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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 2003
---------------------------------
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: 33-61516
----------------------
THE ROBERT MONDAVI CORPORATION
Incorporated under the laws I.R.S. Employer Identification:
of the State of California 94-2765451
Principal Executive Offices:
7801 St. Helena Highway
Oakville, CA 94562
Telephone: (707) 259-9463
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
----- -----
As of April 30, 2003, there were issued and outstanding 9,667,652 shares of the
issuer's Class A Common Stock and 6,646,734 shares of the issuer's Class B
Common Stock.
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PART I
Item 1. Financial Statements.
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
March 31, June 30,
--------- --------
2003 2002
---- ----
Unaudited
Current assets: ---------
Accounts receivable, net $ 82,484 $ 92,555
Inventories 426,103 388,574
Prepaid expenses and other current assets 14,519 12,179
------------ ------------
Total current assets 523,106 493,308
Property, plant and equipment, net 304,657 323,582
Investments in joint ventures 28,286 27,220
Other assets 11,831 11,455
------------ ------------
Total assets $ 867,880 $ 855,565
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Book overdraft $ 3,397 $ 2,734
Notes payable to banks 27,500 4,400
Accounts payable 28,611 23,012
Employee compensation and related costs 15,903 11,044
Other accrued expenses 19,160 21,126
Current portion of long-term debt 8,972 12,568
------------ ------------
Total current liabilities 103,543 74,884
Long-term debt, less current portion 279,473 316,169
Deferred income taxes 26,038 24,039
Deferred executive compensation 6,154 5,657
Other liabilities 3,267 3,537
------------ ------------
Total liabilities 418,475 424,286
------------ ------------
Commitments and contingencies
Shareholders' equity:
Preferred Stock:
Authorized--5,000,000 shares; issued and outstanding--no shares - - - -
Class A Common Stock, without par value:
Authorized--25,000,000 shares;
issued and outstanding--9,667,652 and 9,566,102 shares 95,164 93,827
Class B Common Stock, without par value:
Authorized--12,000,000 shares;
issued and outstanding--6,646,734 and 6,647,647 shares 10,676 10,677
Paid-in capital 11,458 11,025
Retained earnings 334,264 317,915
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (1,860) (1,716)
Forward contracts (297) (449)
------------ ------------
Total shareholders' equity 449,405 431,279
------------ ------------
Total liabilities and shareholders' equity $ 867,880 $ 855,565
============ ============
See Notes to Consolidated Financial Statements.
2
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited) (in thousands, except per share data)
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Revenues $ 96,843 $ 109,833 $ 348,591 $ 332,434
Less excise taxes 4,679 5,543 16,727 16,130
----------- ---------- ----------- ----------
Net revenues 92,164 104,290 331,864 316,304
Cost of goods sold 62,381 57,981 200,701 178,300
----------- ---------- ----------- ----------
Gross profit 29,783 46,309 131,163 138,004
Selling, general and administrative expenses 28,341 29,429 94,963 93,043
Gain on sale of assets (6,144) - - (6,144) - -
Special charges 3,394 - - 6,504 12,240
----------- ---------- ----------- ----------
Operating income 4,192 16,880 35,840 32,721
Other income (expense):
Interest (5,508) (5,877) (16,020) (16,440)
Equity income (loss) from joint ventures (489) 1,137 7,906 8,936
Other (803) (7) (1,775) (643)
----------- ---------- ----------- ----------
Income (loss) before income taxes (2,608) 12,133 25,951 24,574
Income tax provision (benefit) (965) 4,550 9,602 9,215
----------- ---------- ----------- ----------
Net income (loss) $ (1,643) $ 7,583 $ 16,349 $ 15,359
=========== ========== ========== ==========
Earnings (loss) per share-Basic $ (.10) $ .47 $ 1.01 $ .96
=========== ========== ========== ==========
Earnings (loss) per share-Diluted $ (.10) $ .46 $ 1.00 $ .94
=========== ========== ========== ==========
Weighted average number of shares outstanding-Basic 16,290 16,093 16,246 16,056
=========== ========== =========== ==========
Weighted average number of shares outstanding-Diluted 16,290 16,394 16,363 16,367
=========== ========== =========== ==========
See Notes to Consolidated Financial Statements.
