Back to GetFilings.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 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)
Registrant's telephone number, including area code (585) 218-2169
--------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Class A Common Stock New York Stock Exchange
(par value $.01 per share)
Class B Common Stock New York Stock Exchange
(par value $.01 per share)
Securities registered pursuant to Section 12(g) of the Act:
None
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) have been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the common stock held by non-affiliates of
Constellation Brands, Inc., as of May 15, 2002, was $2,127,752,903.
The number of shares outstanding with respect to each of the classes of common
stock of Constellation Brands, Inc., as of May 15, 2002, is set forth below:
Class Number of Shares Outstanding
----- ----------------------------
Class A Common Stock, par value $.01 per share 76,910,506
Class B Common Stock, par value $.01 per share 12,100,290
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement of Constellation Brands, Inc. to be issued for the Annual
Meeting of Stockholders to be held July 23, 2002 is incorporated by reference in
Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART I
ITEM 1. BUSINESS
- ------- --------
INTRODUCTION
Unless the context otherwise requires, the term "Company" refers to
Constellation Brands, Inc. and its subsidiaries, and all references to "net
sales" refer to gross revenue less excise taxes and returns and allowances to
conform with the Company's method of classification. All references to "Fiscal
2002", "Fiscal 2001" and "Fiscal 2000" shall refer to the Company's fiscal year
ended the last day of February of the indicated year.
During Fiscal 2001, the Company changed its name from Canandaigua Brands,
Inc. to Constellation Brands, Inc. The new name better reflects the Company's
dynamic growth, promising potential and diversified portfolio as well as
provides a clear distinction between the corporate parent and its operating
divisions.
Market share and industry data disclosed in this Annual Report on Form 10-K
have been obtained from the following industry and government publications: The
Gomberg-Fredrikson Report; Adams Liquor Handbook; Adams Wine Handbook; Adams
Beer Handbook; Adams Media Handbook Advance; The U.S. Wine Market: Impact
Databank Review and Forecast; The U.S. Beer Market: Impact Databank Review and
Forecast; The U.S. Spirits Market: Impact Databank Review and Forecast; NACM; AC
Nielsen; The Zenith Guide; Beer Marketer's Insights; and The Drink Pocketbook
2001. The Company has 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 2000.
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. With its broad product portfolio, the
Company believes it is distinctly positioned to satisfy an array of consumer
preferences across all beverage alcohol categories. Leading brands in the
Company's portfolio include: Franciscan Oakville Estate, Simi, Estancia,
Ravenswood, Corona Extra, Modelo Especial, St. Pauli Girl, Almaden, Arbor Mist,
Talus, Vendange, Alice White, Black Velvet, Fleischmann's, Schenley, Ten High,
Stowells of Chelsea, Blackthorn and K.
The Company's products are distributed by more than 1,000 wholesale
distributors in North America. In the United Kingdom, the Company distributes
its branded products and those of other companies to more than 16,500 customers.
The Company operates 29 production facilities throughout the world. In addition
to producing and marketing its own brands, the Company also purchases products
for resale from other producers.
The Company is a Delaware corporation incorporated on December 4, 1972, as
the successor to a business founded in 1945. Since the Company's founding in
1945 as a producer and marketer of wine products, the Company has grown through
a combination of internal growth and acquisitions. The Company's internal growth
has been driven by leveraging the Company's 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. The acquisitions
of Ravenswood Winery, Inc. ("Ravenswood"), the Corus Assets (as defined below),
the Turner Road Vintners Assets (as defined below), Forth Wines Limited ("Forth
Wines"), Franciscan Vineyards, Inc. ("Franciscan Estates"), Simi Winery, Inc.
("Simi"),
1
the Black Velvet Assets (as defined below) and Matthew Clark plc ("Matthew
Clark") continued a series of strategic acquisitions made since 1991 by which
the Company has broadened its portfolio and increased its market share, net
sales and cash flow.
COMMON STOCK SPLIT
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 have been
retroactively restated to give effect to the common stock split.
ACQUISITIONS IN FISCAL 2002, FISCAL 2001 AND FISCAL 2000 AND JOINT VENTURE
Through the acquisitions described below and prior acquisitions, the
Company has become more competitive by: diversifying its portfolio; developing
strong market positions in the growing beverage alcohol product categories of
varietal table wine and imported beer; strengthening its relationships with
wholesalers; expanding its distribution and enhancing its production
capabilities; and acquiring additional management, operational, marketing, and
research and development expertise.
ACQUISITION OF RAVENSWOOD WINERY
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 under the Ravenswood brand name. The
preliminary purchase price of Ravenswood, including assumption of indebtedness,
was $151.8 million. 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 acquired operations have been integrated into
the Fine Wine segment (as defined below).
ACQUISITION OF THE CORUS ASSETS
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 preliminary purchase price of the Corus
Assets, including assumption of indebtedness, was $52.3 million plus an earn-out
over six years based on the performance of the brands. 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.
ACQUISITION OF THE TURNER ROAD VINTNERS ASSETS
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 preliminary purchase
price of the Turner Road Vintners Assets, including assumption of indebtedness,
was $289.8 million.
2
The acquisition of the Corus Assets, along with the acquisition of the
Turner Road Vintners Assets, has strengthened the Company's portfolio in the
higher margin and growing premium table wine category. The acquired operations
have been integrated into the Popular and Premium Wine segment (as defined
below).
ACQUISITION OF FORTH WINES
On October 27, 2000, the Company acquired all of the issued Ordinary Shares
and Preference Shares of Forth Wines Limited ("Forth Wines"). The purchase
price of the shares was $4.5 million. The addition of Forth Wines further
strengthened Matthew Clark's position as one of the United Kingdom's leading
drinks wholesalers, and made Matthew Clark the leading provider of wine to the
on-premise market in Scotland. The acquired operations have been integrated
into the U.K. Brands and Wholesale segment (as defined below).
ACQUISITIONS OF FRANCISCAN ESTATES AND SIMI
On June 4, 1999, the Company purchased all of the outstanding capital stock
of Franciscan Estates and, in related transactions, purchased vineyards,
equipment and other vineyard related assets located in Northern California
(collectively the "Franciscan Acquisition"). The purchase price of the shares,
including the assumption of indebtedness, net of cash acquired, was $243.2
million. Franciscan Estates is one of the foremost super-premium and
ultra-premium wine companies in California.
Also on June 4, 1999, the Company purchased all of the outstanding capital
stock of Simi. (The acquisition of the capital stock of Simi is hereafter
referred to as the "Simi Acquisition".) The purchase price of the shares was
$57.5 million. The Simi Acquisition included the Simi winery (located in
Healdsburg, California), equipment, vineyards, inventory and worldwide ownership
of the Simi brand name. Founded in 1876, Simi is one of the oldest and best
known wineries in California, combining a strong super-premium and ultra-premium
brand with a flexible and well-equipped facility and high quality vineyards in
the key Sonoma appellation. On February 29, 2000, Simi was merged into
Franciscan Estates.
The Franciscan and Simi Acquisitions established the Company as a leading
producer and marketer of super-premium and ultra-premium wine. Together,
Franciscan Estates, Simi and Ravenswood represent one of the largest
super-premium and ultra-premium wine companies in the United States. The Company
operates Franciscan Estates, Simi and Ravenswood, and their properties, together
as a separate business segment (collectively, "Fine Wine").
ACQUISITION OF THE BLACK VELVET ASSETS
On April 9, 1999, in an asset acquisition, the Company acquired several
well-known Canadian whisky brands, including Black Velvet, the third best
selling Canadian whisky and the 16th best selling distilled spirits brand in the
United States, production facilities located in Alberta and Quebec, Canada, case
goods and bulk whisky inventories and other related assets from affiliates of
Diageo plc (collectively, the "Black Velvet Assets"). Other principal brands
acquired in the transaction were Golden Wedding, OFC, MacNaughton, McMaster's
and Triple Crown. In connection with the transaction, the Company also entered
into multi-year agreements with affiliates of Diageo plc to provide packaging
and distilling services for various brands retained by the Diageo plc
affiliates. The purchase price of the Black Velvet Assets was $183.6 million.
The addition of the Canadian whisky brands from this transaction
strengthened the Company's position in the North American distilled spirits
category, and enhanced the Company's portfolio of brands
3
and category participation. The acquired operations have been integrated into
the Imported Beer and Spirits segment (as defined below).
PACIFIC WINE PARTNERS
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 second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports. PWP has 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, all located in Monterey County, California.
