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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 December 31, 2002
-------------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------------- -----------------------
Commission File Number: 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 January 31, 2003, there were issued and outstanding 9,618,152 shares of
the issuer's Class A Common Stock and 6,646,734 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
December 31, June 30,
2002 2002
---- ----
Unaudited
Current assets:
Accounts receivable--trade, net $ 94,914 $ 92,555
Inventories 441,949 388,574
Prepaid expenses and other current assets 14,360 12,179
---------- ---------
Total current assets 551,223 493,308
Property, plant and equipment, net 311,464 323,582
Assets held for sale 7,748 - -
Investments in joint ventures 28,901 27,220
Other assets 11,062 11,455
---------- ---------
Total assets $ 910,398 $855,565
========== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Book overdraft $ 3,423 $ 2,734
Notes payable to banks 9,900 4,400
Accounts payable--trade 62,726 23,012
Employee compensation and related costs 13,790 11,044
Other accrued expenses 26,450 21,126
Current portion of long-term debt 9,145 12,568
---------- ---------
Total current liabilities 125,434 74,884
Long-term debt, less current portion 298,810 316,169
Deferred income taxes 26,169 24,039
Deferred executive compensation 6,328 5,657
Other liabilities 3,351 3,537
---------- ---------
Total liabilities 460,092 424,286
---------- ---------
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--9,615,902 and 9,566,102 shares 94,550 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 11,302 11,025
Retained earnings 335,907 317,915
Accumulated other comprehensive income (loss):
Cumulative translation adjustment (1,812) (1,716)
Forward contracts (317) (449)
---------- ---------
Total shareholders' equity 450,306 431,279
---------- ---------
Total liabilities and shareholders' equity $ 910,398 $ 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 Six Months Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenues $148,288 $137,822 $ 251,748 $ 222,601
Less excise taxes 7,194 6,711 12,048 10,587
--------- --------- --------- ---------
Net revenues 141,094 131,111 239,700 212,014
Cost of goods sold 81,047 72,914 138,320 120,319
--------- --------- --------- ---------
Gross profit 60,047 58,197 101,380 91,695
Selling, general and administrative expenses 36,716 34,873 66,622 63,614
Special charges 3,110 1,040 3,110 12,240
--------- --------- --------- ---------
Operating income 20,221 22,284 31,648 15,841
Other income (expense):
Interest (5,377) (5,415) (10,512) (10,563)
Equity income from joint ventures 1,074 15 8,395 7,799
Other (304) (482) (972) (636)
--------- --------- --------- ---------
Income before income taxes 15,614 16,402 28,559 12,441
Provision for income taxes 5,777 6,150 10,567 4,665
--------- --------- --------- ---------
Net income $ 9,837 $ 10,252 $ 17,992 $ 7,776
========= ========= ======== =========
Earnings per share-Basic $ .61 $ .64 $ 1.11 $ .48
======== ========= ========= =========
Earnings per share-Diluted $ .60 $ .63 $ 1.10 $ .48
======== ========= ========= =========
Weighted average number of shares outstanding-Basic 16,235 16,040 16,225 16,038
========= ========= ========= =========
Weighted average number of shares outstanding-Diluted 16,383 16,305 16,372 16,354
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
3
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
December 31,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 17,992 $ 7,776
Adjustments to reconcile net income to net cash
flows from operating activities:
Deferred income taxes 188 (1,542)
Depreciation and amortization 11,907 11,313
Equity income from joint ventures (8,395) (7,799)
Distributions from joint ventures 7,619 7,092
Special charges and asset write-downs 3,110 14,070
Other 1,102 448
Changes in assets and liabilities:
Accounts receivable--trade (2,359) 21,992
Inventories (52,457) (82,426)
Other assets (651) 3,301
Accounts payable--trade and accrued expenses 48,605 22,325
Deferred executive compensation 671 1,054
Other liabilities (318) (91)
---------- ---------
Net cash flows from operating activities 27,014 (2,487)
---------- ---------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (11,343) (20,142)
Proceeds from sale of assets - - 12,327
Contributions to joint ventures (1,468) (1,018)
---------- ---------
Net cash flows from investing activities (12,811) (8,833)
---------- ---------
Cash flows from financing activities:
Book overdraft 689 5,304
Net additions (repayments) under credit lines (6,500) 10,000
Principal repayments of long-term debt (8,782) (10,926)
Proceeds from issuance of Class A Common Stock 260 296
Exercise of Class A Common Stock options 462 113
Other (332) (656)
---------- ---------
Net cash flows from financing activities (14,203) 4,131
---------- ---------
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
(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
December 31, 2002, its results of operations for the three and six month periods
ended December 31, 2002 and 2001 and its cash flows for the six month periods
ended December 31, 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.