3
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
-----------------
March 31,
---------
2003 2002
---- ----
Cash flows from operating activities:
Net income $ 16,349 $ 15,359
Adjustments to reconcile net income to net cash
flows from operating activities:
Deferred income taxes 234 (4,685)
Depreciation and amortization 17,729 16,931
Equity income from joint ventures (7,906) (8,936)
Distributions from joint ventures 9,388 9,792
Special charges 6,504 10,320
Inventory and fixed asset write-downs 7,561 3,750
Gain on sale of assets (6,144) - -
Other 1,476 367
Changes in assets and liabilities:
Accounts receivable, net 10,071 25,147
Inventories (45,329) (62,108)
Other assets 253 4,255
Accounts payable and accrued expenses 8,119 (17,322)
Deferred executive compensation 497 193
Other liabilities (402) (159)
------------ ------------
Net cash flows from operating activities 18,400 (7,096)
------------ ------------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (16,320) (26,109)
Proceeds from sale of assets 17,454 12,327
Contributions to joint ventures (1,814) (1,128)
Increase in restricted cash (1,023) (381)
------------ ------------
Net cash flows from investing activities (1,703) (15,291)
------------ ------------
Cash flows from financing activities:
Book overdraft 663 3,157
Net borrowings (repayments) under credit lines (5,900) 25,100
Principal repayments of long-term debt (11,292) (13,506)
Proceeds from issuance of Class A Common Stock under
stock option and employee stock purchase plans 1,335 1,594
Other (1,503) (1,147)
------------ ------------
Net cash flows from financing activities (16,697) 15,198
------------ ------------
Net change in cash and cash equivalents - - (7,189)
Cash and cash equivalents at the beginning of the period - - 7,189
------------ ------------
Cash and cash equivalents at the end of the period $ - - $ - -
============ ============
See Notes to Consolidated Financial Statements.
4
THE ROBERT MONDAVI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position at
March 31, 2003, its results of operations for the three and nine month periods
ended March 31, 2003 and 2002 and its cash flows for the nine month periods
ended March 31, 2003 and 2002. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted from the accompanying consolidated financial statements. In
addition, certain fiscal 2002 balances have been reclassified to conform with
the current year presentation. For further information, reference should be made
to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2002, on
file at the Securities and Exchange Commission.
Earnings per share
Diluted earnings per share is computed by dividing net income by the sum of the
weighted average number of Class A and Class B common shares outstanding plus
the dilutive effect, if any, of common share equivalents for stock option
awards. Potentially dilutive securities are excluded from the computation of
diluted earnings per share if their inclusion would have an antidilutive effect.
These antidilutive securities, which consisted solely of stock options, stated
as equivalent shares of common stock, amounted to 1,494,000 and 422,000,
respectively, for the three months ended March 31, 2003 and 2002, and 1,145,000
and 431,000, respectively, for the nine months ended March 31, 2003 and 2002.
In computing basic earnings per share for all periods presented, no adjustments
have been made to net income (numerator) or weighted-average shares outstanding
(denominator). The computation of diluted earnings per share for all periods is
identical to the computation of basic earnings per share except that the
weighted-average shares outstanding (denominator) has been increased by 301,000
for the three months ended March 31, 2002, and by 117,000 and 311,000,
respectively, for the nine months ended March 31, 2003 and 2002 to include the
dilutive effect of stock options outstanding.
Derivative instruments and hedging activities
The Company has only a limited involvement with derivative instruments and does
not use them for trading purposes. Forward exchange contracts, generally with
average maturities of less than one year, are used as protection against the
risk that the eventual U.S. dollar cash flows resulting from certain
unrecognized firm purchase commitments and forecasted transactions denominated
in foreign currencies will be adversely affected by changes in exchange rates.
The derivative financial instruments associated with unrecognized firm purchase
commitments are designated as fair-value hedges. The derivative financial
instruments associated with forecasted transactions are designated as cash-flow
hedges.
At March 31, 2003, the Company had outstanding forward exchange contracts,
hedging primarily Australian purchases of software and forecasted receipts of
Canadian dollars and European euros, with notional amounts totaling $13,761.
Using exchange rates outstanding as of March 31, 2003, the U.S. dollar
equivalent of the contracts totaled $14,179.
