. The excess of the purchase price over the
fair value of the net assets acquired (goodwill), $48.5 million, is no longer
being amortized, but is tested for impairment at least annually in accordance
with the provisions of SFAS No. 142. The results of operations of the Corus
Assets are reported in the Constellation Wines segment and have been included in
the Consolidated Statements of Income since the date of acquisition.
RAVENSWOOD ACQUISITION -
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. (the "Ravenswood Acquisition"). The Ravenswood
business produces, markets and sells super-premium and ultra-premium California
wine, primarily under the Ravenswood brand name. The purchase price of the
Ravenswood Acquisition, including direct acquisition costs, was $149.7 million.
In addition, the Company assumed indebtedness of $2.8 million. The purchase
price was financed with revolving loan borrowings under the senior credit
facility. The Ravenswood Acquisition was accounted for using the purchase
method; accordingly, the acquired net assets were recorded at fair value at the
date of acquisition. The excess of the purchase price over the fair value of
the net assets acquired (goodwill), $99.8 million, is not amortizable and is
tested for impairment at least annually in accordance with the provisions of
SFAS No. 142. The Ravenswood Acquisition was consistent with the Company's
strategy of further penetrating the higher gross profit margin super-premium and
ultra-premium wine categories. The results of operations of the Ravenswood
business are reported in the Constellation Wines segment and have been included
in the Consolidated Statements of Income since the date of acquisition.
The following table summarizes the fair values of the assets acquired and
liabilities assumed in the Ravenswood Acquisition at July 2, 2001, as adjusted
for the final appraisal:
(in thousands)
Current assets $ 34,396
Property, plant and equipment 14,994
Goodwill 99,756
Trademarks 45,600
Other assets 26
-----------
Total assets acquired 194,772
-----------
Current liabilities 12,523
Long-term liabilities 32,593
-----------
Total liabilities assumed 45,116
-----------
Net assets acquired $ 149,656
===========
The trademarks are not subject to amortization. None of the goodwill is
expected to be deductible for tax purposes.
HARDY ACQUISITION -
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company
completed its acquisition of all of Hardy's outstanding capital stock. As a
result of the acquisition of Hardy, the Company also acquired the remaining 50%
ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the Company
established with Hardy in July 2001. The acquisition of Hardy along with the
remaining interest in PWP is referred to together as the "Hardy Acquisition."
Through this acquisition, the Company acquired Australia's largest wine producer
with interests in wineries and vineyards in most of Australia's major wine
regions as well as New Zealand and the United States. In addition, Hardy has
significant marketing and sales operations in the United Kingdom.
Total consideration paid in cash and Class A Common Stock to the Hardy
shareholders was $1,137.4 million. Additionally, the Company recorded direct
acquisition costs of $17.7 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
year ended February 29, 2004. 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 purchase price allocation period ended on March 27, 2004, and the Company
will record final adjustments to the valuation of certain assets in the first
quarter of fiscal 2005; however, these adjustments are not material. The Company
is in the process of finalizing the tax bases of assets acquired and liabilities
assumed. Accordingly, deferred tax assets and deferred tax liabilities
associated with temporary differences may be subject to further adjustments.
Estimated fair values at March 27, 2003, are as follows:
(in thousands)
Current assets $ 535,374
Property, plant and equipment 332,125
Other assets 27,672
Trademarks 262,733
Goodwill 615,251
-----------
Total assets acquired 1,773,155
Current liabilities 294,204
Long-term liabilities 325,478
-----------
Total liabilities assumed 619,682
-----------
Net assets acquired $ 1,153,473
===========
The trademarks are not subject to amortization. None of the goodwill is
expected to be deductible for tax purposes.
The following table sets forth the unaudited pro forma results of
operations of the Company for the years ended February 29, 2004, and February
28, 2003, respectively. The unaudited pro forma results of operations 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 certain assumptions that the Company believes are reasonable
under the circumstances. The unaudited pro forma results of operations for the
year ended February 28, 2003, do not reflect total pretax nonrecurring charges
of $30.3 million ($0.23 per share on a diluted basis) related to transaction
costs, primarily for the payment of stock options, which were incurred by Hardy
prior to the acquisition, partially offset by the one-time tax benefit from a
change in Australian tax consolidation rules effective January 1, 2003, related
to acquisition basis adjustments to fair value of $10.6 million ($0.11 per share
on a diluted basis). The unaudited pro forma results of operations do not
purport to present what the Company's results of operations would actually have
been if the aforementioned transactions had in fact occurred on such date or at
the beginning of the period indicated, nor do they project the Company's
financial position or results of operations at any future date or for any future
period.
For the Years Ended
---------------------------
February 29, February 28,
2004 2003
------------ ------------
(in thousands, except per share data)
Net sales $ 3,583,297 $ 3,247,474
Income before income taxes $ 346,184 $ 340,412
Net income $ 222,835 $ 216,756
Income available to common stockholders $ 217,089 $ 216,756
Earnings per common share:
Basic $ 2.15 $ 2.33
============ ============
Diluted $ 2.08 $ 2.26
============ ============
Weighted average common shares outstanding:
Basic 101,052 93,145
Diluted 107,298 96,035
4. PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Land and land improvements $ 209,959 $ 84,758
Vineyards 68,633 37,394
Buildings and improvements 297,128 173,943
Machinery and equipment 800,043 551,271
Motor vehicles 13,707 5,468
Construction in progress 59,663 32,839
------------ ------------
1,449,133 885,673
Less - Accumulated depreciation (351,771) (283,204)
------------ ------------
$ 1,097,362 $ 602,469
============ ============
5. GOODWILL:
As discussed in Note 1, effective March 1, 2002, the Company adopted SFAS
No. 142. The following table presents earnings and earnings per share
information for the comparative periods as if Statement of Financial Accounting
Standards No. 141 ("SFAS No. 141"), "Business Combinations," and the
nonamortization provisions of SFAS No. 142 had been applied beginning March 1,
2001:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands, except per share data)
Reported net income $ 220,414 $ 203,306 $ 136,421
Add back: amortization of goodwill - - 16,114
Add back: amortization of intangibles
reclassified to goodwill - - 2,147
Add back: amortization of indefinite
lived intangible assets - - 9,038
Less: income tax effect - - (8,353)
------------ ------------ ------------
Adjusted net income $ 220,414 $ 203,306 $ 155,367
============ ============ ============
BASIC EARNINGS PER COMMON SHARE:
Reported net income $ 2.13 $ 2.26 $ 1.60
Add back: amortization of goodwill - - 0.19
Add back: amortization of intangibles
reclassified to goodwill - - 0.02
Add back: amortization of indefinite
lived intangible assets - - 0.11
Less: income tax effect - - (0.10)
------------ ------------ ------------
Adjusted net income $ 2.13 $ 2.26 $ 1.82
============ ============ ============
DILUTED EARNINGS PER COMMON SHARE:
Reported net income $ 2.06 $ 2.19 $ 1.55
Add back: amortization of goodwill - - 0.18
Add back: amortization of intangibles
reclassified to goodwill - - 0.03
Add back: amortization of indefinite
lived intangible assets - - 0.10
Less: income tax effect - - (0.09)
------------ ------------ ------------
Adjusted net income $ 2.06 $ 2.19 $ 1.77
============ ============ ============
The changes in the carrying amount of goodwill for the year ended February
29, 2004, 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 650,070 - 650,070
Foreign currency translation
adjustments 165,054 1,327 166,381
Purchase price earn-out 2,412 - 2,412
Other (449) - (449)
------------- ------------- ------------
Balance, February 29, 2004 $ 1,407,350 $ 133,287 $ 1,540,637
============= ============= ============
The Constellation Wines purchase accounting allocations of goodwill
totaling $650.1 million consist of $615.3 million of goodwill resulting from the
Hardy Acquisition, $33.4 million of goodwill
previously included as part of the Company's investment in PWP, and $1.4 million
of goodwill resulting from an immaterial business acquisition.
6. INTANGIBLE ASSETS:
The major components of intangible assets are:
February 29, 2004 February 28, 2003
---------------------- ----------------------
Gross Net Gross Net
Carrying Carrying Carrying Carrying
Amount Amount Amount Amount
---------- ---------- ---------- ----------
(in thousands)
Amortizable intangible assets:
Distribution agreements $ 12,883 $ 4,455 $ 10,158 $ 4,434
Other 4,021 64 4,003 370
---------- ---------- ---------- ----------
Total $ 16,904 4,519 $ 14,161 4,804
========== ==========
Nonamortizable intangible assets:
Trademarks 722,047 357,166
Agency relationships 18,412 20,458
---------- ----------
Total 740,459 377,624
---------- ----------
Total intangible assets $ 744,978 $ 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 $2.6 million, $2.2 million and
$13.4 million for the years ended February 29, 2004, February 28, 2003, and
February 28, 2002, respectively. Estimated amortization expense for each of the
five succeeding fiscal years is as follows:
(in thousands)
2005 $ 2,823
2006 $ 1,318
2007 $ 341
2008 $ 25
2009 $ 12
7. OTHER ASSETS:
The major components of other assets are as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Deferred financing costs $ 54,186 $ 28,555
Derivative assets 41,517 -
Investment in marketable equity securities 14,945 -
Investment in joint ventures 8,412 123,064
Other 7,454 18,418
------------ ------------
126,514 170,037
Less - Accumulated amortization (22,289) (10,928)
------------ ------------
$ 104,225 $ 159,109
============ ============
The Company's investment in marketable equity securities is classified as
an available-for-sale security. As such, gross unrealized losses of $0.6 million
are included, net of applicable income taxes, within AOCI as of February 29,
2004. The Company uses the average cost method as its basis on which
cost is determined in computing realized gains or losses. Realized gains on
sales of securities during the year ended February 29, 2004, are immaterial.
