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, 2004
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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:
841 Latour Court
Napa, CA 94558
Telephone: (800) 228-1395
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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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
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As of November 11, 2004, there were issued and outstanding 10,839,380 shares of
the issuer's Class A Common Stock and 5,770,718 share of the issuer's Class B
Common Stock.
PART I
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
------------------------------------
(In thousands, except share data) 2004 2004
------------------------------------
Unaudited
ASSETS
Current assets:
Cash $54,377 $48,960
Accounts receivable, net 92,706 94,549
Inventories 308.841 387,940
Prepaid expenses and other current assets 22,677 7,025
Assets held for sale, net 122,144 - -
------------------------------------
Total current assets 600,745 538,474
Property, plant and equipment, net 156,382 357,224
Assets held for sale, net 265,669 40,475
Investments in joint ventures 337 29,607
Restricted cash 6,116 6,184
Other assets, net 2,307 6,206
------------------------------------
Total assets $1,031,556 $978,170
====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $77,018 $26,037
Employee compensation and related costs 22,582 15,905
Accrued interest 3,469 6,967
Other accrued expenses 20,872 14,693
Current portion of long-term debt 17,840 18,910
------------------------------------
Total current liabilities 141,781 82,512
Long-term debt, less current portion 278,984 363,289
Liabilities held for sale 82,557 - -
Deferred income taxes 47,201 42,773
Deferred executive compensation 8,017 7,484
Other liabilities 2,404 2,312
------------------------------------
Total liabilities 560,944 498,370
------------------------------------
Commitments and contingencies (Note 7)
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 - 10,693,893 and 10,676,399
shares 99,695 99,268
Class B Common Stock, without par value: authorized -
12,000,000 shares;
issued and outstanding - 5,770,718 shares 9,256 9,256
Paid in capital 15,003 13,347
Retained earnings 346,587 359,436
Deferred compensation stock plans (499) (534)
Accumulated other comprehensive income (loss):
Cumulative translation adjustment 720 (1,011)
Forward contracts (150) 38
------------------------------------
Total shareholders' equity 470,612 479,800
------------------------------------
Total liabilities and shareholders' equity $1,031,556 $978,170
====================================
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
September 30,
----------------------------------
(In thousands, except share data) 2004 2003
----------------------------------
Unaudited Unaudited
Revenues.............................................................................. $ 110,260 $ 108,786
Less excise taxes..................................................................... 5,145 4,849
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Net revenues.......................................................................... 105,115 103,937
Cost of goods sold.................................................................... 69,270 61,924
----------- -----------
Gross profit.......................................................................... 35,845 42,013
Selling, general and administrative expenses.......................................... 30,728 28,730
Special charges....................................................................... 26,542 - -
----------- -----------
Operating (loss) income............................................................... (21,425) 13,283
Other (income) expense:
Interest, net....................................................................... 5,106 5,540
Equity income from joint ventures................................................... (5,383) (8,006)
Other............................................................................... (423) 240
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(Loss) income before income taxes..................................................... (20,725) 15,509
(Benefit) provision for income taxes.................................................. (7,876) 5,661
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Net (loss) income..................................................................... $ (12,849) $ 9,848
============ ===========
(Loss) earnings per share - basic..................................................... $ (0.78) $ 0.60
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(Loss) earnings per share - diluted................................................... $ (0.78) $ 0.60
=========== ===========
Weighted average number of shares outstanding - basic................................. 16,455 16,358
=========== ===========
Weighted average number of shares outstanding - diluted............................... 16,455 16,404
=========== ===========
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30,
----------------------------------
(In thousands) 2004 2003
----------------------------------
Unaudited Unaudited
Cash flows from operating activities:
Net (loss) income..................................................................... $ (12,849) $ 9,848
Adjustments to reconcile net (loss) income to net cash flows
from operating activities:
Deferred income taxes............................................................... 5,469 1,612
Depreciation and amortization....................................................... 6,149 6,048
Equity income from joint ventures................................................... (5,383) (8,006)
Distributions of earnings from joint ventures....................................... 828 - -
Special charges..................................................................... 26,542 - -
Inventory write-downs............................................................... 5,958 - -
Net gain on sale of assets.......................................................... - - (1,617)
Other............................................................................... 45 - -
Change in assets and liabilities:
Accounts receivable, net.......................................................... 2,531 4,535
Inventories....................................................................... (48,734) (37,368)
Other assets...................................................................... (15,837) 5,035
Accounts payable and accrued expenses............................................. 41,975 35,022
Deferred executive compensation................................................... 533 318
Other liabilities................................................................. (87) (81)
----------- -----------
Net cash flows from operating activities.............................................. 7,140 15,346
----------- -----------
Cash flows from investing activities:
Acquisitions of property, plant and equipment......................................... (5,370) (7,115)
Proceeds from sale of assets.......................................................... 4,475 2,131
Decrease (increase) in restricted cash................................................ 68 (8)
----------- ------------
Net cash flows from investing activities.............................................. (827) (4,992)
----------- -----------
Cash flows from financing activities:
Book overdraft........................................................................ - - 2,361
Net additions (repayments) under credit lines......................................... 491 (14,000)
Proceeds from issuance of long-term debt.............................................. - - 2,722
Principal repayments of long-term debt................................................ (3,310) (3,297)
Exercise of Class A Common Stock options.............................................. 427 67
Other................................................................................. 1,496 454
----------- -----------
Net cash flows from financing activities.............................................. (896) (11,693)
----------- -----------
Net change in cash.................................................................... 5,417 (1,339)
Cash at the beginning of the period................................................... 48,960 1,339
----------- -----------
Cash at the end of the period......................................................... $ 54,377 $ - -
=========== ===========
See Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands, except share data)
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
September 30, 2004, its results of operations for the three month periods ended
September 30, 2004 and 2003, and its cash flows for the three month periods
ended September 30, 2004 and 2003. 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 and to the
section "Critical Accounting Policies" under Item 7 on Form 10-K for the fiscal
year ended June 30, 2004, on file at the Securities and Exchange Commission.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, "Consolidation of Variable Interest Entities", an
interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial
Statements". Interpretation 46 establishes accounting guidance for consolidation
of variable interest entities that function to support the activities of the
primary beneficiary. Interpretation 46 applies to any business enterprise, both
public and private, that has a controlling interest, contractual relationship or
other business relationship with a variable interest entity. The Company
maintains master lease facilities that enable the leasing of certain real
property (predominantly vineyards) and equipment to be constructed or acquired
and that qualify as variable interest entities with the Company as the primary
beneficiary. Accordingly, the Company has adopted the provisions of
Interpretation 46, effective July 1, 2003, and has included in its consolidated
financial statements the assets, and related liabilities, leased under its
master lease facilities. Also as encouraged by the Interpretation, the Company
has restated prior period financial statements back to July 1, 2001. In December
2003, the FASB issued a revised Interpretation No. 46, ("FIN 46R") which
clarified and enhanced the provisions of FIN 46. The Company adopted FIN 46R
upon the issuance.
(Loss) earnings per share
Diluted (loss) earnings per share is computed by dividing net (loss) 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 (loss) earnings per share if their inclusion would have
an antidilutive effect. Excluded antidilutive securities are 547,000 and
1,426,000 options, respectively, for the three months ended September 30, 2004
and 2003.
In computing basic (loss) earnings per share for all periods presented, no
adjustments have been made to net (loss) income (numerator) or weighted-average
shares outstanding (denominator). The computation of diluted (loss) earnings per
share for all periods is identical to the computation of basic (loss) earnings
per share except that the weighted-average shares outstanding (denominator) has
been increased by 46,000 for the three months ended September 30, 2003, 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 September 30, 2004, the Company had outstanding forward exchange contracts,
hedging primarily Australian dollar purchases of software and forecasted
receipts of Canadian dollars and European euros, with notional amounts totaling
$7,932. Using exchange rates outstanding as of September 30, 2004, the U.S.
dollar equivalent of the contracts totaled $8,616.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
During the second quarter of fiscal 2004, the Company entered into two interest
rate swap agreements with a total notional amount of $95,000. The objective of
both swaps is to take advantage of the current low interest rate environment and
to protect against further increases in the fair value of the Company's debt due
to further declines in rates. These swap agreements have been designated as
fair-value hedges of certain of the Company's fixed rate debt, effectively
converting them to variable rate obligations indexed to LIBOR. The variable rate
interest to be paid by the Company will be based on 6-month LIBOR plus a spread
of 2.1%. The swap has been marked to fair value at September 30, 2004, resulting
in the recording of a swap liability of $552, which is included in Long-term
Debt, Less Current Portion in the Consolidated Balance Sheets.