5
Stock-Based Compensation
Effective January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 148 (SFAS 148), "Accounting for Stock-Based
Compensation--Transition and Disclosure." SFAS 148 provides alternative methods
of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS 148 requires
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results.
The Company uses the intrinsic value based method of accounting for stock-based
employee compensation in accordance with Accounting Principles Board Opinion No.
25 and its related Interpretations and no compensation cost has been recognized
for its stock option plans or its employee stock purchase plan. The following
table compares earnings as reported to pro forma earnings had compensation cost
for the Company's stock option plans and employee stock purchase plan been
determined based on the fair value at the grant date for awards under those
plans.
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss), as reported $ (1,643) $ 7,583 $ 16,349 $ 15,359
Deduct: Total stock-based employee compensation expense
determined under fair value-based method for all awards, net
of tax effects 789 778 2,447 2,332
----------- ---------- ---------- ----------
Pro forma net income (loss) $ (2,432) $ 6,805 $ 13,902 $ 13,027
========== ========== ========== ==========
Earnings (loss) per share
Basic-as reported $(0.10) $0.47 $1.01 $0.96
Basic-pro forma $(0.15) $0.42 $0.86 $0.81
Diluted-as reported $(0.10) $0.46 $1.00 $0.94
Diluted-pro forma $(0.15) $0.42 $0.85 $0.80
For purposes of calculating compensation cost using the fair value-based method,
the fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal 2003 and 2002, respectively: dividend
yield of 0% for both years; expected volatility of 43% and 44%; risk-free
interest rates of 3.18% and 3.77%; and expected lives of five years for both
years. The weighted-average grant-date fair value of options granted during the
nine months ended March 31, 2003 and 2002 was $13.54 and $14.63 per share,
respectively.
NOTE 2 INVENTORIES
Inventories consist of the following:
March 31, June 30,
2003 2002
---- ----
Wine in production $ 270,169 $ 237,934
Bottled wine 144,439 130,831
Crop costs and supplies 11,495 19,809
------------ ------------
$ 426,103 $ 388,574
============ ============
Inventories are valued at the lower of cost or market and inventory costs are
determined using the first-in, first-out (FIFO) method. Costs associated with
growing crops are recorded as inventory and are recognized as wine inventory
costs in the year in which the related crop is harvested. Included in inventory
at March 31, 2003 and June 30, 2002, respectively, was $3,586 and $6,234 of
inventory cost step-up remaining from applying purchase accounting to the fiscal
year 2001 acquisition of Arrowood.
During the third quarter of fiscal 2003, the Company completed a review of its
surplus wine inventory and concluded that the quality of some of its bulk wines
had deteriorated to a level lower than the Company's quality standards. As a
result, the Company recorded an inventory write-down of $7,561, adjusting the
carrying value of these inventories to their estimated net realizable value
based on anticipated sales on the bulk wine market. This inventory write-down
was classified as cost of goods sold in the consolidated statements of
operations.
6
THE ROBERT MONDAVI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
During the first quarter of fiscal 2002, the Company revised its volume growth
expectations for fiscal year 2002 to reflect the continued economic slowdown and
a significant decrease in on-premise (i.e., hotel and restaurant) sales. As a
result of these lowered volume growth expectations, the Company recorded $3,750
in inventory and fixed asset write-downs during the first quarter of fiscal 2002
that were classified as cost of goods sold in the consolidated statements of
operations.
NOTE 3 ASSETS HELD FOR SALE
During the second quarter of fiscal 2003, the Company completed a strategic
business review of its brands and determined that certain of the Company's
vineyard assets were no longer expected to fit its long-term grape sourcing
needs or meet its long-term financial objectives. At that time, vineyard assets
with a combined book value of $47,042 were identified for potential future sale.
These assets are expected to be held and used while the Company develops a plan
to sell the assets. As of December 31, 2002, the Company had agreed to sell one
of its vineyard properties for an amount lower than its book value, less costs
required to sell the property. As a result, the Company recorded an asset
impairment charge of $3,110 during the second quarter of fiscal 2003, which was
included in special charges in the consolidated statements of operations. The
sale of this property was completed during the third quarter of fiscal 2003, at
which time an additional $650 was recorded due to various purchase price and
closing cost adjustments. This amount was also included in special charges in
the consolidated statements of operations. In addition, the Company recorded a
$6,144 gain on the sale of non-strategic assets during the third quarter of
fiscal 2003. The Company believes that the carrying value of the remaining
assets available for sale, amounting to $36,184 as of March 31, 2003, is
recoverable and it does not exceed fair value.
