Edgar Filing: CONSTELLATION BRANDS, INC.

form10q101007.htm

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2007

o	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 incorporation or organization)		(I.R.S. Employer Identification No.)

370 Woodcliff Drive, Suite 300, Fairport, New York	14450
(Address of principal executive offices)	(Zip Code)

(585) 218-3600

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check One):

Large Accelerated Filer X Accelerated Filer ___ Non-accelerated Filer ___

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of September 30, 2007, is set forth below:

Class		Number of Shares Outstanding
Class A Common Stock, Par Value $.01 Per Share		191,613,756
Class B Common Stock, Par Value $.01 Per Share		23,810,638

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. For further information regarding such forward-looking statements, risks and uncertainties, please see “Information Regarding Forward-Looking Statements” under Part I - Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)

	August 31,			February 28,
	2007			2007
ASSETS
CURRENT ASSETS:
Cash and cash investments	$	33.2		$	33.5
Accounts receivable, net		784.5			881.0
Inventories		1,922.7			1,948.1
Prepaid expenses and other		147.0			160.7
Total current assets		2,887.4			3,023.3
PROPERTY, PLANT AND EQUIPMENT, net		1,728.6			1,750.2
GOODWILL		3,354.4			3,083.9
INTANGIBLE ASSETS, net		1,216.4			1,135.4
OTHER ASSETS, net		544.3			445.4
Total assets	$	9,731.1		$	9,438.2

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to banks	$	149.8		$	153.3
Current maturities of long-term debt		307.4			317.3
Accounts payable		281.3			376.1
Accrued excise taxes		72.1			73.7
Other accrued expenses and liabilities		641.4			670.7
Total current liabilities		1,452.0			1,591.1
LONG-TERM DEBT, less current maturities		4,291.8			3,714.9
DEFERRED INCOME TAXES		473.7			474.1
OTHER LIABILITIES		324.8			240.6
STOCKHOLDERS' EQUITY:
Class A Common Stock, $.01 par value- Authorized, 315,000,000 shares; Issued, 220,341,145 shares at August 31, 2007, and 219,090,309 shares at February 28, 2007		2.2			2.2
Class B Convertible Common Stock, $.01 par value- Authorized, 30,000,000 shares; Issued, 28,820,538 shares at August 31, 2007, and 28,831,138 shares at February 28, 2007		0.3			0.3
Additional paid-in capital		1,310.3			1,271.1
Retained earnings		2,021.2			1,919.3
Accumulated other comprehensive income		477.7			349.1
		3,811.7			3,542.0
Less: Treasury stock -
Class A Common Stock, 29,082,527 shares at August 31, 2007, and 8,046,370 shares at February 28, 2007, at cost		(620.7	)		(122.3	)
Class B Convertible Common Stock, 5,005,800 shares at August 31, 2007, and February 28, 2007, at cost		(2.2	)		(2.2	)
		(622.9	)		(124.5	)
Total stockholders' equity		3,188.8			3,417.5
Total liabilities and stockholders' equity	$	9,731.1		$	9,438.2

The accompanying notes are an integral part of these statements.

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in millions, except per share data)
(unaudited)

	For the Six Months Ended August 31,						For the Three Months Ended August 31,
	2007			2006			2007			2006

SALES	$	2,343.3		$	3,145.1		$	1,167.9		$	1,714.9
Less - Excise taxes		(549.5	)		(571.7	)		(275.3	)		(297.4	)
Net sales		1,793.8			2,573.4			892.6			1,417.5
COST OF PRODUCT SOLD		(1,215.9	)		(1,840.0	)		(582.9	)		(1,002.7	)
Gross profit		577.9			733.4			309.7			414.8
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES		(388.1	)		(377.0	)		(190.5	)		(204.4	)
ACQUISITION-RELATED INTEGRATION COSTS		(3.6	)		(8.1	)		(1.6	)		(7.4	)
RESTRUCTURING AND RELATED CHARGES		(0.8	)		(24.0	)		(0.4	)		(21.7	)
Operating income		185.4			324.3			117.2			181.3
EQUITY IN EARNINGS OF EQUITY METHOD INVESTEES		155.9			0.3			80.1			0.2
INTEREST EXPENSE, net		(166.4	)		(121.2	)		(86.7	)		(72.5	)
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENT		-			55.1			-			2.6
Income before income taxes		174.9			258.5			110.6			111.6
PROVISION FOR INCOME TAXES		(73.0	)		(104.6	)		(38.5	)		(43.2	)
NET INCOME		101.9			153.9			72.1			68.4
Dividends on preferred stock		-			(4.9	)		-			(2.4	)
INCOME AVAILABLE TO COMMON STOCKHOLDERS	$	101.9		$	149.0		$	72.1		$	66.0


SHARE DATA:
Earnings per common share:
Basic - Class A Common Stock	$	0.46		$	0.67		$	0.34		$	0.30
Basic - Class B Common Stock	$	0.42		$	0.61		$	0.31		$	0.27

Diluted - Class A Common Stock	$	0.45		$	0.64		$	0.33		$	0.28
Diluted - Class B Common Stock	$	0.41		$	0.59		$	0.30		$	0.26

Weighted average common shares outstanding:
Basic - Class A Common Stock		198.472			199.943			191.308			200.316
Basic - Class B Common Stock		23.821			23.849			23.819			23.845

Diluted - Class A Common Stock		226.395			240.052			219.300			240.318
Diluted - Class B Common Stock		23.821			23.849			23.819			23.845

The accompanying notes are an integral part of these statements.