Amortization expense for other assets was included in selling, general and
administrative expenses and was $19.3 million, $3.7 million and $4.0 million for
the years ended February 29, 2004, February 28, 2003, and February 28, 2002,
respectively. Amortization expense for the year ended February 29, 2004,
includes $7.9 million related to amortization of the deferred financing costs
associated with the Bridge Loans (as defined in Note 10). As of February 29,
2004, the deferred financing costs associated with the Bridge Loans have been
fully amortized.
8. INVESTMENT IN JOINT VENTURE:
On March 27, 2003, as part of the Hardy Acquisition, the Company acquired
the remaining 50% ownership of PWP, the joint venture formed on July 31, 2001,
which was previously owned equally by the Company and Hardy. Prior to March 27,
2003, the Company's investment was accounted for under the equity method. Since
the Hardy Acquisition, PWP has become a wholly-owned subsidiary of the Company
and its results of operations have been included in the Consolidated Statements
of Income since March 27, 2003.
In addition, in connection with the Hardy Acquisition, the Company acquired
several investments which are being accounted for under the equity method. The
majority of these investments consist of 50% owned joint venture arrangements.
As of February 29, 2004, the Company's investment balance in these equity
investments was $8.4 million.
9. OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as
follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Advertising and promotions $ 132,821 $ 63,155
Income taxes payable 57,065 58,347
Salaries and commissions 49,834 35,769
Adverse grape contracts 40,105 10,244
Interest 25,470 22,019
Other 136,714 114,293
------------ ------------
$ 442,009 $ 303,827
============ ============
10. BORROWINGS:
Borrowings consist of the following:
February 28,
February 29, 2004 2003
--------------------------------------- ------------
Current Long-term Total Total
----------- ----------- ----------- ------------
(in thousands)
Notes Payable to Banks:
-----------------------
Senior Credit Facility -
Revolving Credit Loans $ - $ - $ - $ 2,000
Other 1,792 - 1,792 623
----------- ----------- ----------- ------------
$ 1,792 $ - $ 1,792 $ 2,623
=========== =========== =========== ============
Long-term Debt:
---------------
Senior Credit Facility - Term Loans $ 60,000 $ 800,000 $ 860,000 $ 145,363
Senior Notes - 689,099 689,099 643,229
Senior Subordinated Notes 200,000 250,000 450,000 450,000
Other Long-term Debt 7,245 39,754 46,999 24,303
----------- ----------- ----------- ------------
$ 267,245 $ 1,778,853 $ 2,046,098 $ 1,262,895
=========== =========== =========== ============
SENIOR CREDIT FACILITY -
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
entered into a new credit agreement (as subsequently amended and restated as of
March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the Company
entered into a Second Amended and Restated Credit Agreement (the "October Credit
Agreement") that (i) refinanced the then outstanding principal balance under the
Tranche B Term Loan facility on essentially the same terms as the Tranche B Term
Loan facility under the March 2003 Credit Agreement, but at a lower Applicable
Rate (as such term is defined in the October Credit Agreement) and (ii)
otherwise restated the terms of the March 2003 Credit Agreement, as amended. The
October Credit Agreement was further amended during February 2004 (the "Credit
Agreement"). The March 2003 Credit Agreement provided for aggregate credit
facilities of $1.6 billion consisting of a $400.0 million Tranche A Term Loan
facility due in February 2008, an $800.0 million Tranche B Term Loan facility
due in November 2008 and a $400.0 million Revolving Credit facility (including
an Australian Dollar revolving sub-facility of up to A$10.0 million and a
sub-facility for letters of credit of up to $40.0 million) which expires on
February 29, 2008. Proceeds of the March 2003 Credit Agreement were used to pay
off the Company's obligations under its prior senior credit facility, to fund a
portion of the cash required to pay the former Hardy shareholders and to pay
indebtedness outstanding under certain of Hardy's credit facilities. The Company
uses the remaining availability under the Credit Agreement to fund its working
capital needs on an on-going basis.
The Tranche A Term Loan facility and the Tranche B Term Loan facility were
fully drawn on March 27, 2003. As of February 29, 2004, the Company has made
$40.0 million of scheduled and required payments on the Tranche A Term Loan
facility. In August 2003, the Company paid $100.0 million of the Tranche B Term
Loan facility. In October 2003, the Company paid an additional $200.0 million of
the Tranche B Term Loan facility. As of February 29, 2004, the required annual
repayments of the Tranche A Term Loan and the Tranche B Term Loan are as
follows:
Tranche A Tranche B
Term Loan Term Loan Total
------------- ------------- -----------
(in thousands)
2005 $ 60,000 $ - $ 60,000
2006 80,000 54,420 134,420
2007 100,000 54,420 154,420
2008 120,000 119,048 239,048
2009 - 272,112 272,112
------------- ------------- -----------
$ 360,000 $ 500,000 $ 860,000
============= ============= ===========
The rate of interest payable, at the Company's option, is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate
plus a margin. The margin is adjustable based upon the Company's Debt Ratio (as
defined in the Credit Agreement) and, with respect to LIBOR borrowings, ranges
between 1.50% and 2.50%. As of February 29, 2004, the LIBOR margin for the
Revolving Credit facility and the Tranche A Term Loan facility is 1.75%, while
the LIBOR margin on the Tranche B Term Loan facility is 2.00%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company is obligated to pledge collateral of (i)
100% of the capital stock of all of the Company's U.S. subsidiaries and (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/or thresholds. As a
result of the prepayment of the Bridge Loans (as defined below) with the
proceeds from the 2003 Equity Offerings (see Note 16), 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. The primary financial covenants require the maintenance of a debt
coverage ratio, a senior debt coverage ratio, a fixed charge ratio and an
interest coverage ratio. As of February 29, 2004, the Company is in compliance
with all of its covenants under its Credit Agreement.
As of February 29, 2004, under the Credit Agreement, the Company had
outstanding Tranche A Term Loans of $360.0 million bearing a weighted average
interest rate of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted
average interest rate of 3.2%, undrawn revolving letters of credit of $18.6
million, and $381.4 million in revolving loans available to be drawn. There
were no outstanding revolving loans under the Credit Agreement as of February
29, 2004.
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. On July 30, 2003, the
Company used proceeds from the 2003 Equity Offerings to prepay the $400.0
million Bridge Loans in their entirety.
SUBSIDIARY FACILITIES -
The Company has additional line of credit arrangements available totaling
$91.5 million and $44.5 million as of February 29, 2004, and February 28, 2003,
respectively. These lines support the borrowing needs of certain of the
Company's foreign subsidiary operations. Interest rates and other terms of these
borrowings vary from country to country, depending on local market conditions.
As of February 29, 2004, and February 28, 2003, amounts outstanding under the
subsidiary revolving credit facilities were $1.8 million and $0.6 million,
respectively.
SENIOR NOTES -
On August 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 5/8% Senior Notes due August 2006 (the "August 1999 Senior Notes").
Interest on the August 1999 Senior Notes is payable semiannually on February 1
and August 1. As of February 29, 2004, the Company had outstanding $200.0
million aggregate principal amount of August 1999 Senior Notes.
On November 17, 1999, the Company issued (pound) 75.0 million ($121.7
million upon issuance) aggregate principal amount of 8 1/2% Senior Notes due
November 2009 (the "Sterling Senior Notes"). Interest on the Sterling Senior
Notes is payable semiannually on May 15 and November 15. In March 2000, the
Company exchanged (pound) 75.0 million aggregate principal amount of 8 1/2%
Series B Senior Notes due in November 2009 (the "Sterling Series B Senior
Notes") for all of the Sterling Senior Notes. The terms of the Sterling Series B
Senior Notes are identical in all material respects to the Sterling Senior
Notes. In October 2000, the Company exchanged (pound) 74.0 million aggregate
principal amount of Sterling Series C Senior Notes (as defined below) for
(pound) 74.0 million of the Sterling Series B Notes. The terms of the Sterling
Series C Senior Notes are identical in all material respects to the Sterling
Series B Senior Notes. As of February 29, 2004, the Company had outstanding
(pound) 1.0 million ($1.9 million) aggregate principal amount of Sterling Series
B Senior Notes.
On May 15, 2000, the Company issued (pound) 80.0 million ($120.0 million
upon issuance) aggregate principal amount of 8 1/2% Series C Senior Notes due
November 2009 at an issuance price of (pound) 79.6 million ($119.4 million upon
issuance, net of $0.6 million unamortized discount, with an effective interest
rate of 8.6%) (the "Sterling Series C Senior Notes"). Interest on the Sterling
Series C Senior Notes is payable semiannually on May 15 and November 15. As of
February 29, 2004, the Company had outstanding (pound) 154.0 million ($287.2
million, net of $0.5 million unamortized discount) aggregate principal amount of
Sterling Series C Senior Notes.
On February 21, 2001, the Company issued $200.0 million aggregate principal
amount of 8% Senior Notes due February 2008 (the "February 2001 Senior Notes").
The net proceeds of the offering ($197.0 million) were used to partially fund
the acquisition of the Turner Road Vintners Assets. Interest on the February
2001 Senior Notes is payable semiannually on February 15 and August 15. In July
2001, the Company exchanged $200.0 million aggregate principal amount of 8%
Series B Senior Notes due February 2008 (the "February 2001 Series B Senior
Notes") for all of the February 2001 Senior Notes. The terms of the February
2001 Series B Senior Notes are identical in all material respects to the
February 2001 Senior Notes. As of February 29, 2004, the Company had outstanding
$200.0 million aggregate principal amount of February 2001 Senior Notes.
The senior notes described above are redeemable, in whole or in part, at
the option of the Company at any time at a redemption price equal to 100% of the
outstanding principal amount and a make whole payment based on the present value
of the future payments at the adjusted Treasury rate or adjusted Gilt rate plus
50 basis points. The senior notes are unsecured senior obligations and rank
equally in right of payment to all existing and future unsecured senior
indebtedness of the Company. Certain of the Company's significant operating
subsidiaries guarantee the senior notes, on a senior basis.