NOTE 4 INVESTMENTS IN JOINT VENTURES
Investments in joint ventures are as follows: March 31, 2003 June 30, 2002
-------------- -------------
Opus One $ 10,568 $ 12,680
Chile 6,288 5,564
Italy 6,035 4,918
Ornellaia 2,746 2,844
Australia 2,405 823
Other 244 391
------------ ------------
$ 28,286 $ 27,220
============ ============
The Company's interest in income and losses for each joint venture is equal to
its ownership percentage. The Opus One joint venture is a general partnership,
of which the Company has a 50% general partnership interest. The Chile joint
venture is a corporation, of which the Company owns a 50% interest. The
Ornellaia and Italy joint ventures are limited liability companies, of which the
Company owns a 50% interest. The Australia joint venture operates through two
entities: a limited liability company, of which the Company owns a 50% interest;
and a general partnership, of which the Company has a 50% general partnership
interest.
The condensed combined statements of operations of the joint ventures are
summarized below. The Company's equity in net income (loss) of joint ventures
differs from the amount that would be obtained by applying the Company's
ownership interest to the net income of these entities due to the elimination of
intercompany profit in inventory.
Statements of Operations
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net revenues $ 17,986 $ 14,599 $ 74,085 $ 70,848
Cost of goods sold 8,807 6,874 28,542 28,365
------------ ------------ ------------ ------------
Gross profit 9,179 7,725 45,543 42,483
Other expenses 8,462 5,484 27,730 22,690
------------ ------------ ------------ ------------
Net income $ 717 $ 2,241 $ 17,813 $ 19,793
============ ============ ============ ============
7
THE ROBERT MONDAVI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
NOTE 5 OPERATIONAL CHANGES AND OTHER CHARGES
Effective January 1, 2003, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 146 (SFAS 146), "Accounting for Costs
Associated with Exit or Disposal Activities." This statement addresses financial
accounting and reporting for costs associated with exit or disposal activities
and it requires that a liability for costs associated with exit or disposal
activities be recognized and measured initially at fair value only when the
liability is incurred.
During the third quarter of fiscal 2003, the Company began implementing a number
of significant changes in its business to improve its position in the
competitive premium wine market. These changes included the centralization of
all marketing and sales responsibilities and all California production and
vineyard operations, a workforce reduction and the sale of non-strategic assets.
During the quarter, the Company eliminated 35 positions, primarily general and
administrative support staff, and recorded $1,157 in employee separation
expenses that were included in special charges in the consolidated statements of
operations. All of these employee separation payments are expected to be made
prior to June 30, 2003. The Company also expects to eliminate up to an
additional 20 positions by the end of the fiscal year.
During the third quarter of fiscal 2003, the Company completed a review of its
internal vineyards and concluded that grapes from one of its vineyards were no
longer expected to meet its quality standards and long-term financial
objectives. As a result, the Company removed the grape vines from this vineyard
and recorded a $1,587 write-down during the quarter, which was classified as
special charges in the consolidated statements of operations.
During fiscal 2002, the Company changed from an operator to a sponsor role at
Disney's California Adventure. With this change, the Company eliminated any
further operational risk associated with the project while it continues a
business relationship with Disney and maintains a presence at the theme park.
The Company eliminated 134 positions, reflecting all full-time and part-time
positions that directly supported the project's operations. All of these
positions were eliminated by December 31, 2001. As a result of this operational
change, the Company recorded special charges totaling $12,240, or $0.47 per
diluted share, during the first six months of fiscal 2002. The special charges
included $10,320 in fixed asset write-offs, $842 in employee separation expenses
and $909 in lease cancellation and contract termination fees. The fixed asset
write-downs related primarily to leasehold improvements that were surrendered
and therefore had no remaining value to the Company subsequent to the change in
operations. All employee separation, lease cancellation and contract termination
payments were made prior to June 30, 2002.