Stock-based compensation
The Company measures compensation cost for employee stock options, restricted
shares and similar equity instruments using the intrinsic value method described
in Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for
Stock Issued to Employees," and related interpretations. In accordance with APB
No. 25, the compensation cost for stock options and restricted shares is
recognized in income based on the excess, if any, of the quoted market price of
the stock at the grant date of the award or other measurement date over the
amount an employee must pay to acquire the stock. Stock-based employee
compensation cost reflected in net (loss) income for the three months ended
September 30, 2004 was $1,559 and $35 related to a re-measurement of vested
options and restricted shares, respectively. The Company utilizes the
disclosure-only provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock-Based Compensation,"(Statement 123) as amended by
SFAS No. 148.
The following table illustrates the effect on net (loss) income and (loss)
earnings per share if the Company had applied the fair value recognition
provisions of Statement 123 to stock-based employee compensation.
Three Months Ended
September 30,
---------------------------------
2004 2003
---------------------------------
Net (loss) income, as reported........................................................ $ (12,849) $ 9,848
Add back of total stock-based compensation expense, as reported....................... 1,594 - -
Less total stock-based compensation expense determined under
fair value based method for all awards, net of tax effects......................... (642) (754)
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Pro forma net (loss) income........................................................... $ (11,897) $ 9,094
============ ===========
(Loss) earnings per share:
Basic, as reported.................................................................. $ (0.78) $ 0.60
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Basic, pro forma.................................................................... $ (0.72) $ 0.56
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Diluted, as reported................................................................ $ (0.78) $ 0.60
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Diluted, pro forma.................................................................. $ (0.72) $ 0.55
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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 2005 and 2004, respectively: dividend
yield of 0% for all periods; expected volatility of 41%; risk-free interest
rates of 3.27% and 3.04%; and expected lives of three to five years for all
periods. The weighted-average grant-date fair value of options granted during
fiscal 2005 and 2004, respectively, was $14.12 and $12.02 per share.
Adopted and recently issued accounting pronouncements
On April 30, 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". Statement 149 is intended
to result in more consistent reporting of contracts as either freestanding
derivative instruments subject to Statement 133 in their entirety, or as hybrid
instruments with debt host contracts and embedded derivative features. In
addition, Statement 149 clarifies the definition of a derivative by providing
guidance on the meaning of initial net investments related to derivatives.
Statement 149 is effective for contracts entered into or modified after June 30,
2003. The adoption of Statement 149 did not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
Statement 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Statement 150 represents a
significant change in the practice of accounting for a number of financial
instruments, including mandatory redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. Statement 150 is effective for all financial instruments created or
modified after May 31, 2003, and for other instruments as of July 1, 2003. The
adoption of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.
In May 2003, the Emerging Issue Task Force issued Consensus No. 03-6 ("EITF
03-6"), "Participating Securities and the Two-class Method under FASB No. 128,
Earnings Per Share". EITF 03-6 considers how a "participating security" should
be defined for purposes of applying paragraphs 60 and 61 of Financial Accounting
Standards Board ("FASB") Statement No. 128, and whether paragraph 61 of FASB
Statement No. 128 requires an entity to use the two-class method in computing
EPS based on the presence of a nonconvertible participating security, regardless
of the characteristics of that participating security. EITF 03-6 is effective
for fiscal periods beginning after March 31, 2004. The adoption of EITF 03-6 did
not have a material impact on the Company's results of operations or financial
condition.
NOTE 2 RECENT DEVELOPMENTS
Constellation Offer to Acquire the Company and Subsequent Merger Agreement
On October 12, 2004, the Company received an unsolicited proposal from
Constellation Brands, Inc. ("Constellation") to acquire the Company in a
transaction in which the Company's Class A shareholders would receive $53.00 in
cash and the Company's Class B shareholders would receive $61.75 in cash,
subject to certain terms and conditions. Constellation stated that the
difference in the prices was intended to reflect the premium allocation between
the Class A common stock and the Class B common stock that had been proposed by
the Company in connection with the Company's proposed recapitalization. The
proposal was carefully reviewed by the Company's board of directors on October
18, 2004. The Company's board of directors concluded not to reject the
Constellation proposal but to consider it as part of its on-going process to
maximize value for all of its shareholders and the Company issued a press
release on the same day stating that the Company had received an unsolicited
offer to acquire the Company and the board's conclusion with respect to the
Constellation proposal. At that time, the Company reaffirmed the Company's
intention to proceed with its plan to seek shareholder approval for the proposed
recapitalization and Delaware reincorporation at its annual meeting of
shareholders on November 30, 2004. The press release did not identify the terms
of the offer or the identity of the party making the proposal. The board of
directors took no new action at that time on the Company's previously announced
September 14, 2004, restructuring plan and management continued to implement the
plan. The press release stated that the Company would continue to evaluate all
strategic options and could be able to effectively act upon any of those options
following the approval of the recapitalization and reincorporation at the annual
meeting on November 30, 2004.
On October 28, 2004, the Company and Constellation met to discuss the
Constellation proposal and shortly thereafter the Company began to provide
Constellation with access to confidential information and began to discuss a
merger agreement which included an increased price by Constellation for the
Company's shares.
On November 3, 2004, the Company's board met and the Company and Constellation
issued a joint press release announcing the signing of a definitive merger
agreement in which Constellation will acquire all the outstanding shares of the
Company for $56.50 per share in cash for the Company's Class A common stock and
$65.82 per share in cash for the Company's Class B common stock, subject in each
case to provisions for dissenters' rights and shares held by the Company,
Constellation and their respective subsidiaries.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The merger agreement, which was approved by the Company's Board of Directors,
is subject to the approval of the holders of a majority of Class
A shares (other than holders of Class A shares who are also recordholders of
Class B shares) and the approval of the holders of a majority of the Class B
shares, as well as conditions customary to transactions of this type, including
governmental and regulatory approvals. In that regard, holders of at least a
majority of the outstanding Class B shares have agreed to vote in favor of the
merger. In connection with the transaction, the Company's board announced that
it will no longer seek shareholder approval for its proposed reincorporation and
recapitalization plan, and intends to postpone its annual meeting of
shareholders that had been scheduled for November 30, 2004. In addition, the
Company has suspended its Value Growth Plan, except for the planned sales of the
Company's Byron and Arrowood brand assets as outlined below. The company expects
to complete the merger with Constellation by the end of 2004 or early 2005.
Litigation in Connection with Constellation Offer
Five purported shareholder class action lawsuits have been filed against
the Company and various of its directors arising from the Company's previously
stated recapitalization and restructuring plans, and the Constellation offer.
Four of those lawsuits have been filed in Napa County, California Superior
Court, and are styled Bamboo Partners LLC v. Robert Mondavi Corp., et al., No.
26-27170 (Cal. Super. Ct. compl. filed October 19, 2004); Robert Lewis v. Robert
Mondavi Corp., et al., No. 26-27204 (Cal. Super. Ct. compl. filed October 21,
2004); Nancy Bolozky v. Robert Mondavi Corp. et al., No. 26-27249 (Cal. Super.
Ct. compl. filed October 26, 2004) and Alaska Electrical Pension Fund v. The
Robert Mondavi Corporation et al., No. 26-27334 (Cal. Super. Ct. compl. filed
November 2, 2004). The fifth lawsuit has been filed in Nassau County, New York
Supreme Court, and is styled The Ezra Birnbaum Charitable Trust v. Philip Greer
et al., No. 04-014913 (N.Y. Sup. Ct. compl. filed October 28, 2004). Four of the
lawsuits allege that the defendants breached their fiduciary duties to the
Company's shareholders by, among other things, pursuing the Company's previously
stated recapitalization and restructuring plans, and allegedly refusing to
accept the Constellation offer. One of the lawsuits alleges that the defendants
breached their fiduciary duties to the Company's shareholders by, among other
things, accepting the Constellation offer and allegedly failing to hold an
auction and/or to obtain the highest price available for the Company. The
complaints seek certain declaratory and injunctive relief, compensatory damages
in an unspecified amount, attorneys' fees and costs of suit. On November 8,
2004, the Napa County Superior Court consolidated the four lawsuits filed in
that county, and appointed lead counsel for the plaintiff. The time for the
defendants to respond to the complaints has not yet expired. The Company
believes the lawsuits are without merit and intends to defend against them
vigorously.
Value Growth Plan
On August 20, 2004, the Company's board of directors had directed management to
formulate a plan to divide the Company's business into two separate operating
units within the Company, with one unit focused on its "lifestyle" brands (those
brands selling for up to $15 per bottle retail) and the other unit focused on
its "luxury" brands (those brands selling for above $15 per bottle retail). The
Company's definition of lifestyle wines conforms closely with the industry's
standard definitions of popular premium ($3 to $7 per bottle retail) and super
premium ($7 to $14 bottle retail) wines. The strategic rationale behind this
structural change was that different business models were required to best
execute go-to-market strategies for lifestyle and luxury brands. The Company
believed separating into two operating units with one focused on lifestyle wines
and the other on luxury brands would provide greater focus and additional
opportunities to enhance value for shareholders and customers in the future.
