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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/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 000-24651
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GOLDEN STATE VINTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0412761
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
500 DRAKE'S LANDING ROAD, GREENBRAE, CALIFORNIA 94904
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (415) 461-4400
None
(Former name, former address and former
fiscal year, if changed since last report)
------------------------
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 / /
The number of shares of the Registrant's Class A and Class B Common Stock
outstanding as of November 12, 1998 was 4,342,528 and 5,136,733 shares,
respectively.
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GOLDEN STATE VINTNERS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION:
Item 1: Financial Statements
Consolidated Balance Sheets as of September 30, 1998
and June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three Months
Ended September 30, 1998 and 1997 . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 7
Item 3: Quantitative and Qualitative Disclosures About Market Risk. . . . . 10
PART II -- OTHER INFORMATION
Item 2: Changes in Securities and Use of Proceeds . . . . . . . . . . . . . 11
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 11
</TABLE>
2
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLDEN STATE VINTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1998 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 45 $ 40
Trade and other receivables 16,024 7,586
Inventories 44,267 30,685
Refundable income taxes 1,562 4,658
Deferred income taxes 268 566
Prepaid expenses and other current assets 928 1,359
---------- ----------
Total current assets 63,094 44,894
PROPERTY, PLANT AND EQUIPMENT - Net 80,276 77,641
NOTE RECEIVABLE 1,722 1,722
OTHER ASSETS 420 462
---------- ----------
TOTAL ASSETS $ 145,512 $ 124,719
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ 16,800 $ 18,200
Cash overdraft 1,490 801
Accounts payable 5,289 3,920
Grower payable 14,414 924
Payroll and related liabilities 689 6,352
Other accrued liabilities 1,064 1,404
Accrued interest 730 1,127
Current portion of long-term debt 2,043 3,520
---------- ----------
Total current liabilities 42,519 36,248
LONG-TERM DEBT 42,737 51,918
DEFERRED INCOME TAXES 9,979 9,467
REDEEMABLE PREFERRED STOCK:
12% Senior Exchangeable (no shares outstanding at 9/30/98) - 8,219
8% Junior Exchangeable (no shares outstanding at 9/30/98) - 731
---------- ----------
Total redeemable preferred stock - 8,950
STOCKHOLDERS' EQUITY:
Class A common stock, par value $.01; 6,000,000 and 0 shares
authorized at September 30, 1998 and June 30, 1998, respectively;
4,342,528 and 0 shares issued and outstanding at September 30, 1998
and June 30, 1998, respectively. 44 -
Class B common stock, par value $.01; 54,000,000 and 7,250,000 shares
authorized at September 30, 1998 and June 30, 1998, respectively;
5,136,733 and 5,868,612 shares issued and outstanding at September 30,
1998 and June 30, 1998, respectively. 51 20
Class E common stock; par value $.01; 0 and 2,900,000 shares authorized
at September 30, 1998 and June 30, 1998, respectively; 0 and 1,200,829
shares issued and outstanding at September 30, 1998 and June 30, 1998,
respectively. - 4
Class K common stock; par value $.01; 0 and 1,450,000 shares authorized
at September 30, 1998 and June 30, 1998, respectively; 0 and 99,860 shares
issued and outstanding at September 30, 1998 and June 30, 1998,
respectively. - 1
Paid-in capital 44,706 11,493
Retained earnings 5,476 6,618
---------- ----------
Total stockholders' equity 50,277 18,136
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 145,512 $ 124,719
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
<S> <C> <C>
REVENUES:
Bulk wine and juice $ 4,575 $ 14,044
Brandy and spirits 3,222 5,052
Wine grapes 6,066 16,995
Case goods 3,893 5,206
--------- ---------
Total revenues 17,756 41,297
COST OF SALES 12,803 26,684
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GROSS PROFIT 4,953 14,613
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,549 4,877
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INCOME FROM OPERATIONS 3,404 9,736
INTEREST EXPENSE 1,395 1,622
OTHER EXPENSE 6 136
--------- ---------
INCOME BEFORE INCOME TAXES 2,003 7,978
INCOME TAXES 817 2,948
--------- ---------
NET INCOME 1,186 5,030
ACCRETION ON PREFERRED STOCK (1,928) -
REDEEMABLE PREFERRED STOCK DIVIDENDS (400) -
