Final Prospectus Supplement
Table of Contents

Filed Pursuant to Rule 424(b)(2)
Registration No. 333-63480

 

PROSPECTUS SUPPLEMENT

(To Prospectus Dated July 18, 2003)

 

LOGO

 

6,000,000 Shares

Constellation Brands, Inc.

 

Depositary Shares

Each representing  1/40 of a share of 5.75% Series A Mandatory  Convertible Preferred Stock

 

We are offering 6,000,000 depositary shares by this prospectus supplement and the accompanying prospectus. We will receive all of the net proceeds from the sale of the depositary shares. We have granted the underwriters an option to purchase up to 820,000 additional depositary shares to cover over-allotments.

 

Each depositary share represents  1/40 of a share of our Series A mandatory convertible preferred stock, liquidation preference $1,000 per share, which is equivalent to $25 per depositary share. Holders of depositary shares are entitled to all proportional rights and preferences of the Series A mandatory convertible preferred stock, including dividend, voting, conversion and liquidation rights.

 

We will pay annual dividends on each depositary share in the amount of $1.4375, which is based on the annual dividend rate of $57.50 for each share of our Series A mandatory convertible preferred stock. Dividends will be cumulative from the date of issuance and to the extent that dividends are not prohibited or restricted under our debt agreements, assets are legally available to pay dividends and our board of directors or an authorized committee of our board declares a dividend payable, we will pay dividends in cash, shares of our Class A common stock or a combination thereof, in our sole discretion, after every quarter. Shares of our Class A common stock used to pay dividends will be delivered to the transfer agent to be sold on the holders’ behalf, resulting in net cash proceeds to be distributed to the holders in an amount equal to the cash dividends otherwise payable. The first dividend payment will be made on December 1, 2003.

 

On September 1, 2006, each depositary share will automatically convert, subject to adjustments described in this prospectus supplement, into between 0.7319 and 0.8929 shares of our Class A common stock, depending on the then current market price of our Class A common stock. At any time prior to September 1, 2006, holders may elect to convert each depositary share, subject to adjustments described in this prospectus supplement, into 0.7319 shares of our Class A common stock. If the closing price per share of our Class A common stock exceeds $51.24 for at least 20 trading days within a period of 30 consecutive trading days, we may elect, subject to certain limitations described in this prospectus supplement, to cause the conversion of all, but not less than all, of the depositary shares then outstanding into shares of our Class A common stock at a conversion rate of 0.7319 shares of our Class A common stock for each depositary share.

 

Prior to this offering, there has been no public market for our depositary shares. We have applied to list our depositary shares on the New York Stock Exchange under the symbol “STZ Pr A.” Our Class A common stock is listed on the New York Stock Exchange under the symbol “STZ.” On July 24, 2003, the last reported sale price of our Class A common stock was $28.00 per share.

 

Concurrently with this offering, we are offering, by means of a separate prospectus supplement, 9,500,000 shares of our Class A common stock (or 10,925,000 shares if the underwriters exercise in full their over-allotment option). However, neither offering is contingent upon the consummation of the other.

 

Investing in our depositary shares involves risks. See “Risk Factors” beginning on page S-13 of this prospectus supplement and on page 1 of the accompanying prospectus.

 

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus supplement or the accompanying prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

     Per Share

   Total

Public Offering Price

   $25.00    $150,000,000

Underwriting Discount

   $  0.75    $    4,500,000

Proceeds to Constellation Brands, Inc. (before expenses)

   $24.25    $145,500,000

 

The underwriters expect to deliver the depositary shares to purchasers on or about July 30, 2003.

 

Joint Book-Running Managers

 

JPMorgan    Citigroup

 


 

Joint Lead Manager

 

UBS Investment Bank

July 24, 2003


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[Company Product]


Table of Contents

You should rely only on the information contained in or incorporated by reference in this prospectus supplement and the accompanying prospectus. We have not authorized anyone to provide you with different information. We are not making an offer to sell these securities in any state where the offer is not permitted. You should not assume that the information contained or incorporated by reference in this prospectus supplement or the accompanying prospectus is accurate as of any date other than the date on the front of this prospectus supplement.

 


 

 

TABLE OF CONTENTS

 

Prospectus Supplement

 

     Page

Prospectus Supplement Summary

   S-1

Risk Factors

   S-13

Use of Proceeds

   S-21

Price Range of Class A Common Stock and Dividend Policy

   S-22

Capitalization

   S-23

Selected Financial Data of Constellation

   S-25

Selected Financial Data of Hardy

   S-28

Unaudited Pro Forma Combined Income Statement Data

   S-29

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   S-32

Industry Overview

   S-55

Business

   S-61

Management

   S-69

Principal Stockholders and Beneficial Ownership of Management

   S-72

Description of Depositary Shares

   S-78

Description of Series A Mandatory Convertible Preferred Stock

   S-84

Description of Common Stock

   S-95

Certain U.S. Federal Income Tax Considerations

   S-97

Underwriting

   S-103

Legal Opinions

   S-105

Experts

   S-106

Incorporation of Certain Documents by Reference

   S-106

 


 

Prospectus

 

Constellation Brands, Inc.

   1

The Guarantors

   1

Risk Factors

   1

Use of Proceeds

   5

Dividend Policy

   5

Ratio of Earnings to Fixed Charges

   5

Description of Debt Securities

   6

Description of Preferred Stock

   12

Description of Depositary Shares

   13

Description of Common Stock

   16

Plan of Distribution

   18

Legal Opinions

   19

Experts

   19

 


Table of Contents

INFORMATION REGARDING FORWARD-LOOKING STATEMENTS

 

This prospectus supplement and the accompanying prospectus contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, that could cause actual results to differ materially from those set forth in, or implied by, our forward-looking statements. All statements other than statements of historical facts included in this prospectus supplement and the accompanying prospectus, including the statements under “Prospectus Supplement Summary,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” regarding our business strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management, as well as information concerning expected actions of third parties, are forward-looking statements. When used in this prospectus supplement and the accompanying prospectus, the words “anticipate,” “intend,” “estimate,” “expect,” “project,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this prospectus supplement. Neither we nor the underwriters undertakes any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. Important factors that could cause our actual results to differ materially from our expectations, or “cautionary statements,” are disclosed under “Risk Factors” and elsewhere in the prospectus supplement and the accompanying prospectus. The cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf.

 

CURRENCIES

 

In this prospectus supplement references to “dollars” and “$” are references to United States dollars, and references to “U.S.” are references to the United States of America. References to “Australian dollars” and “A$” are references to Australian currency. In addition, references to “pounds sterling,” “sterling” or “£” are references to the United Kingdom currency. These translations should not be construed as representations that the amounts in Australian dollars or pounds sterling actually represent such U.S. dollar amounts or could be converted into U.S. dollars at the rate indicated herein or at any other rate.

 

INDUSTRY DATA

 

Market share and industry data disclosed in this prospectus supplement have been obtained from various third party sources including the following industry and government publications: Adams Liquor Handbook; Adams Wine Handbook; Adams Beer Handbook; Adams Media Handbook Advance; The United States Wine Market: Impact Databank Review and Forecast; The United States Beer Market: Impact Databank Review and Forecast; The United States Spirits Market: Impact Databank Review and Forecast; International Wine and Spirit Record; Australian Wine and Brandy Reports; NACM; AC Nielsen; IRI; The Drink Pocketbook; Beer Marketers Insights and Winemaker’s Federal of Australia. We have not independently verified these data. Unless otherwise noted, all references to market share data are based on unit volume and unless otherwise noted, the most recent complete industry data available are for calendar 2002.

 

INTELLECTUAL PROPERTY

 

We own or have rights to various trademarks, copyrights and trade names used in our business including the following: Alice White, Almaden, Arbor Mist, Banrock, Banrock Station, Berri Estates, Blackthorn, Black Velvet, Canadian Ltd, Columbia, Cook’s, Covey Run, Diamond White, Dunnewood, Estancia, Estate Cellars, Fleischmann’s, Fleischmann’s Royal, Fleischmann’s Schenley, Franciscan, Franciscan Oakville Estate, Gaymor’s Olde English, Golden Wedding, Grant’s of St. James, Hardys, Hardys Signature, Hardys VR Varietal Range, Inglenook, J. Roget, K Cider, La Baume, Leasingham, MacNaughton, Manischewitz, Marcus James, McMaster’s, Montezuma, Motif, Mr. Boston, Mystic Cliffs, Nectar Valley, Nottage Hill, Oakville Estate, OFC, Omni, Paul Masson, Paul Masson Grande Amber Brandy, QC, Ravenswood, Remano, St. Regis, Ste. Chapelle, St. James, Simi, Stone’s, Stamps of Australia, Stowells, Talus, Taylor, Triple Crown and Vendange. This prospectus supplement, the accompanying prospectus, and the documents incorporated by reference also include trademarks, service marks and trade names of other companies.

 

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PROSPECTUS SUPPLEMENT SUMMARY

 

The following summary highlights selected information from this prospectus supplement, the accompanying prospectus and the documents incorporated by reference and may not contain all the information that is important to you. We encourage you to read this prospectus supplement, the accompanying prospectus and the documents incorporated by reference in their entirety. Unless we indicate otherwise, the terms “we,” “us” and “our” refer to Constellation Brands, Inc. together with its subsidiaries. Constellation Brands, Inc. is a Delaware corporation that was incorporated on December 4, 1972, as the successor to a business founded in 1945. On September 19, 2000, we changed our name to Constellation Brands, Inc. from Canandaigua Brands, Inc.

 

Constellation Brands, Inc.

 

We are a leading international producer and marketer of beverage alcohol in North America, Europe and Australia with a broad portfolio of brands across the wine, imported beer and distilled spirits categories. We have the largest wine business in the world and are the largest multi-category supplier of beverage alcohol brands in the United States. In the United Kingdom, we are the largest marketer of wine and a leading independent drinks wholesaler. We are the largest producer and marketer of wine in Australia. Our strong market positions increase our purchasing power and make us a supplier of choice to our customers.

 

With our broad product portfolio, we believe we are distinctly positioned to satisfy an array of consumer preferences across all beverage alcohol categories and price points. Many of our products are recognized leaders in their respective categories. Leading brands in our portfolio include Corona Extra, Modelo Especial, Pacifico, St. Pauli Girl, Franciscan Oakville Estate, Simi, Estancia, Ravenswood, Blackstone, Banrock Station, Hardys, Nobilo, Houghton, Leasingham, Almaden, Inglenook, Arbor Mist, Vendange, Alice White, Stowells, Black Velvet, Fleischmann’s, Schenley, Ten High and Blackthorn.

 

Since our founding in 1945 as a producer and marketer of wine products, we have grown through a combination of internal growth and acquisitions. Our internal growth has been driven by leveraging our existing portfolio of leading brands, developing new products, new packaging and line extensions, and focusing on the faster growing sectors of the beverage alcohol industry.

 

Since 1991, we have successfully integrated a number of major acquisitions that have broadened our portfolio and increased our market share, net sales, operating income and cash flow. Our acquisition in April 2003 of BRL Hardy Limited, now known as Hardy Wine Company Limited, or Hardy, Australia’s largest producer of wine, enhanced our overall growth prospects and gave us an immediate presence in the Australian domestic and export markets. We and Hardy formed Pacific Wine Partners LLC, or PWP, in July 2001 as an equally-owned joint venture to produce, market and sell a global portfolio of premium wines in the United States, including a range of Australian wines. Other recent acquisitions include: the Ravenswood brand, a leading premium wine from Sonoma, California in July 2001; the Covey Run, Columbia, Ste. Chapelle, Alice White and other premium wine brands in March 2001; and the Vendange, Nathanson Creek, Heritage, Talus and other premium wine brands also in March 2001.

 

Through these acquisitions, we have become more competitive by: diversifying our portfolio; developing strong market positions in the growing beverage alcohol product categories of varietal table wine and imported beer; strengthening our relationships with wholesalers; expanding our distribution and enhancing our production capabilities; and acquiring additional management, operational, marketing, and research and development expertise.

 

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Competitive Strengths

 

Leading Market Positions.    We are the largest supplier of wine in the world. We have leading market positions in various sectors within each of our major product categories in the United States, Australia and New Zealand, and the United Kingdom, which increases our purchasing power and makes us a supplier of choice to our customers.

 

    In the United States, we are the second largest producer and marketer of wine with an 18% market share, the largest marketer of imported beer in 25 primarily western U.S. states, with a 42% share of the imported beer market in such states, and the third largest producer and marketer of distilled spirits with a 10% market share.

 

    In Australia, we are the largest producer and marketer of wine with a 22% market share.

 

    In the United Kingdom, we are the largest marketer of wine and a leading independent drinks wholesaler to on-premise outlets.

 

Strong Brand Recognition.    Many of our products are recognized leaders in their respective categories in the United States, Australia and New Zealand, and the United Kingdom.

 

    Wine.    We sell more than 40 different brands of table wines, dessert wines and sparkling wines around the world. We sell 22 of the top 100 wine brands in the United States, including Almaden, Inglenook, Arbor Mist, Vendange, Richards Wild Irish Rose, Paul Masson, Cook’s, Blackstone, Ravenswood and Banrock Station. With brands like Estancia, Franciscan Oakville Estate, Simi, Blackstone and Ravenswood, we have one of the largest fine wine portfolios in the United States. In the United Kingdom, we have seven of the top 20 selling table wine brands to the off-premise market including: Stowells, Hardys Stamp, Banrock Station, Nottage Hill and Paul Masson. In the on-premise market, we have three of the top 10 selling table wine brands: Stowells, Hardys Stamp and Hardys. We also have QC, the best selling brand of fortified British wine. In Australia, we are the largest producer of cask wines with the Stanley, Berri Estates, Renmano, Banrock Station and Hardy cask wine brands, complemented by Australia’s most comprehensive range of premium regional wine brands, including Houghton, Leasingham, Yarra Burn, Stonehaven and BVE.

 

    Imported Beer.    We are the distributor of six of the top 25 imported beers in the United States: Corona Extra, the best selling imported beer in the United States and the seventh best selling beer overall in the United States, Corona Light, Modelo Especial, St. Pauli Girl, Pacifico and Negra Modelo. We have an exclusive distribution agreement in 25 primarily western U.S. states through 2006 for our Mexican brands, with provisions for five-year automatic renewals of the agreement thereafter.

 

    Distilled Spirits.    We have 15 of the top 100 distilled spirits brands in the United States, including Black Velvet, Barton, Sköl, Paul Masson Grande Amber Brandy, Canadian LTD, Montezuma and Fleischmann’s Royal.

 

Broad Product Portfolio and Geographic Presence.    Through new product introductions, product line extensions, innovative packaging and acquisitions, we have broadened our product portfolio, expanded our geographic scope and improved the consistency of our financial results.

 

    Our sales are primarily spread across three major beverage alcohol categories—wine, beer and distilled spirits—and across three geographies—North America (primarily the United States and Canada), Europe (primarily the United Kingdom) and Australasia (primarily Australia and New Zealand).

 

    With a broad portfolio of products, we are well positioned to meet an array of consumer preferences with the ability to quickly allocate resources to faster growing product categories.

 

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    Our portfolio generates balanced sales and earnings streams. Growth in our premium and super premium wine portfolio in the United States and the United Kingdom, our imported beer portfolio in the United States, our wine exports from Australia and our wholesale business in the United Kingdom are supported by more stable financial results from sales of spirits and popular priced wines in the United States and domestic wine in Australia.

 

Proven Acquisition Track Record.    We have successfully integrated newly acquired companies with our existing operations and achieved revenue growth and cost savings in the process.

 

    Since 1991, we have successfully integrated a number of major acquisitions. From Fiscal 1999 through Fiscal 2003, these acquisitions have contributed to compound annual growth rates in net sales and adjusted operating income of 18.5% and 27.2%, respectively.

 

    Revenue and cost synergies achieved from acquisitions and a focus on higher margin wine brands have contributed to the increase in our gross profit margin from 24.1% in Fiscal 1999 to 27.8% in Fiscal 2003, and in our adjusted operating margin from 11.1% to 14.8% during this period.

 

    Our December 1998 acquisition of Matthew Clark plc has given us a presence in the United Kingdom and a platform for growth in the European market.

 

    With the acquisitions of Franciscan Vineyards, Inc., or Franciscan Estates, and Simi Winery, Inc., or Simi, in June 1999, we entered the faster growing, higher margin super premium and ultra premium wine categories.

 

    We continued to build our portfolio in the premium wine category. In July 2001, we acquired Ravenswood Winery, Inc., or Ravenswood, which has the best selling super premium zinfandel wine in the United States, and in October 2001, we acquired the Blackstone brand through PWP, the best selling red wine brand in the United States selling for greater than $11 per bottle.

 

    In August of 2001, we formed Pacific Wine Partners LLC, or PWP, a joint venture with Hardy, to capitalize on the fast growing Australian and premium wine segments in the United States. Due in part to the success of PWP, we acquired Hardy this year, enhancing our ability to participate in the expected growth of Australian wine around the world and establishing Constellation in Australia. We expect the acquisition will contribute to overall increases in our sales and earnings.

 

Experienced and Incentivized Management Team.    We have one of the most experienced management teams in the beverage alcohol industry.

 

    Our chief executive officer, chief operating officer, division presidents, including the head of our worldwide wines division and former chief executive officer of Hardy, and company presidents have an average of 13 years with Constellation or its affiliates and an average of 25 years in the beverage alcohol industry.

 

    Richard Sands, our Chairman and Chief Executive Officer, and Robert Sands, our President and Chief Operating Officer, are members of the Sands family, which, upon completion of the concurrent offering of our Class A common stock, will own common stock representing approximately 55% of our voting power and approximately 14% of our outstanding common equity.

 

Business Strategy

 

We will remain focused across the beverage alcohol industry by offering a broad range of products in each of our three major categories—wine, beer and spirits. We intend to keep our portfolio positioned for superior top-line growth while maximizing the profitability of our brands. In addition, we seek to increase our relative

 

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importance to key customers in major markets by increasing our share of their overall purchasing, which is increasingly important in a consolidating industry. We also seek to grow internationally by establishing a presence in other significant mass markets when opportunities for attractive cross-border acquisitions become available. We intend to continue to build our growth-oriented and profitable brands through the following key initiatives:

 

Effectively Manage Brand Portfolio.    With over 200 brands in our portfolio, it is essential that we maintain focus in order to be responsive to our customers and the marketplace.

 

    We manage our brand portfolio with individual sales and marketing teams focused by major product category and geography. Where appropriate, we leverage our sales and marketing expertise across product categories to take advantage of high-growth opportunities, particularly in national accounts.

 

    We concentrate our efforts in geographic markets with attractive demographics.

 

Capitalize on Growth Opportunities.    We maximize the profitability of our brand portfolio by allocating resources to and focusing on the faster growing segments of the beverage alcohol market. A number of product categories have demonstrated growth potential in existing markets or are underserved by products currently available in the market.

 

    We intend to further capitalize on the growth of the United States imported beer market. Sales from our portfolio of imported beers, led by Corona Extra, grew at a compound annual growth rate of 16% from 1997 through 2002.

 

    Recognizing the potential for Australian wines in the United States, we acquired Australian wine brand Alice White in March of 2001 and created the PWP joint venture with Hardy the same year. With the recent acquisition of Hardy, we expect to benefit from growth of Australian wines around the world.

 

    Hardys Stamp, already a success in the United Kingdom, was recently launched in the United States to capitalize on three growth opportunities—Australian wines, premium wines and cask (box) wine. Hardys Stamp of Australia was introduced in glass and cask packages and has been well received by the trade.

 

    Capitalizing on our direct access to the California grape market and the growth in California wines in the United Kingdom, we successfully launched a new wine brand specific to the United Kingdom market, Echo Falls. Positioned at a fast growing price point, Echo Falls offers quality varietal wines and pricing ideal for everyday consumption.

 

    In late 2001, we launched the new Hardys VR range in the United Kingdom and in the first 12 months, sales were in excess of one million cases.

 

    The Franciscan Estates, Simi and Ravenswood product lines are well established in the super-premium and ultra-premium wine categories. Organic sales from our portfolio of super-premium and ultra-premium wines had a compound annual growth rate of 22% from 1997 through 2002.

 

    In 1998, we created the wine-with-fruit category to tap a new group of wine consumers with the introduction of Arbor Mist. By building distribution, we now have a brand which sells more than four million cases annually and is the top selling wine-with-fruit brand in the United States.

 

    We continue to increase our market share in our United Kingdom wholesale business by focusing our offerings on the primary growth categories in the on-premise market—wine, spirits and ready-to-drink beverages.

 

Introduce Product Line Extensions.    The commercial success and brand name recognition of our products give us the ability to introduce product line extensions to generate additional growth and to gain market share.

 

    Offering consumers a greater choice of packaging, we expect to introduce several new package extensions for our portfolio of Mexican beers later this year, including Corona Extra, Corona Light and Pacifico in a 24 loose package.

 

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    Blackstone Winery, whose Merlot is the top selling red wine priced over $11 per bottle in the United States, expanded its offerings to include a California Syrah, Zinfandel, Pinot Noir and Sauvignon Blanc.

 

    We are using the well-known Almaden wine name to strengthen our number two position in the growing box wine market in the United States, which now accounts for approximately 20% of all table wine consumed. We continue to offer an increasing number of blends designed to appeal to consumers with preferences for lighter-tasting red wines. We recently introduced two new flavor concepts, red and white Sangria, in a new package with high-impact vibrant colors and a festive theme that sets it apart from the traditional image of the segment.

 

    We continue to take advantage of the top-ranked position of the Stowells wine brand in the United Kingdom. We have successfully introduced Stowells in a variety of bottle sizes, giving consumers the ability to enjoy Stowells beyond the traditional box package. Recently, we introduced the Stowells Cellar Collection: six wine varieties that will appeal to existing Stowells’ consumers, but who prefer more premium wines for special occasions.

 

    We recently introduced Arbor Mist Wine Blenders, the only blender drinks available made with wine in the United States, to capitalize on the strong growth and brand equity of our wine-with-fruit brand, Arbor Mist.

 

    Following the success of 99 Bananas and 99 Blackberries, the 99 Brand family of fruit-flavored liqueurs introduced 99 Apples, helping the brand grow 56% in Fiscal 2003. We expect to continue to introduce new flavors designed to capitalize on changing consumer tastes.

 

    Building on the success of the Chi-Chi’s prepared cocktail line, which include Margarita, Long Island Iced Tea and Pina Colada flavors, we introduced Cosmopolitan and Mango Margarita flavors to the line to capitalize on some of the most popular cocktails in the United States.

 

    Continuing to capitalize on the trend toward flavored vodkas, Fleischmann’s Vodka added apple to its existing line of flavors, which includes raspberry, orange, lime and vanilla.

 

    We are introducing Beachcomber, a new line of flavored rums to take advantage of growth in the rum category.

 

Consider Selective Acquisition Opportunities.    Strategic acquisitions will continue to be a component of our growth strategy to complement our internal brand development initiatives.

 

    We have supplemented our internal growth with a number of major acquisitions since 1991.

 

    Matthew Clark’s established reputation within the industry and proven track record provide us with a platform from which to pursue future acquisitions in Europe.

 

    We will continue to seek to make acquisitions that capitalize on our existing infrastructure or that offer complementary product lines, geographic scope or additional distribution channels.

 

    We have a seasoned management team experienced in identifying, evaluating and integrating acquisitions.

 

Information About Us

 

Our principal executive offices are located at 300 WillowBrook Office Park, Fairport, New York 14450, and our telephone number is 585-218-3600. We maintain a website at www.cbrands.com. The information on our website is not part of this prospectus supplement or the accompanying prospectus.

 

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The Offering

 

Issuer

Constellation Brands, Inc.

 

Securities offered

6,000,000 depositary shares, each representing  1/40 of a share of 5.75% Series A mandatory convertible preferred stock, liquidation preference $1,000 per share, which is equivalent to $25 per depositary share. To the extent that the underwriters sell more than 6,000,000 depositary shares, they have the option to purchase up to an additional 820,000 depositary shares from us at the initial offering price less the underwriting discount.

 

Initial price

$25.00 for each depositary share.

 

Dividends

$1.4375 for each depositary share per year, which is based on the annual dividend rate of $57.50 for each share of Series A mandatory convertible preferred stock per year. Dividends will be cumulative from the date of issuance and to the extent that dividends are not prohibited or restricted under our debt agreements, assets are legally available to pay dividends and our board of directors or an authorized committee of our board declares a dividend payable, we will pay dividends in cash, shares of our Class A common stock, or a combination thereof, in our sole discretion, after every quarter. Shares of our Class A common stock used to pay dividends will be delivered to the transfer agent to be sold on the holders’ behalf, resulting in net cash proceeds to be distributed to the holders in an amount equal to the cash dividends otherwise payable. See “Risk Factors—Our debt agreements may restrict us from paying cash dividends on our Series A mandatory convertible preferred stock under certain circumstances” and “—We cannot assure you that we will be able to file, cause to be declared effective or keep effective, as the case may be, the registration statement required to permit us to pay dividends on our Series A mandatory convertible preferred stock in shares of our Class A common stock.”

 

Dividend payment dates

The 1st calendar day (or the first following business day if the 1st calendar day is not a business day) of each March, June, September and December, commencing on December 1, 2003.

 

Conversion rate

The conversion rate for each depositary share will not be more than 0.8929 shares and not less than 0.7319 shares of our Class A common stock, depending on the applicable market value of our Class A common stock, as described below.

 

 

The conversion rate is subject to certain adjustments, including those described under “Description of Series A Mandatory Convertible Preferred Stock—Anti-dilution Adjustments.”

 

 

The applicable market value is the average of the closing prices per share of our Class A common stock on each of the 20 consecutive trading days ending on the third trading day immediately preceding

 

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the applicable conversion date. It will be calculated as described under “Description of Series A Mandatory Convertible Preferred Stock—Conversion.”

 

 

The following table illustrates the conversion rate per depositary share and the value of our Class A common stock issuable upon conversion on the automatic conversion date, at the applicable market value shown, subject to certain adjustments described under “Description of Series A Mandatory Convertible Preferred Stock—Anti-dilution Adjustments”:

 

Applicable market value on
applicable conversion date


   Conversion rate

less than or equal to $28.00

   0.8929

between $28.00 and $34.16

   0.8929 to 0.7319

equal to or greater than $34.16

   0.7319

 

Automatic conversion date

September 1, 2006, which we call the automatic conversion date.

 

Automatic conversion

On the automatic conversion date, each depositary share will automatically convert into shares of our Class A common stock, based on the conversion rate then in effect for  1/40 of a share of our Series A mandatory convertible preferred stock.

 

 

Holders of the depositary shares on the automatic conversion date will have the right to receive a dividend of cash, shares of our Class A common stock, or a combination thereof, as we determine in our sole discretion, in an amount equal to the accrued and unpaid dividends on our Series A mandatory convertible preferred stock as of the automatic conversion date, whether or not declared, out of legally available assets.

 

Conversion at the option of the holder

At any time prior to September 1, 2006, you may elect to convert each of your depositary shares into 0.7319 shares of our Class A common stock, at the optional conversion rate for  1/40 of a share of Series A mandatory convertible preferred stock. This conversion rate is subject to certain adjustments as described under “Description of Series A Mandatory Convertible Preferred Stock—Anti-dilution Adjustments.”

 

Provisional conversion at our option

If the closing price per share of our Class A common stock exceeds $51.24 for at least 20 trading days within a period of 30 consecutive trading days, we may elect to cause the conversion of all, but not less than all, of the depositary shares then outstanding for shares of our Class A common stock, based on a conversion rate of 0.7319 shares of our Class A common stock for each depositary share, subject to certain adjustments as described under “Description of Series A Mandatory Convertible Preferred Stock—Anti-dilution Adjustments,” only if, in addition to issuing you such shares of Class A common

 

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stock, we pay you in cash the present value of all the remaining dividend payments through and including September 1, 2006, on the depositary shares, computed using a discount rate equal to the Treasury Yield, plus any accrued and unpaid dividend payments on the depositary shares, whether or not declared, in each case, out of legally available assets. See “Description of Series A Mandatory Convertible Preferred Stock—Provisional Conversion at Our Option.”

