<PAGE>
- -------------------------------------------------------------------------------
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UNITED STATES
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: MARCH 31, 1998
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: 000-23175
BERINGER WINE ESTATES HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
DELAWARE 68-0370340
(I.R.S. EMPLOYER
(STATE OR OTHER JURISDICTION IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
100 PRATT AVENUE
ST. HELENA, CALIFORNIA 94574
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(707) 963-7115
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No [_]
As of May 13, 1998, the Registrant's Common Stock outstanding was:
<TABLE>
<CAPTION>
TITLE OUTSTANDING
----- -----------
<S> <C>
Class A Common Stock 1,380,534
Class B Common Stock 18,012,577
</TABLE>
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- -------------------------------------------------------------------------------
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements Unaudited
Consolidated Balance Sheets--March 31, 1998 and June 30, 1997 1
Consolidated Statements of Operations--three and nine-month periods
ended March 31, 1998 and 1997 2
Consolidated Statements of Cash Flows--three and nine-month periods
ended March 31, 1998 and 1997 3
Notes to Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations 6
PART II: OTHER INFORMATION
Item 5 Other Information 14
Item 6 Exhibits and Reports on Form 8-K 14
Signatures 14
</TABLE>
<PAGE>
BERINGER WINE ESTATES HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
--------- --------
1998 1997
--------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash .................................................... $ 106 $ 115
Accounts receivable-trade, net of allowance of $286 and
$251 ................................................... 28,226 28,226
Inventories ............................................. 254,547 214,097
Prepaids and other current assets ....................... 6,882 5,024
-------- --------
Total current assets .................................. 289,761 247,462
Property, plant and equipment, net of accumulated
depreciation of $21,406 and $13,197....................... 230,776 212,378
Investments.............................................. 432 267
Other assets, net........................................ 7,370 7,077
-------- --------
Total assets .......................................... $528,339 $467,184
======== ========
LIABILITIES, REDEEMABLE PREFERRED STOCK, PREFERRED AND
COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable-trade .................................. $ 16,259 $ 10,114
Book overdraft liability ................................ -- 2,001
Accrued trade discounts ................................. 3,982 2,461
Accrued payroll, bonuses and benefits ................... 4,922 3,661
Accrued interest ........................................ 4,639 5,998
Other accrued expenses .................................. 5,612 5,698
Income taxes payable .................................... 1,866 --
Deferred tax liabilities ................................ -- 4,104
Current portion of long-term debt ....................... 5,212 3,714
-------- --------
Total current liabilities ............................. 42,492 37,751
Line of credit............................................. 101,500 104,000
Long-term debt, less current portion....................... 168,904 211,398
Deferred tax liabilities................................... 31,512 29,368
Other liabilities.......................................... 4,833 6,333
-------- --------
Total liabilities ..................................... 349,241 388,850
-------- --------
Redeemable preferred stock:
Redeemable Series A Preferred Stock, $0.01 par value;
stated at redemption value at June 30, 1997, less non-
accreted discount of $2,623,000 including cumulative
dividends in arrears; 2,000,000 shares authorized;
369,640 shares issued and outstanding at June 30, 1997 . -- 34,341
-------- --------
Preferred and Common stock and other stockholders' equity:
Preferred Stock, $0.01 par value; 5,000,000 shares
authorized.............................................. -- --
Class A Common Stock, $0.01 par value; 2,000,000 shares
authorized; 1,416,962 and 1,019,980 shares issued and
outstanding ............................................ 14 10
Class B Common Stock, $0.01 par value; 38,000,000 shares
authorized; 17,663,954 and 11,716,212 shares issued and
outstanding ............................................ 177 117
Notes receivable from stockholders ...................... (477) (636)
Warrants ................................................ -- 1,848
Additional paid-in-capital .............................. 188,218 57,470
Accumulated deficit ..................................... (8,834) (14,816)
-------- --------
Total preferred and common stock and other
stockholders' equity ................................. 179,098 43,993
-------- --------
Total redeemable preferred stock, preferred and common
stock and other stockholders' equity ................... 179,098 78,334
-------- --------
Total liabilities, redeemable preferred stock,
preferred and common stock and other stockholders'
equity ............................................... $528,339 $467,184
======== ========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
BERINGER WINE ESTATES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
---------------- ------------------
1998 1997 1998 1997
------- ------- -------- --------
<S> <C> <C> <C> <C>
Gross revenues .......................... $81,271 $70,670 $249,121 $210,650
Less excise taxes ....................... 4,103 3,226 11,766 10,120
------- ------- -------- --------
Net revenues ............................ 77,168 67,444 237,355 200,530
Cost of goods sold ...................... 43,409 42,408 138,314 133,685
------- ------- -------- --------
Gross profit ............................ 33,759 25,036 99,041 66,845
Selling, general and administrative
expenses ............................... 22,030 18,488 69,828 57,643
------- ------- -------- --------
Operating income ........................ 11,729 6,548 29,213 9,202
Other income (expense):
Interest expense ...................... (5,094) (6,658) (18,049) (19,394)