The Company contributed to PWP assets with a carrying amount of $30.0
million plus $5.5 million of cash. The Company sold assets with a carrying
amount of $31.2 million to BRL Hardy (USA) Inc. ("Hardy") and received $34.9
million in cash. Hardy contributed these assets plus $5.5 million of cash to
PWP. 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.
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
preliminary purchase price of the Blackstone Assets was $138.1 million and was
financed equally by the Company and Hardy.
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.
BUSINESS SEGMENTS
The Company operates primarily in the beverage alcohol industry in North
America and the United Kingdom. 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).
Information regarding net sales, operating income and total assets of each
of the Company's business segments and information regarding geographic areas is
set forth in Note 19 to the Company's consolidated financial statements located
in Item 8 of this Annual Report on Form 10-K.
POPULAR AND PREMIUM WINE
The Popular and Premium Wine segment produces, bottles, imports and markets
wine and brandy in the United States. It is the second largest supplier of wine
in the United States and exports wine to approximately 60 countries from the
United States. This segment sells table wine, dessert wine, sparkling
4
wine and brandy. Its leading brands include Alice White, Almaden, Arbor Mist,
Covey Run, Dunnewood, Estate Cellars, Inglenook, Manischewitz, Marcus James,
Paul Masson, Talus, Taylor, Vendange, Vina Santa Carolina, Cook's, J. Roget,
Richards Wild Irish Rose, and Paul Masson Grande Amber Brandy. Most of its wine
is marketed in the $3.00 to $7.00 per 750 ml bottle price range.
As a related part of its U.S. wine business, the Popular and Premium Wine
segment is a leading grape juice concentrate producer in the United States.
Grape juice concentrate competes with other domestically produced and imported
fruit-based concentrates. Its other wine-related products and services include
bulk wine, cooking wine, grape juice and St. Regis, a leading de-alcoholized
line of wine in the United States.
IMPORTED BEER AND SPIRITS
The Imported Beer and Spirits segment imports and markets a diversified
line of beer and produces, bottles, imports and markets a diversified line of
distilled spirits. It is the second largest marketer of imported beer in the
United States and 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. Its other imported beer brands include Tsingtao from China,
Peroni from Italy and Double Diamond and Tetley's English Ale from the United
Kingdom.
The Imported Beer and Spirits segment is the third largest supplier of
distilled spirits in the United States and exports distilled spirits to
approximately 25 countries from the United States. Its principal distilled
spirits brands include Black Velvet, 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. The
Imported Beer and Spirits segment also sells distilled spirits in bulk and
provides contract production and bottling services for third parties.
U.K. BRANDS AND WHOLESALE
The U.K. Brands and Wholesale segment is a leading producer and marketer of
wine, cider and bottled water. In addition, it is the leading independent
on-premise drinks wholesaler throughout the United Kingdom. This segment also
exports its branded products to approximately 45 countries from the United
Kingdom.
The U.K. Brands and Wholesale segment's Stowells of Chelsea brand is the
best selling branded table wine in the United Kingdom. This segment is the
largest supplier of branded wine to the on-premise trade and a leading supplier
to the off-premise trade in the United Kingdom. It maintains a leading market
share position in fortified British wine through its QC and Stone's brand names
and a strong market position in the wine style drinks category through Babycham,
Country Manor and Arbor Mist.
The U.K. Brands and Wholesale segment is the second largest producer and
marketer of cider in the United Kingdom. This segment distributes its cider
brands in both the on-premise and off-premise markets. Its leading cider brands
include Blackthorn, the number two cider brand in the United Kingdom, Gaymer's
Olde English, the United Kingdom's second largest cider brand in the take-home
market, Diamond White and K. It also produces and markets Strathmore bottled
water in the United Kingdom, the fourth largest bottled water brand and a
leading sparkling water brand.
The U.K. Brands and Wholesale segment is the leading independent beverage
wholesaler to the on-premise trade in the United Kingdom and has one of the
largest customer bases in the United Kingdom, with more than 16,000 on-premise
accounts. Its wholesaling business involves the distribution
5
of branded wine, distilled spirits, cider, beer and soft drinks. While these
products are primarily produced by third parties, they also include the U.K.
Brands and Wholesale segment's branded wine, cider and water products.
FINE WINE
The Fine Wine segment is a major player in the super-premium and
ultra-premium wine market. The Fine Wine segment includes Estancia, Ravenswood,
Franciscan Oakville Estate, Simi, Veramonte, Mt. Veeder and Quintessa wines. The
portfolio of fine wines is supported by the segment's winery and vineyard
holdings in California and Chile. These brands are marketed by a dedicated sales
force, primarily focusing on high-end restaurants and fine wine shops. The Fine
Wine segment also exports its products to approximately 25 countries from the
United States.
CORPORATE OPERATIONS AND OTHER
The Corporate Operations and Other segment includes traditional corporate
related items and the results of an immaterial operation.
MARKETING AND DISTRIBUTION
NORTH AMERICA
The Company's products are distributed and sold throughout North America
through over 1,000 wholesalers, as well as through state and provincial
alcoholic beverage control agencies. The Popular and Premium Wine, Imported Beer
and Spirits and Fine Wine segments employ full-time, in-house marketing, sales
and customer service organizations to develop and service their sales to
wholesalers and state agencies.
The Company believes that the organization of its sales force into separate
segments positions it to maintain a high degree of focus on each of its
principal product categories. However, where appropriate, the Company leverages
its sales and marketing skills across the organization, particularly in national
accounts.
The Company's marketing strategy places primary emphasis upon promotional
programs directed at its broad national distribution network, and at the
retailers served by that network. The Company has extensive marketing programs
for its brands including promotional programs on both a national basis and
regional basis in accordance with the strength of the brands, point-of-sale
materials, consumer media advertising, event sponsorship, market research, trade
advertising and public relations.
UNITED KINGDOM
The Company's U.K.-produced branded products are distributed throughout the
United Kingdom by the U.K. Brands and Wholesale segment. The products are
packaged at one of three production facilities. Shipments of cider and wine are
then made to the U.K. Brands and Wholesale segment's national distribution
center for branded products. All branded products are then distributed to either
the on-premise or off-premise markets with some of the sales to on-premise
customers made through the U.K. Brands and Wholesale segment's wholesale
business. This segment's wholesale products are distributed through 11 depots
located throughout the United Kingdom. On-premise distribution channels include
hotels, restaurants, pubs, wine bars and clubs. The off-premise distribution
channels include grocers, convenience retail and cash-and-carry outlets.
6
The U.K. Brands and Wholesale segment employs full-time, in-house marketing
and sales organizations that separately target or service the off-premise
customers and the on-premise market in the United Kingdom for the U.K. Brands
and Wholesale segment's branded products and the customers of its wholesale
business.
TRADEMARKS AND DISTRIBUTION AGREEMENTS
Trademarks are an important aspect of the Company's business. The Company
sells its products under a number of trademarks, most of which the Company owns.
Throughout its segments, the Company also has various licenses and distribution
agreements, for the production and/or sale of its 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 and Imperial Spirits brands; and a
long-term license agreement with the B. Manischewitz Company, which expires in
2042, for the Manischewitz brand of kosher wine. On September 30, 1998, under
the provisions of an existing long-term license agreement, Nabisco Brands
Company agreed to transfer to Barton all of its right, title and interest to the
corporate name "Fleischmann Distilling Company" and worldwide trademark rights
to the "Fleischmann" mark for alcoholic beverages. Pending the completion of the
assignment of such interests, the license will remain in effect.
All of the Company's 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. The Company's 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 Company personnel
and other terms under the agreement, will be automatically renewed for
additional terms of five years. Changes in control of the Company or of its
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. The Company's agreement for the importation of St. Pauli
Girl expires in December 2007. Prior to their expiration, these agreements may
be terminated if the Company fails to meet certain performance criteria. The
Company believes it is currently in compliance with its material imported beer
distribution agreements. From time to time, the Company has failed, and may in
the future fail, to satisfy certain performance criteria in its distribution
agreements. Although there can be no assurance that the Company's beer
distribution agreements will be renewed, given the Company's long-term
relationships with its suppliers, the Company expects that such agreements will
be renewed prior to their expiration and does not believe that these agreements
will be terminated.