On September 14, 2004, the Company announced that it would focus entirely on the
premium and super-premium lifestyle wine business. Under this plan, the Company
would be anchored by its Woodbridge and Robert Mondavi Private Selection brands
and would pursue the establishment of new wine brands, such as Papio. As a
result, the Company determined it would explore the divestiture of its luxury
wine assets and investments and pursue the sale of other assets identified as
non-strategic.
On September 20, 2004, the Company announced that although it was early in the
process and there could be no assurances, the Company expected to complete the
potential divestiture of the luxury and non-strategic assets within one year and
estimated that if all such assets were sold it would realize between $400
million and $500 million in net after-tax proceeds from the divestitures under
current wine industry and general economic conditions.
On October 27, 2004, the Company announced that it expected to report a net loss
of $(57.7) million for the quarter ended September 30, 2004, which included
$105.9 million in pre-tax charges related to the Company's announced Value
Growth Plan. Due to the November 3, 2004, Constellation merger announcement
detailed above, the Company has suspended its Value Growth Plan initiatives,
except for the planned sales of the Company's Byron and Arrowood brand assets.
As a result of the suspension of the Value Growth Plan initiatives, the Company
has revised its estimates of the fair value of the assets it classified as "Held
for Sale" (see Note 5, Assets Held for Sale, Net). Based on these revised
estimates, management has determined that these assets it classified as Held for
Sale are not impaired, except for the Byron assets which the Company has
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
concluded are impaired based on fair market values. As a result of these revised
estimates, the Company will not record the originally estimated impairment
charges of $32.2 million for inventory, $44.1 million for property, plant and
equipment and $9.0 million of related selling expenses. Based on the planned
sale of the Byron assets the Company has recorded an impairment write-down in
the amount of $11.5 million representing $5.9 million in inventory (which has
been recorded in Cost of Goods Sold), $5.1 million in property, plant and
equipment and $0.5 million in other assets. Additionally, prior to the
suspension of its Value Growth Plan initiatives, the Company had executed
certain aspects of its restructuring plan and consequently recorded pre-tax
charges of $20.9 million at September 30, 2004.
The total charges represent $1.4 million of non-strategic asset impairment
charges, $11.4 million of severance related charges, $4.4 million of other
incurred fees relating to the restructuring of the Company and $3.7 million of
other fees relating to the planned recapitalization which were incurred and are
recorded in Special Charges in the Consolidated Statements of Operations. The
severance charges relate to employees in the Company's vineyard, production and
selling, general and administrative departments. The costs will be primarily
paid out in the second and third quarters of fiscal year 2005. At this time the
Company does not anticipate recording additional charges related to the
restructuring and recapitalization of the Company, except for those items
detailed in Note 9, Subsequent Events.
Management Changes
The Company announced on August 20, 2004, that Dennis Joyce, formerly the
Company's Executive Vice President of Sales and Marketing, has been named chief
operating officer of the lifestyle unit, reporting to the Company's President
and Chief Executive Officer, Mr. Gregory M. Evans.
The Company announced on September 14, 2004 that following a seven-month
sabbatical, R. Michael Mondavi was resigning as a Vice Chairman effective as of
September 14, 2004, and as an officer and employee of the Company effective as
of September 30, 2004. On October 4, 2004, R. Michael Mondavi resigned as a
director of the Company.
The Company announced on October 6, 2004, that Timothy J. Mondavi will continue
to serve on the board of directors, but is departing as an officer, Vice
Chairman, Winegrower and employee of the Company effective as of September 30,
2004.
The Company also announced on October 6, 2004, that Jean-Michel Valette has been
appointed President & Managing Director of Robert Mondavi Winery, reporting to
the Company's President and Chief Executive Officer, Mr. Gregory M. Evans.
Market Purchase Program
On August 20, 2004, the Company announced that the board of directors had
authorized the repurchase of up to $30 million of Mondavi Delaware common stock.
The share repurchase program could have commenced following the merger effecting
the Company's recapitalization and reincorporation in Delaware and would have
permitted the Company to make open market purchases over time based upon
prevailing economic, business and market conditions, subject to applicable loan
covenants and legal restrictions. Due to the November 3, 2004, Constellation
merger announcement detailed above, the Market Purchase Program has been
suspended.
NOTE 3 INVENTORIES
Inventories consist of the following:
September 30, June 30,
-----------------------------------
2004 2004
-----------------------------------
Wine in production........................ $ 234,806 $ 199,673
Bottled wine.............................. 70,144 160,148
Crop costs and supplies................... 3,891 28,119
----------- -----------
$ 308,841 $ 387,940
=========== ===========
9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Inventories are valued at the lower of cost or market. Inventory and cost of
goods sold are determined using the first-in, first-out (FIFO) method. Costs
associated with growing crops, winemaking and other costs associated with the
manufacturing of product for resale are recorded as inventory. The Company's
acquisition of Arrowood Vineyards and Winery in fiscal 2001 resulted in the
allocation of purchase price to inventories in excess of book value. This
difference between the original book value and the fair market value of the
inventory upon acquisition is referred to as inventory step-up. Included in
inventory at September 30, 2004 and June 30, 2004, respectively, was $1,005 and
$1,205 of inventory step-up remaining from the acquisition.
The Company's Value Growth Plan (see Note 2, Recent Developments) identified
certain inventory assets as part of its disposition plan. Based on the planned
sale of the Byron assets in the Company's second fiscal quarter, an inventory
write-down was recorded in the amount of $5,958 in Special Charges in the
Consolidated Statement of Operations. Consequently, $122,144 of inventory is
classified as Assets Held for Sale, Net in the September 30, 2004, Consolidated
Balance Sheet (refer to Note 5, Assets Held for Sale, Net for additional
information).
NOTE 4 INVESTMENTS IN JOINT VENTURES
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
Ornellaia joint venture is a C-Corporation, of which the Company has a 50%
interest. The Italy joint venture is a limited liability company, of which the
Company has a 50% interest. During fiscal 2004, the Australia joint venture
operated 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. Effective July 1, 2004, the Company dissolved its
joint venture with the Robert Oatley family and Southcorp Limited which produced
the Kirralaa and Talomas brands. The Company now produces Talomas wines for
Southcorp Limited under a production agreement while Southcorp produces Kirralaa
wines for the Company under a similar production agreement. Prior to September
2003, the Chile joint venture was a single corporation, of which the Company
owned a 50% interest. During September 2003, the joint venture was split into
two new corporations in order to separate the Sena and Arboleda brands and
assets from the Caliterra brand and assets. The Company had a 50% interest in
each of the new corporations. In January 2004, the Company sold its 50% interest
in the corporation holding the Caliterra brand and assets ("Vina Caliterra") to
its joint venture partner for $1,673 (see Note 5, Assets Held for Sale, Net
below).
The Company's Value Growth Plan (see Note 2, Recent Developments) identified
most joint ventures as part of its disposition plan. Consequently, all of the
joint venture investments, except for the "Other", detailed below are classified
as Assets Held for Sale, Net in the September 30, 2004, Consolidated Balance
Sheets (refer to Note 5, Assets Held for Sale, Net for additional information).
Each of the Company's Joint Ventures allows the joint venture partners to force
a dissolution of the venture and a sale of its business, subject to priority
purchase rights which vary from venture to venture, if the Company undergoes a
change of control. The completion of the Constellation merger will cause these
rights to be available to the joint venture partners.
Investments in joint ventures are summarized below. The Company's interest in
income and losses for each joint venture is stated within parentheses.
September 30, June 30,
---------------------------------
Investments in joint ventures are as follows: 2004 2004
---------------------------------
Opus One (50%)................................ $ 17,270 $ 12,763
Chile (50%)................................... 600 588
Italy (50%)................................... 6,854 6,704
Ornellaia (50%)............................... 7,970 7,143
Australia (50%)............................... - - 2,071
Other (50%)................................... 337 338
---------- ----------
33,031 29,607
Less: Assets held for sale................... 32,694 - -
---------- ----------
Total investment in joint ventures............ $ 337 $ 29,607
========== ==========
10
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The Company's investment in each joint venture increases or decreases each
period for its share of income and losses (equity income) from each joint
venture and for any contributions of capital to or distributions of earnings
from the joint ventures. During the three months ended September 30, 2004, total
distributions of $828 were made from the Company's joint ventures; however,
there were no contributions of capital.