Other, net ............................ 821 622 1,982 228
------- ------- -------- --------
Income (loss) before income taxes ....... 7,456 512 13,146 (9,964)
Provision for (benefit of) income taxes . 2,208 466 3,847 (4,794)
------- ------- -------- --------
Net income (loss) before extraordinary
item ................................... 5,248 46 9,299 (5,170)
Less preferred stock dividends and
accretion of discount .................. -- 1,255 4,365 3,650
------- ------- -------- --------
Income (loss) before extraordinary item
available to common stockholders ....... 5,248 (1,209) 4,934 (8,820)
Extraordinary loss, net of tax .......... -- -- 3,317 --
------- ------- -------- --------
Net income (loss) available to common
stockholders........................ $ 5,248 $(1,209) $ 1,617 $ (8,820)
======= ======= ======== ========
Income (loss) per share:
Basic EPS before extraordinary item ... $ 0.28 $ (0.10) $ 0.30 $ (0.74)
Less extraordinary loss per share ..... -- -- (0.20) --
------- ------- -------- --------
Basic EPS after extraordinary item .. $ 0.28 $ (0.10) $ 0.10 $ (0.74)
======= ======= ======== ========
Diluted EPS before extraordinary item . $ 0.26 $ (0.10) $ 0.28 $ (0.74)
Less extraordinary loss per share ..... -- -- (0.19) --
------- ------- -------- --------
Diluted EPS after extraordinary item
.................................... $ 0.26 $ (0.10) $ 0.09 $ (0.74)
======= ======= ======== ========
Weighted average number of common shares
and equivalents outstanding:
Basic ............................... 19,081 11,931 16,344 11,849
======= ======= ======== ========
Diluted ............................. 20,187 11,931 17,472 11,849
======= ======= ======== ========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
BERINGER WINE ESTATES HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
---------------- -----------------
1998 1997 1998 1997
------- ------- ------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net Income (loss) ...................... $ 5,248 $ 46 $ 5,982 $ (5,170)
Adjustments to reconcile net income
(loss) to net cash used in operating
activities:
Deferred taxes ........................ (1,367) (2,145) (2,921) (13,629)
Depreciation and amortization ......... 2,734 1,675 8,501 4,724
Provision for doubtful accounts ....... -- -- -- 205
Extraordinary loss on early
extinguishment of debt ............... -- -- 1,509 --
Other ................................. -- 27 85 31
Change in assets and liabilities:
Accounts receivable-trade ............. 8,820 (2,875) -- (3,353)
Inventories ........................... 4,014 20,729 (40,450) 5,631
Prepaids and other assets ............. (2,713) (5,420) (2,113) (4,659)
Accounts payable-trade ................ (16,622) (17,330) 6,145 (446)
Book overdraft liability .............. (2,386) -- (2,001) --
Accrued trade discounts ............... (2,047) (1,563) 1,521 693
Accrued payroll, bonuses and benefits . 17 (2,500) 1,261 (1,602)
Accrued interest ...................... (79) 4,377 (1,359) (113)
Other accrued expenses ................ 675 (1,682) (86) 1,145
Income taxes payable .................. 531 (659) 1,866 1,834
Other liabilities ..................... (500) (499) (1,500) 6,834
------- ------- ------- --------
Net cash used in operating activities
..................................... (3,675) (7,819) (23,560) (7,875)
------- ------- ------- --------
Cash flows from investing activities:
Acquisitions of property, plant and
equipment ............................. (9,571) (2,367) (25,914) (9,043)
Stags' Leap acquisition ................ -- (20,351) (20,351)
Other .................................. (194) -- (165) --
------- ------- ------- --------
Net cash used in investing activities
..................................... (9,765) (22,718) (26,079) (29,394)
------- ------- ------- --------
Cash flows from financing activities:
Net fundings (repayments) of long-term
debt and line of credit 13,060 15,999 (45,067) 25,000
Repayment of amount due to Nestle ...... -- -- -- (4,024)
Proceeds from initial public offering .. -- -- 132,476 --
Issuance of common stock ............... 467 4,954 767 5,780
Issuance (redemption) of preferred stock
....................................... -- -- (38,705) 318
Proceeds from notes receivable from
stockholders .......................... -- -- 159 106
------- ------- ------- --------
Net cash provided by financing
activities .......................... 13,527 20,953 49,630 27,180
------- ------- ------- --------
Net increase (decrease) in cash .......... 87 (9,584) (9) (10,089)
Cash at beginning of the period .......... 19 13,718 115 14,223
------- ------- ------- --------
Cash at end of the period ................ $ 106 $ 4,134 $ 106 $ 4,134
======= ======= ======= ========
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which include only normal
recurring adjustments) necessary to present fairly the Company's financial
position at June 30, 1997 and March 31, 1998 and its results of operations and
its cash flows for the three and nine-month periods ended March 31, 1997 and
1998. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted from the accompanying consolidated
financial statements. For further information, reference should be made to the
consolidated financial statements and notes thereto included in the Company's
Registration Statement on Form S-1 filed with the Securities and Exchange
Commission (File No. 333-34443)
NOTE 2--INVENTORIES
The Company utilizes the "first in, first out" (FIFO) method of accounting
for all inventories. Inventories at March 31, 1998 and June 30, 1997 are as
follows:
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1998 1997
($ IN THOUSANDS) --------- --------
<S> <C> <C>
Wine in production........................................ $128,590 $ 89,890
Cased goods and retail.................................... 111,582 104,485
Crop costs and supplies................................... 14,375 19,722
-------- --------
Total................................................. $254,547 $214,097
======== ========
</TABLE>
Included in inventory at March 31, 1998 and June 30, 1997 were $24.7 million
and $47.5 million, of inventory cost step-up remaining from applying purchase
accounting relative to the acquisitions of Beringer Wines Estates Company,
Chateau St. Jean and Stag's Leap Winery.
