________________________________________________________________________________
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, 2003
----------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_______________to__________________
Commission File Number: 33-61516
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THE ROBERT MONDAVI CORPORATION
Incorporated under the laws I.R.S. Employer Identification:
of the State of California 94-2765451
Principal Executive Offices:
7801 St. Helena Highway
Oakville, CA 94562
Telephone: (707) 259-9463
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------------ ------------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes X No
------------ ------------
As of October 31, 2003, there were issued and outstanding 9,881,110 shares of
the issuer's Class A Common Stock and 6,498,195 share of the issuer's Class B
Common Stock.
________________________________________________________________________________
1
The Robert Mondavi Corporation
PART I
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
September 30, June 30,
------------------------------
(In thousands, except share data) 2003 2003
------------------------------
Unaudited
ASSETS
Current assets:
Cash................................................................................ $ - - $ 1,339
Accounts receivable, net............................................................ 91,576 96,111
Inventories......................................................................... 431,735 392,635
Prepaid expenses and other current assets........................................... 7,805 12,545
---------- ----------
Total current assets.............................................................. 531,116 502,630
Property, plant and equipment, net.................................................... 408,926 416,110
Investments in joint ventures......................................................... 37,913 30,763
Other assets.......................................................................... 11,439 11,674
---------- ----------
Total assets.................................................................. $ 989,394 $ 961,177
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Book overdraft...................................................................... $ 2,361 $ - -
Short-term borrowings............................................................... 5,000 5,000
Accounts payable.................................................................... 68,170 28,727
Employee compensation and related costs............................................. 14,513 13,987
Accrued interest.................................................................... 3,589 7,115
Other accrued expenses.............................................................. 6,038 7,317
Current portion of long-term debt................................................... 8,809 9,837
---------- ----------
Total current liabilities......................................................... 108,480 71,983
Long-term debt, less current portion.................................................. 376,511 397,889
Deferred income taxes................................................................. 32,965 30,610
Deferred executive compensation....................................................... 6,826 6,508
Other liabilities..................................................................... 3,112 3,193
---------- ----------
Total liabilities............................................................... 527,894 510,183
---------- ----------
Commitment and contingencies
Shareholders' equity
Preferred Stock: authorized - 5,000,000 shares;
issued and outstanding - no shares................................................ - - - -
Class A Common Stock, without par value: authorized - 25,000,000 shares;
issued and outstanding - 9,837,638 and 9,734,645 shares........................... 96,137 95,909
Class B Common Stock, without par value: authorized - 12,000,000 shares;
issued and outstanding - 6,521,734 and 6,621,734 shares........................... 10,475 10,636
Paid in capital..................................................................... 11,584 11,579
Retained earnings................................................................... 343,700 333,852
Accumulated other comprehensive income (loss):
Cumulative translation adjustment................................................. (360) (1,269)
Forward contracts................................................................. (36) 287
---------- ----------
Total shareholders' equity...................................................... 461,500 450,994
---------- ----------
Total liabilities and shareholders' equity.................................... $ 989,394 $ 961,177
========== ==========
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
September 30,
------------------------------
(Unaudited) (In thousands, except share data) 2003 2002
------------------------------
Revenues.............................................................................. $ 108,786 $ 103,460
Less excise taxes..................................................................... 4,849 4,854
---------- ----------
Net revenues.......................................................................... 103,937 98,606
Cost of goods sold.................................................................... 61,924 57,957
---------- ----------
Gross profit.......................................................................... 42,013 40,649
Selling, general and administrative expenses.......................................... 28,730 29,906
---------- ----------
Operating income...................................................................... 13,283 10,743
Other (income) expense:
Interest............................................................................ 5,540 5,292
Equity income from joint ventures................................................... (8,006) (7,321)
Other............................................................................... 240 (16)
---------- ----------
