CONSTELLATION BRANDS, INC. — Interim / Quarterly Report 2002

Jul 15, 2002

FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended May 31, 2002 ------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------------------- ---------------------- COMMISSION FILE NUMBER 001-08495 CONSTELLATION BRANDS, INC. -------------------------- (Exact name of registrant as specified in its charter) DELAWARE 16-0716709 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 300 WILLOWBROOK OFFICE PARK, FAIRPORT, NEW YORK 14450 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) (585) 218-3600 ----------------------------------------------------- (Registrant's telephone number, including area code) ----------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of June 30, 2002, is set forth below: CLASS NUMBER OF SHARES OUTSTANDING ----- ---------------------------- Class A Common Stock, Par Value $.01 Per Share 77,249,552 Class B Common Stock, Par Value $.01 Per Share 12,095,990 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS - ------- --------------------

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3 CONSTELLATION BRANDS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS MAY 31, 2002 1) MANAGEMENT'S REPRESENTATIONS: The consolidated financial statements included herein have been prepared by Constellation Brands, Inc. and its subsidiaries (the "Company"), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002. Results of operations for interim periods are not necessarily indicative of annual results. Certain February 28, 2002, balances have been reclassified to conform to current year presentation. 2) ACCOUNTING CHANGES: Effective March 1, 2002, the Company completed its adoption of Statement of Financial Accounting Standards No. 141 ("SFAS No. 141"), "Business Combinations," resulting in a reclassification of $47.0 million of previously identified separable intangible assets to goodwill and an elimination of $16.7 million of deferred tax liabilities previously associated with those intangible assets with a corresponding deduction from goodwill. The adoption of SFAS No. 141 did not have any other material impact on the Company's financial statements. Effective March 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible Assets." SFAS No. 142 addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes Accounting Principles Board Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and indefinite lived intangible assets are no longer amortized but are reviewed at least annually for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives. Upon adoption of SFAS No. 142, the Company determined that certain of its intangible assets met the criteria to be considered indefinite lived and, accordingly, ceased their amortization effective March 1, 2002. These intangible assets consisted principally of trademarks. 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. Nonamortizable intangible assets will be tested for impairment in accordance with the provisions of SFAS No. 142 and amortizable intangible assets will be tested for impairment in accordance with the provisions of SFAS No. 144 (as defined below). Note 5 provides a summary of intangible assets segregated between amortizable and nonamortizable amounts. The Company has completed its impairment testing for nonamortizable intangible assets pursuant to the requirements of SFAS No. 142. No instances of impairment were noted during this process. The Company expects to complete the transitional impairment test for goodwill by the end of the six month period ended August 31, 2002, pending completion of the fair value measurement of the Company's reporting units. The Company is currently assessing the financial impact of this provision of SFAS No. 142 on its financial statements. 4 The following table presents earnings and earnings per share information for the comparative quarters as if the nonamortization provisions of SFAS No. 142 had been applied as of March 1, 2001:

The changes in the carrying amount of goodwill for the three months ended May 31, 2002, are as follows:

Effective March 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 144 ("SFAS No. 144"), "Accounting for the Impairment or Disposal of Long-Lived Assets," which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. SFAS 5 No. 144 supersedes Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of Accounting Principles Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements. Effective March 1, 2002, the Company adopted EITF Issue No. 01-09 ("EITF No. 01-09"), "Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor's Products)" which codified various issues related to the income statement classification of certain promotional payments under EITF Issue No. 00-14, "Accounting for Certain Sales Incentives," EITF Issue No. 00-22, "Accounting for 'Points' and Certain Other Time-Based or Volume-Based Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered in the Future," and EITF Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." EITF No. 01-09 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. The Company previously reported such costs as selling, general and administrative expenses. As a result of adopting EITF No. 01-09 on March 1, 2002, the Company has restated net sales, cost of product sold, and selling, general and administrative expenses for the three months ended May 31, 2001. Net sales were reduced by $46.9 million, cost of product sold was increased by $2.4 million, and selling, general and administrative expenses were reduced by $49.3 million. This reclassification did not effect operating income or net income. 