NOTE 3--EARNINGS PER SHARE COMPUTATION
During the quarter ended December 31, 1997, the Company adopted Financial
Accounting Standard No. 128--Earnings Per Share. This standard replaces the
previously reported primary and fully diluted EPS calculations with basic and
diluted EPS calculations. Basic EPS represents the income available to common
stockholders divided by the weighted average number of common shares
outstanding during the measurement period. Diluted EPS represents the income
available to common stockholders divided by the weighted average number of
common shares outstanding during the measurement period while also giving
effect to all dilutive potential common shares that were outstanding during
the period.
Basic EPS is computed using the weighted average number of Class A and Class
B common shares outstanding. Diluted EPS is computed using the weighted
average number of Class A and Class B common shares outstanding while giving
effect to all dilutive potential common shares that were outstanding during
the period. Potential common shares consist primarily of stock options and
warrants (dilutive impact calculated applying the "treasury stock method").
4
<PAGE>
The table below is a summary of both the numerator and denominator for the
basic and diluted EPS calculations:
<TABLE>
<CAPTION>
NINE-
THREE MONTHS ENDED MONTHS ENDED
MARCH 31, MARCH 31,
------------------- --------------
1998 1997 1998 1997
--------- --------- ------ -------
<S> <C> <C> <C> <C>
($ IN THOUSANDS)
NUMERATOR--INCOME (LOSS)
Net income (loss) before extraordinary
item..................................... $ 5,248 $ 46 $9,299 $(5,170)
Less: Preferred stock dividends........... -- 1,255 4,365 3,650
--------- --------- ------ -------
Extraordinary item...................... -- -- 3,317 --
Net income (loss) available to common
stockholders............................. $ 5,248 $ (1,209) $1,617 $(8,820)
========= ========= ====== =======
DENOMINATOR--BASIC SHARES
Average common shares outstanding......... 19,081 11,931 16,344 11,849
Basic EPS................................. $ 0.28 $ (0.10) $ 0.10 $ (0.74)
========= ========= ====== =======
DENOMINATOR--DILUTED SHARES
Average common shares outstanding......... 19,081 11,931 16,344 11,849
Dilutive effect of common stock
equivalents.............................. 1,106 -- 1,128 --
--------- --------- ------ -------
Total diluted shares.................... 20,187 11,931 17,472 11,849
Diluted EPS............................... $ 0.26 $ (0.10) $ 0.09 $ (0.74)
========= ========= ====== =======
</TABLE>
NOTE 4--CHANGES IN REDEEMABLE PREFERRED STOCK AND EQUITY
During the nine-month period ended March 31, 1998 the Company executed
several significant transactions impacting the equity of the Company.
In October 1997 the Company sold, in an initial public offering, 5.5 million
Class B common shares and received net proceeds of $132.5 million. The Company
used $38.7 million of the net proceeds from the IPO to redeem the Series A
Preferred Stock. The table below presents a summary of the significant changes
in redeemable preferred stock and stockholders' equity.
<TABLE>
<CAPTION>
CHANGES IN PREFERRED STOCK AND STOCKHOLDERS' EQUITY
<S> <C>
$ IN MILLIONS
Equity at June 30, 1997.............................................. $ 78.3
Net income for nine-months........................................... 6.0
Initial public offering proceeds..................................... 132.5
Series A preferred stock redeemed.................................... (38.7)
Other changes........................................................ 1.0
------
Equity at March 31, 1998............................................. $179.1
======
</TABLE>
5
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
INTRODUCTION
Beringer Vineyards was founded in 1876. On January 1, 1996, an investment
group led by Texas Pacific Group acquired Beringer Wine Estates Holdings, Inc.
(the Company), in a leveraged transaction. Thereafter, the Company's
operations were expanded with the acquisitions of Chateau St. Jean in April
1996 and Stags' Leap Winery in February 1997.
Each of these transactions was recorded using the purchase accounting
method. Under this method, the purchase price was allocated to the assets and
liabilities of the acquired company in the order of their liquidity and based
on their estimated fair market values at the time of the transaction. When the
Company was acquired in January 1996, $101.9 million of the purchase price in
excess of book value was allocated to the Company's inventory on hand at the
transaction date. This allocation of purchase price is referred to as
inventory step-up throughout this document. Subsequent acquisitions have
resulted in additional inventory step-up. The 1996 purchase of Chateau St.