 

Early conversion upon cash merger

Prior to the automatic conversion date, if we are involved in a merger in which at least 30% of the consideration for all or any class of our common stock consists of cash or cash equivalents, which we refer to as the “cash merger,” then on or after the date of the cash merger, each holder of depositary shares will have the right to convert its depositary shares at the conversion rate in effect for  1/40 of a share of our Series A mandatory convertible preferred stock determined in accordance with “Automatic Conversion” above immediately prior to the cash merger. See “Description of Series A Mandatory Convertible Preferred Stock—Early Conversion upon Cash Merger.”

 

Anti-dilution adjustments

The formula for determining the conversion rate on the automatic conversion date and the number of shares of our Class A common stock to be delivered upon an early conversion event may be adjusted if certain events occur. See “Description of Series A Mandatory Convertible Preferred Stock—Anti-dilution Adjustments.”

 

Liquidation preference

$25 per depositary share, based on $1,000 for each share of Series A mandatory convertible preferred stock, plus an amount equal to the sum of all accrued and unpaid dividends.

 

Voting rights

Holders of Series A mandatory convertible preferred stock will not be entitled to any voting rights, except as required by applicable state law. Holders of the depositary shares will be entitled to instruct the depositary as to any exercise of voting rights pertaining to the number of shares of Series A mandatory convertible preferred stock, or fraction thereof, represented by such holder’s depositary shares. See “Description of Depositary Shares—Voting of Series A Mandatory Convertible Preferred Stock.”

 

Ranking

Our Series A mandatory convertible preferred stock (and the corresponding depositary shares) will rank senior in right of payment to all of our common stock, including our Class A common stock and Class B common stock, now outstanding or to be issued in the future.

 

Concurrent offering of shares of Class A common stock

Concurrently with this offering we are offering by separate prospectus supplement, 9,500,000 shares of Class A common stock (or 10,925,000 shares of Class A common stock if the underwriters exercise their over-allotment option in full). This offering of depository shares is not contingent upon the closing of the offering of shares of Class A common stock.

 

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Use of proceeds

We estimate that the net proceeds from this offering will be approximately $144.9 million. We intend to use the net proceeds from this offering, together with the net proceeds from the concurrent offering of Class A common stock and available cash to repay $400.0 million of borrowings plus $1.3 million of accrued interest under the bridge loans, incurred to partially finance the acquisition of Hardy. In the event the concurrent offering of Class A common stock is not consummated, the net proceeds from this offering will be applied to repay a portion of the bridge loans plus accrued interest. See “Use of Proceeds.”

 

Unless otherwise specified, the information contained in this prospectus supplement assumes:

 

    the consummation of the concurrent offering of Class A common stock; and

 

    no exercise of the underwriters’ over-allotment option to purchase up to an additional 820,000 depositary shares in this offering or of the underwriters’ over-allotment option in the concurrent offering to purchase up to an additional 1,425,000 shares of Class A common stock.

 

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Summary Financial Data for Constellation

 

Summary Historical Consolidated Financial Data

 

The following table sets forth our summary income statement data for each of the fiscal years in the three year period ended February 28, 2003 and for the three month periods ended May 31, 2002 and 2003, and our summary balance sheet as of May 31, 2003 and as of such date on an as adjusted basis to give effect to the completion of this offering and the concurrent offering of our Class A common stock. The historical data have been derived from our audited and unaudited financial statements incorporated by reference into this prospectus supplement. In our opinion, the information for the three months ended May 31, 2002 and 2003 reflects all adjustments consisting only of normal recurring adjustments, necessary to fairly present the results of operations and financial condition. Results for interim periods should not be considered indicative of results for any other periods.

 

The as adjusted balance sheet data as of May 31, 2003, has been adjusted to give effect to the sale of the 6,000,000 depositary shares offered by this prospectus supplement and the sale of the 9,500,000 shares of our Class A common stock offered concurrently under a separate prospectus supplement, in each case after deducting the underwriting discounts and our estimated offering fees and expenses and the application of the net proceeds therefrom. See “Use of Proceeds”.

 

    Year Ended February 28,

    Three Months Ended
May 31,


 
    2001

    2002

    2003

    2002

    2003

 
          (in thousands, except per share data)        
                      (unaudited)  

Income Statement Data:

                                       

Net sales

  $   2,226,020     $   2,606,758     $   2,731,612     $   650,393     $ 771,629  

Gross profit

    578,939       695,160       760,715       176,726       207,912  

Selling, general and administrative expenses

    (308,071 )     (352,679 )     (350,993 )     (90,761 )     (106,629 )

Restructuring charges

    —         —         (4,764 )     —         (2,316 )

Operating income

    270,868       342,481       404,958       85,965       98,967  

Interest expense, net

    (108,631 )     (114,189 )     (105,387 )     (27,141 )     (39,243 )

Income before income taxes and extraordinary items

    162,237       229,959       334,936       61,563       61,233  

Net income

    97,342       136,421       203,306       37,369       39,189  

Earnings per common share:

                                       

Basic

  $ 1.33     $ 1.60     $ 2.26     $ 0.42     $ 0.42  

Diluted

  $ 1.30     $ 1.55     $ 2.19     $ 0.40     $ 0.41  

Weighted average common shares outstanding:

                                       

Basic

    73,446       85,505       89,856       88,845       92,880  

Diluted

    74,751       87,825       92,746       92,353       95,661  

 

     As of May 31, 2003

     Actual

   As Adjusted

     (in thousands, unaudited)

Balance Sheet Data:

    

Working capital

   $ 830,046    $ 1,229,574

Total assets

     5,358,956      5,350,892

Long-term debt, less current maturities

     2,293,548      2,293,548

Total debt

     2,778,385      2,378,385

Total stockholders’ equity

     1,439,662      1,834,573

 

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Summary Pro Forma Combined Financial Data

 

The following table sets forth certain of our unaudited summary pro forma combined income statement data for the year ended February 28, 2003 as described in “Unaudited Pro Forma Combined Income Statement Data” included elsewhere in this prospectus supplement, which gives effect to the Hardy acquisition as if it had occurred on March 1, 2002. The unaudited summary pro forma combined income statement data for the three months ended May 31, 2003 was derived from our quarterly report on Form 10-Q for the fiscal quarter ended May 31, 2003. The consolidated financial statements of Hardy prepared in accordance with accounting principles generally accepted in Australia, or Australian GAAP, used in preparing “Unaudited Pro Forma Combined Income Statement Data” have been adjusted to present such information in accordance with accounting principles generally accepted in the United States and translated into U.S. dollar equivalent financial statements.

 

This summary pro forma combined income statement data do not purport to represent what our results of operations would have actually been had the transaction been consummated as of such dates or to our results of operations for any future period. It is important that you read the summary pro forma combined income statement data presented below along with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our consolidated financial statements and those of Hardy, and “Unaudited Pro Forma Income Statement Data” included elsewhere in this prospectus supplement and our unaudited financial statements filed in our quarterly report on Form 10-Q for the fiscal quarter ended May 31, 2003.

 

     Year Ended
February 28, 2003


   Three Months Ended
May 31, 2003


     (in thousands, except per share data)

Net sales

   $ 3,236,508    $ 805,381

Income before income taxes

     314,999      63,079

Net income

     197,299      39,236

Earnings per common share:

             

Basic

   $ 2.12    $ 0.42

Diluted

   $ 2.05    $ 0.40

Weighted average common shares outstanding:

             

Basic

     93,145      94,274

Diluted

     96,035      97,055

 

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Summary Historical Consolidated Financial Data For Hardy

 

The following table sets forth summary financial data of Hardy for each of the fiscal years in the three year period ended December 31, 2002 prepared in accordance with Australian GAAP, except as noted, and reported in Australian dollars. The statement of income data is derived from Hardy’s audited historical financial statements, the most recent two years of which are incorporated by reference into this prospectus supplement. It is important that you read the summary historical financial data presented below along with “Selected Financial Data of Hardy” included elsewhere in this prospectus supplement and the consolidated financial statements of Hardy incorporated by reference into this prospectus supplement.

 

As a result of Hardy’s adopting AASB 1004 “Revenue” effective January 1, 1999, and applying the revised AASB 1018 “Statement of Financial Performance”, revised AASB 1034 “Financial Report Presentation and Disclosure” and AASB 1040 “Statement of Financial Position” for the first time in the 2001 financial year, a number of comparative amounts for 2000 have been reclassified to ensure comparability with the 2001 and 2002 reporting periods.

 

     For the Year Ended December 31,

 
     2000

    2001

    2002

 
     (A$ and in thousands)  

Statement of Financial Performance:

                        

Revenue from ordinary activities

   A$   641,775     A$   771,377     A$   870,336  

Profit from ordinary activities before borrowing costs and income tax expense

     102,276       124,248       144,626  

Borrowing costs

     (16,266 )     (22,390 )     (25,273 )

Income tax expense

     (22,354 )     (29,699 )     (35,191 )
    


 


 


Net profit

     63,656       72,159       84,162  

Net (profit)/loss attributable to outside equity interests

     (108 )     53       176  
    


 


 


Net profit attributable to members of BRL Hardy Limited

   A$ 63,548     A$ 72,212     A$ 84,338  

Net profit attributable to members of BRL Hardy in U.S. GAAP

           A$ 43,423     A$ 83,181  

 

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RISK FACTORS

 

Before you buy any depositary shares offered by this prospectus supplement and the accompanying prospectus, you should be aware that there are various risks, including those described below and in the accompanying prospectus. You should consider carefully these risk factors together with all of the other information in this prospectus supplement, the accompanying prospectus and the documents that are incorporated by reference before you decide to acquire any depositary shares.

 

Risks related to this offering

 

The trading prices for our depositary shares will be directly affected by the trading prices for our Class A common stock.

 

Prior to this offering, there has been no public market for our depositary shares. We have applied to list the depositary shares, each representing  1/40 of a share of our Series A mandatory convertible preferred stock, on the New York Stock Exchange. Our Class A common stock is listed on the New York Stock Exchange under the symbol “STZ.” We believe that the trading prices of the depositary shares will be directly affected by the trading prices of our Class A common stock. We cannot predict how our Class A common stock will trade. Trading prices of our Class A common stock will be influenced by our consolidated operating results and financial condition and by economic, financial and other factors and market conditions that can affect the capital markets generally. These include the level of, and fluctuations in, the trading prices of stocks generally and sales of substantial amounts of the depositary shares in the market at the same time as or subsequent to this offering, or the perception that these sales may occur.

 

Purchasers of depositary shares who convert their shares into Class A common stock will incur immediate dilution.

 

Persons purchasing our depositary shares, each representing  1/40 of a share of Series A mandatory convertible preferred stock, who convert their shares into our Class A common stock will incur immediate and substantial net tangible book value dilution. In addition, the terms of our Series A mandatory convertible preferred stock do not restrict our ability to offer a new series of preferred stock that is on parity with the Series A mandatory convertible preferred stock in the future or to engage in other transactions that could dilute our Series A mandatory convertible preferred stock. We have no obligation to consider the interests of the holders of our depositary shares in engaging in any such offering or transaction.

 

The market value of our Class A common stock may decline.

 

The market value of our Class A common stock on September 1, 2006, the automatic conversion date, may be less than $34.16 per share, which we call the threshold appreciation price. If that market value of the Class A common stock is less than the threshold appreciation price, then holders of our depositary shares, each representing  1/40 of a share of Series A mandatory convertible preferred stock, will receive shares of our Class A common stock on September 1, 2006 with a market value that is less than the threshold appreciation price. Accordingly, a holder of depositary shares assumes the entire risk that the market value of our Class A common stock may decline. Any decline in the market value of our Class A common stock may be substantial.

 

The opportunity for equity appreciation provided by an investment in the depositary shares is less than that provided by a direct investment in our Class A common stock.

 

The number of shares of our Class A common stock that are issuable upon mandatory conversion on the automatic conversion date of our Series A mandatory convertible preferred stock will decrease if the 20-day average market price per share of our common stock increases to $34.16. Therefore, the opportunity for equity

 

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appreciation provided by an investment in our Series A mandatory convertible preferred stock is less than that provided by a direct investment in our Class A common stock. Assuming the initial price accurately reflects the fair market value, the market price of our Class A common stock on September 1, 2006 must exceed the threshold appreciation price of $34.16 before a holder of our Series A mandatory convertible preferred stock will realize any equity appreciation.

 

Holders of our depositary shares will have no rights as a common stockholder until they acquire our Class A common stock.

 

Until you acquire shares of our Class A common stock upon conversion of your depositary receipts, you will have no rights with respect to our Class A common stock, including voting rights (except as required by applicable state law or our restated certificate of incorporation and as described under “Description of the Series A Mandatory Convertible Preferred Stock—Voting rights”), rights to respond to tender offers for shares of our Class A common stock and rights to receive any dividends or other distributions on our common stock. Upon conversion, you will be entitled to exercise the rights of a holder of Class A common stock only as to matters for which the record date occurs after the conversion date.

 

Our depositary shares have never been publicly traded and an active trading market for such shares may not develop.

 

Prior to this offering, there has been no public market for our depositary shares. Although we have applied to list the depositary shares on the New York Stock Exchange, there can be no assurance that an active trading market will develop, or, if developed, will be maintained. Also, the underwriters have advised us that they intend to facilitate secondary market trading by making a market in the depositary shares. However, the underwriters are not obligated to make a market in the depositary shares and may discontinue market making activities at any time.

 

Our debt agreements may restrict us from paying cash dividends on our Series A mandatory convertible preferred stock under certain circumstances.

 

We will pay dividends on the Series A mandatory convertible preferred stock after every quarter, in cash, shares of our Class A common stock or a combination thereof, in our sole discretion, only to the extent that payment of dividends is not prohibited or restricted under our debt agreements, assets are legally available to pay dividends and our board of directors declares a dividend payable. The terms of our senior credit facility and the indentures governing our outstanding notes may restrict our ability to pay cash dividends on our Series A mandatory convertible preferred stock under certain circumstances that include the occurrence and continuation of any default or event of default. We cannot assure you that the agreements governing our current and future indebtedness, including our senior credit facility and the indentures governing our outstanding notes, will permit us to pay cash dividends on our Series A mandatory convertible preferred stock.

 

We do not intend to pay cash dividends on our Class A common stock in the foreseeable future.

 

We do not anticipate paying cash dividends on our Class A common stock in the foreseeable future. Any payment of cash dividends will depend upon our financial condition, capital requirements, earnings and other factors deemed relevant by our board of directors. Further, the terms of our credit facility, our bridge loan agreement and the indentures governing our outstanding notes currently restrict us from paying cash dividends on our Class A common stock. We cannot assure you that the agreements governing our current and future indebtedness will permit us to pay cash dividends on Class A our common stock. In addition, under the terms of the Series A mandatory convertible preferred stock represented by the depositary shares, we are restricted from paying cash dividends on our Class A common stock if we are not current in our dividend payments with respect to such preferred stock.

 

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We cannot assure you that we will be able to file, cause to be declared effective or keep effective, as the case may be, the registration statement required to permit us to pay dividends on our Series A mandatory convertible preferred stock in shares of our Class A common stock.

 

We are permitted to pay dividends on our Series A mandatory convertible preferred stock by delivering shares of our Class A common stock to the transfer agent to be sold on behalf of the holders of our Series A mandatory convertible preferred stock. We may pay dividends in this manner, however, only if there is an effective registration statement permitting the transfer agent to sell our Class A common stock in the public market. We cannot assure you that we will be able to file, cause to be declared effective or keep effective, as the case may be, such registration statement.

 

Our issuance of preferred stock could adversely affect holders of our Class A common stock.

 

Our board of directors is authorized to issue additional series of preferred stock without any action on the part of our common stockholders. Our board of directors also has the power, without the approval of our common stockholders, to set the terms of any such series of shares of preferred stock that may be issued including voting rights, dividend rights, preferences over our common stock with respect to dividends or if we liquidate, dissolve or wind up our business and other terms. If we issue preferred stock in the future that has preference over our common stock with respect to the payment of dividends or upon our liquidation, dissolution or winding up, or if we issue preferred stock with voting rights that dilute the voting power of our common stock, the rights of holders of our Class A common stock or the market price of our Class A common stock could be adversely affected.

 

Our Series A mandatory convertible preferred stock will rank junior to all our and our subsidiaries’ liabilities in the event of a bankruptcy, liquidation or winding up of our assets.

 

In the event of bankruptcy, liquidation or winding up, our assets will be available to pay obligations on our Series A mandatory convertible preferred stock only after all our liabilities have been paid and only on a pari passu basis with any pari passu preferred stock we may issue following this offering. In addition, our Series A mandatory convertible preferred stock will effectively rank junior to all existing and future liabilities of our subsidiaries and the capital stock (other than common stock) of our subsidiaries held by third parties. The rights of holders of our Series A mandatory convertible preferred stock to participate in the assets of our subsidiaries upon any liquidation or reorganization of any subsidiary will rank junior to the prior claims of that subsidiary’s creditors and equity holders. As of May 31, 2003, we had $2.8 billion of total debt (including debt of our subsidiaries) outstanding. In the event of bankruptcy, liquidation or winding up, there may not be sufficient assets remaining, after paying our and our subsidiaries’ liabilities, to pay amounts due on any or all of our Series A mandatory convertible preferred stock then outstanding.

 

We are controlled by the Sands family.

 

Our outstanding capital stock consists of Class A common stock and Class B common stock. Holders of Class A common stock are entitled to one vote per share and are entitled, as a class, to elect one fourth of the members of our board of directors. Holders of Class B common stock are entitled to 10 votes per share and are entitled, as a class, to elect the remaining directors. Prior to this offering, the Sands family beneficially owned approximately 5.4% of the outstanding shares of Class A common stock, exclusive of shares of Class A common stock issuable pursuant to the conversion feature of the Class B common stock owned by the Sands family, and approximately 94.1% of the outstanding shares of Class B common stock. On the same basis, on all matters other than the election of directors, the Sands family has the ability to vote approximately 57.3% of the votes entitled to be cast by holders of our outstanding Class A common stock and Class B common stock, voting together as a single class. Consequently, we are essentially controlled by the Sands family and they would generally have sufficient voting power to determine the outcome of any corporate transaction or other matter submitted to our stockholders for approval.

 

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As a result of the concurrent offering of Class A common stock, the holders of Class B common stock will no longer have the right to vote as a single class in an election of directors. After giving effect to the closing of concurrent offering of Class A common stock, the Sands family will beneficially own approximately 4.9% of the outstanding shares of Class A common stock and approximately 94.1% of the outstanding shares of Class B common stock. On all matters in which holders of Class A common stock and Class B common stock vote together as a single class (including the election of three-fourths of the directors), the Sands family will have the ability to vote approximately 54.8% of the votes entitled to be cast. Additionally, after giving effect to this offering of depositary shares, on an as converted basis, assuming the conversion of all of such shares at a price equal to the offering price of the Class A common stock sold pursuant to the concurrent offering, the Sands family will beneficially own approximately 4.6% of the outstanding shares of Class A common stock and approximately 94.1% of the outstanding shares of Class B common stock. On all matters in which holders of Class A common stock and Class B common stock vote together as a single class, including the election of directors, the Sands family will have the ability to vote approximately 53.4% of the votes entitled to be cast. Therefore, we will continue to be controlled by the Sands family given their sufficient voting power to elect three-fourths of our directors and to determine the outcome of any corporate transaction or other matter submitted to our stockholders for approval.

 

If our stockholders, including members of the Sands family, sell substantial amounts of our common stock after this offering, the market price of our Class A common stock may fall.

 

Sales of a substantial number of shares of our common stock in the public market by our stockholders, including members of the Sands family, or the perception that such sales may occur, could adversely affect the price of our Class A common stock. Giving effect to the closing of the concurrent Class A common stock offering, we will have outstanding an aggregate of 92,366,947 shares of Class A common stock, based on the number of shares outstanding as of June 30, 2003, of which 91,460,169 shares will be freely tradeable without restriction or further registration under the Securities Act. A total of 906,778 shares of our Class A common stock are held by our “affiliates” and other holders of restricted securities within the meaning of Rule 144 under the Securities Act and may only be sold in compliance with Rule 144. Members of the Sands family and related entities, and our executive officers and directors have agreed that, for a period of 90 days, from the date of this prospectus supplement, subject to certain exceptions, they will not, without the prior written consent of each of Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., dispose of or hedge any shares of our common stock or any securities convertible into or exchangeable for our common stock. The aggregate maximum number of outstanding shares of Class A common stock and Class B common stock that are subject to these lock-up agreements are 941,779 (not taking into account shares of Class A common stock that would be received upon exchange of shares of Class B common stock) and 11,353,616, respectively.

 

In addition, the sale of shares of Class A common stock issuable upon conversion of the depositary shares, each representing  1/40 of a share of Series A mandatory convertible preferred stock, could depress the market price of our Class A common stock. We have reserved 6,089,578 shares of Class A common stock for issuance upon conversion of the depositary shares being offered in this offering (including the depositary shares subject to the underwriters’ over-allotment option). The shares of our Class A common stock issued upon conversion of the depositary shares will be freely transferable, unless they are held by our “affiliates” as that term is used under the Securities Act of 1933, as amended. Under the proposed terms of the Series A mandatory convertible preferred stock, we will have the option of paying dividends on the Series A mandatory convertible preferred stock in Class A common stock rather than cash. The sale of shares of Class A common stock issued to pay dividends on the Series A mandatory convertible preferred stock could also depress the sale price of our Class A common stock.

 

We intend to file, from time to time, registration statements on Form S-8 with respect to shares of our Class A common stock that are subject to issuance under our stock option and other stock incentive plans. Following filing of these registration statements, all of these shares will become freely tradeable upon their issuance, subject to compliance with Rule 144.

 

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Risks relating to our business

 

Our indebtedness could have a material adverse effect on our financial health.

 

We have incurred substantial indebtedness to finance our acquisitions and we may incur substantial additional indebtedness in the future to finance further acquisitions or for other purposes. As of May 31, 2003, we had approximately $2.8 billion of indebtedness outstanding, which does not include approximately $369.9 million of revolving loans we had available to draw upon under our senior credit facility. Our ability to satisfy our debt obligations outstanding from time to time will depend upon our future operating performance, which is subject to prevailing economic conditions, levels of interest rates and financial, business and other factors, many of which are beyond our control. Therefore, there can be no assurance that our cash flow from operations will be sufficient to meet all of our debt service requirements and to fund our capital expenditure requirements.

 

Our current and future debt service obligations and covenants could have important consequences to you if you purchase the depositary shares offered by this prospectus supplement. These consequences may include the following:

 

    our ability to obtain financing for future working capital needs or acquisitions or other purposes may be limited;

 

    a significant portion of our cash flow from operations will be dedicated to the payment of principal and interest on our indebtedness and dividends on our Series A mandatory convertible preferred stock, thereby reducing funds available for operations;

 

    our ability to conduct our business could be limited by restrictive covenants; and

 

    we may be more vulnerable to adverse economic conditions than our less leveraged competitors and, thus, may be limited in our ability to withstand competitive pressures.

 

The restrictive covenants and provisions in our senior credit facility, our bridge loan agreement and the indentures under which our debt securities are issued include, among others, those restricting additional liens, additional borrowing, the sale of assets, changes of control, the payment of dividends, transactions with affiliates, the making of investments and certain other fundamental changes. Our senior credit facility and our bridge loan agreement also contain restrictions on acquisitions and certain financial ratio tests including a debt coverage ratio, a senior debt coverage ratio, a fixed charges ratio and an interest coverage ratio. These restrictions could limit our ability to conduct business. A failure to comply with the obligations contained in our senior credit facility, our bridge loan agreement, our existing indentures or other loan agreements or indentures entered into in the future could result in an event of default under such agreements, which could require us to immediately repay the related debt and also debt under other agreements that may contain cross-acceleration or cross-default provisions.

 

Our acquisition and joint venture strategies may not be successful.

 

We have made a number of acquisitions, including the recent acquisitions of Hardy, Ravenswood Winery, Inc., or Ravenswood, wine brands and other assets from Sebastiani Vineyards, Inc., wine brands and other assets from Tuolomne River Vintners Group and wine brands and other assets from Corus Brands, Inc., and anticipate that we may, from time to time, acquire additional businesses, assets or securities of companies that we believe would provide a strategic fit with our business. Acquired businesses will need to be integrated with our existing operations. There can be no assurance that we will effectively assimilate the business or product offerings of acquired companies into our business or product offerings. We have also entered into joint ventures and may enter into additional joint ventures.

 

Acquisitions are also accompanied by risks such as potential exposure to unknown liabilities of acquired companies, the possible loss of key employees and customers of the acquired business. Acquisitions are subject to risks associated with the difficulty and expense of integrating the operations and personnel of the acquired companies, the potential disruption to our business and the diversion of management time and attention.

 

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We share control of existing joint ventures and may not have majority interest or control of future joint ventures, and, therefore, there is the risk that our joint venture partners may at any time have economic, business or legal interests or goals that are inconsistent with our interests or goals or those of the joint venture. There is also risk that our joint venture partners may be unable to meet their economic or other obligations and that we may be required to fulfill those obligations alone.

 

Failure by us or an entity in which we have a joint venture interest to adequately manage the risks associated with any acquisitions or joint ventures could have a material adverse effect on our financial condition or results of operations. There can be no assurance that any of our acquisitions or joint ventures will be profitable.

 

Competition could have a material adverse effect on our business.

 

We are in a highly competitive industry and the dollar amount and unit volume of our sales could be negatively affected by our inability to maintain or increase prices, changes in geographic or product mix, a general decline in beverage alcohol consumption or the decision of our wholesale customers, retailers or consumers to purchase competitive products instead of our products. Wholesaler, retailer and consumer purchasing decisions are influenced by, among other things, the perceived absolute or relative overall value of our products, including their quality and pricing, compared to competitive products. Unit volume and dollar sales could also be affected by pricing, purchasing, financing, operational, advertising or promotional decisions made by wholesalers and retailers which could affect their supply of, or consumer demand for, our products. We could also experience higher than expected selling, general and administrative expenses if we find it necessary to increase the number of our personnel or our advertising or promotional expenditures to maintain our competitive position or for other reasons.

 

An increase in excise taxes or government regulations could have a material adverse effect on our business.

 

In the United States, the United Kingdom, Australia and other countries in which we operate, we are subject to excise and other taxes on beverage alcohol products in varying amounts which have been subject to change. Significant increases in excise taxes on beverage alcohol products could materially and adversely affect our financial condition or results of operations. Recently, many states have considered proposals to increase, and some of these states have increased, state alcohol excise taxes. In addition, the beverage alcohol industry is subject to extensive regulation by federal, state, local and foreign governmental agencies concerning such matters as licensing, trade and pricing practices, required labeling and advertising. New or revised regulations or increased licensing fees, requirements or taxes could have a material adverse effect on our financial condition or results of operations.

 

We rely on the performance of wholesale distributors, major retailers and chains for the success of our business.

 

In the United States, we sell our products principally to wholesalers for resale to retail outlets including grocery stores, package liquor stores, club and discount stores and restaurants. In the United Kingdom and Australia, we sell our products principally to wholesalers and directly to major retailers and chains. The replacement or poor performance of our major wholesalers, retailers or chains or our inability to collect accounts receivable from our major wholesalers, retailers or chains could materially and adversely affect our results of operations and financial condition. Distribution channels for beverage alcohol products have been consolidating in recent years. In addition, wholesalers and retailers of our products offer products which compete directly with our products for retail shelf space and consumer purchases. Accordingly, there is a risk that wholesalers or retailers may give higher priority to products of our competitors. In the future, our wholesalers and retailers may not continue to purchase our products or provide our products with adequate levels of promotional support.