Income before income taxes............................................................ 15,509 12,788
Provision for income taxes............................................................ 5,661 4,732
---------- ----------
Net income............................................................................ $ 9,848 $ 8,056
========== ==========
Earnings per share - basic............................................................ $ 0.60 $ 0.50
========== ==========
Earnings per share - diluted.......................................................... $ 0.60 $ 0.49
========== ==========
Weighted average number of shares outstanding - basic................................. 16,358 16,215
========== ==========
Weighted average number of shares outstanding - diluted............................... 16,404 16,363
========== ==========
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
September 30,
---------------------------
(Unaudited, in thousands) 2003 2002
---------------------------
Cash flows from operating activities:
Net income............................................................................ $ 9,848 $ 8,056
Adjustments to reconcile net income to net cash flows
from operating activities:
Deferred income taxes............................................................... 1,612 (33)
Depreciation and amortization....................................................... 6,048 6,189
Equity income from joint ventures................................................... (8,006) (7,321)
Distributions of earnings from joint ventures....................................... - - 1,509
Net gain on sale of assets.......................................................... (1,617) - -
Other............................................................................... - - 808
Change in assets and liabilities, net of acquisitions:
Accounts receivable, net.......................................................... 4,535 10,510
Inventories....................................................................... (37,368) (54,650)
Other assets...................................................................... 5,035 (1,870)
Accounts payable and accrued expenses............................................. 35,022 52,251
Deferred executive compensation................................................... 318 311
Other liabilities................................................................. (81) (111)
---------- ----------
Net cash flows from operating activities.............................................. 15,346 15,649
---------- ----------
Cash flows from investing activities:
Acquisitions of property, plant and equipment......................................... (7,115) (13,235)
Proceeds from sale of assets.......................................................... 2,131 - -
Contributions of capital to joint ventures............................................ - - (499)
Increase in restricted cash........................................................... (8) (21)
---------- ----------
Net cash flows from investing activities.............................................. (4,992) (13,755)
---------- ----------
Cash flows from financing activities:
Book overdraft........................................................................ 2,361 10,100
Net repayments under credit lines..................................................... (14,000) (8,400)
Proceeds from issuance of long-term debt.............................................. 2,722 3,644
Principal repayments of long-term debt................................................ (3,297) (6,844)
Exercise of Class A Common Stock options.............................................. 67 54
Other................................................................................. 454 (448)
---------- ----------
Net cash flows from financing activities.............................................. (11,693) (1,894)
---------- ----------
Net change in cash.................................................................... (1,339) - -
Cash at the beginning of the period................................................... 1,339 - -
---------- ----------
Cash at the end of the period......................................................... $ - - $ - -
========== ==========
See Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position at
September 30, 2003, its results of operations for the three month periods ended
September 30, 2003 and 2002 and its cash flows for the three month periods ended
September 30, 2003 and 2002. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted from the accompanying consolidated financial statements. In
addition, certain fiscal 2003 balances have been reclassified to conform with
the current year presentation. For further information, reference should be made
to the consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2003, 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. As a result, property, plant, and equipment and
long-term debt were increased by $114,095 and $114,557, respectively, and
inventory, deferred income tax liabilities and retained earnings were decreased
by $1,754, $826, and $1,390, respectively, at June 30, 2003. Also, as encouraged
by the Interpretation, the Company has restated prior period financial
statements back to July 1, 2001. As a result, property, plant, and equipment and
long-term debt were increased by $108,547 and $108,546, respectively, and
inventory, deferred income tax liabilities and retained earnings were decreased
by $1,402, $524, and $877, respectively, at September 30, 2002. Net income for
the quarter ended September 30, 2002, was reduced by $99. On July 1, 2001,
property, plant, and equipment and long-term debt were increased by $88,292.
Earnings per share
Diluted earnings per share is computed by dividing net income by the sum of the
weighted average number of Class A and Class B common shares outstanding plus
the dilutive effect, if any, of common share equivalents for stock option
awards. Potentially dilutive securities are excluded from the computation of
diluted earnings per share if their inclusion would have an antidilutive effect.