SENIOR SUBORDINATED NOTES -
On March 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 1/2% Senior Subordinated Notes due March 2009 ("Senior Subordinated
Notes"). Interest on the Senior Subordinated Notes is payable semiannually on
March 1 and September 1. The Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after March 1,
2004. As of February 29, 2004, the Company had outstanding $200.0 million
aggregate principal amount of Senior Subordinated Notes. On February 10, 2004,
the Company issued a Notice of Redemption for its Senior Subordinated Notes. The
Senior Subordinated Notes were redeemed with proceeds from the Revolving Credit
facility on March 11, 2004, at 104.25% of par plus accrued interest. In the
first quarter of fiscal 2005, the Company recorded a charge of $10.3 million
related to this redemption.
On January 23, 2002, the Company issued $250.0 million aggregate principal
amount of 8 1/8% Senior Subordinated Notes due January 2012 ("January 2002
Senior Subordinated Notes"). The net proceeds of the offering ($247.2 million)
were used primarily to repay the Company's $195.0 million aggregate principal
amount of 8 3/4% Senior Subordinated Notes due in December 2003. The remaining
net proceeds of the offering were used to repay a portion of the outstanding
indebtedness under the Company's then existing senior credit facility. Interest
on the January 2002 Senior Subordinated Notes is payable semiannually on January
15 and July 15. The January 2002 Senior Subordinated Notes are redeemable at the
option of the Company, in whole or in part, at any time on or after January 15,
2007. The Company may also redeem up to 35% of the January 2002 Senior
Subordinated Notes using the proceeds of certain equity offerings completed
before January 15, 2005. The January 2002 Senior Subordinated Notes are
unsecured and subordinated to the prior payment in full of all senior
indebtedness of the Company, which includes the senior credit facility. The
January 2002 Senior Subordinated Notes are guaranteed, on a senior subordinated
basis, by certain of the Company's significant operating subsidiaries. As of
February 29, 2004, the Company had outstanding $250.0 million aggregate
principal amount of January 2002 Senior Subordinated Notes.
TRUST INDENTURES -
The Company's various Trust Indentures relating to the senior notes and
senior subordinated notes contain certain covenants, including, but not limited
to: (i) limitation on indebtedness; (ii) limitation on restricted payments;
(iii) limitation on transactions with affiliates; (iv) limitation on senior
subordinated indebtedness; (v) limitation on liens; (vi) limitation on sale of
assets; (vii) limitation on issuance of guarantees of and pledges for
indebtedness; (viii) restriction on transfer of assets; (ix) limitation on
subsidiary capital stock; (x) limitation on dividends and other payment
restrictions affecting subsidiaries; and (xi) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of the
Company to another person. The limitation on indebtedness covenant is governed
by a rolling four quarter fixed charge ratio requiring a specified minimum.
DEBT PAYMENTS -
Principal payments required under long-term debt obligations (excluding
unamortized discount of $0.5 million) during the next five fiscal years and
thereafter are as follows:
(in thousands)
2005 $ 267,245
2006 141,682
2007 366,481
2008 445,356
2009 567,516
Thereafter 258,337
-----------
$ 2,046,617
===========
GUARANTEES -
A foreign subsidiary of the Company has guaranteed debt of a joint venture
in the maximum amount of $4.2 million as of February 29, 2004. The liability for
this guarantee is not material and the Company does not have any collateral from
this entity.
11. INCOME TAXES:
Income before income taxes was generated as follows:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Domestic $ 289,960 $ 294,557 $ 199,600
Foreign 54,437 40,379 27,769
------------ ------------ ------------
$ 344,397 $ 334,936 $ 227,369
============ ============ ============
The income tax provision consisted of the following:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Current:
Federal $ 68,125 $ 79,472 $ 63,917
State 13,698 13,807 10,800
Foreign 14,116 17,301 12,556
------------ ------------ ------------
Total current 95,939 110,580 87,273
------------ ------------ ------------
Deferred:
Federal 18,843 16,290 (492)
State 6,180 2,502 (251)
Foreign 3,021 2,258 4,418
------------ ------------ ------------
Total deferred 28,044 21,050 3,675
------------ ------------ ------------
Income tax provision $ 123,983 $ 131,630 $ 90,948
============ ============ ============
The foreign provision for income taxes is based on foreign pretax earnings.
Earnings of foreign subsidiaries would be subject to U.S. income taxation on
repatriation to the U.S. The Company's consolidated financial statements fully
provide for any related tax liability on amounts that may be repatriated.
Deferred tax assets and liabilities reflect the future income tax effects
of temporary differences between the consolidated financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
are measured using enacted tax rates that apply to taxable income.
Significant components of deferred tax assets (liabilities) consist of the
following:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Deferred tax assets:
--------------------
Inventory $ 23,347 $ -
Employee benefits 20,696 15,100
Net operating losses 15,477 -
Insurance accruals 5,682 6,061
Prepaid and other assets 815 9,156
Restructuring accruals - 1,198
Other accruals 23,433 15,778
------------ ------------
Gross deferred tax assets 89,450 47,293
Valuation allowances (2,712) -
------------ ------------
Deferred tax assets, net 86,738 47,293
------------ ------------
Deferred tax liabilities:
-------------------------
Property, plant and equipment $ (96,059) $ (73,705)
Intangible assets (147,271) (101,338)
Derivative instruments (17,883) (9,081)
Inventory - (1,140)
Provision for unremitted earnings (2,547) -
------------ ------------
Total deferred tax liabilities (263,760) (185,264)
------------ ------------
Deferred tax liabilities, net (177,022) (137,971)
Less: Current deferred tax
assets, net 10,388 7,268
------------ ------------
Long-term deferred tax
liabilities, net $ (187,410) $ (145,239)
============ ============
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some or all of the deferred tax assets
will not be realized. Management considers the reversal of deferred tax
liabilities and projected future taxable income in making this assessment.
Based upon this assessment, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net of
any valuation allowances.
Operating loss carryforwards totaling $47.7 million at February 29, 2004,
are being carried forward in a number of U.S. and foreign jurisdictions where
the Company is permitted to use tax operating losses from prior periods to
reduce future taxable income. Of these operating loss carryforwards, $6.6
million will expire in 2019 and $41.1 million may be carried forward
indefinitely. In addition, certain tax credits generated of $8.6 million are
available to future income taxes. These credits will expire, if not utilized, in
2007 through 2009.
The Company is subject to ongoing tax examinations and assessments in
various jurisdictions. Accordingly, the Company provides for additional tax
expense based on probable outcomes of such matters. The Internal Revenue
Service is currently examining tax returns for the years ended February 29,
2000, February 28, 2001, February 28, 2002, and February 28, 2003. While it is
often difficult to predict the final outcome or the timing of resolution of any
particular tax matter, the Company believes the reserves reflect the probable
outcome of known tax contingencies. Unfavorable settlement of any particular
issue would require use of cash. Favorable resolution would be recognized as a
reduction to the effective tax rate in the year of resolution.
A reconciliation of the total tax provision to the amount computed by
applying the statutory U.S. Federal income tax rate to income before provision
for income taxes is as follows:
For the Years Ended
-----------------------------------------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
----------------------- ----------------------- -----------------------
% of % of % of
Pretax Pretax Pretax
Amount Income Amount Income Amount Income
---------- ---------- ---------- ---------- ---------- ----------
(in thousands)
Income tax provision at statutory rate $ 120,521 35.0 $ 117,228 35.0 $ 79,580 35.0
State and local income taxes, net of
federal income tax benefit 13,032 3.8 10,601 3.2 6,812 3.0
Earnings of subsidiaries taxed at
other than U.S. statutory rate (12,170) (3.5) 1,838 0.5 1,105 0.5
Miscellaneous items, net 2,600 0.7 1,963 0.6 3,451 1.5
---------- ---------- ---------- ---------- ---------- ----------
$ 123,983 36.0 $ 131,630 39.3 $ 90,948 40.0
========== ========== ========== ========== ========== ==========
The effect of earnings of foreign subsidiaries includes the difference
between the U.S. statutory rate and local jurisdiction tax rates, as well as the
provision for incremental U.S. taxes on unremitted earnings of foreign
subsidiaries offset by foreign tax credits and other foreign adjustments.
12. OTHER LIABILITIES:
The major components of other liabilities are as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Accrued pension liability $ 55,221 $ 36,351
Adverse grape contracts (Note 15) 83,464 22,550
Other 46,304 40,367
------------ ------------
$ 184,989 $ 99,268
============ ============
13. PROFIT SHARING AND RETIREMENT SAVINGS PLANS:
The Company's retirement and profit sharing plan, the Constellation Brands,
Inc. 401(k) and Profit Sharing Plan (the "Plan"), covers substantially all U.S.
employees, excluding those employees covered by collective bargaining
agreements. The 401(k) portion of the Plan permits eligible employees to defer a
portion of their compensation (as defined in the Plan) on a pretax basis.
Participants may defer up to 50% of their compensation for the year, subject to
limitations of the Plan. The Company makes a matching contribution of 50% of the
first 6% of compensation a participant defers. The amount of the Company's
contribution under the profit sharing portion of the Plan is a discretionary
amount as determined by the Board of Directors on an annual basis, subject to
limitations of the Plan. Company contributions under the Plan were $10.8
million, $10.9 million, and $10.5 million for the years ended February 29, 2004,
February 28, 2003, and February 28, 2002, respectively.
During the year ended February 29, 2004, in connection with the Hardy
Acquisition, the Company acquired the BRL Hardy Superannuation Fund (now known
as the Hardy Wine Company Superannuation Plan) (the "Hardy Plan") which covers
substantially all salaried Australian employees. The Hardy Plan has a defined
benefit component and a defined contribution component. The Company also has a
statutory obligation to provide a minimum defined contribution on behalf of any
Australian employees who are not covered by the Hardy Plan. Additionally in
Fiscal 2004, the Company instituted a
defined contribution plan that covers substantially all of its U.K. employees.