The condensed combined statements of operations of the joint ventures are
summarized below. The Company's equity income from 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
September 30,
--------------------------------
2004 2003
--------------------------------
Net revenues.............................. $ 12,441 $ 31,835
Cost of goods sold........................ 3,179 9,020
---------- ----------
Gross profit.............................. 9,262 22,815
Other expenses............................ 4,083 9,751
---------- ----------
Net income................................ $ 5,179 $ 13,064
========== ==========
NOTE 5 ASSETS HELD FOR SALE, NET
On September 14, 2004, the Company announced that it would focus entirely on the
premium and super-premium lifestyle wine business. As a result, the Company
determined it would explore the divestiture of its luxury wine assets and
investments and pursue the sale of other assets identified as non-strategic. The
luxury brand assets and investments intended for divestiture included Robert
Mondavi Winery and its vineyards; the Company's 50% interests in Opus One,
Ornellaia, Luce della Vite and Vina Sena; the Byron Winery and Vineyards; and
the Arrowood Winery and Vineyards. Non-strategic assets included specified
vineyard land, wine inventory and equipment. At September 14, 2004, certain
assets were identified for potential future sale and are included in Assets Held
for Sale, Net in the Consolidated Balance Sheet at September 30, 2004. These
assets were expected to be held and used while the Company pursued the sale of
the assets. The Company believes that their carrying values are recoverable and
do not exceed fair value. The Company has classified certain assets that are
financed through the master lease facilities as Assets Held for Sale, Net at
September 30, 2004. Consequently, the Company has classified $82,557 of related
debt obligations under the master lease facility as Liabilities Held for Sale in
the Consolidated Balance Sheet at September 30, 2004.
The following table identifies the major classes of assets classified as Assets
Held for Sale, Net in the Consolidated Balance Sheets:
September 30, June 30,
--------------------------
2004 2004
--------------------------
Inventory $128,102 $- -
Less: Inventory write-down 5,958
--------------------------
Total current assets held for sale, net 122,144 - -
Property, plant and equipment, net $236,259 $40,475
Investments in joint ventures 32,694 - -
Other assets, net 2,300 - -
--------------------------
Sub total 271,253
Less: Property, plant and equipment write-down 5,584 - -
--------------------------
Total non-current assets held for sale, net $265,669 $40,475
--------------------------
Total assets held for sale, net $387,813 $40,475
==========================
11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Due to the November 3, 2004, Constellation merger announcement detailed in Note
2 Recent Developments, the Company has suspended its divestiture efforts, except
for the planned sales of the Company's Byron and Arrowood brand assets. Based on
preliminary indications of interest related to the Byron assets, the Company has
determined that these property, plant and equipment assets are impaired and
consequently has recorded an impairment write-down in the amount of $5,584 in
Special Charges in the Consolidated Statement of Operations. The Company expects
to reclassify those assets not intended to be sold to "Held for Use" in the
second quarter.
During fiscal 2003, the Company determined that certain of its vineyard and
other assets were no longer expected to fit its long-term grape sourcing needs
or meet its long-term financial objectives. At the time, assets with a combined
book value of $46,894 were identified for potential future sale. These assets
are being held and used while the Company pursues the sale of the assets.
Certain of the assets were sold during the second half of fiscal 2003. At
September 30, 2004, the net book value of the remaining assets held for sale
totaled $31,772, which is included in Assets Held for Sale, Net in the
Consolidated Balance Sheet. The Company believes that this value is recoverable
and it does not exceed fair value
During the second quarter of fiscal 2004, the Company decided to sell its joint
venture investment in Vina Caliterra. As a result, the Company recorded an
impairment loss of $6,075 for the difference between the carrying value and fair
value less costs to sell at December 31, 2003. The loss is included in Equity
Income from Joint Ventures in the Consolidated Statements of Operations. The
sale of Vina Caliterra was completed on January 22, 2004, for $1,673, an amount
equal to the impaired value.
During the first quarter of fiscal 2004, the Company sold a non-strategic asset
to a related party for $1,997, a price determined using independent appraisers.
The transaction resulted in a gain of $1,965 and was included in Selling,
General and Administrative Expenses in the Consolidated Statements of
Operations.
NOTE 6 COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income includes revenues, expenses, gains and losses that
are excluded from net (loss) income, including foreign currency translation
adjustments and unrealized gains and losses on certain derivative financial
instruments designated as cash-flow hedges. Comprehensive (loss) income for the
three months ended September 30, 2004 and 2003 was as follows:
Three Months Ended
September 30,
---------------------------------
2004 2003
---------------------------------
Net (loss) income....................................... $ (12,849) $ 9,848
Foreign currency translation adjustment, net of tax..... 1,731 909
Forward contracts, net of tax........................... (188) (323)
----------- -----------
Comprehensive (loss) income............................. $ (11,306) $ 10,434
=========== ==========
NOTE 7 COMMITMENTS AND CONTINGENCIES
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.
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. Refer to Note 2, Recent Developments
for further discussion regarding recent legal matters.
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
NOTE 8 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $9,063 and $9,017 for the three month periods ended
September 30, 2004 and 2003, respectively. Cash paid for income taxes was $43
and $38 for the three month periods ended September 30, 2004 and 2003,
respectively.
During the three months ended September 30, 2003, the Company completed the sale
and subsequent leaseback of certain equipment. Proceeds from the sale used to
repay the associated long-term debt totaled $7,712, which resulted in a loss on
disposition of $434 included in Selling, General and Administrative Expenses in
the Consolidated Statements of Operations. The new lease has been accounted for
as an operating lease, has a term of approximately five years, and has lease
payments totaling $621 per year.
NOTE 9 SUBSEQUENT EVENTS
As stated in Note 2, Recent Developments, the Company intends to continue to
pursue the sale of its Arrowood assets. In order for the Company to conclude a
sale of these assets it would be required to make a $12.5 million License Fee
payment to the Arrowood Family Trust and purchase certain currently leased
assets for approximately $8.0 million. These amounts would be added to the
current carrying value of approximately $18.0 million resulting in a net book
value of approximately $38.5 million prior to a sale. Based upon the current
estimated fair market value range for the assets of $18-22 million, the Company
anticipates a loss in the range of approximately $16.5-20.5 million will be
incurred upon a sale transaction. In its second fiscal quarter of 2005 the
Company expects to record an impairment charge after the payments have been made
or a loss upon completion of a sale transaction.
On November 11, 2004, the Company signed a definitive agreement to sell its 50%
interest in the corporation holding the Sena and Arboleda brands to its joint
venture partner for $0.7 million. The Company will recognize a gain on the sale
of approximately $0.1 million in its fiscal second quarter. The joint venture
net book value was classified as Assets Held for Sale, Net in the Consolidated
Balance Sheet at September 30, 2004 (see Note 5, Assets Held for Sale, Net
above).
On November 11, 2004, the Company closed the sale, to a third party, of its
Rosewood Vineyard property for a sale price of $0.8 million. A $0.8 million loss
related to this sale will be recognized by the Company in its second fiscal
quarter.
13
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
INTRODUCTION
The Company is a leading producer and marketer of premium table wines. The
Company has historically operated in one business segment (premium table wines).
Its core brands include Robert Mondavi Winery, Robert Mondavi Private Selection,
and Woodbridge. The Company also produces and markets fine wines under the
following labels: La Famiglia, Kirralaa, Byron Vineyards and Winery, Io,
Arrowood Vineyards and Winery and Grand Archer by Arrowood. The Company produces
Opus One in partnership with the Baroness Philippine de Rothschild of Chateau
Mouton Rothschild of Bordeaux, France; Luce, Lucente, Danzante, and the wines of
Tenuta dell'Ornellaia, in partnership with the Marchesi de'Frescobaldi of
Tuscany, Italy; and Sena and Arboleda in partnership with the Eduardo Chadwick
family of Vina Errazuriz in Chile. In addition to the partnership wines, Robert
Mondavi Imports, a division of the Company, represents the wines of Marchesi
de'Frescobaldi, Attems, and Vina Caliterra in the United States.
