ITEM 1. BUSINESS
BUSINESS INTRODUCTION
The Company is a leading producer of premium table wines. The Company produces and markets fine wines under the following labels: Robert Mondavi Winery, Robert Mondavi Coastal, La Famiglia di Robert Mondavi, Woodbridge Winery, Arrowood Vineyards & Winery, Byron Vineyard & Winery, Io and Vichon Mediterranean. The Company also produces Opus One, in partnership with the Baroness Philippine de Rothschild of Chateau Mouton Rothschild of Bordeaux, France; Luce, Lucente and Danzante in partnership with the Marchesi de' Frescobaldi of Tuscany, Italy; and Sena and Caliterra, in partnership with the Eduardo Chadwick family of Vina Errazuriz in Chile. The Company also has a minority stake in Tenuta dell'Ornellaia, a famous estate in the Bolgheri appellation of Tuscany, producer of Ornellaia and Masseto, founded by Marchese Lodovico Antinori.
Robert Mondavi Winery was founded in 1966, and the Company was incorporated under the laws of California in 1981 as a holding company for the various business interests of the Robert Mondavi Winery. The Company's principal executive offices are located at 7801 St. Helena Highway, Oakville, California 94562. Its telephone number is (707) 259-9463. As used herein, unless the context indicates otherwise, the "Company" shall mean The Robert Mondavi Corporation and its consolidated subsidiaries.
INDUSTRY BACKGROUND
The wine industry is generally segregated into three categories: premium table wines that retail for more than $3 per 750ml bottle; "jug" wines that retail for less than $3 per 750ml bottle; and other wine products, such as sparkling wines, fortified wines, wine coolers and flavored wines. The Company produces and sells only premium table wines. The premium category is generally divided by the trade into four segments: popular premium ($3-$7 per 750ml); super premium ($7-$14 per 750ml); ultra premium ($14-$25 per 750ml); and luxury (over $25 per 750ml). The Company sells wines in each segment of the premium table wine market.
MARKETING AND DISTRIBUTION
The Company's marketing focus is on education, emphasizing the association of fine wines with fine foods. The Company utilizes consumer advertising, educational wine tastings, seminars and a broad array of promotional and public relations activities.
The Company's wines are available through all principal retail channels for premium table wine, including fine restaurants, hotels, specialty shops, supermarkets and club stores in all fifty states and 90 countries throughout the world. Sales of the Company's products outside the United States accounted for approximately 9% of net revenues in fiscal 2000.
The Company's wines are primarily sold through distributors, who then sell to retailers and restaurateurs. Domestic sales of the Company's wines are made through more than 100 independent wine and spirits distributors. International sales are made through independent importers and brokers.
The Company's wines are distributed in California, Florida, Pennsylvania, Nevada, Hawaii, Kentucky and New Mexico by Southern Wine & Spirits, a large national beverage distributor. Sales to Southern Wine & Spirits nationwide represented approximately 30%, 29% and 30% of the Company's gross revenues for the fiscal years ended June 30, 2000, 1999 and 1998, respectively. Sales to the Company's 15 largest distributors represented 67% of the Company's gross revenues in fiscal 2000. The Company's distributors also offer premium table wines of other companies that directly compete with the Company's products.
Sales of the Company's wines in California accounted for 22%, 23% and 23% of the Company's gross revenues for the fiscal years ended June 30, 2000, 1999 and 1998, respectively. Other major domestic markets include Florida, New York, Texas, New Jersey, Massachusetts and Pennsylvania where annual sales represented collectively 28%, 29% and 30% of the Company's gross revenues for the fiscal years ended June 30, 2000, 1999 and 1998, respectively.
GRAPE SUPPLY
The Company controls approximately 9,500 acres of vineyards in the top winegrowing regions of California, including Napa Valley, Lodi, Mendocino County, Monterey County, San Luis Obispo County, Santa Maria Valley, Santa Barbara County and Sonoma County. In addition, the Company's joint ventures control approximately 1,600 acres of vineyards in the top winegrowing regions of Chile, Italy and California. Approximately 7,300 acres of the Company-controlled vineyards are currently planted and the Company expects to plant the balance of the California acreage within the next three years.
In fiscal 2000, approximately 7% of the Company's total grape supply came from Company-controlled vineyards, including approximately 47% of the grape supply for wines produced at the Robert Mondavi Winery in Oakville.
The Company purchases the balance of its California grape supply from approximately 300 independent growers, including approximately 100 growers in Napa Valley. The grower contracts range from one-year spot market purchases to intermediate and long-term agreements.
Winemaking and grape growing are subject to a variety of agricultural risks. Various diseases, pests and certain weather conditions can materially and adversely affect the quality and quantity of grapes available to the Company, thereby materially and adversely affecting the supply of the Company's products and its profitability.
The Company has had limited experience with Pierce's Disease, a disease that destroys individual vines and for which there is no known cure. Recently, a new carrier of Pierce's Disease, the Glassy Winged Sharpshooter, has infected vineyards in Southern California. If this pest migrates north to the Company's vineyards, it could greatly increase the incidence of Pierce's Disease and materially and adversely affect the Company's future grape supply.