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.
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 148,000
and 265,000, respectively, for the three months ended December 31, 2002 and
2001, and by 147,000 and 316,000, respectively, for the six months ended
December 31, 2002 and 2001 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 December 31, 2002, 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 $12,909.
Using exchange rates outstanding as of December 31, 2002, the U.S. dollar
equivalent of the contracts totaled $13,430.
New accounting pronouncements
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 $151,392 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.
5
THE ROBERT MONDAVI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
During December 2002, the FASB issued 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. The Company
plans to adopt the new disclosure requirements of SFAS 148 as required during
the third quarter of fiscal 2003.
During November 2002, the FASB issued 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
Company plans to complete the adoption of this Interpretation as required during
the third quarter of fiscal 2003. The adoption of this Interpretation is not
expected to have a material impact on the Company's consolidated financial
statements.
NOTE 2 INVENTORIES
Inventories consist of the following:
December 31, June 30,
2002 2002
---- ----
Unaudited
Wine in production $ 299,668 $ 237,934
Bottled wine 133,736 130,831
Crop costs and supplies 8,545 19,809
---------- ---------
$ 441,949 $ 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 December 31, 2002 and June 30, 2002, respectively, was $4,324 and $6,234 of
inventory cost step-up remaining from applying purchase accounting to the fiscal
year 2001 acquisition of Arrowood.
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. Vineyard assets with a
combined book value of $47,042 have been identified for potential future sale.
These assets are expected to be held and used while the Company develops a plan
to sell the assets. The Company believes that the carrying value of these assets
is recoverable and it does not exceed fair value, with one exception. 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 income. The sale of this property is expected
to be completed by the end of fiscal 2003.
6
THE ROBERT MONDAVI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 4 INVESTMENTS IN JOINT VENTURES
Investments in joint ventures are summarized below. The Company's interest in
income and losses for each joint venture is stated within parentheses.
December 31, June 30,
2002 2002
---- ----
Unaudited
Opus One (50%) $ 12,240 $ 12,680
Chile (50%) 6,268 5,564
Italy (50%) 5,894 4,918
Ornellaia (50%) 2,447 2,844
Australia (50%) 2,051 823
Other 1 391
-------- ---------
$ 28,901 $ 27,220
========= =========
NOTE 5 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 $12,240 during the first six
months of fiscal 2002, primarily reflecting fixed asset write-offs, employee
separation expenses and lease cancellation fees.
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 in inventory and fixed asset write-downs during the first
quarter of fiscal 2002 that were classified as cost of goods sold.
NOTE 6 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 and six
months ended December 31, 2002 and 2001 was as follows:
Unaudited
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 9,837 $ 10,252 $ 17,992 $ 7,776
Foreign currency translation
adjustment, net of tax 355 (193) (96) (321)
Forward contracts, net of tax (19) (58) 132 (58)
--------- -------- -------- ---------
Comprehensive income $ 10,173 $ 10,001 $ 18,028 $ 7,397
========= ======== ======== =========
7
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
During the second quarter of fiscal 2003, the Company recorded $3.1 million in
special charges related to the impairment of certain vineyards assets held for
sale. During fiscal 2002, the Company recorded $12.2 million in special charges
related to operational changes in its Disney California Adventure project and
$3.8 million of inventory and fixed asset write-downs 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
prepared under accounting principles generally accepted in the United States of
America.
