<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: SEPTEMBER 30, 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 11/12/98, the Registrant's Common Stock outstanding was:
<TABLE>
<CAPTION>
TITLE OUTSTANDING
----- -----------
<S> <C>
Class A Common Stock 1,373,022
Class B Common Stock 18,061,023
</TABLE>
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
PART I: FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets--June 30, 1998 and September 30,
1998 1
Consolidated Statements of Operations--three month periods
ended September 30, 1998 and 1997 2
Consolidated Statements of Cash Flows--three month periods
ended September 30, 1998 and 1997 3
Notes to Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Results of Operations
and Financial Condition 4
PART II: OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
</TABLE>
1. Exhibits: Exhibit 27--Financial Data Schedule
2. Form 8-K: No reports on Form 8-K were filed during the
quarter ended September 30, 1998
<PAGE>
BERINGER WINE ESTATES HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
-------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash................................................. $ 21 $ 18
Accounts receivable--trade, net of allowance of
$249................................................ 30,524 35,106
Inventories.......................................... 251,669 260,764
Deferred tax assets.................................. 5,781 6,286
Prepaids and other current assets.................... 3,214 3,598
-------- --------
Total current assets................................ 291,209 305,772
Property, plant and equipment, net of accumulated
depreciation of $24,041 and $27,064................... 244,697 257,804
Investments.......................................... 432 1,358
Other assets, net.................................... 7,262 7,110
-------- --------
Total assets $543,600 $572,044
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable--trade.............................. $ 17,456 $ 19,556
Book overdraft liability............................. 1,207 3,188
Accrued trade discounts.............................. 4,527 5,570
Accrued payroll, bonuses and benefits................ 6,706 4,485
Accrued interest..................................... 4,543 4,948
Other accrued expenses............................... 6,515 4,849
Income taxes payable................................. 1,686 4,132
Current portion of line of credit.................... 6,800 2,200
Current portion of long-term debt.................... 4,406 4,493
-------- --------
Total current liabilities........................... 53,846 53,421
Line of credit, less current portion................... 98,500 124,000
Long-term debt, less current portion................... 167,461 166,305
Deferred tax liabilities............................... 33,559 34,165
Other liabilities...................................... 4,333 3,833
-------- --------
Total liabilities................................... 357,699 381,724
-------- --------
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; 1,377,652 and 1,373,420 shares
issued and outstanding.............................. 14 14
Class B Common Stock, $0.01 par value; 38,000,000
shares authorized; 18,037,025 and 18,060,625 shares
issued and outstanding.............................. 180 180
Notes receivable from stockholders................... (448) (414)
Additional paid-in-capital........................... 188,721 189,102
Retained earnings (accumulated deficit).............. (2,566) 1,438
-------- --------
Total stockholders' equity.......................... 185,901 190,320
-------- --------
Total liabilities and stockholders' equity.......... $543,600 $572,044
======== ========
</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
ENDED
SEPTEMBER 30,
----------------
1997 1998
------- -------
<S> <C> <C>
Gross revenues.............................................. $68,921 $78,589
Less excise taxes........................................... 3,111 3,569
------- -------
Net revenues................................................ 65,810 75,020
Cost of goods sold.......................................... 39,166 40,642
------- -------
Gross profit................................................ 26,644 34,378
Operating expenses.......................................... 21,195 23,456
------- -------
Operating income............................................ 5,449 10,922
Interest expense............................................ 7,022 5,034
Other expense (income), net................................. (628) (527)
------- -------