WINEMAKING
The Company's winemaking philosophy is to make wines in the traditional manner by starting with high quality fruit and handling it as gently and naturally as possible all the way to the bottle. The Company emphasizes traditional barrel aging as a cornerstone of its winemaking approach. The Company views its barrels as key winemaking assets and its substantial annual investment in new oak barrels enables it to consistently produce premium quality wines and to accomplish both its economic and stylistic objectives within its system of wineries. Each of the Company's wineries is equipped with modern equipment and technology that is appropriate for the style and scale of the wines being produced.
EMPLOYEES
The Company employs approximately 800 regular, full-time employees. The Company also employs part-time and seasonal workers for its vineyard, production and hospitality operations. None of the Company's employees is represented by a labor union and the Company believes that its relationship with its employees is good.
TRADEMARKS
The Company maintains federal trademark registrations for its brands, proprietary products and certain logos, motifs and vineyard names. The Company's joint ventures maintain federal trademark registrations for their brands. International trademark registrations are also maintained where it is appropriate to do so. Each of the United States trademark registrations is renewable indefinitely so long as the Company is making a bona fide usage of the trademark.
ITEM 2.
ITEM 2. PROPERTIES
The Company operates six wineries, including Robert Mondavi Winery, La Famiglia di Robert Mondavi, Woodbridge, Arrowood, Byron and Opus One, which is co-managed with the owners of Chateau Mouton Rothschild. The current available annual production of all these facilities combined is approximately 10.0 million cases. The Woodbridge winery serves as a central warehouse and distribution point for all of the Company's wines. For information regarding the Company's vineyards, see "Grape Supply" under Item 1 above.
The Company leases warehouse space in California. The Company also leases office space in Napa, California, and several cities throughout the United States and abroad. The Company believes that its current facilities, leased and owned, are adequate for its current needs.
ITEM 3.
ITEM 3. 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 or the results of its operations.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the Company's fourth quarter ended June 30, 2000.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Class A Common Stock trades on the NASDAQ National Market System under the symbol "MOND." There is no established trading market for the Company's Class B Common Stock. The following table sets forth the high and low closing prices of the Class A Common Stock for the periods indicated.
The Company has never declared or paid dividends on its common stock and anticipates that all earnings will be retained for use in its business. The payment of any future dividends will be at the discretion of the Board of Directors and will continue to be subject to certain limitations and restrictions under the terms of the Company's indebtedness to various institutional lenders, including a prohibition on the payment of dividends without the prior written consent of such lenders. There were approximately 2,218 shareholders of record as of June 30, 2000.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(1) Excludes inventory step-up charges associated with business acquisitions, as well as a net gain primarily related to the sale of vineyards in fiscal 2000 and reorganization and other one-time charges recorded during fiscal 1999.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
FORWARD-LOOKING STATEMENTS This discussion 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, the premium wine grape market and the Company's anticipated future investment in vineyards and other capital projects. Actual results may differ materially from the Company's present expectations. Among other things, reduced consumer spending or a change in consumer preferences could reduce demand for the Company's wines. Similarly, competition from numerous domestic and foreign vintners could affect the Company's volume and revenue growth. The price of grapes, the Company's single largest product cost, is beyond the Company's control and higher grape costs may put more pressure on the Company's gross profit margin than is currently forecast. Interest rates and other business and economic conditions could change significantly the cost and risks of projected capital spending. 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.
KEY ACCOUNTING MATTERS The Company recorded inventory step-up charges associated with the acquisition of a minority interest in an Italian winery in fiscal 2000. Under purchase accounting, the purchase price is allocated to the assets and liabilities of the acquired company based on their estimated fair market values at the time of the transaction. When the inventory acquired is subsequently sold in the normal course of business, costs of the inventory are charged to cost of goods sold, including the amount of the inventory step-up (the difference between the original book value of the inventory and the fair market value of the inventory upon acquisition). The inventory step-up charges reduce the Company's reported net income. The adjusted figures discussed throughout this report, which better reflect the results of the Company's ongoing operations, exclude inventory step-up charges, as well as a net gain primarily related to the sale of vineyards in fiscal 2000 and reorganization and other one-time charges recorded in fiscal 1999. For a further discussion of the reorganization and other one-time charges, see Note 10 of Notes to Consolidated Financial Statements.
Effective July 1, 1998, the Company changed its wine inventory costing method from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The change has been applied to prior periods by retroactively restating the financial statements. For a further discussion of the impact of, and reasons for, this accounting change, see Note 1 of Notes to Consolidated Financial Statements.
The Company's joint venture interests are accounted for as investments under the equity method. Accordingly, the Company's share of their results is reflected in "equity in net income of joint ventures" and "investments in joint ventures" on the Consolidated Statements of Income and Consolidated Balance Sheets, respectively. The Company also imports wines under importing and marketing agreements with certain of its joint ventures and their affiliates. Under the terms of these agreements the Company purchases wine for resale in the United States. Revenues and expenses related to importing and selling these wines are included in the appropriate sections of the Consolidated Statements of Income.
SEASONALITY AND QUARTERLY RESULTS 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, which generally last for one month. Sales volume tends to decrease if distributors begin a quarter with larger than standard inventory levels. The timing of releases for certain luxury wines can also have a significant impact on quarterly results.