 

Our business could be adversely affected by a decline in the consumption of products we sell.

 

Although since 1995 there have been modest increases in consumption of beverage alcohol products in most of our product categories, there have been periods in the past in which there were substantial declines in the

 

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overall per capita consumption of beverage alcohol products in the United States and other markets in which we participate. A limited or general decline in consumption in one or more of our product categories could occur in the future due to a variety of factors, including:

 

    a general decline in economic conditions;

 

    increased concern about the health consequences of consuming beverage alcohol products and about drinking and driving;

 

    a trend toward a healthier diet including lighter, lower calorie beverages such as diet soft drinks, juices and water products;

 

    the increased activity of anti-alcohol consumer groups; and

 

    increased federal, state or foreign excise taxes.

 

We generally purchase raw materials under short-term supply contracts, and we are subject to substantial price fluctuations for grapes and grape-related materials and we have a limited group of suppliers of glass bottles.

 

Our business is heavily dependent upon raw materials, such as grapes, grape juice concentrate, grains, alcohol and packaging materials from third-party suppliers. We could experience raw material supply, production or shipment difficulties that could adversely affect our ability to supply goods to our customers. We are also directly affected by increases in the costs of raw materials. In the past, we have experienced dramatic increases in the cost of grapes. Although we believe we have adequate sources of grape supplies, in the event demand for certain wine products exceeds expectations, we could experience shortages.

 

One of our largest components of cost of goods sold is that of glass bottles, which, in the United States and Australia, have only a small number of producers. Currently, substantially all of our glass container requirements for our United States operations are supplied by one producer and substantially all of our glass container requirements for our Australian operations are supplied by another producer. The inability of any of our glass bottle suppliers to satisfy our requirements could adversely affect our business.

 

Our global operations subject us to currency rate fluctuations and geopolitical uncertainty which could have a material adverse effect on our business.

 

We have operations throughout the world and, therefore, are subject to risks associated with currency fluctuations. Subsequent to the Hardy acquisition, our exposure to foreign currency risk has increased significantly as a result of having additional international operations in Australia, New Zealand, the United Kingdom and France. We could experience changes in our ability to obtain or hedge against fluctuations in exchange rates. We could also be affected by nationalizations or unstable governments or legal systems or intergovernmental disputes. These currency, economic and political uncertainties may have a material adverse effect on our results of operation, especially to the extent these matters, or the decisions, policies or economic strength of our suppliers, affect our global operations.

 

We have a material amount of goodwill, and if we are required to write down goodwill, it would reduce our net income, which in turn could materially and adversely affect our results of operations.

 

As of May 31, 2003, approximately $1,382.9 million, or 25.8% of our total assets, represented goodwill. Goodwill is the amount by which the costs of an acquisition accounted for using the purchase method exceeds the fair value of the net assets acquired.

 

On March 1, 2002, we adopted the Financial Accounting Standards Board issued Statement of Financial Accounting Standard (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” Under SFAS No. 142 goodwill is no longer amortized, but instead is subject to a periodic impairment evaluation based on the fair value of the reporting unit. Reductions in our net income caused by the write-down of goodwill could materially and adversely affect our results of operations.

 

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The termination or non-renewal of our imported beer distribution agreements could have a material adverse effect on our business.

 

All of our imported beer products are marketed and sold pursuant to exclusive distribution agreements with the suppliers of these products and are subject to renewal from time to time. Our agreement to distribute Corona Extra and our other Mexican beer brands in 25 primarily western U.S. states expires in December 2006 and, subject to compliance with certain performance criteria, continued retention of certain personnel and other terms of the agreement, will be automatically renewed for additional terms of five years. Changes in control of Constellation Brands, Inc. or its subsidiaries involved in importing the Mexican beer brands, or changes in the chief executive officer of such subsidiaries, may be a basis for the supplier, unless it consents to such changes, to terminate the agreement. The supplier’s consent to such changes may not be unreasonably withheld. Prior to their expiration, all of our imported beer agreements may be terminated if we fail to meet certain performance criteria. We believe that we are currently in compliance with all of our material imported beer distribution agreements. From time to time we have failed, and may in the future fail, to satisfy certain performance criteria in our distribution agreements. It is possible that our beer distribution agreements may not be renewed or may be terminated prior to expiration.

 

Our financial statements for the four fiscal years ended February 28, 2002 were audited by Arthur Andersen LLP.

 

Our consolidated financial statements for the four fiscal years ended February 28, 2002 were audited by Arthur Andersen LLP.

 

On August 31, 2002, Arthur Andersen LLP ceased to practice before the SEC. Therefore, Arthur Andersen did not participate in the preparation of our Annual Report on Form 10-K for the fiscal year ended February 28, 2003 that is incorporated by reference into this prospectus supplement (the “2003 Form 10-K”), did not reissue its audit report with respect to the financial statements included in the 2003 Form 10-K, and did not consent to the inclusion of a copy of its previously issued audit report in the 2003 Form 10-K or the incorporation by reference of such report into this prospectus supplement. As a result, holders of our securities may have no effective remedy against Arthur Andersen LLP in connection with a material misstatement or omission in the financial statements to which its audit report relates. In addition, even if such holders were able to assert such a claim, because it has ceased operations, Arthur Andersen LLP may fail or otherwise have insufficient assets to satisfy claims made by holders of our securities that might arise under federal securities laws or otherwise with respect to the audit report of Arthur Andersen LLP.

 

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USE OF PROCEEDS

 

We estimate that our net proceeds from this offering will be approximately $144.9 million, or $164.8 million if the underwriters’ over-allotment option is exercised in full, after deducting the underwriting discount and our estimated offering fees and expenses. We intend to use the net proceeds from this offering, together with the net proceeds of the concurrent offering of shares of Class A common stock discussed below and available cash, to repay $400 million of borrowings plus $1.3 million of accrued interest under our bridge loans. In the event the concurrent offering of Class A common stock is not consummated, the net proceeds from this offering will be applied to repay a portion of the bridge loans plus accrued interest.

 

The bridge loans were incurred to partially finance the acquisition of Hardy and are due to be repaid in full on April 9, 2004. The rate of interest payable on the bridge loans is equal to LIBOR plus a margin. As of July 15, 2003, the bridge loans had a weighted average interest rate of 5.625% per year.

 

Concurrently with this offering of our depositary shares, we are offering 9,500,000 shares of Class A common stock (or 10,925,000 shares if the underwriters’ over-allotment option is exercised in full). We estimate that our net proceeds from that offering will be approximately $253.0 million, or $291.1 million if the underwriters’ over-allotment option is exercised in full, after deducting the underwriting discount and our estimated offering fees and expenses. This offering of depositary shares is not contingent upon the closing of the offering of the shares of Class A common stock.

 

 

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PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY

 

Our Class A common stock trades on the New York Stock Exchange under the symbol “STZ.” The following tables set forth for the periods indicated the high and low sales prices of the Class A common stock as reported on the NYSE.

 

     High

   Low

Fiscal Year Ended February 28, 2002

             

First Quarter

   $ 20.00    $ 15.65

Second Quarter

     23.25      18.40

Third Quarter

     22.50      17.38

Fourth Quarter

     27.18      19.01

Fiscal Year Ended February 28, 2003

             

First Quarter

   $ 31.62    $ 25.25

Second Quarter

     32.00      24.10

Third Quarter

     29.80      21.99

Fourth Quarter

     26.26      22.30

Fiscal Year Ending February 28, 2004

             

First Quarter

   $ 27.65    $ 21.90

Second Quarter (through July 24, 2003)

     31.80      27.39

 

On July 24, 2003, the last sale price of our Class A common stock on the New York Stock Exchange was $28.00 per share. On July 15, 2003, the number of holders of record of our Class A common stock was 989. The above data have been adjusted to give effect to the two-for-one splits of our two classes of common stock in each of May 2001 and 2002.

 

We have not paid any cash dividends since our initial public offering in 1973. We currently intend to retain all of our future earnings to finance the development and expansion of our business. In addition, the indentures for our outstanding senior notes, our outstanding senior subordinated notes, our existing senior credit facility and our existing bridge facility may restrict the payment of cash dividends under certain circumstances. Any indentures for debt securities issued in the future and any credit agreements entered into in the future may also restrict or prohibit the payment of cash dividends. However, we intend to pay cash dividends on the depositary shares.

 

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CAPITALIZATION

 

The following table sets forth our unaudited capitalization as of May 31, 2003:

 

    on an actual basis, and

 

    on an as adjusted basis to give effect to:

 

    the sale of 6,000,000 depositary shares offered by this prospectus supplement and the application of the proceeds from such sale, after deducting underwriting discounts and our estimated offering fees and expenses related thereto, and

 

    the sale of 9,500,000 shares of our Class A common stock offered in the concurrent offering and the application of the proceeds from such sale, after deducting underwriting discount and our estimated offering fees and expenses related thereto.

 

 

The table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus supplement and our consolidated financial statements and related notes incorporated by reference into this prospectus supplement.

 

     May 31, 2003

 
     Actual

    As Adjusted

 
     (in millions, except per
share data)
 

Cash and cash equivalents

   $ 46.0     $ 42.6  
    


 


Long-term debt (including current maturities):

                

Senior Credit Facility—Revolving Credit Loans

   $ 15.0     $ 15.0  

Senior Credit Facility—Term Loans

     1,200.0       1,200.0  

Bridge Loans

     400.0       —    

8 5/8% Senior Notes due 2006

     200.0       200.0  

8% Senior Notes due 2008

     200.0       200.0  

8 1/2% Series B Senior Notes due 2009(a)

     1.6       1.6  

8 1/2% Series C Senior Notes due 2009(b)

     251.5       251.5  

8 1/2% Senior Subordinated Notes due 2009

     200.0       200.0  

8 1/8% Senior Subordinated Notes due 2012

     250.0       250.0  

Other

     60.3       60.3  
    


 


Total debt

     2,778.4       2,378.4  
    


 


Stockholders’ equity:

                

Preferred Stock, $.01 par value—authorized, 1,000,000 shares; issued, none, actual; 150,000 shares, as adjusted for the depositary share offering

     —         0.0  

Class A common stock, $.01 par value — authorized, 275,000,000 shares; issued, 85,428,198 shares, actual; 94,928,198 shares, as adjusted

     0.9       0.9  

Class B common stock, $.01 par value — authorized, 30,000,000 shares; issued, 14,573,670 shares, actual and as adjusted

     0.1       0.1  

Additional paid-in capital

     556.7       954.5  

Retained earnings

     834.7       831.8  

Accumulated other comprehensive income

     79.2       79.2  

Less: Treasury stock(c)

     (31.9 )     (31.9 )
    


 


Total stockholders’ equity

     1,439.7       1,834.6  
    


 


Total capitalization

   $ 4,218.1     $ 4,213.0  
    


 



(a)   Represents £1.0 million converted at a rate of £1.00 = $1.6364.
(b)   Represents £154.0 million less £0.3 million unamortized discount, converted at a rate of £1.00 = $1.6364.
(c)   Represents 2,749,384 shares of Class A common stock and 2,502,900 shares of Class B common stock; actual and as adjusted.

 

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The share information for the Class A common stock excludes:

 

    shares of Class A common stock subject to stock options, of which there were 13,179,944 shares reserved for issuance upon exercise of outstanding stock options on May 31, 2003, at a weighted average exercise price of $17.10 per share;

 

    shares of Class A common stock reserved for future grants under our stock option and other stock incentive plans, of which there were 11,583,691 shares on May 31, 2003;

 

    shares of Class A common stock reserved for issuance upon conversion of shares of Class B common stock into Class A common stock at any time at the option of the holders of our Class B common stock, of which there were 12,070,770 shares reserved for issuance on May 31, 2003; and

 

    6,089,578 shares of Class A common stock that will be reserved, upon closing of this offering (including the depositary shares subject to the underwriters’ over-allotment option), for issuance upon conversion of Series A mandatory convertible preferred stock.

 

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SELECTED FINANCIAL DATA OF CONSTELLATION

 

The table appearing below sets forth our selected financial data as of the end of and for each of the five fiscal years in the period ended February 28, 2003 and the three months ended May 31, 2002 and 2003. The consolidated financial statements for the year ended February 28, 2003 were audited by KPMG LLP. The consolidated financial statements for the years ended February 28, 2002, February 28, 2001, February 29, 2000, and February 28, 1999 were audited by Arthur Andersen LLP and the reports for those years have not been reissued by Arthur Andersen LLP. In our opinion, the information for the three months ended May 31, 2002 and 2003 reflects all adjustments consisting only of normal recurring adjustments, necessary to fairly present the results of operations and financial condition. Results for interim periods should not be considered indicative of results for any other periods. The supplemental data section below presents operating income, income before extraordinary item, net income and earnings per share information for the comparative periods as if the nonamortization provisions of SFAS No. 142 had been applied as of March 1, 1998.

 

Effective March 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, “Intangible Assets.” Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives and are subject to review for impairment. Upon adoption of SFAS No. 142, we determined that certain of our 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. Our trademarks relate to well established brands owned by us which were previously amortized over 40 years. Intangible assets determined to have a finite life, primarily distribution agreements, continue to be amortized over their estimated useful lives which were not modified as a result of adopting SFAS No. 142.

 

Effective March 1, 2002, we adopted EITF Issue No. 01-09, or EITF No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products).” EITF No. 01-09 addresses the recognition, measurement and income statement classification of consideration given by a vendor to a customer (including both a reseller of the vendor’s products and an entity that purchases the vendor’s products from a reseller). EITF No. 01-09, among other things, requires that certain consideration given by a vendor to a customer be characterized as a reduction of revenue when recognized in the vendor’s income statement. We previously reported such costs as selling, general and administrative expenses. As a result of adopting EITF No. 01-09 on March 1, 2002, we have restated net sales, cost of product sold, and selling, general and administrative expenses for the years ended February 28, 2002, February 28, 2001, February 29, 2000, and February 28, 1999. Net sales were reduced by $213.8 million, $170.7 million, $178.7 million and $112.8 million, respectively; cost of product sold was increased by $10.1 million, $7.8 million, $8.8 million and $2.0 million, respectively; and selling, general and administrative expenses were reduced by $223.9 million, $178.5 million, $187.5 million and $114.8 million, respectively. This reclassification did not affect operating income or net income.

 

It is important that you read the selected financial data presented below in conjunction with the historical financial statements incorporated by reference into this prospectus supplement.

 

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    For the Years Ended

   

For the Three Months

Ended May 31,


 
    February 28,
1999


    February 29,
2000


    February 28,
2001


    February 28,
2002


    February 28,
2003


    2002

    2003

 
    (in thousands, except per share data)  

Income Statement Data:

                                                       

Gross sales

  $ 1,872,048     $ 2,909,954     $ 2,983,629     $ 3,420,213     $ 3,583,082     $ 860,463     $ 989,067  

Less-excise taxes

    (487,458 )     (748,230 )     (757,609 )     (813,455 )     (851,470 )     (210,070 )     (217,438 )
   


 


 


 


 


 


 


Net sales

    1,384,590       2,161,724       2,226,020       2,606,758       2,731,612       650,393       771,629  

Cost of product sold

    (1,051,331 )     (1,626,804 )     (1,647,081 )     (1,911,598 )     (1,970,897 )     (473,667 )     (563,717 )
   


 


 


 


 


 


 


Gross profit

    333,259       534,920       578,939       695,160       760,715       176,726       207,912  

Selling, general and administrative expenses

    (184,751 )     (294,369 )     (308,071 )     (352,679 )     (350,993 )     (90,761 )     (106,629 )

Restructuring charges

    —         —         —         —         (4,764 )     —         (2,316 )   

Nonrecurring charges

    (2,616 )     (5,510 )     —         —         —         —         —    
   


 


 


 


 


 


 


Operating income

    145,892       235,041       270,868       342,481       404,958       85,965       98,967  

Gain on change in fair value of derivative instruments

    —         —         —         —         23,129       —         1,181  

Equity in earnings of joint ventures

    —         —         —         1,667       12,236       2,739       328  

Interest expense, net

    (41,462 )     (106,082 )     (108,631 )     (114,189 )     (105,387 )     (27,141 )     (39,243 )
   


 


 


 


 


 


 


Income before income taxes and extraordinary item

    104,430       128,959       162,237       229,959       334,936       61,563       61,233  

Provision for income taxes

    (42,521 )     (51,584 )     (64,895 )     (91,984 )     (131,630 )     (24,194 )     (22,044 )
   


 


 


 


 


 


 


Income before extraordinary item

    61,909       77,375       97,342       137,975       203,306       37,369       39,189  

Extraordinary item, net of income taxes

    (11,437 )     —         —         (1,554 )     —         —         —    
   


 


 


 


 


 


 


Net income

  $ 50,472     $ 77,375     $ 97,342     $ 136,421     $ 203,306     $ 37,369     $ 39,189  
   


 


 


 


 


 


 


Earnings per common share(1):

                                                       

Basic:

                                                       

Income before extraordinary item

  $ 0.85     $ 1.07     $ 1.33     $ 1.62     $ 2.26     $ 0.42     $ 0.42  

Extraordinary items

    (0.16 )     —         —         (0.02 )     —         —         —    
   


 


 


 


 


 


 


Earnings per common share—basic

  $ 0.69     $ 1.07     $ 1.33     $ 1.60     $ 2.26     $ 0.42     $ 0.42  
   


 


 


 


 


 


 


Diluted:

                                                       

Income before extraordinary item

  $ 0.82     $ 1.05     $ 1.30     $ 1.57     $ 2.19     $ 0.40     $ 0.41  

Extraordinary item

    (0.15 )     —         —         (0.02 )     —         —         —    
   


 


 


 


 


 


 


Earnings per common share—diluted

  $ 0.67     $ 1.05     $ 1.30     $ 1.55     $ 2.19     $ 0.40     $ 0.41  
   


 


 


 


 


 


 


Weighted average common shares outstanding

                                                       

Basic

    73,174       72,216       73,446       85,505       89,856       88,845       92,880  

Diluted

    75,015       73,996       74,751       87,825       92,746       92,353       95,661  

(1)   All per share data have been adjusted to give effect to the two-for-one splits of our two classes of common stock in each of May 2001 and May 2002.

 

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    For the Years Ended

  

For the Three Months

Ended May 31,


    February 28,
1999


  February 29,
2000


  February 28,
2001


  February 28,
2002


  February 28,
2003


   2002

  2003

    (in thousands, except per share data)

Supplemental data restated for effect of SFAS No. 142:

                                          

Adjusted operating income

  $ 154,647   $ 254,833   $ 290,372   $ 369,780   $ 404,958    $ 85,965      

Adjusted income before extraordinary item

  $ 67,594   $ 91,793   $ 111,635   $ 156,921   $ 203,306    $ 37,369      

Adjusted net income

  $ 56,157   $ 91,793   $ 111,635   $ 155,367   $ 203,306    $ 37,369      
   

 

 

 

 

  

     

Adjusted earnings per common share(1):

                                          

Basic:

                                          

Income before extraordinary item

  $ 0.93   $ 1.27   $ 1.52   $ 1.84   $ 2.26    $ 0.42      

Earnings per common share—basic

  $ 0.77   $ 1.27   $ 1.52   $ 1.82   $ 2.26    $ 0.42      
   

 

 

 

 

  

     

Diluted:

                                          

Income before extraordinary item

  $ 0.90   $ 1.24   $ 1.49   $ 1.79   $ 2.19    $ 0.40      

Earnings per common share—diluted

  $ 0.75   $ 1.24   $ 1.49   $ 1.77   $ 2.19    $ 0.40      
   

 

 

 

 

  

     

Balance Sheet Data (at period end):

                                          

Total assets

  $ 1,793,776   $ 2,348,791   $ 2,512,169   $ 3,069,385   $ 3,196,330    $ 3,096,434   $ 5,358,956
   

 

 

 

 

  

 

Long-term debt, including current maturities

  $ 837,694   $ 1,289,788   $ 1,361,613   $ 1,374,792   $ 1,262,895    $ 1,363,236   $ 2,762,123
   

 

 

 

 

  

 

Total stockholders’ equity

  $ 435,272   $ 520,840   $ 616,268   $ 955,736   $ 1,174,984    $ 1,009,091   $ 1,439,662
   

 

 

 

 

  

 


(1)   All per share data have been adjusted to give effect to the two-for-one splits of our two classes of common stock in each of May 2001 and May 2002.

 

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SELECTED FINANCIAL DATA OF HARDY

 

The following table sets forth summary financial data of Hardy for each of the fiscal years in the five year period ended December 31, 2002 prepared in accordance with Australian GAAP and reported in Australian dollars. The statement of income data is derived from Hardy’s audited historical financial statements, the most recent two years of which are incorporated by reference into this prospectus supplement. It is important that you read the selected financial data presented below along with the consolidated financial statements of Hardy incorporated by reference herein.

 

As a result of Hardy’s adopting AASB 1004 “Revenue” effective January 1, 1999, and applying the revised AASB 1018 “Statement of Financial Performance”, revised AASB 1034 “Financial Report Presentation and Disclosure” and AASB 1040 “Statement of Financial Position” for the first time in the 2001 financial year, a number of comparative amounts for 1998, 1999 and 2000 have been reclassified to ensure comparability with the 2001 and 2002 reporting periods.

 

     For the Year Ended December 31,

 
     1998

    1999

    2000

    2001

    2002

 
     (A$ and in thousands)  

Statements of financial performance

                                        

Revenue from ordinary activities

   A$ 448,377     A$ 524,036     A$ 641,775     A$ 771,377     A$ 870,336  

Profit from ordinary activities before borrowing costs and income tax expense

     61,929       82,805       102,276       124,248       144,626  

Borrowing cost

     (4,447 )     (9,834 )     (16,266 )     (22,390 )     (25,273 )

Income tax expense

     (18,846 )     (22,847 )     (22,354 )     (29,699 )     (35,191 )
    


 


 


 


 


Net profit

     38,636       50,124       63,656       72,159       84,162  

Net profit/(loss) attributable to outside equity interests

     (85 )     (79 )     (108 )     53       176  
    


 


 


 


 


Net profit attributable to members of BRL Hardy Limited

   A$ 38,551     A$ 50,045     A$ 63,548     A$ 72,212     A$ 84,338  

Net profit attributable to members of BRL Hardy in US GAAP

                           A$ 43,423     A$ 83,181  

 

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UNAUDITED PRO FORMA COMBINED INCOME STATEMENT DATA

 

On January 17, 2003, we entered into an agreement with Hardy to effect our acquisition of all of the outstanding shares of Hardy by a wholly-owned, indirect subsidiary of ours. On March 27, 2003, we acquired control of Hardy’s Board of Directors pursuant to the terms of the agreement. On April 9, 2003, we completed our acquisition of all of Hardy’s outstanding capital stock, as a result of which we also acquired the remaining 50% ownership of Pacific Wine Partners, LLC (“PWP”), the joint venture we established with Hardy in 2001 (collectively, the “Hardy Acquisition”). Total consideration paid in cash and shares of Class A common stock to the Hardy shareholders was valued at $1,137.4 million for accounting purposes. The Class A common stock consisted of 3,288,913 shares which were valued at $77.2 million. Additionally, we recorded direct acquisition costs of $20.0 million. The acquisition date for accounting purposes is March 27, 2003, the date we assumed control of Hardy. We have 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.

 

Our following unaudited pro forma combined income statement data consists of an unaudited pro forma combined statement of income for the year ended February 28, 2003 (the “Pro Forma Statement of Income”).

 

Our information was derived from our audited consolidated financial statements filed in our Annual Report on Form 10-K for the fiscal year ended February 28, 2003. Our historical information was prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) and United States Dollars (“US$” or “$”).

 

Hardy’s information was derived from its audited consolidated financial statements as of and for the fiscal year ended December 31, 2002. Hardy’s historical information was originally prepared using Australian GAAP, which differs in certain material respects from U.S. GAAP, and Australian dollars (“A$”). This historical information has been modified to present Hardy’s information in conformity with our financial statement presentation, using U.S. GAAP and US$. The average US$/A$ exchange rate used to convert information was $0.5440 for the year ended December 31, 2002.

 

The Pro Forma Statement of Income is presented as if the Hardy Acquisition was consummated on March 1, 2002. The Pro Forma Statement of Income reflects the combination of our income statement for the year ended February 28, 2003, the income statement of Hardy for the year ended December 31, 2002, and pro forma adjustments. The pro forma adjustments include: (i) the consolidation of Pacific Wine Partners LLC (“PWP”) (prior to the Hardy Acquisition, PWP was equally owned by us and Hardy; consolidation adjustments include the elimination of the effects of using the equity method of accounting and any applicable elimination entries); and (ii) acquisition adjustments to reflect the purchase method of accounting for the Hardy Acquisition. PWP’s information was derived from its unaudited consolidated financial statements for the fiscal year ended December 31, 2002. PWP’s historical information was prepared using U.S. GAAP and US$.

 

The Pro Forma Statement of Income is for illustrative purposes only and should be read in conjunction with the separate historical financial statements of ours and Hardy and the notes thereto and with the accompanying notes to the Pro Forma Statement of Income, which is based upon currently available information and upon certain assumptions that we believe are reasonable under the circumstances. The purchase price allocation is based upon certain management estimates and preliminary independent appraisals of the fair value of assets acquired and liabilities assumed. These preliminary independent appraisals include a valuation of property, plant and equipment and intangible assets. These amounts may differ significantly from the results of the final independent appraisals which will also include valuations of inventories and grape supply contracts. Management has estimated the fair value of the remaining assets acquired and liabilities assumed.

 

The Pro Forma Statement of Income does not reflect any expected annual savings resulting from any operating synergies anticipated by our management. The Pro Forma Statement of Income does not purport to represent what our results of operations would actually have been if the Hardy Acquisition had, in fact, occurred on March 1, 2002 or to project our financial position or the results of operations at any future date or for any future period.

 

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES

 

UNAUDITED PRO FORMA COMBINED STATEMENT OF INCOME

For the Year Ended February 28, 2003

(in thousands, except per share data)

 

     Historical

    Pro Forma
Adjustments


    Pro Forma
Combined


 
     Constellation

    Hardy*

     

Gross sales

   $ 3,583,082     $ 466,019     $   115,602  (a)   $ 4,139,384  
                       (24,349 )(a)        
                       (970 )(a)        

Less—Excise taxes

     (851,470 )     (48,394 )     (3,012 )(a)     (902,876 )
    


 


 


 


Net sales

     2,731,612       417,625       87,271       3,236,508  

Cost of product sold

     (1,970,897 )     (291,851 )     (69,203 )(a)     (2,301,287 )
                       24,349  (a)        
                       2,450  (a)        
                       3,865  (d)        
    


 


 


 


Gross profit

     760,715       125,774       48,732       935,221  

Selling, general and administrative expenses

     (350,993 )     (64,728 )     (19,058 )(a)     (446,625 )
                       (1,480 )(a)        
                       472  (b)        
                       (12,045 )(e)        
                       1,207  (d)        

Restructuring charges

     (4,764 )                     (4,764 )
    


 


 


 


Operating income

     404,958       61,046       17,828       483,832  

Gain on change in fair value of derivative
instruments

     23,129       7,231               30,360  

Equity in earnings of joint ventures

     12,236       12,664       (24,744 )(a)     156  

Interest expense, net

     (105,387 )     (16,435 )     113  (a)     (199,349 )
                       (76,045 )(c)        
                       (1,595 )(f)        
    


 


 


 


Income (loss) before income taxes

     334,936       64,506       (84,443 )     314,999  

(Provision for) benefit from income taxes

     (131,630 )     (19,256 )     33,186  (g)     (117,700 )
    


 


 


 


Net income (loss)

   $ 203,306     $ 45,250     $ (51,257 )   $ 197,299  
    


 


 


 


Share Data:

                                

Earnings per common share:

                                

Basic

   $ 2.26                     $ 2.12  

Diluted

   $ 2.19                     $ 2.05  

Weighted average common shares outstanding:

                                

Basic

     89,856               3,289  (h)     93,145  

Diluted

     92,746               3,289  (h)     96,035  

*   Derived from Hardy’s audited consolidated financial statements as of and for the fiscal year ended December 31, 2002.

