MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW INTRODUCTION The Company is a leading international producer and marketer of beverage alcohol brands with a broad portfolio across the wine, spirits and imported beer categories. The Company has the largest wine business in the world and is the largest multi-catego- ry supplier of beverage alcohol in the United States; a leading producer and exporter of wine from Australia and New Zealand; and both a major producer and independent drinks wholesaler in the United Kingdom. Through February 28, 2003, the Company reported its operating results in five segments: Popular and Premium Wine (brand- ed popular and premium wine and brandy, and other, primarily grape juice concentrate and bulk wine); Imported Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands and Wholesale (branded wine, cider, and bottled water, and wholesale wine, distilled spirits, cider, beer, RTDs and soft drinks); Fine Wine (primarily branded super-premium and ultra-premium wine); and Corporate Operations and Other (primarily corporate related items). As a result of the Hardy Acquisition (as defined below), the Company has changed the structure of its internal organization to consist of two business divisions, Constellation Wines and Constellation Beers and Spirits. Separate division chief executives report directly to the Company’s chief operating officer. Consequently, the Company reports its operating results in three segments: Constellation Wines (branded wine, and U.K. whole- sale and other), Constellation Beers and Spirits (imported beer and distilled spirits) and Corporate Operations and Other (primari- ly corporate related items and other). Amounts included in the Corporate Operations and Other segment consist of general corpo- rate administration and finance expenses. These amounts include costs of executive management, investor relations, internal audit, treasury, tax, corporate development, legal, financial reporting, professional fees and public relations. Any costs incurred at the cor- porate office that are applicable to the segments are allocated to the appropriate segment. The amounts included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are therefore not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in the chief oper- ating decision maker’s evaluation of the operating income performance of the other operating segments. The new business segments reflect how the Company’s operations are being managed, how operating performance within the Company is being evaluated by senior management and the structure of its internal financial reporting. In addition, the Company changed its definition of operat- ing income for segment purposes to exclude restructuring and related charges and unusual costs that affect comparability. Accordingly, the financial information for Fiscal 2003 and Fiscal 2002 (as defined below) have been restated to conform to the new segment presentation. The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for the year ended February 29, 2004 (“Fiscal 2004”), compared to the year ended February 28, 2003 (“Fiscal 2003”), 24 The Company generates revenue through the production, marketing and sale of beverage alcohol products, primarily in North America, Europe and Australia. The Company has a broad portfolio of brands across the wine, imported beer and distilled spirits categories, and with the acquisition of Hardy in Fiscal 2004 solidified its position as the world’s largest wine company. The Company’s business strategy is to remain focused across the beverage alcohol industry by offering a broad range of prod- ucts in each of the Company’s three major categories: wine, beer and spirits. The Company intends to keep its portfolio positioned for superior top-line growth while maximizing the profitability of its brands. In addition, the Company seeks to increase its rela- tive importance to key customers in major markets by increasing its share of their overall purchasing, which is increasingly impor- tant in a consolidating industry. The Company’s strategy of breadth across categories and geographies, and strengthening scale in core markets, is designed to deliver long-term profitable growth. This strategy allows the Company more investment choices, pro- vides flexibility to address changing market conditions and creates stronger routes-to-market. The Company’s businesses fall within one of two areas: growth or scale. The growth businesses represent approximately 60% of the Company’s Fiscal 2004 net sales and include approximately half of the Company’s branded wine business (specifically pre- mium wines in the U.S. and wines in the U.K.), imported beer in the U.S. and the U.K. wholesale business. The scale businesses rep- resent approximately 40% of Fiscal 2004 net sales and include spirits, the remaining half of the Company’s branded wine business, cider, and non-branded sales. The scale businesses are operated to maximize profitability and cash flow and to maintain strong routes-to-market. With a solid foundation of growth and scale businesses, the Company expects to continue to be able to leverage sales growth into even higher growth in earnings and cash flow. The U.S. beer industry has experienced a healthy pricing environment over the last several years; however, this could change due to market dynamics. Beginning January 2004, the Company raised prices to its wholesalers on the Company’s imported Mexican beer brands. The timing of this price increase resulted in a shift in sales volume from Fiscal 2005 to Fiscal 2004 due to wholesaler buy-in ahead of the price increase. As a result of the wholesaler buy-in and as retailers and consumers adapt to the high- er price, the Company expects a negative impact on volume trends for Fiscal 2005. The Company remains committed to its long-term financial model of growing sales (both organically and through acquisitions), expanding margins and increasing cash flow to achieve superior earnings per share growth and improve return on invested capital.