The following table sets forth certain information regarding the Company's net revenues and adjusted net income for each of the last eight fiscal quarters:
Seasonal cash requirements increase just after harvest in the fall as a result of contract grape payments and, to a lesser degree, due to the large seasonal work force employed in both the vineyards and wineries during harvest. Also, many grape contracts include a deferral of a portion of the payment obligations until April 1st of the following calendar year, resulting in significant cash payments on March 31 of each year. As a result of harvest costs and the timing of its contract grape payments, the Company's borrowings, net of cash, generally peak during December and March of each year. Cash requirements also fluctuate depending on the level and timing of capital spending and joint venture investments. The following table sets forth the Company's total borrowings, net of cash, at the end of each of its last eight fiscal quarters:
RESULTS OF OPERATIONS
FISCAL 2000 COMPARED TO FISCAL 1999
NET REVENUES Net revenues increased by 15.4%, reflecting a 13.6% increase in sales volume that was driven by the Woodbridge and Robert Mondavi Coastal brands. In addition, net revenues per case increased by 1.6% to $49.25, due mainly to price increases on certain Robert Mondavi Winery Reserve and Napa Valley wines.
COST OF GOODS SOLD Cost of goods sold as reported increased by 10.3%. Adjusted cost of goods sold increased by 12.7%, reflecting increased sales volume that was partially offset by a shift in sales mix to wines with lower average costs per case.
GROSS PROFIT As a result of the factors discussed above, the reported gross profit percentage increased to 47.0% compared to 44.6% reported last year. The adjusted gross profit percentage increased to 47.0% compared to 45.8% last year.
OPERATING EXPENSES Operating expenses as reported increased by 19.6%. Adjusted operating expenses increased by 21.4% and the ratio of adjusted operating expenses to net revenues increased to 29.2% compared to 27.8% a year ago. These increases were primarily due to higher promotional spending per case and an increase in certain management incentive programs that are tied to the Company's profitability.
INTEREST Interest expense increased by 12.8%, due primarily to increases in the Company's average borrowings and its average interest rate. Interest expense associated with higher borrowing levels was partially offset by an increase in capitalized interest due to winery renovation and facility expansion projects. The Company's average interest rate was 7.20% compared to 7.06% last year.
EQUITY IN NET INCOME OF JOINT VENTURES Equity in net income of joint ventures as reported increased by 20.6% due mainly to improved income from Opus One. Adjusted equity in net income of joint ventures increased by 39.4% to $6.9 million, reflecting the Opus One improvement and adjusted equity income from the Company's recent investment in Ornellaia.
OTHER "Other" primarily consists of miscellaneous non-operating income and expense items. "Other" as reported includes a net gain primarily related to the sale of vineyards of $2.5 million in fiscal 2000. Adjusted "other" expenses totaled $1.0 million compared to $1.3 million last year.
PROVISION FOR INCOME TAXES The Company's effective tax rate remained unchanged from the prior year at 38.5%.
NET INCOME AND EARNINGS PER SHARE As a result of the above factors, net income as reported totaled $41.6 million, or $2.60 per diluted share, compared to $30.8 million, or $1.94 per diluted share, a year ago. Adjusted net income totaled $40.6 million, or $2.54 per diluted share, compared to $34.5 million, or $2.17 per diluted share, a year ago.
FISCAL 1999 COMPARED TO FISCAL 1998
NET REVENUES Net revenues increased by 14.0% due primarily to a 13.0% increase in sales volume. Net revenues per case increased by 0.8% to $48.46 per case compared to $48.06 per case in fiscal 1998.
COST OF GOODS SOLD Cost of goods sold as reported increased by 18.2%. Adjusted cost of goods sold increased by 15.6%, reflecting increased sales volume and a shift in sales mix to wines with higher average costs per case.
GROSS PROFIT As a result of the factors discussed above, the reported gross profit percentage was 44.6% compared to 46.5% in fiscal 1998. The adjusted gross profit percentage was 45.8% in fiscal 1999.
OPERATING EXPENSES Operating expenses as reported increased by 16.1%. Adjusted operating expenses increased by 14.4% and the ratio of adjusted operating expenses to net revenues was 27.8% compared to 27.7% in fiscal 1998. These increases were primarily due to higher promotional spending per case, primarily in advertising, that was partially offset by a decrease in general and administrative expenses.
INTEREST Interest expense increased by 15.6%, reflecting an increase in the Company's average borrowings that was partially offset by an increase in capitalized interest and a decrease in the Company's average interest rate. The increase in capitalized interest was due to increased vineyard development and winery expansion projects. The Company's average interest rate was 7.06% compared to 7.45% in fiscal 1998.
EQUITY IN NET INCOME OF JOINT VENTURES Equity in net income of joint ventures increased by 91.1% due mainly to improved income from Opus One.
OTHER "Other" primarily consists of miscellaneous non-operating income and expense items. "Other" totaled $1.3 million compared to $2.2 million in fiscal 1998.
PROVISION FOR INCOME TAXES The Company's effective tax rate was 38.5% compared to 39.0% in fiscal 1998. The lower effective tax rate was primarily the result of an increase in the benefit derived from manufacturing tax credits.