 

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES

 

NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENT

OF INCOME FOR THE YEAR ENDED FEBRUARY 28, 2003

(in thousands, except per share data)

 

(a)   Reflects the consolidation of PWP, a joint venture previously owned equally by us and Hardy, and the elimination of the effects of using the equity method of accounting in the historical financial statements, including the elimination of (i) sales and cost of product sold from Hardy to PWP of $20,386; (ii) revenues for crush, wine production, bottling and storage services provided by PWP to us of $3,963; (iii) sales of grapes and concentrate of $970 from us to PWP; and (iv) charges for other administrative services of $1,480 provided by us to PWP.

 

(b)   Reflects the elimination of stock-based compensation expense recognized in accordance with FASB Interpretations No. 44 (“FIN No. 44”), “Accounting for Certain Transactions Involving Stock Compensation (an Interpretation of APB Opinion No. 25)” recorded by PWP for Constellation and Hardy options granted to employees of PWP, previously considered non-employees under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” resulting in fair value measurement in accordance with FIN No. 44.

 

(c)   Reflects the effects of the Hardy Acquisition financing and its use in consummating the Hardy Acquisition, including the elimination of certain of Hardy’s interest expense due to the refinancing of certain of Hardy’s debt, the additional interest expense incurred on the debt to finance the Hardy Acquisition and the incremental interest expense on our historical borrowings resulting from the higher interest rate in our 2003 credit facility. In determining the pro forma adjustment, we have assumed interest rates on our LIBOR-based senior credit facility ranging from 4.6% to 5.1% for the pro forma period. The assumed interest rate on the bridge loan facility, which has escalation provisions, range from 6.1% in the first three months to 8.4% in the last three months of the pro forma period. The overall effective interest rate was 5.65% for the pro forma year ended February 28, 2003. We have recorded a $1,626 reduction in the purchase price to reflect imputed interest between the accounting acquisition date and the final payment of consideration. This charge is not reflected in the pro forma statement of income but will be reflected in our first quarter of fiscal 2004 earnings. The pro forma statement of income reflects interest expense for the bridge loan agreement pursuant to its terms despite our intention to repay this loan during fiscal 2004. Since the timing of repayment and exact nature and amount of the refinancing are not yet determinable, its impacts have not been reflected.

 

(d)   Reflects the adjustment to depreciation expense related to the acquired property, plant and equipment of Hardy. These assets have been restated at their estimated fair values and depreciated using our depreciation methods over the remaining useful lives of the assets as identified in the preliminary independent appraisal. The decrease in depreciation expense of $5,072 was due primarily to longer useful lives per the preliminary independent appraisal as compared to the estimated useful lives used by Hardy, and was allocated to cost of product sold and selling, general and administrative expenses as indicated.

 

(e)   Reflects incremental amortization expense associated with the deferred debt issuance costs as follows:

 

    

Year Ended

February 28,

2003


Credit agreement

   $ 3,900

Bridge loan agreement

     8,145
    

     $ 12,045
    

 

The deferred debt issuance costs associated with these agreements are being amortized over the life of the related debt. Deferred debt issuance costs associated with the bridge loan agreement are being amortized over five months, the period of time that we expect the related borrowings to be outstanding.

 

(f)   Reflects interest expense on the present value of adverse grape contracts.

 

(g)   Reflects the tax effect of the pro forma adjustments using our statutory tax rate of 39.3%.

 

(h)   Reflects the issuance of 3,288,913 shares of our Class A common stock given as part of the consideration in consummation of the Hardy Acquisition.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Introduction

 

We are a leading international producer and marketer of beverage alcohol in North America, Europe and Australia with a broad portfolio of brands across the wine, imported beer and distilled spirits categories. We have the largest wine business in the world and we are the largest multi-category supplier of beverage alcohol brands in the United States. In the United Kingdom, we are the largest marketer of wine, the second largest producer and marketer of cider and a leading independent drinks wholesaler. We are the largest producer and marketer of wine in Australia.

 

Through February 28, 2003, we reported our operating results in five segments: Popular and Premium Wine (branded popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider, and bottled water, and wholesale wine, distilled spirits, cider, beer, ready-to-drinks and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine); and Corporate Operations and Other (primarily corporate related items). As a result of our acquisition of Hardy as described below, we changed the structure of our internal organization to consist of two business divisions, Constellation Wines and Constellation Beers and Spirits. Separate division chief executives report directly to our chief operating officer. As a result of these changes, beginning with the first quarter of Fiscal 2004, we will report our operating results in three segments: Constellation Wines (branded wine, U.K. wholesale and other), Constellation Beers and Spirits (imported beer and distilled spirits) and Corporate Operations and Other. The new business segments reflect how our operations are now being managed, how operating performance is now being evaluated by senior management and the structure of its internal financial reporting. In addition, we changed our definition of operating income for segment purposes to exclude restructuring charges and unusual costs that affect comparability. Accordingly, financial information for the three months ended May 31, 2002 (“First Quarter 2003”) has been restated to conform to the new segment presentation.

 

The following discussion and analysis summarizes the significant factors affecting our (i) consolidated results of operations for the year ended February 28, 2003 (“Fiscal 2003”), compared to the year ended February 28, 2002 (“Fiscal 2002”), and Fiscal 2002 compared to the year ended February 28, 2001 (“Fiscal 2001”), (ii) consolidated results of operations for the three months ended May 31, 2003 (“First Quarter 2004”), compared to First Quarter 2003, and (ii) financial liquidity and capital resources for Fiscal 2003 and First Quarter 2004. This discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto incorporated by reference in this prospectus supplement.

 

As discussed in Note 1 to our consolidated financial statements for the year ended February 28, 2003, we adopted SFAS No. 142 on March 1, 2002. Upon the adoption of SFAS No. 142, we ceased amortization of goodwill and intangible assets with indefinite lives. Retroactive application of SFAS No. 142 is not permitted. As discussed in Note 2 to our consolidated financial statements, we adopted EITF No. 01-09 on March 1, 2002. EITF No. 01-09 requires that certain consideration given by a vendor to a customer be characterized as a reduction of revenue. We previously reported such costs as selling, general and administrative expenses. As a result of adopting EITF No. 01-09, we have restated our net sales, cost of product sold and selling, general and administrative expenses for Fiscal 2002 and Fiscal 2001. This reclassification did not affect our operating income or net income.

 

Recent Developments

 

Acquisition of Hardy

 

On March 27, 2003, we acquired control of BRL Hardy Limited, now known as Hardy Wine Company Limited, or Hardy, and on April 9, 2003, we completed our acquisition of all of Hardy’s outstanding capital stock. As a result of the acquisition of Hardy, we also acquired the remaining 50% ownership of Pacific Wine

 

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Partners LLC (“PWP”), the joint venture we established with Hardy in July 2001, which we refer to together with the acquisition of all of Hardy’s outstanding capital stock, as the Hardy acquisition. Hardy is Australia’s largest wine producer with interests in wineries and vineyards in most of Australia’s major wine regions as well as New Zealand, France and the United States. In addition, Hardy has significant marketing and sales operations in the United Kingdom. This acquisition supports our strategy of driving long- term growth and positions us to capitalize on the growth opportunities in “new world” wine markets. Hardy has a comprehensive portfolio of wine products across all price points with a strong focus on premium wine production. Hardy’s wines are distributed worldwide through a network of marketing and sales operations, with the majority of sales generated in Australia, the United Kingdom and the United States.

 

Total consideration paid in cash and Class A common stock to the Hardy shareholders was $1,137.4 million. Additionally, we recorded direct acquisition costs of $20.0 million. The acquisition date for accounting purposes is March 27, 2003. We have 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 our consolidated statement of income for the three months ended May 31, 2003. The cash portion of the purchase price paid to the Hardy shareholders and optionholders ($1,060.2 million) was financed with $660.2 million of borrowings under our senior credit agreement and $400.0 million of borrowings under our bridge loan facility. Additionally, we issued 3,288,913 shares of the our Class A common stock, which were valued at $77.2 million based on the simple average of the closing market prices of our 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 results of operations of Hardy and PWP have been reported in our new Constellation Wines segment from March 27, 2003. The Hardy acquisition is significant and we expect it to have a material impact on our future results of operations, financial position and cash flows.

 

Acquisitions in Fiscal 2003, Fiscal 2002 and Fiscal 2001 and Joint Venture

 

Acquisition of Ravenswood Winery

 

On July 2, 2001, we acquired all of the outstanding capital stock of Ravenswood Winery, Inc., a leading premium wine producer based in Sonoma, California. On June 30, 2002, Ravenswood Winery, Inc. was merged into Franciscan Vineyards, Inc., our wholly-owned subsidiary. The Ravenswood business produces, markets and sells super-premium and ultra-premium California wine, primarily under the Ravenswood brand name. The majority of the wine the Ravenswood business produces and sells is red wine, including the number one super-premium Zinfandel in the United States. The results of operations of the Ravenswood business were reported in the Fine Wine segment for Fiscal 2003 and Fiscal 2002 and have been included in our consolidated results of operations since the date of acquisition. Beginning in Fiscal 2004, the results of operations of the Ravenswood business will be reported in the our new Constellation Wines segment.

 

Acquisition of the Corus Assets

 

On March 26, 2001, in an asset acquisition, we acquired certain wine brands, wineries, working capital, primarily inventories, and other related assets from Corus Brands, Inc. which we refer to as the Corus Assets. In this acquisition, we acquired several well-known premium wine brands primarily sold in the northwestern United States, including Covey Run, Columbia, Ste. Chapelle and Alice White. In connection with the transaction, we also entered into long-term grape supply agreements with affiliates of Corus Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards. The results of operations of the Corus Assets were reported in the Popular and Premium Wine segment for Fiscal 2003 and Fiscal 2002 and have been included in our consolidated results of operations since the date of acquisition. Beginning in Fiscal 2004, the results of operations of the Corus Assets will be reported in our new Constellation Wines segment.

 

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Acquisition of the Turner Road Vintners Assets

 

On March 5, 2001, in an asset acquisition, we 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 which we refer to as the Turner Road Vintners Assets. The results of operations of the Turner Road Vintners Assets were reported in the Popular and Premium Wine segment for Fiscal 2003 and Fiscal 2002 and have been included in our consolidated results of operations since the date of acquisition. Beginning in Fiscal 2004, the results of operations of the Turner Road Vintners Assets will be reported in our new Constellation Wines segment.

 

Acquisition of Forth Wines

 

On October 27, 2000, we acquired all of the issued Ordinary Shares and Preference Shares of Forth Wines Limited. The results of operations of Forth Wines were reported in the U.K. Brands and Wholesale segment for Fiscal 2003 and Fiscal 2002 and have been included in our consolidated results of operations since the date of acquisition. Beginning in Fiscal 2004, the results of operations of Forth Wines will be reported in our new Constellation Wines segment.

 

Pacific Wine Partners

 

On July 31, 2001, we and Hardy formed Pacific Wine Partners LLC, or PWP, a joint venture owned equally by us and Hardy. In connection with the initial formation of the joint venture, PWP was given the exclusive distribution rights in the United States and the Caribbean to seven brands – Banrock Station, Hardys, Leasingham, Barossa Valley Estate and Chateau Reynella from Australia; Nobilo from New Zealand; and La Baume from France. The joint venture also owns Farallon, a premium California coastal wine. In addition, PWP owns a winery and controls 1,400 acres of vineyards, located in Monterey County, California and an additional winery located in Sonoma County, California.

 

On October 16, 2001, we announced that PWP completed the purchase of certain assets of Blackstone Winery, including the Blackstone brand and the Codera wine business in Sonoma County.

 

The investment in PWP was accounted for using the equity method; accordingly, the results of operations of PWP since its formation through March 27, 2003 have been included in the equity in earnings of joint venture line in our Consolidated Statements of Income.

 

As a result of the Hardy acquisition, PWP became our wholly-owned subsidiary. Accordingly, its results of operations will be consolidated and reported in our new Constellation Wines segment.

 

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Results of Operations

 

First Quarter 2003 Compared to First Quarter 2004

 

Net Sales

 

The following table sets forth the net sales (in thousands of dollars) by our operating segments for First Quarter 2003 and First Quarter 2004.

    

First Quarter 2003 Compared to

First Quarter 2004


 
     Net Sales

 
     2003

   2004

  

% Increase/

(Decrease)


 

Constellation Wines:

                    

Branded wine

   $   214,011    $   310,010    44.9  %

Wholesale and other

     164,477      184,150    12.0  %
    

  

      

Constellation Wines net sales

     378,488      494,160    30.6  %
    

  

      

Constellation Beers and Spirits:

                    

Imported beers

     199,706      207,264    3.8  %

Spirits

     72,199      70,205    (2.8 )%
    

  

      

Constellation Beers and Spirits net sales

     271,905      277,469    2.0  %
    

  

      

Corporate Operations and Other

     —        —      N/A  
    

  

      

Consolidated net sales

   $ 650,393    $ 771,629    18.6  %
    

  

      

 

Net sales for First Quarter 2004 increased to $771.6 million from $650.4 million for First Quarter 2003, an increase of $121.2 million, or 18.6%. This increase resulted primarily from the inclusion of $101.9 million of net sales of products acquired in the Hardy acquisition. In addition, net sales increased due to increases in U.K. wholesale sales, imported beer sales and a favorable foreign currency impact of $18.2 million.

 

Constellation Wines

 

Net sales for Constellation Wines increased to $494.2 million for First Quarter 2004 from $378.5 million in First Quarter 2003, an increase of $115.7 million, or 30.6%. This increase was primarily due to the addition of $98.5 million of sales of branded wine acquired in the Hardy acquisition and also included a positive impact on branded wine sales of $3.0 million from foreign exchange partially offset by a decrease in our base (non Hardy) sales. Wholesale and other net sales increased $19.7 million, due to a favorable foreign currency impact of $15.2 million, partially offset by lower cider sales. We continue to face a challenging wine environment due to competitive discounting driven in part by excess grape supplies. We do not believe this is a long-term issue. We have taken a strategy of preserving the long-term brand equity of our portfolio and investing our marketing dollars in the higher growth sectors of the wine business.

 

Constellation Beers and Spirits

 

Net sales for Beers and Spirits increased to $277.5 million for First Quarter 2004 from $271.9 million for First Quarter 2003, an increase of $5.6 million, or 2.0%. This increase resulted primarily from both volume gains and higher average prices of beer which increased $7.6 million, or 3.8%, partially offset by spirit sales which were down $2.0 million, or (2.8%), on flat volume. The higher average beer prices resulted from a price increase on our Mexican portfolio, which took effect in First Quarter 2003. The decline in spirits sales was due primarily to sales mix towards lower average priced brands.

 

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Gross Profit

 

Our gross profit increased to $207.9 million for First Quarter 2004 from $176.7 million for First Quarter 2003, an increase of $31.2 million, or 17.6%. The dollar increase in gross profit resulted primarily from sales from the Hardy acquisition of $26.8 million (net of $5.5 million of pass through of stepped-up inventory costs), higher average beer sales and lower average spirits costs, partially offset by higher average beer costs. Gross profit as a percent of net sales decreased to 26.9% for First Quarter 2004 from 27.2% for First Quarter 2003 primarily due to the Hardy acquisition.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased to $106.6 million for First Quarter 2004 from $90.8 million for First Quarter 2003, an increase of $15.9 million, or 17.5%. This increase resulted primarily from $11.4 million in selling, general and administrative expenses related to the brands acquired in the Hardy acquisition. In addition, $4.1 million of amortized deferred financing costs associated with non-continuing financing in connection with the Hardy acquisition were included in the Corporate Operations and Other segment. These costs were primarily related to the bridge loan agreement. Selling, general and administrative expenses as a percent of net sales decreased to 13.8% for First Quarter 2004 as compared to 14.0% for First Quarter 2003 due primarily to the Hardy acquisition which had a lower percentage of selling, general and administrative expenses than our base businesses.

 

Restructuring Charges

 

Restructuring charges resulted from the realignment of business operations in our wine segment, as previously announced in our fourth quarter of fiscal 2003. We recorded a restructuring charge of $2.3 million in First Quarter 2004 and expect to incur additional charges of approximately $5.0 million for the previously announced actions over the remainder of fiscal 2004.

 

In June 2003, we made a decision to exit the commodity concentrate product line located in Madera, California. The commodity concentrate product line is facing declining sales and profits and is not part of our core business, beverage alcohol. We will continue to produce and sell value-added, proprietary concentrate products such as MegaColors.

 

Related to exiting commodity concentrate, we will sell our Escalon facility, located in Escalon, California, and move all remaining production and storage from Escalon to Madera and other locations. By exiting commodity concentrate, we will free up capacity at our winery in Madera and forego further investment in our Escalon facility. We believe these steps will simplify our wine operations and will result in a better use of our capital.

 

The total restructuring charge for exiting the commodity concentrate product line and closing the Escalon facility is expected to be $56 million and is expected to be incurred over the next six quarters, beginning with an estimated $40 million in the second quarter of fiscal 2004. Of the total restructuring charges, approximately $25 million relate to inventory charges which will be included in cost of product sold. The remaining charges result from renegotiating existing grape contracts associated with commodity concentrate and the Escalon facility, asset write-offs and severance-related costs. More than half of the charges are non-cash charges.

 

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Operating Income

 

The following table sets forth the operating income/(loss) (in thousands of dollars) by our operating segments for First Quarter 2003 and First Quarter 2004.

 

    

First Quarter 2003 Compared to

First Quarter 2004


 
     Operating Income (Loss)

 
     2003

     2004

     % Increase

 

Constellation Wines

   $   38,838      $ 61,023      57.1  %

Constellation Beers and Spirits

     54,421        59,883      10.0  %

Corporate Operations and Other

     (7,294 )      (10,071 )    38.1  %
    


  


      

Total Reportable Segments

     85,965        110,835      28.9  %

Restructuring and Unusual Costs

     —          (11,868 )    N/A  
    


  


      

Consolidated Operating Income

   $   85,965      $ 98,967      15.1  %
    


  


      

 

Restructuring and unusual costs of $11.9 million for First Quarter 2004 included restructuring and certain unusual costs that are excluded by management in their evaluation of the results of each operating segment. These costs represent the flow-through of inventory step-up and the amortization of deferred financing costs associated with the Hardy acquisition of $5.5 million and $4.1 million, respectively, and restructuring charges of $2.3 million. As a result of these costs and the above factors, consolidated operating income increased to $99.0 million for First Quarter 2004 from $86.0 million for First Quarter 2003, an increase of $13.0 million, or 15.1%.

 

Interest Expense, Net

 

Net interest expense increased to $39.2 million for First Quarter 2004 from $27.1 million for First Quarter 2003, an increase of $12.1 million, or 44.6%. The increase resulted from higher average borrowings due to the financing of the Hardy acquisition, partially offset by a lower average borrowing rate, and $1.7 million of imputed interest expense related to the Hardy acquisition.

 

Provision for Income Taxes

 

Our effective tax rate for First Quarter 2004 was 36.0% as compared to 39.3% for First Quarter 2003 as a result of the Hardy acquisition, which significantly increases the allocation of income to jurisdictions with lower income tax rates.

 

Net Income

 

As a result of the above factors, net income increased to $39.2 million for First Quarter 2004 from $37.4 million for First Quarter 2003, an increase of $1.8 million, or 4.9%.

 

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Fiscal 2002 Compared to Fiscal 2003

 

Net Sales

 

The following table sets forth our net sales (in thousands of dollars) by operating segment for Fiscal 2002 and Fiscal 2003.

 

     Fiscal 2002 Compared to Fiscal 2003

 
     Net Sales

 
     2002

    2003

   

% Increase

(Decrease)


 

Popular and Premium Wine:

                      

Branded:

                      

External customers

   $ 696,901     $ 684,094     (1.8 )%

Intersegment

     9,669       8,570     (11.4 )%
    


 


     

Total Branded

     706,570       692,664     (2.0 )%
    


 


     

Other:

                      

External customers

     57,718       45,223     (21.6 )%

Intersegment

     13,751       11,537     (16.1 )%
    


 


     

Total Other

     71,469       56,760     (20.6 )%
    


 


     

Popular and Premium Wine net sales

     778,039       749,424     (3.7 )%
    


 


     

Imported Beer and Spirits:

                      

Beer

     726,953       776,006     6.7 %

Spirits

     274,702       282,307     2.8 %
    


 


     

Imported Beer and Spirits net sales

     1,001,655       1,058,313     5.7 %
    


 


     

U.K. Brands and Wholesale:

                      

Branded:

                      

External customers

     223,791       229,283     2.5 %

Intersegment

     574       189     (67.1 )%
    


 


     

Total Branded

     224,365       229,472     2.3 %

Wholesale

     495,532       560,346     13.1 %
    


 


     

U.K. Brands and Wholesale net sales

     719,897       789,818     9.7 %
    


 


     

Fine Wine:

                      

External customers

     131,161       154,353     17.7 %

Intersegment

     753       1,405     86.6 %
    


 


     

Fine Wine net sales

     131,914       155,758     18.1 %
    


 


     

Corporate Operations and Other

     —         —       N/A  
    


 


     

Intersegment eliminations

     (24,747 )     (21,701 )   (12.3 )%
    


 


     

Consolidated net sales

   $ 2,606,758     $ 2,731,612     4.8 %
    


 


     

 

Net sales for Fiscal 2003 increased to $2,731.6 million from $2,606.8 million for Fiscal 2002, an increase of $124.9 million, or 4.8%. This increase resulted primarily from increased sales of imported beer and the impact of foreign currency changes of $50.7 million in the U.K. Brands and Wholesale segment. Also contributing to the sales growth were increased sales in U.K. wholesale, on a local currency basis, fine wine and spirits, offset by lower bulk wine, grape juice concentrate, Popular and Premium branded wine and U.K. branded sales, on a local currency basis.

 

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Popular and Premium Wine

 

Net sales for the Popular and Premium Wine segment for Fiscal 2003 decreased to $749.4 million from $778.0 million for Fiscal 2002, a decrease of $28.6 million, or (3.7)%. Other sales declined $14.7 million, or (20.6)%, on lower bulk wine and grape juice concentrate sales. Branded sales declined $13.9 million, or (2.0)%, on lower volume offset slightly by higher average selling prices. Volumes were negatively impacted as a result of increased promotional spending in the industry, in which we did not participate in heavily. In this competitive pricing environment, we continue to be selective in our promotional activities, focusing instead on growth areas, long-term brand building initiatives and increased profitability.

 

Imported Beer and Spirits

 

Net sales for the Imported Beer and Spirits segment for Fiscal 2003 increased to $1,058.3 million from $1,001.7 million for Fiscal 2002, an increase of $56.7 million, or 5.7%. This increase resulted primarily from a $49.1 million increase in imported beer sales. The growth in imported beer sales was due to a price increase on our Mexican beer portfolio, which took effect in the first quarter of Fiscal 2003. Spirits sales increased $7.6 million due primarily to increased bulk whiskey sales, along with a slight increase in branded sales.

 

U.K. Brands and Wholesale

 

Net sales for the U.K. Brands and Wholesale segment for Fiscal 2003 increased to $789.8 million from $719.9 million for Fiscal 2002, an increase of $69.9 million, or 9.7%. This increase resulted from the impact of foreign currency changes of $50.7 million and a $28.6 million local currency increase in wholesale sales due to the addition of new accounts and increased average delivery sizes, partially offset by a $9.4 million local currency decline in branded sales as a decrease in cider sales was partially offset by increases in wine sales.

 

Fine Wine

 

Net sales for the Fine Wine segment for Fiscal 2003 increased to $155.8 million from $131.9 million for Fiscal 2002, an increase of $23.8 million, or 18.1%. This increase resulted from an additional four months of sales of the brands acquired in the Ravenswood acquisition, completed in July 2001, of $14.1 million, as well as growth in the Ravenswood, Simi, Estancia and Franciscan brands. The growth was due to higher sales volumes led by Ravenswood and Simi, partially offset by higher promotional costs and a shift towards lower priced brands.

 

Gross Profit

 

Our gross profit increased to $760.7 million for Fiscal 2003 from $695.2 million for Fiscal 2002, an increase of $65.6 million, or 9.4%. The dollar increase in gross profit resulted from higher imported beer sales, the additional four months of sales of the brands acquired in the Ravenswood acquisition, completed in July 2001, a favorable mix of sales towards higher margin products, particularly popular and premium wine and tequila, lower average wine and spirits costs, and a favorable foreign currency impact. These increases were partially offset by higher average imported beer costs and lower concentrate and bulk wine sales. As a result of the foregoing, gross profit as a percent of net sales increased to 27.8% for Fiscal 2003 from 26.7% for Fiscal 2002.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased to $351.0 million for Fiscal 2003 from $352.7 million for Fiscal 2002, a decrease of $1.7 million, or (0.5)%. We adopted SFAS No. 142 on March 1, 2002, and, accordingly, stopped amortizing goodwill and other indefinite lived intangible assets. Therefore, the decrease of $1.7 million consists of a decrease of $27.3 million of amortization expense from Fiscal 2002 offset by an increase of $25.6 million. The increase resulted primarily from increased personnel costs to support our growth, higher selling costs to support the growth in the U.K. wholesale business, and increased advertising costs

 

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on certain popular and premium wine brands and imported beer brands. Selling, general and administrative expenses as a percent of net sales decreased to 12.8% for Fiscal 2003 as compared to 13.5% for Fiscal 2002. This decrease was due to the reduced amortization expense noted above partially offset by (i) the percent increase in general and administrative expenses growing at a faster rate than the percent change in the Corporate Operations and Other, Popular and Premium Wine and U.K. Brands and Wholesale segments’ net sales, and (ii) the percent increase in the U.K. Brands and Wholesale segment’s selling costs being greater than the percent increase in U.K. Brands and Wholesale segment’s net sales.

 

Restructuring Charges

 

Our Popular and Premium Wine segment recorded a property, plant and equipment impairment charge of $4.8 million in Fiscal 2003 in connection with the planned closure of two of its production facilities in Fiscal 2004. We began the realignment of our business operations within the Popular and Premium Wine segment to further improve productivity. This realignment is not expected to have an impact on brand sales. As part of this realignment, we expect to incur an additional $6.7 million in charges, primarily in cash, during Fiscal 2004 within the Constellation Wines segment. No such charges were incurred in Fiscal 2002.

 

In connection with the Hardy acquisition, we expect to record a restructuring charge related to the integration of Hardy in the amount of $3.2 million in Fiscal 2004. In addition, we expect to record a one-time charge in the amount of $8.2 million in Fiscal 2004 for the write-off of bank fees related to the repayment of our senior credit facility.

 

Operating Income

 

The following table sets forth our operating income (loss) (in thousands of dollars) by operating segment for Fiscal 2002 and Fiscal 2003.

 

    

Fiscal 2002 Compared to Fiscal 2003


 
     Operating Income (Loss)

 
     2002

    2003

    % Increase

 

Popular and Premium Wine

   $ 104,781     $ 107,715     2.8 %

Imported Beer and Spirits

     178,805       217,963     21.9 %

U.K. Brands and Wholesale

     47,270       56,577     19.7 %

Fine Wine

     39,169       55,515     41.7 %

Corporate Operations and Other

     (27,544 )     (32,812 )   19.1 %
    


 


     

Consolidated Operating Income

   $ 342,481     $ 404,958     18.2 %
    


 


     

 

As a result of the above factors, operating income increased to $405.0 million for Fiscal 2003 from $342.5 million for Fiscal 2002, an increase of $62.5 million, or 18.2%. Fiscal 2002 operating income for Popular and Premium Wine, Imported Beer and Spirits, U.K. Brands and Wholesale and Fine Wine included amortization expense of $8.9 million, $8.2 million, $5.9 million, and $4.3 million, respectively.