Income (loss) before income taxes........................... (945) 6,415
Provision for (benefit of) income taxes..................... (272) 2,411
------- -------
Net income (loss)........................................... (673) 4,004
Less preferred stock dividends and accretion of discount.... 1,367 --
------- -------
Net income (loss) available to common stockholders....... $(2,040) $ 4,004
======= =======
Income (loss) per share:
Basic EPS................................................ $ (0.16) $ 0.21
======= =======
Diluted EPS.............................................. $ (0.16) $ 0.20
======= =======
Weighted average number of common shares and equivalents
outstanding:
Basic.................................................... 12,912 19,434
======= =======
Diluted.................................................. 12,912 20,168
======= =======
</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
ENDED
SEPTEMBER 30,
------------------
1997 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)........................................ $ (673) $ 4,004
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Deferred taxes.......................................... (524) 101
Depreciation and amortization........................... 2,684 3,393
Other................................................... 82 27
Change in assets and liabilities:
Accounts receivable--trade.............................. (985) (4,582)
Inventories............................................. (46,867) (9,095)
Prepaids and other assets............................... 1,479 (602)
Accounts payable--trade................................. 40,501 2,100
Book overdraft liability................................ 6,218 1,981
Accrued trade discounts................................. 307 1,043
Accrued payroll, bonuses and benefits................... 60 (2,221)
Accrued interest........................................ (424) 405
Other accrued expenses.................................. (397) (1,666)
Income taxes payable.................................... -- 2,446
Other liabilities....................................... (499) (500)
-------- --------
Net cash provided by (used in) operating activities.... 962 (3,166)
-------- --------
Cash flows from investing activities:
Acquisitions of property, plant and equipment............ (9,189) (16,130)
Increase in investments.................................. -- (926)
Distributions from investments........................... 29 --
-------- --------
Net cash used in investing activities.................. (9,160) (17,056)
-------- --------
Cash flows from financing activities:
Net (repayments of) proceeds from line of credit......... (905) 20,900
Proceeds from (repayment of) long-term debt.............. 8,800 (1,069)
Issuance of common stock................................. 300 354
Proceeds from notes receivable from stockholders......... -- 34
-------- --------
Net cash provided by financing activities.............. 8,195 20,219
-------- --------
Net decrease in cash....................................... (3) (3)
Cash at beginning of the period............................ 115 21
-------- --------
Cash at end of the period.................................. $ 112 $ 18
======== ========
</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, 1998, and September 30, 1998, and its results of
operations and cash flow for the three month periods ended September 30, 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. For further information, refer to
the Company's Form 10-K for the year ended June 30, 1998. Operating results
for the three month period ended September 30, 1998 are not necessarily
indicative of the results that may be expected for the fiscal year ending June
30, 1999.
NOTE 2--INVENTORIES
The Company utilizes the "first in, first out" (FIFO) method of accounting
for all inventories. Inventories at June 30 and September 30, 1998 are as
follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1998 1998
(IN THOUSANDS) -------- -------------
<S> <C> <C>
Bulk wine............................................. $ 96,779 $ 73,861
Cased goods and retail................................ 133,668 157,883
Crop costs and supplies............................... 21,222 29,020
-------- --------
Total............................................... $251,669 $260,764
======== ========
</TABLE>
Included in inventory at June 30 and September 30, 1998 were $19.6 million
and $14.7 million, respectively, of inventory cost step-up remaining from
applying purchase accounting to the acquisitions of Beringer Wines Estates
Company, Chateau St. Jean and Stags' Leap Winery.