NOTE 6 COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes revenues, expenses, gains and losses that
are excluded from net income, including foreign currency translation adjustments
and unrealized gains and losses on certain derivative financial instruments
designated as cash-flow hedges. Comprehensive income (loss) for the three and
nine months ended March 31, 2003 and 2002 was as follows:
Three Months Ended Nine Months Ended
------------------ -----------------
March 31, March 31,
--------- ---------
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ (1,643) $ 7,583 $ 16,349 $ 15,359
Foreign currency translation adjustment, net of tax (48) (281) (144) (602)
Forward contracts, net of tax 20 37 152 (21)
--------- -------- --------- ---------
Comprehensive income (loss) $ (1,671) $ 7,339 $ 16,357 $ 14,736
========= ======== ========= =========
8
THE ROBERT MONDAVI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
NOTE 7 COMMITMENTS AND CONTINGENCIES
The Company maintains master lease facilities that provide the capacity to fund
up to $186,087, of which $152,641 had been utilized as of March 31, 2003. The
combined facilities enable the Company to lease certain real property and
equipment to be constructed or acquired. The leases are classified as operating
leases and they have initial terms of three to seven years, after a construction
period, with options to renew. The Company may, at its option, purchase the
property under lease during or at the end of the lease term. If the Company does
not exercise the purchase option, the Company will guarantee a residual value of
the property under lease, which was approximately $130,944 as of March 31, 2003.
During January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." Under this
new Interpretation, the Company will be required to include in its consolidated
financial statements the majority of the $152,641 of assets leased under its
master lease facilities during the first quarter of fiscal 2004. The assets
leased under these facilities have historically been included in the financial
covenants of the Company's debt agreements and in the evaluation of the
Company's creditworthiness by its banks.
The Company has contracted with various growers and certain wineries to supply a
large portion of its future grape requirements and a smaller portion of its
future bulk wine requirements. These contracts range from one-year spot market
purchases to longer-term agreements. While most of these contracts call for
prices to be determined by market conditions, many long-term contracts also
provide minimum grape or bulk wine purchase prices. The ultimate amount due
under any of these contracts cannot be determined until the end of each year's
harvest because the contracted amount varies based on vineyard grape yields,
grape quality and grape market conditions.
Effective January 1, 2003, the Company completed the adoption of FASB
Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others." This new
Interpretation clarifies the accounting and disclosure requirements for certain
types of guarantees. The adoption of this Interpretation did not have a material
impact on the Company's consolidated financial statements.
The Company is subject to litigation in the ordinary course of business. In the
opinion of management, the ultimate outcome of existing litigation will not have
a material adverse effect on the Company's consolidated financial condition,
results of its operations, or cash flows.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
Sales volume for the quarter decreased by 13.6% and net revenues decreased by
11.6%, reflecting intensifying competition in the premium wine industry
resulting from a weak U.S. economy and an oversupply of grapes. The Company
reported a net loss of $1.6 million, or $0.10 per diluted share, for the quarter
ended March 31, 2003, compared to net income of $7.6 million, or $0.46 per
diluted share, a year ago. The net loss for the quarter included pre-tax
inventory write-downs, asset impairment charges and employee separation expenses
totaling $7.6 million, $2.2 million and $1.2 million, respectively, which were
partially offset by a pre-tax gain of $6.1 million on the sale of non-strategic
fixed assets.
To improve the Company's position in this fiercely competitive market,
management recently began implementing a number of significant changes in its
business. These changes included the centralization of all marketing and sales
responsibilities and all California production and vineyard operations, a
workforce reduction and the sale of non-strategic assets. Management is also
evaluating other potential changes in the Company's business, which could result
in additional charges of up to as much as $10 million, the majority of which
would likely occur during the fourth quarter of fiscal 2003.
RESULTS OF OPERATIONS
Third Quarter of Fiscal 2003 Compared to Third Quarter of Fiscal 2002
Net Revenues Net revenues decreased by 11.6%, reflecting a 13.6% decrease in
sales volume to 2.0 million cases and a $1.8 million increase in promotional
allowances that were partially offset by a $1.6 million increase in revenues
from the sale of surplus bulk wine. The sales volume decrease during the quarter
reflects intensifying competition in the premium wine industry resulting from a
weak U.S. economy and an over supply of grapes.