COMPETITION
The beverage alcohol industry is highly competitive. The Company competes
on the basis of quality, price, brand recognition and distribution. The
Company's beverage alcohol products compete with other alcoholic and
nonalcoholic beverages for consumer purchases, as well as shelf space in retail
stores, a presence in restaurants and marketing focus by the Company's
wholesalers. The Company competes with numerous multinational producers and
distributors of beverage alcohol products, some of which may have greater
resources than the Company. In the United States, the Popular and Premium Wine
segment's principal competitors include E & J Gallo Winery and The Wine Group.
The Imported Beer and Spirits segment's principal competitors include Heineken
USA, Molson Breweries USA, Labatt's USA, Guinness Bass Import Company,
Brown-Forman Beverages, Jim Beam Brands and Heaven Hill Distilleries, Inc. The
Fine Wine segment's principal competitors include Beringer Blass,
7
Robert Mondavi Corp., and Kendall-Jackson. In the United Kingdom, the U.K.
Brands and Wholesale segment's principal competitors include H.P. Bulmer,
Halewood Vintners, Waverley Vintners and Volvic. In connection with its
wholesale business, the U.K. Brands and Wholesale segment distributes the
branded wine of third parties that compete directly against its own wine brands.
PRODUCTION
In the United States, the Company's wine is produced from several varieties
of wine grapes grown principally in California. The grapes are crushed at the
Company's wineries and stored as wine, grape juice or concentrate. Such grape
products may be made into wine for sale under the Company's brand names, sold to
other companies for resale under their own labels, or shipped to customers in
the form of juice, juice concentrate, unfinished wine, high-proof grape spirits
or brandy. Most of the Company's wine is bottled and sold within 18 months after
the grape crush. The Company's inventories of wine, grape juice and concentrate
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.
The bourbon whiskeys, domestic blended whiskeys and light whiskeys marketed
by the Company are primarily produced and aged by the Company at its distillery
in Bardstown, Kentucky. Following the Black Velvet Assets acquisition, the
majority of the Company's Canadian whisky requirements are produced and aged at
its Canadian distilleries in Lethbridge, Alberta, and Valleyfield, Quebec. At
its Albany, Georgia, facility, the Company produces all of the neutral grain
spirits and whiskeys it uses in the production of vodka, gin and blended whiskey
it sells to customers in the state of Georgia. The Company's requirements of
Scotch whisky, tequila, mezcal and the neutral grain spirits it uses in the
production of gin and vodka for sale outside of Georgia, and other spirits
products, are purchased from various suppliers.
The Company operates three facilities in the United Kingdom that produce,
bottle and package cider, wine and water. To produce Stowells of Chelsea, wine
is imported in bulk from various countries such as Australia, Chile, Germany,
France, Spain, South Africa and the United States, which is then packaged at the
Company's facility at Bristol and distributed under the Stowells of Chelsea
brand name. The Bristol facility also produces fortified British wine and wine
style drinks. All cider production takes place at the Company's facility at
Shepton Mallet, where apples of many different varieties are purchased from U.K.
growers and crushed. This juice, along with European-sourced concentrate, is
then fermented into cider, blended and then packaged. The Strathmore brand of
bottled water (which is available in still, sparkling, and flavored varieties)
is sourced and bottled in Forfar, Scotland.
The Company operates one winery in Chile that crushes, vinifies, cellars
and bottles wine.
SOURCES AND AVAILABILITY OF RAW MATERIALS
The principal components in the production of the Company's branded
beverage alcohol products are packaging materials (primarily glass) and
agricultural products, such as grapes and grain. The Company utilizes glass and
polyethylene terephthalate ("PET") bottles and other materials such as caps,
corks, capsules, labels and cardboard cartons in the bottling and packaging of
its products. Glass bottle costs are one of the largest components of the
Company's cost of product sold. The glass bottle industry is highly
concentrated with only a small number of producers. The Company has
traditionally obtained, and continues to obtain, its glass requirements from a
limited number of producers. The Company has not experienced difficulty in
satisfying its requirements with respect to any of the foregoing and considers
its sources of supply to be adequate. However, the inability of any of the
Company's glass bottle suppliers to satisfy the Company's requirements could
adversely affect the Company's operations.
8
Most of the Company's annual grape requirements are satisfied by purchases
from each year's harvest which normally begins in August and runs through
October. The Company believes that it has adequate sources of grape supplies to
meet its sales expectations. However, in the event demand for certain wine
products exceeds expectations, the Company could experience shortages.
The Company purchases grapes from approximately 800 independent growers,
principally in the San Joaquin Valley and Central and North Coast regions of
California. The Company enters into written purchase agreements with a majority
of these growers on a year-to-year basis. The Company currently owns or leases
approximately 6,500 acres of land and vineyards, either fully bearing or under
development, in California, New York and Chile. This acreage supplies only a
small percentage of the Company's total needs. The Company continues to consider
the purchase or lease of additional vineyards, and additional land for vineyard
plantings, to supplement its grape supply.
The distilled spirits manufactured by the Company require various
agricultural products, neutral grain spirits and bulk spirits. The Company
fulfills its requirements through purchases from various sources through
contractual arrangements and through purchases on the open market. The Company
believes that adequate supplies of the aforementioned products are available at
the present time.
In the United Kingdom, the Company manufactures wine and cider from
materials that are purchased either on a contracted basis or on the open market.
In particular, supplies of cider apples are sourced through long-term supply
arrangements with owners of apple orchards. There are adequate supplies of the
various raw materials at this particular time.
GOVERNMENT REGULATION
The Company's operations in the United States are subject to extensive
federal and state regulation. These regulations cover, among other matters,
sales promotion, advertising and public relations, labeling and packaging,
changes in officers or directors, ownership or control, distribution methods and
relationships, and requirements regarding brand registration and the posting of
prices and price changes. All of the Company's operations and facilities are
also subject to federal, state, foreign and local environmental laws and
regulations and the Company is required to obtain permits and licenses to
operate its facilities.
In the United Kingdom, the Company has secured a Customs and Excise License
to carry on its excise trade. Licenses are required for all premises where wine
is produced. The Company holds a license to act as an excise warehouse
operator. Registrations have been secured for the production of cider and
bottled water. Formal approval of product labeling is not required.
In Canada, the Company's operations are also subject to extensive federal
and provincial regulation. These regulations cover, among other matters,
advertising and public relations, labeling and packaging, environmental matters
and customs and duty requirements. The Company is also required to obtain
licenses and permits to operate its facilities.
The Company believes that it is in compliance in all material respects with
all applicable governmental laws and regulations and that the cost of
administration and compliance with, and liability under, such laws and
regulations does not have, and is not expected to have, a material adverse
impact on the Company's financial condition, results of operations or cash
flows.
9
EMPLOYEES
The Company had approximately 2,960 full-time employees in the United
States at the end of April 2002, of which approximately 840 were covered by
collective bargaining agreements. Additional workers may be employed by the
Company during the grape crushing season.
The Company had approximately 1,900 full-time employees in the United
Kingdom at the end of April 2002, of which approximately 420 were covered by
collective bargaining agreements. Additional workers may be employed during the
peak season.
The Company had approximately 220 full-time employees in Canada at the end
of April 2002, of which approximately 170 were covered by collective bargaining
agreements.
The Company considers its employee relations generally to be good.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K 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 Annual
Report on Form 10-K, including the statements under this Item 1 "Business" and
Item 7 "Management's Discussion and Analysis of Financial Condition and Results
of Operations" regarding our business strategy, future financial position,
prospects, plans and objectives of management, as well as information concerning
expected actions of third parties are forward-looking statements. All
forward-looking statements speak only as of the date of this Annual Report on
Form 10-K. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to the
risks and uncertainties of ordinary business operations, important factors that
could cause actual results to differ materially from those set forth in, or
implied by the Company's forward-looking statements contained in this Annual
Report on Form 10-K are as follows:
COMPETITION COULD HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
The Company is in a highly competitive industry and the dollar amount, and
unit volume, of its sales could be negatively affected by its 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
the Company's products. Wholesaler, retailer and consumer purchasing decisions
are influenced by, among other things, the perceived absolute or relative
overall value of the Company's products, including their quality or 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, the Company's products. The Company could
also experience higher than expected selling, general and administrative
expenses if the Company finds it necessary to increase the number of its
personnel or advertising or promotional expenditures to maintain its competitive
position or for other reasons.