NOTE 3--EARNINGS PER SHARE COMPUTATION
The table below presents the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
SEPTEMBER 30,
-----------------
1997 1998
-------- -------
<S> <C> <C>
(IN THOUSANDS)
NUMERATOR--INCOME (LOSS)
Net income (loss) available to common stockholders........ $ (2,040) $ 4,004
DENOMINATOR--BASIC SHARES
Average common shares outstanding......................... 12,912 19,434
-------- -------
Basic EPS................................................. $ (0.16) $ 0.21
DENOMINATOR--DILUTED SHARES
Average common shares outstanding......................... 12,912 19,434
Dilutive effect of common stock equivalents............... -- 734
-------- -------
Total diluted shares.................................... 12,912 20,168
-------- -------
Diluted EPS............................................... $ (0.16) $ 0.20
</TABLE>
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
SUMMARY
NET INCOME (LOSS) AND PER SHARE AMOUNTS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1998 1998 1998
THREE MONTHS ENDED: ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
As Reported
Net income (loss)
available to common
stockholders.......... $ (2,040) $ (1,591) $5,248 $6,266 $4,004
Diluted EPS............ (0.16) (0.09) 0.26 0.31 0.20
Adjusted (1)
Net income available to
common stockholders... $ 3,123 $ 8,916 $8,801 $8,697 $7,017
Diluted EPS............ 0.22 0.50 0.44 0.43 0.35
</TABLE>
- --------
(1) Net income (loss) available to common stockholders adjusted to exclude the
after tax effect of the non-cash charge related to inventory step-up, the
extraordinary loss from the early redemption of debt in the September 30,
1997 quarter, and the non-recurring charge for the accelerated accretion
of the preferred stock discount resulting from the redemption of Series A
Preferred Stock in the September 30, 1997 quarter.
Beringer Wine Estate's first quarter net income available to common
stockholders grew to $4.0 million, an increase of $6.0 million from the first
quarter of fiscal 1998. Diluted earnings per share for the first quarter rose
$0.36 per share from the first quarter of last year to $0.20 per share.
Adjusted net income for the quarter increased $3.9 million or 125%, to $7.0
million. Adjusted earnings per share increased in the first quarter by $0.13
per diluted share, or 59% over last year's first quarter, to $0.35. Adjusted
net income (loss) is net income (loss) adjusted to exclude the after tax
effect of the non-cash charges related to inventory step-up and the non-
recurring charges for the extraordinary loss from the early redemption of debt
recorded in the September 30, 1997 quarter, and the accelerated accretion of
the preferred stock discount resulting from the redemption of Series A
Preferred Stock in the September 30, 1997 quarter.
Net revenues for the quarter ended September 30, 1998 grew 14%, as compared
to the same period last year, to $75.0 million. Sales volume for the first
quarter of fiscal 1999 increased 10% while average unit revenue increased 4%.
First quarter gross profit was $34.4 million, an increase of $7.7 million or
29% compared to last year's first quarter. Adjusted gross profit, excluding
the non-cash charge related to inventory step-up, for the first quarter grew
$4.8 million or 14% over the same quarter last year, to $39.3 million.
Operating expenses for the first quarter increased $2.3 million or 11%,
compared to last year's first quarter, to $23.5 million. First quarter
operating income increased $5.5 million, to $10.9 million, from last year's
first fiscal quarter. Adjusted operating income, excluding inventory step-up,
was $15.9 million, an increase of $2.6 million or 19% compared to last year's
first quarter.
5
<PAGE>
RESULTS OF OPERATIONS
Results of Operations
GROSS PROFIT
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1998 1998 1998
THREE MONTHS ENDED: ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Net Revenue............. $65,810 $94,377 $77,168 $81,093 $75,020
Cost of Goods Sold...... 39,166 55,739 43,409 44,243 40,642
------- ------- ------- ------- -------
Gross Profit............ 26,644 38,638 33,759 36,850 34,378
Inventory Step-up....... 7,852 8,220 6,694 5,079 4,939
------- ------- ------- ------- -------
Adjusted Gross Profit... $34,496 $46,858 $40,453 $41,929 $39,317
======= ======= ======= ======= =======
</TABLE>
Net revenue for the first quarter of fiscal 1999 increased $9.2 million or
14% over last year's first quarter to $75.0 million. In the first quarter, 1.3
million nine-liter case equivalents were shipped, a 10% increase over the same
period last year. First quarter average net revenue per nine-liter case
equivalent was $56.48, an increase of 4% from first quarter fiscal 1998. The
Company expects future revenue growth to continue primarily from increases in
sales volume rather than price increases.
First quarter net revenue growth was primarily due to the Beringer and
Meridian brands. First quarter net revenue increased 16% for Beringer and 28%
for Meridian compared to the same period last year. Case shipments increased
12% and 26%, respectively, for Beringer and Meridian over the first quarter of
fiscal 1998.
