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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 September 30, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-61516
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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
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As of October 31, 2002, there were issued and outstanding 9,570,602 shares of
the issuer's Class A Common Stock and 6,647,647 shares of the issuer's Class B
Common Stock.
1
PART I
Item 1. Financial Statements.
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
September 30, June 30,
2002 2002
---- ----
Unaudited
---------
Current assets:
Accounts receivable--trade, net $ 82,045 $ 92,555
Inventories 444,049 388,574
Prepaid expenses and other current assets 14,570 12,179
------------ ------------
Total current assets 540,664 493,308
Property, plant and equipment, net 326,632 323,582
Investments in joint ventures 32,915 27,220
Other assets 11,258 11,455
------------ ------------
Total assets $ 911,469 $ 855,565
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Book overdraft $ 12,834 $ 2,734
Notes payable to banks - - 4,400
Accounts payable--trade 72,847 23,012
Employee compensation and related costs 13,721 11,044
Other accrued expenses 20,329 21,126
Current portion of long-term debt 9,314 12,568
------------- ------------
Total current liabilities 129,045 74,884
Long-term debt, less current portion 308,872 316,169
Deferred income taxes 24,945 24,039
Deferred executive compensation 5,968 5,657
Other liabilities 3,426 3,537
------------ ------------
Total liabilities 472,256 424,286
------------ ------------
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--9,570,602 and 9,566,102 shares 93,881 93,827
Class B Common Stock, without par value:
Authorized--12,000,000 shares;
issued and outstanding--6,647,647 shares 10,677 10,677
Paid-in capital 11,050 11,025
Retained earnings 326,070 317,915
Accumulated other comprehensive income:
Cumulative translation adjustment (2,167) (1,716)
Forward contracts (298) (449)
------------ ------------
Total shareholders' equity 439,213 431,279
------------ ------------
Total liabilities and shareholders' equity $ 911,469 $ 855,565
============ ============
See Notes to Consolidated Financial Statements.
2
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands, except per share data)
Three Months Ended
September 30,
-------------
2002 2001
---- ----
Gross revenues $ 103,460 $ 84,779
Less excise taxes 4,854 3,876
------------ ------------
Net revenues 98,606 80,903
Cost of goods sold 57,273 47,405
------------ ------------
Gross profit 41,333 33,498
Selling, general and administrative expenses 29,906 28,741
Special charges - - 11,200
------------ ------------
Operating income (loss) 11,427 (6,443)
Other income (expense):
Interest (5,135) (5,148)
Equity in net income of joint ventures 7,321 7,784
Other (668) (154)
------------ ------------
Income (loss) before income taxes 12,945 (3,961)
Provision (benefit) for income taxes 4,790 (1,485)
------------ ------------
Net income (loss) $ 8,155 $ (2,476)
============ ============
Earnings (loss) per share--Basic $ .50 $ (.15)
============ ============
Earnings (loss) per share--Diluted $ .50 $ (.15)
============ ============
Weighted average number of shares outstanding--Basic 16,215 16,037
============ ============
Weighted average number of shares outstanding--Diluted 16,363 16,037
============ ============
See Notes to Consolidated Financial Statements.
3
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended
September 30,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 8,155 $ (2,476)
Adjustments to reconcile net income to net cash
provided by operating activities:
Deferred income taxes 25 492
Depreciation and amortization 5,947 5,777
Equity in net income of joint ventures (7,321) (7,784)
Distributions from joint ventures 1,509 1,000
Special charges and asset write-downs - - 14,070
Other 808 149
Changes in assets and liabilities:
Accounts receivable--trade 10,510 43,687
Inventories (54,858) (80,338)
Other assets (1,870) (2,930)
Accounts payable--trade and accrued expenses 52,251 58,523
Deferred executive compensation 311 769
Other liabilities (111) (6)
------------ ------------
Net cash provided by operating activities 15,356 30,933
------------ ------------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (9,591) (15,950)
Proceeds from sale of assets - - 12,327
Contributions to joint ventures (499) (9)
------------ ------------
Net cash used in investing activities (10,090) (3,632)
------------ ------------
Cash flows from financing activities:
Book overdraft 10,100 16,114
Net repayments under credit lines (8,400) (47,800)
Principal repayments of long-term debt (6,551) (2,703)
Exercise of Class A Common Stock options 54 - -
Other (469) (101)
------------ ------------
Net cash used in financing activities (5,266) (34,490)
------------ ------------
Net decrease 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
(Dollars in thousands)
NOTE 1 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
September 30, 2002, its results of operations for the three month periods ended
September 30, 2002 and 2001 and its cash flows for the three month periods ended
September 30, 2002 and 2001. 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.