Jean generated $6.4 million in inventory step-up, while the 1997 acquisition
of Stags' Leap winery generated $14.6 million in inventory step-up. The
Company uses the "first-in, first-out" ("FIFO") method of inventory
accounting. As the inventory on hand at the transaction dates is sold in the
normal course of business under the FIFO method of accounting, costs of the
wine sold are charged to cost of goods sold, including the amount of the
inventory step-up allocated to the wine sold. As this inventory step-up is
charged to cost of goods sold, it reduces the Company's gross profit and its
overall operating results. The charges to cost of goods sold resulting from
the inventory step-up are non-cash items and are expected to affect the
Company's reported performance at decreasing levels through fiscal year 2000.
As the inventory step-up will affect the Company's reported financial results
only in the near term, the current results are not indicative of the Company's
future performance. Management's discussion reflects adjusted results
excluding the impact of inventory step-up.
In October 1997, the Company sold 4,920,000 shares of Class B Common Stock
to the public (the IPO) and 600,000 shares of Class B Common Stock directly to
holders of the Series A Preferred Stock. Net proceeds from the public offering
were $132.5 million which was used to retire all of its outstanding
subordinated notes, redeem all outstanding shares of the Series A Preferred
Stock, and retire $49.9 million and $6.0 million of the Company's line of
credit and long-term senior debt, respectively. The early retirement of the
subordinated notes resulted in a pre-tax extraordinary charge of $4.7 million
that included a $3.2 million prepayment penalty and $1.5 million write-off of
unamortized discount. The early redemption of the Series A Preferred Stock
resulted in a $2.5 million reduction of net income allocable to common
stockholders, which represented the accelerated accretion of the original
issue discount remaining on the redemption date.
SUMMARY
<TABLE>
<CAPTION>
NET INCOME (LOSS) AND PER
SHARE AMOUNTS
$ IN THOUSANDS, EXCEPT PER
SHARE DATA
03/31/98 12/31/97 09/30/97 06/30/97 03/31/97 12/31/96 09/30/96
3 MONTHS ENDED: -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
As Reported
Net Income (loss) to
Common................. $5,248 $(1,591) $(2,040) $(1,549) $(1,209) $(1,600) $(6,011)
Diluted EPS............. 0.26 (0.09) (0.16) (0.12) (0.10) (0.13) (0.51)
Adjusted (1)
Net Income (loss) to
Common................. $8,801 $ 8,916 $ 3,123 $ 3,666 $ 5,208 $ 3,843 $ 2,372
Diluted EPS............. 0.44 0.50 0.22 0.26 0.39 0.29 0.18
</TABLE>
- --------
(1) Net income adjusted to exclude the non-cash charge related to inventory
step-up and the non-recurring charges for the extraordinary item and the
accelerated accretion of the preferred dividend discount resulting from
the redemption of Series A Preferred Stock.
6
<PAGE>
Beringer Wine Estates' net income available to common stockholders was $5.2
million or $0.26 per diluted share in the third quarter of fiscal 1998
compared to a loss of $1.2 million or $(0.10) per share in the third quarter
last year. Adjusted net income available to common stockholders was $8.8
million or $0.44 per share for the quarter compared to $5.2 million or $0.39
per share in the third quarter 1997. Adjusted net income is net income
adjusted to exclude the non-cash charge related to inventory step-up and the
non-recurring charges for the extraordinary item and the accelerated accretion
of the preferred dividend discount resulting from the redemption of Series A
Preferred Stock.
For the nine-months ended March 31, 1998 net income available to common
stockholders was $1.6 million or $0.09 per diluted share. This compares to a
net loss of $8.8 million or $(0.74) per diluted share for the nine-months
ended March 31, 1997. Adjusted net income for the current nine-month period
was $20.8 million or $1.19 per share compared to $11.4 million or $0.86 per
share last year. This $9.4 million or 82% increase in adjusted net income was
due to an improvement in gross profit, a reduction of total expense, and the
reduction of the preferred dividend and normal accretion.
Third quarter gross profit increased $8.7 million or 35%, to $33.8 million
over the third quarter of last year. Gross profit, excluding the non-cash
charge related to inventory step-up, for the third quarter grew 17% over third
quarter 1997 to $40.5 million, reflecting an 11% increase in case volume and
higher gross margin. Selling, general and administrative expenses for the
third quarter fiscal 1998 grew $3.5 million or 19% over third quarter fiscal
1997, reflecting increased spending on advertising and other non-product
specific expenses. Third quarter operating income was $11.7 million as
compared to $6.5 million in the third quarter of fiscal 1997. Third quarter
adjusted operating income, excluding inventory step-up, increased $2.4 million
or 15% to $18.4 million compared to the same quarter last year.
Total assets and inventory were $528.3 million and $254.5 million
respectively, 13% and 19% higher than the June 30, 1997 balances. Total debt
at March 31, 1998 was $275.6 million, down $43.5 million from June 30, 1997.