3) ACQUISITIONS: On March 5, 2001, in an asset acquisition, the Company acquired several well-known premium wine brands, including Vendange, Nathanson Creek, Heritage, and Talus, working capital (primarily inventories), two wineries in California, and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River Vintners Group (the "Turner Road Vintners Assets"). The purchase price of the Turner Road Vintners Assets, including assumption of indebtedness of $9.4 million, was $289.8 million. The acquisition was financed by the proceeds from the sale of the February 2001 Senior Notes and revolving loan borrowings under the senior credit facility. The Turner Road Vintners Assets acquisition was accounted for using the purchase method; accordingly, the acquired net assets were recorded at fair market value at the date of acquisition. Based upon the final appraisal, the excess of the purchase price over the fair market value of the net assets acquired (goodwill), $147.3 million, is no longer being amortized, but will be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The results of operations of the Turner Road Vintners Assets are reported in the Popular and Premium Wine segment and have been included in the Consolidated Statements of Income since the date of acquisition. On March 26, 2001, in an asset acquisition, the Company acquired certain wine brands, wineries, working capital (primarily inventories), and other related assets from Corus Brands, Inc. (the "Corus Assets"). In this acquisition, the Company acquired several well-known premium wine brands primarily sold in the northwestern United States, including Covey Run, Columbia, Ste. Chapelle and Alice White. The purchase price of the Corus Assets, including assumption of indebtedness (net of cash acquired) of $3.0 million, was $52.3 million plus an earn-out over six years based on the performance of the brands. As of May 31, 2002, the Company has paid an earn-out in the amount of $0.8 million. In connection with the transaction, the Company also entered into long-term grape supply agreements with affiliates of Corus Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards. The acquisition was 6 financed with revolving loan borrowings under the senior credit facility. The Corus Assets acquisition was accounted for using the purchase method; accordingly, the acquired net assets were recorded at fair market value at the date of acquisition. Based upon the final appraisal, the excess of the purchase price over the fair market value of the net assets acquired (goodwill), $48.9 million, is no longer being amortized, but will be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The results of operations of the Corus Assets are reported in the Popular and Premium Wine segment and have been included in the Consolidated Statements of Income since the date of acquisition. On July 2, 2001, the Company acquired all of the outstanding capital stock of Ravenswood Winery, Inc. ("Ravenswood"). Ravenswood produces, markets and sells super-premium and ultra-premium California wine, primarily under the Ravenswood brand name. The preliminary purchase price of Ravenswood, including assumption of indebtedness of $2.9 million, was $151.8 million. The purchase price is subject to final closing adjustments which the Company does not expect to be material. The purchase price was financed with revolving loan borrowings under the senior credit facility. The Ravenswood acquisition was accounted for using the purchase method; accordingly, the acquired net assets were recorded at fair market value at the date of acquisition, subject to final appraisal. The excess of the purchase price over the estimated fair market value of the net assets acquired (goodwill), $96.9 million, is not amortizable and will be tested for impairment at least annually in accordance with the provisions of SFAS No. 142. The Ravenswood acquisition was consistent with the Company's strategy of further penetrating the higher gross profit margin super-premium and ultra-premium wine categories. The results of operations of Ravenswood are reported in the Fine Wine segment and have been included in the Consolidated Statements of Income since the date of acquisition. The following table summarizes the estimated fair values of the Ravenswood assets acquired and liabilities assumed at the date of acquisition. The Company is in the process of obtaining third-party valuations of certain assets; thus, the allocation of the purchase price is subject to refinement which the Company does not expect to be material. Estimated fair values at July 2, 2001, are as follows: Current assets $ 38,044 Property, plant and equipment 14,994 Other assets 353 Trademarks 45,000 Goodwill 96,913 --------- Total assets acquired 195,304 Current liabilities 14,019 Long-term liabilities 32,347 --------- Total liabilities assumed 46,366 --------- Net assets acquired $ 148,938 ========= The trademarks are not subject to amortization. None of the goodwill is expected to be deductible for tax purposes. The following table sets forth the unaudited historical and unaudited pro forma results of operations of the Company for the three months ended May 31, 2002 and May 31, 2001, respectively. The unaudited pro forma results of operations for the three months ended May 31, 2001, gives effect to the acquisitions of the Turner Road Vintners Assets, the Corus Assets and Ravenswood as if they occurred on March 1, 2001. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of goodwill, interest expense on the acquisition financing and related income tax effects. The unaudited pro forma results of operations are based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations do not purport to present what the Company's results of operations would actually have been if the aforementioned 7 transactions had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company's financial position or results of operations at any future date or for any future period. For the Three Months Ended May 31, ---------------------- 2002 2001 ---------- ---------- (in thousands, except per share data) Net sales $ 648,941 $ 606,090 Income before income taxes $ 61,563 $ 37,100 Net income $ 37,369 $ 22,261 Earnings per common share: Basic $ 0.42 $ 0.27 ========== ========== Diluted $ 0.40 $ 0.26 ========== ========== Weighted average common shares outstanding: Basic 88,845 82,508 Diluted 92,353 85,051 4) INVENTORIES: Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following: May 31, February 28, 2002 2002 ----------- ------------ (in thousands) Raw materials and supplies $ 34,007 $ 34,126 In-process inventories 499,920 524,373 Finished case goods 233,795 219,087 ----------- ------------ $ 767,722 $ 777,586 =========== ============ 5) INTANGIBLE ASSETS: The major components of intangible assets are:

The difference between the gross carrying amount and net carrying amount for each item presented is attributable to accumulated amortization. Amortization expense for intangible assets was 8 $0.6 million for the three months ended May 31, 2002. Estimated amortization expense for each of the five succeeding fiscal years is as follows: (in thousands) 2003 $ 2,249 2004 $ 1,625 2005 $ 1,427 2006 $ 1,361 2007 $ 365 6) INVESTMENT IN JOINT VENTURE: On July 31, 2001, the Company and BRL Hardy Limited completed the formation of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the Company and BRL Hardy Limited. The Company and PWP are parties to the following agreements: crushing, wine production, bottling, storage, and related services agreement; inventory supply agreement; sublease and assumption agreements pertaining to certain vineyards, which agreements include a market value adjustment provision; and a market value adjustment agreement relating to a certain vineyard lease held by PWP. As of May 31, 2002, amounts related to the above agreements were not material. On October 16, 2001, the Company 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 Blackstone Assets"). The purchase price of the Blackstone Assets was $138.0 million and was financed equally by the Company and Hardy. The Company used revolving loan borrowings under its senior credit facility to fund the Company's portion of the transaction. As of May 31, 2002, the Company's investment balance, which is accounted for under the equity method, was $113.3 million and is included on the Consolidated Balance Sheets in other assets. The carrying amount of the investment is less than the Company's equity in the underlying net assets of PWP by $4.1 million. This amount is included in earnings as the assets are used by PWP. 7) EARNINGS PER COMMON SHARE: Basic earnings per common share exclude the effect of common stock equivalents and are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period for Class A Common Stock and Class B Convertible Common Stock. Diluted earnings per common share reflect the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Diluted earnings per common share assume the exercise of stock options using the treasury stock method. The computation of basic and diluted earnings per common share is as follows: For the Three Months Ended May 31, ---------------------- 2002 2001 -------- -------- (in thousands, except per share data) Income applicable to common shares $ 37,369 $ 23,843 -------- -------- Weighted average common shares outstanding - basic 88,845 82,508 Stock options 3,508 2,543 -------- -------- Weighted average common shares outstanding - diluted 92,353 85,051 ======== ======== EARNINGS PER COMMON SHARE - BASIC $ 0.42 $ 0.29 ======== ======== EARNINGS PER COMMON SHARE - DILUTED $ 0.40 $ 0.28 ======== ======== 9 Stock options to purchase 2.8 million shares of Class A Common Stock at a weighted average price per share of $17.74 were outstanding during the three months ended May 31, 2001, but were not included in the computation of the diluted earnings per common share because the stock options' exercise price was greater than the average market price of the Class A Common Stock for the period. 8) COMPREHENSIVE INCOME: Comprehensive income consists of net income, foreign currency translation adjustments, net unrealized gains or losses on derivative instruments and minimum pension liability adjustments. The reconciliation of net income to comprehensive income is as follows:

Accumulated other comprehensive loss includes the following components:

9) CONDENSED CONSOLIDATING FINANCIAL INFORMATION: The following information sets forth the condensed consolidating balance sheets of the Company as of May 31, 2002, and February 28, 2002, and the condensed consolidating statements of income and cash flows for the three months ended May 31, 2002 and 2001, for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company's senior notes and senior subordinated notes ("Subsidiary Guarantors") and the combined subsidiaries of the Company which are not Subsidiary Guarantors, primarily Matthew Clark, which is included in the U.K. Brands and Wholesale segment ("Subsidiary Nonguarantors"). The Subsidiary Guarantors are wholly owned and the guarantees are full, unconditional, joint and several obligations of each of the Subsidiary Guarantors. Separate financial statements for the Subsidiary Guarantors of the Company are not presented because the Company has determined that such financial statements would not be material to investors. The Subsidiary Guarantors comprise all of the direct and indirect subsidiaries of the Company, other than Matthew Clark, the Company's Canadian subsidiary and certain other subsidiaries which individually, and in the aggregate, are inconsequential. The accounting policies of the parent company, the Subsidiary 10 Guarantors and the Subsidiary Nonguarantors are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002, and include the accounting changes described in Note 2 herein. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.