Company contributions under the defined contribution component of the Hardy
Plan, the Australian statutory obligation, and the U.K. defined contribution
plan aggregated $6.5 million for the year ended February 29, 2004.
The Company also has defined benefit pension plans that cover certain of
its non-U.S. employees. These consist of a Canadian plan, an U.K. plan and the
defined benefit component of the Hardy Plan. During the year ended February 29,
2004, the Company ceased future accruals for active employees under its U.K.
plan. There were no curtailment charges arising from this event. Net periodic
benefit cost (income) reported in the Consolidated Statements of Income for
these plans includes the following components:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Service cost $ 2,202 $ 4,245 $ 4,298
Interest cost 14,471 12,055 11,549
Expected return on plan assets (15,155) (14,639) (15,867)
Amortization of prior service cost 9 8 8
Recognized net actuarial loss (gain) 2,019 843 (33)
------------ ------------ ------------
Net periodic benefit cost (income) $ 3,546 $ 2,512 $ (45)
============ ============ ============
The following table summarizes the funded status of the Company's defined
benefit pension plans and the related amounts included in the Consolidated
Balance Sheets:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 220,686 $ 186,722
Service cost 2,202 4,245
Interest cost 14,471 12,055
Plan participants' contributions 235 1,638
Actuarial loss 19,079 3,423
Acquisition 10,764 -
Benefits paid (11,013) (7,706)
Foreign currency exchange rate changes 45,184 20,309
------------ ------------
Benefit obligation as of the last day of February $ 301,608 $ 220,686
============ ============
Change in plan assets:
Fair value of plan assets as of March 1 $ 175,819 $ 181,815
Actual return on plan assets 21,618 (19,794)
Acquisition 9,601 -
Plan participants' contributions 235 1,638
Employer contribution 3,983 979
Benefits paid (11,013) (7,706)
Foreign currency exchange rate changes 36,071 18,887
------------ ------------
Fair value of plan assets as of the last day of February $ 236,314 $ 175,819
============ ============
Funded status of the plan as of the last day of February:
Funded status $ (65,294) $ (44,867)
Unrecognized prior service cost 18 24
Unrecognized actuarial loss 93,926 69,732
------------ ------------
Net amount recognized $ 28,650 $ 24,889
============ ============
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost $ 97 $ -
Accrued benefit liability (55,221) (36,351)
Intangible asset 18 24
Deferred tax asset 25,569 18,681
Accumulated other comprehensive loss 58,187 42,535
------------ ------------
Net amount recognized $ 28,650 $ 24,889
============ ============
As of February 29, 2004, and February 28, 2003, the accumulated benefit
obligation for all defined benefit pension plans was $290.3 million and $212.2
million, respectively. The following table summarizes the projected benefit
obligation, accumulated benefit obligation and fair value of plan assets for
those pension plans with an accumulated benefit obligation in excess of plan
assets:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Projected benefit obligation $ 286,617 $ 220,686
Accumulated benefit obligation $ 275,508 $ 212,170
Fair value of plan assets $ 220,287 $ 175,819
The increase in minimum pension liability included in AOCI for the years
ended February 29, 2004, and February 28, 2003, were $15.6 million and $42.5
million, respectively.
The following table sets forth the weighted average assumptions used in
developing the net periodic pension expense for the years ended February 29,
2004, and February 28, 2003:
For the Years Ended
---------------------------
February 29, February 28,
2004 2003
------------ ------------
Rate of return on plan assets 7.32% 7.78%
Discount rate 5.85% 6.06%
Rate of compensation increase 4.16% 3.75%
The following table sets forth the weighted average assumptions used in
developing the benefit obligation as of February 29, 2004, and February 28,
2003:
February 29, February 28,
2004 2003
------------ ------------
Rate of return on plan assets 7.62% 7.54%
Discount rate 5.57% 5.80%
Rate of compensation increase 3.34% 3.50%
14. POSTRETIREMENT BENEFITS:
The Company currently sponsors multiple unfunded postretirement benefit
plans for certain of its Constellation Beers and Spirits segment employees.
During Fiscal 2004, an amendment to one of the unfunded postretirement benefit
plans modifying the eligibility requirements and retiree contributions decreased
the postretirement benefit obligation by $0.6 million.
The status of the plans is as follows:
February 29, February 28,
2004 2003
------------ ------------
(in thousands)
Change in benefit obligation:
Benefit obligation as of March 1 $ 4,471 $ 4,676
Service cost 147 135
Interest cost 282 260
Benefits paid (159) (145)
Plan amendment (645) -
Actuarial loss (gain) 1,177 (566)
Foreign currency exchange rate changes 187 111
------------ -----------
Benefit obligation as of the last day of February $ 5,460 $ 4,471
============ ===========
Funded status as of the last day of February:
Funded status $ (5,460) $ (4,471)
Unrecognized prior service cost (311) 323
Unrecognized net loss (gain) 926 (168)
------------ -----------
Accrued benefit liability $ (4,845) $ (4,316)
============ ===========
Net periodic benefit cost reported in the Consolidated Statements of Income
includes the following components:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Service cost $ 147 $ 135 $ 155
Interest cost 282 260 305
Amortization of prior service cost 7 41 41
Recognized net actuarial gain (loss) 19 (20) 9
------------ ------------ ------------
Net periodic benefit cost $ 455 $ 416 $ 510
============ ============ ============
The following table sets forth the weighted average assumptions used in
developing the benefit obligation as of February 29, 2004, and February 28,
2003:
February 29, February 28,
2004 2003
------------ ------------
Discount rate 6.00% 6.46%
Rate of compensation increase 3.50% 4.00%
The following table sets forth the weighted average assumptions used in
developing the net periodic non-pension postretirement expense for the years
ended February 29, 2004, and February 28, 2003:
For the Years Ended
---------------------------
February 29, February 28,
2004 2003
------------ ------------
Discount rate 6.46% 6.50%
Rate of compensation increase 4.00% 4.00%
The following table sets forth the assumed health care cost trend rates as
of February 29, 2004, and February 28, 2003:
February 29, 2004 February 28, 2003
--------------------- ---------------------
Non-U.S. Non-U.S.
U.S. Plan Plan U.S. Plan Plan
--------- --------- --------- ---------
Health care cost trend rate assumed for next year 5.1% 10.5% 6.2% 10.3%
Rate to which the cost trend rate is assumed to
decline to (the ultimate trend rate) 4.0% 4.7% 4.0% 4.7%
Year that the rate reaches the ultimate trend rate 2005 2011 2005 2010
Assumed health care trend rates could have a significant effect on the
amount reported for health care plans. A one percent change in assumed health
care cost trend rates would have the following effects:
1% Increase 1% Decrease
----------- -----------
(in thousands)
Effect on total service and interest cost components $ 56 $ (47)
Effect on postretirement benefit obligation $ 623 $ (540)
15. COMMITMENTS AND CONTINGENCIES:
OPERATING LEASES -
Step rent provisions, escalation clauses, capital improvement funding and
other lease concessions, when present in the Company's leases, are taken into
account in computing the minimum lease payments. The minimum lease payments for
the Company's operating leases are recognized on a straight-line basis over the
minimum lease term. Future payments under noncancelable operating leases having
initial or remaining terms of one year or more are as follows during the next
five fiscal years and thereafter:
(in thousands)
2005 $ 39,155
2006 33,621
2007 34,002
2008 21,209
2009 18,388
Thereafter 154,935
---------
$ 301,310
=========
Rental expense was $38.7 million, $25.3 million, and $24.0 million for
Fiscal 2004, Fiscal 2003, and Fiscal 2002, respectively.
PURCHASE COMMITMENTS AND CONTINGENCIES -
The Company has agreements with suppliers to purchase various spirits of
which certain agreements are denominated in British pound sterling and Canadian
dollars. The maximum future obligation under these agreements, based upon
exchange rates at February 29, 2004, aggregate $20.3 million for contracts
expiring through December 2007.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements from the suppliers of these products. The
Company's agreement to distribute Corona Extra and its other Mexican beer brands
exclusively throughout 25 primarily western U.S. states expires in December
2006, with automatic five year renewals thereafter, subject to compliance with
certain performance criteria and other terms under the agreement. The remaining
agreements expire through December 2008. Prior to their expiration, these
agreements may be terminated if the Company fails to meet certain performance
criteria. At February 29, 2004, the Company believes it is in compliance with
all of its material distribution agreements and, given the Company's long-term
relationships with its suppliers, the Company does not believe that these
agreements will be terminated.
In connection with previous acquisitions as well as with the Hardy
Acquisition, the Company has assumed grape purchase contracts with certain
growers and suppliers. In addition, the Company has entered into other grape
purchase contracts with various growers and suppliers in the normal course of
business. Under the grape purchase contracts, the Company is committed to
purchase all grape production yielded from a specified number of acres for a
period of time from one to fifteen years. The actual tonnage and price of
grapes that must be purchased by the Company will vary each year depending on
certain factors, including weather, time of harvest, overall market conditions
and the agricultural practices and location of the growers and suppliers under
contract. The Company purchased $284.0 million and $166.6 million of grapes
under contracts during Fiscal 2004 and Fiscal 2003, respectively. Based on
current production yields and published grape prices, the Company estimates that
the aggregate purchases under these contracts over the remaining terms of the
contracts will be $2,131.3 million.
In connection with the Turner Road Vintners Assets acquisition, the Corus
Assets acquisition and the Hardy Acquisition, the Company established a reserve
for the estimated loss on firm purchase commitments assumed at the time of
acquisition. As of February 29, 2004, the remaining balance on this reserve is
$123.6 million.
The Company's aggregate obligations under bulk wine purchase contracts will
be $78.9 million over the remaining terms of the contracts which extend through
fiscal 2008.
In connection with the Hardy Acquisition, the Company assumed certain
processing contracts which commits the Company to utilize outside services to
process and/or package a minimum volume quantity. In addition, the Company
entered into a new processing contract in Fiscal 2004 utilizing outside services
to process a minimum volume of brandy at prices which are dependent on the
processing ingredients provided by the Company. The Company's aggregate
obligations under these processing contracts will be $67.5 million over the
remaining terms of the contracts which extend through December 2014.