--------- ---------
INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ (1,142) $ 5,030
--------- ---------
--------- ---------
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ (0.13) $ 0.73
--------- ---------
--------- ---------
DILUTED $ (0.13) $ 0.71
--------- ---------
--------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 8,934 6,862
--------- ---------
--------- ---------
DILUTED 8,934 7,134
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,186 $ 5,030
Adjustments:
Depreciation and amortization 964 1,758
Deferred compensation - 3,150
Deferred income taxes 810 478
Changes in assets and liabilities:
Receivables (8,438) (20,306)
Inventories (13,331) (29,015)
Prepaid expenses and other current assets (695) (95)
Accounts payable 1,369 3,555
Grower payable 13,490 28,944
Payroll and related liabilities (5,663) (702)
Other accrued liabilities (340) 417
Accrued interest (397) (96)
Income taxes refundable/payable 3,096 1,521
--------- ---------
Net cash used in operating activities (7,949) (5,361)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (1,860) (1,240)
Refund of deposits - 150
--------- ---------
Net cash used in investing activities (1,860) (1,090)
FINANCING ACTIVITIES:
Borrowings on line of credit 22,050 9,900
Payments on line of credit (23,450) (8,400)
Cash overdraft 689 5,155
Repayments of long-term debt (12,595) (575)
Redemption of Sr. Preferred Stock (10,000) -
Payment of dividends (400) -
Proceeds from the sale of common stock 33,992 -
Public offering costs (472) -
--------- ---------
Net cash provided by financing activities 9,814 6,080
--------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 5 (371)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 40 1,219
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 45 $ 848
--------- ---------
--------- ---------
OTHER CASH FLOW INFORMATION:
Interest paid $ 1,843 $ 1,621
--------- ---------
--------- ---------
Income taxes paid $ - $ 950
--------- ---------
--------- ---------
Notes/leases issued to acquire property and equipment $ 1,916 $ 587
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which include all normal and
recurring adjustments) necessary to present fairly the Company's financial
position at September 30, 1998 and its results of operations and its cash
flows for the three month periods ended September 30, 1998 and 1997. 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. The unaudited consolidated financial statements set
forth in this quarterly report on Form 10-Q should be read in conjunction
with the audited consolidated financial statements and notes thereto included
in the Company's Annual Report on Form 10-K (the "10-K") for the fiscal year
ended June 30, 1998, on file at the Securities and Exchange Commission.
The Company's results for the three months 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:
Inventories consist of the following:
<TABLE>
<CAPTION>
September 30, June 30,
1998 1998
------------- -------------
<S> <C> <C>
Bulk wine $ 28,313 $ 15,730
Cased and bottled wine 4,734 3,823
Brandy 5,709 2,429
Juice, supplies and other 1,657 1,174
Unharvested crop costs 3,854 7,529
------------- -------------
Total $ 44,267 $ 30,685
------------- -------------
------------- -------------
</TABLE>
NOTE 3 - PREFERRED STOCK AND STOCKHOLDERS' EQUITY
On April 23, 1998 and April 28, 1998, the Board of Directors and the
Company's stockholders, respectively, approved a recapitalization and stock
split, which resulted in each share of the Company's common stock being split
into 2.9 shares of common stock. The recapitalization and stock split was
effected by the filing of the Amended and Restated Certificate of
Incorporation of the Company with the Delaware Secretary of State on July 20,
1998. The recapitalization was in the form of (i) the creation by the Company
of a new Class A Common Stock and a new Class B Common Stock, (ii) the
conversion of all of the Company's outstanding shares of old Class B Common
on a one-for-one basis into shares of Company's newly-created Class A Common
Stock, (iii) the conversion of all of the Company's outstanding shares of old
Class E and old Class K Common Stock on a one-for-one basis into shares of
the Company's newly-created Class B Common Stock, (iv) a 2.9-for-1 stock
split for each of the Company's outstanding shares of newly-created Class A
Common Stock and newly-created Class B Common Stock, and (v) the conversion
of all of the Company's outstanding shares of Junior Preferred Stock into
130,343 shares of the Company's newly-created Class B Common Stock.