NET INCOME AND EARNINGS PER SHARE As a result of the above factors, net income as reported totaled $30.8 million, or $1.94 per diluted share, compared to $30.2 million, or $1.90 per diluted share, in fiscal 1998. Adjusted net income totaled $34.5 million, or $2.17 per diluted share, in fiscal 1999.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of June 30, 2000, was $308.1 million compared to $297.8 million at June 30, 1999. The $10.3 million increase in working capital was primarily attributable to an increase in inventories that was partially offset by an increase in short-term credit line borrowings. Borrowings under the Company's credit lines totaled $79.7 million at June 30, 2000, compared to $61.9 million at June 30, 1999. The Company had a cash balance of $3.0 million at June 30, 2000, compared to $4.5 million at June 30, 1999.
Cash and cash equivalents decreased by $1.5 million in fiscal 2000, as cash used in investing activities exceeded cash provided by operating and financing activities. Cash provided by operations totaled $26.2 million, reflecting net income, net of depreciation and amortization, and an increase in inventories required to support expected future sales growth. Cash used in investing activities totaled $84.9 million, reflecting vineyard development and land acquisitions; renovation of the Robert Mondavi Winery; facility expansion and purchases of production equipment; the acquisition of a minority interest in an Italian winery; and distributions from joint ventures. Cash provided by financing activities totaled $57.2 million, reflecting the addition of $50.0 million in new term debt, a net increase in credit line borrowings and repayments of term debt.
Management expects that the Company's working capital needs will grow significantly to support expected future growth in sales volumes. Due to the lengthy aging and processing cycles involved in premium wine production, expenditures for inventory and fixed assets need to be made one to three years or more in advance of anticipated sales. The Company currently expects its capital spending requirements will total approximately $90.0 million for the two-year period ending June 30, 2002.
During fiscal 2000, the Company increased its total acreage of controlled vineyards in California to nearly 9,500 acres from approximately 5,000 acres at the end of fiscal 1999. The increased acreage was primarily achieved through long-term leases.
The Company maintains master lease facilities that provide the capacity to fund up to $105.0 million. The combined facilities enable the Company to lease certain real property to be constructed or acquired. At June 30, 2000, $30.7 million of the combined facilities had been utilized.
The Company has unsecured short-term and long-term credit lines that have maximum credit availability of $91.5 million and $60.0 million, respectively. The short-term credit lines expire as follows: $55.0 million expires on December 21, 2000 and $36.5 million expires on December 23, 2000. The long-term credit lines expire as follows: $20.0 million expires on December 31, 2001 and $40.0 million expires on December 31, 2002. The annual interest rates on these lines are based on various bank programs and ranged from 5.55% to 9.00% during fiscal 2000.
The Company anticipates that current capital combined with cash from operating activities and the availability of cash from additional borrowings will be sufficient to meet its liquidity and capital expenditure requirements at least through the end of fiscal 2001.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included in Notes to Consolidated Financial Statements appearing under Item 14(a)(1) of this Form 10-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of The Robert Mondavi Corporation
In our opinion, the consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 31 present fairly, in all material respects, the financial position of The Robert Mondavi Corporation and its subsidiaries at June 30, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 2000 in conformity with accounting principles generally accepted in the United States. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 14(a)(2) on page 31 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PRICEWATERHOUSECOOPERS LLP - ----------------------------------- PricewaterhouseCoopers LLP San Francisco, California July 31, 2000
THE ROBERT MONDAVI CORPORATION CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
See Notes to Consolidated Financial Statements
THE ROBERT MONDAVI CORPORATION CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
See Notes to Consolidated Financial Statements
THE ROBERT MONDAVI CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (IN THOUSANDS)
See Notes to Consolidated Financial Statements
THE ROBERT MONDAVI CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
See Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share amounts)
NOTE 1 ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Robert Mondavi Corporation (RMC) and its consolidated subsidiaries (the Company) are primarily engaged in the production and sale of premium table wine. The Company also sells wine under importing and marketing agreements.
The Company sells its products principally to distributors for resale to restaurants and retail outlets in the United States. A substantial part of the Company's wine sales is concentrated in California and, to a lesser extent, the states of Florida, New York, Massachusetts, Texas, New Jersey and Pennsylvania. Export sales account for approximately 9% of net revenues, with major markets in Canada, Europe and Asia.
A summary of significant accounting policies follows:
Basis of presentation
The consolidated financial statements include the accounts of RMC and all of its subsidiaries. All significant intercompany transactions and balances have been eliminated. Investments in joint ventures are accounted for using the equity method. Certain fiscal 1999 and 1998 balances have been reclassified to conform with the current year presentation.
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition
Revenue is recognized when the product is shipped and title passes to the customer. Revenue from items sold through the Company's retail locations is recognized at the time of sale. No products are sold on consignment.
In May 2000, the Emerging Issues Task Force released Issue No. 00-14 (EITF 00-14), "Accounting for Certain Sales Incentives." EITF 00-14 is effective in fiscal 2001 and it provides guidance on the recognition, measurement and income statement classification of certain sales incentives. The Company is currently assessing the impact of EITF 00-14 on its consolidated financial statements, and believes that the effect, if any, will not be material to the Company's operating results.
In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition in Financial Statements." SAB 101 is effective in fiscal 2001 and it provides guidance on applying generally accepted accounting principles to revenue recognition in financial statements. The Company does not expect SAB 101 to have a material effect on its consolidated financial statements.