First quarter cost of goods sold was $40.6 million, an increase of $1.5
million or 4% compared to the first quarter of fiscal 1998. First quarter cost
of goods sold included $4.9 million of non-cash charges resulting from
inventory step-up for fiscal 1999 and $7.9 million for fiscal 1998. Adjusted
cost of goods sold, excluding the inventory step-up, was $35.7 million for the
quarter, an increased $4.4 million or 14% over the prior year's first quarter.
Gross profit for the first quarter increased $7.7 million or 29%, compared
to the first fiscal quarter last year, to $34.4 million. Adjusted gross
profit, excluding the non-cash inventory step-up charge, for the first quarter
was $39.3 million, an increase of $4.8 million or 14% over last year's first
quarter. The increase in adjusted gross profit reflects a 10% increase in case
volume combined with a 4% increase in per unit profitability.
GROSS MARGIN
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1998 1998 1998
THREE MONTHS ENDED: ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Net Revenue............. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold...... 59.5% 59.1% 56.3% 54.6% 54.2%
----- ----- ----- ----- -----
Gross Margin............ 40.5% 40.9% 43.7% 45.4% 45.8%
Inventory Step-up....... 11.9% 8.7% 8.7% 6.3% 6.6%
----- ----- ----- ----- -----
Adjusted Gross Margin... 52.4% 49.6% 52.4% 51.7% 52.4%
===== ===== ===== ===== =====
</TABLE>
Gross margin for the first quarter was 45.8%, up from 40.5% one year ago,
due primarily to the lower inventory step-up charge. Adjusted gross margin,
excluding inventory step-up, was unchanged from the prior year at 52.4%.
6
<PAGE>
Operating Expenses, Operating Income and Interest Expense
OPERATING INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1998 1998 1998
THREE MONTHS ENDED: ------------- ------------ --------- -------- -------------
<S> <C> <C> <C> <C> <C>
Operating Income........ $ 5,449 $12,035 $11,729 $13,430 $10,922
Add Back Inventory Step-
up..................... 7,852 8,220 6,694 5,079 4,939
------- ------- ------- ------- -------
Adjusted Operating
Income................. $13,301 $20,255 $18,423 $18,509 $15,861
======= ======= ======= ======= =======
Operating Margin........ 8.3% 12.8% 15.2% 16.6% 14.6%
Adjusted Operating
Margin................. 20.2% 21.5% 23.9% 22.8% 21.1%
</TABLE>
First quarter operating expenses were $23.5 million, an increase of $2.3
million, or 11% compared to last year. First quarter operating expenses were
31.3% of net revenue compared to 32.2% for the same quarter last year.
Operating expenses will vary quarterly with changes in seasonal promotional
activity. First quarter operating income increased $5.5 million from the first
quarter one year ago to $10.9 million. Adjusted operating income for the first
quarter increased $2.6 million or 19% over last year's first quarter, to $15.9
million. First quarter fiscal 1999 interest expense decreased $2.0 million or
28% from first quarter fiscal 1998. The interest expense reduction is a result
of the retirement of debt with the proceeds from the IPO and lower average
interest rates.
FINANCIAL CONDITION
Assets
Total assets increased $28.4 million or 5% from June 30, 1998 to $572.0
million on September 30, 1998. Inventory grew $9.1 million from June 30, 1998
to $260.8 million. This increase reflects a $14.0 million increase in
inventory quantities on hand offset by a $4.9 million reduction in inventory
step-up remaining in inventory at September 30, 1998.