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.
NOTE 2 INVENTORIES
Inventories consist of the following:
September 30, June 30,
2002 2002
---- ----
Unaudited
---------
Wine in production $ 283,181 $ 237,934
Bottled wine 148,723 130,831
Crop costs and supplies 12,145 19,809
------------ ------------
$ 444,049 $ 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 September 30, 2002, was $5,524 of inventory cost step-up remaining from
applying purchase accounting to the acquisition of Arrowood.
NOTE 3 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 September 30, 2002, the Company had outstanding forward exchange contracts,
hedging primarily European euro purchases of barrels and corks and forecasted
receipts of Canadian dollars and European euros, with notional amounts totaling
$8,219. Using exchange rates outstanding as of September 30, 2002, the U.S.
dollar equivalent of the contracts totaled $8,765.
5
THE ROBERT MONDAVI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 4 OPERATIONAL CHANGES
During the first quarter of fiscal 2002, the Company implemented a number of
operational changes aimed at improving its competitiveness in the slowing
economy. These included changes in the Company's Disney California Adventure
project and the write-down of certain inventories and fixed assets due to
lowered volume growth expectations.
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. As a result of this change,
the Company recorded special charges totaling $11,200 during the first quarter
of fiscal 2002, primarily reflecting fixed asset write-offs and lease
cancellation fees. An additional $1,040 of special charges was recorded during
the second quarter of fiscal 2002, primarily reflecting employee separation
expenses.
During the first quarter of fiscal 2002, the Company also revised its volume
growth expectations for the fiscal year 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, or $0.14 per diluted share, in inventory and fixed asset
write-downs during the first quarter that were classified as cost of goods sold.
NOTE 5 COMPREHENSIVE INCOME
Comprehensive income 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 for the three months ended
September 30, 2002 and 2001 was as follows:
Unaudited
Three Months Ended
September 30,
-------------
2002 2001
---- ----
Net income (loss) $ 8,155 $ (2,476)
Foreign currency translation adjustment, net of tax (451) (128)
Forward contracts, net of tax 151 - -
------------ ------------
Comprehensive income (loss) $ 7,855 $ (2,604)
============ ============
6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
During the first quarter of the prior fiscal year, the Company recorded $11.2
million, or $0.43 per diluted share, in special charges related to operational
changes in its Disney California Adventure project. The Company also recorded
inventory and fixed asset write-downs, totaling $3.8 million, or $0.14 per
diluted share, during the same period as a result of lowering its sales volume
growth projections for the fiscal year. The adjusted figures discussed
throughout this report, exclude the special charges and asset write-downs, as
well as inventory step-up charges associated with business acquisitions for all
periods presented.
The Company has included these adjusted figures in its discussion and analysis
of financial condition and results of operations to provide a clearer picture of
its ongoing operating performance as compared to its reported results. The
adjusted figures should not be considered an alternative to financial statements
required under accounting principles generally accepted in the United States of
America.
RESULTS OF OPERATIONS
First Quarter of Fiscal 2003 Compared to First Quarter of Fiscal 2002
Net Revenues -- Net revenues increased by 22.0%, reflecting a 25.0%
increase in sales volume and a 2.6% decrease in net revenues per case. Prior
year net revenues and sales volume reflected the negative impact of a sharp
decline in the travel and entertainment sectors that began during September
2001. The increase in sales volume to 2.1 million cases was primarily driven by
the Woodbridge and Robert Mondavi Private Selection brands. The shift in sales
mix to these brands combined with higher promotional spending per case
contributed to the decrease in net revenues per case.