Inventories
Effective July 1, 1998, the Company changed its wine inventory costing method from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The primary reasons for the change in accounting method are: management's belief that the FIFO method of accounting better matches revenues and expenses of the Company's wines sold, and therefore provides a better method of reporting the Company's results of operations; the FIFO method of accounting reduces intra-year cost of sales volatility; and the FIFO method of accounting provides improved financial comparability to other publicly-traded companies in the industry. The accounting change has been applied to prior years by retroactively restating the financial statements. As a result of this restatement, net income for the year ended June 30, 1998 increased by $1,147, or $0.07 per diluted share.
In accordance with the general practice in the wine industry, wine inventories are included in current assets, although a portion of such inventories may be aged for periods longer than one year.
Property, plant and equipment
Property, plant and equipment is stated at cost. Maintenance and repairs are expensed as incurred. Costs incurred in developing vineyards, including related interest costs, are capitalized until the vineyards become commercially productive.
Depreciation and amortization is computed using the straight-line method, with the exception of barrels which are depreciated using an accelerated method, over the estimated useful lives of the assets. Leasehold improvements are amortized over the estimated useful lives of the improvements or the terms of the related lease, whichever is shorter.
Other assets
Other assets include goodwill, loan fees and label design costs. These assets are amortized using the straight-line method over their estimated useful lives or terms of their related loans, not exceeding 40 years.
Advertising costs
Advertising costs are expensed as incurred or the first time the advertising takes place. Point of sale materials are accounted for as inventory and charged to expense as utilized. Advertising expense, including point of sale materials charged to expense, totaled $15,085, $14,662 and $10,688, respectively, for the year ended June 30, 2000, 1999 and 1998.
Income taxes
Deferred income taxes are computed using the liability method. Under the liability method, taxes are recorded based on the future tax effects of the difference between the tax and financial reporting bases of the Company's assets and liabilities. In estimating future tax consequences, all expected future events are considered, except for potential income tax law or rate changes.
Comprehensive income
The Company's comprehensive income is comprised of net income and foreign currency translation adjustments.
Segment reporting
Management organizes financial information primarily by product line for purposes of making operating decisions and assessing performance. These product lines have been aggregated as a single operating segment in the consolidated financial statements because they share similar economic characteristics, production processes, customer types and distribution methods.
Major customers
The Company sells the majority of its wines through distributors in the United States and through brokers and agents in export markets. There is a common ownership in several distributorships in different states that, when considered to be one entity, represented 30%, 29% and 30%, respectively, of gross revenues for the year ended June 30, 2000, 1999 and 1998. Trade accounts receivable from these distributors at June 30, 2000 and 1999 totaled $18,490 and $29,376, respectively.
Wine futures program
The Company has a wine futures program whereby contracts to buy cased wine are sold to distributors prior to the time the wine is available for shipment. The agreement to deliver the wine in the future is recorded when the Company receives the distributor's deposit representing the total purchase price. Revenue relating to this program is deferred and recognized when the wine is shipped.
Stock-based compensation
The Company measures compensation cost for employee stock options and similar equity instruments using the intrinsic value-based method of accounting. The Company's stock option plans are discussed in Note 9.
Earnings per share
Earnings per share has been computed by dividing net income by the sum of the weighted average number of Class A and Class B common shares outstanding plus the dilutive effect, if any, of common share equivalents for stock option awards.
In computing basic earnings per share for the years ended June 30, 2000, 1999 and 1998, no adjustments have been made to net income (numerator) or weighted-average shares outstanding (denominator). The computation of diluted earnings per share for the same periods is identical to the computation of basic earnings per share except that the weighted-average shares outstanding (denominator) has been increased by 474,000, 451,000 and 583,000, respectively, for the year ended June 30, 2000, 1999 and 1998 to include the dilutive effect of stock options outstanding.
Fair value of financial instruments
The fair value of the Company's debt is estimated based on the current market rates available to the Company for debt of the same remaining maturities. At June 30, 2000, the carrying amount and estimated fair value of debt was $310,592 and $302,756, respectively. At June 30, 1999, the carrying amount and estimated fair value of the company's debt was $254,010 and $251,690, respectively.
Derivative financial instruments
The Company has only a limited involvement with derivative financial instruments and does not use them for trading purposes. Forward exchange contracts are used to manage exchange rate risks on certain purchase commitments denominated in foreign currencies. Gains and losses relating to firm purchase commitments are deferred and are recognized as adjustments of carrying amounts or in income when the hedged transaction occurs.
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS 133), Accounting for Derivative Instruments and Hedging Activities. SFAS 133 is effective for years beginning after June 15, 2000. The statement requires all derivatives to be recorded on the balance sheet at fair value and establishes "special accounting" for the different types of hedges. The Company plans to adopt this statement in fiscal 2001 and does not expect it to have a material effect on the consolidated financial statements.
At June 30, 2000, the Company has outstanding forward exchange contracts to purchase various foreign currencies through June 30, 2001 for the U.S. dollar equivalent of $6,068. Using exchange rates outstanding as of June 30, 2000, the U.S. dollar equivalent of the contracts was $6,104.
NOTE 2 INVENTORIES
Inventories consist of the following:
Wine inventories are valued at the lower of cost or market and inventory costs are determined using the FIFO method. Costs associated with growing crops are recorded as inventory and are recognized as wine inventory costs in the year in which the related crop is harvested.