These antidilutive securities, which consisted solely of stock options, stated
as equivalent shares of common stock, amounted to 1,426,000 and 913,000,
respectively, for the three months ended September 30, 2003 and 2002.
In computing basic earnings per share for all periods presented, no adjustments
have been made to net income (numerator) or weighted-average shares outstanding
(denominator). The computation of diluted earnings per share for all periods is
identical to the computation of basic earnings per share except that the
weighted-average shares outstanding (denominator) has been increased by 46,000
and 148,000, respectively for the three months ended September 30, 2003 and
2002, to include the dilutive effect of stock options outstanding.
Derivative instruments and hedging activities
The Company has only a limited involvement with derivative instruments and does
not use them for trading purposes. Forward exchange contracts, generally with
average maturities of less than one year, are used as protection against the
risk that the eventual U.S. dollar cash flows resulting from certain
unrecognized firm purchase commitments and forecasted transactions denominated
in foreign currencies will be adversely affected by changes in exchange rates.
The derivative financial instruments associated with unrecognized firm purchase
commitments are designated as fair-value hedges. The derivative financial
instruments associated with forecasted transactions are designated as cash-flow
hedges.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
At September 30, 2003, the Company had outstanding forward exchange contracts,
hedging primarily European euro purchases of barrels and corks, Australian
dollar purchases of software and wine, and forecasted receipts of Canadian
dollars and European euros, with notional amounts totaling $4,366. Using
exchange rates outstanding as of September 30, 2003, the U.S. dollar equivalent
of the contracts totaled $4,685.
Stock-based compensation
The Company measures compensation cost for employee stock options 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 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. No stock-based employee compensation cost is reflected in net income for
the three month periods ended September 30, 2003 or 2002 as all options granted
had an exercise price equal to or greater than the fair market value of the
underlying common stock on the date of grant. The Company utilizes the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," as amended by Statement 148.
The following table illustrates the effect on net income and 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,
--------------------------
2003 2002
--------------------------
Net income, as reported............................................................... $ 9,848 $ 8,056
Less total stock-based compensation expense determined under
fair value based method for all awards, net of tax effects......................... (754) (827)
---------- ----------
Pro forma net income.................................................................. $ 9,094 $ 7,229
========== ==========
Earnings per share:
Basic, as reported.................................................................. $ 0.60 $ 0.50
========== ==========
Basic, pro forma.................................................................... $ 0.56 $ 0.45
========== ==========
Diluted, as reported................................................................ $ 0.60 $ 0.49
========== ==========
Diluted, pro forma.................................................................. $ 0.55 $ 0.44
========== ==========
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 2004 and 2003, respectively: dividend
yield of 0% for all periods; expected volatility of 42% and 43%; risk-free
interest rates of 3.08% and 3.18%; and expected lives of three to five years for
all periods. The weighted-average grant-date fair value of options granted
during fiscal 2004 and 2003, respectively, was $11.27 and $13.54 per share.
NOTE 2 INVENTORIES
Inventories consist of the following:
September 30, June 30,
---------------------------
2003 2003
---------------------------
Wine in production.................................................................... $ 245,972 $ 224,064
Bottled wine.......................................................................... 170,960 145,842
Crop costs and supplies............................................................... 14,803 22,729
----------- -----------
$ 431,735 $ 392,635
=========== ===========
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
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
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, 2003 and June 30, 2003, respectively, was $2,218 and
$2,837 of inventory step-up remaining from the acquisition.
NOTE 3 ASSETS HELD FOR SALE
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 that time, assets with a combined
book value of $57,752 were identified for potential future sale. These assets
are expected to be held and used while the Company executes the sale of the
assets. At September 30, 2003, the net book value of the remaining assets held
for sale totaled $42,096. The Company believes that this value is recoverable
and it does not exceed fair value.