10) BUSINESS SEGMENT INFORMATION: The Company reports its operating results in five segments: Popular and Premium Wine (branded popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider and bottled water, and wholesale wine, cider, distilled spirits, beer and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine) and Corporate Operations and Other (primarily corporate related items). Segment selection was based upon internal organizational structure, the way in which these operations are managed and their performance evaluated by management and the Company's Board of Directors, and the availability of separate financial results. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002, and include the accounting changes described in Note 2 herein. The Company evaluates performance based on operating income of the respective business units. 14 Segment information is as follows:

11) 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. The Company is required to adopt SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently assessing the financial impact of SFAS No. 143 on its financial statements. 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 16 corrections, clarify meanings, or describe their applicability under changed conditions. The Company is required to adopt 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 adopted on March 1, 2002. The adoption of the applicable provisions of SFAS No. 145 did not have a material impact on the Company's financial statements. The adoption of the remaining provisions will result in a reclassification of the extraordinary loss related to the extinguishment of debt recorded in the fourth quarter of the fiscal year ended February 28, 2002 ($1.6 million, net of income taxes), to increase nonoperating expense ($2.6 million) and to decrease the provision for income taxes ($1.0 million). ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS - ------- ----------------------------------------------------------------------- OF OPERATIONS ------------- INTRODUCTION - ------------ The Company is a leader in the production and marketing of beverage alcohol brands in North America and the United Kingdom. As the second largest supplier of wine, the second largest marketer of imported beer and the third largest supplier of distilled spirits, the Company is the largest single-source supplier of these products in the United States. In the United Kingdom, the Company is a leading marketer of wine, the second largest producer and marketer of cider and a leading independent drinks wholesaler. The Company reports its operating results in five segments: Popular and Premium Wine (branded popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider and bottled water, and wholesale wine, cider, distilled spirits, beer and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine) and Corporate Operations and Other (primarily corporate related items). During April 2002, the Board of Directors of the Company approved a two-for-one stock split of both the Company's Class A Common Stock and Class B Common Stock, which was distributed in the form of a stock dividend on May 13, 2002, to stockholders of record on April 30, 2002. Pursuant to the terms of the stock dividend, each holder of Class A Common Stock received one additional share of Class A stock for each share of Class A stock held, and each holder of Class B Common Stock received one additional share of Class B stock for each share of Class B stock held. All share and per share amounts in this Quarterly Report on Form 10-Q are adjusted to give effect to the common stock split. The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for the three months ended May 31, 2002 ("First Quarter 2003"), compared to the three months ended May 31, 2001 ("First Quarter 2002"), and (ii) financial liquidity and capital resources for First Quarter 2003. This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included herein and in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002 ("Fiscal 2002"). As discussed in Note 2 to the financial statements, the Company adopted SFAS No. 142 and EITF No. 01-09 on March 1, 2002. ACQUISITIONS IN FISCAL 2002 On July 2, 2001, the Company acquired all of the outstanding capital stock of Ravenswood Winery, Inc. ("Ravenswood"), a leading premium wine producer based in Sonoma, California. Ravenswood produces, markets and sells super-premium and ultra-premium California wine primarily 17 under the Ravenswood brand name. The vast majority of the wine Ravenswood produces and sells is red wine, including the number one super-premium Zinfandel in the United States. The results of operations of Ravenswood are reported in the Fine Wine segment and have been included in the consolidated results of operations of the Company since the date of acquisition. On March 26, 2001, in an asset acquisition, the Company acquired certain wine brands, wineries, working capital (primarily inventories), and other related assets from Corus Brands, Inc. (the "Corus