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
	For the Six Months Ended August 31,
	2007			2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	101.9		$	153.9

Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of property, plant and equipment		71.6			58.5
Stock-based compensation expense		16.9			7.8
Loss on disposal of business		6.8			17.4
Amortization of intangible and other assets		5.4			3.7
Deferred tax provision		3.4			31.1
Equity in earnings of equity method investees, net of distributed earnings		2.2			0.2
Loss on disposal or impairment of long-lived assets, net		0.7			1.4
Gain on change in fair value of derivative instrument		-			(55.1	)
Non-cash portion of loss on extinguishment of debt		-			11.8
Change in operating assets and liabilities, net of effects from purchases and sales of businesses:
Accounts receivable, net		(56.6	)		(152.1	)
Inventories		1.8			36.0
Prepaid expenses and other current assets		(9.0	)		(43.1	)
Accounts payable		(10.7	)		55.3
Accrued excise taxes		13.1			1.0
Other accrued expenses and liabilities		61.4			(57.6	)
Other, net		(31.2	)		11.2
Total adjustments		75.8			(72.5	)
Net cash provided by operating activities		177.7			81.4

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of business, net of cash acquired		(386.3	)		(1,091.8	)
Purchases of property, plant and equipment		(47.0	)		(103.1	)
Payment of accrued earn-out amount		(2.8	)		(1.1	)
Investment in equity method investee		(0.6	)		-
Proceeds from formation of joint venture		185.6			-
Proceeds from sales of businesses		3.0			28.4
Proceeds from sales of assets		2.3			1.2
Proceeds from maturity of derivative instrument		-			55.1
Other investing activities		-			(0.1	)
Net cash used in investing activities		(245.8	)		(1,111.4	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt		716.1			3,695.0
Exercise of employee stock options		12.5			33.8
Excess tax benefits from share-based payment awards		7.4			12.3
Proceeds from employee stock purchases		3.0			3.2
Purchases of treasury stock		(500.0	)		(82.0	)
Principal payments of long-term debt		(163.1	)		(2,771.5	)
Payment of financing costs of long-term debt		(6.1	)		(19.3	)
Net (repayment of) proceeds from notes payable		(2.1	)		212.1
Payment of preferred stock dividends		-			(4.9	)
Net cash provided by financing activities		67.7			1,078.7

Effect of exchange rate changes on cash and cash investments		0.1			(17.4	)

NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS		(0.3	)		31.3
CASH AND CASH INVESTMENTS, beginning of period		33.5			10.9
CASH AND CASH INVESTMENTS, end of period	$	33.2		$	42.2

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Fair value of assets acquired, including cash acquired	$	427.7		$	1,739.7
Liabilities assumed		(40.1	)		(612.4	)
Net assets acquired		387.6			1,127.3
Plus - settlement of note payable		-			2.3
Plus - payment of direct acquisition costs previously accrued		0.4			-
Less - cash acquired		(1.6	)		(34.9	)
Less - direct acquisition costs accrued		(0.1	)		(2.9	)
Net cash paid for purchases of businesses	$	386.3		$	1,091.8

The accompanying notes are an integral part of these statements.

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

AUGUST 31, 2007

1)	MANAGEMENT’S REPRESENTATIONS:

The consolidated financial statements included herein have been prepared by Constellation Brands, Inc. and its subsidiaries (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007. Results of operations for interim periods are not necessarily indicative of annual results.

2) RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:

Effective March 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”) Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with FASB Statement No. 109. FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN No. 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition (see Note 9).

3) ACQUISITIONS:

Acquisition of Svedka –

On March 19, 2007, the Company acquired the SVEDKA Vodka brand (“Svedka”) in connection with the acquisition of Spirits Marque One LLC and related business (the “Svedka Acquisition”). Svedka is a premium Swedish vodka. The acquisition of Svedka supports the Company’s strategy of expanding the Company’s premium spirits business. The acquisition provides a foundation from which the Company looks to leverage its existing and future premium spirits portfolio for growth. In addition, Svedka complements the Company’s existing portfolio of super-premium and value vodka brands by adding a premium vodka brand.

Total consideration paid in cash for the Svedka Acquisition was $385.8 million. In addition, the Company expects to incur direct acquisition costs of approximately $1.3 million. The purchase price was financed with revolver borrowings under the Company’s 2006 Credit Agreement (as defined in Note 8). In accordance with the purchase method of accounting, the acquired net assets are recorded at fair value at the date of acquisition. The purchase price was based primarily on the estimated future operating results of the Svedka business, including the factors described above.

The results of operations of the Svedka business are reported in the Constellation Spirits segment and have been included in the consolidated results of operations of the Company from the date of acquisition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed in the Svedka Acquisition at the date of acquisition. The Company is in the process of obtaining third-party valuations of certain assets and liabilities. Accordingly, the allocation of the purchase price is preliminary and subject to change. Estimated fair values at March 19, 2007, are as follows:

(in millions)
Current assets	$	20.2
Property, plant and equipment		0.1
Goodwill		349.8
Trademark		36.4
Other assets		20.7
Total assets acquired		427.2

Current liabilities		24.0
Long-term liabilities		16.1
Total liabilities assumed		40.1

Net assets acquired	$	387.1

The trademark is not subject to amortization. Approximately $85 million of the goodwill is expected to be deductible for tax purposes.

Acquisition of Vincor –

On June 5, 2006, the Company acquired all of the issued and outstanding common shares of Vincor International Inc. (“Vincor”), Canada’s premier wine company. Vincor is Canada’s largest producer and marketer of wine. At the time of the acquisition, Vincor was the world’s eighth largest producer and distributor of wine and related products by revenue and was also one of the largest wine importers, marketers and distributors in the United Kingdom (“U.K.”). Through this transaction, the Company acquired various additional winery and vineyard interests used in the production of premium, super-premium and fine wines from Canada, California, Washington State, Western Australia and New Zealand. In addition, as a result of the acquisition, the Company sources, markets and sells premium wines from South Africa. Well-known premium brands acquired in the acquisition of Vincor include Inniskillin, Jackson-Triggs, Sawmill Creek, Sumac Ridge, R.H. Phillips, Toasted Head, Hogue, Kim Crawford and Kumala.

The acquisition of Vincor supports the Company’s strategy of strengthening the breadth of its portfolio across price segments and geographic regions to capitalize on the overall growth in the wine industry. In addition to complementing the Company’s current operations in the United States (“U.S.”), U.K., Australia and New Zealand, the acquisition of Vincor increases the Company’s global presence by adding Canada as another core market and provides the Company with the ability to capitalize on broader geographic distribution in strategic international markets. In addition, the acquisition of Vincor makes the Company the largest wine company in Canada and strengthens the Company’s position as the largest wine company in the world and the largest premium wine company in the U.S.

Total consideration paid in cash to the Vincor shareholders was $1,115.8 million. In addition, the Company incurred direct acquisition costs of $9.4 million. At closing, the Company also assumed outstanding indebtedness of Vincor, net of cash acquired, of $320.2 million. The purchase price was financed with borrowings under the Company’s June 2006 Credit Agreement (as defined in Note 8). In accordance with the purchase method of accounting, the acquired net assets are recorded at fair value at the date of acquisition. The purchase price was based primarily on the estimated future operating results of the Vincor business, including the factors described above, as well as an estimated benefit from operating cost synergies.