10
INCREASE IN EXCISE TAXES AND GOVERNMENT RESTRICTIONS COULD HAVE A MATERIAL
ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
In the United States, the federal government and individual states impose excise
taxes on beverage alcohol products in varying amounts which have been subject to
change. In addition, the beverage alcohol products industry is subject to
extensive regulation by state and federal agencies. The federal U.S. Bureau of
Alcohol, Tobacco and Firearms and the various state liquor authorities regulate
such matters as licensing requirements, trade and pricing practices, permitted
and required labeling, advertising and relations with wholesalers and retailers.
Certain federal and state regulations also require warning labels and signage.
In the United Kingdom, Matthew Clark carries on its operations under a Customs
and Excise License. Licenses are required for all premises where wine is
produced. Matthew Clark holds a license to act as an excise warehouse operator
and registrations have been secured for the production of cider and bottled
water. Increases in excise taxes on beverage alcohol products in the United
States or the United Kingdom, if enacted, could materially and adversely affect
the Company's financial condition or results of operations. New or revised
regulations or increased licensing fees and requirements could also have a
material adverse effect on the Company's financial condition or results of
operations.
THE COMPANY RELIES ON THE PERFORMANCE OF WHOLESALE DISTRIBUTORS FOR THE SUCCESS
OF ITS BUSINESS.
In the United States, the Company sells its products principally to
wholesalers for resale to retail outlets including grocery stores, package
liquor stores, club and discount stores and restaurants. The replacement or poor
performance of the Company's major wholesalers or the Company's inability to
collect accounts receivable from the Company's major wholesalers could
materially and adversely affect the Company's results of operations and
financial condition. Distribution channels for beverage alcohol products have
been characterized in recent years by rapid change, including consolidations of
certain wholesalers. In addition, wholesalers and retailers of the Company's
products offer products which compete directly with the Company's products for
retail shelf space and consumer purchases. Accordingly, there is a risk that
these wholesalers or retailers may give higher priority to products of the
Company's competitors. In the future, the Company's wholesalers and retailers
may not continue to purchase the Company's products or provide the Company's
products with adequate levels of promotional support.
THE COMPANY'S BUSINESS COULD BE ADVERSELY AFFECTED BY A GENERAL DECLINE IN THE
CONSUMPTION OF PRODUCTS THE COMPANY SELLS.
In the United States, notwithstanding the fact that there have been modest
increases in consumption of beverage alcohol in the most recent few years, the
overall per capita consumption of beverage alcohol products by adults (ages 21
and over) has declined substantially over the past 20 years. A general decline
in consumption could be caused by 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 and state excise taxes.
11
THE COMPANY GENERALLY DOES NOT HAVE LONG-TERM SUPPLY CONTRACTS AND THE COMPANY
IS SUBJECT TO SUBSTANTIAL PRICE FLUCTUATIONS FOR GRAPES AND GRAPE-RELATED
MATERIALS; THE COMPANY HAS A LIMITED GROUP OF SUPPLIERS OF GLASS BOTTLES.
The Company's business is heavily dependent upon raw materials, such as
grapes, grape juice concentrate, grains, alcohol and packaging materials from
third-party suppliers. The Company could experience raw material supply,
production or shipment difficulties which could adversely affect the Company's
ability to supply goods to its customers. The Company is also directly affected
by increases in the costs of such raw materials. In the past, the Company has
experienced dramatic increases in the cost of grapes. Although the Company
believes it has adequate sources of grape supplies, in the event demand for
certain wine products exceeds expectations, the Company could experience
shortages. In addition, one of the Company's largest components of cost of goods
sold is that of glass bottles, which have only a small number of producers. The
inability of any of the Company's glass bottle suppliers to satisfy its
requirements could adversely affect the Company's business.
CURRENCY RATE FLUCTUATIONS/FOREIGN OPERATIONS.
The Company has operations in different countries and, therefore, is
subject to the risks associated with currency fluctuations. The Company could
experience changes in its ability to obtain or hedge against foreign currency,
foreign exchange rates and fluctuations in those rates. The Company could also
be affected by nationalizations or unstable governments or legal systems or
intergovernmental disputes. These currency, economic and political
uncertainties may affect the Company's results, especially to the extent these
matters, or the decisions, policies or economic strength of the Company's
suppliers, affect the Company's foreign operations or imported beer products.
THE COMPANY'S ACQUISITION OR JOINT VENTURE STRATEGIES MAY NOT BE SUCCESSFUL.
The Company has made a number of acquisitions, including the recent
acquisitions of Ravenswood, the Turner Road Vintners Assets and the Corus
Assets, and anticipates that it may, from time to time, acquire additional
businesses, assets or securities of companies that the Company believes would
provide a strategic fit with its business. In addition, the Company recently
entered into a joint venture, PWP, with BRL Hardy. Also, PWP completed its
acquisition of the Blackstone Assets and may acquire other businesses. The
Company may enter into additional joint ventures. Acquired business will need to
be integrated with the Company's existing operations. There can be no assurance
that the Company will effectively assimilate the business or product offerings
of acquired companies into its business or product offerings. Any acquisitions
will also be accompanied by risks such as potential exposure to unknown
liabilities of acquired companies and 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 the Company's business and
the diversion of management time and attention. The Company shares control of
PWP equally with BRL Hardy, and may not have majority interest or control of any
future joint venture. 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 those of the joint venture or the Company. There is also risk
that the Company's joint venture partners may be unable to meet their economic
or other obligations and that the Company may be required to fulfill those
obligations alone. The Company's failure or the failure of an entity in which
the Company has a joint venture interest to adequately manage the risks
associated with any acquisitions or joint ventures could have a material adverse
effect on the Company's financial condition or results of operations.
12
THE COMPANY HAS A MATERIAL AMOUNT OF GOODWILL, AND IF THE COMPANY IS REQUIRED TO
WRITE DOWN GOODWILL DUE TO IMPAIRMENT, IT WOULD REDUCE THE COMPANY'S NET INCOME,
WHICH IN TURN COULD MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S RESULTS OF
OPERATIONS.
Approximately $675.2 million (net of accumulated amortization), or 22.0%,
of our total assets as of February 28, 2002, represented unamortized goodwill.
Goodwill is the amount by which the costs of an acquisition accounted for using
the purchase method exceeds the fair market value of the net assets acquired.
The Company was required to record goodwill as an intangible asset on the
balance sheet and to amortize it over a period of years. The Company has
historically amortized goodwill on a straight-line basis over a period of 40
years. Even though it reduced the Company's net income for accounting purposes,
a portion of the amortization of goodwill is deductible for tax purposes. Prior
to March 1, 2002, the Company was required to evaluate periodically whether the
Company could recover its remaining goodwill from the undiscounted future cash
flows that the Company expected to receive from the operations of acquired
businesses. If these undiscounted cash flows were less than the carrying value
of the associated goodwill, the goodwill was deemed to be impaired and the
Company would have reduced the carrying value of the goodwill to equal the
discounted future cash flows and recorded the amount of the reduction as a
charge against net income.
On July 20, 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets"
("SFAS No. 142"). SFAS No. 142 became effective on July 1, 2001, for
acquisitions occurring on or after that date and has been adopted by the Company
on March 1, 2002, for acquisitions that occurred prior to July 1, 2001. SFAS No.
142 results in goodwill no longer being amortized. Instead, goodwill is subject
to a periodic impairment evaluation based on the fair value of the reporting
unit. Reductions in the Company's net income caused by a write-down of goodwill
could materially and adversely affect the Company's results of operations.
THE TERMINATION OR NON-RENEWAL OF IMPORTED BEER DISTRIBUTION AGREEMENTS COULD
HAVE A MATERIAL ADVERSE EFFECT ON THE COMPANY'S BUSINESS.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products which
are subject to renewal from time to time. Our exclusive 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 the Company 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, these agreements may be
terminated if the Company fails to meet certain performance criteria. The
Company believes that it is currently in compliance with all of its material
imported beer distribution agreements. From time to time the Company has failed,
and may in the future fail, to satisfy certain performance criteria in the
Company's distribution agreements. It is possible that the Company's beer
distribution agreements may not be renewed or may be terminated prior to
expiration.
THE COMPANY'S INDEBTEDNESS COULD HAVE A MATERIAL ADVERSE EFFECT ON ITS FINANCIAL
HEALTH.
The Company has incurred substantial indebtedness to finance its
acquisitions and may incur substantial additional indebtedness in the future to
finance further acquisitions. The Company's ability to satisfy its financial
obligations under the Company's indebtedness outstanding from time to time will
depend upon the Company's 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 the
13
Company's control. Therefore, there can be no assurance that the Company's cash
flow from operations will be sufficient to meet all of its debt service
requirements and to fund its capital expenditure requirements.