Cost of Goods Sold Cost of goods sold increased by 7.6%, reflecting inventory
write-downs totaling $7.6 million, a $1.8 million increase in the cost
associated with surplus bulk wines sold, and the negative impact of balancing
inventories by utilizing higher cost surplus wines in the Company's popular and
super premium brands. These increases were partially offset by decreased sales
volume.
Gross Profit The gross profit percentage decreased to 32.3% compared to 44.4%
last year. Approximately 9.2% of the 12.1% decline in the gross profit
percentage was due to the inventory write-downs and surplus wine sales.
Selling, General and Administrative Expenses Selling, general and administrative
expenses decreased by 3.7%, reflecting the favorable impact of cost cutting
efforts that was partially offset by higher costs associated with changes in the
Company's sales organization. The ratio of selling, general and administrative
expenses to net revenues increased to 30.8% from 28.2% a year ago, reflecting
the loss of sales volume leverage.
Gain on Sale of Assets The Company completed the sale of certain non-strategic
fixed assets during the quarter, which resulted in a $6.1 million gain.
Special Charges During the third quarter of fiscal 2003, the Company recorded
$3.4 million in special charges, reflecting $2.2 million in vineyard write-downs
and $1.2 million in employee separation expenses. The vineyard write-downs were
the result of the Company concluding that certain of its vineyards were no
longer expected to meet the Company's quality standards and long-term financial
objectives; and various purchase price and closing cost adjustments related to
the completion of a vineyard sale during the quarter. The employee separation
expenses were the result of the elimination of 35 positions, primarily general
and administrative support staff, during the quarter. All of these employee
separation payments are expected to be made prior to June 30, 2003.
Interest Interest expense decreased by $0.4 million, primarily reflecting a
decrease in average borrowings outstanding that was partially offset by a $0.4
million decrease in capitalized interest resulting from the completion of
certain capital and vineyard development projects.
Equity Income (Loss) from Joint Ventures The Company reported an equity loss
from joint ventures of $0.5 million compared to income of $1.1 million a year
ago, reflecting a decrease in profits during the period from the Opus One and
Italian joint ventures of $0.7 million and $0.4 million, respectively.
10
Income Tax Provision (Benefit) The Company's effective tax rate was 37.0%
compared to 37.5% last year. The lower effective tax rate was primarily the
result of an increase in certain manufacturing tax credits.
Net Income (Loss) and Earnings (Loss) Per Share As a result of the above
factors, the Company reported a net loss of $1.6 million, or $0.10 per diluted
share, compared to net income of $7.6 million, or $0.46 per diluted share, a
year ago.
First Nine Months of Fiscal 2003 Compared to the First Nine Months of Fiscal
2002
Net Revenues Net revenues increased by 4.9%, reflecting a 4.6% increase in sales
volume to 7.1 million cases and a $3.1 million increase in revenues from the
sale of surplus bulk wines that were partially offset by a $7.5 million increase
in promotional allowances.
Cost of Goods Sold Cost of goods sold increased by 12.6%, reflecting increased
sales volume; higher inventory write-downs, which totaled $7.6 million and $3.8
million in fiscal 2003 and 2002, respectively; a $4.0 million increase in the
cost associated with surplus bulk wines sold; and the negative impact of
balancing inventories by utilizing higher cost surplus wines in the Company's
popular and super premium brands.
Gross Profit The gross profit percentage decreased to 39.5% compared to 43.6%
last year. Approximately 2.4% of the 4.1% decline in the gross profit percentage
was due to increased inventory write-downs and surplus bulk wine sales.
Selling, General and Administrative Expenses Selling, general and administrative
expenses increased by 2.1%, reflecting a $1.6 million increase in advertising
expenses and higher costs associated with changes in the Company's sales
organization that were partially offset by the favorable impact of cost cutting
efforts and the elimination of operating expenses associated with the Disney
California Adventure project, which totaled $1.8 million in fiscal 2002. The
ratio of selling, general and administrative expenses to net revenues decreased
to 28.6% from 29.4% a year ago, reflecting the favorable impact of sales volume
leverage.