Assets"). In this acquisition, the Company acquired several well-known premium wine brands primarily sold in the northwestern United States, including Covey Run, Columbia, Ste. Chapelle and Alice White. In connection with the transaction, the Company also entered into long-term grape supply agreements with affiliates of Corus Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards. The results of operations of the Corus Assets are reported in the Popular and Premium Wine segment and have been included in the consolidated results of operations of the Company since the date of acquisition. On March 5, 2001, in an asset acquisition, the Company acquired several well-known premium wine brands, including Vendange, Nathanson Creek, Heritage, and Talus, working capital (primarily inventories), two wineries in California, and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River Vintners Group (the "Turner Road Vintners Assets"). The results of operations of the Turner Road Vintners Assets are reported in the Popular and Premium Wine segment and have been included in the consolidated results of operations of the Company since the date of acquisition. JOINT VENTURE On July 31, 2001, the Company and BRL Hardy Limited completed the formation of Pacific Wine Partners LLC ("PWP"), a joint venture owned equally by the Company and BRL Hardy Limited. On October 16, 2001, the Company 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 is accounted for using the equity method; accordingly, the results of operations of PWP since July 31, 2001, have been included in the equity in earnings of joint venture line in the Consolidated Statements of Income of the Company. 18 RESULTS OF OPERATIONS - --------------------- FIRST QUARTER 2003 COMPARED TO FIRST QUARTER 2002 NET SALES The following table sets forth the net sales (in thousands of dollars) by operating segment of the Company for First Quarter 2003 and First Quarter 2002.

Net sales for First Quarter 2003 increased to $648.9 million from $595.2 million for First Quarter 2002, an increase of $53.7 million, or 9.0%. Popular and Premium Wine ------------------------ Net sales for the Popular and Premium Wine segment for First Quarter 2003 decreased to $163.5 million from $166.1 million for First Quarter 2002, a decrease of $2.6 million, or (1.6)%. This decrease resulted primarily from declines in the Company's grape juice concentrate and bulk businesses partially offset by a slight increase in branded sales from sales of higher priced premium wines. 19 Imported Beer and Spirits ------------------------- Net sales for the Imported Beer and Spirits segment for First Quarter 2003 increased to $270.5 million from $241.7 million for First Quarter 2002, an increase of $28.7 million, or 11.9%. This increase resulted primarily from a 14.4% increase in imported beer sales, with volume growth exceeding the price increase on the Company's Mexican beer portfolio, which took effect in First Quarter 2003. Additionally, spirits sales increased 5.5% resulting primarily from a favorable mix towards higher priced products, particularly tequila. The Company believes that the volume growth of its Mexican beer portfolio for the quarter was the result of wholesalers replenishing inventories due to the healthy depletion and heavy retail promotion prior to and during the initial stages of the price increase. While the longer-term impact of the price increase is difficult to determine at this time, the Company believes that near-term Mexican beer sales volume may be adversely impacted as the new pricing is fully reflected at the retail level and as the wholesalers and retailers more closely manage their inventories. U.K. Brands and Wholesale ------------------------- Net sales for the U.K. Brands and Wholesale segment for First Quarter 2003 increased to $186.8 million from $168.2 million for First Quarter 2002, an increase of $18.6 million, or 11.0%. This increase resulted primarily from a 16.7% volume increase in wholesale sales due to the addition of new accounts and increased average delivery sizes. Additionally, branded sales increased 2.7% with an increase in wine and ready-to-drink sales being partially offset by a decrease in cider sales. Fine Wine --------- Net sales for the Fine Wine segment for First Quarter 2003 increased to $34.8 million from $24.9 million for First Quarter 2002, an increase of $9.9 million, or 39.9%. This increase resulted primarily from $11.9 million of sales of the acquired brands from the Ravenswood acquisition, completed in July 2001. This increase was partially offset by an 8.0% decrease in Fine Wine's base business, which followed a robust fourth quarter of fiscal 2002 with lower volume in First Quarter 2003. GROSS PROFIT The Company's gross profit increased to $175.3 million for First Quarter 2003 from $152.7 million for First Quarter 2002, an increase of $22.6 million, or 14.8%. The dollar increase in gross profit resulted from higher beer sales, the addition of Ravenswood and a favorable mix of spirit sales towards higher margin products, particularly tequila. As a percent of net sales, gross profit increased to 27.0% for First Quarter 2003 versus 25.7% for First Quarter 2002 primarily attributable to the favorable mix of spirit sales towards higher margin products, sales of higher margin Ravenswood brands and the growth in the Mexican beer portfolio. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES Selling, general and administrative expenses increased to $89.3 million for First Quarter 2003 from $82.8 million for First Quarter 2002, an increase of $6.6 million, or 7.9%. The Company adopted SFAS No. 142 on March 1, 2002 and accordingly, stopped amortizing goodwill and other indefinite lived intangible assets. Excluding $6.4 million of amortization expense from First Quarter 2002, the Company's selling, general and administrative expenses increased $12.9 million, or 16.9%. The dollar increase in selling, general and administrative expenses resulted primarily from higher beer advertising costs and increased personnel costs to support the Company's growth. Selling, general and administrative expenses as a percent of net sales decreased to 13.8% for First Quarter 2003 as compared to 13.9% for 20 First Quarter 2002. Excluding amortization expense in First Quarter 2002, selling, general and administrative expenses as a percent of net sales increased to 13.8% for First Quarter 2003 as compared to 12.8% for First Quarter 2002. This increase was primarily due to (i) the percent increase in the Imported Beer and Spirits segment's advertising costs was greater than the percent increase in the Imported Beer and Spirits segment's net sales and (ii) the percent increase in general and administrative expenses supporting the Company's growth in the Imported Beer and Spirits segment, U.K. Brands and Wholesale segment and Corporate Operations and Other segment grew at a faster rate than the increase in the respective segment's net sales. OPERATING INCOME The following table sets forth the operating income/(loss) (in thousands of dollars) by operating segment of the Company for First Quarter 2003 and First Quarter 2002.

As a result of the above factors, consolidated operating income increased to $86.0 million for First Quarter 2003 from $69.9 million for First Quarter 2002, an increase of $16.0 million, or 22.9%. Excluding amortization expense for First Quarter 2002, operating income for Popular and Premium Wine, Imported Beer and Spirits, U.K. Brands and Wholesale and Fine Wine would have been $17.2 million, $46.1 million, $10.3 million and $8.1 million, respectively. Further, consolidated operating income would have been $76.3 million. INTEREST EXPENSE, NET Net interest expense decreased to $27.1 million for First Quarter 2003 from $30.2 million for First Quarter 2002, a decrease of $3.0 million, or (10.1)%. The decrease resulted from both a decrease in the average interest rate and a decrease in the average borrowings for the period. NET INCOME As a result of the above factors, net income increased to $37.4 million for First Quarter 2003 from $23.8 million for First Quarter 2002, an increase of $13.5 million, or 56.7%. Excluding amortization expense and the associated income tax benefit for First Quarter 2002, net income increased $9.3 million, or 32.9%. For financial analysis purposes only, the Company's earnings before interest, taxes, depreciation and amortization ("EBITDA") for First Quarter 2003 were $104.6 million, an increase of $12.7 million over EBITDA of $91.8 million for First Quarter 2002. EBITDA should not be construed as an alternative to operating income or net cash flow from operating activities and should not be construed as an indication of operating performance or as a measure of liquidity. 21 FINANCIAL LIQUIDITY AND CAPITAL RESOURCES - ----------------------------------------- GENERAL The Company's principal use of cash in its operating activities is for purchasing and carrying inventories. The Company's primary source of liquidity has historically been cash flow from operations, except during the annual fall grape harvests when the Company has relied on short-term borrowings. The annual grape crush normally begins in August and runs through October. The Company generally begins purchasing grapes in August with payments for such grapes beginning to come due in September. The Company's short-term borrowings to support such purchases generally reach their highest levels in November or December. Historically, the Company has used cash flow from operating activities to repay its short-term borrowings. The Company will continue to use its short-term borrowings to support its working capital requirements. The Company believes that cash provided by operating activities and its financing activities, primarily short-term borrowings, will provide adequate resources to satisfy its working capital, liquidity and anticipated capital expenditure requirements for both its short-term and long-term capital needs. FIRST QUARTER 2003 CASH FLOWS OPERATING