EMPLOYMENT CONTRACTS -
The Company has employment contracts with certain of its executive officers
and certain other management personnel with automatic one year renewals unless
terminated by either party. These agreements provide for minimum salaries, as
adjusted for annual increases, and may include incentive bonuses based upon
attainment of specified management goals. In addition, these agreements provide
for severance payments in the event of specified termination of employment. As
of February 29, 2004, the aggregate commitment for future compensation and
severance, excluding incentive bonuses, was $8.0 million, none of which was
accruable at that date.
EMPLOYEES COVERED BY COLLECTIVE BARGAINING AGREEMENTS -
Approximately 31.2% of the Company's full-time employees are covered by
collective bargaining agreements at February 29, 2004. Agreements expiring
within one year cover approximately 11.9% of the Company's full-time employees.
LEGAL MATTERS -
In the course of its business, the Company is subject to litigation from
time to time. Although the amount of any liability with respect to such
litigation cannot be determined, in the opinion of management such liability
will not have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
16. STOCKHOLDERS' EQUITY:
COMMON STOCK -
The Company has two classes of common stock: Class A Common Stock and Class
B Convertible Common Stock. Class B Convertible Common Stock shares are
convertible into shares of Class A Common Stock on a one-to-one basis at any
time at the option of the holder. Holders of Class B Convertible Common Stock
are entitled to ten votes per share. Holders of Class A Common Stock are
entitled to one vote per share and a cash dividend premium. If the Company pays
a cash dividend on Class B Convertible Common Stock, each share of Class A
Common Stock will receive an amount at least ten percent greater than the amount
of the cash dividend per share paid on Class B Convertible Common Stock. In
addition, the Board of Directors may declare and pay a dividend on Class A
Common Stock without paying any dividend on Class B Convertible Common Stock.
However, under the terms of the Company's senior credit facility, the Company is
currently constrained from paying cash dividends on its common stock. In
addition, the indentures for the Company's outstanding senior notes and senior
subordinated notes may restrict the payment of cash dividends on its common
stock under certain circumstances.
In July 2002, the stockholders of the Company approved an increase in the
number of authorized shares of Class A Common Stock from 120,000,000 shares to
275,000,000 shares and Class B Convertible Common Stock from 20,000,000 shares
to 30,000,000 shares, thereby increasing the aggregate number of authorized
shares of the Company to 306,000,000 shares.
At February 29, 2004, there were 94,566,611 shares of Class A Common Stock
and 12,061,730 shares of Class B Convertible Common Stock outstanding, net of
treasury stock.
STOCK REPURCHASE AUTHORIZATION -
In June 1998, the Company's Board of Directors authorized the repurchase of
up to $100.0 million of its Class A Common Stock and Class B Convertible Common
Stock. The Company may finance such purchases, which will become treasury
shares, through cash generated from operations or through the senior credit
facility. No shares were repurchased during Fiscal 2004, Fiscal 2003 and Fiscal
2002.
PREFERRED STOCK -
In Fiscal 2004, the Company issued 5.75% Series A Mandatory Convertible
Preferred Stock ("Preferred Stock") (see "Equity Offerings" discussion below).
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. 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.
As of February 29, 2004, 170,500 shares of Preferred Stock were outstanding
and $2.5 million of dividends were accrued.
EQUITY OFFERINGS -
During March 2001, the Company completed a public offering of 8,740,000
shares of its Class A Common Stock, which was held as treasury stock. This
resulted in net proceeds to the Company, after deducting underwriting discounts
and expenses, of $139.4 million. The net proceeds were used to repay revolving
loan borrowings under the senior credit facility of which a portion was incurred
to partially finance the acquisition of the Turner Road Vintners Assets.
During October 2001, the Company sold 645,000 shares of its Class A Common
Stock, which was held as treasury stock, in connection with a public offering of
Class A Common Stock by stockholders of the Company. The net proceeds to the
Company, after deducting underwriting discounts, of $12.1 million were used to
repay borrowings under the senior credit facility.
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 $261.1 million. In
addition, the Company also completed a public offering of 170,500 shares of its
5.75% Series A Mandatory Convertible 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 majority of 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.
LONG-TERM STOCK INCENTIVE PLAN -
Under the Company's Long-Term Stock Incentive Plan, nonqualified stock
options, stock appreciation rights, restricted stock and other stock-based
awards may be granted to employees, officers and directors of the Company. The
aggregate number of shares of the Company's Class A Common Stock available for
awards under the Company's Long-Term Stock Incentive Plan is 28,000,000 shares.
The exercise price, vesting period and term of nonqualified stock options
granted are established by the committee administering the plan (the
"Committee"). Grants of stock appreciation rights, restricted stock and other
stock-based awards may contain such vesting, terms, conditions and other
requirements as the Committee may establish. During Fiscal 2004, Fiscal 2003
and Fiscal 2002, no stock appreciation rights were granted. No restricted stock
was granted during Fiscal 2004. During Fiscal 2003, 7,080 shares of
restricted Class A Common Stock were granted at a weighted average grant date
fair value of $28.41 per share. No restricted stock was granted during Fiscal
2002.
INCENTIVE STOCK OPTION PLAN -
Under the Company's Incentive Stock Option Plan, incentive stock options
may be granted to employees, including officers, of the Company. Grants, in the
aggregate, may not exceed 4,000,000 shares of the Company's Class A Common
Stock. The exercise price of any incentive stock option may not be less than
the fair market value of the Company's Class A Common Stock on the date of
grant. The vesting period and term of incentive stock options granted are
established by the Committee. The maximum term of incentive stock options is
ten years.
A summary of stock option activity under the Company's Long-Term Stock
Incentive Plan and the Incentive Stock Option Plan is as follows:
Weighted Weighted
Shares Average Average
Under Exercise Options Exercise
Option Price Exercisable Price
------------ ---------- ----------- ----------
Balance, February 28, 2001 12,308,804 $ 10.97 4,816,884 $ 8.51
Options granted 5,115,100 $ 19.12
Options exercised (4,234,440) $ 11.20
Options forfeited/canceled (711,656) $ 15.49
------------
Balance, February 28, 2002 12,477,808 $ 14.12 7,565,199 $ 12.31
Options granted 1,243,200 $ 27.20
Options exercised (2,096,061) $ 13.44
Options forfeited/canceled (217,016) $ 20.06
------------
Balance, February 28, 2003 11,407,931 $ 15.55 8,345,855 $ 13.58
Options granted 2,816,357 $ 23.86
Options exercised (2,612,311) $ 13.87
Options forfeited/canceled (324,504) $ 25.61
------------
Balance, February 29, 2004 11,287,473 $ 17.73 8,821,298 $ 15.80
============
The following table summarizes information about stock options outstanding
at February 29, 2004:
Options Outstanding Options Exercisable
------------------------------------ -----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- ---------- ------------ ---------
$ 4.25 - $10.25 1,486,583 2.6 years $ 7.71 1,486,583 $ 7.71
$11.19 - $17.74 4,621,375 5.9 years $ 14.49 4,541,215 $ 14.50
$18.75 - $32.38 5,179,515 8.4 years $ 23.49 2,793,500 $ 22.21
----------- ----------
11,287,473 6.6 years $ 17.73 8,821,298 $ 15.80
=========== =========
The weighted average fair value of options granted during Fiscal 2004,
Fiscal 2003 and Fiscal 2002 was $9.74, $12.18 and $8.99, respectively. The fair
value of options is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk-free
interest rate of 3.2% for Fiscal 2004, 5.0% for Fiscal 2003 and 4.7% for Fiscal
2002; volatility of 35.7% for Fiscal 2004, 36.7% for Fiscal 2003 and 41.0% for
Fiscal 2002; and expected option life of 6.2 years for Fiscal 2004, 6.0 years
for Fiscal 2003 and 6.0 years for Fiscal 2002. The dividend yield was 0% for
Fiscal 2004, Fiscal 2003 and Fiscal 2002. Forfeitures are recognized as they
occur.
Employee stock purchase plans -
The Company has a stock purchase plan under which 4,500,000 shares of Class
A Common Stock may be issued. Under the terms of the plan, eligible employees
may purchase shares of the Company's Class A Common Stock through payroll
deductions. The purchase price is the lower of 85% of the fair market value of
the stock on the first or last day of the purchase period. During Fiscal 2004,
Fiscal 2003 and Fiscal 2002, employees purchased 137,985 shares, 138,304 shares
and 120,674 shares, respectively.
The weighted average fair value of purchase rights granted during Fiscal
2004, Fiscal 2003 and Fiscal 2002 was $6.60, $7.02 and $5.59, respectively. The
fair value of purchase rights is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted average
assumptions: risk-free interest rate of 1.0% for Fiscal 2004, 1.4% for Fiscal
2003 and 2.6% for Fiscal 2002; volatility of 22.2% for Fiscal 2004, 40.3% for
Fiscal 2003 and 33.2% for Fiscal 2002; and expected purchase right life of 0.5
years for Fiscal 2004, Fiscal 2003 and Fiscal 2002. The dividend yield was 0%
for Fiscal 2004, Fiscal 2003 and Fiscal 2002.
The Company has a stock purchase plan under which 2,000,000 shares of the
Company's Class A Common Stock may be issued to eligible employees and directors
of the Company's United Kingdom subsidiaries. Under the terms of the plan,
participants may purchase shares of the Company's Class A Common Stock through
payroll deductions. The purchase price may be no less than 80% of the closing
price of the stock on the day the purchase price is fixed by the committee
administering the plan. During Fiscal 2004 and Fiscal 2003, employees purchased
27,791 shares and 758 shares, respectively. During Fiscal 2002, there were no
shares purchased under this plan.