Sales volume for the quarter ended September 30, 2004, increased by 1.7% to 2.2
million cases and net revenues increased by 1.1% to $105.1 million compared to
the same period last year. The Company reported net loss of $12.8 million, or
$0.78 per share-diluted, for the period ended September 30, 2004, compared to
net income of $9.8 million, or $0.60 per share-diluted, a year ago. The first
quarter change in net (loss) income from the same period last year is detailed
below in the Results of Operations discussion, but can be primarily linked to
the Company's current period restructuring and recapitalization charges totaling
$20.9 million on a pre-tax basis. On October 27, 2004, the Company announced
that it expected to report a net loss of $(57.7) million for the quarter ended
September 30, 2004, which included $105.9 million in pre-tax charges related to
the Company's announced Value Growth Plan. Due to the November 3, 2004,
Constellation merger announcement detailed above, the Company has suspended its
Value Growth Plan initiatives, except for the planned sales of the Company's
Byron and Arrowood brand assets. As a result of the suspension of the Value
Growth Plan initiatives, the Company has revised its estimates of the fair value
of the assets it classified as "Held for Sale" (see Note 5, Assets Held for
Sale, Net). Based on these revised estimates, management has determined that
these assets it classified as Held for Sale are not impaired, except for the
Byron assets which the Company has concluded are impaired based on fair market
values. As a result of these revised estimates, the Company will not record the
originally estimated impairment charges of $32.2 million for inventory, $44.1
million for property, plant and equipment and $9.0 million of related selling
expenses. Based on the planned sale of the Byron assets, the Company has
recorded an impairment write-down related to the planned sale of these assets in
the amount of $11.5 million, representing $5.9 million in inventory (which has
been recorded in Cost of Goods Sold), $5.1 million in property, plant and
equipment and $0.5 million in other assets. Additionally, prior to the
suspension of its Value Growth Plan initiatives, the Company had executed
certain aspects of its restructuring plan and consequently recorded pre-tax
charges of $20.9 million at September 30, 2004. The total charges represent $1.4
million of non-strategic asset impairment charges, $11.4 million of severance
related charges, $4.4 million of other incurred fees relating to the
restructuring of the Company and $3.7 million of other fees relating to the
planned recapitalization which were incurred and are recorded in Special Charges
in the Consolidated Statements of Operations. The severance charges relate to
employees in the Company's vineyard, production and selling, general and
administrative departments. The costs will be primarily paid out in the second
and third quarters of fiscal year 2005. At this time the Company does not
anticipate recording additional charges related to the restructuring and
recapitalization of the Company, except for those items detailed in Subsequent
Events below.
The Company has historically experienced and expects to continue experiencing
seasonal and quarterly fluctuations in its net revenues, gross profit, equity
income from joint ventures, and net income. Sales volume tends to increase in
advance of holiday periods, before price increases go into effect, and during
promotional periods. Sales volume tends to decrease if distributors begin a
quarter with larger than normal inventory levels. The timing of releases for
certain luxury wines can also have a significant impact on quarterly results.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 2004 and recent 8-K filings for further discussion of the operations and
organizational changes.
14
RECENT DEVELOPMENTS
Constellation Offer to Acquire the Company and Subsequent Merger Agreement
On October 12, 2004, the Company received an unsolicited proposal from
Constellation Brands, Inc. to acquire the Company in a transaction in which the
Company's Class A shareholders would receive $53.00 in cash and the Company's
Class B shareholders would receive $61.75 in cash, subject to certain terms and
conditions. Constellation stated that the difference in the prices is intended
to reflect the premium allocation between the Class A common stock and the Class
B common stock that had been proposed by the Company in connection with the
Company's proposed recapitalization. The proposal was carefully reviewed by the
Company's board of directors on October 18, 2004. The Company's board of
directors concluded not to reject the Constellation proposal but to consider it
as part of its on-going process to maximize value for all of its shareholders
and the Company issued a press release on the same day stating that the Company
had received an unsolicited offer to acquire the Company and the board's
conclusion with respect to the Constellation proposal. At that time, the Company
reaffirmed the Company's intention to proceed with its plan to seek shareholder
approval for the proposed recapitalization and Delaware reincorporation at its
annual meeting of shareholders on November 30, 2004. The press release did not
identify the terms of the offer or the identity of the party making the
proposal. The board of directors took no new action at that time on the
Company's previously announced September 14, 2004, restructuring plan and
management continued to implement the plan. The press release stated that the
Company would continue to evaluate all strategic options and could be able to
effectively act upon any of those options following the approval of the
recapitalization and reincorporation at the annual meeting on November 30, 2004.
On October 28, 2004, the Company and Constellation met to discuss the
Constellation proposal and shortly thereafter the Company began to provide
Constellation with access to confidential information and began to discuss a
merger agreement which included an increased price by Constellation for the
Company's shares.
On November 3, 2004, the Company's board met and the Company and Constellation
issued a joint press release announcing the signing of a definitive merger
agreement in which Constellation will acquire all the outstanding shares of the
Company for $56.50 per share in cash for the Company's Class A common stock and
$65.82 per share in cash for the Company's Class B common stock, subject in each
case to provisions for dissenters' tights and shares held by the Company,
Constellation and their respective subsidiaries.
The merger agreement, which was approved by the Company's Board of Directors,
is subject to the approval of the holders of a majority of Class
A shares (other than holders of Class A shares who are also recordholders of
Class B shares) and the approval of the holders of a majority of the Class B
shares, as well as conditions customary to transactions of this type, including
governmental and regulatory approvals. In that regard, holders of at least a
majority of the outstanding Class B shares have agreed to vote in favor of the
merger. In connection with the merger, the Company's board announced that it
will no longer seek shareholder approval for its proposed reincorporation and
recapitalization plan, and intends to postpone its annual meeting of
shareholders scheduled for November 30, 2004. In addition, the Company has
suspended its Value Growth Plan, except for the planned sales of the Company's
Byron and Arrowood brand assets, as outlined below. The company expects to
complete the merger with Constellation by the end of 2004 or early 2005.
Litigation in Connection with Constellation Offer
Five purported shareholder class action lawsuits have been filed against
the Company and various of its directors arising from the Company's previously
stated recapitalization and restructuring plans, and the Constellation offer.
Four of those lawsuits have been filed in Napa County, California Superior
Court, and are styled Bamboo Partners LLC v. Robert Mondavi Corp., et al., No.
26-27170 (Cal. Super. Ct. compl. filed October 19, 2004); Robert Lewis v. Robert
Mondavi Corp., et al., No. 26-27204 (Cal. Super. Ct. compl. filed October 21,
2004); Nancy Bolozky v. Robert Mondavi Corp. et al., No. 26-27249 (Cal. Super.
Ct. compl. filed October 26, 2004) and Alaska Electrical Pension Fund v. The
Robert Mondavi Corporation et al., No. 26-27334 (Cal. Super. Ct. compl. filed
November 2, 2004). The fifth lawsuit has been filed in Nassau County, New York
Supreme Court, and is styled The Ezra Birnbaum Charitable Trust v. Philip Greer
et al., No. 04-014913 (N.Y. Sup. Ct. compl. filed October 28, 2004). Four of the
lawsuits allege that the defendants breached their fiduciary duties to the
Company's shareholders by, among other things, pursuing the Company's previously
stated recapitalization and restructuring plans, and allegedly refusing to
accept the Constellation offer. One of the lawsuits alleges that the defendants
breached their fiduciary duties to the Company's shareholders by, among other
things, accepting the Constellation offer and allegedly failing to hold an
auction and/or to obtain the highest price available for the Company. The
complaints seek certain declaratory and injunctive relief, compensatory damages
in an unspecified amount, attorneys' fees and costs of suit. On November 8,
2004, the Napa County Superior Court consolidated the four lawsuits filed in
that county, and appointed lead counsel for the plaintiff. The time for the
defendants to respond to the complaints has not yet expired. The Company
believes the lawsuits are without merit and intends to defend against them
vigorously.
15
Value Growth Plan
On August 20, 2004, the Company's board of directors had directed management to
formulate a plan to divide the Company's business into two separate operating
units within the Company, with one unit focused on its "lifestyle" brands (those
brands selling for up to $15 per bottle retail) and the other unit focused on
its "luxury" brands (those brands selling for above $15 per bottle retail). The
Company's definition of lifestyle wines conforms closely with the industry's
standard definitions of popular premium ($3 to $7 per bottle retail) and super
premium ($7 to $14 bottle retail) wines. The strategic rationale behind this
structural change was that different business models were required to best
execute go-to-market strategies for lifestyle and luxury brands. The Company
believed separating into two operating units with one focused on lifestyle wines
and the other on luxury brands would provide greater focus and additional
opportunities to enhance value for shareholders and customers in the future.
On September 14, 2004, the Company announced that it would focus entirely on the
premium and super-premium lifestyle wine business. Under this plan, the Company
would be anchored by its Woodbridge and Robert Mondavi Private Selection brands
and would pursue the establishment of new wine brands, such as Papio. As a
result, the Company determined it would explore the divestiture of its luxury
wine assets and investments and pursue the sale of other assets identified as
non-strategic.
On September 20, 2004, the Company announced that although it was early in the
process and there could be no assurances, the Company expected to complete the
potential divestiture of the luxury and non-strategic assets within one year and
estimated that if all such assets were sold it would realize between $400
million and $500 million in net after-tax proceeds from the divestitures under
current wine industry and general economic conditions.