ACTIVITIES Net cash provided by operating activities for First Quarter 2003 was $42.4 million, which resulted from $52.8 million in net income adjusted for noncash items, less $10.4 million representing the net change in the Company's operating assets and liabilities. The net change in operating assets and liabilities resulted primarily from a seasonal increase in accounts receivable and decreases in accrued salaries and accrued excise taxes, offset by increases in accrued advertising, income taxes payable, and accrued interest. INVESTING ACTIVITIES AND FINANCING ACTIVITIES Net cash used in investing activities for First Quarter 2003 was $12.5 million, which resulted primarily from $12.3 million of capital expenditures. Net cash used in financing activities for First Quarter 2003 was $32.7 million resulting primarily from $22.6 million of net revolving loan payments under the senior credit facility and $19.0 million of principal payments of long-term debt partially offset by $8.8 million of proceeds from employee stock option exercises. DEBT Total debt outstanding as of May 31, 2002, amounted to $1,396.0 million, a decrease of $34.0 million from February 28, 2002. The ratio of total debt to total capitalization decreased to 58.0% as of May 31, 2002, from 59.9% as of February 28, 2002. SENIOR CREDIT FACILITY As of May 31, 2002, under its senior credit facility, the Company had outstanding term loans of $264.7 million bearing a weighted average interest rate of 4.0%, $27.5 million of revolving loans bearing a weighted average interest rate of 3.2%, undrawn revolving letters of credit of $13.2 million, and $259.3 million in revolving loans available to be drawn. 22 SENIOR NOTES As of May 31, 2002, the Company had outstanding $200.0 million aggregate principal amount of 8 5/8% Senior Notes due August 2006 (the "Senior Notes"). The Senior Notes are currently redeemable, in whole or in part, at the option of the Company. As of May 31, 2002, the Company had outstanding (pound) 1.0 million ($1.5 million) aggregate principal amount of 8 1/2% Series B Senior Notes due November 2009 (the "Sterling Series B Senior Notes"). In addition, as of May 31, 2002, the Company had outstanding (pound) 154.0 million ($223.6 million, net of $0.5 million unamortized discount) aggregate principal amount of 8 1/2% Series C Senior Notes due November 2009 (the "Sterling Series C Senior Notes"). The Sterling Series B Senior Notes and Sterling Series C Senior Notes are currently redeemable, in whole or in part, at the option of the Company. Also, as of May 31, 2002, the Company had outstanding $200.0 million aggregate principal amount of 8% Senior Notes due February 2008 (the "February 2001 Senior Notes"). The February 2001 Senior Notes are currently redeemable, in whole or in part, at the option of the Company. SENIOR SUBORDINATED NOTES As of May 31, 2002, the Company had outstanding $200.0 million aggregate principal amount of 8 1/2% Senior Subordinated Notes due March 2009 (the "Senior Subordinated Notes"). The Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after March 1, 2004. Also, as of May 31, 2002, the Company had outstanding $250.0 million aggregate principal amount of 8 1/8% Senior Subordinated Notes due January 2012 (the "January 2002 Senior Subordinated Notes"). The January 2002 Senior Subordinated Notes are redeemable at the option of the Company, in whole or in part, at any time on or after January 15, 2007. The Company may also redeem up to 35% of the January 2002 Senior Subordinated Notes using the proceeds of certain equity offerings completed before January 15, 2005. 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. The Company is required to adopt SFAS No. 143 for fiscal years beginning March 1, 2003. The Company is currently assessing the financial impact of SFAS No. 143 on its financial statements. 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. 23 Lastly, SFAS No. 145 also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings, or describe their applicability under changed conditions. The Company is required to adopt 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 adopted on March 1, 2002. The adoption of the applicable provisions of SFAS No. 145 did not have a material impact on the Company's financial statements. The adoption of the remaining provisions will result in a reclassification of the extraordinary loss related to the extinguishment of debt recorded in the fourth quarter of the fiscal year ended February 28, 2002 ($1.6 million, net of income taxes), to increase nonoperating expense ($2.6 million) and to decrease the provision for income taxes ($1.0 million). INFORMATION REGARDING FORWARD-LOOKING STATEMENTS This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company's control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including statements regarding the Company's future financial position and prospects, are forward-looking statements. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. For risk factors associated with the Company and its business, which factors could cause actual results to differ materially from those set forth in, or implied by, the Company's forward-looking statements, reference should be made to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- Information about market risks for the three months ended May 31, 2002, does not differ materially from that discussed under Item 7A in the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2002. 24 PART II - OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------- -------------------------------- (a) See Index to Exhibits located on Page 27 of this Report. (b) The following Reports on Form 8-K were filed with the Securities and Exchange Commission during the quarter ended May 31, 2002: (i) Form 8-K dated April 4, 2002. This Form 8-K reported information under Items 4 and 7. (ii) Form 8-K dated April 10, 2002. This Form 8-K reported information under Item 5 and included (i) the Company's Condensed Consolidated Balance Sheets as of February 28, 2002 and February 28, 2001; (ii) the Company's Condensed Consolidated Statements of Income for the three months ended February 28, 2002 and February 28, 2001; and (iii) the Company's Condensed Consolidated Statements of Income for the year ended February 28, 2002 and February 28, 2001. (iii) Form 8-K/A dated April 4, 2002. This Form 8-K/A reported information under Items 4 and 7. 25 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CONSTELLATION BRANDS, INC. Dated: July 15, 2002 By:/s/ Thomas F. Howe -------------------------------------- Thomas F. Howe, Senior Vice President, Controller Dated: July 15, 2002 By:/s/ Thomas S. Summer -------------------------------------- Thomas S. Summer, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) 26 INDEX TO EXHIBITS (2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR SUCCESSION. 2.1 Asset Purchase Agreement dated as of February 21, 1999 by and among Diageo Inc., UDV Canada Inc., United Distillers Canada Inc. and the Company (filed as Exhibit 2 to the Company's Current Report on Form 8-K dated April 9, 1999 and incorporated herein by reference). 2.2 Stock Purchase Agreement, dated April 21, 1999, between Franciscan Vineyards, Inc., Agustin Huneeus, Agustin Francisco Huneeus, Jean-Michel Valette, Heidrun Eckes-Chantre Und Kinder Beteiligungsverwaltung II, GbR, Peter Eugen Eckes Und Kinder Beteiligungsverwaltung II, GbR, Harald Eckes-Chantre, Christina Eckes-Chantre, Petra Eckes-Chantre and Canandaigua Brands, Inc. (now known as Constellation Brands, Inc.) (filed as Exhibit 2.1 to the Company's Current Report on Form 8-K dated June 4, 1999 and incorporated herein by reference). 2.3 Stock Purchase Agreement by and between Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the Company) and Moet Hennessy, Inc. dated April 1, 1999 (filed as Exhibit 2.3 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 1999 and incorporated herein by reference). 2.4 Purchase Agreement dated as of January 30, 2001, by and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc. (a wholly-owned subsidiary of the Company) (filed as Exhibit 2.5 to the Company's Annual Report on Form 10-K for the fiscal year ended February 28, 2001 and incorporated herein by reference). 2.5 First Amendment to Purchase Agreement and Pro Forma Closing Balance Sheet, dated as of March 5, 2001, by and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc. (filed as Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2001 and incorporated herein by reference). 2.6 Second Amendment to Purchase Agreement, dated as of March 5, 2001, by and among Sebastiani Vineyards, Inc., Tuolomne River Vintners Group and Canandaigua Wine Company, Inc. (filed as Exhibit 2.6 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2001 and incorporated herein by reference). 2.7 Agreement and Plan of Merger by and among Constellation Brands, Inc., VVV Acquisition Corp. and Ravenswood Winery, Inc. dated as of April 10, 2001 (filed as Exhibit 2.5 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2001 and incorporated herein by reference). (3) ARTICLES OF INCORPORATION AND BY-LAWS. 3.1 Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2000 and incorporated herein by reference). 3.2 By-Laws of the Company (filed as Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2000 and incorporated herein by reference). (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. Not applicable. 27 (10) MATERIAL CONTRACTS. Not applicable. (11) STATEMENT RE COMPUTATION OF PER SHARE EARNINGS. Computation of per share earnings (filed herewith). (15) LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION. Not applicable. (18) LETTER RE CHANGE IN ACCOUNTING PRINCIPLES. Not applicable. (19) REPORT FURNISHED TO SECURITY HOLDERS. Not applicable. (22) PUBLISHED REPORT REGARDING MATTERS SUBMITTED TO A VOTE OF SECURITY HOLDERS. Not applicable. (23) CONSENTS OF EXPERTS AND COUNSEL. Not applicable. (24) POWER OF ATTORNEY. Not applicable. (99) ADDITIONAL EXHIBITS. Not applicable. 28