On July 21, 1998, the Company completed an underwritten public offering of
approximately 4,300,000 shares of Class B Common Stock, at a public offering
price of $17.00 per share (the "Offering"). The net proceeds to the Company
from the offering of approximately $34.0 million were primarily used to repay
the Company's line of credit, certain bank term loans, senior redeemable
preferred stock, including related dividends and certain costs and expenses
of the offering.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" which
would require that all items required to be recognized as components of
comprehensive income be reported in the financial statements, but had no
effect on the Company's disclosures as net income and comprehensive income
are the same.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers; and SFAS No. 132 "Employers'
Disclosures about Pension and Other Postretirement Benefits," which
standardizes the disclosure requirements for pensions and other
postretirement benefits and expands disclosures on changes in benefit
obligations and fair values of plan assets. The Company will implement these
statements in fiscal 1999. Adoption of these statements will not impact the
Company's consolidated financial position, results of operations or cash
flows, and any effect will be limited to the form and content of its
disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivatives, requiring recognition as either
assets or liabilities on the balance sheet and measurement at fair value.
The Company plans to adopt this statement in fiscal 2001. The Company has
not yet determined the effect adoption of this statement will have on the
Company's consolidated financial position, results of operations or cash
flows.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF GOLDEN STATE VINTNERS, INC. (THE "COMPANY") CONTAINS
"FORWARD-LOOKING STATEMENTS," AS DEFINED IN SECTION 27A OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. FORWARD-LOOKING STATEMENTS ARE STATEMENTS OTHER THAN HISTORICAL
INFORMATION OR STATEMENTS OF CURRENT CONDITION AND RELATE TO FUTURE EVENTS
OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. SOME FORWARD-LOOKING
STATEMENTS MAY BE IDENTIFIED BY USE OF SUCH TERMS AS "BELIEVES,"
"ANTICIPATES," "INTENDS" OR "EXPECTS." SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING WITHOUT LIMITATION,
THOSE FACTORS DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED JUNE 30, 1998, AS FILED WITH SECURITIES AND EXCHANGE
COMMISSION ON OCTOBER 19, 1998. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT
OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
Recent Developments
On July 21, 1998, the Company consummated a firmly underwritten initial
public offering of 4.3 million shares of its Class B Common Stock (the
"IPO"), of which 2.15 million were sold by the Company and 2.15 million were
sold by certain stockholders of the Company. The Company realized net
proceeds of approximately $32 million in the IPO.
Seasonality and Quarterly Results
Historically, the Company has experienced and expects to continue to
experience seasonal and quarterly fluctuations in its revenues. Because of
the inherent seasonality of its operations, the Company has traditionally
reported its highest revenues and net income in the first and second fiscal
quarters as, historically, the Company sold most of its grapes in its first
fiscal quarter, and following harvest, sold most of the Company's bulk wine
and brandy in its second fiscal quarter. Also, during and after crush,
the Company performed many of its wine processing services in the first and
second fiscal quarters. In the Company's current fiscal year, El Nino-related
weather conditions, among other things, caused an approximate four week delay
as compared to the prior year California wine grape harvest. The Company
anticipates that the late harvest of grapes will result in the substantial
reallocation of revenues relating directly to the 1998 crush into the
Company's second and third fiscal quarters, though there can be no assurance
in that regard.
THREE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
Revenues
Revenues for the first quarter of fiscal 1999 were $17.8 million, a
decrease of $23.5 million or 56.9%, as compared to revenues of $41.3 million
for the first quarter of fiscal 1998. The overall decrease in revenues was
primarily due to the delayed harvest of wine grapes in the first fiscal
quarter of fiscal 1999 compared to the first fiscal quarter of fiscal 1998.
For fiscal 1999, the Company restructured its grape supply relationship with
the EJ Gallo Winery to allow the Company to utilize a greater percentage
of grapes grown in the Company's vineyard for the internal production of bulk
wine and brandy. As a result of this action, grape sales revenues declined
in the first quarter of the Company's 1999 fiscal year, as compared to the
first quarter of fiscal 1998.
Bulk Wine and Related Services. For the first quarter of fiscal 1999,
revenues from bulk wine and related services were $4.6 million, a decrease of
$9.4 million or 67.1%, as compared to revenues of $14.0 million in the first
quarter of fiscal 1998. The quarter-to-quarter decline in the Company's bulk
wine and related services revenues primarily resulted from the delay in the
California wine grape harvest, as noted above.