On October 27, 2004, the Company announced that it expected to report a net loss
of $(57.7) million for the quarter ended September 30, 2004, which included
$105.9 million in pre-tax charges related to the Company's announced Value
Growth Plan. Due to the November 3, 2004, Constellation merger announcement
detailed above, the Company has suspended its Value Growth Plan initiatives,
except for the planned sales of the Company's Byron and Arrowood brand assets.
As a result of the suspension of the Value Growth Plan initiatives, the Company
has revised its estimates of the fair value of the assets it classified as "Held
for Sale" (see Note 5, Assets Held for Sale, Net). Based on these revised
estimates, management has determined that these assets it classified as Held for
Sale are not impaired, except for the Byron assets which the Company has
concluded are impaired based on fair market values. As a result of these revised
estimates, the Company will not record the originally estimated impairment
charges of $32.2 million for inventory, $44.1 million for property, plant and
equipment and $9.0 million of related selling expenses. Based on the planned
sale of the Byron assets, the Company has recorded an impairment write-down
related to these assets in the amount of $11.5 million, representing $5.9
million in inventory (which has been recorded in Cost of Goods Sold), $5.1
million in property, plan and equipment and $0.5 million in other assets.
Additionally, prior to the suspension of its Value Growth Plan initiatives, the
Company had executed certain aspects of its restructuring plan and consequently
recorded pre-tax charges of $20.9 million at September 30, 2004. The total
charges represent $1.4 million of non-strategic asset impairment charges, $11.4
million of severance related charges, $4.4 million of other incurred fees
relating to the restructuring of the Company and $3.7 million of other fees
relating to the planned recapitalization which were incurred and are recorded in
Special Charges in the Consolidated Statements of Operations. The severance
charges relate to employees in the Company's vineyard, production and selling,
general and administrative departments. The costs will be primarily paid out in
the second and third quarter of fiscal year 2005. At this time the Company does
not anticipate recording additional charges related to the restructuring and
recapitalization of the Company, except for those items detailed in Subsequent
Events below.
Management Changes
The Company announced on August 20, 2004, that Dennis Joyce, formerly the
Company's Executive Vice President of Sales and Marketing, has been named chief
operating officer of the lifestyle unit, reporting to the Company's President
and Chief Executive Officer, Mr. Gregory M. Evans.
The Company also announced on September 14, 2004 that following a seven-month
sabbatical, R. Michael Mondavi was resigning as a Vice Chairman effective as of
September 14, 2004, and as an officer and employee of the Company effective as
of September 30, 2004. On October 4, 2004, R. Michael Mondavi resigned as a
director of the Company.
The Company announced on October 6, 2004, that Timothy J. Mondavi will continue
to serve on the board of directors, but is departing as an officer, Vice
Chairman, Winegrower and employee of the Company effective as of September 30,
2004.
16
The Company also announced on October 6, 2004, that Jean-Michel Valette has been
appointed President & Managing Director of Robert Mondavi Winery, reporting to
the Company's President and Chief Executive Officer, Mr. Gregory M. Evans.
Market Purchase Program
On August 20, 2004, the Company announced that the board of directors had
authorized the repurchase of up to $30 million of Mondavi Delaware common stock.
The share repurchase program could have commenced following the merger effecting
the Company's recapitalization and reincorporation in Delaware and would have
permitted the Company to make open market purchases over time based upon
prevailing economic, business and market conditions, subject to applicable loan
covenants and legal restrictions. Due to the November 3, 2004, Constellation
merger announcement detailed above, the Market Purchase Program has been
suspended.
Subsequent Events
As stated in Note 2, Recent Developments, the Company intends to continue to
pursue the sale of its Arrowood assets. In order for the Company to conclude a
sale of these assets it would be required to make a $12.5 million License Fee
payment to the Arrowood Family Trust and purchase certain currently leased
assets for approximately $8.0 million. These amounts would be added to the
current carrying value of approximately $18.0 million, resulting in a net book
value of approximately $38.5 million prior to a sale. Based upon the current
estimated fair market value range for the assets of $18-22 million, the Company
anticipates a loss in the range of approximately $16.5-20.5 million will be
incurred upon a sale transaction. In its second fiscal quarter of 2005 the
Company expects to record an impairment charge after the payments have been made
or a loss upon completion of a sale transaction.
On November 11, 2004, the Company signed a definitive agreement to sell its 50%
interest in the corporation holding the Sena and Arboleda brands to its joint
venture partner for $0.7 million. The Company will recognize a gain on the sale
of approximately $0.1 million in its fiscal second quarter. The joint venture
net book value was classified as Assets Held for Sale, Net in the Consolidated
Balance Sheet at September 30, 2004 (see Note 5, Assets Held for Sale, Net
above).
On November 11, 2004, the Company closed the sale, to a third party, of its
Rosewood Vineyard property for a sale price of $0.8 million. A $0.8 million loss
related to this sale will be recognized by the Company in its second fiscal
quarter related to this sale.
RISK FACTORS
Certain officers and directors of the Company have interests that are different
from, or in addition to, the interests of other shareholders of the Company.
Timothy J. Mondavi and Marcia Mondavi Borger, members of the board of directors
of the Company, beneficially own approximately 40.5% of the Company's Class B
common stock and as such have interests in the merger that are different from,
or in addition to, the interests of holders of Class A common stock. Timothy J.
Mondavi and Marcia Mondavi Borger abstained from voting on the merger agreement
and the merger. In addition, certain officers of the Company may receive
severance packages, if they are terminated in connection with or after the
merger. You should consider whether these severance arrangements may have
influenced the three officers to support the merger. Finally, certain of the
Company's non-employee directors have options to purchase shares of the Class A
common stock and/or other equity awards that will be cashed out on an
accelerated basis in connection with the merger. You should consider whether
these interest and benefits may have influenced these directors' decisions to
approve the merger.
Failure to consummate the merger with Constellation could adversely affect the
Company's stock price.
The merger agreement that the Company entered into with Constellation contains
several conditions to Constellation's obligation to complete the merger. These
conditions include:
-- approval of the Company's shareholders;
-- obtaining antitrust clearance and other requisite approvals and
consents;
-- operating the Company's business in compliance with the covenants set
forth in the merger agreement; and
-- continued accuracy of the Company's representations and warranties,
including the absence of any material adverse effect on the Company's
business.
17
The Company cannot be certain it will obtain the necessary regulatory approvals
or that it will satisfy the other closing conditions. If the transaction were
terminated for failure to satisfy a condition or for any other reason, or if it
appeared reasonably likely to be terminated, this could have a significant
adverse effect on the Class A stock price.
Provisions in the merger agreement may discourage other companies from
attempting to acquire the Company.
Until the completion of the merger, with certain limited exceptions, the merger
agreement prohibits the Company from entering into or soliciting any acquisition
proposal or offer for a merger with a party other than Constellation. The
Company will be required to pay a $31 million termination fee to Constellation
if the merger agreement is terminated under certain specified circumstances,
including:
- -- If (x) there is a third party acquisition proposal to the Company and
either (i) the Company's shareholders do not approve the merger with
Constellation, (ii) the merger is not consummated prior to April 30, 2005
or (iii) Constellation terminates the merger agreement because the Company
has breached a representation, warranty or covenant; and (y) the Company
enters into an agreement to be acquired by a third party within 12 months
following the termination of the merger agreement with Constellation;
- -- If the Company terminates the merger agreement in order to enter into an
agreement with a third party with respect to a superior proposal for the
entire company; or
- -- If Constellation terminates the merger agreement because the Company's
board of directors has either withdrawn, qualified or modified in a manner
adverse to Constellation its recommendation to the Company's shareholders,
or if Constellation terminates the merger agreement because the Company's
board of directors has approved or recommended approval of a superior
proposal for the entire company.
These provisions could discourage other companies from trying to acquire the
Company even though those companies might be willing to offer greater value to
the Company's shareholders than Constellation has offered in the proposed
merger.
If the merger does not occur, the Company will not benefit from the expenses it
has incurred in preparation for the merger.
If the merger is not consummated, the Company will have incurred substantial
expenses for which no ultimate benefit will have been received by it. The
Company currently expects to incur significant out-of-pocket expenses for
services in connection with the merger, consisting of financial advisor, legal
and accounting fees and financial printing and other related charges, much of
which may be incurred even if the merger is not completed.
The announced merger with Constellation may adversely affect the Company's
results of operations.