FINANCIAL HIGHLIGHTS (In thousands, except per share data)
Three Months Ended December 31,
Reported Adjusted
------------------------------------- -------------------------------------
2002 2001 2002 2001
----------------- ----------------- ---------------- -----------------
Cases sold 3,031 2,823 3,031 2,823
Net revenues $ 141,094 $ 131,111 $ 141,094 $ 131,111
Cost of goods sold 81,047 72,914 79,847 71,974
Gross profit 60,047 58,197 61,247 59,137
Gross profit % 42.6% 44.4% 43.4% 45.1%
Selling, general & administrative exp. 36,716 34,873 36,716 34,873
Special charges 3,110 1,040 - - - -
Operating income 20,221 22,284 24,531 24,264
Other income (expense):
Interest (5,377) (5,415) (5,377) (5,415)
Equity income from joint ventures 1,074 15 1,296 210
Other (304) (482) (304) (482)
Income before income taxes 15,614 16,402 20,146 18,577
Provision for income taxes 5,777 6,150 7,454 6,966
Net income 9,837 10,252 12,692 11,611
Earnings per share - Diluted $ .60 $ .63 $ .77 $ .71
Six Months Ended December 31,
Reported Adjusted
------------------------------------- ------------------------------------
2002 2001 2002 2001
----------------- ----------------- ---------------- -----------------
Cases sold 5,120 4,492 5,120 4,492
Net revenues $ 239,700 $ 212,014 $ 239,700 $ 212,014
Cost of goods sold 138,320 120,319 136,410 114,790
Gross profit 101,380 91,695 103,290 97,224
Gross profit % 42.3% 43.2% 43.1% 45.9%
Selling, general & administrative exp. 66,622 63,614 66,622 63,614
Special charges 3,110 12,240 - - - -
Operating income 31,648 15,841 36,668 33,610
Other income (expense):
Interest (10,512) (10,563) (10,512) (10,563)
Equity income from joint ventures 8,395 7,799 10,007 9,297
Other (972) (636) (972) (636)
Income before income taxes 28,559 12,441 35,191 31,708
Provision for income taxes 10,567 4,665 13,021 11,891
Net income 17,992 7,776 22,170 19,817
Earnings per share - Diluted $ 1.10 $ .48 $ 1.35 $ 1.21
8
RESULTS OF OPERATIONS
Second Quarter of Fiscal 2003 Compared to Second Quarter of Fiscal 2002
Net Revenues Net revenues increased by 7.6%, reflecting a 7.4% increase in sales
volume. The sales volume increase was primarily driven by the Company's popular
and super premium wines, as luxury wine sales continue to improve at a slower
rate than the other categories. Sales volume of the Company's wines grew at a
slower rate than last quarter due to price reductions taken by competing brands
and due to the introduction of significantly lower priced wines sourced from the
depressed bulk wine market.
Cost of Goods Sold Cost of goods sold as reported increased by 11.2%, including
inventory step-up charges associated with the Arrowood acquisition of $1.2
million and $0.9 million, respectively, for the second quarter of fiscal 2003
and 2002. Adjusted cost of goods sold increased by 11.0%. The increase in both
reported and adjusted cost of goods sold reflects increased sales volume and the
negative impact of balancing inventories through bulk wine sales and by
utilizing higher cost surplus wines in the Company's popular and super premium
brands.
Gross Profit As a result of the above factors, the reported gross profit
percentage was 42.6% compared to 44.4% reported last year. The adjusted gross
profit percentage was 43.4% compared to 45.1% last year.
Selling, General and Administrative Expenses Selling, general and administrative
expenses increased by 5.3%, reflecting increased advertising expenses and higher
costs associated with changes in the Company's sales organization. The ratio of
selling, general and administrative expenses to net revenues decreased to 26.0%
from 26.6% a year ago, reflecting the favorable impact of sales volume leverage
and cost cutting efforts.