Cost of Goods Sold -- Cost of goods sold as reported increased by 21.0%.
Adjusted cost of goods sold increased by 32.1%, reflecting increased sales
volume and the negative impact of balancing inventories through external bulk
wine sales and by utilizing higher cost surplus wines in the Company's
popular-premium brands.
Gross Profit -- As a result of the above factors, the reported gross profit
percentage was 41.9% compared to 41.4% reported last year. The adjusted gross
profit percentage was 42.6% compared to 47.1% last year.
Selling, General and Administrative Expenses -- Selling, general and
administrative expenses increased by 4.1%, reflecting increased advertising
expenses and costs associated with changes in the Company's sales organization
that were partially offset by the elimination of operating expenses associated
with the Disney California Adventure project. The ratio of selling, general and
administrative expenses to net revenues decreased to 30.3% from 35.5% a year
ago, reflecting the favorable impact of sales volume leverage.
Special Charges -- During the prior fiscal year, 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. As a result of this change, the Company recorded special
charges during the first quarter of the prior fiscal year, totaling $11.2
million, or $0.43 per diluted share, primarily reflecting fixed asset write-offs
and lease cancellation fees. An additional $1,040 of special charges was
recorded during the second quarter of fiscal 2002, primarily reflecting employee
separation expenses.
Interest -- Interest expense was essentially unchanged from the prior year,
despite decreases in the Company's average interest rate and average borrowings
outstanding, due to a decrease in capitalized interest resulting from the
completion of certain capital and vineyard development projects.
7
Equity Income from Joint Ventures -- Equity income from joint ventures decreased
by 6.0%, reflecting a decrease in income from Opus One that was partially offset
by an increase in income from Ornellaia.
Provision for Income Taxes -- 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, reported
net income totaled $8.2 million, or $0.50 per diluted share, compared to a
reported net loss of $2.5 million, or ($0.15) per diluted share, a year ago.
Adjusted net income totaled $9.5 million, or $0.58 per diluted share, compared
to $8.2 million, or $0.50 per diluted share, a year ago.
LIQUIDITY AND CAPITAL RESOURCES
The Company had a book overdraft, representing the float on outstanding checks,
of $12.8 million at September 30, 2002, compared to a book overdraft of $2.7
million at June 30, 2002. Cash provided by operations totaled $15.4 million,
reflecting a decrease in accounts receivable and the impact of harvest, with
significant increases in inventories and accounts payable to growers. Cash used
in investing activities totaled $10.1 million, reflecting purchases of
production equipment and vineyard development costs. Cash used in financing
activities totaled $5.3 million, primarily reflecting net repayments of debt.
The Company maintains master lease facilities that provide the capacity to fund
up to $187.2 million, of which $148.8 million had been utilized as of September
30, 2002. 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 $128.0 million as of September
30, 2002.
On June 28, 2002, the Financial Accounting Standards Board issued a proposed
interpretation of Accounting Research Bulletin No. 51 related to the
consolidation of certain special-purpose entities. If this proposed
interpretation is adopted as currently written, the Company would be required to
include in its consolidated financial statements the majority of the $148.8
million of assets leased under its master lease facilities during the fourth
quarter of its fiscal year ending June 30, 2003. The Company is currently
evaluating the potential accounting and financing implications of this proposed
interpretation. 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
$33.0 million outstanding under its long-term credit lines as of September 30,
2002.
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. No amounts were outstanding
under this credit facility as of September 30, 2002.
8
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 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 October 23, 2002, 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.
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits:
10.53 Employment Agreement dated as of May 1, 2001 between
Registrant and Gregory M. Evans.
10.54 Employment Agreement dated as of July 1, 2001 between
Registrant and Henry J. Salvo, Jr.
2) Form 8-K:
No reports on Form 8-K were filed during the quarter ended
September 30, 2002.
9
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: November 14, 2002 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, 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.
10
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: November 14, 2002
-----------------
/s/ GREGORY M. EVANS
--------------------
Gregory M. Evans
President/CEO
11
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: November 14, 2002
-----------------
/s/ HENRY J. SALVO, JR.
-----------------------
Henry J. Salvo, Jr.
Executive Vice President/CFO