The weighted average fair value of purchase rights granted during Fiscal
2002 was $6.26. There were no purchase rights granted during Fiscal 2004 and
Fiscal 2003. The fair value of purchase rights is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions for Fiscal 2002: risk-free interest rate of 4.9%; volatility of
36.2%; and expected purchase right life of 3.8 years. The dividend yield was 0%
for Fiscal 2002.
17. EARNINGS PER COMMON SHARE:
Earnings per common share are as follows:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands, except per share data)
Net income $ 220,414 $ 203,306 $ 136,421
Dividends on preferred stock (5,746) - -
------------ ------------ ------------
Income available to common stockholders $ 214,668 $ 203,306 $ 136,421
============ ============ ============
Weighted average common shares outstanding - basic 100,702 89,856 85,505
Stock options 3,314 2,890 2,320
Preferred stock 2,932 - -
------------ ------------ ------------
Weighted average common shares outstanding - diluted 106,948 92,746 87,825
============ ============ ============
Earnings per common share:
Earnings per common share - basic $ 2.13 $ 2.26 $ 1.60
============ ============ ============
Earnings per common share - diluted $ 2.06 $ 2.19 $ 1.55
============ ============ ============
Stock options to purchase 0.1 million, 1.1 million and 2.2 million shares
of Class A Common Stock at a weighted average price per share of $31.09, $27.41
and $20.70 were outstanding during the years ended February 29, 2004, February
28, 2003, and February 28, 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 respective periods.
18. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS):
Accumulated other comprehensive 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 410,694 36,949 (432) (15,652) 431,559
----------- ----------- ---------- ---------- -------------
Balance, February 29, 2004 $ 393,972 $ 36,949 $ (432) $ (58,187) $ 372,302
=========== =========== ========== ========== =============
19. SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
Sales to the five largest customers represented 20.6%, 21.2%, and 19.1% of
the Company's sales for the years ended February 29, 2004, February 28, 2003,
and February 28, 2002, respectively. No single customer was responsible for
greater than 10% of sales during these years. Accounts receivable from the
Company's largest customer, Southern Wine and Spirits, represented 8.3%, 11.4%,
and 10.0% of the Company's total accounts receivable as of February 29, 2004,
February 28, 2003, and February 28, 2002, respectively. Sales to the Company's
five largest customers are expected to continue to represent a significant
portion of the Company's revenues. The Company's arrangements with certain of
its customers may, generally, be terminated by either party with prior notice.
The Company performs ongoing credit evaluations of its customers' financial
position, and management of the Company is of the opinion that any risk of
significant loss is reduced due to the diversity of customers and geographic
sales area.
The Company purchases the majority of its glass inventories from a limited
number of suppliers. Glass bottle costs are one of the largest components of
the Company's cost of product sold. The glass bottle industry is highly
concentrated with only a small number of producers. The inability of any of the
Company's glass bottle suppliers to satisfy the Company's requirements could
adversely affect the Company's operations.
20. RESTRUCTURING AND RELATED CHARGES:
For the year ended February 29, 2004, the Company recorded $31.2 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 and (ii) the 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. For the year ended February 28, 2003, the Company recorded
restructuring and related charges associated with an asset impairment charge of
$4.8 million in connection with two of Constellation Wines segment's production
facilities (see Note 1). No restructuring and related charges were recorded for
the year ended February 28, 2002.
The retructuring and related charges of $31.2 million for the year ended
February 29, 2004, included $6.9 million of employee termination benefit costs,
$17.7 million of grape contract termination costs, $1.9 million of facility
consolidation and relocation costs, and $4.7 million of other related charges,
which consisted of a $2.1 million loss on the sale of the Escalon facility and
$2.6 million of other costs related to the realignment of the business
operations in the Constellation Wines segment.
The Company estimates that the completion of the restructuring actions will
include (i) a total of $9.9 million of employee termination benefit costs
through February 28, 2005, of which $6.9 million has been incurred through
February 29, 2004, (ii) a total of $22.1 million of grape contract termination
costs through February 28, 2005, of which $17.7 million has been incurred
through February 29, 2004, and (iii) a total of $4.8 million of facility
consolidation and relocation costs through February 28, 2005, of which $1.9
million has been incurred through February 29, 2004. The Company has incurred
other costs related to the restructuring plan for the disposal of fixed assets
and other costs of realigning the business operations of the Constellation Wines
segment and expects to incur additional costs of realigning the business
operations of $1.3 million during the year ending February 28, 2005.
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 6,834 17,697 1,935 26,466
Cash expenditures (5,295) (16,649) (1,935) (23,879)
----------- ----------- -------------- ---------
Balance, February 29, 2004 $ 1,539 $ 1,048 $ - $ 2,587
=========== =========== ============== =========
21. CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
Subsequent to February 29, 2004, four subsidiaries of the Company which
were previously included as Subsidiary Nonguarantors (as defined below) became
Subsidiary Guarantors (as defined below) under the Company's existing
indentures. The following information sets forth the condensed consolidating
balance sheets as of February 29, 2004, and February 28, 2003, the condensed
consolidating statements of income and cash flows for each of the three years in
the period ended February 29, 2004, 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"), as if the new
Subsidiary Guarantors had been in place as of and for all periods presented. The
Subsidiary Guarantors are wholly owned and the guarantees are full,
unconditional, joint and several obligations of each of the Subsidiary
Guarantors. Separate financial statements for the Subsidiary Guarantors of the
Company are not presented because the Company has determined that such financial
statements would not be material to investors. The accounting policies of the
parent company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are
the same as those described for the Company in the Summary of Significant
Accounting Policies in Note 1 and include recently adopted accounting
pronouncements described in Note 2. There are no restrictions on the ability of
the Subsidiary Guarantors to transfer funds to the Company in the form of cash
dividends, loans or advances.
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Balance Sheet
-------------------------------------
at February 29, 2004
--------------------
Current assets:
Cash and cash investments $ 1,048 $ 4,664 $ 31,424 $ - $ 37,136
Accounts receivable, net 137,422 145,152 353,336 - 635,910
Inventories, net 9,922 696,928 561,900 (7,372) 1,261,378
Prepaid expenses and other 8,734 72,788 55,525 - 137,047
Intercompany (payable) receivable (381,765) (176,470) 558,235 - -
----------- ------------ --------------- -------------- -------------
Total current assets (224,639) 743,062 1,560,420 (7,372) 2,071,471
Property, plant and equipment, net 50,022 409,852 637,488 - 1,097,362
Investments in subsidiaries 4,270,871 1,757,700 - (6,028,571) -
Goodwill 50,338 586,259 904,040 - 1,540,637
Intangible assets, net 10,572 385,581 348,825 - 744,978
Other assets 36,041 2,146 66,038 - 104,225
----------- ------------ --------------- -------------- -------------
Total assets $ 4,193,205 $ 3,884,600 $ 3,516,811 $ (6,035,943) $ 5,558,673
=========== ============ =============== ============== =============
Current liabilities:
Notes payable to banks $ - $ - $ 1,792 $ - $ 1,792
Current maturities of long-term debt 260,061 3,949 3,235 - 267,245
Accounts payable 33,631 67,459 169,201 - 270,291
Accrued excise taxes 8,005 15,344 25,116 - 48,465
Other accrued expenses and liabilities 151,534 23,352 267,123 - 442,009
----------- ------------ --------------- -------------- -------------
Total current liabilities 453,231 110,104 466,467 - 1,029,802
Long-term debt, less current maturities 1,739,221 8,510 31,122 - 1,778,853
Deferred income taxes 56,815 119,704 10,891 - 187,410
Other liabilities 6,209 21,646 157,134 - 184,989
Stockholders' equity:
Preferred stock 2 - - - 2
Class A and Class B common stock 1,117 6,443 141,573 (148,016) 1,117
Additional paid-in capital 1,024,048 1,977,179 2,418,614 (4,395,793) 1,024,048
Retained earnings 1,017,565 1,431,384 53,378 (1,492,134) 1,010,193
Accumulated other comprehensive
(loss) income (74,960) 209,630 237,632 - 372,302
Treasury stock and other (30,043) - - - (30,043)
----------- ------------ --------------- -------------- -------------
Total stockholders' equity 1,937,729 3,624,636 2,851,197 (6,035,943) 2,377,619
----------- ------------ --------------- -------------- -------------
Total liabilities and
stockholders' equity $ 4,193,205 $ 3,884,600 $ 3,516,811 $ (6,035,943) $ 5,558,673
=========== ============ =============== ============== =============
Condensed Consolidating 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
=========== ============ =============== ============== =============
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:
Preferred stock - - - - -
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 Year Ended February 29, 2004
------------------------------------
Gross sales $ 814,042 $ 1,879,442 $ 1,866,165 $ (90,379) $ 4,469,270
Less - excise taxes (143,964) (417,130) (355,747) - (916,841)
----------- ------------ --------------- -------------- -------------
Net sales 670,078 1,462,312 1,510,418 (90,379) 3,552,429
Cost of product sold (553,391) (894,227) (1,212,105) 83,082 (2,576,641)
----------- ------------ --------------- -------------- -------------
Gross profit 116,687 568,085 298,313 (7,297) 975,788
Selling, general and administrative
expenses (115,163) (171,036) (171,078) - (457,277)
Restructuring and related charges - (40,567) 9,413 - (31,154)
----------- ------------ --------------- -------------- -------------
Operating income 1,524 356,482 136,648 (7,297) 487,357
Gain on change in fair value of
derivative instruments 1,181 - - - 1,181
Equity in earnings of
subsidiary/joint venture 215,775 90,157 2 (305,392) 542
Interest income (expense), net 15,945 (154,914) (5,714) - (144,683)
----------- ------------ --------------- -------------- -------------
Income before income taxes 234,425 291,725 130,936 (312,689) 344,397
Provision for income taxes (6,714) (75,950) (41,319) - (123,983)
----------- ------------ --------------- -------------- -------------
Net income 227,711 215,775 89,617 (312,689) 220,414
Dividends on preferred stock (5,746) - - - (5,746)