 

Gain on Change in Fair Value of Derivative Instruments

 

In February 2003, we entered into a foreign currency collar contract in connection with the Hardy acquisition to lock in a range for the cost of the acquisition in U.S. dollars. As of February 28, 2003, this derivative instrument had a fair value of $23.1 million. Under SFAS No. 133, a transaction that involves a business combination is not eligible for hedge accounting treatment. As such, the derivative was recorded on the balance sheet at its fair value with the change in the fair value recognized separately on our consolidated statements of income.

 

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In the first quarter of Fiscal 2004, we will record an additional gain of $4.1 million related to the settlement of the foreign currency derivative instruments entered into in conjunction with the Hardy acquisition.

 

Interest Expense, Net

 

Net interest expense decreased to $105.4 million for Fiscal 2003 from $114.2 million for Fiscal 2002, a decrease of $8.8 million, or (7.7)%. The decrease resulted from both a decrease in the average borrowings for the year and a decrease in the average interest rate.

 

Provision for Income Taxes

 

Our effective tax rate for Fiscal 2003 was 39.3% as compared to 40.0% for Fiscal 2002 as a result of the adoption of SFAS No. 142 on March 1, 2002.

 

Net Income

 

As a result of the above factors, net income increased to $203.3 million for Fiscal 2003 from $136.4 million for Fiscal 2002, an increase of $66.9 million, or 49.0%.

 

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Fiscal 2001 Compared to Fiscal 2002

 

Net Sales

 

The following table sets forth our net sales (in thousands of dollars) by operating segment for Fiscal 2001 and Fiscal 2002.

 

     Fiscal 2001 Compared to Fiscal 2002

 
     Net Sales

 
     2001

    2002

   

% Increase

(Decrease)


 

Popular and Premium Wine:

                      

Branded:

                      

External customers

   $ 546,211     $ 696,901     27.6 %

Intersegment

     6,451       9,669     49.9 %
    


 


     

Total Branded

     552,662       706,570     27.8 %
    


 


     

Other:

                      

External customers

     64,799       57,718     (10.9 )%

Intersegment

     16,562       13,751     (17.0 )%
    


 


     

Total Other

     81,361       71,469     (12.2 )%
    


 


     

Popular and Premium Wine net sales

     634,023       778,039     22.7 %
    


 


     

Imported Beer and Spirits:

                      

Beer

     633,833       726,953     14.7 %

Spirits

     262,933       274,702     4.5 %
    


 


     

Imported Beer and Spirits net sales

     896,766       1,001,655     11.7 %
    


 


     

U.K. Brands and Wholesale:

                      

Branded:

                      

External customers

     225,550       223,791     (0.8 )%

Intersegment

     1,193       574     (51.9 )%
    


 


     

Total Branded

     226,743       224,365     (1.0 )%

Wholesale

     404,208       495,532     22.6 %
    


 


     

U.K. Brands and Wholesale net sales

     630,951       719,897     14.1 %
    


 


     

Fine Wine:

                      

External customers

     88,486       131,161     48.2 %

Intersegment

     217       753     247.0 %
    


 


     

Fine Wine net sales

     88,703       131,914     48.7 %
    


 


     

Corporate Operations and Other

     —         —       N/A  
    


 


     

Intersegment eliminations

     (24,423 )     (24,747 )   1.3 %
    


 


     

Consolidated net sales

   $ 2,226,020     $ 2,606,758     17.1 %
    


 


     

 

Net sales for Fiscal 2002 increased to $2,606.8 million from $2,226.0 million for Fiscal 2001, an increase of $380.7 million, or 17.1%.

 

Popular and Premium Wine

 

Net sales for the Popular and Premium Wine segment for Fiscal 2002 increased to $778.0 million from $634.0 million for Fiscal 2001, an increase of $144.0 million, or 22.7%. This increase resulted primarily from $158.5 million of sales of the newly acquired brands from the Turner Road Vintners Assets and Corus Assets

 

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acquisitions, which we collectively refer to as the March Acquisitions, both completed in March 2001. This increase was partially offset by declines in the Popular and Premium Wine segment’s grape juice concentrate business and certain other wine brands.

 

Imported Beer and Spirits

 

Net sales for the Imported Beer and Spirits segment for Fiscal 2002 increased to $1,001.7 million from $896.8 million for Fiscal 2001, an increase of $104.9 million, or 11.7%. This increase resulted primarily from a 14.7% increase in imported beer sales, led by volume growth in the Mexican beer portfolio. Spirits sales increased slightly primarily from an increase in bulk whiskey sales, partially offset by slightly lower branded spirits sales as a result of lower net selling prices from the implementation of a net pricing strategy in the third quarter of Fiscal 2001, which also resulted in lower promotion costs.

 

U.K. Brands and Wholesale

 

Net sales for the U.K. Brands and Wholesale segment for Fiscal 2002 increased to $719.9 million from $631.0 million for Fiscal 2001, an increase of $88.9 million, or 14.1%. This increase resulted from a 27.1% local currency basis increase in wholesale sales, with the majority of this growth coming from organic sales, and a 7.4% local currency basis increase in branded sales, with an increase in wine sales being partially offset by a decrease in cider sales, partially offset by a 22.9% adverse foreign currency impact.

 

Fine Wine

 

Net sales for the Fine Wine segment for Fiscal 2002 increased to $131.9 million from $88.7 million for Fiscal 2001, an increase of $43.2 million, or 48.7%. This increase resulted primarily from $30.4 million of net sales of the newly acquired brands from the Ravenswood acquisition and organic sales growth primarily due to volume increases in the Estancia, Veramonte and Franciscan brands.

 

Gross Profit

 

Our gross profit increased to $695.2 million for Fiscal 2002 from $578.9 million for Fiscal 2001, an increase of $116.2 million, or 20.1%. The dollar increase in gross profit resulted primarily from sales of the newly acquired brands from the March Acquisitions and the Ravenswood acquisition, volume growth in the Imported Beer and Spirits segment’s Mexican beer portfolio, volume growth in the Fine Wine segment’s portfolio, and volume growth in the U.K. Brands and Wholesale segment’s wholesale business and branded business. These increases were partially offset by a decrease in the Imported Beer and Spirits segment’s spirits sales and an adverse foreign currency impact. As a percent of net sales, gross profit increased to 26.7% for Fiscal 2002 from 26.0% for Fiscal 2001, resulting primarily from sales of higher-margin wine brands acquired in the March Acquisitions and the Ravenswood acquisition.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased to $352.7 million for Fiscal 2002 from $308.1 million for Fiscal 2001, an increase of $44.6 million, or 14.5%. The dollar increase in selling, general and administrative expenses resulted primarily from an increase in advertising, selling, general and administrative expenses associated with the brands acquired in the March Acquisitions and the Ravenswood acquisition. In addition, there were increases in selling, general and administrative expenses associated with the Imported Beer and Spirits segment’s Mexican beer portfolio volume growth, and the U.K. Brands and Wholesale segment’s wholesale volume growth, and increased personnel costs to support our growth within the Corporate Operations and Other segment. Selling, general and administrative expenses as a percent of net sales decreased slightly to 13.5% for Fiscal 2002 as compared to 13.8% for Fiscal 2001 due to higher sales growth from the March Acquisitions and the Ravenswood acquisition than the related selling, general and administrative expense growth.

 

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Operating Income

 

The following table sets forth our operating income (loss) (in thousands of dollars) by operating segment for Fiscal 2001 and Fiscal 2002.

 

     Fiscal 2001 Compared to Fiscal 2002

 
     Operating Income (Loss)

 
     2001

    2002

   

% Increase

(Decrease)


 

Popular and Premium Wine

   $ 50,390     $ 104,781     107.9  %

Imported Beer and Spirits

     167,680       178,805     6.6  %

U.K. Brands and Wholesale

     48,961       47,270     (3.5 )%

Fine Wine

     24,495       39,169     59.9  %

Corporate Operations and Other

     (20,658 )     (27,544 )   33.3  %
    


 


     

Consolidated Operating Income

   $ 270,868     $ 342,481     26.4  %
    


 


     

 

As a result of the above factors, operating income increased to $342.5 million for Fiscal 2002 from $270.9 million for Fiscal 2001, an increase of $71.6 million, or 26.4%.

 

Interest Expense, Net

 

Net interest expense increased to $114.2 million for Fiscal 2002 from $108.6 million for Fiscal 2001, an increase of $5.6 million, or 5.1%. The increase resulted primarily from an increase in the average borrowings primarily due to the financing of the March Acquisitions and the Ravenswood acquisition, partially offset by a decrease in the average interest rate.

 

Net Income

 

As a result of the above factors, net income increased to $136.4 million for Fiscal 2002 from $97.3 million for Fiscal 2001, an increase of $39.1 million, or 40.1%.

 

Financial Liquidity and Capital Resources

 

General

 

Our principal use of cash in our operating activities is for purchasing and carrying inventories. Our primary source of liquidity has historically been cash flow from operations, except during the annual Fall grape harvests when we have relied on short-term borrowings. In the United States, the annual grape crush normally begins in August and runs through October. In Australia, the annual grape crush normally begins in March and runs through May. We generally begin purchasing grapes at the beginning of the crush season with payments for such grapes beginning to come due one month later. Our short-term borrowings to support such purchases generally reach their highest levels one to two months after the crush season has ended. Historically, we have used cash flow from operating activities to repay our short-term borrowings. We will continue to use our short-term borrowings to support our working capital requirements. We believe that cash provided by our operating activities and our financing activities, primarily short-term borrowings, will provide adequate resources to satisfy our working capital, liquidity and anticipated capital expenditure requirements for both our short-term and long- term capital needs.

 

First Quarter 2004 Cash Flows

 

Operating Activities

 

Net cash used in operating activities for First Quarter 2004 was $6.4 million, which resulted from $65.1 million in net income adjusted for non-cash items, less $71.5 million representing the net change in our operating assets and liabilities. The net change in operating assets and liabilities resulted primarily from a seasonal increase in accounts receivable and a decrease in accounts payable.

 

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Investing Activities

 

Net cash used in investing activities for First Quarter 2004 was $1,081.9 million, which resulted primarily from net cash paid of $1,067.7 million for the Hardy purchases of businesses and $18.1 million of capital expenditures.

 

Financing Activities

 

Net cash provided by financing activities for First Quarter 2004 was $1,098.1 million resulting primarily from proceeds of $1,600.0 million from issuance of long-term debt, including $1,060.2 million of long-term debt incurred to acquire Hardy. This amount was partially offset by principal payments of long-term debt of $492.7 million.

 

During June 1998, our Board of Directors authorized the repurchase of up to $100.0 million of our Class A Common Stock and Class B Common Stock. The repurchase of shares of common stock will be accomplished, from time to time, in management’s discretion and depending upon market conditions, through open market or privately negotiated transactions. We may finance such repurchases through cash generated from operations or through the senior credit facility. The repurchased shares will become treasury shares. As of July 15, 2003, we had purchased 4,075,344 shares of Class A Common Stock at an aggregate cost of $44.9 million, or at an average cost of $11.01 per share. No shares were repurchased during First Quarter 2004.

 

Fiscal 2003 Cash Flows

 

Operating Activities

 

Net cash provided by operating activities for Fiscal 2003 was $236.1 million, which resulted from $256.5 million in net income adjusted for noncash items, less $20.4 million representing the net change in our operating assets and liabilities. The net change in operating assets and liabilities resulted primarily from an increase in inventories and a reduction in accrued excise taxes and adverse grape contracts partially offset by increases in accrued income taxes payable and accrued advertising and promotion expenses.

 

Investing Activities

 

Net cash used in investing activities for Fiscal 2003 was $72.0 million, which resulted primarily from $71.6 million of capital expenditures (including $7.0 million for vineyards).

 

Financing Activities

 

Net cash used in financing activities for Fiscal 2003 was $161.5 million resulting primarily from $151.1 million of principal payments of long-term debt and $51.9 million of net repayments of notes payable. These debt payments were partially funded by $28.7 million of proceeds from employee stock option exercises and $10.0 million of proceeds from long-term debt which was used for the repayment of debt at one of our Chilean subsidiaries.

 

No shares were repurchased during Fiscal 2003 under our Board approved stock repurchase authority described above in “—First Quarter 2004 Cash Flows—Financing Activities.”

 

Fiscal 2002 Cash Flows

 

Operating Activities

 

Net cash provided by operating activities for Fiscal 2002 was $213.3 million, which resulted from $226.3 million in net income adjusted for noncash items, less $13.0 million representing the net change in our operating assets and liabilities. The net change in operating assets and liabilities resulted primarily from increases in accounts receivable and inventories partially offset by increases in accounts payable, deferred revenue, accrued salaries and commissions, and accrued advertising and promotions.

 

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Investing Activities

 

Net cash used in investing activities for Fiscal 2002 was $585.4 million, which resulted from net cash paid of $472.8 million for the March Acquisitions and the Ravenswood acquisition, $77.3 million of equity contributions to PWP and $71.1 million of capital expenditures (including $10.1 million for vineyards), partially offset by $35.8 million of proceeds from the sale of assets.

 

Financing Activities

 

Net cash provided by financing activities for Fiscal 2002 was $236.9 million, which resulted primarily from proceeds of $252.5 million from the issuance of long-term debt, including $250.0 million of 8 1/8% Senior Subordinated Notes used to repay $130.0 million of 8 3/4% Senior Subordinated Notes and $65.0 million of 8 3/4% Series C Senior Subordinated Notes and a portion of our borrowings under our senior credit facility, net proceeds of $151.5 million from equity offerings, proceeds of $51.4 million from net revolving loan borrowings under the senior credit facility, and proceeds of $45.0 million from exercise of employee stock options. These amounts were partially offset by principal payments of long-term debt of $261.0 million, which included the repayments as discussed above and $54.7 million of scheduled or required principal payments under our senior credit facility.

 

No shares were repurchased during Fiscal 2002 or Fiscal 2001 under our Board approved stock repurchase authority described above in “—First Quarter 2004 Cash Flows—Financing Activities.”

 

Debt

 

Total debt outstanding as of May 31, 2003, amounted to $2,778.4 million, an increase of $1,512.9 million from February 28, 2003. The ratio of total debt to total capitalization increased to 65.9% as of May 31, 2003, from 51.9% as of February 28, 2003.

 

Total debt outstanding as of February 28, 2003, amounted to $1,265.5 million, a decrease of $164.0 million from February 28, 2002. The ratio of total debt to total capitalization decreased to 51.9% as of February 28, 2003, from 59.9% as of February 28, 2002.

 

Senior Credit Facilities

 

2000 Credit Agreement

 

As of February 28, 2003, under the 2000 credit agreement, we had outstanding term loans of $145.4 million bearing a weighted average interest rate of 3.1%, $2.0 million of outstanding revolving loans bearing a weighted average interest rate of 3.1%, undrawn letters of credit of $15.1 million, and $282.9 million available to be drawn under the revolving credit facility. The 2000 credit agreement was a senior credit facility originally entered into between us, certain of our principal operating subsidiaries and a syndicate of banks, for which The Chase Manhattan Bank acted as administrative agent, on October 6, 1999, and subsequently amended.

 

2003 Credit Agreement

 

In connection with the Hardy acquisition, on January 16, 2003, we and our United States subsidiaries (excluding certain inactive subsidiaries) and Canandaigua Limited, JPMorgan Chase Bank, as a lender and administrative agent, and certain other lenders (such other lenders, together with the administrative agent, we collectively refer to as the lenders) entered into a new credit agreement, which was subsequently amended and restated as of March 19, 2003. This 2003 credit agreement provides for aggregate credit facilities of $1.6 billion consisting of a $400.0 million tranche A term loan facility due in February 2008, an $800.0 million tranche B term loan facility due in November 2008 and a $400.0 million revolving credit facility (including an Australian Dollar revolving sub-facility of up to A$10.0 million and a sub-facility for letters of credit of up to $40.0 million) which expires on the fifth anniversary of the first date on which the lenders’ obligation to make loans under the 2003 credit agreement commences.

 

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The required annual repayments of the tranche A term loan facility is $40.0 million in Fiscal 2004 and increases by $20.0 million each year through fiscal 2008. The required annual repayments of the tranche B term loan, which is backend loaded, is $10.0 million in Fiscal 2004 and increases to $400.0 million in fiscal 2009.

 

The rate of interest payable, at our 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 our debt ratio, as defined in the 2003 credit agreement, and with respect to LIBOR borrowings, ranges between 1.75% and 2.75%. The initial LIBOR margin for the revolving credit facility and the tranche A term loan facility is 2.25%, while the initial LIBOR margin on the tranche B term loan facility is 2.75%.

 

Our obligations are guaranteed by the U.S. subsidiaries of the Company (excluding certain inactive subsidiaries), Canandaigua Limited, CBI Australia Holdings Pty Limited and Constellation Australia Pty Limited, as guarantors, and we have pledged collateral of (i) 100% of the capital stock of all of our United States subsidiaries and (ii) 65% of the voting capital stock of Canandaigua Limited, Matthew Clark plc, Hardy, Constellation Australia Pty Limited and certain other foreign subsidiaries of ours. In addition, under certain circumstances, we and the guarantors are required to pledge certain of their assets consisting of, among other things, inventory, accounts receivable and trademarks to secure the obligations under the 2003 credit agreement.

 

Under the 2003 credit agreement, Constellation and the guarantors make certain representations and warranties to the Administrative Agent and the Lenders customarily found in credit agreements of this type.

 

We and our 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, the disposition and acquisition of property and the making of certain investments, in each case subject to baskets, exceptions and thresholds. Hardy guarantees debt of a joint venture in the maximum amount of $3.5 million as of May 31, 2003, which is permitted under the 2003 credit agreement. The primary financial covenants require the maintenance of a debt coverage ratio, a senior debt coverage ratio, a fixed charges ratio and an interest coverage ratio.

 

We used the proceeds of the tranche A term loan facility, the tranche B term loan facility and a portion of the revolving credit facility under the 2003 credit agreement to pay off our obligations under the 2000 credit agreement, to fund a portion of the cash required to pay the Hardy shareholders and to pay indebtedness outstanding under certain of Hardy’s credit facilities. We intend to use the remaining availability under the 2003 credit agreement to fund our working capital needs on an ongoing basis.

 

As of May 31, 2003, under the 2003 credit agreement, we had outstanding tranche A term loans of $400.0 million bearing a weighted average interest rate of 3.6%, tranche B term loans of $800.0 million bearing a weighted average interest rate of 4.1%, $15.0 million of revolving loans bearing a weighted average interest rate of 3.1%, undrawn revolving letters of credit of $15.1 million, and $369.9 million in revolving loans available to be drawn.

 

In connection with this offering, we have entered into an amendment to the 2003 credit agreement to provide us with additional flexibility in the payment of cash dividends on the depositary shares.

 

Bridge Agreement

 

On January 16, 2003, we, our U.S. subsidiaries (excluding certain inactive subsidiaries) and Canandaigua Limited, JPMorgan Chase Bank, as a lender and administrative agent, and certain other lenders (such other lenders, together with the administrative agent, we collectively refer to 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 of up to, in the aggregate, $450.0 million. On April 9, 2003, we used $400.0 million of the bridge loans to fund a portion of the cash required to pay the former Hardy shareholders. The bridge loans are due on the first anniversary of the date of the funding of the bridge loans which we refer to as the bridge loan maturity date. The rate of interest payable on the bridge loans is equal to LIBOR plus a margin. The initial margin on the bridge loans is 3.75%.

 

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If the bridge loans are not repaid on the bridge loan maturity date, the bridge lenders have committed to make certain term loans in an amount corresponding to the then-outstanding amount of the bridge loans which we refer to as term loans. The term loans are due on the seventh anniversary of the date on which the bridge loans are funded. The rate of interest payable on the term loans is equal to LIBOR plus a margin. The rate of interest payable on any of the bridge loans or the term loans is capped at 11.50%. If the bridge loans are not repaid on the date that is three months after the date of funding, then the margin will increase on a quarterly basis thereafter until the rate of interest payable reaches the rate cap.

 

The lenders have the right to exchange on or after the bridge loan maturity date all or a portion of their respective bridge loans or term loans for notes, which we refer to as exchange notes, that will be issued pursuant to an indenture to be entered into among us, as issuer, certain of our subsidiaries, as guarantors, and an indenture trustee on behalf of the holders of the exchange notes. The exchange notes indenture will be in a form to be agreed between us and the administrative agent and will contain terms and a final maturity date that are substantially consistent with the terms and the maturity date of the term loans. The exchange notes will bear interest at a fixed rate as determined by the exchanging holder that will not exceed the 11.50%.

 

The guarantors have guaranteed our obligations under the bridge loan agreement.

 

We and the guarantors have made certain representations and warranties in the bridge loan agreement which are substantially the same as the representations and warranties in the 2003 credit agreement. The bridge loan agreement also contains covenants and events of default that are similar to the covenants and events of default in the indentures pursuant to which we issued our senior notes and senior subordinated notes.

 

As of May 31, 2003, under the bridge loan agreement, we had outstanding $400.0 million of bridge loans bearing a weighted average interest rate of 5.1%. As we intend to repay the bridge loans at or prior to the bridge loan maturity date, these bridge loans are classified as current liabilities on our consolidated balance sheet.

 

Senior Notes

 

On August 4, 1999, we issued $200.0 million aggregate principal amount of 8 5/8% Senior Notes due August 2006, which we refer to as the August 1999 Senior Notes. Interest on the August 1999 Senior Notes is payable semiannually on February 1 and August 1. The August 1999 Senior Notes are redeemable at our option, in whole or in part, at any time. The August 1999 Senior Notes are unsecured senior obligations and rank equally in right of payment to all of our existing and future unsecured senior indebtedness. The August 1999 Senior Notes are guaranteed, on a senior basis, by certain of our significant operating subsidiaries.

 

On November 17, 1999, we issued £75.0 million ($121.7 million upon issuance) aggregate principal amount of 8 1/2% Senior Notes due November 2009, which we refer to as the Sterling Senior Notes. Interest on the Sterling Senior Notes is payable semiannually on May 15 and November 15. The Sterling Senior Notes are redeemable at our option, in whole or in part, at any time. The Sterling Senior Notes are unsecured senior obligations and rank equally in right of payment to all of our existing and future unsecured senior indebtedness. The Sterling Senior Notes are guaranteed, on a senior basis, by certain of our significant operating subsidiaries. In March 2000, we exchanged £75.0 million aggregate principal amount of 8 1/2% Series B Senior Notes due November 2009, which we refer to as 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, we exchanged £74.0 million aggregate principal amount of Sterling Series C Senior Notes, as described below, for £74.0 million of the Sterling Series B Notes. The terms of the Sterling Series C Senior Notes are identical in all material respects to the Sterling Series B Senior Notes. As of February 28, 2003, we had outstanding £1.0 million ($1.6 million) aggregate principal amount of Sterling Series B Senior Notes.

 

On May 15, 2000, we issued £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 £79.6 million ($119.4 million upon issuance, net of $0.6 million unamortized discount, with an effective interest rate of 8.6%), which we refer to as

 

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the Sterling Series C Senior Notes. The net proceeds of the offering (£78.8 million, or $118.2 million) were used to repay a portion of our British pound sterling borrowings under our then existing senior credit facility. Interest on the Sterling Series C Senior Notes is payable semiannually on May 15 and November 15. The Sterling Series C Senior Notes are redeemable at our option, in whole or in part, at any time. The Sterling Series C Senior Notes are unsecured senior obligations and rank equally in right of payment to all of our existing and future unsecured senior indebtedness. The Sterling Series C Senior Notes are guaranteed, on a senior basis, by certain of our significant operating subsidiaries. As of February 28, 2003, we had outstanding £154.0 million ($241.7 million, net of $0.5 million unamortized discount) aggregate principal amount of Sterling Series C Senior Notes.

 

On February 21, 2001, we issued $200.0 million aggregate principal amount of 8% Senior Notes due February 2008, which we refer to as the February 2001 Senior Notes. The net proceeds of the offering ($197.0 million) were used to partially fund the acquisition of the Turner Road Vintners Assets. Interest on the February 2001 Senior Notes is payable semiannually on February 15 and August 15. The February 2001 Senior Notes are redeemable at our option, in whole or in part, at any time. The February 2001 Senior Notes are unsecured senior obligations and rank equally in right of payment to all of our existing and future unsecured senior indebtedness. The February 2001 Senior Notes are guaranteed, on a senior basis, by certain of our significant operating subsidiaries. In July 2001, we exchanged $200.0 million aggregate principal amount of 8% Series B Senior Notes due February 2008, which we refer to as the February 2001 Series B Senior Notes, for all of the February 2001 Senior Notes. The terms of the February 2001 Series B Senior Notes are identical in all material respects to the February 2001 Senior Notes.

 

Senior Subordinated Notes

 

On March 4, 1999, we issued $200.0 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009, which we refer to as the 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 our option, in whole or in part, at any time on or after March 1, 2004. The Senior Subordinated Notes are unsecured and subordinated to the prior payment in full of all of our senior indebtedness, which includes the senior credit facility. The Senior Subordinated Notes are guaranteed, on a senior subordinated basis, by certain of our significant operating subsidiaries.

 

On January 23, 2002, we issued $250.0 million aggregate principal amount of 8 1/8% Senior Subordinated Notes due January 2012, which we refer to as the January 2002 Senior Subordinated Notes. The net proceeds of the offering ($247.2 million) were used primarily to repay our $195.0 million aggregate principal amount of 8 3/4% Senior Subordinated Notes due in December 2003. In connection with this repayment, we incurred an extraordinary loss of $2.6 million ($1.6 million, net of income taxes of $1.0 million) related to the write-off of the remaining deferred financing costs and unamortized discount. The remaining net proceeds of the offering were used to repay a portion of the outstanding indebtedness under our 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 our option, in whole or in part, at any time on or after January 15, 2007. We 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 of our senior indebtedness, which includes the senior credit facility. The January 2002 Senior Subordinated Notes are guaranteed, on a senior subordinated basis, by certain of our significant operating subsidiaries.

 

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Contractual Obligations and Commitments

 

The following table sets forth information about our long-term contractual obligations outstanding at February 28, 2003. It brings together data for easy reference from the consolidated balance sheet and from individual notes to the our consolidated financial statements.

 

     Payments Due By Period

     Total

  

Less than

1 year


   1-3 years

   3-5 years

  

After

5 years


     (in thousands)

Contractual obligations

                                  

Notes payable to banks

   $ 2,623    $ 2,623    $ —      $ —      $ —  

Long-term debt (excluding unamortized discount)

     1,248,799      67,682      81,081      404,400      695,636

Capital lease obligations

     14,590      3,582      5,870      3,465      1,673

Operating leases

     192,898      24,612      39,992      28,229      100,065

Unconditional purchase obligations

     605,748      176,412      242,104      119,827      67,405
    

  

  

  

  

Total contractual cash obligations

   $ 2,064,658    $ 274,911    $ 369,047    $ 555,921    $ 864,779
    

  

  

  

  

 

The above table includes the payments due by period as of February 28, 2003, and includes the required payments under the then existing 2000 credit agreement. Subsequent to February 28, 2003, we drew down $8.0 million in revolving debt and $1,200.0 million in term loan debt under the 2003 credit agreement and $400.0 million under the bridge loan agreement. We used these proceeds to pay off our obligations under the 2000 credit agreement, to fund the cash required to pay the Hardy shareholders and to pay indebtedness outstanding under certain of Hardy’s credit facilities. Consequently, the following table gives the payments due by period taking into account these changes:

 

     Payments Due By Period

     Total

  

Less than

1 year


   1-3 years

   3-5 years

  

After

5 years


     (in thousands)

Contractual obligations

                                  

Notes payable to banks

   $ 8,623    $ 8,623    $ —      $ —      $ —  

Long-term debt (excluding unamortized discount)

     2,303,436      50,600      677,800      879,400      695,636

Capital lease obligations

     14,590      3,582      5,870      3,465      1,673

Operating leases

     192,898      24,612      39,992      28,229      100,065

Unconditional purchase obligations

     605,748      176,412      242,104      119,827      67,405
    

  

  

  

  

Total contractual cash obligations

   $ 3,125,295    $ 263,829    $ 965,766    $ 1,030,921    $ 864,779
    

  

  

  

  

 

In addition, in connection with the formation of a joint venture, PWP, in July 2001, we transferred certain of our vineyard lease and vineyard management agreements to PWP. The agreements have terms that expire between 2012 and 2026. We guaranteed PWP’s payment and performance under these agreements. The estimated maximum amount of our exposure is $42.6 million in undiscounted future payments. At February 28, 2003, we had not recorded a liability for these guarantees and did not have any collateral from PWP. As a result of the Hardy acquisition, we acquired the remaining 50% ownership of PWP.