Special Charges During the second quarter of fiscal 2003, the Company recorded
$3.1 million in special charges related to the impairment of certain vineyard
assets as a result of its decision to sell one of its vineyard properties that
was no longer expected to meet its long-term financial objectives, nor fit its
long-term grape sourcing requirements.
During the second quarter of fiscal 2002, the Company recorded $1.0 million in
special charges related primarily to employee separation expenses associated
with operational changes made in the Disney California Adventure project at the
end of the first quarter of fiscal 2002.
Interest Interest expense was essentially unchanged from the prior year, despite
a decrease in average borrowings outstanding, due to a decrease in capitalized
interest resulting from the completion of certain capital and vineyard
development projects.
Equity Income from Joint Ventures Equity income from joint ventures as reported
included $0.2 million of inventory step-up associated with the Ornellaia
acquisition for both the second quarter of fiscal 2003 and 2002. The increase in
both reported and adjusted equity income from joint ventures was primarily due
to improved income from Opus One and the Chilean joint venture during the
period. The improvement in income from Opus One was mainly due to a difference
in the timing of wine shipments. The improvement in income from Chile was mainly
due to cost reductions implemented at the joint venture level.
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 $9.8 million, or $0.60 per diluted share, compared to $10.3
million, or $0.63 per diluted share, a year ago. Adjusted net income totaled
$12.7 million, or $0.77 per diluted share, compared to $11.6 million, or $0.71
per diluted share, a year ago.
9
First Six Months of Fiscal 2003 Compared to the First Six Months of Fiscal 2002
Net Revenues Net revenues increased by 13.1%, reflecting a 14.0% increase in
sales volume that was partially offset by a 0.8% 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 sales volume increase was primarily driven by the Company's
popular and super premium wines, as luxury wine sales continue to improve at a
slower rate than the other categories. The shift in sales mix 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 15.0%, including
inventory step-up charges associated with the Arrowood acquisition of $1.9
million and $1.8 million, respectively, for the first six months of fiscal 2003
and 2002, as well as inventory and fixed asset write-downs totaling $3.8 million
during the first six months of fiscal 2002. Adjusted cost of goods sold
increased by 18.8%. The increase in both reported and adjusted cost of goods
sold reflects increased sales volume and the negative impact of balancing
inventories through bulk wine sales and by utilizing higher cost surplus wines
in the Company's popular and super premium brands.
Gross Profit As a result of the above factors, the reported gross profit
percentage was 42.3% compared to 43.2% reported last year. The adjusted gross
profit percentage was 43.1% compared to 45.9% last year.
Selling, General and Administrative Expenses Selling, general and administrative
expenses increased by 4.7%, reflecting increased advertising expenses and higher
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 27.8% from 30.0% a year
ago, reflecting the favorable impact of sales volume leverage and cost cutting
efforts.
Special Charges As discussed earlier, the Company recorded $3.1 million in
special charges related to the impairment of certain vineyard assets held for
sale during the second quarter of fiscal 2003.
During the first quarter of 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. As a result of this change, the Company recorded special charges
totaling $12.2 million during the first six months of fiscal 2002, primarily
reflecting fixed asset write-offs, employee separation expenses and lease
cancellation fees.
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.
Equity Income from Joint Ventures Equity income from joint ventures as reported
included $1.6 million and $1.5 million, respectively, of inventory step-up
associated with the Ornellaia acquisition for the first six months of fiscal
2003 and 2002. The increase in both reported and adjusted equity income from
joint ventures was primarily due to improved income from Ornellaia and the
Chilean joint venture during the period. The improvement in income from
Ornellaia was mainly due to a difference in the timing of wine shipments. The
improvement in income from Chile was mainly due to cost reductions implemented
at the joint venture level.