In connection with the acquisition of Vincor, the Company entered into a foreign currency forward contract to fix the U.S. dollar cost of the acquisition and the payment of certain outstanding indebtedness in April 2006. During the six months ended August 31, 2006, the Company recorded a gain of $55.1 million in connection with this derivative instrument. Under Statement of Financial Accounting Standards No. 133 (“SFAS No. 133”), “Accounting for Derivative Instruments and Hedging Activities,” as amended, a transaction that involves a business combination is not eligible for hedge accounting treatment. As such, the gain was recognized separately on the Company’s Consolidated Statements of Income.

The results of operations of the Vincor business are reported in the Constellation Wines segment and have been included in the Consolidated Statements of Income from the date of acquisition.

The following table summarizes the fair values of the assets acquired and liabilities assumed in the acquisition of Vincor at the date of acquisition:

(in millions)
Current assets	$	390.5
Property, plant and equipment		241.4
Goodwill		874.8
Trademarks		224.3
Other assets		49.5
Total assets acquired		1,780.5

Current liabilities		418.3
Long-term liabilities		237.0
Total liabilities assumed		655.3

Net assets acquired	$	1,125.2

The trademarks are not subject to amortization. None of the goodwill is expected to be deductible for tax purposes.

The following table sets forth the unaudited historical results of operations and the unaudited pro forma results of operations of the Company for the six months and three months ended August 31, 2007, and August 31, 2006, respectively. Unaudited pro forma results of operation of the Company for the six months and three months ended August 31, 2007, are not presented to give effect to the Svedka Acquisition as if it had occurred on March 1, 2006, as they are not significant. The unaudited pro forma results of operations for the six months and three months ended August 31, 2006, give effect to the Svedka Acquisition and the acquisition of Vincor as if they occurred on March 1, 2006. The unaudited pro forma results of operations are presented after giving effect to certain adjustments for depreciation, amortization of certain intangible assets and deferred financing costs, interest expense on the acquisition financing, interest expense associated with adverse grape contracts, and related income tax effects. The unaudited pro forma results of operations are based upon currently available information and certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma results of operations for the six months ended August 31, 2006, do not reflect total pretax nonrecurring charges of $29.5 million ($0.09 per share on a diluted basis) related to transaction costs, primarily for the acceleration of vesting of stock options, legal fees and investment banker fees, all of which were incurred by Vincor prior to the acquisition. The unaudited pro forma results of operations do not purport to present what the Company’s results of operations would actually have been if the aforementioned transactions had in fact occurred on such date or at the beginning of the period indicated, nor do they project the Company’s financial position or results of operations at any future date or for any future period.

	For the Six Months Ended August 31,				For the Three Months Ended August 31,
	2007		2006		2007		2006
(in millions, except per share data)
Net sales	$	1,793.8	$	2,712.5	$	892.6	$	1,430.0
Income before income taxes	$	174.9	$	205.4	$	110.6	$	108.3
Net income	$	101.9	$	118.6	$	72.1	$	66.2
Income available to common stockholders	$	101.9	$	113.7	$	72.1	$	63.8

Earnings per common share – basic:
Class A Common Stock	$	0.46	$	0.51	$	0.34	$	0.29
Class B Common Stock	$	0.42	$	0.47	$	0.31	$	0.26
Earnings per common share – diluted:
Class A Common Stock	$	0.45	$	0.49	$	0.33	$	0.28
Class B Common Stock	$	0.41	$	0.45	$	0.30	$	0.25

Weighted average common shares outstanding – basic:
Class A Common Stock		198.472		199.943		191.308		200.316
Class B Common Stock		23.821		23.849		23.819		23.845
Weighted average common shares outstanding – diluted:
Class A Common Stock		226.395		240.052		219.300		240.318
Class B Common Stock		23.821		23.849		23.819		23.845

4)	INVENTORIES:

Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following:

	August 31, 2007		February 28, 2007
(in millions)
Raw materials and supplies	$	110.8	$	106.5
In-process inventories		1,183.2		1,264.4
Finished case goods		628.7		577.2
	$	1,922.7	$	1,948.1

GOODWILL:

The changes in the carrying amount of goodwill for the six months ended August 31, 2007, are as follows:

	Constellation Wines			Constellation Spirits		Crown Imports		Consolidations and Eliminations			Consolidated
(in millions)
Balance, February 28, 2007	$	2,939.5		$	144.4	$	13.0	$	(13.0	)	$	3,083.9
Purchase accounting allocations		(10.1	)		349.8		-		-			339.7
Foreign currency translation adjustments		71.4			1.6		-		-			73.0
Purchase price earn-out		1.2			-		-		-			1.2
Disposal of business		(143.4	)		-		-		-			(143.4	)
Balance, August 31, 2007	$	2,858.6		$	495.8	$	13.0	$	(13.0	)	$	3,354.4

The Constellation Spirits segment’s purchase accounting allocations totaling $349.8 million consist of purchase accounting allocations associated with the Svedka Acquisition. The Constellation Wines segment’s purchase accounting allocations totaling ($10.1) million consist primarily of a reduction of $17.0 million in connection with an adjustment to income taxes payable acquired in a prior acquisition, partially offset by final purchase accounting allocations associated with the acquisition of Vincor of $6.7 million. The Constellation Wines segment’s disposal of business of $143.4 million consists of the Company’s reduction of goodwill in connection with the Company’s contribution of its U.K. wholesale business associated with the formation of a joint venture with Punch Taverns plc (“Punch”) (see Note 7).

6) INTANGIBLE ASSETS:

The major components of intangible assets are as follows:

	August 31, 2007				February 28, 2007
	Gross Carrying Amount		Net Carrying Amount		Gross Carrying Amount		Net Carrying Amount
(in millions)
Amortizable intangible assets:
Customer relationships	$	55.4	$	52.1	$	32.9	$	31.3
Distribution agreements		11.1		6.6		19.9		6.9
Other		3.4		1.9		2.4		1.1
Total	$	69.9		60.6	$	55.2		39.3

Nonamortizable intangible assets:
Trademarks				1,151.6				1,091.9
Agency relationships				4.2				4.2
Total				1,155.8				1,096.1
Total intangible assets			$	1,216.4			$	1,135.4

The difference between the gross carrying amount and net carrying amount for each item presented is attributable to accumulated amortization. Amortization expense for intangible assets was $2.2 million and $1.3 million for the six months ended August 31, 2007, and August 31, 2006, respectively, and $1.1 million and $0.7 million for the three months ended August 31, 2007, and August 31, 2006, respectively. Estimated amortization expense for the remaining six months of fiscal 2008 and for each of the five succeeding fiscal years and thereafter is as follows:

(in millions)
2008	$	2.3
2009	$	4.6
2010	$	4.6
2011	$	4.5
2012	$	3.9
2013	$	3.8
Thereafter	$	36.9

7)	OTHER ASSETS:

Investment in Matthew Clark –

On April 17, 2007, the Company and Punch commenced operations of a joint venture for the U.K. wholesale business (“Matthew Clark”). The U.K. wholesale business was formerly owned entirely by the Company. Under the terms of the arrangement, the Company and Punch, directly or indirectly, each have a 50% voting and economic interest in Matthew Clark. The Company received $185.6 million of cash proceeds from the formation of the joint venture.