The Company's current and future debt service obligations and covenants
could have important consequences. Such obligations and covenants, include and
may include the following:
- the Company's ability to obtain financing for future working capital
needs or acquisitions or other purposes may be limited;
- a significant portion of the Company's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness,
thereby reducing funds available for operations;
- the Company is subject to restrictive covenants that could limit its
ability to conduct its business; and
- the Company may be more vulnerable to adverse economic conditions than
less leveraged competitors and, thus, may be limited in its ability to
withstand competitive pressures.
The restrictive covenants included in the Company's senior credit facility
and its indentures 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. The senior credit facility also contains 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 the Company's ability to conduct
business. A failure to comply with the obligations contained in the senior
credit facility or its indentures could result in an event of default under such
agreements, which could require the Company to immediately repay the related
debt and also debt under other agreements that may contain cross-acceleration or
cross-default provisions.
-----------------------------
ITEM 2. PROPERTIES
- ------- ----------
The Company consists of four business operating segments. Through these
business segments, the Company currently operates wineries, distilling plants,
bottling plants, and cider and water producing facilities, most of which include
warehousing and distribution facilities on the premises. The Company also
operates separate distribution centers under the U.K. Brands and Wholesale
segment's wholesaling business. The Company believes that all of its facilities
are in good condition and working order and have adequate capacity to meet its
needs for the foreseeable future. The Company's corporate headquarters are
located in offices leased in Fairport, New York.
POPULAR AND PREMIUM WINE
The Popular and Premium Wine segment maintains its headquarters in owned
and leased offices in Canandaigua, New York. It operates three wineries in New
York, located in Canandaigua, Naples and Batavia, six wineries in California,
located in Madera, Lodi, Escalon, Fresno and Ukiah, two wineries in Washington,
located in Woodinville and Sunnyside, and one winery in Caldwell, Idaho. All of
the facilities in which these wineries operate are owned, except for the
wineries in Batavia (New York), Caldwell (Idaho) and Woodinville (Washington),
which are leased. This segment considers 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
14
wine and produces grape juice concentrate. The Canandaigua winery crushes grapes
and produces, bottles and distributes wine.
This segment currently owns or leases 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 maintains its headquarters in leased
offices in Chicago, Illinois. It owns and operates 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, which were acquired in connection with the Black
Velvet Acquisition, are located in Valleyfield, Quebec and Lethbridge, Alberta.
This segment considers 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 the Company 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 operates
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 considers 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 maintains its headquarters in owned
offices in Bristol, England. It currently owns and operates two facilities in
England, located in Bristol and Shepton Mallet and one facility in Scotland,
located in Forfar. This segment considers 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 operates 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. To
support its wholesaling business, this segment operates 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 the Company. This segment has been and will continue
consolidating the operations of its wholesaling distribution centers.
FINE WINE
The Fine Wine segment maintains its headquarters in offices owned in
Rutherford, California. Through this segment, the Company owns and operates six
wineries in the United States, one of which is on land that is leased, and,
through a majority owned subsidiary, operates one winery in Chile. All six
wineries in the United States are located in the state of California, in
Rutherford, Healdsburg, Monterey County, Napa County and two in Sonoma County.
The winery in Chile is located in the Casablanca Valley. This segment considers
its principal wineries to be one of its wineries in Sonoma County (California)
and its wineries located in Rutherford (California), Healdsburg (California),
Monterey
15
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 owns and leases approximately 2,700 plantable acres of
vineyards in California and approximately 1,000 plantable acres of vineyards in
Chile.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
The Company and its 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 the
Company's financial condition, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
Not Applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to the current executive officers of the Company
is as follows:
NAME AGE OFFICE HELD
- ---- --- -----------
Richard Sands 51 Chairman of the Board, President and Chief
Executive Officer
Robert Sands 43 Group President
Alexander L. Berk 52 President and Chief Executive Officer of
Barton Incorporated
Agustin Francisco Huneeus 36 President and Chief Executive Officer of
Franciscan Vineyards, Inc.
Tim Kelly 44 Chief Operating Officer, Constellation
International
Jon Moramarco 45 President and Chief Executive Officer of
Canandaigua Wine Company, Inc.
Thomas J. Mullin 50 Executive Vice President and General Counsel
George H. Murray 55 Executive Vice President and Chief Human
Resources Officer
Richard Peters 42 Chief Operating Officer of Matthew Clark plc
Thomas S. Summer 48 Executive Vice President and Chief Financial
Officer
Richard Sands, Ph.D., has been employed by the Company in various
capacities since 1979. He was elected Executive Vice President and a director
in 1982, became President and Chief Operating Officer in May 1986 and was
elected Chief Executive Officer in October 1993. In September 1999, Mr. Sands
was elected Chairman of the Board. He is the brother of Robert Sands.
Robert Sands was appointed Group President in April 2000 and has served as
a director since January 1990. Mr. Sands also had served 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 President and Chief Executive Officer of Barton
Incorporated, a wholly owned subsidiary of the Company. In this capacity, Mr.
Berk is in charge of the Imported Beer and Spirits segment. Since 1990 and prior
to becoming Chief Executive Officer in March 1998, Mr. Berk was President and
Chief Operating Officer of Barton and from 1988 to 1990, he was the President
and Chief
16
Executive Officer of Schenley Industries. Mr. Berk has been in the beverage
alcohol industry for most of his career, serving in various positions.
Agustin Francisco Huneeus is the President and Chief Executive Officer of
Franciscan Vineyards, Inc., a wholly owned subsidiary of the Company. In this
capacity, Mr. Huneeus is in charge of the Fine Wine segment. Since December 1995
and prior to becoming President in May 2000, he served in various positions with
Franciscan, the last of which was Senior Vice President, Sales and Marketing.
From June 1994 to December 1995, he was an associate in the branded consumer
venture group of Hambrecht & Quist.
Tim Kelly joined the Company as Chief Operating Officer, Constellation
International in February 2002. Prior to joining the Company, he was employed by
Diageo plc and served as President of Guinness-Bass Import Company (a U.S.
Subsidiary of Diageo) from 1998 to 2001 and as Vice President Marketing,
Guinness Ireland from 1995 to 1998. For the previous nine years, Mr. Kelly
served in various marketing and sales positions at Coca Cola & Schweppes
Beverages.
Jon Moramarco joined Canandaigua Wine Company, Inc., a wholly owned
subsidiary of the Company, in November 1999 as its President and Chief Executive
Officer. In this capacity, Mr. Moramarco is in charge of the Popular and Premium
Wine segment. Prior to joining Canandaigua Wine Company, Inc., he served as
President and Chief Executive Officer of Allied Domecq Wines, USA since 1992.
Mr. Moramarco has more than 15 years of diverse experience in the wine industry,
including prior service as Chairman of the American Vintners Association, a
national wine trade organization.
Thomas J. Mullin joined the Company as Executive Vice President and General
Counsel in May 2000. Prior to joining the Company, 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 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.
George H. Murray joined the Company in April 1997 as Senior Vice President
and Chief Human Resources Officer and in April 2000 was elected Executive Vice
President. From August 1994 to April 1997, Mr. Murray served as Vice President
- - Human Resources and Corporate Communications of ACC Corp., an international
long distance reseller. For eight and a half years prior to that, he served in
various senior management positions with First Federal Savings and Loan
Association of Rochester, New York, including the position of Senior Vice
President of Human Resources and Marketing from 1991 to 1994.
Richard Peters is the Chief Operating Officer of Matthew Clark plc, a
wholly owned subsidiary of the Company. Since May 1, 2002, in this capacity, he
is in charge of the U.K. Brands and Wholesale segment. Mr. Peters has been
employed by Matthew Clark since 1994 in various management positions, including
positions in production and operations. Prior to his employment at Matthew
Clark, for three years, he was a Management Consultant with AT Kearney,
responsible for marketing and strategy projects for a wide range of clients.
Thomas S. Summer joined the Company 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.