RESULTS OF OPERATIONS
Net Revenue
<TABLE>
<CAPTION>
GROSS PROFIT
03/31/98 12/31/97 09/30/97 06/30/97 03/31/97 12/31/96 09/30/96
($ IN THOUSANDS) -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue............. $77,168 $94,377 $65,810 $68,930 $67,444 $77,125 $55,961
Cost of Goods Sold...... 36,715 47,519 31,314 33,989 32,977 39,498 28,057
Inventory Step-up....... 6,694 8,220 7,852 10,155 9,431 8,543 15,179
------- ------- ------- ------- ------- ------- -------
Gross Profit............ $33,759 $38,638 $26,644 $24,786 $25,036 $29,084 $12,725
</TABLE>
Fiscal 1998 third quarter net revenue increased $9.7 million or 14%, over
the fiscal 1997 third quarter, to $77.2 million. This increase was due to
volume gains, higher per unit revenues and favorable changes in the mix of
brands sold. Shipments of nine-liter case equivalents for the quarter
increased 11% to 1.45 million cases over the same quarter last year. The
volume gain resulted primarily from Beringer and Meridian brand growth and the
impact of the Stags' Leap winery acquired in February 1997. During the third
quarter, Beringer and Meridian revenue grew from last year by 11% and 55%,
respectively. The Company expects revenue growth in future quarters will
result primarily from volume growth as the impact of price increases, if any,
are expected to be less than those taken in the past two years.
The third quarter average revenue per nine-liter case increased 4% to $53.33
per case compared to the third quarter last year. This increase primarily
reflects the positive mix change resulting from increased Meridian volume and
higher per unit revenue from other California brands.
7
<PAGE>
Net revenues for the nine-months ended March 31, 1998, were $237.4 million,
an increase of 18% compared to the nine-months ended March 31, 1997. Case
shipments for the nine-months increased 10% over last year, to 4.49 million
nine-liter case equivalents. For the nine-month period, as compared to the
prior year, revenue was up 15% for Beringer, 43% for Meridian and 22% for
Imports. The average revenue per nine-liter case equivalent increased $3.64 or
7% to $52.85 for the nine-month period compared to last year.
Cost of Goods Sold
Third quarter cost of goods sold rose $1.0 million to $43.4 million from the
same period last year. Included in third quarter cost of goods sold are $6.7
million and $9.4 million of non-cash charges resulting from the inventory
step-up for fiscal 1998 and fiscal 1997, respectively. Excluding inventory
step-up, cost of goods sold for the quarter increased $3.7 million or 11% from
last year, to $36.7 million. This increase reflects an 11% increase in case
volume and an $0.18 increase in per case cost. The change in average product
cost includes increases in Beringer and all other California brands cost per
case partially offset by a decrease in Meridian cost per case. These changes
are primarily due to price changes in raw materials as new vintages are
introduced.
Cost of goods sold for the nine-months ended March 31, 1998 increased from
the prior year by $4.6 million to $138.3 million. Included in cost of goods
sold are $22.8 and $33.2 million of non-cash charges resulting from the
inventory step-up for the nine-month periods ended March 31, 1998 and 1997.
Cost of goods sold, excluding the non-cash charge related to inventory step-
up, was $115.5 million for the nine-months ended March 31, 1998. This was a
$15.0 million increase from the same period of fiscal 1997. For the nine-month
period ended March 31, 1998 the average cost per nine-liter case increased
$1.06 to $25.73, an increase of 4% over the same period in the prior year.
Gross Profit
Third quarter gross profit increased $8.7 million or 35% over the same
quarter a year ago. Excluding the non-cash charge associated with inventory
step-up, the third quarter gross profit increased $6.0 million or 17% over the
prior year. This increase reflects an 11% increase in case volume and a 6%
increase in per unit profitability.
Gross Margin
<TABLE>
<CAPTION>
03/31/98 12/31/97 09/30/97 06/30/97 03/31/97 12/31/96 09/30/96
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenue............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold...... 56.3% 59.1% 59.5% 64.0% 62.9% 62.3% 77.3%
----- ----- ----- ----- ----- ----- -----
Gross Margin............ 43.7% 40.9% 40.5% 36.0% 37.1% 37.7% 22.7%
Inventory Step-up....... 8.7% 8.7% 11.9% 14.7% 14.0% 11.1% 27.1%
----- ----- ----- ----- ----- ----- -----
Adjusted Gross Margin... 52.4% 49.6% 52.4% 50.7% 51.1% 48.8% 49.8%
----- ----- ----- ----- ----- ----- -----
</TABLE>
Third quarter gross margin improved to 43.7% from a 37.1% margin for the
third quarter fiscal 1997. Gross margin, excluding the non-cash charge
associated with inventory step-up, grew from 51.1% to 52.4% for the same
period. On a per unit basis, the improvement in gross margin was due to a
$1.80 increase in average net revenue per nine-liter case partially offset by
an $0.18 average per case cost increase.
Gross profit for the nine-month period ended March 31, 1998 was $33.8
million, an increase of $8.7 million over the same period in fiscal 1997.
Adjusted gross profit for the nine-month period ending March 31, 1998
increased $21.8 million to $121.8 million over the nine-month period ended
March 31, 1997. The increase was a result of 10% volume growth and 11% growth
in per unit profits.