Upon formation of the joint venture, the Company discontinued consolidation of the U.K. wholesale business and accounts for the investment in Matthew Clark under the equity method. Accordingly, the results of operations of Matthew Clark are included in the equity in earnings of equity method investees line in the Company’s Consolidated Statements of Income from the date of investment. As of August 31, 2007, the Company’s investment in Matthew Clark was $73.5 million.

Investment in Crown Imports –

On January 2, 2007, Barton Beers, Ltd. (“Barton”), an indirect wholly-owned subsidiary of the Company, and Diblo, S.A. de C.V. (“Diblo”), an entity owned 76.75% by Grupo Modelo, S.A.B. de C.V. (“Modelo”) and 23.25% by Anheuser-Busch, Inc., completed the formation of Crown Imports LLC (“Crown Imports”), a joint venture in which Barton and Diblo each have, directly or indirectly, equal interests. Crown Imports has the exclusive right to import, market and sell Modelo’s Mexican beer portfolio (the “Modelo Brands”) in the 50 states of the U.S., the District of Columbia and Guam. In addition, the owners of the Tsingtao and St. Pauli Girl brands have transferred exclusive importing, marketing and selling rights with respect to those brands in the U.S. to the joint venture. The importer agreement that previously gave Barton the exclusive right to import, market and sell the Modelo Brands primarily west of the Mississippi River was superseded by the transactions consummated by the newly formed joint venture.

Upon commencement of operations of the joint venture, the Company discontinued consolidation of the imported beer business and accounts for the investment in Crown Imports under the equity method. Accordingly, the results of operations of Crown Imports are included in the equity in earnings of equity method investees line in the Company’s Consolidated Statements of Income from the date of investment. As of August 31, 2007, the Company’s investment in Crown Imports was $159.6 million. The carrying amount of the investment is greater than the Company’s equity in the underlying assets of Crown Imports by $13.6 million due to the difference in the carrying amounts of the indefinite lived intangible assets contributed to Crown Imports by each party.

Summary financial information for Crown Imports for the six months and three months ended August 31, 2007, is presented below. The amounts shown represent 100% of Crown Imports consolidated operating results.

	For the Six Months Ended August 31, 2007		For the Three Months Ended August 31, 2007
(in millions)
Net sales	$	1,380.8	$	722.7
Gross profit	$	424.0	$	219.3
Net income	$	303.9	$	157.5

8)	BORROWINGS:

Senior credit facility -

In connection with the acquisition of Vincor, on June 5, 2006, the Company and certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and administrative agent, and certain other agents, lenders, and financial institutions entered into a new credit agreement (the “June 2006 Credit Agreement”). On February 23, 2007, the June 2006 Credit Agreement was amended (the “February Amendment”). The June 2006 Credit Agreement together with the February Amendment is referred to as the “2006 Credit Agreement”. The 2006 Credit Agreement provides for aggregate credit facilities of $3.9 billion, consisting of a $1.2 billion tranche A term loan facility due in June 2011, a $1.8 billion tranche B term loan facility due in June 2013, and a $900 million revolving credit facility (including a sub-facility for letters of credit of up to $200 million) which terminates in June 2011. Proceeds of the June 2006 Credit Agreement were used to pay off the Company’s obligations under its prior senior credit facility, to fund the acquisition of Vincor and to repay certain indebtedness of Vincor. The Company uses its revolving credit facility under the 2006 Credit Agreement for general corporate purposes, including working capital, on an as needed basis.

As of August 31, 2007, the required principal repayments of the tranche A term loan and the tranche B term loan for the remaining six months of fiscal 2008 and for each of the five succeeding fiscal years are as follows:

	Tranche A Term Loan		Tranche B Term Loan		Total
(in millions)
2008	$	-	$	-	$	-
2009		210.0		2.0		212.0
2010		270.0		4.0		274.0
2011		300.0		4.0		304.0
2012		150.0		4.0		154.0
2013		-		1,426.0		1,426.0
	$	930.0	$	1,440.0	$	2,370.0

The rate of interest on borrowings under the 2006 Credit Agreement is a function of LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate plus a margin. The margin is fixed with respect to the tranche B term loan facility and is adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit Agreement) with respect to the tranche A term loan facility and the revolving credit facility. As of August 31, 2007, the LIBOR margin for the revolving credit facility and the tranche A term loan facility is 1.25%, while the LIBOR margin on the tranche B term loan facility is 1.50%.

The February Amendment amended the June 2006 Credit Agreement to, among other things, (i) increase the revolving credit facility from $500.0 million to $900.0 million, which increased the aggregate credit facilities from $3.5 billion to $3.9 billion; (ii) increase the aggregate amount of cash payments the Company is permitted to make in respect or on account of its capital stock; (iii) remove certain limitations on the application of proceeds from the incurrence of senior unsecured indebtedness; (iv) increase the maximum permitted total “Debt Ratio” and decrease the required minimum “Interest Coverage Ratio”; and (v) eliminate the “Senior Debt Ratio” covenant and the “Fixed Charges Ratio” covenant.

The Company’s obligations are guaranteed by certain of its U.S. subsidiaries. These obligations are also secured by a pledge of (i) 100% of the ownership interests in certain of the Company’s U.S. subsidiaries and (ii) 65% of the voting capital stock of certain of the Company’s foreign subsidiaries.

The Company and its subsidiaries are also subject to covenants that are contained in the 2006 Credit Agreement, including those restricting the incurrence of additional indebtedness (including guarantees of indebtedness), additional liens, mergers and consolidations, disposition or acquisition of property, the payment of dividends, transactions with affiliates and the making of certain investments, in each case subject to numerous conditions, exceptions and thresholds. The financial covenants are limited to maximum total debt coverage ratios and minimum interest coverage ratios.