17
Executive officers of the Company hold office until the next Annual Meeting
of the Board of Directors and until their successors are chosen and qualify.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- ----------------------------------------------------------------------
MATTERS
-------
On September 19, 2000, when the Company changed its name to Constellation
Brands, Inc., the Company's Class A Common Stock (the "Class A Stock") and Class
B Common Stock (the "Class B Stock") began trading on the New York Stock
Exchange (R) ("NYSE") under the symbols STZ and STZ.B, respectively. From
October 12, 1999, to September 18, 2000, the Company's Class A Stock and Class B
Stock traded on the NYSE under the symbols CDB and CDB.B, respectively. Prior to
October 12, 1999, the Company's Class A Stock and Class B Stock traded on the
Nasdaq Stock Market (R) ("NASDAQ") under the symbols CBRNA and CBRNB,
respectively. (The Company delisted voluntarily its securities from NASDAQ in
order to list its Class A Stock and Class B Stock on the NYSE.)
The following tables set forth for the periods indicated the high and low
sales prices of the Class A Stock and the Class B Stock, as adjusted to give
retroactive effect to the May 13, 2002, two-for-one stock split. For all
periods of Fiscal 2002 and Fiscal 2001, the high and low sales prices of the
Class A Stock and Class B Stock reflect trades on the NYSE.
CLASS A STOCK
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Fiscal 2001
High $ 13.94 $ 13.89 $ 14.61 $ 17.15
Low $ 10.09 $ 10.95 $ 11.47 $ 11.75
Fiscal 2002
High $ 20.00 $ 23.25 $ 22.50 $ 27.18
Low $ 15.65 $ 18.40 $ 17.38 $ 19.01
CLASS B STOCK
-----------------------------------------------------
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Fiscal 2001
High $ 13.50 $ 13.75 $ 14.03 $ 16.75
Low $ 10.63 $ 12.06 $ 12.00 $ 12.25
Fiscal 2002
High $ 19.95 $ 23.00 $ 21.63 $ 26.67
Low $ 16.08 $ 19.50 $ 19.75 $ 19.93
At May 15, 2002, the number of holders of record of Class A Stock and Class
B Stock of the Company were 954 and 249, respectively.
The Company's policy is to retain all of its earnings to finance the
development and expansion of its business, and the Company has not paid any cash
dividends since its initial public offering in 1973. In addition, the Company's
current senior credit facility, the Company's indenture for its $200 million 8
5/8% Senior Notes due August 2006, its indenture for its $200 million 8% Senior
Notes due February 2008, its indenture for its $200 million 8 1/2% Senior
Subordinated Notes due March 2009, its indenture for its $250 million 8 1/8%
Senior Subordinated Notes due January 2012, its indenture for its (pound) 1
million 8 1/2% Series B Senior Notes due November 2009 and its (pound) 154
million 8 1/2% Series C Senior Notes due November 2009 restrict the payment of
cash dividends. During April 2002, the Company's Board of Directors approved a
two-for-one split of both the Company's Class A Stock and Class B Stock, which
18
was distributed in the form of a stock dividend on May 13, 2002, to stockholders
of record on April 30, 2002. All share and per share amounts have been
retroactively restated to give effect to the common stock split.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
FOR THE YEARS ENDED
----------------------------------------------------------------------------
FEBRUARY 28, FEBRUARY 28, FEBRUARY 29, FEBRUARY 28, FEBRUARY 28,
2002 2001 2000 1999 1998
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
Gross sales $ 3,633,958 $ 3,154,294 $ 3,088,699 $ 1,984,801 $ 1,632,357
Less-excise taxes (813,455) (757,609) (748,230) (487,458) (419,569)
------------ ------------ ------------ ------------ ------------
Net sales 2,820,503 2,396,685 2,340,469 1,497,343 1,212,788
Cost of product sold (1,901,462) (1,639,230) (1,618,009) (1,049,309) (869,038)
------------ ------------ ------------ ------------ ------------
Gross profit 919,041 757,455 722,460 448,034 343,750
Selling, general and
administrative expenses (576,560) (486,587) (481,909) (299,526) (231,680)
Nonrecurring charges - - (5,510) (2,616) -
------------ ------------ ------------ ------------ ------------
Operating income 342,481 270,868 235,041 145,892 112,070
Equity in earnings
of joint venture 1,667 - - - -
Interest expense, net (114,189) (108,631) (106,082) (41,462) (32,189)
------------ ------------ ------------ ------------ ------------
Income before income taxes
and extraordinary item 229,959 162,237 128,959 104,430 79,881
Provision for income taxes (91,984) (64,895) (51,584) (42,521) (32,751)
------------ ------------ ------------ ------------ ------------
Income before
extraordinary item 137,975 97,342 77,375 61,909 47,130
Extraordinary item, net of
income taxes (1,554) - - (11,437) -
------------ ------------ ------------ ------------ ------------
Net income $ 136,421 $ 97,342 $ 77,375 $ 50,472 $ 47,130
============ ============ ============ ============ ============
Earnings per common share:
Basic:
Income before
extraordinary item $ 1.62 $ 1.33 $ 1.07 $ 0.85 $ 0.63
Extraordinary item (0.02) - - (0.16) -
------------ ------------ ------------ ------------ ------------
Earnings per common
share - basic $ 1.60 $ 1.33 $ 1.07 $ 0.69 $ 0.63
============ ============ ============ ============ ============
Diluted:
Income before
extraordinary item $ 1.57 $ 1.30 $ 1.05 $ 0.82 $ 0.62
Extraordinary item (0.02) - - (0.15) -
------------ ------------ ------------ ------------ ------------
Earnings per common
share - diluted $ 1.55 $ 1.30 $ 1.05 $ 0.67 $ 0.62
============ ============ ============ ============ ============
Total assets $ 3,069,385 $ 2,512,169 $ 2,348,791 $ 1,793,776 $ 1,090,555
============ ============ ============ ============ ============
Long-term debt $ 1,293,183 $ 1,307,437 $ 1,237,135 $ 831,689 $ 309,218
============ ============ ============ ============ ============
For the fiscal years ended February 28, 2002, and February 28, 2001, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 of this Annual Report on Form 10-K and Notes to
Consolidated Financial Statements as of February 28, 2002, under Item 8 of this
Annual Report on Form 10-K.
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
19
form of a stock dividend on May 13, 2002, to stockholders of record on April 30,
2002. All share and per share amounts have been retroactively restated to give
effect to the common stock split.
ITEM 7. 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).
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the year
ended February 28, 2002 ("Fiscal 2002"), compared to the year ended February 28,
2001 ("Fiscal 2001"), and Fiscal 2001 compared to the year ended February 29,
2000 ("Fiscal 2000"), and (ii) financial liquidity and capital resources for
Fiscal 2002. This discussion and analysis should be read in conjunction with
the Company's consolidated financial statements and notes thereto included
herein.
COMMON STOCK SPLIT
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. All share and per share
amounts have been retroactively restated to give effect to the common stock
split.
ACQUISITIONS IN FISCAL 2002, FISCAL 2001 AND FISCAL 2000 AND JOINT VENTURE
ACQUISITION OF RAVENSWOOD WINERY
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 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.
20
ACQUISITION OF THE CORUS ASSETS
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.
ACQUISITION OF THE TURNER ROAD VINTNERS ASSETS
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. The acquisition of the Turner Road
Vintners Assets is significant.
ACQUISITION OF FORTH WINES
On October 27, 2000, the Company acquired all of the issued Ordinary Shares
and Preference Shares of Forth Wines Limited ("Forth Wines"). The results of
operations of Forth Wines are reported in the U.K. Brands and Wholesale segment
and have been included in the consolidated results of operations of the Company
since the date of acquisition.
ACQUISITIONS OF FRANCISCAN ESTATES AND SIMI
On June 4, 1999, the Company purchased all of the outstanding capital stock
of Franciscan Estates and, in related transactions, purchased vineyards,
equipment and other vineyard related assets located in Northern California
(collectively the "Franciscan Acquisition"). Also on June 4, 1999, the Company
purchased all of the outstanding capital stock of Simi. (The acquisition of the
capital stock of Simi is hereafter referred to as the "Simi Acquisition".) The
Simi Acquisition included the Simi winery (located in Healdsburg, California),
equipment, vineyards, inventory and worldwide ownership of the Simi brand name.
The results of operations from the Franciscan and Simi Acquisitions
(collectively, "Franciscan") are reported together in the Fine Wine segment and
have been included in the consolidated results of operation of the Company since
the date of acquisition. On February 29, 2000, Simi was merged into Franciscan
Estates.