7
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Grape Sales. In the first quarter of fiscal 1999, revenues from grape
sales were $6.1 million, a decrease of $10.9 million or 64.1%, as compared
to revenues of $17.0 million in the first quarter of fiscal 1998. Grape tons
delivered to customers decreased to approximately 23,400 tons in the first
fiscal quarter 1999 compared to 65,000 tons in the first fiscal quarter 1998,
primarily as a result of the Company's reallocation of grape resources. The
Company has intentionally restructured its grape contracts to utilize a
greater percentage of its own grapes toward the internal production of bulk
wine and brandy. The reduction in grape sales revenues was also significantly
impacted by the late grape harvest, as discussed above. Additionally, period
to period comparisons were affected by the above average grape harvest in the
summer of 1997, which resulted in greater than normal grape sales revenues in
the first quarter of the Company's 1998 fiscal year.
Case Goods and Related Services. For the first quarter of fiscal 1999,
revenues from case goods and related services were $3.9 million, a decrease
of $1.3 million or 25.0%, as compared to revenues of $5.2 million in the
first quarter of fiscal 1998. The period to period decline in case goods and
related services revenues was primarily due to a temporary decline in private
label case goods sales.
Brandy. For the first quarter of fiscal 1999, revenues from the sale of
brandy and grape spirits were $3.2 million, a decrease of $1.8 million or
36.0%, as compared to revenues of $5.1 million in the first quarter of fiscal
1998. The period to period decline in brandy revenues was due to the late
wine grape harvest.
Cost of Sales
Cost of sales includes all direct and indirect costs to produce the
Company's marketed products. Bulk wine, case goods and brandy cost of sales
generally include wine grape costs, direct and indirect plant production
costs and certain allocated overhead items such as depreciation and
insurance. Vineyard costs include farming expenses and direct and allocated
indirect costs. For the first quarter of fiscal 1999, total cost of sales was
$12.8 million, a decrease of $13.9 million or 52.1%, from $26.7 million in
the first quarter of fiscal 1998. As a percentage of revenues, cost of sales
for the first quarter of fiscal 1999 was 72.1%, an increase from 64.6% in the
first quarter of fiscal 1998. The dollar decrease in cost of sales resulted
from an overall quarter to quarter decrease in Company operations, due
primarily to the delayed wine grape harvest, which, among other things,
delayed the Company's bulk wine, brandy and wine grape activities. The
increase of cost of sales on a percentage of revenues basis resulted from the
proportionately higher cost of wine grapes, which increased due to the
mix of varietal grapes available for harvest prior to September 30.
Additionally, farming costs have increased slightly, due to increased
chemical application costs related to the wet conditions brought by the El
Nino weather phenomena.
Gross Profit
Gross profit generally represents revenues less cost of sales. In the
first quarter of fiscal 1999, the Company's realized gross profit of $5.0
million, a decrease of $9.6 million or 65.8%, as compared to gross profit of
$14.6 million in the first quarter of fiscal 1998. As a percentage of
revenues, gross profits for the first quarter of fiscal 1999 was 27.9%, a
decrease from 35.4% in the first quarter of fiscal 1998. Margin growth was
adversely affected by the reduction in grape sales, which resulted from (a)
the reallocation of the Company's wine grapes for internal production, (b) the
late harvest, and (c) an overall reduction in the Company's grape harvest, in
comparison to last year's above average grape yields. Margin growth was also
adversely affected by lower bulk wine revenues, due to the late harvest.
Margin growth was positively impacted by reduced cost of sales in brandy
production, resulting from the Company's use of internally produced grapes.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include general
administrative items, corporate overhead and in fiscal 1998, expenses
relating to certain management incentives. For the first quarter of fiscal
1999, selling, general and administrative expenses were $1.5 million, a
decrease of $3.4 million or 69.4%, from $4.9 million for the first quarter of
fiscal 1998. The first fiscal quarter of 1998 included a one-time management
incentive restructuring charge equaling $3.4 million.