As of August 31, 2007, under the 2006 Credit Agreement, the Company had outstanding tranche A term loans of $930.0 million bearing an interest rate of 6.6%, tranche B term loans of $1.44 billion bearing an interest rate of 6.9%, revolving loans of $17.0 million bearing an interest rate of 5.8%, outstanding letters of credit of $33.9 million, and $849.1 million in revolving loans available to be drawn.

As of August 31, 2007, the Company had outstanding interest rate swap agreements which fixed LIBOR interest rates on $1.2 billion of the Company’s floating LIBOR rate debt at an average rate of 4.1% through fiscal 2010. For the six months ended August 31, 2007, and August 31, 2006, the Company reclassified $3.5 million, net of tax effect of $2.3 million, and $2.3 million, net of tax effect of $1.5 million, respectively, from AOCI (as defined in Note 14) to the interest expense, net line in the Company’s Consolidated Statements of Income. For the three months ended August 31, 2007, and August 31, 2006, the Company reclassified $1.7 million, net of tax effect of $1.1 million, and $1.5 million, net of tax effect of $1.0 million, respectively, from AOCI to the interest expense, net line in the Company’s Consolidated Statements of Income. This non-cash operating activity is included on the other, net line in the Company’s Consolidated Statements of Cash Flows.

Senior notes –

On May 14, 2007, the Company issued $700.0 million aggregate principal amount of 7 1/4% Senior Notes due May 2017 (the “May 2007 Senior Notes”). The net proceeds of the offering ($693.9 million) were used to reduce a corresponding amount of borrowings under the revolving portion of the Company’s 2006 Credit Agreement. Interest on the May 2007 Senior Notes is payable semiannually on May 15 and November 15 of each year, beginning November 15, 2007. The May 2007 Senior Notes are redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest to the redemption date, plus a make whole payment based on the present value of the future payments at the applicable Treasury Rate plus 50 basis points. The May 2007 Senior Notes are unsecured senior obligations and rank equally in right of payment to all existing and future unsecured senior indebtedness of the Company. Certain of the Company’s significant U.S. operating subsidiaries guarantee the May 2007 Senior Notes, on an unsecured senior basis. As of August 31, 2007, the Company had outstanding $700.0 million aggregate principal amount of May 2007 Senior Notes.

In connection with the issuance of the May 2007 Senior Notes, the Company entered into a registration rights agreement. Pursuant to the registration rights agreement, the Company agreed to, among other things, (i) file a registration statement with respect to an offer to exchange the May 2007 Senior Notes for new, registered notes of the Company with otherwise identical terms within 395 days after the issue date of the May 2007 Senior Notes; (ii) have the registration statement declared effective within 485 days after such issue date; and (iii) consummate the exchange offer within 525 days after such issue date. If any such event does not occur, then additional cash interest will accrue on the May 2007 Senior Notes at the rate of 0.25% per year for the first 90-day period immediately following the event of default, increasing by an additional 0.25% per year for each subsequent 90-day period up to a maximum of 1.00% per year until the event of default is cured or, in the absence of a completed exchange offer, the May 2007 Senior Notes either (i) are registered for resale as required under the registration rights agreement or (ii) become freely tradeable without registration. As of August 31, 2007, the Company has not recorded any liability for any such additional cash interest as the Company has determined that the likelihood of failing to meet the Company's obligations under the registration rights agreement is remote.

Subsidiary credit facilities –

The Company has additional credit arrangements totaling $434.9 million as of August 31, 2007. These arrangements primarily support the financing needs of the Company’s domestic and foreign subsidiary operations. Interest rates and other terms of these borrowings vary from country to country, depending on local market conditions. As of August 31, 2007, amounts outstanding under these arrangements were $206.0 million.

9)	INCOME TAXES:

As noted in Note 2, effective March 1, 2007, the Company adopted FIN No. 48. The Company did not record any cumulative effect adjustment to retained earnings as a result of the adoption of FIN No. 48. Upon adoption, the liability for income taxes associated with uncertain tax positions was $108.1 million. Unrecognized tax benefits of $62.8 million would affect the Company’s effective tax rate if recognized. The Company reclassified $83.9 million of income tax liabilities from current to non-current liabilities because payment of cash is not anticipated within one year of the balance sheet date. These non-current liabilities are recorded in the other liabilities line in the Company’s Consolidated Balance Sheet.

In accordance with the Company’s accounting policy, the Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. This policy did not change as a result of the adoption of FIN No. 48. As of the date of adoption, $8.5 million, net of tax benefit, was included in the liability for uncertain tax positions for the possible payment of interest and penalties.

Various U.S. federal, state, and foreign income tax examinations are currently in progress. It is reasonably possible that the liability associated with the Company’s unrecognized tax benefits will increase or decrease within the next twelve months as a result of these examinations or the expiration of the statutes of limitation. At this time, an estimate of the range of reasonably possible outcomes cannot be made. The Company files U.S. federal income tax returns and various state, local and foreign income tax returns. With few exceptions, the Company is no longer subject to U.S. federal, state, local or foreign income tax examinations for fiscal years prior to February 29, 2000.

The Company’s effective tax rate for the six months ended August 31, 2007, and August 31, 2006, was 41.7% and 40.5%, respectively. The increase in the Company’s effective tax rate for the six months ended August 31, 2007, is primarily due to the recognition of a nondeductible pretax loss in connection with the Company’s contribution of its U.K. wholesale business to the Matthew Clark joint venture and increases to existing tax contingencies and related interest, partially offset by reductions in deferred income tax liabilities as a result of legislative changes in various state and foreign jurisdictions.

The Company’s effective tax rate for the three months ended August 31, 2007, and August 31, 2006, was 34.8% and 38.7%, respectively. The decrease in the Company’s effective tax rate for the three months ended August 31, 2007, is primarily due to reductions in deferred income tax liabilities as a result of legislative changes in various state and foreign jurisdictions and the tax effects of foreign earnings, partially offset by increases to existing tax contingencies and related interest.