 

Equity Offerings

 

During March 2001, we completed a public offering of 8,740,000 shares of our Class A common stock, which was held as treasury stock. This resulted in net proceeds to us, 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.

 

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During October 2001, we sold 645,000 shares of our Class A common stock, which was held as treasury stock, in connection with a public offering of Class A common stock by certain of our stockholders. The net proceeds to us, after deducting underwriting discounts, of $12.1 million were used to repay borrowings under the senior credit facility.

 

Capital Expenditures

 

During Fiscal 2003, we spent $71.6 million for capital expenditures, including $7.0 million related to vineyards. We plan to spend approximately $120 million for capital expenditures, exclusive of vineyards, in Fiscal 2004. In addition, we continue to consider the purchase, lease and development of vineyards and may incur additional expenditures for vineyards if opportunities become available. Management reviews the capital expenditure program periodically and modifies it as required to meet current business needs.

 

Related Parties

 

Agustin Francisco Huneeus, the executive in charge of the Fiscal 2003 Fine Wine segment, along with other members of his immediate family, through various family owned entities engaged in certain transactions with the Fine Wine segment during each of the three years in the period ended February 28, 2003. The Huneeus interests engage the Fine Wine segment as the exclusive distributor of its Quintessa wines under a long-term contract; sell grapes to the Fine Wine segment pursuant to existing long-term contracts; lease a vineyard consisting of 67 acres to the Fine Wine segment pursuant to a 5-year lease contract; participate as partners with the Fine Wine segment in the ownership and operation of a winery and vineyards in Chile; and render brand management and other consulting and advisory services in the United States and internationally to the Fine Wine segment and us. Total amounts paid to the Huneeus interests pursuant to these transactions and arrangements totaled $6.5 million, $4.8 million, and $5.0 million for the years ended February 28, 2003, February 28, 2002, and February 28, 2001, respectively. In addition, the Fine Wine segment performs certain wine processing services for the Huneeus interests. Total fees earned from the Huneeus interests to the Fine Wine segment for these services totaled $0.2 million, $0.4 million, and $0.6 million for the years ended February 28, 2003, February 28, 2002, and February 28, 2001, respectively. As of February 28, 2003, and February 28, 2002, the net amounts due to/from the Huneeus interests under these agreements are insignificant.

 

Effects of Inflation and Changing Prices

 

Our results of operations and financial condition have not been significantly affected by inflation and changing prices. We have been able, subject to normal competitive conditions, to pass along rising costs through increased selling prices. There can be no assurances, however, that we will continue to be able to pass along rising costs through increased selling prices.

 

Critical Accounting Policies

 

Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements located elsewhere in this prospectus supplement. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. On an ongoing basis, we review our estimates to ensure that they appropriately reflect changes in our business. Our critical accounting policies include:

 

   

Accounting for promotional activities.    Gross sales reflect reductions attributable to consideration given to customers in various customer incentive programs, including pricing discounts on single transactions, volume discounts, promotional and advertising allowances, coupons, and rebates. Certain

 

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customer incentive programs require management to estimate the cost of those programs. The accrued liability for these programs is determined through analysis of programs offered, historical trends, expectations regarding customer and consumer participation, sales and payment trends, and experience with payment patterns associated with similar programs that had been previously offered. If assumptions included in our estimates were to change or market conditions were to change, then material incremental reductions to revenue could be required, which would have a material adverse impact on our financial statements. Promotional costs were $231.6 million, $223.9 million and $178.5 million for Fiscal 2003, Fiscal 2002 and Fiscal 2001, respectively.

 

    Inventory valuation.    Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. We assess the valuation of our inventory and reduce the carrying value of those inventories that are obsolete or in excess of our forecasted usage to their estimated net realizable value. We estimate 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 our products is less favorable than our forecasts, then the value of the inventories may be required to be reduced, which could result in material additional expense to us and have a material adverse impact on our financial statements.

 

    Accounting for business combinations.    The acquisition of businesses is an important element of our strategy. Under the purchase method, we are required to record the net assets acquired at the estimated fair value at the date of acquisition. The determination of the fair value of the assets acquired and liabilities assumed requires us to make estimates and assumptions that affect our financial statements. For example, our acquisitions typically result in goodwill and other intangible assets; the value and estimated life of those assets may affect the amount of future period amortization expense for intangible assets with finite lives as well as possible impairment charges that may be incurred.

 

    Impairment of goodwill and intangible assets with indefinite lives.    Intangible assets with indefinite lives consist primarily of trademarks as well as certain distributor and agency agreements. We are required to analyze our goodwill and other intangible assets with indefinite lives for impairment on an annual basis as well as when events and circumstances indicate that an impairment may have occurred. Certain factors that may occur and indicate that an impairment exists include, but are not limited to, operating results that are lower than expected and adverse industry or market economic trends. The impairment testing requires management to estimate the fair value of the assets or reporting unit and record an impairment loss for the excess of the carrying value over the fair value. The estimate of fair value of the assets is generally determined on the basis of discounted future cash flows. The estimate of fair value of the reporting unit is generally determined on the basis of discounted future cash flows supplemented by the market approach. In estimating the fair value, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings and other factors. The assumptions used in the estimate of fair value are generally consistent with the past performance of each reporting unit and other intangible assets and are also consistent with the projections and assumptions that are used in current operating plans. Such assumptions are subject to change as a result of changing economic and competitive conditions. If these estimates or their related assumptions change in the future, we may be required to record an impairment loss for these assets. The recording of any resulting impairment loss could have a material adverse impact on our financial statements.

 

Accounting Pronouncements

 

In August 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 143 (“SFAS No. 143”), “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. As required, we adopted SFAS No. 143 on March 1, 2003. The adoption of SFAS No. 143 did not have a material impact on our financial statements.

 

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In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145 (“SFAS No. 145”), “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS No. 145 rescinds Statement of Financial Accounting Standards No. 4 (“SFAS No. 4”), “Reporting Gains and Losses from Extinguishment of Debt,” Statement of Financial Accounting Standards No. 44, “Accounting for Intangible Assets of Motor Carriers,” and Statement of Financial Accounting Standards No. 64, “Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements.” In addition, SFAS No. 145 amends Statement of Financial Accounting Standards No. 13, “Accounting for Leases,” to eliminate an inconsistency between required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Lastly, SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. We adopted the provisions related to the rescission of SFAS No. 4 for fiscal years beginning March 1, 2003. All other provisions of SFAS No. 145 were effective for fiscal years beginning March 1, 2002. The adoption of the applicable provisions of SFAS No. 145 did not have a material impact on our financial statements. The adoption of the provisions rescinding SFAS No. 4 has 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).

 

In November 2002, the Emerging Issues Task Force (“EITF”) reached a consensus on EITF Issue No. 00-21 (“EITF No. 00-21”), “Revenue Arrangements with Multiple Deliverables.” EITF No. 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF No. 00-21 also addresses how arrangement consideration should be measured and allocated to the separate units of accounting in the arrangement. We are required to adopt EITF No. 00-21 for all revenue arrangements entered into beginning August 1, 2003. We are currently assessing the financial impact of EITF No. 00-21 on our financial statements.

 

In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (“SFAS No. 148”), “Accounting for Stock-Based Compensation—Transition and Disclosure.” SFAS No. 148 amends Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. Lastly, SFAS No. 148 amends Accounting Principles Board Opinion No. 28 (“APB Opinion No. 28”), “Interim Financial Reporting,” to require disclosure about those effects in interim financial information. We have adopted the disclosure provisions of SFAS No. 148 for the fiscal year ended February 28, 2003. We adopted the amendment to APB Opinion No. 28 for financial reports containing condensed financial statements for interim periods beginning March 1, 2003.

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN No. 46”), “Consolidation of Variable Interest Entities—an interpretation of ARB No. 51.” FIN No. 46 requires all variable interest entities to be consolidated by the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the variable interest entity. In addition, the interpretation expands disclosure requirements for both variable interest entities that are consolidated as well as variable interest entities from which the entity is the holder of a significant amount of the beneficial interests, but not the majority. We are required to adopt FIN No. 46 in its entirety beginning September 1, 2003. We are currently assessing the financial impact of FIN No. 46 on our financial statements.

 

In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (“SFAS No. 149”), “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments

 

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embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and hedging relationships designated after June 30, 2003, except for those provisions of SFAS No. 149 which relate to SFAS No. 133 Implementation Issues that have been effective for fiscal quarters that began prior to June 15, 2003. For these issues, the provisions that are currently in effect should continue to be applied in accordance with their respective effective dates. In addition, certain provisions of SFAS No. 149, which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. We are currently assessing the financial impact of SFAS No. 149 on our financial statements.

 

In May 2003, the FASB issued 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. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for us beginning September 1, 2003. We are currently assessing the financial impact of SFAS No. 150 on our financial statements.

 

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INDUSTRY OVERVIEW

 

United States

 

The beverage alcohol industry in the United States consists of three major product categories: wine, beer and distilled spirits. Products are produced, marketed and distributed through a legally separated three-tier system comprised of suppliers, wholesalers and retailers. Over the past decade, there has been increasing consolidation at the supplier, wholesaler and, in certain markets, retailer tiers of the beverage alcohol industry. As a result, it has become advantageous for certain suppliers to expand their portfolio of brands through acquisitions and internal development to take advantage of economies of scale and to increase their importance to a more limited number of wholesalers and, in certain markets, retailers.

 

The beverage alcohol industry has continued on its growth path over the last five years. Volume entering distribution channels was 7.3 billion gallons in 2002, its highest level ever. Beverage alcohol consumption is expected to increase steadily throughout the next several years as members of the “baby boomlet” generation—the offspring of baby boomers—continue to reach legal drinking age. Last year, more than 4 million new adults were added to the population, a figure that is expected to creep up annually and approach 5 million by 2010.

 

We believe the following key trends will likely impact industry performance:

 

    growth in imports, particularly beer;

 

    increasing demand for flavored beverage alcohol products;

 

    stepped-up advertising spending industry-wide;

 

    a growing young adult population;

 

    levels of disposable income;

 

    consolidation within each of the industry’s three distribution tiers; and

 

    recognition of potential health benefits associated with moderate alcohol consumption.

 

The following table sets forth the industry unit volume for consumption of wine, imported beer, domestic beer and distilled spirits in the United States. Data shown are for the six years ended December 31, 2002:

 

Industry


   1997

   1998

   1999

   2000

   2001

   2002

Domestic Wine(a)(b)

   168.0    169.7    179.0    180.6    179.6    182.7

Imported Wine(a)(b)

   40.2    42.2    45.2    47.7    51.5    56.4

Domestic Beer(c)(d)

   2,453.6    2,453.0    2,473.1    2,483.5    2,489.3    2,521.7

Imported Beer(c)

   190.1    219.1    248.0    272.8    296.2    314.6

Distilled Spirits(b)

   137.3    138.9    142.1    145.3    146.8    149.7

(a)   Includes table, sparkling, specialty and dessert wine and vermouth.
(b)   Units are in millions of 9-liter case equivalents (2.378 gallons per case).
(c)   Units are in millions of 2.25 gallon cases.
(d)   Includes low alcohol refreshers (Flavored Alcohol Beverages).

 

Wine

 

Shipments of wine in the United States increased at a compound annual growth rate of 2.8% from 1997 to 2002. In 2002, wine shipments increased by 3.4% when compared to 2001. United States wine market growth has largely been driven by an increase in demand for table wines, particularly varietal table wines. Table wine accounted for 90% of the total United States wine market in 2002. We believe the increase in table wine consumption may be due in part to positive demographic trends and to published reports over recent years from a

 

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number of sources, citing the potential health benefits of moderate wine consumption. As wine appeal has expanded to a broader population base, distribution shifts have followed, with supermarkets, chain stores and retail supercenters taking share away from traditional wine and liquor stores.

 

Imported wine has led the growth of the United States wine market. Shipments of imported wine increased at a compound annual growth rate of 7.0% from 1997 to 2002. Australian wine has exhibited the strongest growth among imports, with shipments increasing at a compound annual growth rate of 35.7% from 1997 to 2002, and 34.9% in 2002 when compared to 2001.

 

United States Imported Wine

(in millions of 9-liter case equivalents)

 

Country


   1997

   1998

   1999

   2000

   2001

   2002

Italy

   13.2    14.8    16.8    17.6    19.0    21.2

Australia

   2.5    3.0    5.0    6.3    8.5    11.5

France

   12.8    11.9    11.1    11.0    10.8    11.2

Chile

   6.3    6.5    5.9    6.2    6.3    6.5

 

Wines containing 14% or less alcohol by volume are generally referred to as table wines. Within this category, table wines are further characterized as either “generic” or “varietal.” Generic wines include wines named after the European regions where similar types of wines were originally produced (e.g., burgundy), niche products and proprietary brands. Varietal wines are those named for the grape that comprises the principal component of the wine. Varietal table wines, which now account for approximately 71% of the domestic market for California table wines table wine market, have grown steadily since 1990, while generic wines have experienced a slight decline over the same time period.

 

Favorable demographic trends, coupled with newly introduced research on the potential health benefits of moderate wine consumption have helped lead to favorable growth trends in wine consumption of the United States consumer. In addition, increasing disposable income has driven the strong growth of the super-premium and ultra-premium market in the last decade. The total U.S. super-premium and ultra-premium wine market grew 12.6% in 2002 when compared to 2001. Much of this growth can be attributed to the shifts in preference of aging baby boomers. Currently the largest and wealthiest age segment of the population, the baby boomers have helped support the growth in the premium and super-premium wine markets, because as their interest in wine drinking has increased, their tastes have also matured to the extent that they choose premium wines over the generic wines that had been popular in the 1970s and 1980s. These attractive industry trends are expected to continue into the foreseeable future.

 

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Imported Beer

 

Shipments of imported beer in the United States increased at a compound annual growth rate of 10.6% from 1997 to 2002, led by Mexican imports. Mexican beers are the best selling imported beers in the United States and now account for 41.5% of the total imported beer market compared to 29.8% in 1997. Shipments of Mexican beer in 2002 increased 8.0% over 2001 as compared to an increase of 6.2% for the entire imported beer category. Shipments of imported beer as a percentage of the United States beer market increased to 11.1% in 2002 from 7.2% in 1997. Imported beer, along with microbrews and super-premium priced domestic beer, is generally priced above the leading domestic premium brands.

 

United States Imported Beers

(in millions of 2.25 gallon cases)

 

     1997

   1998

   1999

   2000

   2001

   2002

Mexico

   56.7    75.9    90.9    105.0    120.8    130.4

Netherlands

   46.0    51.1    55.9    63.8    68.7    74.2

Canada

   43.2    44.3    45.6    46.4    48.3    44.8

Germany

   14.3    15.7    16.8    16.6    17.3    17.0

United Kingdom

   9.2    10.6    11.6    12.4    13.1    14.0

 

Distilled Spirits

 

United States spirits consumption grew modestly for the seventh consecutive year led primarily by gains in rum, vodka, tequila, and brandy. Shipments of distilled spirits in the United States increased at a compound annual growth rate of 1.7% from 1997 to 2002. Vodka accounts for approximately 27% of total United States spirits consumption, twice the consumption of the second largest category, American whiskey.

 

Despite consolidation and in part due to diverse regional brand preferences, the United States spirits industry remains highly fragmented. As a result, today, seven major and 15 regional spirits producers continue to market hundreds of products.

 

United States Distilled Spirits

(in millions of 9-liter case equivalents)

 

     1997

   1998

   1999

   2000

   2001

   2002

Vodka

   34.7    35.3    36.1    37.2    38.9    40.6

Liqueurs

   16.9    17.3    17.7    18.5    18.7    19.1

American Whiskey

   19.3    19.1    19.0    18.8    18.6    18.5

Rum

   12.2    13.0    13.8    14.7    15.6    16.2

Canadian Whisky

   15.6    15.1    15.1    15.0    14.8    14.9

Gin

   11.0    10.7    10.7    10.7    10.5    10.5

Brandy & Cognac

   8.6    8.8    9.3    9.7    10.0    10.4

Scotch Whisky

   8.8    8.6    8.3    8.3    8.0    8.0

Tequila

   6.1    6.5    7.2    7.3    6.7    7.3

Prepared Cocktails

   3.9    4.1    4.5    4.7    4.7    4.2

 

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United Kingdom

 

The beverage alcohol industry in the United Kingdom consists of three major product categories: long drinks, wine and distilled spirits. Long drinks consist primarily of beer, cider and flavored alcoholic beverages, or FABs. Total consumption of beverage alcohol has increased 2.7% from 1997 through 2002. Slight declines in consumption of beer, which accounted for 71% of the total beverage alcohol market in 2002, were more than offset by increases in consumption of wine and FABs. The following table sets forth the industry unit volume (in millions of hectoliters) for wine, beer, cider, FABs and distilled spirits for the six years ended December 31, 2002.

 

     1997

   1998

   1999

   2000

   2001

   2002

Wine

   8.85    9.12    9.70    10.12    10.70    11.31

Beer

   61.11    58.84    58.92    57.02    58.23    57.41

Cider

   4.83    4.74    5.04    4.95    5.01    5.00

FABs

   1.15    1.24    1.85    2.85    3.71    3.99

Distilled Spirits

   2.11    1.98    2.30    2.32    2.42    2.48

 

The United Kingdom beverage alcohol market can also be separated into two distribution channels: on-premise and off-premise. On-premise distribution channels include hotels, restaurants, pubs, wine bars and clubs. Off-premise distribution channels include multiple grocers, convenience retail, cash & carry and wholesalers. In 2002, the total beverage alcohol retail sales in the United Kingdom were approximately £28.0 billion, with the on-premise market accounting for 69% of those sales.

 

Wine

 

From 1997 to 2002, wine experienced a compound annual growth rate of 5.0%. Light wines, often referred to as table wines in the United States, are wines containing 15% or less alcohol by volume. Light wines account for approximately 90% of all wine sold in the United Kingdom and are one of the fastest growing segments of the wine industry with a compound annual growth rate of 7.7% from 1997 to 2002. The United Kingdom is a sophisticated wine market and consumers are open to experimentation of wines around the world as the United Kingdom has little domestic wine production. In 2002, wine comprised 22% of the total United Kingdom beverage alcohol market by value.

 

Beer

 

The United Kingdom beer industry continues to face consolidation pressure due to lower consumer demand and excess capacity. From 1997 to 2002, the compound annual growth rate for beer was negative 1.2%. In 2002, beer comprised 51% of the total United Kingdom beverage alcohol market by value.

 

Cider

 

Cider grew at a compound annual growth rate of 0.7% from 1997 to 2002. The cider market is segmented into two categories: packaged cider and draft cider. Packaged cider, which is sold primarily off-premise, accounted for 69% of all cider sales by volume in 2002. Draft cider is sold exclusively on-premise and accounted for the remaining 31% of sales in 2002.

 

Flavored Alcohol Beverages (FABs)

 

FABs are packaged drinks with between 1.2% and 5.5% alcohol by volume and include spirit based drinks. FABs have been the fastest growing alcohol segment in the United Kingdom, with a compound annual growth rate of 28.3% from 1997 to 2002. While this growth was from a small base, FABs now account for almost 5% of all beverage alcohol consumed in the United Kingdom.

 

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Distilled Spirits

 

The United Kingdom distilled spirits industry also continues to face increasing consolidation. From 1997 to 2002, the compound annual growth rate for distilled spirits was 3.3%. In 2002, distilled spirits comprised 19% of the total United Kingdom beverage alcohol market by value.

 

Wholesale

 

The overall beverage alcohol wholesale market in the United Kingdom is comprised of more than 133,000 on-premise outlets located throughout the region. Brewers and wholesalers provide a variety of beer, wine, cider, distilled spirits and other beverages where purchasing decisions are driven by price, quality and customer service. Brewers continue to dominate the supply of beer to the on-premise trade, as they are able to offer lower prices and larger volume distributions. Independent wholesalers differentiate themselves from the major brewers by offering a complete composite of drinks to the trade and providing value-added services.

 

Australia

 

Wine

 

The Australian wine industry has experienced a decade of strong growth. Wine production has increased at a compound annual growth rate of 11.3% from 1997 to 2002. Driving this growth has been a surge in exports, supported by stable, moderate domestic growth.

 

Domestic

 

The domestic market is a source of stable, modest growth for Australian wine producers. Domestic shipments of Australian wine grew for a fourth consecutive year. Sales of domestic wine increased at a compound annual growth rate of 3.4% from 1997 and 2002. Cask wine (wine in a box) accounts for nearly 50% of total domestic sales, however, bottled (glass) wine is the fastest growing segment in Australia.

 

Australian Domestic Wine

(in thousands of 9-liter case equivalents)

 

     1997

   1998

   1999

   2000

   2001

   2002

Cask Wine

   18,643    18,331    19,561    19,884    20,494    21,125

Bottled Wine

   18,708    18,319    21,553    21,455    21,842    23,117
    
  
  
  
  
  

Total Domestic Sales

   37,351    36,650    41,114    41,339    42,336    44,242

 

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Exports

 

Strong demand in overseas markets has fueled the growth of Australian wine. Exports have increased dramatically in recent years, growing at a compound annual growth rate of 22.3% from 1997 to 2002. In 2002, exports accounted for 54.2% of total Australian wine sales, up from 33.8% in 1997.

 

The United Kingdom is the largest export market for Australian wine. Shipments of Australian wine to the United Kingdom have grown at a compound annual growth rate of 22.5% from 1997 to 2002, and increased 17.6% in 2002 when compared with 2001. The United States represents Australia’s second largest and fastest growing export market. Sales of Australian wine in the United States have increased at a compound annual growth rate of 35.0% from 1997 to 2002, and increased 53.4% in 2002 when compared to 2001. The United Kingdom and the United States together accounted for 71.2% of Australia’s total wine exports in 2002. The results in each of these markets are due largely to the success of Australian wine in the lucrative $7—$10 price range.

 

Australian Exports by Country

(in thousands of 9-liter case equivalents)

 

     1997

   1998

   1999

   2000

   2001

   2002

United Kingdom

   8,673    10,354    14,276    16,820    20,358    23,952

United States

   2,979    3,748    4,734    6,673    8,697    13,342

New Zealand

   2,191    2,277    2,498    2,308    2,581    2,963

Canada

   797    893    1,115    1,666    1,858    2,444

Germany

   399    563    754    1,093    1,419    1,721

Other

   4,038    4,273    5,481    6,242    6,758    7,879
    
  
  
  
  
  

Total

   19,077    22,107    28,857    34,803    41,670    52,300

 

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BUSINESS

 

Introduction

 

We are a leading international producer and marketer of beverage alcohol in North America, Europe and Australia with a broad portfolio of brands across the wine, imported beer and distilled spirits categories. We have the largest wine business in the world and we are the largest multi-category supplier of beverage alcohol brands in the United States. In the United Kingdom, we are the largest marketer of wine and a leading independent drinks wholesaler. We are the leading producer and marketer of wine in Australia. Our strong market positions increase our purchasing power and make us a supplier of choice to our customers.

 

With our broad product portfolio, we believe we are distinctly positioned to satisfy an array of consumer preferences across all beverage alcohol categories and price points. Many of our products are recognized leaders in their respective categories. Leading brands in our portfolio include Corona Extra, Modelo Especial, Pacifico, St. Pauli Girl, Franciscan Oakville Estate, Simi, Estancia, Ravenswood, Blackstone, Banrock Station, Hardys, Nobilo, Houghton, Leasingham, Almaden, Inglenook, Arbor Mist, Vendange, Alice White, Stowells, Black Velvet, Fleischmann’s, Schenley, Ten High and Blackthorn.

 

Since our founding in 1945 as a producer and marketer of wine products, we have grown through a combination of internal growth and acquisitions. Our internal growth has been driven by leveraging our existing portfolio of leading brands, developing new products, new packaging and line extensions, and focusing on the faster growing sectors of the beverage alcohol industry.

 

Since 1991, we have successfully integrated a number of major acquisitions that have broadened our portfolio and increased our market share, net sales, operating income and cash flow. Through these acquisitions, we have become more competitive by: diversifying our portfolio; developing strong market positions in the growing beverage alcohol product categories of varietal table wine and imported beer; strengthening our relationships with wholesalers; expanding our distribution and enhancing our production capabilities; and acquiring additional management, operational, marketing, and research and development expertise.

 

In April 2003, we completed the acquisition of BRL Hardy Limited, now known as Hardy Wine Company Limited or Hardy, Australia’s largest producer of wine, which enhanced our overall growth prospects and gave us an immediate presence in the Australian domestic and export markets. Well known brands in Hardy’s portfolio include Banrock Station, Hardys Nottage Hill, Hardys Stamp, VR, Eileen Hardy, Sir James, Omni, Leasingham and Houghton. Other recent acquisitions include: the acquisition in July 2001 of the Ravenswood brand, a leading premium wine from Sonoma, California; the acquisition in March 2001 of the Covey Run, Columbia, Ste. Chapelle, Alice White and other premium wine brands; the acquisition in March 2001 of the Vendange, Nathanson Creek, Heritage, Talus and other premium wine brands; and the formation in July 2001 of PWP, a joint venture owned equally by us and Hardy that produces, markets and sells a global portfolio of premium wine in the United States, including a range of Australian imports. As a result of the Hardy acquisition, we acquired the remaining 50% ownership of PWP. For more information about these acquisitions, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Business Segments

 

As a result of the Hardy acquisition, we have changed the structure of our internal organization to consist of two business divisions, Constellation Wines and Constellation Beers and Spirits. Separate division chief executives report directly to our chief operating officer. As a result of such changes, beginning with the first quarter of Fiscal 2004, we report our operating results in three segments: Constellation Wines (branded wine, and U.K. wholesale and other), Constellation Beers and Spirits (imported beer and distilled spirits) and Corporate Operations and Other. The new business segments, described more fully below, reflect how our operations are now being managed, how our operating performance is now being evaluated by senior management and the availability and structure of internal financial reporting.

 

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Pre-Fiscal 2004 Business Segments

 

For Fiscal 2003, Fiscal 2002 and Fiscal 2001, we reported our operating results in the five segments described below:

 

The Popular and Premium Wine segment included the production, bottling, importing and marketing of wine and brandy in the United States and exporting of its wine to other major wine consuming markets. Most of this prior segment’s wine is marketed in the under $10.00 per 750 ml bottle price range. This segment also included the production and sale of bulk wine, grape juice concentrate and other related products and services.

 

The Imported Beer and Spirits segment included importing and marketing of a diversified line of imported beer, producing, bottling, importing and marketing of a diversified line of distilled spirits and selling bulk distilled spirits and other related products and services.

 

The U.K. Brands and Wholesale segment included the production and marketing of wine, cider and bottled water and a business that is the leading independent on-premise drinks wholesaler in the United Kingdom. This segment also included exporting branded products from the United Kingdom.

 

The Fine Wine segment included participation in the super-premium and ultra-premium wine market in the United States and exporting its products to other major wine consuming markets.