Interest Expense
For the first quarter of fiscal 1999, interest expense was $1.4 million,
a decrease of $.2 million or 12.5%, as compared to interest expense of $1.6
million in the first quarter of fiscal 1998. In the first quarter of fiscal
1999, the Company used net proceeds from the IPO to repay approximately $11.9
million in long term debt, $5.7 million in officer notes and to reduce its
outstanding line of credit balance by $4.7 million, thereby reducing interest
expense during the quarter.
Net Income
For the first quarter of fiscal 1999, net income was $1.2 million, a
decrease of $3.8 million or 76.0%, as compared to net income of $5.0 million in
the first quarter of fiscal 1998. Net income in the first quarter of fiscal
1999 was adversely impacted by the reduction of revenues arising from the late
California grape harvest and the Company's reallocation of its grape
resources for internal use.
Earnings Per Share
For the first quarter of fiscal 1999, the basic loss per share was $.13,
as compared to basic earnings per share of $.73 for the first quarter of
fiscal 1998. Net loss available to common shareholders for the first quarter
of fiscal 1999 was impacted by the decrease in net income
8
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described above, dividend payments of $.4 million on shares of Senior
Preferred Stock and, as a result of the IPO, the accretion of $1.9 million
with respect to Senior Preferred Stock redeemed and the Junior Preferred
Stock converted during the quarter.
Liquidity and Capital Resources
The Company's working capital position at September 30, 1998 was $20.6
million, as compared to $8.6 million at June 30, 1998. The increase in
working capital is primarily due to the IPO, which occurred in July 1998.
The Company maintains a revolving line of credit for working capital purposes
which is secured by inventory, accounts receivable, the current year's wine
grape crop and other collateral. Collateral balances of September 30, 1998
are adequate for the Company's working capital requirements. Borrowings
under the line typically peak in November, during the Company's second fiscal
quarter. Revolving line of credit balances were $16.8 million at September
30, 1998 and $18.2 million at June 30, 1998. Unused availability under the
line of credit was $5.7 million at September 30, 1998.
Net cash used in operating activities for the first quarter of fiscal
1999 was $7.9 million, as compared to net cash used in operations of $5.4
million for the first quarter of fiscal 1998. In the first quarter of fiscal
1999, the Company made payments on officer notes aggregating $5.7 million.
Management expects that the Company's working capital requirements will
grow as the business expands and that peak borrowing needs will continue to
occur in the second quarter of the Company's fiscal year. Management
believes that current working capital, cash generated from operations and
funds available under the Company's line of credit will be sufficient to fund
working capital requirements and operations during the Company's 1999 fiscal
year.
Year 2000 Compliance
A significant percentage of the software that runs most of the computers in
the United States relies on two-digit date codes to perform a number of
computation and decision making functions. Commencing on January 1, 2000, these
computer programs may fail from an inability to interpret date codes properly,
misreading "00" for the year 1900 instead of the year 2000.
The Company has initiated a comprehensive program to identify, evaluate and
address issues associated with the ability of its information technology and
non-information technology systems to properly recognize the Year 2000 in order
to avoid interruption of the operation of these systems and a material adverse
effect on the Company's operations as a result of the century change. Each of
the information technology software programs that the Company currently uses has
either been certified by its respective vendor as Year 2000 compliant or will be
replaced with software that is so certified prior to January 1, 2000. The
Company intends to conduct comprehensive tests of all of its software programs
for Year 2000 compliance as part of its Year 2000 readiness program. The Company
does not believe that its non-information technology systems, such as its
bottling and production equipment, air conditioning/refrigeration units,
telephones and faxes will be adversely affected by the Year 2000, but will not
know definitively until the Company tests and evaluates such equipment early in
1999. As part of its Year 2000 compliance program, the Company also intends to
contact its significant vendors, suppliers and customers to ascertain whether
the systems used by such third parties are Year 2000 compliant. The Company
plans to have all Year 2000 compliance initial testing and any necessary
conversions completed by the summer of 1999.
To date, the Company has spent approximately $250,000 to reprogram,
replace and test its information technology software for Year 2000
compliance. The remainder of the costs associated with the Company's Year
2000 compliance efforts will be incurred during fiscal 1999 and 2000. The
Company estimates the costs of these efforts will be between $100,000 and
$150,000 over the remaining life of the project; though such expenditures may
increase following testing of non-information technology systems. Costs and
expenses arising in connection with the Company's Year 2000 compliance
efforts have been, and will be, expensed as incurred.