8
<PAGE>
Selling, General and Administrative Expenses (SG&A)
<TABLE>
<CAPTION>
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES
03/31/98 12/31/97 09/30/97 06/30/97 03/31/97 12/31/96 09/30/96
($ IN THOUSANDS) -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SG&A.................... $22,030 $26,603 $21,195 $21,004 $18,488 $24,250 $14,905
% of Net Revenue........ 29% 28% 32% 30% 27% 31% 27%
</TABLE>
SG&A consists of product specific selling and marketing expenses such as
trade discounts, advertising and product merchandising, and non-product
specific expenses such as sales and marketing staff, and general and
administrative expenses. The $3.5 million increase in SG&A from third quarter
1997 to third quarter 1998 was due to increased advertising spending and
increases in other costs including sales, marketing, hospitality, and general
and administrative expenses.
For the current nine-month period, SG&A increased $12.2 million or 21% over
last year. This increase reflects additional advertising spending and
increased non-product specific costs. Beringer and Meridian print and radio
campaigns and Meridian national television spots accounted for most of the
increased advertising spending. The Company expects SG&A to continue to
increase as it expands its advertising campaigns and continues to test market
potential new product lines.
Operating Income
<TABLE>
<CAPTION>
OPERATING INCOME
03/31/98 12/31/97 09/30/97 06/30/97 03/31/97 12/31/96 09/30/96
($ IN THOUSANDS) -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Operating Income........ $11,729 $12,035 $5,449 $3,782 $6,548 $4,834 $(2,180)
Add Back Inventory Step-
up..................... 6,694 8,220 7,852 10,155 9,431 8,543 15,179
------- ------- ------ ------ ------ ------ -------
Adjusted Operating
Income................. 18,423 20,255 13,301 13,937 15,979 13,377 12,999
Operating Margin........ 15.2% 12.8% 8.3% 5.5% 9.7% 6.3% -3.9%
Adjusted Operating
Margin................. 23.9% 21.5% 20.2% 20.2% 23.7% 17.3% 23.2%
</TABLE>
The $5.2 million increase in third quarter operating income includes a $2.7
million decrease in third quarter inventory step-up in cost of sales compared
to the same period in the prior year. Excluding inventory step-up, operating
income increased $2.4 million or 15% for third quarter 1998 compared to a year
ago.
Operating income for the nine-months ended March 31, 1998 was $11.7 million,
a 79% increase from the same period in fiscal 1997. Excluding inventory step-
up, operating income for the nine-months ended March 31, 1998 was $52.0
million, a $9.6 million or 23% increase over the nine-months ended March 31,
1997. The nine-month adjusted operating margin improved to 21.9% from 21.1%
last year.
Interest Expense and Other Income/Expense
Third quarter interest expense fell to $5.1 million or 23% from $6.7 million
in the third quarter of fiscal 1997 due to a $38.8 million reduction in total
debt outstanding. The debt reduction was a result of the retirement of debt
with the proceeds from the IPO.
Interest expense for the nine-month period was $18.0 million, a decrease of
$1.3 million or 7% from the same period last year.
Income Tax Provision (Benefit)
The $2.2 million third quarter and $3.8 million nine-month income tax
provision was based on an anticipated annual tax rate of approximately 30%.
The $5.3 third quarter and $13.2 million nine-month adjusted
9
<PAGE>
tax provision was based on an anticipated annual tax rate of approximately
37%. The adjusted tax provision reflects the exclusion of the non-cash charge
related to inventory step-up and the non-recurring charges for the
extraordinary item and the accelerated accretion of the preferred dividend
discount resulting from the redemption of Series A Preferred Stock. The
increase in the effective tax rate from last year was primarily the result of
higher taxable income. Management anticipates the Company's effective tax rate
will continue to increase as income increases until it reaches the Company's
statutory rate of approximately 41%.
Preferred Stock Dividends
During the second quarter of fiscal 1998, the Company redeemed all of its
Series A Preferred Stock with proceeds from the IPO. As a result of this
redemption which occurred in the second quarter, the Company recorded
accelerated accretion of the remaining original issue discount of $2.5
million. In addition, prior to redemption, the Company recorded dividends and
normal accretion of $1.9 million in fiscal 1998. Therefore, the total
dividends and accretion of $4.4 million for the current fiscal year were
higher than the $3.7 million paid for the nine-months ending March 31, 1997.
Extraordinary Items
During the second quarter of fiscal 1998, the Company retired all of its
outstanding subordinated debt with proceeds from the IPO. The prepayment
penalty and accelerated accretion of the remaining original issue discount
resulted in an extraordinary charge of $4.7 million. The extraordinary item is
shown net of $1.4 million in taxes.
FINANCIAL CONDITION
Assets
Total assets increased $61.2 million or 13% over June 30, 1997 to $528.3
million on March 31, 1998. March 31, 1998 inventory grew $40.5 million from
June 30, 1997 to $254.4 million. This increase reflects the cost of increased
quantities on hand partially offset by a reduction of $22.8 million in
inventory step-up balances from June 30, 1997. The $18.4 million increase in
property, plant and equipment over the past nine-months consists of $25.9
million in acquisitions offset by depreciation of $7.5 million.