During the first quarter of fiscal 2004, the Company sold a non-strategic asset
to a related party at a price determined using independent appraisers. The
transaction resulted in a gain of $2.0 million, and was included in Selling,
General and Administrative Expenses in the Consolidated Statements of Income.
NOTE 4 INVESTMENTS IN JOINT VENTURES
September 30, June 30,
--------------------------
nvestments in joint ventures are as follows: 2003 2003
--------------------------
Opus One.............................................................................. $ 16,265 $ 10,695
Chile................................................................................. 6,161 6,160
Italy................................................................................. 6,980 6,662
Ornellaia............................................................................. 5,614 4,334
Australia............................................................................. 2,541 2,295
Other................................................................................. 352 617
---------- ---------
$ 37,913 $ 30,763
========== =========
The Company's interest in income and losses for each joint venture is equal to
its ownership percentage. The Opus One joint venture is a general partnership,
of which the Company has a 50% general partnership interest. The Chile joint
venture is a corporation, of which the Company owns a 50% interest. The
Ornellaia and Italy joint ventures are limited liability companies, of which the
Company owns a 50% interest. The Australia joint venture operates through two
entities: a limited liability company, of which the Company owns a 50% interest;
and a general partnership, of which the Company has a 50% general partnership
interest.
The 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 quarter ended September 30, 2003, no
contributions of capital were made to nor were any distributions or earnings
received from the Company's joint ventures.
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,
--------------------------
2003 2002
--------------------------
Net revenues.......................................................................... $ 31,835 $ 35,394
Cost of goods sold.................................................................... 9,020 9,372
---------- ---------
Gross profit.......................................................................... 22,815 26,022
Other expenses........................................................................ 9,751 11,526
---------- ---------
Net income............................................................................ $ 13,064 $ 14,496
========== =========
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
NOTE 5 COMPREHENSIVE INCOME
Comprehensive income includes revenues, expenses, gains and losses that are
excluded from net income, including foreign currency translation adjustments and
unrealized gains and losses on certain derivative financial instruments
designated as cash-flow hedges. Comprehensive income for the three months ended
September 30, 2003 and 2002 was as follows:
Three Months Ended
September 30,
--------------------------
2003 2002
--------------------------
Net income............................................................................ $ 9,848 $ 8,056
Foreign currency translation adjustment, net of tax................................... 909 (451)
Forward contracts, net of tax......................................................... (323) 151
---------- ---------
Comprehensive income.................................................................. $ 10,434 $ 7,756
========== =========
NOTE 6 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.
NOTE 7 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, was $9,066 and $8,949 for
the three month periods ended September 30, 2003 and 2002, respectively. Cash
paid for income taxes was $38 and $4,198 for the three month periods ended
September 30, 2003 and 2002, respectively.
During the quarter ended September 30, 2003, the Company completed the sale and
subsequent leaseback of certain equipment. Proceeds from the sale totaled
$7,712, which resulted in a loss on disposition of $434. 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.
8
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 operates in one business segment (premium table wine). Its core brands
include Robert Mondavi Winery, Robert Mondavi Private Selection and Woodbridge.
The Company's smaller wineries include Byron in Santa Maria and Arrowood in
Sonoma, as well as four international joint ventures. The Company produces Opus
One in partnership with the Baron Philippe de Rothschild of Chateau Mouton
Rothschild of Bordeaux, France; Luce, Lucente, Danzante and Ornellaia in
partnership with Marchesi de'Frescobaldi of Tuscany, Italy; Sena, Arboleda and
Caliterra in partnership with the Eduardo Chadwick family of Vina Errazuriz in
Chile; and Talomas and Kirralla in partnership with the Robert Oatley family and
Southcorp Limited.