The Company currently anticipates that both its information technology and
non-information technology systems will be Year 2000 compliant in sufficient
time to avoid business interruptions, though no assurances can be given that the
Company's compliance testing will not detect unanticipated Year 2000 compliance
problems. Furthermore, the Company does not yet know the Year 2000 compliance
status of third parties that are integral to the Company's business and is
therefore currently unable to assess the likelihood or the risk to the Company
of third party system failures. However, a system failure by any of the
Company's significant customers, suppliers or vendors could result in a material
adverse effect on the Company's business and operations.
The Company has developed contingency plans to handle a Year 2000 system
failure experienced by its information technology systems. These backup
procedures, including manual record keeping and processing, have been tested and
utilized by the Company in the past during times of unplanned system failure.
The Company intends to develop any necessary contingency plans for its
non-information technology systems after it has adequately evaluated the Year
2000 compliance status of these systems.
9
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Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk
exposure from that reported in the Company's Form 10-K for the fiscal year
ended June 30, 1998.
10
<PAGE>
PART II
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The Company received net proceeds of approximately $32.3 million
following the completion of its IPO on July 21, 1998. Proceeds from the IPO
were used as follows:(a) approximately $10.0 million was used by the Company
to redeem all outstanding shares of its 12% Senior Preferred Stock, (b)
approximately $17.6 million was used by the Company to repay various
outstanding long term debt obligations including officer notes' payable and
(c) $4.7 million was used by the Company to reduce borrowings under its line
of credit.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk
exposure from that reported in the Company's Form 10-K for the fiscal year
ended June 30, 1998.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
11 Statement Regarding Computation of Per Share Earnings
27 Summary Financial Information
11
<PAGE>
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.
Dated: November 16, 1998 GOLDEN STATE VINTNERS, INC.
By: /s/ BRIAN R. THOMPSON
---------------------------------
Brian R. Thompson
Chief Financial Officer
(Principal Financial &
Accounting Officer and
Duly Authorized Officer)
12
<PAGE>
GOLDEN STATE VINTNERS, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EXHIBIT 11
Basic and fully diluted earnings per share ("EPS") are determined as follows:
<TABLE>
<CAPTION>
Three Months Ended
September 30,
------------------------
1998 1997
--------- ---------
<S> <C> <C>
Basic EPS Computation
Numerator:
Net income $ 1,186 $ 5,030
Less: Accretion of redeemed senior preferred stock (1,771) -
Accretion of converted junior preferred stock (157) -
Redeemable preferred stock dividends (400) -
--------- ---------
Income (loss) available to common stockholders $ (1,142) $ 5,030
--------- ---------
--------- ---------
Denominator:
Weighted average common shares 8,934 6,862
--------- ---------
--------- ---------
Basic EPS $ (0.13) $ 0.73
--------- ---------
--------- ---------
Diluted EPS Computation
Numerator:
Income (loss) available to common stockholders $ (1,142) $ 5,030
--------- ---------
--------- ---------
Denominator:
Weighted average common shares outstanding 8,934 6,862
Stock options - 272
--------- ---------
Adjusted weighted average common shares 8,934 7,134
--------- ---------
--------- ---------
Diluted EPS $ (0.13) $ 0.71
--------- ---------
--------- ---------
</TABLE>
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-30-1998
<PERIOD-END> SEP-30-1998
<CASH> 45
<SECURITIES> 0
<RECEIVABLES> 16,202
<ALLOWANCES> 178
<INVENTORY> 44,267
<CURRENT-ASSETS> 63,094
<PP&E> 93,036
<DEPRECIATION> 12,760
<TOTAL-ASSETS> 145,512
<CURRENT-LIABILITIES> 42,519
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 50,182
<TOTAL-LIABILITY-AND-EQUITY> 145,512
<SALES> 0
<TOTAL-REVENUES> 17,756
<CGS> 0
<TOTAL-COSTS> 12,803
<OTHER-EXPENSES> 1,549
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,395
<INCOME-PRETAX> 2,003
<INCOME-TAX> 817
<INCOME-CONTINUING> 1,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,186
<EPS-PRIMARY> ($.13)
<EPS-DILUTED> ($.13)
</TABLE>