10)	RETIREMENT SAVINGS PLANS AND POSTRETIREMENT BENEFIT PLANS:

Net periodic benefit costs reported in the Consolidated Statements of Income for the Company’s defined benefit pension plans include the following components:

	For the Six Months Ended August 31,						For the Three Months Ended August 31,
	2007			2006			2007			2006
(in millions)
Service cost	$	2.5		$	1.1		$	1.3		$	0.5
Interest cost		12.3			9.7			6.3			4.9
Expected return on plan assets		(14.7	)		(10.9	)		(7.5	)		(5.5	)
Amortization of prior service cost		0.2			0.1			0.1			0.1
Recognized net actuarial loss		4.3			2.6			2.2			2.1
Net periodic benefit cost	$	4.6		$	2.6		$	2.4		$	2.1

Net periodic benefit costs reported in the Consolidated Statements of Income for the Company’s unfunded postretirement benefit plans include the following components:

	For the Six Months Ended August 31,				For the Three Months Ended August 31,
	2007		2006		2007		2006
(in millions)
Service cost	$	0.1	$	0.1	$	-	$	0.1
Interest cost		0.2		0.1		0.1		-
Amortization of prior service cost		-		-		-		-
Recognized net actuarial loss		-		-		-		-
Net periodic benefit cost	$	0.3	$	0.2	$	0.1	$	0.1

Contributions of $5.7 million have been made by the Company to fund its defined benefit pension plans for the six months ended August 31, 2007. The Company presently anticipates contributing an additional $5.9 million to fund its defined benefit pension plans during the year ending February 29, 2008, resulting in total employer contributions of $11.6 million for the year ending February 29, 2008.

11)	STOCKHOLDERS’ EQUITY:

Stock repurchase –

In February 2007, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s Class A Common Stock and Class B Common Stock. During the six months ended August 31, 2007, the Company repurchased 21,332,468 shares of Class A Common Stock pursuant to this authorization at an aggregate cost of $500.0 million, or an average cost of $23.44 per share, through a combination of open market transactions and an accelerated share repurchase (“ASR”) transaction that was announced in May 2007. The repurchased shares include 933,206 shares of Class A Common Stock that were received by the Company in July 2007 in connection with the early termination of the calculation period for the ASR transaction by the counterparty to the ASR transaction. The Company used revolver borrowings under the 2006 Credit Agreement to pay the purchase price for the repurchased shares. The repurchased shares have become treasury shares.

Class A Common Stock –

In July 2007, the stockholders of the Company approved an increase in the number of authorized shares of Class A Common Stock from 300,000,000 shares to 315,000,000 shares, thereby increasing the aggregate number of authorized shares of the Company’s common and preferred stock to 346,000,000 shares.

Long-term stock incentive plan –

In July 2007, the stockholders of the Company approved, among other things, an increase in the number of shares of Class A Common Stock available for awards under the Company’s Long-Term Stock Incentive Plan from 80,000,000 shares to 94,000,000 shares.

12)	EARNINGS PER COMMON SHARE:

Basic earnings per common share excludes the effect of common stock equivalents and is computed using the two-class computation method. Diluted earnings per common share for Class A Common Stock reflects the potential dilution that could result if securities to issue common stock were exercised or converted into common stock. Diluted earnings per common share for Class A Common Stock assumes the exercise of stock options using the treasury stock method and the conversion of Class B Convertible Common Stock and Preferred Stock using the more dilutive if-converted method. Diluted earnings per common share for Class B Convertible Common Stock is presented without assuming conversion into Class A Common Stock and is computed using the two-class computation method.

The computation of basic and diluted earnings per common share is as follows:

	For the Six Months Ended August 31,					For the Three Months Ended August 31,
	2007		2006			2007		2006
(in millions, except per share data)
Net income	$	101.9	$	153.9		$	72.1	$	68.4
Dividends on preferred stock		-		(4.9	)		-		(2.4	)
Income available to common stockholders	$	101.9	$	149.0		$	72.1	$	66.0

Weighted average common shares outstanding – basic:
Class A Common Stock		198.472		199.943			191.308		200.316
Class B Common Stock		23.821		23.849			23.819		23.845
Total weighted average common shares outstanding – basic		222.293		223.792			215.127		224.161
Stock options		4.102		6.277			4.173		6.174
Preferred stock		-		9.983			-		9.983
Weighted average common shares outstanding – diluted		226.395		240.052			219.300		240.318

Earnings per common share – basic:
Class A Common Stock	$	0.46	$	0.67		$	0.34	$	0.30
Class B Common Stock	$	0.42	$	0.61		$	0.31	$	0.27
Earnings per common share – diluted:
Class A Common Stock	$	0.45	$	0.64		$	0.33	$	0.28
Class B Common Stock	$	0.41	$	0.59		$	0.30	$	0.26

Stock options to purchase 9.8 million and 9.0 million shares of Class A Common Stock at a weighted average price per share of $26.03 and $26.45 were outstanding during the six months ended August 31, 2007, and August 31, 2006, respectively, but were not included in the computation of the diluted earnings per common share because the stock options’ exercise price was greater than the average market price of the Class A Common Stock for the period. Stock options to purchase 8.8 million and 9.0 million shares of Class A Common Stock at a weighted average price per share of $26.37 and $26.45 were outstanding during the three months ended August 31, 2007, and August 31, 2006, respectively, but were not included in the computation of the diluted earnings per common share because the stock options’ exercise price was greater than the average market price of the Class A Common Stock for the period.

13)	STOCK-BASED COMPENSATION:

The Company recorded $16.9 million and $7.7 million of stock-based compensation cost in its Consolidated Statements of Income for the six months ended August 31, 2007, and August 31, 2006, respectively. The Company recorded $7.5 million and $4.1 million of stock-based compensation cost in its Consolidated Statements of Income for the three months ended August 31, 2007, and August 31, 2006, respectively. Of the $16.9 million, $7.8 million is related to the granting of 8.8 million nonqualified stock options under the Company’s Long-Term Stock Incentive Plan to employees and nonemployee directors during the year ending February 29, 2008, and $1.0 million is related to the accelerated vesting of 0.1 million nonqualified stock options granted during the year ended February 28, 2007, to employees of the Company’s then existing 100% owned U.K. wholesale business. These options were accelerated prior to the Company’s formation of the joint venture with Punch in April 2007. The remainder is related primarily to the amortization of employee and nonemployee directors stock options granted during the year ended February 28, 2007.