In response to the announcement of the merger, the Company's customers and
strategic partners may delay or defer decisions, which could have a material
adverse effect on the Company's business regardless of whether the merger is
ultimately completed. Similarly, current and prospective employees of the
Company may experience uncertainty about their future roles with the combined
company. This may adversely affect employee morale and the Company's ability to
attract and retain key management, sales, marketing and technical personnel. In
addition, focus on the merger and related matters have resulted in, and may
continue to result in, the diversion of management attention and resources. To
the extent that there is uncertainty about the closing of the merger, or if the
merger does not close, the Company's business may be harmed if customers,
strategic partners or others believe that the Company cannot effectively compete
in the marketplace without the merger or if there is customer and employee
uncertainty surrounding the future direction of the Company on a stand-alone
basis. In addition, the Company has suspended the implementation of its Value
Growth Plan and certain other contemplated restructuring steps to pursue the
merger. If the merger does not close and the Company decides to re-implement its
Value Growth Plan and other previously contemplated restructuring steps, the
delay in such re-implementation may adversely affect the Company's business and
results of operations.
18
RESULTS OF OPERATIONS
First Quarter of Fiscal 2005 Compared to First Quarter of Fiscal 2004
Net Revenues - Overall net revenues increased by 1.1% to $105.1 million and
shipments rose 1.7% to 2.2 million cases. The volume increase is driven by a
5.1% increase in Robert Mondavi Private Selection, 17.0% increase in Robert
Mondavi Winery brand and a 70% increase in other California brands introduced
within the last year. The increase was offset by a 2.6% decrease in Woodbridge
volume. Total net revenues per case decreased to $48.55 in the current quarter
from $48.80 in the prior year's quarter. The decrease is a result of a mix shift
to new low priced product rollout and a $1.1 million increase in sales
promotional spending compared to the prior year's quarter.
Cost of Goods Sold - Overall cost of goods sold increased by 11.9% to $69.3
million, attributable to a $5.9 million inventory write-down for the Byron
winery (refer to Recent Developments for further discussion) and an increase of
2.2% or $1.4 million due to increased cases sold for the quarter and product mix
specifically related to higher sales of more expensive Robert Mondavi Winery
products compared to the prior year.
Gross Profit - As a result of the above factors, the gross profit percentage
decreased to 20.4% from 40.4% in the same period last year.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased by $2.0 million, or 7.0% and the ratio of
selling, general and administrative expenses to net revenues increased to 29.2%
from 27.6% a year ago. Reflected in prior year's amount is a $1.5 million net
gain related to the sale of certain non-strategic assets, therefore the change
from same period last year is essentially flat.
Special Charges - Prior to the suspension of the Value Growth Plan initiatives,
except for the planned sales of the Company's Byron and Arrowood brand assets,
the Company executed certain aspects of its restructuring plan and consequently
recorded pre-tax charges of $20.9 million at September 30, 2004. The total
charges represent $1.4 million of non-strategic asset impairment charges, $11.4
million reflecting severance related charges, $4.4 million of other fees
relating to the restructuring of the Company and $3.7 million of other fees
relating to recapitalization charges which were incurred and are recorded in
Special Charges in the Consolidated Statements of Operations. The severance
charges relate to employees in the Company's vineyard, production and selling,
general and administrative departments. According to the severance plan, the
costs will be primarily paid out in second and third quarters of fiscal 2005.
Additionally, the Company has recorded an impairment write-down with respect to
the planned sale of its Byron brand assets in the amount of $5.1 million
relating to property, plant and equipment and $0.5 million other assets. At this
time the Company does not anticipate recording additional charges related to the
restructuring and recapitalization of the Company, except for those items
detailed in Subsequent Events above.
Interest, Net - Interest expense decreased by $0.4 million or 7.8%, primarily
reflecting a 2.8% decrease in average borrowings outstanding, lower interest
rates, and the positive effect of the Company's new interest rate swap program,
partially offset by a $0.1 million decrease in capitalized interest resulting
from the completion of certain capital and vineyard development projects.
Equity Income from Joint Ventures - The Company reported equity income from
joint ventures of $5.4 million compared to $8.0 million in the prior year
quarter, primarily reflecting decreased income due to timing of shipments from
Opus One and the Company's Italian joint ventures of $1.1 million and $1.3
million, respectively, compared to prior year's quarter.
Income Tax Provision - The Company's effective tax rate was 38.0% compared to
36.5% last year.
Net (Loss) Income and (Loss) Earnings Per Share - As a result of the above
factors, the Company reported a net loss of $12.8 million, or $0.78 per
share-diluted, compared to net income of $9.8 million, or $0.60 per
share-diluted, a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of September 30, 2004, was $459.0 million compared to $456.0
million at June 30, 2004. The $3.0 million increase in working capital was
primarily attributable to an increase in prepaid and other current assets of
$15.7 million and a $43.0 million increase in inventories, which is a result of
the harvest. This increase is offset by a seasonal increase of $51.0 million in
accounts payable and $6.2 million of other accrued expenses related primarily to
accruals of restructuring charges and the Company's current tax position.
Cash provided by operations totaled $7.1 million, primarily reflecting net loss
of $12.8 million, $4.6 million of equity income from joint ventures (net of
distributions from joint ventures during the period), and offset by $26.5
million of restructuring and recapitalization costs and $5.9 million of
inventory write-downs for the quarter and $6.1 million of non-cash depreciation
and amortization. Cash used in investing activities totaled $0.8 million,
primarily reflecting $5.4 million of capital purchases offset by proceeds of
$4.5 million from the sale of certain assets. Cash used in financing activities
totaled $0.9 million, primarily reflecting net repayments of debt of $2.8
million reduced by $1.5 million of foreign currency translation adjustments. As
a result of these activities, the Company increased cash on hand from $49.0
million at June 30, 2004 to $54.4 million at September 30, 2004.
19
The Company has an uncollateralized revolving credit line that has maximum
credit availability of $150.0 million and expires on December 14, 2004. The
Company had no amounts outstanding under this facility at September 30, 2004.
The Company also has $267.1 million of fixed rate debt and capital lease
obligations outstanding at September 30, 2004, of which $17.8 million is
classified as current at quarter end. The Company has classified certain assets
that are financed through the master lease facilities as Assets Held for Sale,
Net at September 30, 2004. Consequently, the Company has classified $82.6
million of related debt obligation under the master lease facility as
Liabilities Held for Sale in the Consolidated Balance Sheet at September 30,
2004.
Due to the Value Growth Plan detailed in "Recent Developments" above, the
Company had classified $122.1 million in current assets and $265.7 million in
non-current assets as "Assets Held for Sale, Net" in the Consolidated Balance
Sheet at September 30, 2004. Due to the November 3, 2004, Constellation merger
announcement detailed in Note 2, Recent Developments, the Company has suspended
its divestiture efforts, except for the planned sales of the Company's Byron and
Arrowood brand assets. The Company expects to reclassify those assets not
intended to be sold to "Held for Use" in the second quarter.
During the second quarter of fiscal 2004, the Company entered into two interest
rate swap agreements with a total notional amount of $95,000. The objective of
both swaps is to take advantage of the current low interest rate environment and
to protect against further increases in the fair value of the Company's debt due
to further declines in rates. These swap agreements have been designated as
fair-value hedges of certain of the Company's fixed rate debt, effectively
converting them to variable rate obligations indexed to LIBOR. The variable rate
interest to be paid by the Company will be based on 6-month LIBOR plus a spread
of 2.1%. The swap has been marked to fair value at September 30, 2004, resulting
in the recording of a swap liability of $552, which is included in Long-term
Debt, Less Current Portion in the Consolidated Balance Sheets.
The Company maintains master lease facilities that provide the capacity to fund
up to $129.4 million, of which $112.3 million had been utilized as of September
30, 2004. The facilities enable the Company to lease certain real property to be
constructed or acquired. The leases 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
$93.2 million as of September 30, 2004. Effective July 1, 2003, the Company
adopted the provisions of FIN 46, and included in its consolidated financial
statements the assets, and related liabilities, leased under the master lease
facilities. Also, as encouraged by FIN 46, the Company has restated prior period
financial statements. 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
classified certain assets that are financed through the master lease facilities
as Assets Held for Sale, Net at September 30, 2004. Consequently, the Company
has classified $82.6 million of related debt obligation under the master lease
facility as Liabilities Held for Sale in the Consolidated Balance Sheet at
September 30, 2004.
The premium wine industry is a capital intensive business, due primarily to the
lengthy aging and processing cycles involved in premium wine production.
Historically, the Company has financed its operations and capital spending
principally through borrowings, as well as through internally generated funds.
If the announced merger with Constellation were not consummated, then the
Company projects continued capital spending over the next several years to
expand production capacity, acquire barrels and complete its vineyard
development. The Company currently expects its capital spending requirements to
be between $25 million and $30 million for fiscal 2005.
Management believes that the Company will support its operating and capital
needs and its debt service requirements through internally generated funds for
the foreseeable future, but will utilize available short-term borrowings to
support seasonal and quarterly fluctuations in cash requirements.