ACQUISITION OF THE BLACK VELVET ASSETS
On April 9, 1999, in an asset acquisition, the Company acquired several
well-known Canadian whisky brands, including Black Velvet, production facilities
located in Alberta and Quebec, Canada, case goods and bulk whisky inventories
and other related assets from affiliates of Diageo plc (collectively, the "Black
Velvet Assets"). In connection with the transaction, the Company also entered
into multi-year agreements with affiliates of Diageo plc to provide packaging
and distilling services for various brands retained by the Diageo plc
affiliates. The results of operations from the Black Velvet Assets are reported
in the Imported Beer and Spirits segment and have been included in the
consolidated results of operations of the Company since the date of acquisition.
21
PACIFIC WINE PARTNERS
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 second largest wine company in Australia. PWP
produces, markets and sells a global portfolio of premium wine in the United
States, including a range of Australian imports. PWP has 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, all located in Monterey County, California.
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.
RESULTS OF OPERATIONS
- ---------------------
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2002 and Fiscal 2001.
Fiscal 2002 Compared to Fiscal 2001
-------------------------------------
Net Sales
-------------------------------------
%Increase
2002 2001 (Decrease)
----------- ----------- ----------
Popular and Premium Wine:
Branded:
External customers $ 781,662 $ 603,948 29.4 %
Intersegment 9,669 6,451 49.9 %
----------- -----------
Total Branded 791,331 610,399 29.6 %
----------- -----------
Other:
External customers 57,718 64,799 (10.9)%
Intersegment 13,751 16,562 (17.0)%
----------- -----------
Total Other 71,469 81,361 (12.2)%
----------- -----------
Popular and Premium Wine net sales $ 862,800 $ 691,760 24.7 %
----------- -----------
Imported Beer and Spirits:
Beer $ 758,800 $ 659,371 15.1 %
Spirits 288,568 285,743 1.0 %
----------- -----------
Imported Beer and Spirits net sales $ 1,047,368 $ 945,114 10.8 %
----------- -----------
U.K. Brands and Wholesale:
Branded:
External customers $ 296,770 $ 285,717 3.9 %
Intersegment 574 1,193 (51.9)%
----------- -----------
Total Branded 297,344 286,910 3.6 %
Wholesale 495,549 404,209 22.6 %
----------- -----------
U.K. Brands and Wholesale net sales $ 792,893 $ 691,119 14.7 %
----------- -----------
22
Fiscal 2002 Compared to Fiscal 2001
-------------------------------------
Net Sales
-------------------------------------
%Increase
2002 2001 (Decrease)
----------- ----------- ----------
Fine Wine:
External customers $ 141,436 $ 92,898 52.2 %
Intersegment 753 217 247.0 %
----------- -----------
Fine Wine net sales $ 142,189 $ 93,115 52.7 %
----------- -----------
Corporate Operations and Other $ - $ - N/A
----------- -----------
Intersegment eliminations $ (24,747) $ (24,423) 1.3 %
------------ -----------
Consolidated Net Sales $ 2,820,503 $ 2,396,685 17.7 %
============ ===========
Net sales for Fiscal 2002 increased to $2,820.5 million from $2,396.7
million for Fiscal 2001, an increase of $423.8 million, or 17.7%.
POPULAR AND PREMIUM WINE
Net sales for the Popular and Premium Wine segment for Fiscal 2002
increased to $862.8 million from $691.8 million for Fiscal 2001, an increase of
$171.0 million, or 24.7%. This increase resulted primarily from $188.1 million
of sales of the newly acquired brands from the Turner Road Vintners Assets and
Corus Assets acquisitions (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 $1,047.4 million from $945.1 million for Fiscal 2001, an increase
of $102.3 million, or 10.8%. This increase resulted primarily from a 15.1%
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 $792.9 million from $691.1 million for Fiscal 2001, an increase of
$101.8 million, or 14.7%. Excluding an adverse foreign currency impact of $28.9
million, net sales increased $130.7 million, or 18.9%. This local currency basis
increase resulted primarily from a 27.1% increase in wholesale sales, with the
majority of this growth coming from organic sales. Additionally, branded sales
increased 7.4% with an increase in wine sales being partially offset by a
decrease in cider sales.
FINE WINE
Net sales for the Fine Wine segment for Fiscal 2002 increased to $142.2
million from $93.1 million for Fiscal 2001, an increase of $49.1 million, or
52.7%. This increase resulted primarily from $32.9 million of 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.
23
GROSS PROFIT
The Company's gross profit increased to $919.0 million for Fiscal 2002 from
$757.5 million for Fiscal 2001, an increase of $161.6 million, or 21.3%. 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 32.6% for Fiscal 2002 from 31.6%
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 $576.6 million
for Fiscal 2002 from $486.6 million for Fiscal 2001, an increase of $90.0
million, or 18.5%. The dollar increase in selling, general and administrative
expenses resulted primarily from an increase in advertising, promotion, selling,
and general and administrative expenses associated with the brands acquired in
the March Acquisitions and the Ravenswood acquisition. In addition, there were
increases in promotion and advertising expenses associated with the Imported
Beer and Spirits segment's Mexican beer portfolio volume growth, the U.K. Brands
and Wholesale segment's branded business volume growth, and the Fine Wine
segment's portfolio volume growth. Selling, general and administrative expenses
as a percent of net sales remained virtually unchanged at 20.4% for Fiscal 2002
as compared to 20.3% for Fiscal 2001.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands
of dollars) by operating segment of the Company for Fiscal 2002 and Fiscal 2001.
Fiscal 2002 Compared to Fiscal 2001
-----------------------------------
Operating Income (Loss)
-----------------------------------
% Increase
2002 2001 (Decrease)
--------- --------- ----------
Popular and Premium Wine $ 104,781 $ 50,390 107.9 %
Imported Beer and Spirits 178,805 167,680 6.6 %
U.K. Brands and Wholesale 47,270 48,961 (3.5)%
Fine Wine 39,169 24,495 59.9 %
Corporate Operations and Other (27,544) (20,658) 33.3 %
--------- ---------
Consolidated Operating Income $ 342,481 $ 270,868 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.
24
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%.
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Fiscal 2002 were
$429.6 million, an increase of $88.3 million over EBITDA of $341.3 million for
Fiscal 2001. 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.
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2001 and Fiscal 2000.
Fiscal 2001 Compared to Fiscal 2000
--------------------------------------
Net Sales
--------------------------------------
%Increase
2001 2000 (Decrease)
----------- ----------- ----------
Popular and Premium Wine:
Branded:
External customers $ 603,948 $ 623,796 (3.2)%
Intersegment 6,451 5,524 16.8 %
----------- -----------
Total Branded 610,399 629,320 (3.0)%
----------- -----------
Other:
External customers 64,799 86,814 (25.4)%
Intersegment 16,562 1,146 1345.2 %
----------- -----------
Total Other 81,361 87,960 (7.5)%
----------- -----------
Popular and Premium Wine net sales $ 691,760 $ 717,280 (3.6)%
----------- -----------
Imported Beer and Spirits:
Beer $ 659,371 $ 570,380 15.6 %
Spirits 285,743 267,762 6.7 %
----------- -----------
Imported Beer and Spirits net sales $ 945,114 $ 838,142 12.8 %
----------- -----------
U.K. Brands and Wholesale:
Branded:
External customers $ 285,717 $ 313,027 (8.7)%
Intersegment 1,193 75 1490.7 %
----------- -----------
Total Branded 286,910 313,102 (8.4)%
Wholesale 404,209 416,644 (3.0)%
----------- -----------
U.K. Brands and Wholesale net sales $ 691,119 $ 729,746 (5.3)%
----------- -----------
Fine Wine:
External customers $ 92,898 $ 62,046 49.7 %
Intersegment 217 73 197.3 %
----------- -----------
Fine Wine net sales $ 93,115 $ 62,119 49.9 %
----------- -----------
Corporate Operations and Other $ - $ - N/A
----------- -----------
Intersegment eliminations $ (24,423) $ (6,818) 258.2 %
----------- -----------
Consolidated Net Sales $ 2,396,685 $ 2,340,469 2.4 %
=========== ===========
Net sales for Fiscal 2001 increased to $2,396.7 million from $2,340.5
million for Fiscal 2000, an increase of $56.2 million, or 2.4%.
25
POPULAR AND PREMIUM WINE
Net sales for the Popular and Premium Wine segment for Fiscal 2001
decreased to $691.8 million from $717.3 million for Fiscal 2000, a decrease of
$25.5 million, or (3.6)%. The decline resulted primarily from a decrease in
table wine sales, a decrease in sparkling wine sales as third quarter 2000
included the impact of sales associated with Millennium activities, and a
decrease in grape juice concentrate sales. These decreases were partially offset
by increases in sales of Paul Masson Grande Amber and Arbor Mist.