 

The Corporate Operations and Other segment included traditional corporate-related items.

 

Results of operations of our previous business segments for Fiscal 2003, Fiscal 2002 and Fiscal 2001 is set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operation.”

 

Post-Fiscal 2003 Business Segments

 

Constellation Wines

 

Constellation Wines is the leading producer and marketer of wine in the world. It sells a large number of wine brands across all categories—table wine, dessert wine and sparkling wine—and across all price points—popular, premium, super-premium and ultra-premium. Constellation Wines’ portfolio of super-premium and ultra-premium wines is supported by our vineyard holdings in California, Australia, New Zealand and Chile. As the largest producer and marketer of wine in the world, Constellation Wines has leading market positions in several countries. It is the second largest producer and marketer of wine in the United States and the largest producer and marketer of wine in Australia and the largest marketer of wine in the United Kingdom. In addition, Constellation Wines exports its wine products to the major wine consuming markets of the world.

 

In the United States, Constellation Wines sells 22 of the top 100 wine brands and has one of the largest fine wine portfolios. In the United Kingdom, it has seven of the top 20 selling table wine brands to the off-premise market, three of the top 10 table wine brands in the on-premise market and the best selling brand of fortified British wine. In Australia, it has wine brands across all price points and varieties, including the most comprehensive range of premium wine brands, and is the largest producer of cask wines.

 

Constellation Wines’ leading wine brands include Franciscan, Oakville Estate, Simi, Estancia, Ravenswood, Blackstone, Banrock Station, Hardys, Nobilo, Houghton, Leasingham, Almaden, Inglenook, Arbor Mist, Vendange, Alice White and Stowells.

 

Constellation Wines is also the leading independent beverage wholesaler to the on-premise trade in the United Kingdom and has more than 16,000 on-premise accounts. The wholesaling business is wine led, but also involves the distribution of branded distilled spirits, cider, beer, RTDs and soft drinks. While these products are primarily produced by other major drinks companies, they also include Constellation Wines’ branded wine, cider and water products.

 

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Constellation Wines is also the second largest producer and marketer of cider in the United Kingdom, with leading cider brands Blackthorn and Gaymer’s Olde English, and produces and markets Strathmore, the leading bottled water brand in the United Kingdom on-premise market.

 

In conjunction with its wine production, Constellation Wines produces and sells bulk wine and other related products and services.

 

Constellation Beers and Spirits

 

Constellation Beers and Spirits imports and markets a diversified line of beer and produces, bottles, imports and markets a diversified line of distilled spirits. It is the largest marketer of imported beer in 25 primarily western U.S. states, where it has exclusive rights to distribute the Mexican brands in its portfolio. Constellation Beers and Spirits has exclusive rights to the entire United States for its non-Mexican brands. It distributes six of the top 25 imported beer brands in the United States: Corona Extra, Modelo Especial, Corona Light, Pacifico, St. Pauli Girl, and Negra Modelo. Corona Extra is the best selling imported beer in the United States and the seventh best selling beer overall in the United States. Its other imported beer brands include Tsingtao from China and Double Diamond and Tetley’s English Ale from the United Kingdom.

 

Constellation Beers and Spirits is the third largest producer and marketer of distilled spirits in United States and exports its distilled spirits to other major distilled spirits consuming markets. Its principal distilled spirits brands include Black Velvet, Sköl, Fleischmann’s, Mr. Boston, Canadian LTD, Chi-Chi’s prepared cocktails, Ten High, Montezuma, Barton, Monte Alban and Inver House. Substantially all of this segment’s distilled spirits unit volume consists of products marketed in the value and mid-premium priced category. Constellation Beers and Spirits also sells bulk distilled spirits and other related products and services.

 

Corporate Operations and Other

 

The Corporate Operations and Other segment includes traditional corporate-related items.

 

Marketing and Distribution

 

We employ full-time, in-house marketing, sales and customer service organizations within our segments to maintain a high degree of focus on each of our product categories. The organizations use a range of marketing strategies and tactics to build brand equity and increase sales, including market research, consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship and public relations. Where opportunities exist, particularly with national accounts, we leverage our sales and marketing skills across the organization.

 

In North America, our products are primarily distributed by more than 1,000 wholesale distributors as well as state and provincial alcoholic beverage control agencies. In our other markets, products are primarily distributed either directly to retailers or through wholesalers and importers. In Australia, distribution is dominated by a small number of industry leaders. Our U.K. wholesaling business sells and distributes our branded products and those of other major drinks companies through a network of depots located throughout the United Kingdom.

 

Trademarks and Distribution Agreements

 

Trademarks are an important aspect of our business. We sell our products under a number of trademarks, most of which we own or have the right to use. Throughout our segments, we also have various licenses and distribution agreements, for the sale or the production and sale of our products, as well as for the sale of products of third parties. These licenses and distribution agreements have varying terms and durations. Agreements include, among others, a long-term license agreement with Hiram Walker & Sons, Inc., which expires in 2116, for the Ten High, Crystal Palace, Northern Light, Lauder’s and Imperial Spirits brands.

 

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All of our imported beer products are marketed and sold pursuant to exclusive distribution agreements with the suppliers of these products. These agreements have terms that vary and prohibit us from importing other beer from other producers from the same country. Our agreement to distribute Corona Extra and other Mexican beer brands exclusively throughout 25 primarily western U.S. states expires in December 2006 and, subject to compliance with certain performance criteria, continued retention of certain of our personnel and other terms under the agreement, will be automatically renewed for additional terms of five years. A change in control of us or of our subsidiaries involved in importing the Mexican beer brands, changes in the position of the Chief Executive Officer of Barton Beers, Ltd., including by death or disability, or the termination of the President of Barton Incorporated, may be a basis for the supplier, unless it consents to such changes, to terminate the agreement. The supplier’s consent to such changes may not be unreasonably withheld. Prior to their expiration, all of our imported beer distribution agreements may be terminated if we fail to meet certain performance criteria. We believe we are currently in compliance with our material imported beer distribution agreements. From time to time, we have failed, and may in the future fail, to satisfy certain performance criteria in our distribution agreements. Although there can be no assurance that our material beer distribution agreements will be renewed, given our long-term relationships with our suppliers, we expect that such agreements will be renewed prior to their expiration and we do not believe that these agreements will be terminated.

 

Competition

 

The beverage alcohol industry is highly competitive. We compete on the basis of quality, price, brand recognition and distribution strength. Our beverage alcohol products compete with other alcoholic and nonalcoholic beverages for consumer purchases, as well as shelf space in retail stores, restaurant presence and wholesaler attention. We compete with numerous multinational producers and distributors of beverage alcohol products, some of which may have greater resources than us.

 

Constellation Wines’ principal wine competitors include: E & J Gallo Winery, The Wine Group, Beringer Blass, The Robert Mondavi Corporation and Kendall-Jackson in the United States; Southcorp Wines, Orlando Wyndham and Beringer Blass in Australia; and E & J Gallo Winery, Southcorp Wines, Western Wines, Halewood Vintners and Pernod-Ricard in the United Kingdom. Its wholesale business competes with major brewers who also have wholesale operations, in particular, Scottish Courage, Coors, Interbrew and Carlsberg Tetley, and other independent national and regional wholesalers. Constellation Wines’ principal cider competitor is H.P. Bulmer.

 

Constellation Beers and Spirits’ principal competitors include: Heineken USA, Molson, Labatt USA and Guinness Import Company in the imported beer category, as well as domestic producers such as Anheuser Busch, Coors and SAB-Miller; and Diageo, Brown-Forman Beverages, Jim Beam Brands and Heaven Hill Distilleries in the distilled spirits category.

 

Production

 

In the United States, we operate 20 wineries where wine is produced from many varieties of grapes grown principally in the Napa, Sonoma, Monterey and San Joaquin regions of California. In Australia, we operate 10 wineries where wine is produced from many varieties of grapes grown in most of the major viticultural regions of Australia. Grapes are crushed at our wineries and stored as wine until packaged for sale under our brand names or sold in bulk. Most of our wine is bottled and sold within 18 months after the grape crush. In the United States, our inventories of wine are usually at their highest levels in November and December immediately after the crush of each year’s grape harvest, and are substantially reduced prior to the subsequent year’s crush. Similarly, in Australia, our inventories of wine are usually at their highest levels in April and May immediately after the crush of each year’s grape harvest, and are substantially reduced prior to the subsequent year’s crush. We also operate one winery in Chile, two wineries in New Zealand and one winery in France.

 

The bourbon whiskeys, domestic blended whiskeys and light whiskeys that we market are primarily produced and aged by us at our distillery in Bardstown, Kentucky. Our primary distilled spirits bottling facility in

 

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the United States is in Owensboro, Kentucky. The majority of our Canadian whisky requirements are produced and aged at our Canadian distilleries in Lethbridge, Alberta, and Valleyfield, Quebec. Our requirements of Scotch whisky, tequila, mezcal and the neutral grain spirits we use in the production of gin, vodka and other spirits products, are primarily purchased from various suppliers.

 

We operate three facilities in the United Kingdom that produce, bottle and package cider, wine and water. To produce Stowells, wine is imported in bulk from various countries and packaged at our facility at Bristol. The Bristol facility also produces fortified British wine and wine style drinks. All cider production takes place at our facility at Shepton Mallet. The Strathmore brand of bottled water is sourced and bottled in Forfar, Scotland.

 

Sources and Availability of Production Materials

 

The principal components in the production of our branded beverage alcohol products are agricultural products, such as grapes and grain, and packaging materials, primarily glass.

 

Most of our annual grape requirements are satisfied by purchases from each year’s harvest which normally begins in August and runs through October in the United States and begins in February and runs through May in Australia. We believe that we have adequate sources of grape supplies to meet our sales expectations. However, in the event demand for certain wine products exceeds expectations, we could experience shortages.

 

We purchase grapes from approximately 800 independent growers in the United States and 1,450 growers in Australia. We enter into written purchase agreements with a majority of these growers and pricing generally varies year-to-year based on current market prices. In Australia, approximately 800 of the 1,450 growers belong to a grape growers cooperative. We purchase the majority of our Australian grape requirements from this cooperative under a long-term arrangement. In the United Kingdom, we produce wine from materials purchased either on a contract basis or on the open market.

 

We currently own or lease approximately 16,080 acres of land and vineyards, either fully bearing or under development, in California (United States), New York (United States), Australia, Chile and New Zealand. This acreage supplies only a small percentage of our overall total wine needs. However, most of this acreage is used to supply a large portion of the grapes used for the production of our super-premium and ultra-premium wines. We continue to consider the purchase or lease of additional vineyards, and additional land for vineyard plantings, to supplement our grape supply.

 

The distilled spirits manufactured by us require various agricultural products, neutral grain spirits and bulk spirits. We fulfill our requirements through purchases from various sources by contractual arrangement and through purchases on the open market. We believe that adequate supplies of the aforementioned products are available at the present time.

 

In the United Kingdom, we source apples for cider production primarily through long-term supply arrangements with owners of apple orchards. There are adequate supplies of apples at this particular time.

 

We utilize glass and polyethylene terephthalate, or PET, bottles and other materials such as caps, corks, capsules, labels and cardboard cartons in the bottling and packaging of our products. Glass bottle costs are one of the largest components of our cost of product sold. In the United States and Australia, the glass bottle industry is highly concentrated with only a small number of producers. We have traditionally obtained, and continue to obtain, our glass requirements from a limited number of producers. Currently, substantially all of our glass container requirements for our United States operations are supplied by one producer and substantially all of our glass container requirements for our Australian operations are supplied by another producer. We have not experienced difficulty in satisfying our requirements with respect to any of the foregoing and consider our sources of supply to be adequate. However, the inability of any of our glass bottle suppliers to satisfy our requirements could adversely affect our operations.

 

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Government Regulation

 

We are subject to a range of regulations in the countries in which we operate. Where we produce products, we are subject to environmental laws and regulations and may be required to obtain permits and licenses to operate our facilities. Where we market and sell products, we may be subject to laws and regulations on trademark and brand registration, packaging and labeling, distribution methods and relationships, pricing and price changes, sales promotions, advertising and public relations. We are also subject to rules and regulations relating to changes in officers or directors, ownership or control.

 

We believe we are in compliance in all material respects with all applicable governmental laws and regulations in the countries in which we operate. We also believe that the cost of administration and compliance with, and liability under, such laws and regulations do not have, and are not expected to have, a material adverse impact on our financial condition, results of operations or cash flows.

 

Seasonality

 

The beverage alcohol industry is subject to seasonality in each major category. As a result, in response to wholesaler and retailer demand which precedes consumer purchases, our wine and spirits sales are typically highest during the third quarter of our fiscal year, primarily due to seasonal holiday buying, and our imported beer sales are typically highest during the first and second quarters of our fiscal year, which correspond to the spring and summer periods in the United States.

 

Employees

 

As of the end of March 2003, including the impact of the Hardy acquisition, we had approximately 7,680 full-time employees throughout the world. Approximately 3,030 full-time employees were in the United States and approximately 4,650 full-time employees were outside of the United States, in countries including Australia, the United Kingdom, Canada, New Zealand and France. Additional workers may be employed by us during the peak and grape crushing seasons. We consider our employee relations generally to be good.

 

Properties

 

During Fiscal 2003, we had five business segments. As a result of the Hardy acquisition, we modified our business segmentation and now report our operating results in three segments: Constellation Wines, Constellation Beers and Spirits and Corporate Operations and Other. Set forth below under the title “Hardy Acquisition” is a general description of the production properties acquired by virtue of the Hardy acquisition. Through our business segments, we operate wineries, distilling plants, bottling plants, and cider and water producing facilities, most of which include warehousing and distribution facilities on the premises. We also operate separate distribution centers in our U.K. wholesaling business.

 

We believe that our facilities, taken as a whole, are in good condition and working order and have adequate capacity to meet our needs for the foreseeable future.

 

The following discussion details the properties associated with the five business segments as reported in Fiscal 2003.

 

Popular and Premium Wine

 

The Popular and Premium Wine segment maintained its headquarters in owned and leased offices in Canandaigua, New York. It operated three wineries in New York, located in Canandaigua, Naples and Batavia; seven wineries in California, located in Escalon, Fresno, Ukiah, two in Lodi and two in Madera; two wineries in

 

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Washington, located in Woodinville and Sunnyside; and one winery in Caldwell, Idaho. All of these wineries are owned, except for the wineries in Batavia (New York), Caldwell (Idaho) and Woodinville (Washington), which are leased. This segment considered its principal wineries to be the Mission Bell winery in Madera (California) and the Canandaigua winery in Canandaigua (New York). The Mission Bell winery crushes grapes, produces, bottles and distributes wine and produces grape juice concentrate. The Canandaigua winery crushes grapes and produces, bottles and distributes wine. This segment plans to close its wineries located in Batavia (New York) and Fresno (California) and has sold its winery located in Escalon (California) in Fiscal 2004.

 

This segment owned or leased approximately 2,800 acres of vineyards, either fully bearing or under development, in California and New York.

 

Imported Beer and Spirits

 

The Imported Beer and Spirits segment maintained its headquarters in leased offices in Chicago, Illinois. It owned and operated four distilling plants, two in the United States and two in Canada. The two distilling plants in the United States are located in Bardstown, Kentucky and Albany, Georgia. The two distilling plants in Canada are located in Valleyfield, Quebec and Lethbridge, Alberta. This segment considered its principal distilling plants to be the facilities located in Bardstown (Kentucky), Valleyfield (Quebec) and Lethbridge (Alberta). The Bardstown facility distills, bottles and warehouses distilled spirits products for us and, on a contractual basis, for other industry members. The two Canadian facilities distill, bottle and store Canadian whisky for the segment, and distill and/or bottle and store Canadian whisky, vodka, rum, gin and liqueurs for third parties.

 

In the United States, the Imported Beer and Spirits segment also operated three bottling plants, located in Georgia, Kentucky and California. The facilities located in Atlanta, Georgia and Owensboro, Kentucky are owned, while the facility in Carson, California is operated and leased through an arrangement involving an ongoing management contract. This segment considered the bottling plant located in Owensboro (Kentucky) to be one of its principal facilities. The Owensboro facility bottles and warehouses distilled spirits products for the segment and is also utilized for contract bottling.

 

U.K. Brands and Wholesale

 

The U.K. Brands and Wholesale segment maintained its headquarters in owned offices in Bristol, England. It owned and operated two facilities in England, located in Bristol and Shepton Mallet and one facility in Scotland, located in Forfar. This segment considered all three facilities to be its principal facilities. The Bristol facility produces, bottles and packages wine; the Shepton Mallet facility produces, bottles and packages cider; and the Forfar facility produces, bottles and packages water products. The U.K. Brands and Wholesale segment also owns another facility in Taunton, England, which it plans to sell since the operations have been consolidated into the Shepton Mallet facility.

 

The U.K. Brands and Wholesale segment operated a National Distribution Centre, located at a leased facility in Severnside, England to distribute its products that are produced at the Bristol and Shepton Mallet facilities as well as products imported from other wine suppliers. To support its wholesaling business, this segment operated 11 distribution centers located throughout the United Kingdom, 10 of which are leased. These 11 distribution centers are used to distribute products produced by third parties, as well as by us. This segment has been and will continue consolidating the operations of its wholesaling distribution centers.

 

Fine Wine

 

The Fine Wine segment maintained its headquarters in offices owned in Rutherford, California. Through this segment, we owned and operated five wineries in the United States, one of which is on land that is leased, and, through a majority owned subsidiary, operated one winery in Chile. All five wineries in the United States are located in the state of California, in Rutherford, Healdsburg, Monterey County and two in Sonoma County.

 

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The winery in Chile is located in the Casablanca Valley. This segment considered its principal wineries to be one of its wineries in Sonoma County (California) and its wineries located in Rutherford (California), Healdsburg (California), Monterey County (California), and the Casablanca Valley (Chile). The winery in Monterey County crushes, vinifies and cellars wine. The other principal wineries crush grapes, vinify, cellar and bottle wine.

 

This segment also owned and leased approximately 2,700 plantable acres of vineyards in California and approximately 1,000 plantable acres of vineyards in Chile.

 

Corporate Operations and Other

 

Our corporate headquarters are located in offices leased in Fairport, New York.

 

Hardy Acquisition

 

During the first quarter of Fiscal 2004, we acquired Hardy, an Australian company based in Reynella, South Australia. Hardy owns ten Australian wineries, five in South Australia, two in Western Australia and the other three in New South Wales, Australian Capital Territory and Tasmania. Hardy also owns two wineries in New Zealand and one winery in France. All of these wineries crush, vinify and cellar wine. In addition, four of these wineries include bottling and/or packaging operations. Hardy also owns a bottling facility in Reynella, South Australia which bottles a significant portion of the wine produced by Hardy. We consider Hardy’s principal facilities to be the Berri Estates and the Renmano wineries located in South Australia, the Stanley winery located in New South Wales, the Houghton winery located in Western Australia, the Nobilo winery located in New Zealand, and the bottling facility located in Reynella.

 

Hardy owns or has interests in approximately 6,200 plantable acres of vineyards in South Australia, the Australian Capital Territory, Western Australia, Victoria, and Tasmania, approximately 1,900 plantable acres of vineyards in New Zealand and approximately 80 plantable acres of vineyards in France.

 

As a result of the Hardy acquisition, we acquired the remaining 50% ownership of PWP. PWP owns and operates two wineries in California, one located in Monterey County and the other in Sonoma County. These wineries crush, vinify and cellar wine. In addition, the winery in Monterey County includes bottling operations and distribution facilities. PWP also owns or has interests in approximately 1,400 plantable acres of vineyards in California.

 

Legal Proceedings

 

We and our subsidiaries are subject to litigation from time to time in the ordinary course of business. Although the amount of any liability with respect to such litigation cannot be determined, in the opinion of management such liability will not have a material adverse effect on our financial condition, results of operations or cash flows.

 

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MANAGEMENT

 

The following table sets forth information with respect to our current executive officers and directors:

 

Name


   Age

  

Position


Richard Sands

   52    Chairman of the Board, Chief Executive Officer and Director

Robert Sands

   45    President, Chief Operating Officer and Director

Alexander L. Berk

   53    Chief Executive Officer, Constellation Beers and Spirits(a)

Stephen B. Millar

   59    Chief Executive Officer, Constellation Wines(b)

Thomas J. Mullin

   51    Executive Vice President and General Counsel

Thomas S. Summer

   49    Executive Vice President and Chief Financial Officer

F. Paul Hetterich

   41    Executive Vice President, Business Development and Corporate Strategy

W. Keith Wilson

   52    Executive Vice President and Chief Human Resources Officer

George Bresler

   78    Director

Jeananne K. Hauswald

   59    Director

James A. Locke III

   61    Director

Thomas C. McDermott

   67    Director

Paul L. Smith

   67    Director

(a)   Employed by Barton Incorporated
(b)   Employed by Hardy Wine Company Limited

 

Richard Sands, Ph.D., is the Chairman of the Board and our Chief Executive Officer. He has been employed by us in various capacities since 1979. He was elected Chief Executive Officer in October 1993 and has served as a director since 1982. In September 1999, Mr. Sands was elected Chairman of the Board. He served as Executive Vice President from 1982 to May 1986, as President from May 1986 to December 2002 and as Chief Operating Officer from May 1986 to October 1993. He is the brother of Robert Sands.

 

Robert Sands was appointed our President and Chief Operating Officer in December 2002 and has served as a director since January 1990. Mr. Sands also had served as Group President from April 2000 through December 2002, as Chief Executive Officer, International from December 1998 through April 2000, as Executive Vice President from October 1993 through April 2000, as General Counsel from June 1986 through May 2000, and as Vice President from June 1990 through October 1993. He is the brother of Richard Sands.

 

Alexander L. Berk is the Chief Executive Officer of Constellation Beers and Spirits and the President and Chief Executive Officer of Barton Incorporated. Since 1990 and prior to becoming Chief Executive Officer of Barton Incorporated in March 1998, Mr. Berk was President and Chief Operating Officer of Barton Incorporated and from 1988 to 1990, he was the President and Chief Executive Officer of Schenley Industries. Mr. Berk has been in the beverage alcohol industry for most of his career, serving in various positions.

 

Stephen B. Millar is the Chief Executive Officer of Constellation Wines and has held this position since the closing of the Hardy acquisition. Prior to our acquisition of Hardy, Mr. Millar was Hardy’s Managing Director and had held this position since 1991. Mr. Millar currently serves in leadership roles in numerous industry organizations. He is an Executive Council Member, Chairman of the Audit Committee and Deputy Chairman of the International Trade Advisory Committee of the Winemakers’ Federation of Australia. He also serves as the President of the Australian Wine and Brandy Producers’ Association, is Deputy Chairman of the Australian Wine Export Council and is a Director of Business SA.

 

Thomas J. Mullin joined us as Executive Vice President and General Counsel in May 2000. Prior to then, Mr. Mullin served as President and Chief Executive Officer of TD Waterhouse Bank, NA since February 2000, of CT USA, F.S.B. since September 1998, and of CT USA, Inc. since March 1997. He also served as Executive

 

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Vice President, Business Development and Corporate Strategy of C.T. Financial Services, Inc. from March 1997 through February 2000. From 1985 through 1997, Mr. Mullin served as Vice Chairman and Senior Executive Vice President of First Federal Savings and Loan Association of Rochester, New York and from 1982 through 1985, he was a partner in the law firm of Phillips, Lytle, Hitchcock, Blaine & Huber.

 

Thomas S. Summer joined us in April l997 as Senior Vice President and Chief Financial Officer and in April 2000 was elected Executive Vice President. From November 1991 to April 1997, Mr. Summer served as Vice President, Treasurer of Cardinal Health, Inc., a large national health care services company, where he was responsible for directing financing strategies and treasury matters. Prior to that, from November 1987 to November 1991, Mr. Summer held several positions in corporate finance and international treasury with PepsiCo, Inc.

 

F. Paul Hetterich has been our Executive Vice President, Business Development and Corporate Strategy since June 2003. From April 2001 to June 2003, Mr. Hetterich served as our Senior Vice President, Business Development. Prior to that, Mr. Hetterich held several increasingly senior positions in our marketing and business development groups. Mr. Hetterich has been with us since 1986.

 

W. Keith Wilson joined us in January 2002 as Senior Vice President, Human Resources, and in September 2002, he was elected Chief Human Resources Officer and in April 2003 he was elected Executive Vice President. From 1999 to 2001, Mr. Wilson served as Senior Vice President, Global Human Resources of Xerox Engineering Systems, a subsidiary of Xerox Corporation, that engineers, manufactures and sells hi-tech reprographics equipment and software worldwide. From 1990 to 1999, he served in various senior human resource positions with the banking, marketing and real estate and relocation businesses of Prudential Life Insurance of America, an insurance company that also provides other financial products.

 

George Bresler, a director of Constellation since 1992, has been engaged in the practice of law since 1957. Since 1992, Mr. Bresler has been a partner of the law firm of Kurzman Eisenberg Corbin Lever & Goodman, LLP, and its predecessor firms, in New York, New York. Mr. Bresler provides us with legal services.

 

Jeananne K. Hauswald, a director of Constellation since 2000, has been a managing partner of Solo Management Group, LLC, a corporate financial and investment management consulting company, since September 1998. From 1987 to her retirement in 1998, Ms. Hauswald was employed by The Seagram Company Ltd., a beverage and entertainment/communications company, where she served in various positions, including Vice President Human Resources from 1990 to 1993 and Vice President and Treasurer from 1993 to 1998. Ms. Hauswald currently serves on the board of directors of Thomas & Betts Corporation.

 

James A. Locke III, a director of Constellation since 1983, has been engaged in the practice of business and corporate law since 1971. He has been a partner of the law firm of Nixon Peabody LLP, and its predecessor firm, in Rochester, New York, since 1996. Nixon Peabody LLP is our principal outside counsel. For twenty years prior to joining Nixon Peabody LLP, Mr. Locke practiced law in Rochester, New York as a partner with another law firm.

 

Thomas C. McDermott, a director of Constellation since 1997, has been Chairman of GPM Associates, LLP (formerly, Forbes Products, LLC), a custom vinyl business products company, since January 1998. From 1994 to 1997, Mr. McDermott was President and Chief Executive Officer of Goulds Pumps, Incorporated, a centrifugal pumps company for industrial, domestic and agricultural markets, where he also was Chairman from 1995 to 1997. From 1986 to 1993, he was President and Chief Operating Officer of Bausch & Lomb Incorporated, a contact lens, lens-care and eyewear products company.

 

Paul L. Smith, a director of Constellation since 1997, retired from Eastman Kodak Company in 1993 after working there for thirty-five years. Mr. Smith was employed in various positions at Eastman Kodak Company, the last of which was from 1983 to 1993, when he served as Senior Vice President and Chief Financial Officer. Also from 1983 to 1993, Mr. Smith served on the Board of Directors of Eastman Kodak Company. Mr. Smith currently serves on the Board of Directors of Home Properties, Inc.

 

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The Committees of the Board of Directors

 

Audit Committee

 

The Audit Committee is currently composed of Paul L. Smith (Chair), Jeananne K. Hauswald and Thomas C. McDermott, each of whom is independent in accordance with the definition in the New York Stock Exchange’s listing standards. The Audit Committee operates under a written charter that was approved by our Board of Directors. This Committee assists the Board of Directors in fulfilling its oversight responsibilities as they relate to our accounting policies, internal controls and financial reporting practices. In addition, this Committee maintains a line of communication between the Board of Directors and our financial management, internal auditors and independent accountants.

 

Corporate Governance Committee

 

The Corporate Governance Committee is currently composed of James A. Locke III (Chair), George Bresler, Thomas C. McDermott, Robert Sands and Paul L. Smith. The full Board is responsible for nominating candidates to become directors, but has delegated the screening process involved to the Corporate Governance Committee. The Corporate Governance Committee advises the Board concerning appropriate composition of the Board and its committees and advises the Board regarding appropriate corporate governance practices and assists the Board in achieving them. Among other matters, this Committee also makes recommendations to the full Board with respect to an officer to be designated as Chief Executive Officer, and a director to serve as Chairman of the Board. In addition, this Committee recommends to the Board compensation for directors who are neither present nor former full-time officers of ours.