Liabilities
Total liabilities of $349.2 million on March 31, 1998 decreased $39.6
million from June 30, 1997. At March 31, 1998 long-term debt outstanding was
$168.9 million and the line of credit balance was $101.5 million. After taking
into consideration a $3.5 million outstanding letter of credit, $53.4 million
was available under the terms of this credit agreement. The revolving line of
credit is classified as long-term debt due to its expiration date of January
2001.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at March 31, 1998 was $247.3 million, compared to $209.7
million at June 30, 1997.
In October 1997 the Company used the net proceeds of its initial public
offering to:
1) Retire all the outstanding Subordinated Notes, including prepayment
penalties and interest, in the amount of $39.1 million; 2) Repay $49.9
million of its line of credit; 3) Repay $6.0 million of its long-term
senior debt; 4) Redeem all of the Series A Preferred Stock, at the
redemption value of $38.7 million.
The Company anticipates that current capital, combined with cash from
operations and the availability of cash from additional financing under the
Company's currently existing credit facilities, will be sufficient to meet
10
<PAGE>
its liquidity and capital expenditures requirements through the end of fiscal
1998. As a result of the Company's expected future growth and planned capital
investments, management expects to increase its use of its existing credit
facilities and potentially access alternative financing sources in the future.
YEAR 2000 COMPLIANCE
As a result of computer programs being written using two digits rather than
four, the performance of the Company's computer systems, and those of its
suppliers and customers, in the Year 2000 is uncertain. Any computer programs
that have time-sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has initiated a Year 2000 project, using internal and external
resources, to evaluate the impact of the Year 2000 on its products and
operating systems. This will include the initiation of formal communications
with its significant suppliers and customers to determine the extent to which
the Company's interface systems are vulnerable to third party failures to
remediate their own Year 2000 issues. There can be no guarantee that the
systems of other companies on which the Company's systems rely will be timely
converted and would not have an adverse effect on the Company's systems.
Given that most of the Company's internal financial and administrative
systems have been installed within the last few years, the Company does not
expect the cost of addressing the Year 2000 issue to have a material impact on
the Company's business, results of operations or financial condition. However,
there can be no guarantee that if modifications or replacement of portions of
the software are necessary, it will be completed in a timely manner.
FACTORS THAT MAY AFFECT RESULTS
Changes in Consumer Spending and Preferences for Wine Could Adversely Affect
the Company
The success of the Company's business depends upon a number of factors
related to the level of consumer spending, including the general state of the
economy and consumer confidence in future economic conditions.
Risks from Geographic Concentration of Sales
In its fiscal year ended June 30, 1997, approximately 25% of the Company's
wine sales were concentrated in California and approximately 25% were
concentrated in the States of New York, New Jersey, Texas, Illinois,
Pennsylvania and Florida. Changes in national consumer spending or consumer
spending in these and other regions can affect both the quantity and price
level of wines that customers are willing to purchase at restaurants or
through retail outlets. Reduced consumer confidence and spending may result in
reduced demand for the Company's products, limitations on its ability to
increase prices, and increased selling and promotional expenses.
Risk of Dependence on Certain Varietals
Approximately 78% of the Company's net revenues in its fiscal year ended
June 30, 1997 were concentrated in its top three selling varietal wines. Sales
of White Zinfandel, Chardonnay and Cabernet Sauvignon accounted for 40.0%,
26.0% and 11.0% of the Company's fiscal 1997 net revenues, respectively. A
sudden and unexpected shift in consumer preferences, or a reduction in sales
of wine generally or in wine varietals or types, particularly White Zinfandel,
could have a material adverse affect on the Company's business, financial
condition and results of operations.
11
<PAGE>
Risks from Competition
The premium table wine industry is intensely competitive and highly
fragmented. The Company's wines compete in all of the premium wine market
segments with many other premium wines produced domestically and abroad, with
imported wines coming primarily from France, Italy and Chile. The Company's
wines also compete with popular-priced generic wines and with other alcoholic
and, to a lesser degree, non-alcoholic beverages for shelf space in retail
stores and for marketing focus by the Company's independent distributors, many
of which carry extensive brand portfolios. Many of the Company's competitors
have significantly greater capital resources than the Company.
Risks from Seasonality of Wine Business
The Company has experienced, and expects to continue to experience, seasonal
and quarterly fluctuations in net revenue, cost of goods sold and net income.
Sales volume tends to increase in advance of and to decrease following holiday
periods and the date price increases go into effect. In addition, sales volume
tends to decrease when distributors begin a quarter with larger than standard
inventory levels. The timing of releases for certain wines can also have an
impact on quarterly results. Further, sales volume tends to decrease during
the summer months. Thus, the Company typically reports lower earnings in its
first fiscal quarter. The Company's level of borrowing fluctuates throughout
the year, generally peaking during the second or third fiscal quarter as a
result of harvest costs and the timing of contractual payments to grape
growers.
The Company is managed to achieve broad, long-term strategic objectives. In
certain instances, the Company may make decisions that it believes will
enhance its long-term growth and profitability, even if such decisions depress
quarterly earnings.
Agricultural Risks
Winemaking and grape growing are subject to a variety of agricultural risks.