Gain on Sale of Assets The Company completed the sale of certain non-strategic
fixed assets during fiscal 2003, which resulted in a $6.1 million gain.
Special Charges During fiscal 2003, the Company recorded $6.5 million in special
charges, reflecting $5.3 million in vineyard write-downs and $1.2 million in
employee separation expenses. The vineyard write-downs were the result of the
Company completing the sale of one of its non-strategic vineyard assets for an
amount less than its book value and concluding that certain of its vineyards
were no longer expected to meet the Company's quality standards and long-term
financial objectives. The employee separation expenses were the result of the
elimination of 35 positions, primarily general and administrative support staff,
during the third quarter. All of these employee separation payments are expected
to be made prior to June 30, 2003. The Company also expects to eliminate up to
an additional 20 positions by the end of the fiscal year.
During fiscal 2002, the Company changed from an operator to a sponsor role at
Disney's California Adventure. With this change, the Company eliminated any
further operational risk associated with the project while it continues a
business relationship with Disney and maintains a presence at the theme park.
The Company eliminated 134 positions, reflecting all full-time and part-time
positions that directly supported the project's operations. All of these
positions were eliminated by December 31, 2001. As a result of this operational
change, the Company recorded special charges totaling $12.2 million or $0.47 per
diluted share, during the first six months of fiscal 2002. The special charges
included $10.3 million in fixed asset write-offs, $0.8 million in employee
separation expenses and $0.9 million in lease cancellation and contract
termination fees. The fixed asset write-downs related primarily to leasehold
improvements that were surrendered and therefore had no remaining value to the
Company subsequent to the change in operations. All employee separation, lease
cancellation and contract termination payments were made prior to June 30, 2002.
Interest Interest expense decreased by $0.4 million, primarily reflecting a
decrease in average borrowings outstanding that was partially offset by a $1.4
million decrease in capitalized interest resulting from the completion of
certain capital and vineyard development projects.
11
Equity Income (Loss) from Joint Ventures Equity income from joint ventures
decreased by $1.0 million, reflecting a decrease in profits during the period
from the Opus One and Italian joint ventures of $0.7 million and $0.6 million,
respectively.
Income Tax Provision The Company's effective tax rate was 37.0% compared to
37.5% last year. The lower effective tax rate was primarily the result of an
increase in certain manufacturing tax credits.
Net Income and Earnings Per Share As a result of the above factors, net income
totaled $16.3 million, or $1.00 per diluted share, compared to $15.4 million, or
$0.94 per diluted share, a year ago.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a book overdraft, representing the float on outstanding checks,
of $3.4 million at March 31, 2003, compared to a book overdraft of $2.7 million
at June 30, 2002. Cash provided by operations totaled $18.4 million, reflecting
net income of $16.3 million, adjustments to reconcile net income to net cash
flows from operating activities totaling $28.8 million, a $10.1 million decrease
in accounts receivable and an $8.1 million increase in accounts payable, which
were partially offset by a $45.3 million increase in inventories. Cash used in
investing activities totaled $1.7 million, reflecting $16.3 million in purchases
of property, plant and equipment and vineyard development costs, $17.5 million
in proceeds from the sale of non-strategic assets and $1.8 million in
contributions to joint ventures. Cash used in financing activities totaled $16.7
million, primarily reflecting net repayments of debt.
The Company maintains master lease facilities that provide the capacity to fund
up to $186.1 million, of which $152.6 million had been utilized as of March 31,
2003. The facilities enable the Company to lease certain real property and
equipment to be constructed or acquired. The leases are classified as operating
leases and they have initial terms of three to seven years, after a construction
period, with options to renew. The Company may, at its option, purchase the
property under lease during or at the end of the lease term. If the Company does
not exercise the purchase option, the Company will guarantee a residual value of
the property under lease, which was approximately $130.9 million as of March 31,
2003. The assets leased under these facilities have historically been included
in the financial covenants of the Company's debt agreements and in the
evaluation of the Company's creditworthiness by its banks.
The Company has unsecured long-term credit lines that have maximum credit
availability of $150.0 million and expire on December 14, 2004. The Company had
$8.0 million outstanding under its long-term credit lines as of March 31, 2003.