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 $18.0 million, or $1.10 per diluted share, compared to $7.8
million, or $0.48 per diluted share, a year ago. Adjusted net income totaled
$22.2 million, or $1.35 per diluted share, compared to $19.8 million, or $1.21
per diluted share, a year ago.
10
Liquidity and Capital Resources
The Company had a book overdraft, representing the float on outstanding checks,
of $3.4 million at December 31, 2002, compared to a book overdraft of $2.7
million at June 30, 2002. Cash provided by operations totaled $27.0 million,
reflecting net income of $33.0 million (before depreciation, amortization,
special charges and asset write-downs) and seasonal increases in inventories and
accounts payable to growers. Cash used in investing activities totaled $12.8
million, reflecting purchases of production equipment and vineyard development
costs. Cash used in financing activities totaled $14.2 million, primarily
reflecting net repayments of debt.
The Company maintains master lease facilities that provide the capacity to fund
up to $186.7 million, of which $151.4 million had been utilized as of December
31, 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 $130.0 million as of December
31, 2002. 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
$25.0 million outstanding under its long-term credit lines as of December 31,
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. The Company had $9.9 million
outstanding under this credit facility as of December 31, 2002.
NEW ACCOUNTING PRONOUNCEMENTS
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 $151.4 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.
During December 2002, the FASB issued 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. The Company
plans to adopt the new disclosure requirements of SFAS 148 as required during
the third quarter of fiscal 2003.
During November 2002, the FASB issued 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
Company plans to complete the adoption of this Interpretation as required during
the third quarter of fiscal 2003. The adoption of this Interpretation is not
expected to have a material impact on the Company's consolidated financial
statements.
11
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 January 22, 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 4. Submission of Matters to a Vote of Security Holders.
The Company's Annual Meeting of Shareholders was held on November 8, 2002, at
the Napa Valley Marriott, Napa, California. Three matters were submitted to a
vote of shareholders: election of directors; ratification of
PricewaterhouseCoopers LLP as the Company's independent auditors for the fiscal
year ending June 30, 2003; and an amendment of the 1993 Equity Incentive Plan to
extend the term of the plan by ten years to February 25, 2013.
Philip Greer, Anthony Greener and Bartlett Rhoades were nominated as Class A
directors. 7,913,321 Class A shares were voted for Mr. Greer and 305,306 shares
were withheld. 7,822,284 Class A shares were voted for Mr. Greener and 396,343
shares were withheld. 7,821,284 Class A shares were voted for Mr. Rhoades and
397,343 shares were withheld. Accordingly, Mssrs. Greer, Greener and Rhoades
were re-elected as Class A directors.
Robert G. Mondavi, R. Michael Mondavi, Marcia Mondavi Borger, Timothy J.
Mondavi, Frank E. Farella, Gregory M. Evans, John M. Thompson and Adrian Bellamy
were nominated as Class B directors. 6,647,647 Class B shares were voted for
each of them. Accordingly, each of the Class B nominees was re-elected to the
Board.
74,358,087 votes were cast in favor of the ratification of
PricewaterhouseCoopers LLP, 330,865 votes were cast against and 6,144 votes
abstained. Accordingly, the selection of PricewaterhouseCoopers LLP as
independent auditors was ratified.
68,913,302 votes were cast in favor of the ratification of the amendment to the
1993 Equity Incentive Plan, 3,984,108 votes were cast against and 18,101 votes
abstained. Accordingly, the amendment of the plan was adopted as proposed.
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits:
10.55 Amended and Restated 1993 Equity
Incentive Plan
2) Form 8-K:
No reports on Form 8-K were filed during the
quarter ended December 31, 2002.
12
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: February 14, 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, 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.
13
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: February 14, 2003
-----------------------
/s/ GREGORY M. EVANS
------------------------------------
Gregory M. Evans
President / CEO
14
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: February 14, 2003
-------------------------
/s/ HENRY J. SALVO, JR.
------------------------------------
Henry J. Salvo, Jr.
Executive Vice President / CFO
15