----------- ------------ --------------- -------------- -------------
Income available to common
stockholders $ 221,965 $ 215,775 $ 89,617 $ (312,689) $ 214,668
=========== ============ =============== ============== =============
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Condensed Consolidating Statement of Income
-------------------------------------------
for the Year Ended February 28, 2003
------------------------------------
Gross sales $ 817,458 $ 1,989,490 $ 1,145,520 $ (369,386) $ 3,583,082
Less - excise taxes (148,129) (412,022) (291,319) - (851,470)
----------- ------------ --------------- -------------- -------------
Net sales 669,329 1,577,468 854,201 (369,386) 2,731,612
Cost of product sold (558,811) (1,088,899) (692,558) 369,371 (1,970,897)
----------- ------------ --------------- -------------- -------------
Gross profit 110,518 488,569 161,643 (15) 760,715
Selling, general and administrative
expenses (109,576) (146,037) (95,380) - (350,993)
Restructuring charges - (4,764) - - (4,764)
----------- ------------ --------------- -------------- -------------
Operating income 942 337,768 66,263 (15) 404,958
Gain on change in fair value of
derivative instruments 23,129 - - - 23,129
Equity in earnings of
subsidiary/joint venture 186,448 55,129 - (229,341) 12,236
Interest income (expense), net 11,648 (114,051) (2,984) - (105,387)
----------- ------------ --------------- -------------- -------------
Income before income taxes 222,167 278,846 63,279 (229,356) 334,936
Provision for income taxes (18,846) (92,398) (20,386) - (131,630)
----------- ------------ --------------- -------------- -------------
Net income $ 203,321 $ 186,448 $ 42,893 $ (229,356) $ 203,306
=========== ============ =============== ============== =============
Condensed Consolidating Statement of
------------------------------------
Income for the Year Ended February 28, 2002
--------------------------------------------
Gross sales $ 832,065 $ 1,954,585 $ 1,032,130 $ (398,567) $ 3,420,213
Less - excise taxes (147,446) (408,532) (257,477) - (813,455)
----------- ------------ --------------- -------------- -------------
Net sales 684,619 1,546,053 774,653 (398,567) 2,606,758
Cost of product sold (511,714) (1,172,935) (625,522) 398,573 (1,911,598)
----------- ------------ --------------- -------------- -------------
Gross profit 172,905 373,118 149,131 6 695,160
Selling, general and administrative
expenses (92,891) (167,521) (94,857) - (355,269)
----------- ------------ --------------- -------------- -------------
Operating income 80,014 205,597 54,274 6 339,891
Equity in earnings of
subsidiary/joint venture 90,620 34,488 - (123,441) 1,667
Interest expense, net (3,689) (106,610) (3,890) - (114,189)
----------- ------------ --------------- -------------- -------------
Income before income taxes 166,945 133,475 50,384 (123,435) 227,369
Provision for income taxes (30,530) (42,855) (17,563) - (90,948)
----------- ------------ --------------- -------------- -------------
Net income $ 136,415 $ 90,620 $ 32,821 $ (123,435) $ 136,421
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Cash
-----------------------------------------
Flows for the Year Ended February 29, 2004
------------------------------------------
Net cash provided by (used in)
operating activities $ 397,785 $ 115,791 $ (173,269) $ - $ 340,307
Cash flows from investing activities:
Purchases of businesses, net of cash - (1,069,470) - - (1,069,470)
Purchases of property, plant and
equipment (25,063) (19,982) (60,049) - (105,094)
Payment of accrued earn-out amount - (2,035) - - (2,035)
Proceeds from sale of assets - 11,396 2,053 - 13,449
Proceeds from sale of business - - 3,814 - 3,814
Proceeds from sale of marketable
equity securities - - 849 - 849
----------- ------------ --------------- -------------- -------------
Net cash used in investing activities (25,063) (1,080,091) (53,333) - (1,158,487)
----------- ------------ --------------- -------------- -------------
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Cash flows from financing activities:
Proceeds from issuance of long-term
debt, net of discount 1,600,000 - - - 1,600,000
Proceeds from equity offerings,
net of fees 426,086 - - - 426,086
Exercise of employee stock options 36,017 - - - 36,017
Proceeds from employee stock
purchases 3,481 - - - 3,481
Intercompany financing activities, net (1,474,100) 776,442 697,658 - -
Principal payments of long-term debt (885,359) (23,394) (373,521) - (1,282,274)
Payment of issuance costs of
long-term debt (33,748) - - - (33,748)
Payment of dividends (3,295) - - - (3,295)
Net (repayment of) proceeds from
notes payable (2,000) (1,400) 2,287 - (1,113)
----------- ------------ --------------- -------------- -------------
Net cash (used in) provided by
financing activities (332,918) 751,648 326,424 - 745,154
------------ ------------ --------------- -------------- -------------
Effect of exchange rate changes on
cash and cash investments (40,182) 216,068 (79,534) - 96,352
----------- ------------ --------------- -------------- -------------
Net (decrease) increase in cash and
cash investments (378) 3,416 20,288 - 23,326
Cash and cash investments, beginning
of period 1,426 1,248 11,136 - 13,810
----------- ------------ --------------- -------------- -------------
Cash and cash investments, end of
period $ 1,048 $ 4,664 $ 31,424 $ - $ 37,136
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Cash
-----------------------------------------
Flows for the Year Ended February 28, 2003
------------------------------------------
Net cash provided by operating
activities $ 135,057 $ 83,491 $ 17,505 $ - $ 236,053
Cash flows from investing activities:
Purchases of property, plant and
equipment (15,541) (39,451) (16,583) - (71,575)
Payment of accrued earn-out amount - (1,674) - - (1,674)
Proceeds from sale of assets 1 409 878 - 1,288
----------- ------------ --------------- -------------- -------------
Net cash used in investing activities (15,540) (40,716) (15,705) - (71,961)
----------- ------------ --------------- -------------- -------------
Cash flows from financing activities:
Principal payments of long-term debt (141,423) (3,458) (6,253) - (151,134)
Net repayment of notes payable (48,000) - (3,921) - (51,921)
Payment of issuance costs of
long-term debt (20) - - - (20)
Exercise of employee stock options 28,706 - - - 28,706
Proceeds from issuance of long-term
debt, net of discount - - 10,000 - 10,000
Proceeds from employee stock
purchases 2,885 - - - 2,885
Other - 142 (142) - -
----------- ------------ --------------- -------------- -------------
Net cash used in financing activities (157,852) (3,316) (316) - (161,484)
----------- ------------ --------------- -------------- -------------
Effect of exchange rate changes on
cash and cash investments 38,923 (40,295) 3,613 - 2,241
----------- ------------ --------------- -------------- -------------
Parent Subsidiary Subsidiary
Company Guarantors Nonguarantors Eliminations Consolidated
----------- ------------ --------------- -------------- -------------
(in thousands)
Net increase (decrease) in cash
and cash investments 588 (836) 5,097 - 4,849
Cash and cash investments, beginning
of year 838 2,084 6,039 - 8,961
----------- ------------ --------------- -------------- -------------
Cash and cash investments, end of year $ 1,426 $ 1,248 $ 11,136 $ - $ 13,810
=========== ============ =============== ============== =============
Condensed Consolidating Statement of Cash
-----------------------------------------
Flows for the Year Ended February 28, 2002
------------------------------------------
Net cash provided by operating
activities $ 110,056 $ 82,669 $ 20,574 $ - $ 213,299
Cash flows from investing activities:
Purchases of businesses, net of
cash acquired (478,574) 5,742 - - (472,832)
Investment in joint venture - (77,282) - - (77,282)
Purchases of property, plant and
equipment (11,544) (43,812) (15,792) - (71,148)
Proceeds from sale of assets - 35,466 349 - 35,815
----------- ------------ --------------- -------------- -------------
Net cash used in investing activities (490,118) (79,886) (15,443) - (585,447)
----------- ------------ --------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of long-term
debt, net of discount 250,000 - 2,539 - 252,539
Proceeds from equity offerings,
net of fees 151,479 - - - 151,479
Net proceeds from notes payable 50,000 - 1,403 - 51,403
Exercise of employee stock options 45,027 - - - 45,027
Proceeds from employee stock
purchases 1,986 - - - 1,986
Principal payments of long-term debt (249,720) (9,346) (1,916) - (260,982)
Payment of issuance costs of
long-term debt (4,537) - - - (4,537)
----------- ------------ --------------- -------------- -------------
Net cash provided by (used in)
financing activities 244,235 (9,346) 2,026 - 236,915
----------- ------------ --------------- -------------- -------------
Effect of exchange rate changes on
cash and cash investments (5,439) 5,408 (1,447) - (1,478)
----------- ------------ --------------- -------------- -------------
Net (decrease) increase in cash
and cash investments (141,266) (1,155) 5,710 - (136,711)
Cash and cash investments, beginning
of year 142,104 3,239 329 - 145,672
----------- ------------ --------------- -------------- -------------
Cash and cash investments, end of year $ 838 $ 2,084 $ 6,039 $ - $ 8,961
=========== ============ =============== ============== =============
22. 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 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 being
managed, how operating performance within the Company is being evaluated by
senior management and the structure of its internal financial reporting. In
addition, the Company 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 years ended
February 28, 2003, and February 28, 2002, has been restated to conform to the
new segment presentation. For the year ended February 29, 2004, restructuring
and related charges and unusual costs consist of the flow through of inventory
step-up and financing costs associated with the Hardy Acquisition of $22.5
million and $11.6 million, respectively, and restructuring and related charges
of $48.0 million, including a write-down of commodity concentrate inventory of
$16.8 million, partially offset by the relief from certain excise tax, duty and
other costs incurred in prior years of $10.4 million. For the year ended
February 28, 2003, restructuring and related charges and unusual costs consist
of an asset impairment charge of $4.8 million recorded in connection with the
Company's realignment of its business operations within the Constellation Wines
segment. For the year ended February 28, 2002, restructuring and related charges
and unusual costs consist of the write-off of the remaining deferred financing
costs and unamortized discount associated with certain of the Company's senior
subordinated notes which were redeemed in February 2002 of $2.6 million. The
Company evaluates performance based on operating income of the respective
business units. The accounting policies of the segments are the same as those
described for the Company in the Summary of Significant Accounting Policies in
Note 1 and include the recently adopted accounting pronouncements described in
Note 2. Transactions between segments consist mainly of sales of products and
are accounted for at cost plus an applicable margin.