NOTE 3 PROPERTY, PLANT AND EQUIPMENT
The cost and accumulated depreciation of property, plant and equipment consist of the following:
Included in property, plant and equipment are assets leased under capital leases with cost and accumulated depreciation totaling $6,514 and $3,322, respectively, at June 30, 2000 and $6,514 and $2,878, respectively, at June 30, 1999. Depreciation expense for machinery and equipment under capital leases was $444, $565 and $723 for the year ended June 30, 2000, 1999 and 1998, respectively.
Included in property, plant and equipment is $5,511, $3,513 and $2,645 of interest capitalized for the year ended June 30, 2000, 1999 and 1998, respectively.
NOTE 4 INVESTMENTS IN JOINT VENTURES
During fiscal 2000, the Company purchased an interest in Tenuta dell'Ornellaia (Ornellaia), an Italian winery that produces luxury category premium table wines, for $11,593 in cash and 29,976 shares of the Company's Class A Common Stock. The issuance of these shares represents a non-cash investing activity for purposes of the consolidated statement of cash flows.
Investments in joint ventures are summarized below. The Company's ownership interest in each joint venture is stated within parentheses.
The condensed combined balance sheets and statements of operations of the joint ventures, along with the Company's proportionate share, are summarized as follows:
BALANCE SHEETS
The Company's investments in joint ventures differ from the amount that would be obtained by applying the Company's ownership interest to the venturers' equity of these entities due to preferred capital accounts and capital account differences specified in the joint venture agreements.
STATEMENTS OF OPERATIONS
NOTE 5 EMPLOYEE COMPENSATION AND RELATED COSTS
The Company has a tax-qualified defined contribution retirement plan (the Plan) which covers substantially all of its employees. Company contributions to the Plan are 7% of eligible compensation paid to participating employees. Company contributions to the Plan were $2,736, $2,219 and $2,411 for the year ended June 30, 2000, 1999 and 1998, respectively. Contributions to the Plan are limited by the Internal Revenue Code. The Company has a non-qualified supplemental executive retirement plan to restore contributions limited by the Plan. This plan is administered on an unfunded basis. The unfunded liability related to this plan totaled $1,665 and $1,377 at June 30, 2000 and 1999, respectively.
The Company has a deferred compensation plan with certain key executives, officers and directors. Under the provisions of this plan, participants may elect to defer up to 100% of their eligible compensation and earn a guaranteed interest rate on their deferred amounts, which was approximately 8.7% and 8.5% for the year ended June 30, 2000 and 1999, respectively. The Company's liability under this plan totaled $2,262 and $1,544 at June 30, 2000 and 1999, respectively. Amounts deferred are held within a Rabbi Trust for the benefit of the participants. These funds and the accumulated interest are included in other assets.
The Company also has a deferred executive incentive compensation plan with certain present and past key officers. Under the provisions of this plan, units were awarded to participants at the discretion of the Board of Directors. The units each earn a percentage of Company profits as defined by the plan over a five year vesting period. In February 1993, the Board of Directors determined that no future units will be awarded under the plan; however, the plan remains in place with respect to existing units. Subject to participant election for deferral of payments and payment terms for participants no longer in the plan, the accrued amounts are distributable in cash when fully vested. The compensation earned on the units and accumulated interest on fully vested amounts not distributed, are accrued but unfunded. The unfunded liability related to this plan totaled $6,466 and $6,138 at June 30, 2000 and 1999, respectively.
NOTE 6 LONG-TERM DEBT AND NOTES PAYABLE TO BANKS
Long-term debt consists of the following:
Aggregate annual maturities of long-term debt at June 30, 2000, are as follows:
The Company has unsecured credit lines with two banks that provide for both short-term and long-term borrowings. The short-term credit lines expire on December 21, 2000 and December 23, 2000 and have maximum credits available of $36,500 and $55,000, respectively. The long-term credit lines expire on December 31, 2001 and December 31, 2002 and have maximum credit available of $40,000 and $20,000, respectively. The credit lines bear interest, which is payable monthly, at rates determined under various bank interest programs, ranging from 5.55% to 9.00% at June 30, 2000. The Company had $19,700 outstanding under its short-term credit lines as of June 30, 2000. There were no borrowings outstanding under the short-term credit lines as of June 30, 1999.
On March 28, 2000, the Company entered into unsecured term loans totaling $50,000 that bear interest, payable semiannually, at a fixed rate of 7.93%. The proceeds from these loans were used to pay down credit line borrowings.
Property, plant and equipment with a net book value of approximately $25,564 at June 30, 2000, is pledged as collateral for long-term debt. The terms of the unsecured credit lines and certain long-term debt agreements include covenants that require the maintenance of various minimum financial ratios and other covenants. The most restrictive of these covenants requires the ratio of net tangible assets to debt maturing in excess of one year to be 1.75 to 1 or greater. The Company was in compliance with all such covenants during the year ended June 30, 2000.
NOTE 7 INCOME TAXES
The provision for income taxes consists of the following:
Income tax expense differs from the amount computed by multiplying the statutory federal income tax rate times income before taxes, due to the following:
The approximate effect of temporary differences and carryforwards that give rise to deferred tax balances are as follows:
The Company has foreign tax credits at June 30, 2000 that can be utilized upon repatriation of foreign source earnings and can be carried forward five years thereafter.
During the year ended June 30, 2000 and 1999, the Company recognized certain tax benefits related to stock option plans in the amount of $514 and $490, respectively. These benefits were recorded as a decrease in income taxes payable and an increase in paid-in capital.