The Company also has the ability to borrow up to $35.0 million under an
uncommitted credit facility with a bank. The Company may request advances under
this credit facility, and if approved by the bank, the advance must be repaid in
no more than 180 days from the date of the advance. The Company had $27.5
million outstanding under this credit facility as of March 31, 2003.
NEW ACCOUNTING PRONOUNCEMENT
During January 2003, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities." Under this
new Interpretation, the Company will be required to include in its consolidated
financial statements the majority of the $152.6 million of assets leased under
its master lease facilities during the first quarter of fiscal 2004. The Company
is currently evaluating the accounting and financing implications of this new
Interpretation.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There were no material changes from the items disclosed in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2002, on file at the
Securities and Exchange Commission.
Item 4. Controls and Procedures.
Included below in this report are the Certifications by the Chief Executive
Officer and Chief Financial Officer required by the instructions to SEC Form
10-Q. In order to provide their certifications the CEO and the CFO have
reviewed, as of April 23, 2003, the effectiveness of the Company's disclosure
controls and procedures. These are the controls and other procedures of the
Company that are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits to the SEC under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. They include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in such reports is accumulated and
communicated to the issuer's management, including its principal executive
officer and principal financial officer, as appropriate to allow timely
disclosure decisions regarding required disclosure. Based on their review, the
CEO and CFO have concluded that the Company's disclosure controls and procedures
are effective for the foregoing purposes. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect those controls subsequent to the date of their evaluation.
PART II
Item 1. Legal Proceedings.
The Company is subject to litigation in the ordinary course of its business. In
the opinion of management, the ultimate outcome of existing litigation will not
have a material adverse effect on the Company's consolidated financial
condition, the results of its operations or its cash flows.
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits: None.
2) Form 8-K:
A Current Report on Form 8-K was filed on March 27, 2003, in
which the Company lowered its earnings forecast for the
remainder of its fiscal year and announced a number of
changes to its business to increase top line growth, reduce
product and operating costs, and increase asset efficiency.
A Current Report on Form 8-K was filed on April 24, 2003, in
which the Company announced results for its third quarter of
fiscal 2003.
13
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ROBERT MONDAVI CORPORATION
Dated: May 15, 2003 By /s/ HENRY J. SALVO, JR.
----------------------------------
Henry J. Salvo, Jr.
Chief Financial Officer
Forward-looking Statements
--------------------------
The above Form 10-Q and other information provided from time to time by the
Company contain historical information as well as forward-looking statements
about the Company, the premium wine industry and general business and economic
conditions. Such forward-looking statements include, for example, projections or
predictions about the Company's future growth, consumer demand for its wines,
including new brands and brand extensions, margin trends, anticipated future
investment in vineyards and other capital projects, the premium wine grape
market and the premium wine industry generally. Actual results may differ
materially from the Company's present expectations. Among other things, a soft
economy, a downturn in the travel and entertainment sector, risk associated with
conflict in the Middle East, reduced consumer spending, or changes in consumer
preferences could reduce demand for the Company's wines. Similarly, increased
competition or changes in tourism to our California properties could affect the
Company's volume and revenue growth outlook. The supply and price of grapes, the
Company's most important raw material, are beyond the Company's control. A
shortage of grapes might constrict the supply of wine available for sale and
cause higher grape costs that put more pressure on gross profit margins. A
surplus of grapes might allow for greater sales and lower grape costs, but it
might also result in more competition and pressure on selling prices or
marketing spending. Interest rates and other business and economic conditions
could increase significantly the cost and risks of projected capital spending.
For additional cautionary statements identifying important factors that could
cause actual results to differ materially from such forward-looking information,
please refer to Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2002, on file with the Securities and
Exchange Commission. For these and other reasons, no forward-looking statement
by the Company can nor should be taken as a guarantee of what will happen in the
future.
14
CERTIFICATION
I, GREGORY M. EVANS, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Robert Mondavi
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
-----------------------------
/s/ GREGORY M. EVANS
-----------------------------
Gregory M. Evans
President / CEO
15
CERTIFICATION
I, HENRY J. SALVO, JR., certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Robert Mondavi
Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
-----------------------------
/s/ HENRY J. SALVO, JR.
------------------------------
Henry J. Salvo, Jr.
Executive Vice President / CFO