Segment information is as follows:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Constellation Wines:
--------------------
Net sales:
Branded wine $ 1,549,750 $ 983,505 $ 963,514
Wholesale and other 846,306 689,794 641,589
------------ ------------ ------------
Net sales $ 2,396,056 $ 1,673,299 $ 1,605,103
Segment operating income $ 348,132 $ 224,556 $ 191,227
Equity in earnings of joint venture $ 542 $ 12,236 $ 1,667
Long-lived assets $ 1,004,906 $ 509,598 $ 492,252
Investment in joint venture $ 8,412 $ 123,064 $ 110,520
Total assets $ 4,789,199 $ 2,429,890 $ 2,323,295
Capital expenditures $ 94,147 $ 57,551 $ 58,616
Depreciation and amortization $ 73,046 $ 46,167 $ 63,043
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Constellation Beers and Spirits:
--------------------------------
Net sales:
Imported beers $ 862,637 $ 776,006 $ 726,953
Spirits 284,551 282,307 274,702
------------ ------------ ------------
Net sales $ 1,147,188 $ 1,058,313 $ 1,001,655
Segment operating income $ 252,533 $ 217,963 $ 178,805
Long-lived assets $ 80,388 $ 79,757 $ 78,516
Total assets $ 718,380 $ 700,545 $ 711,484
Capital expenditures $ 7,497 $ 8,722 $ 8,350
Depreciation and amortization $ 9,491 $ 9,732 $ 17,940
Corporate Operations and Other:
-------------------------------
Net sales $ - $ - $ -
Segment operating loss $ (41,717) $ (32,797) $ (27,551)
Long-lived assets $ 12,068 $ 13,114 $ 7,996
Total assets $ 51,094 $ 65,895 $ 34,606
Capital expenditures $ 3,450 $ 5,302 $ 4,182
Depreciation and amortization $ 19,417 $ 4,190 $ 4,421
Restructuring and Related
-------------------------
Charges and Unusual Costs:
----------------------------
Net sales $ 9,185 $ - $ -
Operating loss $ (71,591) $ (4,764) $ (2,590)
Consolidated:
-------------
Net sales $ 3,552,429 $ 2,731,612 $ 2,606,758
Operating income $ 487,357 $ 404,958 $ 339,891
Equity in earnings of joint venture $ 542 $ 12,236 $ 1,667
Long-lived assets $ 1,097,362 $ 602,469 $ 578,764
Investment in joint venture $ 8,412 $ 123,064 $ 110,520
Total assets $ 5,558,673 $ 3,196,330 $ 3,069,385
Capital expenditures $ 105,094 $ 71,575 $ 71,148
Depreciation and amortization $ 101,954 $ 60,089 $ 85,404
The Company's areas of operations are principally in the United States.
Operations outside the United States are primarily in the United Kingdom and
Australia and are included within the Constellation Wines segment.
Geographic data is as follows:
For the Years Ended
------------------------------------------
February 29, February 28, February 28,
2004 2003 2002
------------ ------------ ------------
(in thousands)
Net sales
---------
United States $ 2,169,798 $ 1,941,794 $ 1,886,861
Non-U.S. 1,382,631 789,818 719,897
------------ ------------ ------------
Total $ 3,552,429 $ 2,731,612 $ 2,606,758
============ ============ ============
Significant non-U.S. revenue sources include:
United Kingdom $ 1,128,022 $ 789,818 $ 719,897
Australia $ 205,696 $ - $ -
New Zealand $ 32,533 $ - $ -
February 29, February 28,
2004 2003
------------ ------------
Long-lived assets
-----------------
United States $ 518,015 $ 454,016
Non-U.S. 579,347 148,453
------------ ------------
Total $ 1,097,362 $ 602,469
============ ============
Significant non-U.S. long-lived assets include:
United Kingdom $ 183,214 $ 148,453
Australia $ 340,510 $ -
New Zealand $ 55,532 $ -
23. 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", which will
replace FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable
Interest Entities," upon its effective date. FIN No. 46(R) retains many of the
basic concepts introduced in FIN No. 46; however, it also introduces a new scope
exception for certain types of entities that qualify as a business as defined in
FIN No. 46(R) and revises the method of calculating expected losses and residual
returns for determination of primary beneficiaries, including new guidance for
assessing variable interests. The application of the transition requirements of
FIN No. 46(R) with regard to special purpose entities and existing variable
interest entities did not result in any entities requiring consolidation or any
additional disclosures. The Company is continuing to evaluate the impact of FIN
No. 46(R) for its adoption as of May 31, 2004. However, it is not expected to
have a material impact on the Company's 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) supersedes
Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"), by
revising employers' disclosures about pension plans and other postretirement
benefit plans. SFAS No. 132(R) requires additional disclosures to those in SFAS
No. 132 regarding the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. SFAS No. 132(R) also amends Accounting Principles Board Opinion No. 28
("APB Opinion No. 28"), "Interim Financial Reporting," to require additional
disclosures for interim periods. The Company has adopted certain of the annual
disclosure provisions of SFAS No. 132(R), primarily those related to its U.S.
postretirement plan, for the fiscal year 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.
In March 2004, the Financial Accounting Standards Board issued a proposed
statement, "Share-Based Payment, an amendment of FASB Statements No. 123 and
95." The objective of the proposed statement is to require recognition in an
entity's financial statements of the cost of employee services received in
exchange for equity instruments issued, and liabilities incurred, to employees
in share-based payment (or compensation) transactions based on the fair value of
the instruments at the grant date. The proposed statement would eliminate the
alternative of continuing to account for share-based payment arrangements with
employees under APB No. 25 and require that the compensation cost resulting from
all share-based payment transactions be recognized in an entity's financial
statements. If adopted in its current form, the proposed statement would be
effective for awards that are granted, modified, or settled in fiscal years
beginning after December 15, 2004. Also, if adopted in its current form, the
proposed statement could result in a significant charge to the Company's
Consolidated Statement of Income for the fiscal year ended February 28, 2006.
24. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of selected quarterly financial information is as follows:
QUARTER ENDED
------------------------------------------------------
May 31, August 31, November 30, February 29,
Fiscal 2004 2003 2003 2003 2004 Full Year
------------------------------------- ----------- ---------- ------------ ------------ -----------
(in thousands, except per share data)
Net sales(1) $ 772,801 $ 911,065 $ 987,248 $ 881,315 $ 3,552,429
Gross profit(1) $ 209,085 $ 240,532 $ 282,616 $ 243,555 $ 975,788
Net income(2) $ 39,189 $ 35,564 $ 82,840 $ 62,821 $ 220,414
Earnings per common share(3):
Basic $ 0.42 $ 0.35 $ 0.76 $ 0.57 $ 2.13
=========== ========== ============ ============ ===========
Diluted $ 0.41 $ 0.34 $ 0.73 $ 0.55 $ 2.06
=========== ========== ============ ============ ===========
QUARTER ENDED
-----------------------------------------------------
May 31, August 31, November 30, February 28,
Fiscal 2003 2002 2002 2002 2003 Full Year
------------------------------------- ----------- ---------- ------------ ------------ -----------
(in thousands, except per share data)
Net sales $ 650,393 $ 689,806 $ 738,379 $ 653,034 $ 2,731,612
Gross profit $ 176,726 $ 193,262 $ 213,494 $ 177,233 $ 760,715
Net income(4) $ 37,369 $ 49,572 $ 64,344 $ 52,021 $ 203,306
Earnings per common share(3):
Basic $ 0.42 $ 0.55 $ 0.71 $ 0.57 $ 2.26
=========== ========== ============ ============ ===========
Diluted $ 0.40 $ 0.53 $ 0.69 $ 0.56 $ 2.19
=========== ========== ============ ============ ===========
(1) 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
AOCI 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.
(2) In Fiscal 2004, the Company recorded net unusual costs consisting of the
flow through of inventory step-up and financing costs associated with the
Hardy Acquisition; restructuring and related charges resulting from (i) the
realignment of business operations in the Constellation Wines 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; and gains
from the relief of certain excise tax, duty and other costs incurred in
prior years. The following table identifies these items, net of income
taxes, by quarter and in the aggregate for Fiscal 2004:
QUARTER ENDED
------------------------------------------------------
May 31, August 31, November 30, February 29,
Fiscal 2004 2003 2003 2003 2004 Full Year
------------------------------------- ----------- ---------- ------------ ------------ -----------
(in thousands, net of tax)
Flow through of inventory step-up $ 3,531 $ 5,770 $ 1,741 $ 3,340 $ 14,382
Financing costs 2,582 3,334 1,490 - 7,406
Concentrate inventory write-down - 10,769 - - 10,769
Restructuring charges 1,482 10,934 5,176 2,347 19,939
Relief of certain excise tax, duty
and other costs - - - (6,678) (6,678)
----------- ---------- ------------ ------------ -----------
Total restructuring and related
charges and unusual costs $ 7,595 $ 30,807 $ 8,407 $ (991) $ 45,818
=========== ========== ============ ============ ===========
(3) The sum of the quarterly earnings per common share in Fiscal 2004 and
Fiscal 2003 may not equal the total computed for the respective years as
the earnings per common share are computed independently for each of the
quarters presented and for the full year.
(4) During the fourth quarter of Fiscal 2003, the Company's Constellation
Wines segment recorded an asset impairment charge of $4.8 million in
connection with the planned closure of two of its production facilities in
Fiscal 2004.