NOTE 8 SHAREHOLDERS' EQUITY
The authorized capital stock of the Company consists of Preferred Stock, Class A Common Stock and Class B Common Stock.
During the second quarter of fiscal 1998, 370,000 shares of Class B Common Stock, owned by a major shareholder, were converted into 370,000 shares of Class A Common Stock. The conversion of the shares represents a non-cash financing activity for purposes of the consolidated statement of cash flows.
Each share of Class A Common Stock is entitled to one vote and each share of Class B Common Stock is entitled to ten votes on all matters submitted to a vote of the shareholders. The holders of the Class A Common Stock, voting as a separate class, elect 25% of the total Board of Directors of the Company and the holders of the Class B Common Stock, voting as a separate class, elect the remaining directors.
All shares of common stock share equally in dividends, except that any stock dividends are payable only to holders of the respective class. If dividends or distributions payable in shares of stock are made to either class of common stock, a pro rata and simultaneous dividend or distribution payable in shares of stock must be made to the other class of common stock. Upon liquidation, dissolution or winding up of the Company, after distributions as required to the holders of outstanding Preferred Stock, if any, all shares of Class A and Class B Common Stock share equally in the remaining assets of the Company available for distribution.
The holders of the outstanding shares of Class B Common Stock and the Company are parties to a Stock Buy-Sell Agreement. Subject to the provisions of the Buy-Sell Agreement, each share of Class B Common Stock is convertible at the option of the holder into Class A Common Stock on a share-for-share basis. The Class A Common Stock is not convertible.
Included in retained earnings at June 30, 2000, is $7,077 of undistributed income from joint ventures that has been accounted for using the equity method.
NOTE 9 STOCK OPTION AND EMPLOYEE STOCK PURCHASE PLANS
The Company has stock option plans and an employee stock purchase plan that are described below. The Company accounts for its plans using the intrinsic value-based method of accounting and no compensation cost has been recognized for its stock option plans or its employee stock purchase plan. Had compensation cost for the Company's stock option plans and employee stock purchase plan been determined based on the fair value at the grant date for awards under those plans, net income would have been $38,903, $28,738 and $28,840, respectively, and earnings per diluted share would have been $2.43, $1.81, and $1.82, respectively, for the year ended June 30, 2000, 1999 and 1998.
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 2000, 1999 and 1998, respectively: dividend yield of 0% for all years; expected volatility of 50%, 50% and 49%; risk-free interest rates of 5.70%, 4.79% and 6.26%; and expected lives of three to five years for all years.
Stock Option Plans
The Company has two stock option plans: the 1993 Equity Incentive Plan for key employees and the 1993 Non-Employee Directors' Stock Option Plan for non-employee members of the Company's Board of Directors (the Board).
Under the Equity Incentive Plan, the Company is authorized to grant both incentive stock options and non-qualified stock options for up to 2,585,294 shares of Class A Common Stock. Incentive stock options may not be granted for less than the fair market value of the Class A Common Stock at the date of grant. Non-qualified stock options may not be granted for less than 50% of the fair market value of the Class A Common Stock at the date of grant. The stock options are exercisable over a period determined by the Board at the time of grant, but no longer than ten years after the date they are granted.
Under the Non-Employee Directors' Stock Option Plan, the Company is authorized to grant options for up to 100,000 shares of Class A Common Stock. These options may not be granted for less than the fair market value of the Class A Common Stock at the date of grant. Non-employee directors are granted options when they are elected for the first time to the Board. These options become exercisable over five years from the date of grant and expire ten years after the date of grant. Incumbent non-employee directors are granted options annually on the date of the Annual Meeting of Shareholders. These options vest in twelve equal monthly installments and expire ten years after the date of grant.
A summary of the Company's stock option plans is presented below:
The following table summarizes information about stock options outstanding at June 30, 2000:
Employee Stock Purchase Plan
Under the Employee Stock Purchase Plan, the Board will from time to time grant rights to eligible employees to purchase Class A Common Stock. Under this plan, the Company is authorized to grant rights to purchase up to 300,000 shares of Class A Common Stock. The purchase price is the lower of 85% of the fair market value on the date the Company grants the right to purchase or 85% of the fair market value on the date of purchase. Employees, through payroll deductions of no more than 15% of their base compensation, may exercise their rights to purchase for the period specified in the related offering. During the year ended June 30, 2000, 1999 and 1998, shares totaling 19,273, 16,622 and 17,819, respectively, were issued under the Employee Stock Purchase Plan at average prices of $27.80 per share, $32.27 per share and $26.90 per share, respectively.
NOTE 10 REORGANIZATION AND OTHER NON-RECURRING ITEMS
During fiscal 2000, the Company recorded a gain of approximately $2,500 related to the sale and acquisition of vineyards and vineyard land through a non-monetary exchange of assets. This asset exchange represents a non-cash investing activity for purposes of the consolidated statement of cash flows.
During the second quarter of fiscal 1999, the Company implemented a series of operational and organizational changes aimed at improving its competitiveness and resources for investing in vineyards and wineries and providing stronger marketing support for its wines. These changes included the reduction of approximately 4% of the Company's workforce; the centralization of various support functions; the write-down of excess imported wine inventory; and the write-off of certain vineyard assets. As a result of these operational and organizational changes, the Company recorded one-time charges totaling $6,000, or $0.23 per diluted share, during the second quarter of fiscal 1999.