14)	COMPREHENSIVE INCOME:

Comprehensive income (loss) consists of net income, foreign currency translation adjustments, net unrealized gains or losses on derivative instruments and pension/postretirement adjustments. The reconciliation of net income to comprehensive income is as follows:

	For the Six Months Ended August 31,						For the Three Months Ended August 31,
	2007			2006			2007			2006
(in millions)
Net income	$	101.9		$	153.9		$	72.1		$	68.4
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax expense of $2.5, $8.7, $3.7 and $1.1, respectively		144.9			97.1			(11.7	)		35.7
Cash flow hedges:
Net derivative losses, net of tax benefit of $9.3, $7.1, $9.6 and $6.0, respectively		(12.9	)		(14.6	)		(18.1	)		(9.0	)
Reclassification adjustments, net of tax benefit of $1.1, $3.4, $0.5 and $1.9, respectively		(3.0	)		(7.2	)		(1.7	)		(4.0	)
Net cash flow hedges		(15.9	)		(21.8	)		(19.8	)		(13.0	)
Pension/postretirement adjustments, net of tax benefit (expense) of $0.2, $3.5, ($0.4) and $0.8, respectively		(0.4	)		(8.1	)		1.0			(1.8	)
Total comprehensive income	$	230.5		$	221.1		$	41.6		$	89.3

Accumulated other comprehensive income (“AOCI”), net of tax effects, includes the following components:

	Foreign Currency Translation Adjustments		Net Unrealized Gains (Losses) on Derivatives			Pension/ Postretirement Adjustments			Accumulated Other Comprehensive Income
(in millions)
Balance, February 28, 2007	$	446.8	$	13.3		$	(111.0	)	$	349.1
Current period change		144.9		(15.9	)		(0.4	)		128.6
Balance, August 31, 2007	$	591.7	$	(2.6	)	$	(111.4	)	$	477.7

15) ACQUISITION-RELATED INTEGRATION COSTS:

For the six months ended August 31, 2007, the Company recorded $3.6 million of acquisition-related integration costs associated primarily with the Vincor Plan (as defined in Note 16). The Company defines acquisition-related integration costs as nonrecurring costs incurred to integrate newly acquired businesses after a business combination which are incremental to those of the Company prior to the business combination. As such, acquisition-related integration costs include, but are not limited to, (i) employee-related costs such as salaries and stay bonuses paid to employees of the acquired business that will be terminated after their integration activities are completed, (ii) costs to relocate fixed assets and inventories, and (iii) facility costs and other one-time costs such as external services and consulting fees. For the six months ended August 31, 2007, acquisition-related integration costs included $0.7 million of employee-related costs and $2.9 million of facilities and other one-time costs. For the six months ended August 31, 2006, the Company recorded $8.1 million of acquisition-related integration costs associated primarily with the Vincor Plan.

For the three months ended August 31, 2007, the Company recorded $1.6 million of acquisition-related integration costs associated primarily with the Vincor Plan. Acquisition-related integration costs included $0.3 million of employee-related costs and $1.3 million of facilities and other one-time costs. For the three months ended August 31, 2006, the Company recorded $7.4 million of acquisition-related integration costs associated primarily with the Vincor Plan.

16)	RESTRUCTURING AND RELATED CHARGES:

The Company has several restructuring plans within its Constellation Wines segment as follows:

Robert Mondavi Plan –

The Company’s plan announced in January 2005 to restructure and integrate the operations of The Robert Mondavi Corporation (the “Robert Mondavi Plan”). The objective of the Robert Mondavi Plan is to achieve operational efficiencies and eliminate redundant costs resulting from the December 22, 2004, acquisition of The Robert Mondavi Corporation (“Robert Mondavi”). The Robert Mondavi Plan includes the elimination of certain employees, the consolidation of certain field sales and administrative offices, and the termination of various contracts. Although restructuring and related charges in connection with the Robert Mondavi Plan have been completed as of February 28, 2007, a balance remains for amounts not yet paid as of August 31, 2007. The remaining liability is expected to be paid through the year ending February 29, 2012.

Fiscal 2006 Plan –

The Company’s worldwide wine reorganizations and the Company’s plan to consolidate certain west coast production processes in the U.S., both announced during the year ended February 28, 2006, (collectively, the “Fiscal 2006 Plan”). The Fiscal 2006 Plan’s principal features are to reorganize and simplify the infrastructure and reporting structure of the Company’s global wine business and to consolidate certain west coast production processes. This Fiscal 2006 Plan is part of the Company’s ongoing effort to enhance its administrative, operational and production efficiencies in light of its ongoing growth. The objective of the Fiscal 2006 Plan is to achieve greater efficiency in sales, administrative and operational activities and eliminate redundant costs. The Fiscal 2006 Plan includes the termination of employment of certain employees in various locations worldwide, the consolidation of certain worldwide wine selling and administrative functions, the consolidation of certain warehouse and production functions, the termination of various contracts, investment in new assets and the reconfiguration of certain existing assets. The Company expects the Fiscal 2006 Plan to be complete by February 28, 2009.

Vincor Plan –

The Company’s plan announced in July 2006 to restructure and integrate the operations of Vincor (the “Vincor Plan”). The objective of the Vincor Plan is to achieve operational efficiencies and eliminate redundant costs resulting from the June 5, 2006, acquisition of Vincor, as well as to achieve greater efficiency in sales, marketing, administrative and operational activities. The Vincor Plan includes the elimination of certain employment redundancies, primarily in the U.S., U.K. and Australia, and the termination of various contracts. The Company expects the Vincor Plan to be complete by February 28, 2009.

Fiscal 2007 Wine Plan –

The Company’s plans announced in August 2006 to invest in new distribution and bottling facilities in the U.K. and to streamline certain Australian wine operations (collectively, the “Fiscal 2007 Wine Plan”). The U.K. portion of the plan includes new investments in property, plant and equipment and certain disposals of property, plant and equipment and is expected to increase wine bottling capacity and efficiency and reduce costs of transport, production and distribution. The U.K. portion of the plan also includes costs for employee terminations. The Australian portion of the plan includes the buy-out of certain grape supply and processing contracts and the sale of certain property, plant and equipment. The initiatives are part of the Company’s ongoing efforts to maximize asset utilization, further reduce costs and improve long-term return on invested capital throughout its international operations. The Company expects the Australian portion of the plan to be complete by February 29, 2008, and the U.K. portion of the plan to be complete by February 28, 2010.

For the six months ended August 31, 2007, and August 31, 2006, the Company recorded $0.8 million and $24.0 million, respectively, of restructuring and related charges associated primarily with the Fiscal 2006 Plan. For the three months ended August 31, 2007, and August 31, 2006, the Company recorded $0.4 million and $21.7 million, respectively, of restructuring and related charges associated primarily with the Fiscal 2006 Plan and the Vincor Plan.