Sales volume for the first quarter ended September 30, 2003, increased by 2.0%
to 2.1 million cases and net revenues increased by 5.4% to $103.9 million. The
Company reported net income of $9.8 million, or $0.60 per share-diluted, for the
period ended September 30, 2003, compared to net income of $8.1 million, or
$0.49 per share-diluted, a year ago. The increase in net revenues and net 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 increased investment in
its core brands, continued development of new products, the positive impact from
the streamlining of the Company's operations and organization structure in the
second half of fiscal 2003, and a net gain realized from the sale of
non-strategic assets. Refer to the Company's Annual Report on Form 10-K for the
fiscal year ended June 30, 2003, for further discussion of the operations and
organizational changes.
RESULTS OF OPERATIONS
First Quarter of Fiscal 2004 Compared to First Quarter of Fiscal 2003
Net Revenues - Net revenues increased by 5.4% to $103.9 million and
shipments rose 2.0% to 2.1 million cases. The increase in volume is driven by
growth in the Robert Mondavi Winery brand, Robert Mondavi Private Selection
brand and the Company's import portfolio, which increased 16%, 9% and 21%,
respectively, and from the introduction of several new products (including Papio
and Woodbridge Select Vineyard Series). The increase in net revenues,
incremental to volume, is a result of positive sales mix towards brands with
higher net revenues per case, which increased to $48.80 in the current quarter
from $47.20 in the prior year's quarter. Net revenues also includes revenue from
the sale of surplus bulk wines, which increased by $1.3 million from the prior
year.
Cost of Goods Sold - Cost of goods sold increased by 6.8% to $61.9 million,
reflecting increased sales volume of 2.0%, an increase from the prior year
quarter in the cost associated with sales of surplus bulk wine of 0.8%, and a
4.0% increase due to the shift in product mix toward brands with both higher net
revenues per case and higher costs per case.
Gross Profit - As a result of the above factors, the gross profit percentage
decreased to 40.4% from 41.2% in the same period last year.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses decreased by $1.2 million, or 4.0%, reflecting a net
gain of $1.5 million related to the sale of certain non-strategic assets offset
by additional sales and marketing spending in support of the increase in sales.
The ratio of selling, general and administrative expenses to net revenues
decreased to 27.6% from 30.3% a year ago, reflecting the net gain on the sale of
non-strategic assets coupled with general and administrative cost savings
resulting from the fiscal 2003 organization changes.
Interest - Interest expense increased by $0.2 million or 4.7%, primarily
reflecting a $0.4 million decrease in capitalized interest resulting from the
completion of certain capital and vineyard development projects that was
partially offset by a decrease in average borrowings outstanding.
Equity Income from Joint Ventures - The Company reported equity income from
joint ventures of $8.0 million compared to income of $7.3 million in the prior
year quarter, primarily reflecting a $1.4 million reduction from the prior year
quarter in the amount of Ornellaia inventory step-up recorded offset by a
decrease of $0.9 million from the Opus One venture.
9
Income Tax Provision - The Company's effective tax rate was 36.5% compared to
37.0% last year.
Net Income and Earnings Per Share - As a result of the above factors, the
Company reported net income of $9.8 million, or $0.60 per share-diluted,
compared to net income of $8.1 million, or $0.49 per share-diluted, a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of September 30, 2003, was $422.6 million compared to $430.6
million at June 30, 2003. The $8.0 million decrease in working capital was
primarily attributable to a $4.5 million decrease in accounts receivable and a
$4.7 million decrease in prepaid expenses and other current assets. The increase
in inventories of $39.1 million, which is a result of ongoing harvest, is offset
by an increase of $36.5 million in current liabilities, primarily financing
grower payables.
Cash provided by operations totaled $15.3 million, primarily reflecting net
income of $9.8 million, $4.4 million of non-cash items (depreciation,
amortization, and net gain on sale of assets), an increase in deferred tax
liabilities of $1.6 million, and $7.5 million from the net change in current and
other assets and liabilities, offset by $8.0 million in equity income from joint
ventures (no distributions from joint ventures of earnings were received this
quarter). Cash used in investing activities totaled $5.0 million, primarily
reflecting $7.1 million of capital purchases offset by proceeds of $2.1 million
from the sale of certain assets. Cash used in financing activities totaled $11.7
million, primarily reflecting net repayments of debt. As a result of these
activities, the Company went from cash on hand of $1.3 million at June 30, 2003
to a book overdraft position of $2.4 million at September 30, 2003.
The Company has an unsecured credit line that has maximum credit availability of
$150.0 million and expires on December 14, 2004. The Company had $5.0 million
outstanding under this facility at September 30, 2003, all of which is borrowed
under a short-term swing-line facility and is included in Short-Term Borrowings
in the Consolidated Balance Sheets. The Company also has $385.3 million of fixed
rate debt and capital lease obligations outstanding at September 30, 2003, of
which $8.8 million is classified as current at quarter end.
The Company maintains master lease facilities that provide the capacity to fund
up to $129.4 million, of which $109.4 million had been utilized as of September
30, 2003. The facilities enable the Company to lease certain real property and
equipment 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 $90.8 million as of September 30, 2003. Effective July 1, 2003,
the Company adopted the provisions of Financial Accounting Standards Board
(FASB) Interpretation No. 46, "Consolidation of Variable Interest Entities", and
included in its consolidated financial statements the assets, and related
liabilities, leased under the master lease facilities. Also, as encouraged by
the Interpretation, 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 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.
The Company projects continued capital spending over the next several years to
expand production capacity, purchase barrels and complete its vineyard
development. The Company currently expects its capital spending requirements to
be between $25 million and $30 million for fiscal 2004.
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.
10
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, 2003, on file at the
Securities and Exchange Commission.
Item 4. Controls and Procedures.
The Registrant carried out an evaluation, under the supervision and with the
participation of the Registrant's management, including the Registrant's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
Registrant's disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) of the Securities and Exchange Act of 1934. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Registrant's disclosure controls and procedures as of
September 30, 2003 were effective to ensure that information required to be
disclosed by the Registrant in reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission's rules
and forms.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or more
people, or by management override of the control. The design of any control
procedure also is based in part upon certain assumptions about the likelihood of
future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions; over time,
controls may become inadequate because of changes in conditions, or the degree
of compliance with the policies or procedures may deteriorate. Because of the
inherent limitations in a cost-effective control procedure, misstatements due to
error or fraud may occur and not be detected.
There were no changes in the Registrant's internal control over financial
reporting that occurred during the quarter ended September 30, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Registrant's internal control over financial reporting.
PART II
Item 1. Legal Proceedings.
The Company is subject to litigation in the ordinary course of its business. In
the opinion of management, the ultimate outcome of existing litigation will not
have a material adverse effect on the Company's consolidated financial
condition, the results of its operations or its cash flows.
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits:
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 October 23, 2003, in
which the Company announced results for its first quarter of
fiscal 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ROBERT MONDAVI CORPORATION
Dated: November 14, 2003 By /s/ HENRY J. SALVO, JR.
---------------------------
Henry J. Salvo, Jr.
Chief Financial Officer
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. Such forward-looking statements include, for example, projections or
predictions about the Company's future growth, consumer demand for its wines,
including new brands and brand extensions, margin trends, anticipated future
investment in vineyards and other capital projects, the premium wine grape
market and the premium wine industry generally. Actual results may differ
materially from the Company's present expectations. Among other things, a soft
economy, a downturn in the travel and entertainment sector, risk associated with
continued worldwide conflict, 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 that put more pressure on gross profit
margins. A surplus of grapes might allow for greater sales and lower grape
costs, but it might also result in more competition and pressure on selling
prices or marketing spending. Interest rates and other business and economic
conditions could increase significantly the cost and risks of projected capital
spending, which in turn could impact the Company's profit margins. 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, 2003, on file with the Securities and
Exchange Commission. For these and other reasons, no forward-looking statement
by the Company can nor should be taken as a guarantee of what will happen in the
future.
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