Liabilities
Total liabilities increased $24.0 million or 7% from June 30, 1998 to $381.7
million on September 30, 1998. At September 30, 1998, long-term debt
outstanding was $166.3 million and the long term line of credit balance was
$124.0 million. Taking into consideration a $3.5 million outstanding letter of
credit and the $6.7 million current portion of debt, $32.0 million was
available under the terms of the credit agreement at September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities for the first quarter was $3.2 million
this year. First quarter net cash used in investing activities of $17.1
million consisted primarily of expenditures for property, plant and equipment
of $16.1 million. Capital spending included $6.4 million for vineyard
development and $9.7 million for facilities development. The Company expects
to continue to have significant cash requirements for the remainder of this
fiscal year, primarily for growth in inventory and capital spending on
vineyards and facilities.
Net cash of $19.8 million was provided from the existing credit agreements
in the first quarter. The Company anticipates that current capital, combined
with cash from operations and the availability of cash from additional
financing under the Company's credit facilities, will be sufficient to meet
its liquidity and capital expenditures requirements through the end of fiscal
1999. However, as a result of the Company's expected growth and planned
capital investments, management expects to increase its use of credit
facilities and potentially access alternative financing sources in the future.
7
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates. To
manage this exposure, the Company enters into interest rate exchange
agreements. The Company does not use financial instruments for trading
purposes and is not a party to any leveraged derivatives.
At September 30, 1998, the Company's debt was $297.0 million, of which
$184.2 million will reprice during the year ended June 30, 1999 under various
bank programs. Additionally, at September 30, 1998 the Company had interest
rate exchange agreements that converted a notional amount of $25.0 million of
the variable-rate debt to a fixed rate. During fiscal 1999, these interest
rate exchange agreements will increase to a notional amount of $90 million.
Assuming a 1% increase in interest rates, annual interest expense would be
expected to increase approximately $630,000.
The Company's credit exposure under these agreements is limited to the cost
of replacing an agreement in the event of non-performance by its counterparty.
To minimize this risk, the Corporation selects high credit quality
counterparties.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 is effective for years beginning after
June 15, 1999. The statement requires all derivative securities to be recorded
on the balance sheet at fair value and establishes "special accounting" for
the different types of derivative securities. The Company plans to adopt this
statement in fiscal 2000. Had the Company adopted the statement at September
30, 1998, it would have reported a pre-tax charge to other comprehensive
income of approximately $4.2 million, reflecting reduction in market rates
relative to the fixed rates of the swap agreements.
YEAR 2000 COMPLIANCE
The Company has an established program in place, with executive sponsorship,
to address Year 2000 issues. During calendar 1997, the Company replaced its
financial and administrative computer programs. These new systems are all Year
2000 compliant. The Company is still in the process of reviewing and replacing
or modifying processes and systems within its production operations. The
Company estimates that the cost of its Year 2000 compliance will not be
material and the target completion date for achieving Year 2000 compliance is
June 30, 1999.
Additionally, the Company is contacting all material outside business
relationships to confirm Year 2000 compliance, or if not yet compliant, plans
and timelines to achieve compliance. This survey is being conducted during the
fall of 1998, with a completion date of June 30, 1999. Until the survey of
material outside business relationships is completed, the Company cannot
determine the reasonable worst case scenario. However, there can also be no
guarantee that the systems of other companies, with which the Company has
material outside business relationships, will be timely converted and not have
an adverse effect on the Company's operations. In the event that one or more
material business relationships identifies failure reaching Year 2000
compliance, the Company is ready to develop contingency plans to minimize
disruption in the Company's operations. The contingency plan will be completed
by June 30, 1999.
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.
8
<PAGE>
Risks from Geographic Concentration of Sales
The Company's gross wine sales are concentrated in certain states. 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
The Company's net revenues are concentrated in its top three selling
varietal wines, White Zinfandel, Chardonnay and Cabernet Sauvignon. 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.
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 phylloxera-infested vineyards that
need to be replanted over the next three 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 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.
9
<PAGE>
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 ten largest
distributors are expected to continue to represent a 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. 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 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.
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 Company's Annual Report and Form 10-K for the year ended June 30, 1998.
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.
10
<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.
November 11, 1998
By: Peter F. Scott
Peter F. Scott, Senior Vice
President, Finance and Operations
and CFO
11
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