Restructuring and related charges consisting of employee termination benefit costs, contract termination costs, and other associated costs are accounted for under either Statement of Financial Accounting Standards No. 112 (“SFAS No. 112”), “Employers’ Accounting for Postemployment Benefits – an Amendment of FASB Statements No. 5 and 43,” or Statement of Financial Accounting Standards No. 146 (“SFAS No. 146”), “Accounting for Costs Associated with Exit or Disposal Activities,” as appropriate. Employee termination benefit costs are accounted for under SFAS No. 112, as the Company has had several restructuring programs which have provided employee termination benefits in the past. The Company includes employee severance, related payroll benefit costs such as costs to provide continuing health insurance, and outplacement services as employee termination benefit costs. Contract termination costs, and other associated costs including, but not limited to, facility consolidation and relocation costs are accounted for under SFAS No. 146. Per SFAS No. 146, contract termination costs are costs to terminate a contract that is not a capital lease, including costs to terminate the contract before the end of its term or costs that will continue to be incurred under the contract for its remaining term without economic benefit to the entity. The Company includes costs to terminate certain operating leases for buildings, computer and IT equipment, and costs to terminate contracts, including distributor contracts and contracts for long-term purchase commitments, as contract termination costs. Per SFAS No. 146, other associated costs include, but are not limited to, costs to consolidate or close facilities and relocate employees. The Company includes employee relocation costs and equipment relocation costs as other associated costs.

Details of each plan are presented in the following table:

	Fiscal 2007 Wine Plan			Vincor Plan			Fiscal 2006 Plan			Robert Mondavi Plan			Total
(in millions)
Restructuring liability, February 28, 2007	$	2.8		$	21.2		$	3.5		$	5.4		$	32.9

Vincor acquisition		-			(0.8	)		-			-			(0.8	)

Restructuring charges:
Employee termination benefit costs		-			(0.1	)		0.1			-			-
Contract termination costs		-			-			0.2			-			0.2
Facility consolidation/relocation costs		-			0.1			0.1			-			0.2
Restructuring charges, May 31, 2007		-			-			0.4			-			0.4
Employee termination benefit costs		-			-			0.1			-			0.1
Contract termination costs		-			-			0.2			-			0.2
Facility consolidation/relocation costs		-			0.1			-			-			0.1
Restructuring charges, August 31, 2007		-			0.1			0.3			-			0.4
Total restructuring charges		-			0.1			0.7			-			0.8

Cash expenditures		(0.5	)		(9.8	)		(1.8	)		(0.8	)		(12.9	)

Foreign currency translation adjustments		0.1			0.6			-			-			0.7
Restructuring liability, August 31, 2007	$	2.4		$	11.3		$	2.4		$	4.6		$	20.7

In addition, the following table presents other related costs incurred in connection with the Fiscal 2007 Wine Plan, Vincor Plan and the Fiscal 2006 Plan:

	For the Six Months Ended August 31, 2007
	Fiscal 2007 Wine Plan		Vincor Plan		Fiscal 2006 Plan		Total
Accelerated depreciation/inventory write-down (cost of product sold)	$	2.3	$	0.1	$	1.9	$	4.3
Asset write-down/other costs (selling, general and administrative expenses)	$	1.2	$	-	$	0.2	$	1.4

	For the Three Months Ended August 31, 2007
	Fiscal 2007 Wine Plan		Vincor Plan		Fiscal 2006 Plan		Total
Accelerated depreciation/inventory write-down (cost of product sold)	$	1.2	$	-	$	0.9	$	2.1
Asset write-down/other costs (selling, general and administrative expenses)	$	0.9	$	-	$	-	$	0.9

A summary of restructuring charges and other related costs incurred since inception for each plan, as well as total expected costs for each plan, are presented in the following table:

	Fiscal 2007 Wine Plan		Vincor Plan		Fiscal 2006 Plan
(in millions)
Costs incurred to date
Restructuring charges:
Employee termination benefit costs	$	2.0	$	1.5	$	26.6
Contract termination costs		24.0		1.0		1.2
Facility consolidation/relocation costs		-		0.4		0.9
Total restructuring charges		26.0		2.9		28.7

Other related costs:
Accelerated depreciation/inventory write-down		5.6		0.4		18.9
Asset write-down/other costs		14.1		-		3.7
Total other related costs		19.7		0.4		22.6
Total costs incurred to date	$	45.7	$	3.3	$	51.3

Total expected costs
Restructuring charges:
Employee termination benefit costs	$	2.0	$	1.5	$	27.3
Contract termination costs		24.8		1.1		8.6
Facility consolidation/relocation costs		0.3		0.4		1.6
Total restructuring charges		27.1		3.0		37.5

Other related costs:
Accelerated depreciation/inventory write-down		10.5		0.6		19.6
Asset write-down/other costs		28.0		-		3.7
Total other related costs		38.5		0.6		23.3
Total expected costs	$	65.6	$	3.6	$	60.8

In connection with the Company’s acquisition of Vincor and Robert Mondavi, the Company accrued $38.4 million and $50.5 million of liabilities for exit costs, respectively, as of the respective acquisition date. As of August 31, 2007, the balances of the Vincor and Robert Mondavi purchase accounting accruals were $9.9 million and $4.6 million, respectively. As of February 28, 2007, the balances of the Vincor and Robert Mondavi purchase accounting accruals were $19.3 million and $5.4 million, respectively.

17)	CONDENSED CONSOLIDATING FINANCIAL INFORMATION:

The following information sets forth the condensed consolidating balance sheets as of August 31, 2007, and February 28, 2007, the condensed consolidating statements of income for the six months and three months ended August 31, 2007, and August 31, 2006, and the condensed consolidating statements of cash flows for the six months ended August 31, 2007, and August 31, 2006, for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company’s senior notes and senior subordinated notes (“Subsidiary Guarantors”) and the combined subsidiaries of the Company which are not Subsidiary Guarantors (primarily foreign subsidiaries) (“Subsidiary Nonguarantors”). The Subsidiary Guarantors are wholly-owned and the guarantees are full, unconditional, joint and several obligations of each of the Subsidiary Guarantors. Separate financial statements for the Subsidiary Guarantors of the Company are not presented because the Company has determined that such financial statements would not be material to investors. The accounting policies of the parent company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007, and include the recently adopted accounting pronouncements described in Note 2 herein. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.

Parent

Company