IMPORTED BEER AND SPIRITS
Net sales for the Imported Beer and Spirits segment for Fiscal 2001
increased to $945.1 million from $838.1 million for Fiscal 2000, an increase of
$107.0 million, or 12.8%. This increase resulted primarily from volume growth
and selling price increases in the Mexican beer portfolio, selling price
increases on tequila products and the inclusion of $11.3 million of incremental
net sales during the first quarter of Fiscal 2001 from the Canadian whisky
brands acquired as part of the Black Velvet Assets acquisition, which was
completed in April 1999.
U.K. BRANDS AND WHOLESALE
Net sales for the U.K. Brands and Wholesale segment for Fiscal 2001
decreased to $691.1 million from $729.7 million for Fiscal 2000, a decrease of
$38.6 million, or (5.3)%. This decrease resulted primarily from an adverse
foreign currency impact of $58.8 million. On a local currency basis, net sales
increased 2.8% primarily due to an increase in wholesale sales, including sales
from the recent Forth Wines acquisition, an increase in branded table wine
sales, and an increase in packaged cider sales. These increases were partially
offset by decreases in private label cider and draft cider sales.
FINE WINE
Net sales for the Fine Wine segment for Fiscal 2001 increased to $93.1
million from $62.1 million for Fiscal 2000, an increase of $31.0 million, or
49.9%. As the acquisition of Franciscan was completed in June 1999, this
increase resulted primarily from the inclusion of $21.9 million of net sales
from the first quarter of Fiscal 2001 and from selling price increases
instituted during the second quarter of Fiscal 2001.
GROSS PROFIT
The Company's gross profit increased to $757.5 million for Fiscal 2001 from
$722.5 million for Fiscal 2000, an increase of $35.0 million, or 4.8%. The
dollar increase in gross profit was primarily related to volume growth and
selling price increases in the Company's Mexican beer portfolio, sales
attributable to the acquisitions of Franciscan (completed in June 1999) and the
Black Velvet Assets (completed in April 1999), and increases in the Fine Wine
segment's selling prices. These increases were partially offset by an adverse
foreign currency impact. As a percent of net sales, gross profit increased to
31.6% for Fiscal 2001 from 30.9% for Fiscal 2000, resulting primarily from sales
of higher-margin distilled spirits and super-premium and ultra-premium wine
acquired in the acquisitions of the Black Velvet Assets and Franciscan,
respectively, and from improved margins resulting from selling price increases
in the Company's imported beer business and the Fine Wine segment portfolio, as
well as cost improvements in the U.K. Brands and Wholesale segment's cider and
wholesale businesses.
26
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $486.6 million
for Fiscal 2001 from $481.9 million for Fiscal 2000, an increase of $4.7
million, or 1.0%. The dollar increase in selling, general and administrative
expenses resulted primarily from an increase in selling expenses in all
operating segments, the inclusion of the Franciscan business and expenses
related to the brands acquired in the Black Velvet Assets acquisition for a full
year in Fiscal 2001, and an increase in expenses in Corporate Operations. These
increases were partially offset by a decrease in advertising and promotion
expenses, primarily in the Popular and Premium Wine segment, and a favorable
foreign currency impact. Selling, general and administrative expenses as a
percent of net sales decreased to 20.3% for Fiscal 2001 as compared to 20.6% for
Fiscal 2000 as the percent increase in net sales for Fiscal 2001 was greater
than the percent increase in selling, general and administrative expenses for
Fiscal 2001.
NONRECURRING CHARGES
The Company incurred nonrecurring charges of $5.5 million in Fiscal 2000
related to the closure of a cider production facility within the U.K. Brands and
Wholesale operating segment in the United Kingdom ($2.9 million) and to a
management reorganization within the Popular and Premium Wine operating segment
($2.6 million). No such charges were incurred in Fiscal 2001.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2001 and Fiscal 2000.
Fiscal 2001 Compared to Fiscal 2000
-----------------------------------
Operating Income (Loss)
-----------------------------------
2001 2000 % Increase
---------- ---------- ----------
Popular and Premium Wine $ 50,390 $ 47,305 6.5 %
Imported Beer and Spirits 167,680 142,931 17.3 %
U.K. Brands and Wholesale 48,961 48,473 1.0 %
Fine Wine 24,495 12,708 92.8 %
Corporate Operations and Other (20,658) (16,376) 26.1 %
---------- ----------
Consolidated Operating Income $ 270,868 $ 235,041 15.2 %
========== ==========
As a result of the above factors, operating income increased to $270.9
million for Fiscal 2001 from $235.0 million for Fiscal 2000, an increase of
$35.8 million, or 15.2%. Exclusive of the aforementioned $2.6 million in
nonrecurring charges, operating income for the Popular and Premium Wine
operating segment increased 1.0% in Fiscal 2001 from $49.9 million in Fiscal
2000. Operating income for the U.K. Brands and Wholesale operating segment,
excluding the aforementioned nonrecurring charges of $2.9 million, decreased
4.8% in Fiscal 2001 from $51.4 million in Fiscal 2000.
INTEREST EXPENSE, NET
Net interest expense increased to $108.6 million for Fiscal 2001 from
$106.1 million for Fiscal 2000, an increase of $2.5 million, or 2.4%. The
increase resulted primarily from an increase in the average interest rate which
was partially offset by a decrease in average borrowings.
NET INCOME
As a result of the above factors, net income increased to $97.3 million for
Fiscal 2001 from $77.4 million for Fiscal 2000, an increase of $20.0 million, or
25.8%.
27
For financial analysis purposes only, the Company's earnings before
interest, taxes, depreciation and amortization ("EBITDA") for Fiscal 2001 were
$341.3 million, an increase of $41.5 million over EBITDA of $299.8 million for
Fiscal 2000. 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.
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.
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 the Company's 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.
INVESTING ACTIVITIES AND FINANCING 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.
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 the Company's borrowings under its 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 the Company's senior credit facility.
28
During June 1998, the Company's Board of Directors authorized the
repurchase of up to $100.0 million of its Class A Common Stock and Class B
Common Stock. The repurchase of shares of common stock will be accomplished,
from time to time, in management's discretion and depending upon market
conditions, through open market or privately negotiated transactions. The
Company may finance such repurchases through cash generated from operations or
through the senior credit facility. The repurchased shares will become treasury
shares. As of May 15, 2002, the Company had purchased 4,075,344 shares of Class
A Common Stock at an aggregate cost of $44.9 million, or at an average cost of
$11.01 per share. No shares were repurchased during Fiscal 2002, Fiscal 2001 and
Fiscal 2000.
DEBT
Total debt outstanding as of February 28, 2002, amounted to $1,429.6
million, an increase of $63.8 million from February 28, 2001. The ratio of
total debt to total capitalization decreased to 59.9% as of February 28, 2002,
from 68.9% as of February 28, 2001.
SENIOR CREDIT FACILITY
As of February 28, 2002, under the 2000 Credit Agreement (as defined
below), the Company had outstanding term loans of $281.3 million bearing a
weighted average interest rate of 3.9%, $50.0 million of outstanding revolving
loans bearing a weighted average interest rate of 3.1%, undrawn letters of
credit of $13.2 million, and $236.8 million in revolving loans available to be
drawn.
During June 1999, the Company financed the purchase price for the
Franciscan Acquisition primarily through additional term loan borrowings under
its previous senior credit facility. The Company financed the purchase price
for the Simi Acquisition with revolving loan borrowings under the same senior
credit facility. During August 1999, as discussed below, a portion of the
Company's borrowings under that senior credit facility were repaid with the net
proceeds of its Senior Notes (as defined below) offering.
On October 6, 1999, the Company, certain of its principal operating
subsidiaries, and a syndicate of banks (the "Syndicate Banks"), for which The
Chase Manhattan Bank acts as administrative agent, entered into a senior credit
facility (as subsequently amended, the "2000 Credit Agreement"). The 2000
Credit Agreement includes both U.S. dollar and British pound sterling
commitments of the Syndicate Banks of up to, in the aggregate, the equivalent of
$1.0 billion (subject to increase as therein provided to $1.2 billion).
Proceeds of the 2000 Credit Agreement were used to repay all outstanding
principal and accrued interest on all loans under the Company's prior senior
credit facility, and are available to fund permitted acquisitions and ongoing
working capital needs of the Company and its subsidiaries.
The 2000 Credit Agreement p