ADOPTED AND RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Amendment of Statement 133 on Derivative Instruments and Hedging Activities
On April 30, 2003, the FASB issued Statement No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". Statement 149 is intended
to result in more consistent reporting of contracts as either freestanding
derivative instruments subject to Statement 133 in their entirety, or as hybrid
instruments with debt host contracts and embedded derivative features. In
addition, Statement 149 clarifies the definition of a derivative by providing
guidance on the meaning of initial net investments related to derivatives.
Statement 149 is effective for contracts entered into or modified after June 30,
2003. The adoption of Statement 149 did not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
20
Financial Instruments with Characteristics of Both Liabilities and Equity
On May 15, 2003, the FASB issued Statement No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
Statement 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Statement 150 represents a
significant change in the practice of accounting for a number of financial
instruments, including mandatory redeemable equity instruments and certain
equity derivatives that frequently are used in connection with share repurchase
programs. Statement 150 is effective for all financial instruments created or
modified after May 31, 2003, and for other instruments as of July 1, 2003. The
adoption of this statement did not have a material impact on the Company's
financial position, results of operations or cash flows.
Participating Securities and the Two-class Method
In May 2003, the Emerging Issue Task Force issued Consensus No. 03-6 ("EITF
03-6"), "Participating Securities and the Two-class Method under FASB No. 128,
Earnings Per Share". EITF 03-6 considers how a "participating security" should
be defined for purposes of applying paragraphs 60 and 61 of Financial Accounting
Standards Board ("FASB") Statement No. 128, and whether paragraph 61 of FASB
Statement No. 128 requires an entity to use the two-class method in computing
EPS based on the presence of a nonconvertible participating security, regardless
of the characteristics of that participating security. EITF 03-6 is effective
for fiscal periods beginning after March 31, 2004. The adoption of EITF 03-6 did
not have a material impact on the Company's results of operations or financial
condition.
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, 2004 and the Company's
proxy statement dated October 25, 2004, both on file at the Securities and
Exchange Commission.
Item 4. Controls and Procedures.
The Company's Chief Executive Officer and Chief Financial Officer have reviewed,
as of the end of the period covered by this report, the Company's "disclosure
controls and procedures" (defined in the Securities Exchange Act of 1934, Rules
13a-15 (e) and 15d- 15 (e)). Based upon this review, the Chief Executive Officer
and Chief Financial Officer believe that the disclosure controls and procedures
in place are effective to ensure that information relating to the Company
required to be disclosed in its Exchange Act reports is recorded, processed,
summarized and reported in a timely and proper manner. There have been no
changes in the Company's internal controls over financial reporting that
occurred during the most recent fiscal quarter which would materially affect, or
is reasonably likely to affect the Company's internal controls over financial
reporting.
PART II
Item 1. Legal Proceedings.
Five purported shareholder class action lawsuits have been filed against
the Company and various of its directors arising from the Company's previously
stated recapitalization and restructuring plans, and the Constellation offer.
Four of those lawsuits have been filed in Napa County, California Superior
Court, and are styled Bamboo Partners LLC v. Robert Mondavi Corp., et al., No.
26-27170 (Cal. Super. Ct. compl. filed October 19, 2004); Robert Lewis v. Robert
Mondavi Corp., et al., No. 26-27204 (Cal. Super. Ct. compl. filed October 21,
2004); Nancy Bolozky v. Robert Mondavi Corp. et al., No. 26-27249 (Cal. Super.
Ct. compl. filed October 26, 2004) and Alaska Electrical Pension Fund v. The
Robert Mondavi Corporation et al., No. 26-27334 (Cal. Super. Ct. compl. filed
November 2, 2004). The fifth lawsuit has been filed in Nassau County, New York
Supreme Court, and is styled The Ezra Birnbaum Charitable Trust v. Philip Greer
et al., No. 04-014913 (N.Y. Sup. Ct. compl. filed October 28, 2004). Four of the
lawsuits allege that the defendants breached their fiduciary duties to the
Company's shareholders by, among other things, pursuing the Company's previously
stated recapitalization and restructuring plans, and allegedly refusing to
accept the Constellation offer. One of the lawsuits alleges that the defendants
breached their fiduciary duties to the Company's shareholders by, among other
things, accepting the Constellation offer and allegedly failing to hold an
auction and/or to obtain the highest price available for the Company. The
complaints seek certain declaratory and injunctive relief, compensatory damages
in an unspecified amount, attorneys' fees and costs of suit. On November 8,
2004, the Napa County Superior Court consolidated the four lawsuits filed in
that county, and appointed lead counsel for the plaintiff. The time for the
defendants to respond to the complaints has not yet expired. The Company
believes the lawsuits are without merit and intends to defend against them
vigorously.
21
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:
Exhibit 31.1 Certification by Gregory M. Evans pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934
Exhibit 31.2 Certification by Henry J. Salvo, Jr. pursuant to
Rule 13a-14(a) of the Securities Exchange Act of 1934
Exhibit 32.1 Certification by Gregory M. Evans pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification by Henry J. Salvo, Jr. pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
2) Form 8-K:
A Current Report on Form 8-K was filed on September 15, 2004,
in which the Company (a) announced its strategy to focus on
the lifestyle wine segment and to explores divestiture of its
luxury assets; and (b) revised fiscal 2005 guidance.
A Current Report on Form 8-K was filed on September 15, 2004,
in which the Company announced the departure of R. Michael
Mondavi.
A Current Report on Form 8-K was filed on September 20, 2004,
in which the Company filed a Termination of Employment
Agreement for R. Michael Mondavi.
A Current Report on Form 8-K was filed on September 20, 2004,
in which the Company disclosed costs associated with exit or
disposal activities.
A Current Report on Form 8-K was filed on September 20, 2004,
in which the Company announced its intention to address
investors at the Bank of America Securities Conference.
A Current Report on Form 8-K was filed on October 1, 2004, in
which the Company issued a press release reaffirming
expectations to realize between $400M to $500M from
divestiture of assets.
A Current Report on Form 8-K was filed on October 5, 2004, in
which the Company announced the resignation of R. Michael
Mondavi as a director of the Company.
A Current Report on Form 8-K was filed on October 5, 2004, in
which the Company issued a press release announcing the
departure of R. Michael Mondavi from the Company's board of
directors.
A Current Report on Form 8-K was filed on October 7, 2004, in
which the Company issued a press release announcing (a) the
appointment of Jean-Michel Vallette as President and Managing
Director of Robert Mondavi Winery and (b) the departure of
Timothy J. Mondavi as an employee of the Company and retention
of Mr. Mondavi as Consulting Winegrower to the Company.
An amended Current Report on Form 8-K/A was filed on October
8, 2004, to update the disclosure to item 2.05 of the Current
Report on Form 8-K filed on September 20, 2004.
A Current Report on Form 8-K was filed on October 19, 2004, in
which the Company announced receipt of an unsolicited proposal
to acquire the Company.
A Current Report on Form 8-K was filed on October 20, 2004, in
which the Company filed a Termination Agreement and Personal
Services Agreement with Timothy J. Mondavi.
22
A Current Report on Form 8-K was filed on October 28, 2004, in
which the Company announced its financial results for the
quarter ended September 30, 2004.
A Current Report on Form 8-K was filed on November 4, 2004, in
which the Company issued a press release announcing that it
had signed a definitive merger agreement with Constellation
Brands.
A Current Report on Form 8-K was filed on November 8, 2004, in
which the Company filed a copy of its definitive merger
agreement.
A Current Report on Form 8-K was filed on November 10, 2004,
in which the Company announced that the annual shareholder
meeting scheduled for November 30, 2004, would be postponed.
23
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 15, 2004 By /s/ HENRY J. SALVO, JR.
---------------------------------
Henry J. Salvo, Jr.
Chief Financial Officer
24
Cautionary Statement Regarding Forward-Looking Statements
---------------------------------------------------------
This announcement 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. These forward-looking statements include, for example, statements
regarding the Company's proposed merger with Constellation Brands, projections
or predictions about the company's future growth, earnings before interest and
tax ratios and financial returns, 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 in general. 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 continued 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 the Company's 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, is beyond the Company's
control. A shortage of grapes might constrict the supply of wine available for
sale and cause higher grape costs putting 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.
There are also significant risks associated with the proposed merger with
Constellation. The announcement of the proposed merger may impair management's
ability to focus on other needed areas of business execution. There is no
assurance that the Company will successfully complete the merger within the
expected timeframe or at all and failure to complete the merger could adversely
affect the Company's stock price. If the Company fails to complete the merger,
it may be required to pay Constellation a termination fee and the Company will
not realize any benefits from the expenses it has incurred in preparation for
the merger. 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, 2004 and to the risk factors
above. For these and other reasons, no forward-looking statement by the Company
can nor should be taken as any assurance of what will happen in the future.
Actual results may differ significantly from those projected in the
forward-looking statements.
25