 

Human Resources Committee

 

The Human Resources Committee is currently composed of Thomas C. McDermott (Chair), Jeananne K. Hauswald and Paul L. Smith. The Human Resources Committee monitors, among other matters: human resources policies and procedures as they relate to our goals and objectives and good management practices; and procedures and internal controls that relate to personnel administration, pay practices and benefits administration. The Human Resources Committee is responsible for reviewing total executive compensation in relation to individual executive performance, our performance, salary information and other parameters deemed reasonable in the assignment of executive compensation levels. This Committee also reviews and approves executive benefits and perquisites and reviews performance systems, including reward programs. The Human Resources Committee is responsible for evaluating the performance of the Chief Executive Officer and approves his salary, as well as the salaries of other executives. This Committee also presently administers our stock plans and reviews succession planning and other important human resources issues.

 

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PRINCIPAL STOCKHOLDERS AND BENEFICIAL OWNERSHIP OF MANAGEMENT

 

The following tables set forth information regarding the beneficial ownership of our Class A common stock and our Class B common stock as of May 20, 2003 (unless otherwise specified), by:

 

    all persons known to us who beneficially own 5% or more of either our Class A common stock or our Class B common stock;

 

    our chief executive officer and each of the other four most highly compensated executive officers at the end of Fiscal 2003;

 

    each of our current directors; and

 

    all of our current directors and executive officers as a group.

 

Unless otherwise indicated in the footnotes to the tables, the stockholders listed below have sole voting and investment power with respect to the shares that they own, subject to applicable community property laws. For purposes of these tables, beneficial ownership includes:

 

    shares over which the stockholder has sole or shared voting or investment power; and

 

    shares of Class A common stock that may be acquired through the exercise of options that are exercisable on May 20, 2003 or within 60 days of May 20, 2003, which we refer to as “presently exercisable”.

 

For the purpose of the tables, a stockholder that owns shares of Class B common stock will not be deemed to beneficially own shares of Class A common stock, notwithstanding the rules of the Exchange Act that provide that a holder of Class B common stock will be deemed to beneficially own shares of Class A common stock because each share of Class B common stock is convertible into one share of Class A common stock at any time. The footnotes to the tables indicate the number of shares of Class A common stock that are beneficially owned by a stockholder as a result of the conversion feature of the Class B common stock.

 

The applicable percentage of Class A common stock beneficially owned is based upon 82,459,606 shares of Class A common stock outstanding as of May 20, 2003. The applicable percentage of Class B common stock beneficially owned is based upon 12,070,770 shares of Class B common stock outstanding as of May 20, 2003.

 

Except as otherwise indicated below, the address of each stockholder, each director and each executive officer is c/o Constellation Brands, Inc., 300 WillowBrook Office Park, Fairport, New York 14450.

 

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Beneficial ownership of Class A common stock (1)

 

Name and Address of Beneficial Owner


   Number of shares

     Percent of class

 

Robert Sands

300 WillowBrook Office Park

Fairport, NY 14450

   1,309,748 (2)    1.6 %

Richard Sands

300 WillowBrook Office Park

Fairport, NY 14450

   1,298,395 (3)    1.6 %

CWC Partnership-I

300 WillowBrook Office Park

Fairport, NY 14450

   236,188 (4)    *  

Trust for the benefit of Andrew Stern, M.D. under the will of Laurie Sands

300 WillowBrook Office Park

Fairport, NY 14450

   236,188 (5)    *  

Stockholders Group Pursuant to Section 13(d)(3) of the Securities

Exchange Act of 1934, as amended

   2,276,956 (6)    2.7 %

FMR Corp.

82 Devonshire Street

Boston, MA 02109

   8,074,928 (7)    9.8 %

Wellington Management Company, LLP

75 State Street

Boston, MA 02109

   9,193,005 (8)    11.1 %

Alexander L. Berk

   492,045 (9)    *  

Thomas S. Summer

   204,931 (10)    *  

Thomas J. Mullin

   174,461 (11)    *  

George Bresler

   16,436 (12)    *  

Jeananne K. Hauswald

   28,436 (13)    *  

James A. Locke III

   32,632 (14)    *  

Thomas C. McDermott

   52,436 (15)    *  

Paul L. Smith

   17,166 (16)    *  

All executive officers and directors as a group (13 persons)

   3,464,011 (17)    4.1 %

*   Percentage does not exceed (1%) of the outstanding shares of such class.

 

Beneficial ownership of Class B common stock (1)

 

Name and Address of Beneficial Owner


   Number of shares

     Percent of class

 

Richard Sands

300 WillowBrook Office Park

Fairport, NY 14450

   8,384,188 (2)    69.5 %

Robert Sands

300 WillowBrook Office Park

Fairport, NY 14450

   8,381,368 (3)    69.4 %

Trust for the benefit of Andrew Stern, M.D. under the will of Laurie Sands

300 WillowBrook Office Park

Fairport, NY 14450

   3,331,356 (5)    27.6 %

CWC Partnership-I

300 WillowBrook Office Park

Fairport, NY 14450

   3,049,540 (4)    25.3 %

Trust for the benefit of the Grandchildren of Marvin and Marilyn Sands

300 WillowBrook Office Park

Fairport, NY 14450

   2,025,000 (18)    16.8 %

Stockholders Group Pursuant to Section 13(d)(3) of the Securities

Exchange Act of 1934, as amended

   11,335,484 (6)    93.9 %

James A. Locke III

   132 (14)    *  

All executive officers and directors as a group (13 persons)

   11,335,616 (17)    93.9 %

*   Percentage does not exceed (1%) of the outstanding shares of such class.

 

(1)  

The number of shares and the percentage of ownership set forth in the Class A common stock table includes the number of shares of Class A common stock that can be purchased by exercising stock options

 

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exercisable on May 20, 2003 or within sixty (60) days thereafter (“presently exercisable”). Additionally, such number does not include the shares of Class A common stock issuable pursuant to the conversion feature of Class B common stock beneficially owned by each person. The number of shares and percentage of ownership assuming conversion of Class B common stock into Class A common stock are contained in the footnotes. For purposes of calculating the percentage of ownership of Class A common stock in the table and in the footnotes, additional shares of Class A common stock equal to the number of presently exercisable options and, as appropriate, the number of shares of Class B common stock owned by each person are assumed to be outstanding pursuant to Rule 13d-3(d)(1) under the Securities Exchange Act. Where the footnotes reflect shares of Class A common stock as being included, such shares are included only in the Class A common stock table and where the footnotes reflect shares of Class B common stock as being included, such shares are included only in the Class B common stock table.

(2)   Mr. Sands has sole power to vote and dispose of 997,586 of the Class A shares and 2,951,296 of the Class B shares indicated. The Class A shares indicated as to which he has sole voting and dispositive power include 745,130 shares of Class A stock issuable upon the exercise of options that are presently exercisable by Mr. Sands. He shares power to vote or dispose, as applicable, with respect to 298,712 Class A shares and 5,430,072 Class B shares, as follows: 235,804 shares of Class A common stock and 2,715,856 shares of Class B common stock owned by CWC Partnership-I, a New York general partnership (“CWCP-I”), of which Robert Sands is a managing partner, 73,716 shares of Class B common stock owned by the Marvin Sands Master Trust (the “Master Trust”), of which Robert Sands is a trustee and beneficiary, 384 shares of Class A common stock and 333,684 shares of Class B common stock owned by M, L, R & R, a New York general partnership (“MLR&R”), of which Mr. Sands and the Master Trust are general partners, 281,816 shares of Class B common stock owned by CWC Partnership-II, a New York general partnership (“CWCP-II”), of which Mr. Sands is a trustee of the managing partner, 2,025,000 shares of Class B common stock owned by the trust described in footnote (18) below, and 62,524 shares of Class A common stock owned by the Mac and Sally Sands Foundation, Incorporated, a Virginia corporation (the “Sands Foundation”), of which Mr. Sands is a director and officer. Mr. Sands disclaims beneficial ownership of all of the foregoing shares except to the extent of his ownership interest in CWCP-I and MLR&R and his beneficial interest in the Master Trust. The amounts reflected do not include 91,760 shares of Class A common stock owned by Mr. Sands’ wife, individually and as custodian for their minor children, the remainder interest Mr. Sands has in 709,430 of the 2,150,004 shares of Class A common stock subject to the life estate held by Marilyn Sands described below or the remainder interest of CWCP-II in 723,906 of such shares. Marilyn Sands is the beneficial owner of a life estate in 2,150,004 shares of Class A common stock that includes the right to receive income from and the power to vote and dispose of such shares. The remainder interest in such shares is held by Richard Sands, Robert Sands and CWCP-II. Mr. Sands disclaims beneficial ownership with respect to all such shares. Assuming the conversion of Class B common stock beneficially owned by Mr. Sands into Class A common stock, Mr. Sands would beneficially own 9,677,666 shares of Class A common stock, representing 10.6% of the outstanding Class A common stock after such conversion.
(3)  

Mr. Sands has sole power to vote and dispose of 980,658 of the Class A shares and 2,954,116 of the Class B shares indicated. The Class A shares indicated as to which he has sole voting and dispositive power include 803,505 shares of Class A Stock issuable upon the exercise of options that are presently exercisable by Mr. Sands. He shares power to vote or dispose, as applicable, with respect to 298,712 Class A shares and 5,430,072 Class B shares, as follows: 235,804 shares of Class A common stock and 2,715,856 shares of Class B common stock owned by CWCP-I, of which Richard Sands is a managing partner, 73,716 shares of Class B common stock owned by the Master Trust, of which Mr. Sands is a trustee and beneficiary, 384 shares of Class A common stock and 333,684 shares of Class B common stock owned by MLR&R, of which Mr. Sands and the Master Trust are general partners, 281,816 shares of Class B common stock owned by CWCP-II, of which Mr. Sands is a trustee of the managing partner, 2,025,000 shares of Class B common stock owned by the trust described in footnote (18) below, and 62,524 shares of Class A common stock owned by the Sands Foundation, of which Mr. Sands is a director and officer. Mr. Sands disclaims beneficial ownership of all of the foregoing shares except to the extent of his ownership interest in CWCP-I and MLR&R and his beneficial interest in the Master Trust. The amounts reflected do not include 7,860 shares of Class A common stock owned by Mr. Sands’ wife, the remainder interest Mr. Sands has in

 

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716,668 of the 2,150,004 shares of class A common stock subject to the life estate held by Marilyn Sands described below or the remainder interest of CWCP-II in 723,906 of such shares. Marilyn Sands is the beneficial owner of a life estate in 2,150,004 shares of Class A common stock that includes the right to receive income from and the power to vote and dispose of such shares. The remainder interest in such shares is held by Richard Sands, Robert Sands and CWCP-II. Mr. Sands disclaims beneficial ownership with respect to all such shares. Assuming the conversion of Class B common stock beneficially owned by Mr. Sands into Class A common stock, Mr. Sands would beneficially own 9,663,558 shares of Class A common stock, representing 10.5% of the outstanding Class A common stock after such conversion.

(4)   The amounts reflected include, as applicable, 384 shares of Class A common stock and 333,684 shares of Class B common stock owned by MLR&R, of which CWCP-I is a general partner. The shares owned by CWCP-I are included in the number of shares beneficially owned by Richard Sands and Robert Sands, the managing partners of CWCP-I, the Marital Trust (defined in footnote (5) below), a partner of CWCP-I which owns a majority in interest of the CWCP-I partnership interests, and the group described in footnote (6) below. The other partners of CWCP-I are trusts for the benefit of Laurie Sands’ children. Assuming the conversion of Class B common stock beneficially owned by CWCP-I into Class A common stock, CWCP-I would beneficially own 3,285,728 shares of Class A common stock, representing 3.8% of the outstanding Class A common stock after such conversion.
(5)   The amounts reflected include, as applicable, 235,804 shares of Class A common stock and 2,715,856 shares of Class B common stock owned by CWCP-I, in which the Trust for the benefit of Andrew Stern, M.D. under the will of Laurie Sands (the “Marital Trust”) is a partner and owns a majority in interest of the CWCP-I partnership interests, 281,816 shares of Class B common stock owned by CWCP-II, in which the Marital Trust is a partner and owns a majority in interest of the CWCP-II partnership interests, and 384 shares of Class A common stock and 333,684 shares of Class B common stock owned by MLR&R, of which CWCP-I is a general partner. The Marital Trust disclaims beneficial ownership with respect to all of the foregoing shares except to the extent of its ownership interest in CWCP-I and CWCP-II. The amounts reflected do not include the remainder interest CWCP-II has in 723,906 of the 2,150,004 shares of Class A common stock subject to the life estate held by Marilyn Sands described below. Marilyn Sands is the beneficial owner of a life estate in 2,150,004 shares of Class A common stock that includes the right to receive income from and the power to vote and dispose of such shares. The remainder interest in such shares is held by Richard Sands, Robert Sands and CWCP-II. The Marital Trust disclaims beneficial ownership with respect to all such shares. Assuming the conversion of Class B common stock beneficially owned by the Marital Trust into Class A common stock, the Marital Trust would beneficially own 3,567,544 shares of Class A common stock, representing 4.2% of the outstanding Class A common stock after such conversion.
(6)   The group as reported consists of Richard Sands, Robert Sands, CWCP-I, CWCP-II, and the trust described in footnote (18) (collectively, the “Group”). The basis for the Group consists of: (i) a Stockholders Agreement among Richard Sands, Robert Sands and CWCP-I and (ii) the fact that the familial relationship between Richard Sands and Robert Sands, their actions in working together in the conduct of our business and their capacity as partners and trustees of the other members of the Group may be deemed to constitute an agreement to “act in concert” with respect to our shares. The members of the Group disclaim that an agreement to act in concert exists. Except with respect to the shares subject to the Stockholders Agreement, the shares owned by CWCP-I and CWCP-II and the shares held by the trust described in footnote (18) below and the Master Trust, no member of the Group is required to consult with any other member of the Group with respect to the voting or disposition of any shares of us. Assuming the conversion of Class B common stock beneficially owned by the Group into Class A common stock, the Group would beneficially own 13,612,440 shares of Class A common stock, representing 14.3% of the outstanding Class A common stock after such conversion. Of the shares of Class A common stock and Class B common stock held by the Group, 76,924 shares of Class A common stock and 1,700,898 shares of Class B common stock have been pledged by certain members of the Group as collateral for loans made to such members of the Group.
(7)  

The number of shares equals the number of shares of Class A common stock reported to be beneficially owned by FMR Corp., Edward C. Johnson 3d and Abigail P. Johnson (collectively, “FMR”) in its Schedule 13G (Amendment No. 1) dated February 10, 2003, filed with the Securities and Exchange

 

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Commission. The percentage of ownership reflected in the table is calculated on the basis of 82,459,606 shares of Class A common stock outstanding on May 20, 2003. The Schedule 13G (Amendment No. 1) indicates that of the 8,074,928 shares beneficially owned by FMR, through its control of Fidelity Management & Research Company, FMR has sole dispositive power with respect to 6,962,920 shares, through its control of Fidelity Management Trust Company, FMR has sole dispositive and voting power with respect to 696,300 shares, and through other relationships, FMR has sole dispositive and voting power with respect to 415,708 shares. For further information pertaining to FMR, reference should be made to FMR’s Schedule 13G (Amendment No. 1) filed with the Securities and Exchange Commission. With respect to the information contained herein pertaining to shares of Class A common stock beneficially owned by FMR, we have relied solely on the information reported in FMR’s Schedule 13G (Amendment No. 1) and has not independently verified FMR’s beneficial ownership as of May 20, 2003.

(8)   The number of shares equals the number of shares of Class A common stock reported to be beneficially owned by Wellington Management Company, LLP (“WMC”) in its Schedule 13G (Amended) dated July 10, 2003, filed with the Securities and Exchange Commission. The percentage of ownership reflected in the table is calculated on the basis of 82,459,606 shares of Class A common stock outstanding on May 20, 2003. The Schedule 13G (Amended) indicates that of the 9,193,005 shares beneficially owned by WMC in its capacity as an investment advisor, WMC has shared voting power with respect to 7,782,105 shares and has shared dispositive power with respect to 9,193,005 shares. For further information pertaining to WMC, reference should be made to WMC’s Schedule 13G (Amended) filed with the Securities and Exchange Commission. With respect to the information contained herein pertaining to shares of Class A common stock beneficially owned by WMC, we have relied solely on the information reported in WMC’s Schedule 13G (Amended) and has not independently verified WMC’s beneficial ownership as of May 20, 2003.
(9)   Includes 477,965 shares of Class A common stock that that can be purchased by exercising presently exercisable stock options.
(10)   Includes 185,675 shares of Class A common that that can be purchased by exercising presently exercisable stock options. Mr. Summer shares the power to vote and dispose of 18,151 shares with his spouse. He has no voting power or investment discretion with respect to 800 shares that his spouse holds as a custodian.
(11)   Includes 169,640 shares of Class A common stock issuable that that can be purchased by exercising presently exercisable stock options.
(12)   Includes 12,000 shares of Class A common stock that that can be purchased by exercising presently exercisable stock options.
(13)   Includes 24,000 shares of Class A common stock that that can be purchased by exercising presently exercisable stock options.
(14)   Includes 24,000 shares of Class A common stock that that can be purchased by exercising presently exercisable stock options. Assuming the conversion of Mr. Locke’s 132 shares of Class B common stock into Class A common stock, Mr. Locke would beneficially own 32,764 shares of Class A common stock, representing less than one percent (1%) of the outstanding Class A common stock after such conversion.
(15)   Includes 48,000 shares of Class A common stock that that can be purchased by exercising presently exercisable stock options.
(16)   Includes 12,000 shares of Class A common stock that that can be purchased by exercising presently exercisable stock options.
(17)   Includes 2,627,940 shares of Class A common stock that that can be purchased by exercising presently exercisable stock options. This group consists of the Company’s current executive officers and directors. Assuming the conversion of a total of 11,335,616 shares of Class B common stock beneficially owned by the executive officers and directors as a group into Class A common stock, all executive officers and directors as a group would beneficially own 14,638,127 shares of Class A common stock, representing 15.2% of the outstanding Class A common stock after such conversion. Includes 23,599 shares as to which voting and dispositive power is shared with spouses. Includes 9,755 shares of Class A common stock that underlie CHESS Depositary Interests held by an executive officer. Does not include 14,561 shares of Class A common stock that underlie CHESS Depositary Interests held by the spouse of an executive officer and for which the executive officer disclaims beneficial ownership with respect to such securities.

 

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(18)   The trust was created by Marvin Sands under the terms of an Irrevocable Trust Agreement dated November 18, 1987 (the “Trust”). The Trust is for the benefit of the present and future grandchildren of Marvin and Marilyn Sands. The Co-Trustees of the Trust are Richard Sands and Robert Sands. Unanimity of the Co-Trustees is required with respect to voting and disposing of Class B common stock owned by the Trust. The shares owned by the Trust are included in the number of shares beneficially owned by Richard Sands, Robert Sands and the Group. Assuming the conversion of Class B common stock beneficially owned by the Trust into Class A common stock, the Trust would beneficially own 2,025,000 shares of Class A common stock, representing 2.4% of the outstanding Class A common stock after such conversion.

 

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DESCRIPTION OF DEPOSITARY SHARES

 

The description in this prospectus supplement of the terms of the depositary shares is only a summary and should be read together with the other information in this prospectus.

 

General

 

Each depositary share is evidenced by a depositary receipt and represents  1/40 of a share of Series A mandatory convertible preferred stock. We will enter into a deposit agreement with Mellon Investor Services LLC, who will act as the depositary on behalf of the holders of the depositary receipts. The shares of Series A mandatory convertible preferred stock represented by depositary shares will be deposited with the depositary pursuant to the deposit agreement.

 

The deposit agreement entitles each owner of a depositary share to all the rights, preferences and privileges of the shares of Series A mandatory convertible preferred stock represented by those depositary shares, including dividend, conversion, voting and liquidation rights. Holders of depositary shares are also subject to all of the limitations of the Series A mandatory convertible preferred stock. Those limitations are summarized below under “Description of Series A Mandatory Convertible Preferred Stock.” The following summary of the terms and provisions of the deposit agreement, depositary shares and depositary receipts is not a complete restatement of the provisions of the deposit agreement or the certificate of designations for the Series A mandatory convertible preferred stock. Copies of the depositary agreement and the certificate of designations may be obtained from us upon request or from the depositary at its principal office.

 

The depositary shares will be evidenced by depositary receipts issued pursuant to the deposit agreement. Depositary receipts will be distributed to those persons purchasing the depositary shares representing the Series A mandatory convertible preferred stock in accordance with the terms of this offering.

 

Pending the preparation of definitive depositary receipts, the depositary may, upon our written order, issue temporary depositary receipts substantially identical to (and entitling the holders thereof to all the rights pertaining to) the definitive depositary receipts but not in definitive form. Definitive depositary receipts will be prepared thereafter without unreasonable delay, and temporary depositary receipts will be exchangeable for definitive depositary receipts at our expense.

 

Mellon Investor Services LLC will act as transfer agent, dividend disbursing agent and registrar for the depositary shares and the Series A mandatory convertible preferred stock and currently acts as the transfer agent, dividend disbursing agent and registrar for our common stock.

 

Issuance of Depositary Receipts and Withdrawal of Series A Mandatory Convertible Preferred Stock

 

Immediately following the issuance of the Series A mandatory convertible preferred stock, we will deposit the Series A mandatory convertible preferred stock with the depositary, and the depositary will issue and deliver the depositary receipts to us. We will then deliver the depositary receipts to the underwriters. Depositary receipts are issued evidencing only whole depositary shares. Upon surrender of depositary receipts at the corporate office of the depositary, or such other office as the depositary may designate, the owner of the depositary shares evidenced by the depositary receipts is entitled to delivery at such corporate office of certificates evidencing the number of whole shares of Series A mandatory convertible preferred stock and any money and other property represented by such depositary receipts. If the depositary receipts delivered by the holder evidence a number of depositary shares in excess of the number of whole shares of Series A mandatory convertible preferred stock to be withdrawn, the depositary will deliver to such holder at the same time a new depositary receipt evidencing such excess number of depositary shares. We do not expect that there will be any public trading market for the Series A mandatory convertible preferred stock except as represented by the depositary shares.

 

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Conversion Provisions

 

Our Series A mandatory convertible preferred stock is convertible into shares of our Class A common stock as described under “Description of Series A Mandatory Convertible Preferred Stock—Automatic Conversion,” “Description of Series A Mandatory Convertible Preferred Stock —Provisional Conversion at Our Option,” “Description of Series A Mandatory Convertible Preferred Stock—Conversion at the Option of the Holder” and “Description of Series A Mandatory Convertible Preferred Stock—Early Conversion upon Cash Merger.” In each such case, the depositary shares will be converted into shares of our Class A common stock upon the same terms and conditions as the Series A mandatory convertible preferred stock, except that the number of shares of Class A common stock received upon conversion of each depositary share will be equal to the number of shares of Class A common stock received upon conversion of each share of Series A mandatory convertible preferred stock divided by 40.

 

On any applicable conversion date, the record holders of depositary shares representing the Series A mandatory convertible preferred stock must deliver depositary receipts and a proper assignment of the depositary receipts to us, to the transfer agent for the depositary shares, or in blank, to the depositary or its agent (together with, in the case of conversion at the option of the holder, written notice of conversion and, if applicable, payment of an amount equal to the dividend payable on the depositary shares to be converted). In the event that the conversion of depositary shares into Class A common stock would result in the issuance of fractional shares, we will pay the holder of such depositary shares cash in lieu of such fractional shares as described below in “Description of Series A Mandatory Convertible Preferred Stock—Fractional Shares.”

 

Payment

 

We will pay all cash amounts with respect to the depositary shares in U.S. dollars at our office or agency maintained for such purpose within New York City or, at our option, we may pay dividends by check mailed to the holders of the depositary shares at their respective addresses set forth in the register of holders of the depositary shares maintained by the transfer agent. Any payment on the depositary shares due on any day that is not a business day need not be made on that day, but may be made on the next business day with the same force and effect as if made on the due date.

 

Dividends and Other Distributions

 

The depositary will distribute all cash dividends or other cash distributions, and shares of Class A common stock distributed as dividends, received in respect of the Series A mandatory convertible preferred stock to the record holders of depositary shares in proportion, insofar as possible, to the number of depositary shares owned by such holders. In the event of a distribution of shares of Class A common stock as dividends in respect of the Series A mandatory convertible preferred stock, the depositary will sell such shares of Class A common stock and distribute the net proceeds from such sale to the record holders of depositary shares in proportion, insofar as possible, to the number of depositary shares owned by such holder, subject to obligations of holders to file proofs, certificates and other information and to pay certain charges and expenses to the depositary. See “Description of Series A Mandatory Convertible Preferred Stock—Dividends”.

 

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Record Date

 

Whenever

 

    any cash dividend or other cash distribution shall become payable or any Class A common stock distributed in lieu thereof, any other distribution shall be made, or any rights, preferences, or privileges shall be offered with respect to the Series A mandatory convertible preferred stock, or

 

    the depositary shall receive notice of any meeting at which holders of the Series A mandatory convertible preferred stock are entitled to vote or of which holders of the Series A mandatory convertible preferred stock are entitled to notice,

 

the depositary shall in each such instance fix a record date, which shall be the same date as the record date for the Series A mandatory convertible preferred stock, for the determination of the holders of depositary receipts

 

    who shall be entitled to receive such dividend, distribution, rights, preferences, or privileges, or the net proceeds of the sale thereof, or

 

    who shall be entitled to give instructions for the exercise of voting rights at any such meeting or to receive notice of such meeting.

 

Voting of Series A Mandatory Convertible Preferred Stock

 

Upon receipt of notice of any meeting at which the holders of Series A mandatory convertible preferred stock are entitled to vote, the depositary will mail the information contained in such notice of meeting to the record holders of depositary shares. Each record holder of the depositary shares on the record date, which will be the same date as the record date for the Series A mandatory convertible preferred stock, will be entitled to instruct the depositary as to the exercise of voting rights pertaining to the number of shares of Series A mandatory convertible preferred stock, or fraction thereof, represented by such holder’s depositary shares. The depositary will endeavor, insofar as practicable, to vote the number of shares of Series A mandatory convertible preferred stock, or fractions thereof, represented by such depositary shares in accordance with the instructions it receives from the holders, and we have agreed to take all reasonable action which may be deemed necessary by the depositary in order to enable the depositary to do so. The depositary will not vote shares of Series A mandatory convertible preferred stock to the extent it does not receive specific written instructions from the holders of depositary shares representing the corresponding Series A mandatory convertible preferred stock. Each depositary share shall entitle the holder to instruct the depositary to cast  1/40 of the vote of a share of Series A mandatory convertible preferred stock on each matter submitted to a vote of our stockholders.

 

Amendment of Deposit Agreement

 

The form of depositary receipts and any provision of the deposit agreement may at any time be amended by agreement between us and the depositary. However, any amendment that adversely alters the rights of the holders of depositary shares will not be effective unless such amendment has been approved by the holders of at least 66 2/3% of the depositary shares then outstanding. Every holder of depositary receipts at the time any such amendment becomes effective shall be deemed to consent and agree to such amendment and to be bound by the deposit agreement as so amended.

 

Charges of Depositary

 

We will pay all transfer and other taxes and governmental charges that arise solely from the existence of the depositary arrangements and the initial deposit of the Series A mandatory convertible preferred stock. Holders of depositary shares will pay all other taxes, including transfer taxes, governmental charges, and the charges expressly set forth in the deposit agreement to be for the account of the holders of the Series A mandatory convertible preferred stock.

 

 

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