Various diseases, pests, and extreme weather conditions can materially, and
adversely, effect the quality and quantity of grapes available to the Company.
This could, therefore, materially and adversely affect the quality and supply
of the Company's wines and, consequently, its business, financial condition
and results of operations. The Company has approximately 1,000 acres of
phylloxera-infested vineyards that need to be replanted over the next four
years.
Risks from Fluctuations in Quantity and Quality of Grape Supply
A shortage in the supply of wine grapes could result in an increase in the
price of some or all grape varieties and a corresponding increase in the cost
to the Company of its wine production, particularly with respect to White
Zinfandel, for which virtually all of the Company's grapes are externally
sourced. Such an increase in the cost of producing the Company's wines could
have a material adverse effect on the Company's business, financial condition
and results of operations.
New vineyards are rapidly being planted and old vineyards are being
replanted to greater densities, with the expected result of significantly
increasing the supply of premium wine grapes and the amount of wine that will
be produced. This expected increase in grape production could result in an
excess of supply over demand and force wineries to reduce or not increase
prices, which could have a material adverse effect on the Company's business,
financial condition and results of operations.
Risks from Dependence on Distribution Network
The Company sells its products principally to distributors for resale to
restaurants and retail outlets. Sales to the Company's largest distributor
(Southern Wine and Spirits of America, Inc.) and to the Company's ten largest
distributors combined, represented approximately 30% and 59%, respectively, of
the Company's net revenues during fiscal 1997. Sales to the Company's ten
largest distributors are expected to continue to represent a
12
<PAGE>
substantial majority of the Company's net revenues in the future. Poor
performance of the Company's major distributors or the Company's inability to
collect accounts receivable from its major distributors could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Risks from Capital Requirements of the Wine Business and the Company's
Leverage
The premium wine industry is a capital-intensive business that requires
substantial capital expenditures to develop and acquire vineyards and to
improve or expand wine production. Further, the farming of vineyards and
acquisition of grapes and bulk wine require substantial amounts of working
capital. The Company was acquired in a leveraged transaction at the beginning
of 1996 and since that time has reduced its indebtedness so that at March 31,
1998, the Company's total long-term debt was approximately $270 million. The
Company projects the need for significant capital spending and increased
working capital requirements over the next several years which will require
additional borrowings or other financing.
The Company's substantial leverage has several important consequences to
holders of its Common Stock, including the following: (1) the Company has
significant fixed interest and principal repayment obligations requiring the
expenditure of substantial amounts of cash; and, (2) the Company's existing
senior debt covenants restrict, among other things, its ability to pay
dividends on its capital stock and to incur additional indebtedness. The
Company's leverage could also have a material adverse effect on the Company's
business, financial condition and results of operations.
FORWARD-LOOKING STATEMENTS
This Form 10-Q and other information provided from time to time by the
Company contains historical information as well as forward-looking statements
about the Company, the premium wine industry, and general economic conditions.
These forward-looking statements include, for example, projections about the
Company's planned capital and other expenditures, projections relating to
estimates of sales and earnings growth, and costs of labor and grapes.
Actual results may differ materially from the Company's current projections.
A shift in consumer preferences and demand for premium wine, competition from
other premium wine companies, and agricultural risks, among other conditions,
may adversely affect the Company's operating results.
For additional cautionary statements and risks which could cause results to
differ materially from the Company's forward-looking statements, please refer
to the "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's Prospectus, dated
October 28, 1997. These forward-looking statements speak only as of the date
of this Form 10-Q. The Company expressly disclaims any obligation to publicly
release any updates or revisions of any such forward-looking statements to
reflect any changes in the Company's expectations or any change in events,
conditions or circumstances on which any such statement is based.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1 THROUGH 5. OTHER INFORMATION
Not applicable
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A.Exhibit 11 Statement re Computation of Per Share Earnings (see Note 3 to
the Financial Statements on Page 4).
Exhibit 27 Financial Data Schedule
B.No reports on Form 8K were filed during the quarter ended March 31, 1998.
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.
Beringer Wine Estates Holdings, Inc.
May 11, 1998
By: Peter F. Scott
--------------------------------
Peter F. Scott, Senior Vice
President, Finance and Operations
and CFO
14
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 106
<SECURITIES> 0
<RECEIVABLES> 28,512
<ALLOWANCES> (286)
<INVENTORY> 254,547
<CURRENT-ASSETS> 289,761
<PP&E> 252,182
<DEPRECIATION> (21,406)
<TOTAL-ASSETS> 528,339
<CURRENT-LIABILITIES> 42,492
<BONDS> 0
0
0
<COMMON> 191
<OTHER-SE> 178,907
<TOTAL-LIABILITY-AND-EQUITY> 528,339
<SALES> 77,168
<TOTAL-REVENUES> 77,168
<CGS> 43,409
<TOTAL-COSTS> 43,409
<OTHER-EXPENSES> 22,030
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,094
<INCOME-PRETAX> 7,456
<INCOME-TAX> 2,208
<INCOME-CONTINUING> 5,248
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,248
<EPS-PRIMARY> 0.28
<EPS-DILUTED> 0.26
</TABLE>