The Company eliminated 36 positions, primarily in Napa Valley winery operations and in the administrative areas. These job eliminations, combined with the centralization of finance, logistics, purchasing and customer service, are intended to make the Company more efficient without affecting wine quality or service levels. As a result of these organizational changes, the Company incurred $1,500 of employee separation expenses during fiscal 1999. All severance payments were made as of June 30, 1999.
The Company also completed a strategic review of its product portfolio in fiscal 1999 and decided to focus more of its resources on the Company's core brands: Robert Mondavi Winery, Robert Mondavi Coastal and Woodbridge. As a result, the Company lowered its sales growth expectations for its Vichon Mediterranean brand. Based on revised sales forecasts, the Company determined it had approximately 475,000 gallons of excess imported wine inventory. Accordingly, the Company wrote-down the excess inventory to its fair market value based on current market prices and recent sales of similar wine inventory. The resulting $4,000 write-down was included in cost of goods sold in fiscal 1999. At June 30, 2000, the Company had completed the sale of the excess inventory and fully utilized the corresponding inventory reserve.
The Company also decided to prioritize the replanting of its internal vineyards during fiscal 1999. As a result, the Company accelerated the removal of certain vineyards for replant. The net book value of the vineyards removed totaled $500, which was included in cost of goods sold in fiscal 1999.
NOTE 11 COMMITMENTS AND CONTINGENCIES
The Company leases some of its office space, warehousing facilities, vineyards and equipment under non-cancelable operating leases. Certain of these leases have options to renew. Rental expense amounted to $5,108, $4,163 and $3,789, respectively, for the year ended June 30, 2000, 1999 and 1998. The Company also leases land, machinery and equipment under capital leases. The minimum rental payments under non-cancelable operating and capital leases at June 30, 2000 are as follows:
Interest expense on capital lease obligations was $331, $385 and $431 for the year ended June 30, 2000, 1999 and 1998, respectively.
The Company maintains master lease facilities that provide the capacity to fund up to $105,000. The combined facilities enable the Company to lease certain real property (the Property) to be constructed or acquired. The leases have initial terms of three years, after a development period of three years, with options to renew. Rent obligations for the Property commence on various dates. The Company may, at its option, purchase the Property during or at the end of the lease term for 100% of the then outstanding amounts expended by the lessor for the Property. If the Company does not exercise the purchase option, the Company will guarantee a residual value of the Property as determined by the agreement, which was approximately $25,440 at June 30, 2000. At June 30, 2000, $30,651 of the combined facilities had been utilized.
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. While most of these contracts call for prices to be determined by market conditions, several long-term contracts provide for minimum grape or bulk wine purchase prices.
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 12 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, was $16,026, $14,382 and $9,853 for the year ended June 30, 2000, 1999 and 1998, respectively. Cash paid for income taxes was $27,796, $22,149 and $16,800 for the year ended June 30, 2000, 1999 and 1998, respectively.
Non-cash investing activities not included in the statements of cash flows include the issuance of stock as part of the acquisition of a minority interest in Ornellaia (Note 4) and a non-monetary exchange of assets (Note 10) during fiscal 2000.
Non-cash financing activities not included in the statements of cash flows include the conversions of stock in fiscal 1998 (Note 8) and the tax benefits related to stock option plans in fiscal 2000, 1999 and 1998 (Note 7).
NOTE 13 QUARTERLY HIGHLIGHTS (UNAUDITED)
Selected highlights for each of the fiscal quarters during the year ended June 30, 2000 and 1999 are as follows:
NOTE 14 SUBSEQUENT EVENT
On July 13, 2000, the Company acquired 100% of the outstanding shares of Arrowood Vineyards & Winery. The acquisition will be accounted for as a purchase; accordingly, the purchase price of approximately $18,000 will be allocated to the underlying assets and liabilities based on their respective estimated fair values at the date of acquisition. The Company also has the option to purchase certain tangible assets, including vineyards and winery facilities, within the next five years for $12,000. In addition, the Company entered into a long-term licensing agreement for use of the Arrowood and Grand Archer brand names that includes an option to purchase the brand names for approximately $15,000, which will be adjusted for certain financial performance measures, in 2010.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is incorporated by reference from pages 2-4 of the registrant's definitive proxy statement for its annual meeting of shareholders to be held on November 3, 2000, as filed with the Securities and Exchange Commission.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from pages 7-11 of the registrant's definitive proxy statement for its annual meeting of shareholders to be held on November 3, 2000, as filed with the Securities and Exchange Commission.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from pages 5-6 of the registrant's definitive proxy statement for its annual meeting of shareholders to be held on November 3, 2000, as filed with the Securities and Exchange Commission.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from page 12 of the registrant's definitive proxy statement for its annual meeting of shareholders to be held on November 3, 2000, as filed with the Securities and Exchange Commission.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
ROBERT MONDAVI CORPORATION SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED JUNE 30, 2000 (IN THOUSANDS)
Notes:
(1) Balances written off as uncollectible.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
By /s/ HENRY J. SALVO, JR. ----------------------- Henry J. Salvo, Jr., Senior Vice President and Chief Financial Officer
Pursuant to the Requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX