GOLDEN STATE VINTNERS INC, 10-K405, 1998-10-19

GOLDEN STATE VINTNERS INC
10-K405, 1998-10-19
MALT BEVERAGES

Previous: SSB VEHICLE SEC INC HYUNDAI AUTO RECEIVABLES TRUST 1998-A, 8-K, 1998-10-19

Next: MITCHELL HUTCHINS INSTITUTIONAL SERIES, 497, 1998-10-19

<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549
------------------------

FORM 10-K

(MARK ONE)

/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED JUNE 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
------------------------

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)

Registrant's telephone number, including area code: (415) 461-4400

Securities registered pursuant to Section 12(b) of the Act:
Class B Common Stock, par value $0.01 per share

Name of each exchange on which registered: The Nasdaq National Market

Securities registered pursuant to Section 12(g) of the Act: None
------------------------

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 / / NO /X/

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/

The aggregate market value of the Class B Common Stock of the Registrant
held by non-affiliates of the Registrant on October 16, 1998, based on the
closing sales price of the Class B Common Stock as reported by Nasdaq on such
date was $37,485,170.63. All of the shares of Class A Common Stock of the
Registrant are held by affiliates of the Registrant.

The number of shares of the Registrant's Class A and Class B Common Stock
outstanding as of October 16, 1998 was 4,342,528 and 5,136,733 shares,
respectively.

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I

THIS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1998 (THE
"FORM 10-K") CONTAINS "FORWARD-LOOKING STATEMENTS," AS DEFINED UNDER SECTION 27A
OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND SECTION
21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE ACT").
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 ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. 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.

ITEM 1. BUSINESS.

INTRODUCTION

Golden State Vinters, Inc. ("GSV" or the "Company") is one of the largest
suppliers of premium bulk wines, wine processing and storage services, wine
grapes and case goods in the United States. Management believes that the Company
is a contract supplier of choice for many of the leading branded wineries in
California because of its reputation for quality and service, extensive vineyard
holdings, strategically located facilities and ability to tailor a full range of
products and services to meet the particular needs of its customers. The Company
believes that its strong customer relationships, low-cost operations and ability
to successfully integrate vineyard and facility acquisitions have enabled GSV to
capitalize on recent wine industry trends, including the growth of the premium
wine market and the trend by many of the leading branded wineries to outsource
wine production.

The Company provides a broad range of high quality winemaking and processing
services, barrel fermentation and bottling and storage services to many of the
largest branded wineries in California and to a number of international
wineries. The Company supplies premium bulk wine pursuant to long-term supply
agreements with Sutter Home Winery ("Sutter Home"), Canandaigua Wine Company
("Canandaigua"), Sebastiani Vineyards ("Sebastiani"), IDV North America
("Heublein"), Vincor International, Inc. ("Vincor") and other wineries. The
Company also delivers contract wine processing, barrel fermentation and storage
services under contracts with, among others, The Wine Group, Robert Mondavi
Winery ("Mondavi") and Beringer Wine Estates ("Beringer"). The Company also
sells wine grapes, primarily to EJ Gallo Winery ("Gallo").

GSV produces private label case goods for a number of clients, such as
Archer Daniels Midland Co. ("ADM"), JC Boisset USA ("Boisset") and Trader Joe's.
In fiscal 1998, the Company derived approximately 10% of its revenues from the
sale of bulk wine and case goods outside of the United States. The Company also
supplies brandy (a distilled derivative of wine) to a single customer pursuant
to a long-term agreement and is the second largest brandy producer in the United
States.

The combination of GSV's extensive vineyard holdings and five strategically
located facilities has enabled the Company to become what management believes is
one of California's low-cost producers of premium bulk wine. The Company's 9,600
acres of vineyard properties in California's San Joaquin Valley allow the
Company to source high quality wine grapes at a competitive cost. The Company's
wine processing facilities are generally modern, efficient and automated, and
allow for large scale, low-cost production of premium bulk wine and case goods
and the delivery of a full line of winemaking, processing and storage services.
Over the last four years, the Company has greatly expanded its presence in the
California wine industry by acquiring vineyards and wine and brandy processing
facilities and quickly integrating these assets into GSV's winemaking
operations.

1
<PAGE>
Management believes that the growth in the Company's sales is attributable
in part to the growth of the premium wine market. Over the past 10 years, there
has been a shift in consumer preferences in the United States from generic or
"jug" wines to high quality, branded premium varietal wines sold primarily in
750ml bottles. Since 1987, sales of premium California table wines have
increased at a 15% compounded annual rate, from approximately $932 million in
1987 to approximately $3.8 billion in 1997, according to Gombey Fredrikson &
Associates, a wine industry consulting firm ("Fredrikson"). In 1997, premium
table wines accounted for 78% of the $4.8 billion California table wine market
(expressed in winery sales revenues), compared to 52% of the $1.8 billion
California table wine market in 1987. The Company believes that this major shift
in consumer preferences has occurred due to (1) the maturing "baby-boomer"
generation entering its prime wine consumption period; (2) a growing consumer
interest in premium wines in general; (3) a growing interest in and
sophistication about food that lends itself to expanded consumption of premium
wines; and (4) the improving quality and reputation of California premium wines.

Management believes that the Company's recent financial performance has also
benefited from the increasing trend by a number of California's leading branded
wineries to outsource various steps in the winemaking process. With the growth
in demand for premium wines, these wineries have focused on the marketing of
their brands and have invested significant financial resources in building brand
awareness and loyalty through marketing and distribution. Additionally, the
growing demand for premium wine has strained the winemaking capacity of a number
of leading branded wineries. These wineries have demonstrated a strategic
preference towards focusing their resources on brand building as opposed to
facility expansion. Management believes that these and other factors in the wine
industry have resulted in an increasing need for California's large, branded
wineries to outsource the production of premium wine. As a quality-oriented,
low-cost provider of contract winemaking and processing services, management
believes that the Company is well positioned to continue to capitalize on these
wine industry trends.

The Company became subject to the filing requirements of Section 13 of the
Exchange Act on July 21, 1998 upon the registration of the Company's Class B
Common Stock pursuant to Section 12(b) of such Act.

FISCAL 1998 REVENUES
(dollars in millions)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
BULK WINE AND RELATED SERVICES -
$58.9 53%
<S> <C>
Grape Sales - $22.8 20%
Case Goods and Related Services -
$20.0 18%
Brandy - $10.3 9%
</TABLE>

COMPANY OPERATIONS

The Company's operations include the following: bulk wine and related
services, grape sales, case goods and related services and brandy. Bulk wine and
related services includes the production and sale of bulk wine, the provision of
custom crushing services, the storage of bulk wine in tanks and barrels and the
delivery of bulk wine barreling services, such as racking and topping. The
Company's grape sales consist of

2
<PAGE>
the sale of grapes grown at the Company's vineyards as well as grapes purchased
by the Company from third party growers. Case goods and related services
includes the production of proprietary and private label bottled wine and
wine-related beverages and the provision of custom bottling and storage
services. The Company's brandy business includes the production of brandy and
grape spirits and the provision of brandy barrel storage and related barreling
services.

BULK WINE AND RELATED SERVICES

The Company generates a majority of its revenues from the sale of premium
bulk wine and the delivery of a broad range of wine processing, barrel
fermentation and storage services to its branded winery customers.

The Company sells premium bulk wine to a number of the largest branded
wineries in California, including Sutter Home, Canandaigua, Sebastiani and
Heublein, and to a number of international wineries, including Vincor. In
response to recent wine industry trends towards an increase in the outsourcing
of premium wine production, GSV has increased its production of premium bulk
wines significantly, from approximately 11.8 million gallons in fiscal 1995 to
approximately 17.0 million gallons in fiscal 1998.

The Company's standard bulk wine supply contract establishes the variety of
wine, source of grapes and vintage and generally calls for the delivery of a set
number of gallons of wine or processed grape juice at an agreed upon price per
ton of grapes. Industry practice calls for the delivery of 170 gallons of wine
per ton of grapes crushed. The Company supplies, crushes and processes the
grapes and typically stores the wine for six months or more following
production. Winemaking standards are usually agreed to by the parties in
advance. GSV generally guarantees the quality of the wine produced. Delivery of
bulk wine is usually F.O.B. the particular GSV winery.

Historically, approximately 10% of the grapes grown at the Company's
vineyards have been available for the production of premium bulk wine. The
Company has therefore purchased grapes in the marketplace in order to meet the
needs of its bulk wine customers. The Company typically buys grapes from
numerous growers pursuant to a variety of long-term, evergreen grape purchase
contracts and short-term grape purchase contracts entered into prior to grape
harvest. Additionally, after analyzing anticipated grape yields and grape prices
during a harvest, the Company often elects to purchase needed grape supplies on
the spot market. The Company believes it has expertise in matching the grape
needs for its bulk wine contracts with available grape supplies and carefully
monitors grape quality and prices. As a result of the restructuring of the
Company's relationship with Gallo, beginning in the Company's 1999 fiscal year,
a majority of the Company's grape crop will be available for the production of
GSV's premium bulk wine. The Company believes that this use of its grapes will
be a more profitable utilization of the Company's resources. Additionally,
management believes that the availability of the Company's grapes will lessen
the Company's exposure to unexpected price variations in the California grape
market.

The Company produces more than half of its bulk wine at its most modern and
efficient wine processing facility in Fresno, which has the capacity to handle
100,000 tons of grapes annually (the equivalent of 7.2 million cases), and is
used primarily for the production of premium white wine. At the Company's Cutler
facility approximately 40,000 tons of red wine grapes (the equivalent of 2.9
million cases) are processed annually for the production of bulk red wine. GSV
also processes smaller quantities of premium bulk wine at its St. Helena,
Monterey and Reedley facilities. As is customary in the industry, the Company
engages the services of wine brokers to place bulk wine, at a pre-determined
commission.

As a full service provider, the Company also delivers an array of contract
wine processing, barrel fermentation and storage services under long-term
contracts. GSV is flexible with respect to providing these services and
customizes its products and services to meet the unique needs of its customers.
Wine processing and storage services are available for all steps of the
winemaking process, including crushing grapes, wine production, fermentation in
oak barrels and storage in stainless steel tanks and oak barrels. Under a
typical wine processing and storage contract, a wine processing customer will
deliver grapes for

3
<PAGE>
crushing, fermentation and storage in separately labeled tanks or barrels.
Customers often have a winemaker on site to monitor every step of the winemaking
process.

Historically, the Company conducted most of its wine processing and storage
services at its Fresno facility. In December 1996, the Company acquired its
Monterey winery, and, following the 1997 summer harvest, initiated wine
processing and storage operations at Monterey.

GRAPE SALES

For the last twelve years the Company has sold most of its grapes to Gallo
pursuant to long-term grape purchase contracts. In August 1996, GSV began
restructuring its relationship with Gallo, though the Company was still required
to deliver approximately 87% and 86%, respectively, of its grapes to Gallo for
the contract years 1996 and 1997.

In May 1995, the Company entered into new long-term grape supply contracts
with Gallo covering certain Chardonnay and Zinfandel grapes. The terms of these
contracts extend six years to May 2001. These contracts require the Company to
deliver grapes meeting specified sugar levels and other quality measurements.
Substantially all of the contracts call for payment in full within 30 days of
delivery of the crop to Gallo.

Due to the Company's restructuring of its relationship with Gallo, a
majority of the Company's grapes from the 1998 harvest could be retained by the
Company for internal use in the production of bulk wine, depending on market
conditions. Thus, revenues from grape sales will decline significantly in GSV's
1999 fiscal year. Nevertheless, the Company believes that this use of grapes is
a potentially more profitable allocation of the Company's resources.

Certain of the Company's grape purchase contracts require GSV to purchase
the entire grape production of a number of small vineyards. Thus, the Company
must purchase varieties of grapes that it does not use in its production of bulk
wine. The Company generally sells these grapes into the market at a small margin
over cost.

CASE GOODS AND RELATED SERVICES

The Company produces proprietary and private label products and provides
custom bottling and storage services for its customers and for the Company's own
proprietary brands. These case goods sales are comprised of wine bottled and
sold in a case containing twelve 750ml bottles, or the volume equivalent. The
Company sold more than 1,450,000 cases of wine and wine related products in its
1998 fiscal year. In fiscal 1998, the sale of case goods produced and bottled
for third parties, or "private" case goods, accounted for more than 60% of total
case goods revenues, while case goods products sold under the Company's
proprietary labels accounted for the remainder of such revenues.

PRIVATE LABEL CASE GOODS. The sale of private label case goods can include
any or all of the various steps in the winemaking process, from the purchase and
processing of grapes, aging and storage of wine to the bottling and labeling of
the finished product. The majority of the Company's private label case goods
revenues in fiscal 1998 were derived from two customers based on short-term
arrangements that may terminate at any time. The Company has made a concerted
effort to expand private label case goods sales into higher margin premium
varietal wines. Private label case goods are produced and bottled primarily at
the Company's Cutler facility, although products for the Company's largest
private label case goods customer in its 1998 fiscal year were produced at GSV's
St. Helena winery in the Napa Valley.

PROPRIETARY AND CONTROL BRANDS. The Company sells proprietary wine products
under a variety of brands in the generic and premium wine categories. Generally,
the Company's BOUNTY and LEBLANC labels sell in the generic category, the
Company's GOLDEN STATE VINTNERS, J. WILE, MUIRFIELD, SUMMERFIELD and WESTON
brands sell in the popular premium category, the Company's MONTHAVEN and
SUMMERFIELD RESERVE labels compete in the superpremium category and the
Company's EDGEWOOD ESTATE label is sold in the

4
<PAGE>
ultrapremium category. The Company's proprietary wines include a number of
different types of premium varietal wines, including vintage Cabernet Sauvignon,
Chardonnay, Merlot and Zinfandel. Many of the Company's proprietary wines are
produced, processed and/or bottled at the Company's St. Helena winery. The
Company's proprietary products are sold primarily through third party
distributors and directly to specific wine and general merchandise retailers.

The Company also offers its proprietary brands to retailers, such as large
supermarket chains, for sale on an exclusive basis in certain defined geographic
regions. The terms of the exclusive arrangements for the Company's "control
brands" vary from customer to customer and are negotiated directly with
retailers, rather than through wine wholesalers.

BRANDY

Brandy is produced by processing wine grapes into wine, distilling the wine
into brandy and aging the brandy in oak barrels for a minimum of two years. The
Company is the second largest brandy processor in the United States and has a
long-term brandy production agreement to produce brandy for sale under the
CHRISTIAN BROTHERS label. Under the terms of this agreement, GSV is paid for all
aspects of the brandy distillation process, including the purchase of grapes and
barrels for brandy storage and various processing charges. The Company also
produces limited quantities of brandy for other customers.

INTERNATIONAL

Approximately 10% of the Company's revenues in its 1998 fiscal year were
derived from the sale of wine and wine products internationally. The Company
exports bulk wine and case goods to a number of foreign locations, including
Canada, Europe and Asia. The Company also imports bulk wine from South America
and Europe for its customers in North America.

WINEMAKING FACILITIES

The Company's five winemaking and processing facilities are strategically
located in Fresno, Monterey, Napa and Tulare counties to provide winemaking and
processing services in or adjacent to most of the primary grape growing and
winemaking centers in California.

The table below sets forth the name of each of the Company's facilities and
the approximate tonnage of grapes crushed and processed into wine, the number of
gallons of wine or brandy produced and the related case equivalent, and the
number of gallons of wine or brandy cooperage capacity at each facility. The
information presented below relates to activities at the Company's winemaking
facilities following the 1997 harvest, which are reflected in the Company's 1998
fiscal year.

PRODUCTION AT THE COMPANY'S WINEMAKING FACILITIES

<TABLE>
<CAPTION>
GALLONS OF
TONS OF GRAPES CASE COOPERAGE
FACILITY NAME CRUSHED IN 1997 EQUIVALENT(1) CAPACITY
- ------------------------------------------------ --------------- --------------- -------------
<S> <C> <C> <C>
(IN MILLIONS)
Fresno.......................................... 99,600 7.1 18.3
Cutler.......................................... 40,500 2.9 10.4
Reedley......................................... 35,400 2.5(2) 17.4
Monterey........................................ 16,800 1.2 7.7
Napa Valley..................................... 5,500 0.4 1.7
------- --- -----
Total....................................... 197,800 14.1 55.5
------- --- -----
------- --- -----
</TABLE>

- ------------------------

(1) It is industry custom to convert one ton of wine grapes into 170 gallons of
wine, and to convert gallons of wine into cases of twelve 750ml bottles at
the rate of 2.3775 gallons per case.

(2) A majority of grapes processed at Reedley were distilled into brandy and
other grape spirits.

5
<PAGE>
FRESNO. The Company's Fresno winery is situated on six acres amidst the
Company's 4,400 acre Fresno vineyard and is located approximately 10 miles
southwest of the city of Fresno. The Fresno winery is an extremely efficient
wine processing facility and serves as the Company's bulk wine processing center
for premium varietal white wines, including Chardonnay, White Zinfandel and
other premium white wines.

CUTLER. The Company's Cutler facility is the original and oldest GSV winery
and is located on approximately 120 acres in Tulare County north of the town of
Visalia. In GSV's 1998 fiscal year many of the Company's private label case
goods were processed and produced at Cutler, primarily for varietal bulk red and
white wine customers. The Cutler facility also has bottling lines.

REEDLEY. The Company's Reedley facility is located on a 246-acre parcel in
southern Fresno County, northwest of the town of Parlier. The Company uses the
Reedley facility primarily for the production and storage of brandy and the
production of dry and sweet white wines, as well as fortified wines such as
sherry and port.

MONTEREY. The Monterey winery is GSV's most recently acquired winemaking
facility. Located on 21 acres in the town of Soledad, in Monterey County, the
Monterey facility is strategically situated near California's growing central
coast wine region. The Company acquired the Monterey facility in the second
quarter of fiscal 1997 but did not commence operations at the winery until the
first quarter of fiscal 1998. The Company uses the winery primarily for custom
processing of small lots of popular premium, superpremium and ultrapremium white
and red wines for GSV's wine processing customers.

NAPA VALLEY WINERY. The Company's Napa Valley winery in St. Helena occupies
approximately 22 acres and is located in the town of St. Helena fronting Highway
29, in the center of the Napa Valley. The Napa Valley winery produces primarily
superpremium and ultrapremium white and red wines for a number of the leading
branded wineries in California. A significant portion of the Company's
proprietary and control label case goods are produced and bottled at the Napa
Valley winery. The facility also has a bottling line.

NAPA VALLEY WAREHOUSE. The Company uses the Napa Valley warehouse for wine
fermentation and storage in oak barrels. The Napa Valley warehouse has a
24,000-barrel storage capacity, which was virtually full in fiscal 1998.

FACILITY EXPANSION. The Company recently authorized capital expenditures of
up to $20 million primarily to upgrade, maintain and expand its facilities over
the next two years. Of the $20 million authorized, the Company has expended
approximately $12 million to date.

VINEYARD OPERATIONS

The Company owns more than 9,600 acres of vineyard properties, of which more
than 8,500 acres are permanently planted. The table below sets forth the name of
each of the Company's vineyards and the acres of wine grapes at each vineyard.

THE COMPANY'S VINEYARD PROPERTIES

<TABLE>
<CAPTION>
APPROXIMATE
VINEYARD NAME COUNTY LOCATION ACRES PLANTED
- ---------------------------------------------------------------------- --------------- ---------------
<S> <C> <C>
Fresno Vineyard....................................................... Fresno 3,713
Gravelly Ford Vineyard................................................ Madera 2,136
Lost Hills Vineyard................................................... Kern 1,410
Cawelo Vineyard....................................................... Kern 661
Mazzie Vineyard....................................................... Kern 619
-----
Total............................................................. 8,539(1)
-----
-----
</TABLE>

- ------------------------

(1) Includes 159 vineyard acres under development.

6
<PAGE>
GRAPE PRODUCTION. The tonnage per acre and the overall yields of premium
varietal grapes from GSV's vineyards have increased in recent years due to,
among other factors, changes in product mix through vine grafting and
replanting. Generally, newly planted or replanted vines do not produce
significant amounts of fruit for three to four years after planting, while vines
grafted with a different variety of grape may bear a viable grape crop within 18
months of grafting. Replanting, however, allows the Company to plant new
varieties of rootstock, including disease-resistant varieties.

The following table shows GSV's net vine production by grape variety from
the 1994 to 1997 harvest years and the total grape tonnage produced by GSV
following each summer grape harvest. Information regarding the Company's 1998
harvest is not yet available, though management believes that the 1998 harvest
should be consistent with historical per acre yields.

NET PRODUCTION ACRES OWNED BY GSV AND TONS PRODUCED

<TABLE>
<CAPTION>
NET PRODUCTION ACRES
------------------------------------------
GRAPE VARIETY 1994 1995 1996 1997
- --------------------------------------------------------------------------- --------- --------- --------- ---------
<S> <C> <C> <C> <C>
French Colombard........................................................... 3,162 3,114 3,114 2,965
Zinfandel (1).............................................................. 135 1,211 1,211 1,211
Chardonnay (2)............................................................. 0 875 875 1,124
Ruby Cabernet.............................................................. 941 941 941 941
Merlot (1)................................................................. 125 537 687 687
Barbera.................................................................... 379 379 379 379
Carnelian.................................................................. 344 344 344 344
Chenin Blanc............................................................... 861 418 418 313
Other...................................................................... 1,110 371 416 416
--------- --------- --------- ---------
Total Net Production Acres............................................. 7,057 8,190 8,385 8,380
Total Tons Produced.................................................... 68,311 59,183 72,896 88,209
</TABLE>

- ------------------------

(1) Grafted in 1995.

(2) Grafted in 1995 and 1996.

Typically, the Company's vineyards yield approximately 8.8 tons per acre.
Due to a bountiful harvest in the summer of 1997, the Company picked a record
harvest of 88,000 tons of grapes, an average of approximately 10.4 tons of
grapes per acre. The Company's 1998 harvest will return to lower, more typical
levels.

In May 1995, the Company began a major improvement and refurbishment program
and took approximately 2,750 acres, including all of its Lost Hills Vineyard,
temporarily out of production, in order to graft or replant new premium varietal
grape rootstock. This planned decline in grape production resulted in a
significant decline in tonnage produced in 1995 and 1996. The Company's grafted
premium varietal acreage started to mature in the 1997 harvest and the
production of premium varietal grapes increased. On a per acre basis, the
Company's vineyards are presently planted with 35% French Colombard, 14%
Zinfandel, 13% Chardonnay, 13% Ruby Cabernet, and 8% Merlot, with the remaining
17% of the Company's vineyards planted with a number of other grape varieties.

In the Company's 1998 fiscal year, approximately $1.6 million was spent on
the Company's vineyards, primarily on vineyard development costs. In the future,
the Company intends to replant approximately 300 acres each year. While the
Company historically grafted its vineyards to respond to the changing demands
for varietal grapes, the Company believes that replanting is a preferable
alternative, due to an overall increase in long-term yields of replanted
vineyards.

7
<PAGE>
VITICULTURAL PRACTICES. The Company's vineyards and vineyard operations
benefit from above average soil quality and the availability of an economical
and dependable supply of high quality water. The large, contiguous vineyards are
almost entirely machine harvested, creating significant economies of scale,
especially during periods of larger than normal grape crops, as occurred in the
summer of 1997. Management believes that the Company's farming and harvesting
costs per acre of vineyard are below the average per acre farming cost of a
typical California vineyard.

The Company follows a progressive vineyard management philosophy. Short-term
needs such as pruning, fertilizing, pesticide spraying and harvesting are
competitively contracted to multiple service providers, reducing the Company's
capital equipment and labor costs and expenses. Pest control is managed in an
integrated manner, with the selective application of approved pesticides and the
introduction of beneficial predatory insects to vines.

WATER SUPPLY. The Company's Fresno, Gravelly Ford, Mazzie and Cawelo
Vineyards benefit from deep aquifers that provide a reliable and relatively
inexpensive water source. The Company irrigates these vineyards from wells
located on or near these properties. The quality of the water obtained from the
wells is good, and the wells have proven to be a plentiful and reliable source
of water for the Company's operations, even during the drought years of the late
1980s. The Company's Lost Hills Vineyard relies upon area water
district-supplied water, which is allocated among surrounding properties and
uses. The Company believes its sources of water will be available and sufficient
for the foreseeable future, but various factors such as drought or contamination
could adversely affect the Company's water supply.

AGRICULTURAL HAZARDS. Grape production is subject to many risks common to
agriculture that can materially and adversely affect the quality and quantity of
grapes produced. These hazards include, among other things, adverse weather such
as drought, frost, excessive rain, excessive heat or prolonged periods of cold
weather during the growing season. These weather conditions can materially and
adversely affect the quality and quantity of grapes produced by the Company. In
January 1997, severe flooding in the San Joaquin River Basin destroyed a number
of protective levees, damaging a portion of the Company's Gravelly Ford
vineyards, which damage was not entirely insured.

Vineyards are also susceptible to certain diseases, insects and pests, which
can increase farming expenses, reduce yields or kill vines. In the last ten
years phylloxera, a louse that feeds on the roots of grape vines, has infested
many vineyards in the wine grape producing regions of California and caused
grape yields to decrease. Within a few years of the initial infestation,
phylloxera can leave a vine entirely unproductive. Phylloxera infestation has
been widespread in California, particularly in Napa, Sonoma, Mendocino and
Monterey Counties, and most of the other wine grape producing areas of the state
are affected to some degree. As a result of this widespread problem, thousands
of vineyard acres throughout California have been replanted with
phylloxera-resistant rootstock or, in some cases, taken out of production
completely.

In 1997, GSV discovered a phylloxera infestation in certain acres of the
Company's vineyards. The Company believes that the lighter, sandy, porous soil
in its Fresno, Madera and Kern County vineyards, as compared to the heavier,
clay-like soil in more northern regions such as Napa and Sonoma Counties,
hinders the growth and spread of phylloxera. Additionally, high soil
temperatures and vine vigor in the Central and Southern San Joaquin Valley
mitigate root damage that can be caused by phylloxera. Further, the Company has
attacked the infestation with improved irrigation management and soil
fertilizations. The grape production from the Company's phylloxera-infested
acres in the 1997 harvest did not evidence lower yields than in other,
unaffected acres. Thus, the Company does not believe that phylloxera will have a
material adverse effect on vineyard operations and production, though there can
be no assurances that phylloxera will not adversely affect the Company's future
harvests.

8
<PAGE>
problem for vineyards, and wine grapevines are also susceptible to certain viral
infections which may cause reduction of yields. The presence of potentially
harmful nematodes in relatively high numbers has been detected in certain acres
of the Company's vineyards. The Company has countered the infestation with
improved irrigation management and soil fertilization. The Company believes none
of these infestations or infections currently poses a major threat to the
Company's vineyards, although they could do so in the future.

ENVIRONMENTAL MATTERS. The Company's vineyard operations require the
periodic usage of various chemical herbicides, fungicides and pesticides, some
of which contain hazardous or toxic substances. The usage and storage of these
chemicals are, to varying degrees, subject to federal and state regulation.

COMPETITION

The markets in which the Company operates are highly competitive and are
dominated by companies with substantially greater financial, production,
personnel and other resources than the Company. In the area of bulk wine
production and processing, the Company competes primarily with JFJ Bronco and
Delicato Winery, as well as a number of smaller companies. The Company's
proprietary label case goods compete with the products of branded wineries and
with other alcoholic and, to a lesser degree, nonalcoholic beverages in the
retail stores where the Company's case goods products are sold and in the
beverage marketplace in general.

The Company also experiences competition from its current and potential
customers. There are an estimated 800 commercial wineries that produce and
market California wine, although, according to Fredrikson, seven wineries
account for approximately 76% of California wine sales, based on total volume of
California wine shipments in 1997. Certain major wineries, including many of the
Company's customers, grow a significant amount of the grapes they need to make
wine and produce wine for their own branded labels.

Numerous wine producers in Europe, South America, South Africa and Australia
also compete with GSV by exporting their wine into the United States. California
grape and wine supply shortages in 1995, especially in red wines, prompted some
domestic national brand marketers to purchase wine from foreign sources. Most
imports are bottled wines; however, some wineries have imported bulk wine in
large tanks for bottling and sale in the United States. According to Fredrikson,
bulk table wine imports into the United States for these purposes increased from
approximately 605,000 gallons in 1995 to approximately 20.3 million gallons in
1997.

The Company does not believe that it faces a significant competitive threat
from new entrants into the wine grape growing and wine production markets due to
the substantial capital investments and lengthy start-up periods involved in the
development of productive vineyards and winemaking facilities and the
establishment of customer relationships. Rather, the expansion of the Company's
current competitors and the entry of the Company's customers into the bulk wine
business pose a more significant long-term competitive concern for the Company.

CUSTOMERS

The Company provides premium bulk wine pursuant to long-term supply
agreements to wineries such as Sutter Home, Canandaigua, Sebastiani, Heublein
and Vincor and sells wine grapes to Gallo pursuant to long-term grape purchase
contracts. ADM, Boisset and Trader Joe's were among the Company's private label
case goods customers in fiscal 1998. The Company also provides various wine
processing services for Mondavi, Beringer and The Wine Group, among other
wineries, and brandy distillation and production for Heublein. The Company
exports bulk wine internationally to Vincor, Calona Wines Limited and Vin &
Sprit AB.

9
<PAGE>
GOVERNMENT REGULATION

The wine industry is subject to extensive regulation by the Federal Bureau
of Alcohol, Tobacco and Firearms, various foreign agencies and state liquor and
local authorities. These regulations and laws dictate such matters as licensing
requirements, trade and pricing practices, permitted distribution channels,
permitted and required labeling, advertising restrictions and relations with
wholesalers and retailers. Expansion of the Company's existing facilities and
development of new vineyards and wineries may be limited by present and future
zoning ordinances, environmental restrictions and other legal requirements. In
addition, new regulations or requirements or increases in excise taxes, sales
taxes or international tariffs, could materially adversely affect the financial
results of the Company.

TRADEMARKS

The Company's trademarks include GOLDEN STATE VINTNERS, and the proprietary
labels EDGEWOOD ESTATE, SUMMERFIELD, SUMMERFIELD RESERVE, MONTHAVEN, CUTLER
CREEK, BOUNTY, J. WILE, MUIRFIELD, WESTON and LEBLANC.

EMPLOYEES

As of June 30, 1998, the Company had approximately 180 full-time equivalent
employees. The Company believes that its relations with its employees are good.
GSV also periodically employs seasonal and contract labor through independent
sources as needed for vineyard development, pruning and harvesting, as well as
all wine processing services and other related tasks, primarily during the late
summer and early fall months.

10
<PAGE>
RISK FACTORS

IN EVALUATING THE COMPANY, ITS BUSINESS, OPERATIONS AND FINANCIAL POSITION,
THE FOLLOWING RISK FACTORS SHOULD BE CAREFULLY CONSIDERED, IN ADDITION TO THE
OTHER INFORMATION CONTAINED IN THIS FORM 10-K. THE FOLLOWING FACTORS, AMONG
OTHERS, COULD AFFECT THE COMPANY'S ACTUAL FUTURE OPERATING RESULTS AND COULD
CAUSE SUCH RESULTS TO DIFFER FROM THE RESULTS DISCUSSED ELSEWHERE IN THIS FORM
10-K.

CONCENTRATION OF CUSTOMERS

During fiscal 1998, five of the Company's customers accounted for
approximately 52% of the Company's revenues, with Gallo and Heublein accounting
for approximately 17% and 13%, respectively. While many of the Company's largest
customers have entered into some form of long-term contract with the Company,
there can be no assurance that each of these relationships will continue
following the expiration of these contracts or that the volume of business the
Company is currently conducting with such customers will continue at such
levels. The loss of any one of the Company's major customers or a significant
reduction in the volume of their business with the Company could have a material
adverse effect on GSV's business, financial condition and results of operations.

In the Company's 1998 fiscal year, approximately 86.0% of the Company's
grape production (on a per ton basis) was contracted for sale to Gallo. Such
grape sales accounted for approximately 17% of the Company's revenues in fiscal
1998. However, the Company has restructured its grape supply arrangements with
Gallo, and as the Company goes into the 1998 harvest, most of its grape
production will not be subject to guaranteed purchase contracts with Gallo or
with any other customer. As a result of these restructuring efforts, GSV will
experience a significant decline in grape sale revenues and may experience a
decline in total revenues for the Company's 1999 fiscal year. Further, if the
wine industry were to experience a significant decline in the price of premium
varietal grapes, there can be no assurance that the Company could profitably use
or sell such grapes, which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company continues
to have long-term grape supply contracts with Gallo, covering Zinfandel and
Chardonnay grapes.

AGRICULTURAL RISKS

Grape production is subject to a variety of agricultural risks. Extreme
weather conditions can materially and adversely affect the quality and quantity
of grapes produced. In 1995 and 1996, variability in production yields in
California's Central Valley contributed to a significant decline in the tonnage
of grapes produced by virtually all vineyards, including those of the Company.
Additionally, in January 1997, severe flooding in the San Joaquin River Basin
destroyed a number of protective levees, damaging a portion of the Company's
Gravelly Ford vineyards, which damage was not entirely insured. There can be no
assurance that inclement weather in the future will not affect a substantial
portion of the Company's vineyards in any year and have a material adverse
effect on the Company's business, financial condition and results of operations.

Vineyards are also susceptible to certain diseases, insects and pests, which
can increase operating expenses, reduce yields and damage or kill vines. In
recent years phylloxera, a louse that feeds on and may ultimately destroy the
roots of grape vines, has infested many vineyards in the wine grape producing
regions of California, causing grape yields to decrease. Phylloxera infestation
has been widespread in California, particularly in Napa, Sonoma, Mendocino and
Monterey Counties, where the soil and climate provide an ideal environment for
the pest. As a result of this widespread infestation, thousands of vineyard
acres throughout the State of California have been replanted with
phylloxera-resistant rootstock or, in some cases, taken out of production
completely. The cost of controlling this pest was significant to affected
vineyard owners.

Substantially all of the Company's vineyards are planted on their own
rootstock that is not phylloxera-resistant. In the fall of 1997, phylloxera was
discovered in certain acres of the Company's vineyards. The Company believes
that the scope of this phylloxera infestation is modest, though there can be no
assurance

11
<PAGE>
in that regard. Additionally, GSV believes the climate, soil and water
conditions in California's San Joaquin Valley slow the development of phylloxera
in vineyard roots. Further, in the 1997 harvest, the yields from the Company's
phylloxera-infested acres were not notably lower than yields from surrounding,
non-infested acreage. There can, however, be no assurance that phylloxera will
not spread throughout adjoining vineyard acres, reduce yields and require a
significant investment in replanting with disease-resistant root stock, all of
which would have a material adverse effect on the Company.

Other pests that may infest vineyards include leafhoppers, thrips,
nematodes, mites, insects, orange tortrix and various grapevine diseases.
Pesticides and the selection of resistant rootstocks reduce losses from these
pests, but do not eliminate the risk of such loss. Gophers, rabbits, deer and
birds can also pose a problem for vineyards, and wine grapevines are also
susceptible to certain viral infections which may cause reduction of yields. In
addition, the presence of potentially harmful nematodes in relatively high
numbers has been detected in certain acres of the Company's vineyards. None of
these infestations or infections currently poses a major threat to the Company's
vineyards, although they could do so in the future and could subject the
vineyards to severe damage, which could have a material adverse effect on the
Company.

RISKS RELATING TO THE PRODUCTION OF BULK WINE

While the Company has substantial experience in producing and processing
bulk wine, the Company may still experience production difficulties and delays
with respect to the delivery of finished wine. The Company generally guarantees
the quality of the wine produced, which could result in the Company bearing
financial responsibility for wine that fails to meet agreed upon quality
standards. From time to time, the Company has received claims from customers
based on alleged defects in wine produced by the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations". Such
production difficulties could have a material adverse effect on the Company's
business, results of operations and financial condition.

DEPENDENCE ON CONSUMER DEMAND

The growth of the wine industry and the success of the Company's business
depend to a significant extent on a number of factors relating to discretionary
consumer spending, including the general condition of the economy, federal,
state and local taxation, the deductibility of business entertainment expenses
under federal and state tax laws and general levels of consumer confidence.
Imposition of excise or other taxes on wine could negatively impact the wine
industry by increasing wine prices for consumers. The wine industry is also
subject to changes in consumer tastes and preferences. To the extent wine
consumers reduce consumption of wine in favor of other beverages, or if there
should be any significant decline in general economic conditions or
uncertainties regarding future economic prospects that adversely affect
discretionary consumer spending generally, or purchases of wine specifically,
demand for wine and for the Company's products and services could decline.

In recent years there has been substantial publicity regarding the possible
health benefits of moderate wine consumption. The results of a number of studies
suggest that moderate consumption of wine (or other alcoholic beverages) could
result in decreased mortality and other health benefits. Alternatively,
anti-alcohol groups have, in the past, successfully advocated more stringent
labeling requirements and other regulations designed to discourage consumption
of alcoholic beverages, including wine. More restrictive regulations, negative
publicity regarding alcohol consumption, publication of studies that indicate a
significant health risk from moderate consumption of alcohol or changes in
consumer perceptions of the relative healthfulness or safety of wine generally
could adversely affect the sale and consumption of wine and the demand for wine
and wine grapes and could have a material adverse effect on the Company's
business, financial condition and results of operations.

12
<PAGE>
DEMAND FOR BULK WINE

Bulk wine and related services accounted for approximately 53% of GSV's
revenues in its 1998 fiscal year. Recently, the Company has focused its
resources on the expansion of this portion of its business. Any loss of a major
bulk wine customer would reduce GSV's bulk wine revenues, which could have a
material adverse effect on the Company's business, financial condition and
results of operations.

CASE GOODS SALES

Sales of case goods and related services accounted for approximately 18% of
revenues in its 1998 fiscal year. A significant portion of the Company's case
goods revenues consisted of short-term private label case goods sales.
Additionally, the Company's higher margin proprietary case goods revenues
resulted from sales of the Company's relatively unknown proprietary brands of
premium wines. Any significant increase in the supply of premium wine in the
California wine market that is not met by a corresponding demand could adversely
affect the Company's case goods sales.

WINE GRAPE SUPPLY; PRICING

As recently as the 1996 harvest, the California wine industry experienced a
shortage of grapes due to insufficient plantings of premium varieties in the
early 1990s, acreage taken out of production due to phylloxera infestation and
reduced yields due to poor weather. The Company believes that the demand for
wine grapes has also increased substantially over recent years and has generally
outpaced grape supply. As a result, prices for premium California wine grapes
were at historically high levels following the 1996 harvest and through the 1997
harvest. A number of recent developments, including (1) plantings of new
vineyards, (2) yield enhancements through technological advances, (3) denser
plantings of vines, (4) availability of wine from foreign sources and (5)
excellent weather in the 1997 growing season, have resulted in a greatly
increased grape supply, resulting in downward price pressure following the 1997
harvest. Such increases in supply may cause California premium wine grape prices
and wine prices to decline significantly, which could have a material adverse
effect on the Company's business, financial condition and results of operations.

ENVIRONMENTAL RISKS

The Company's current operations emit ethanol and require the periodic usage
of various chemical herbicides, fungicides and pesticides, some of which contain
hazardous or toxic substances. The emission and usage of these chemicals are, to
varying degrees, subject to federal and state regulation. The Company believes
that its properties and operations have been and continue to be in material
compliance with relevant environmental regulations. At the same time, if
hazardous substances are discovered to have emanated from the Company's
properties, the Company could be subject to material liability arising from the
remediation of such potential harm.

SEASONALITY OF BUSINESS; QUARTERLY REVENUES; FLUCTUATING RESULTS

The wine grape business is extremely seasonal and the Company recognizes the
vast majority of its revenues in the first six months of its fiscal year. GSV is
not positioned to maximize quarter-to-quarter results, and its quarterly results
should not be considered indicative of those to be expected for a full year. The
Company recorded 80% of its revenues during the first six months of the
Company's 1998 fiscal year. GSV has historically operated at a loss in the last
two fiscal quarters due to limited sales during such quarters. Seasonality of
revenues also affects the Company's cash flow requirements. In the past, GSV has
borrowed funds under lines of credit beginning in February or March to finance
crop production costs through harvest and has repaid such borrowings from the
proceeds of each harvest. GSV also borrows substantial sums from late summer
through the fall to finance inventory build-up during the fall crush season.
Such seasonality in revenues and borrowings may lead to significant fluctuations
in the Company's reported quarterly results. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations".

13
<PAGE>
COMPETITION; INDUSTRY FRAGMENTATION

The wine industry is extremely competitive. The Company competes with
several well-capitalized companies in the production of bulk wine. Further, many
of the Company's current and prospective competitors have substantially greater
financial, production, personnel and other resources than the Company. In order
to meet near-term shortfalls in supply, a number of wineries have commenced
purchases of wine from foreign sources. Because of higher production costs in
the United States and the higher prices of grapes in California, especially in
comparison to the prices of years past, some wineries can achieve significant
cost savings, even after taking into account shipping costs, by importing bulk
wine from abroad. Some countries, such as France, have launched marketing
campaigns to increase their sales in the United States. Foreign competition can
be expected to continue and increase. In addition, the Company's principal
winery customers compete with each other and with other wineries located in the
United States, Europe, South America, South Africa and Australia. Wine also
competes with other alcoholic, and to a lesser degree, nonalcoholic beverages,
and to the extent wine consumers reduce consumption of wine in favor of such
other beverages, demand for wine and the Company's products and services could
decline.

FACILITY EXPANSION

The Company is currently operating a number of its wine processing
facilities at close to full capacity. During fiscal 1998, the Company authorized
capital expenditures of up to $20 million over the next two fiscal years,
primarily to upgrade, maintain and expand its facilities. The Company intends to
increase the annual processing capacity at its Fresno facility by approximately
20,000 tons of grapes and to expand Fresno wine cooperage capacity by
approximately four million gallons. GSV will also expand its Monterey wine
processing facility's annual capacity by approximately 15,000 tons of grapes and
increase annual barrel fermentation capacity by approximately 18,000 barrels.
GSV's efficient use of capital resources in the next two years to expand wine
production will be important for the Company to maintain its position as one of
the leading suppliers of premium bulk wine and related wine processing services
in the United States. The Company's ability to complete this and subsequent
expansions may be subject to substantial delays due to shortages of stainless
steel tanks and other important materials and equipment, delays that the
marketplace periodically experiences. Other factors that may delay such
improvements are higher than anticipated expenditures, adverse weather and
delays in construction by contractors. Failure to deploy such capital resources
successfully or complete any expansion of the Company's operations on a timely
basis or underestimating the costs and time required to improve the Company's
facilities could have a material adverse effect on the Company's results of
operations and prospects.

GROWTH THROUGH ACQUISITION

In the last three years the Company has virtually doubled the size of its
operations through the acquisition of vineyard acres and wine and brandy
production facilities. These acquisitions have created additional winemaking
capacity and grape supply sources, which have contributed to significant growth
in revenues and net income for the Company on a year-to-year basis. In the
future, there can be no assurance that acceptable acquisition opportunities will
be available to the Company or that the Company will be able to profitably
integrate any such future acquisition. Thus, it is unlikely that GSV's previous
level of acquisition-related activity will continue in the Company's 1999 fiscal
year and beyond.

FIXED FARMING COSTS

The Company incurs relatively fixed annual farming costs per vineyard acre.
Revenues from grape sales and wine processing and production are not realized
until harvest and vary depending upon numerous factors. Vineyard productivity
varies from year to year depending upon weather and other factors, and
significant variations in annual yields should be expected from time to time.
Because production costs are not significantly variable in light of productivity
or revenue levels, weak harvests or lower grape prices cannot be fully mitigated
by cost reductions and could have an adverse effect upon profitability.

14
<PAGE>
RELIANCE ON KEY PERSONNEL

The Company believes its continued success depends on the active involvement
of Jeffrey B. O'Neill, the Company's Chief Executive Officer, and Brian R.
Thompson, the Company's Chief Financial Officer. There can be no assurance that
these persons will remain in their management positions with the Company, and
the loss of the services of either of these persons could have an adverse effect
on the Company's business, financial condition and results of operations.

GOVERNMENT REGULATION

GSV is subject to a broad range of federal and state regulatory requirements
regarding its operations and practices. These regulations are subject to change
and conceivably could have a significant impact on operating practices, chemical
usage and other aspects of the Company's business. There can be no assurance
that new or revised regulations pertaining to the wine grape production industry
will not have a material adverse effect on the Company's business, financial
condition and results of operations.

Wine production and sales are subject to extensive regulation by the Federal
Bureau of Alcohol, Tobacco and Firearms, the California Department of Alcohol
Beverage Control and other state and federal governmental authorities that
regulate licensing, trade and pricing practices, labeling, advertising and other
activities. In recent years, federal and state authorities have required warning
labels on beverages containing alcohol. Restrictions imposed by government
authorities on the sale of wine could increase the retail price of wine, which
could have an adverse effect on demand for wine in general. There can be no
assurance that there will not be new or revised laws or regulations pertaining
to the wine industry which could have a negative impact on the Company's
business.

VOLATILITY OF STOCK PRICE

The market price of the shares of Class B Common Stock has declined sharply
since the Company's initial public offering in late July 1998. The market price
for such shares will continue to be volatile and may be significantly affected
by factors such as actual or anticipated fluctuations in the Company's operating
results, industry consolidation, conditions and trends in the wine industry,
changes in recommendations and estimates by security analysts, general market
conditions and other factors. There can be no assurance that an active trading
market of the Class B Common Stock will be sustained. In addition, stock markets
from time to time have experienced price and volume fluctuations that have
affected the market price for many companies and that frequently have been
unrelated to the operating performance of those companies. Such market
fluctuations may adversely affect the market price of the Class B Common Stock.

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 software and operating 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. 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 interruption, though no assurances can be
given that the Company's compliance testing will not detect unanticipated Year
2000 compliance problems or that GSV's significant vendors, suppliers and
customers will be Year 2000 compliant. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations".

15
<PAGE>
ITEM 2. PROPERTIES.

The Company leases approximately 5,130 square feet for its executive
corporate office in Greenbrae, California under a sublease expiring in May 2000.
The Company believes that its existing executive office facility will be
adequate to meet the Company's needs for the foreseeable future and that
additional space will be available as needed at commercially reasonable rates.
In addition, the Company owns all of the vineyards and winemaking facilities
described above under "Business--Vineyard Operations" and "--Winemaking
Facilities".

ITEM 3. LEGAL PROCEEDINGS.

In June 1998 Treana Winery ("Treana") filed an action in Marin County
Superior Court against Golden State Vintners, a California corporation and
wholly-owned subsidiary of the Company ("Golden State Vintners"), alleging
damages aggregating $2.7 million arising from two breach of contract claims
regarding the preparation of Chardonnay and Cabernet Sauvignon wines by Golden
State Vintners. Golden State Vintners is in the process of settling this dispute
for an amount that is substantially below the damages alleged by Treana.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

During the fourth quarter of fiscal 1998, several matters were approved by
majority written consent of the Company's stockholders.

On April 21, 1998, the holders of an aggregate of 5,868,612 shares of the
Company's then-existing class of voting stock approved by majority written
consent an amendment to the Company's Certificate of Incorporation to change the
name of the Company from "Golden State Acquisition Corp." to "Golden State
Vintners, Inc."

On April 24, 1998, the holders of an aggregate of 5,868,612 shares of the
Company's then-existing class of voting stock voted by majority written consent
(i) to elect Peter Mullin and W. Scott Hedrick to the Company's Board of
Directors, and (ii) to adopt the 1998 Director Stock Option Plan. The term of
the following other members of the Company's Board of Directors continued:
Jeffrey B. O'Neill, Jeffrey J. Brown, Keith R. Fox, Nicholas B. Binkley and
Douglas R. Wolter.

On April 28, 1998, the holders of an aggregate of 5,868,612 shares of the
Company's then-existing class of voting stock and 1,200,829 shares of the
Company's former Class E common stock voted by majority written consent to
approve an Amended and Restated Certificate of Incorporation, which provided for
a reorganization of Company's capital structure.

There were no votes cast against or withheld or abstentions or broker
non-votes with respect to any of the above-described actions.

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.

The Company's Class B Common Stock commenced trading on the Nasdaq National
Market on July 22, 1998. The following table sets forth the high and low sales
prices for the Class B Common Stock, as reported by Nasdaq, since July 22, 1998.

<TABLE>
<CAPTION>
FISCAL YEAR ENDING JUNE 30, 1999 HIGH LOW
- ----------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
First Quarter (commencing July 22, 1998)....................................................... $ 18.12 $ 9.00
Second Quarter (through October 16, 1998)...................................................... $ 10.00 $ 6.875
</TABLE>

16
<PAGE>
The last reported sale price of the Class B Common Stock on the Nasdaq
National Market on October 16, 1998 was $7.375 per share. As of October 16,
1998, there were 48 holders of record of the Company's Class B Common Stock.

There is no established public trading market for the Company's Class A
Common Stock. As of October 15, 1998, there were four holders of record of the
Company's Class A Common Stock.

The Company has never paid cash dividends on its Common Stock and has no
intention of paying cash dividends in the foreseeable future. The Company
anticipates that all future earnings, if any, generated from operations will be
retained by the Company to develop and expand its business. Any future
determination with respect to the payment of dividends will be at the discretion
of the Board of Directors and will depend upon, among other things, the
Company's operating results, financial condition and capital requirements, the
terms of then-existing indebtedness, general business conditions and such other
factors as the Board of Directors deems relevant. In addition, negative
covenants contained in the Company's senior credit facility currently prohibit
the Company from paying cash dividends on such shares without the prior approval
of the lender.

During its 1998 fiscal year, the Company issued and sold the following
unregistered securities:

Effective as of December 31, 1997, the Company terminated all outstanding
stock appreciation rights held by two of the Company's executive officers. In
exchange for such rights, the Company granted to such holders options to
purchase an aggregate of 794,347 shares of the Company's Class B Common Stock
and an amount of cash equal to the difference between the base price of each
stock appreciation right and the per share fair market value of the Company's
common stock on December 31, 1997. The options were fully-vested on the date of
grant and are exercisable at a price of $12.07 per share.

In April 1998, in connection with the exercise of options by two executive
officers, the Company issued 307,600 shares of Class A Common Stock and issued
29,617 shares of Class B Common Stock. Each officer paid cash in connection with
the exercise of these options.

In April 1998, the Company granted to several officers options to purchase
an aggregate of 20,300 shares of Class B Common Stock under its 1996 Stock
Option Plan and, in April and May of 1998, granted to several non-employee
directors options to purchase an aggregate of 74,975 shares of Class B Common
Stock pursuant to the 1998 Director Stock Option Plan.

The sales and issuances of the securities described above were deemed to be
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof, as transactions not involving a public offering, or, with respect to
stock appreciation rights and options issued to officers, in reliance upon the
exemption from registration provided by Rule 701 of the Commission. The
purchasers in such private offerings represented their intention to acquire the
securities for investment only and not with a view to distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. All recipients had adequate access, through employment or other
relationships, to information about the Company. No underwriter was employed
with respect to any such sales.

As a result of the Company's initial public offering of Class B Common Stock
on July 21, 1998, the Company received approximately $32 million, net of $2
million in expenses relating to the offering. Of these net proceeds, (a)
approximately $10 million was used to redeem the Company's outstanding Senior
Preferred Stock, (b) approximately $10 million was used to repay outstanding
long term debt and (c) approximately $12 million was used to reduce borrowings
under the Company's line of credit.

17
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.

The Company (referred to as "New GSV" below) was incorporated for the
purpose of acquiring all of the outstanding capital stock of Golden State
Vintners, currently one of the Company's consolidated subsidiaries (referred to
as "Old GSV" below), on April 27, 1995. The selected consolidated financial data
set forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements of the Company and Notes thereto included elsewhere in this
Form 10-K.

<TABLE>
<CAPTION>
OLD GSV
------------------ NEW GSV
YEAR ------------------------------------
ENDED JULY 1, APRIL 27, YEAR ENDED
JUNE 1994 TO 1995 TO JUNE 30,
30, APRIL 26, JUNE 30, -------------------------
1994 1995 1995 1996 1997 1998
------- --------- --------- ------- ------- -------
(DOLLARS IN (DOLLARS IN THOUSANDS,
<S> <C> <C> <C> <C> <C> <C>
THOUSANDS, EXCEPT
PER SHARE DATA) EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues................................ $44,063 $42,851 $ 4,037 $71,755 $95,785 $111,994
Cost of sales (1)....................... 34,241 34,772 3,949 58,468 71,662 83,684
Gross profit............................ 9,822 8,079 88 13,287 24,123 28,310
Selling, general, and administrative
expenses (2).......................... 2,768 3,364 951 5,042 7,408 14,451
Income (loss) from operations........... 7,054 4,715 (863) 8,245 16,715 13,859
Interest expense........................ 3,189 2,797 920 5,344 5,880 6,867
Other expense, net...................... 37 44 1 394 677 356
Income (loss) before income taxes....... 3,828 1,874 (1,784) 2,507 10,158 6,636
Net income (loss)....................... 3,503 1,874 (1,784) 1,924 6,170 4,184
Redeemable preferred stock dividends.... -- -- -- (1,290) (1,314) (1,272)
Redemption of Junior Preferred Stock.... -- -- -- -- (405) --
------- --------- --------- ------- ------- -------
Income (loss) available to common
stockholders.......................... 3,503 1,874 (1,784) 634 4,451 2,912
------- --------- --------- ------- ------- -------
Earnings (loss) per common share (3):
Basic................................. $ (.26) $ .09 $ .65 $ .42
--------- ------- ------- -------
--------- ------- ------- -------
Diluted............................... $ (.26) $ .09 $ .65 $ .41
--------- ------- ------- -------
--------- ------- ------- -------
Weighted average shares outstanding (3):
Basic................................. 6,856 6,856 6,860 6,918
--------- ------- ------- -------
--------- ------- ------- -------
Diluted............................... 6,856 6,856 6,860 7,325
--------- ------- ------- -------
--------- ------- ------- -------
</TABLE>

<TABLE>
<CAPTION>
NEW GSV
------------------------------------------
OLD GSV
----------- JUNE 30,
JUNE 30, ------------------------------------------
1994 1995 1996 1997 1998
----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $ 10,011 $ 8,735 $ 9,335 $ 9,386 $ 8,846
Total assets................................... 53,537 80,941 90,435 102,111 124,519
Total long-term debt........................... 30,900 44,322 42,973 49,781 51,918
Redeemable preferred stock..................... -- 9,978 10,034 8,813 8,951
Stockholders' equity........................... 13,789 10,037 10,670 12,574 18,136
</TABLE>

- --------------------------

(1) In accordance with purchase accounting rules applied to the Company's
acquisition of Old GSV, inventory was increased to fair market value. The
inventory step-up increased cost of sales for the period April 27, 1995 to
June 30, 1995 and the year ended June 30, 1996 by $471 and $1,563,
respectively.

(2) Management incentives relating to stock appreciation rights and bonuses
increased selling, general and administrative expenses by $33, $930, $2,141
and $8,800 for the period April 27, 1995 to June 30, 1995, the years ended
June 30, 1996, 1997, and 1998, respectively.

(3) See Note 2 of the Notes to Consolidated Financial Statements for an
explanation of the basic and diluted earnings per share computations.

18
<PAGE>
ITEM 7. 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 THE COMPANY SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL DATA" AND THE COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS
AND NOTES THERETO, EACH OF WHICH IS INCLUDED ELSEWHERE IN THIS FORM 10-K. FOR
COMPARATIVE PURPOSES ONLY, DATA FOR THE PERIODS JULY 1, 1994 TO APRIL 26, 1995
AND APRIL 27, 1995 TO JUNE 30, 1995 HAVE BEEN COMBINED AND REFLECTED BELOW IN
ALL REFERENCES TO THE COMPANY'S 1995 FISCAL YEAR. THIS DISCUSSION CONTAINS
FORWARD-LOOKING STATEMENTS, AS DEFINED IN SECTION 27A OF THE SECURITIES ACT AND
SECTION 21E OF THE EXCHANGE ACT, THAT INVOLVE RISKS AND UNCERTAINTIES. GSV'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN THE
FORWARD-LOOKING STATEMENTS AS A RESULT OF CERTAIN FACTORS, INCLUDING, BUT NOT
LIMITED TO THOSE DISCUSSED IN "RISK FACTORS" AND ELSEWHERE IN THIS FORM 10-K.

OVERVIEW

The Company's operations can be distinguished among the following: bulk wine
and related services, grape sales, case goods and related services and brandy.
Bulk wine and related services includes the production and sale of bulk wine,
the provision of custom crushing services, the storage of bulk wine in tanks and
barrels and the delivery of bulk wine barreling services, such as racking and
topping. Grape sales consist of the sale of grapes grown at the Company's
vineyards as well as grapes purchased by the Company from third party growers.
Case goods and related services includes the production of proprietary and
private label bottled wine and wine-based beverages and the provision of custom
bottling and storage services. The Company's brandy business includes the
production of brandy and grape spirits and the provision of brandy barrel
storage and related barreling services. See "Business--Company Operations".

In connection with the Golden State Vintners Purchase, as defined, Golden
State Vintners entered into a five-year Employment Agreement (the "Old
Agreement") with Jeffrey B. O'Neill, the Company's President and Chief Executive
Officer. Terms of the Old Agreement provided for, among other things, the
granting to Mr. O'Neill of 504,347 and 145,000 stock appreciation rights (the
"O'Neill SARs") at exercise prices of $1.72 and $0.003 per right, respectively.
Additionally, the Old Agreement provided for a performance-based bonus
calculated as a percentage of operating income, as set forth therein (the
"O'Neill Bonus"). An additional 145,000 stock appreciation rights were issued to
Brian R. Thompson, GSV's Chief Financial Officer, in connection with his
employment in November 1995 at an exercise price of $2.59 per right (the
"Thompson SARs"). The O'Neill SARs, the Thompson SARs and the O'Neill Bonus are
sometimes collectively referred to as the "Management Incentives".

In the fiscal year ended June 30, 1997 and 1998, Management Incentives of
$2.1 and $8.8 million, respectively were included in the selling, general and
administrative expenses reported for such periods. With respect to the fiscal
year ended June 30, 1998, $1.5 million of such $8.8 million of Management
Incentives arose as a result of the acceleration of certain estimated bonus
amounts due under the Old Agreement. As of December 31, 1997, (a) the Old
Agreement was terminated, eliminating the O'Neill Bonus, and (b) each of the
O'Neill SARs and the Thompson SARs were replaced with a combination of
compensation paid partly in cash and partly with promissory notes and fully
vested non-qualified stock options having an exercise price of $12.07 per share
(the "Replacement Incentives"). Such Replacement Incentives will not have a
material impact on the Company's net income in future periods, but, as a result
of the fully vested nature of the options granted to Messrs. O'Neill and
Thompson, will impact GSV's future earnings per share. None of the Replacement
Incentives contains a formula based bonus. Additionally, the Company does not
anticipate that bonuses paid to Mr. O'Neill will be material under the terms of
his current employment agreement.

In connection with the Replacement Incentives, effective January 1, 1998,
(1) the Company made cash payments of $4.7 million and $0.7 million to Messrs.
O'Neill and Thompson, respectively (the "Executive Cash Payments"), and (2) the
Company issued promissory notes in the amount of $4.7 million and $0.7 million
to Messrs. O'Neill and Thompson, respectively (the "Executive Promissory
Notes"). Messrs.

19
<PAGE>
O'Neill and Thompson used their respective Executive Cash Payments to exercise
stock options and to pay certain income taxes due. See "Certain Relationships
and Related Transactions" and Note 15 of Notes to Consolidated Financial
Statements.

The table below sets forth summary statement of operations data for the
three fiscal years ended June 30, 1998:

SUMMARY STATEMENT OF OPERATIONS DATA
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Revenues.................................................... $ 71,755 $ 95,785 $ 111,994
Cost of sales............................................... 58,468 71,662 83,684
--------- --------- ----------
Gross profit................................................ 13,287 24,123 28,310
Selling, general and administrative expenses................ 5,042 7,408 14,451
--------- --------- ----------
Income (loss) from operations............................... 8,245 16,715 13,859
Interest expense............................................ 5,344 5,880 6,867
Other expense, net.......................................... 394 677 356
--------- --------- ----------
Income before income taxes.................................. 2,507 10,158 6,636
Income taxes................................................ 583 3,988 2,452
--------- --------- ----------
Net income.................................................. $ 1,924 $ 6,170 $ 4,184
--------- --------- ----------
--------- --------- ----------
</TABLE>

The following table reflects summary statement of operations data shown
above, expressed as a percentage of revenues:

PERCENTAGE OF REVENUES

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0%
Cost of sales........................................................ 81.5 74.8 74.7
--------- --------- ---------
Gross profit......................................................... 18.5 25.2 25.3
Selling, general and administrative expenses......................... 7.0 7.7 12.9
--------- --------- ---------
Income (loss) from operations........................................ 11.5 17.5 12.4
Interest expense..................................................... 7.4 6.2 6.2
Other expense, net................................................... 0.6 0.8 0.3
--------- --------- ---------
Income before income taxes........................................... 3.5 10.6 5.9
Income taxes (benefit)............................................... 0.8 4.2 2.2
--------- --------- ---------
Net income........................................................... 2.7 6.4 3.7
--------- --------- ---------
--------- --------- ---------
</TABLE>

RECENT DEVELOPMENTS

On July 21, 1998, GSV consummated a firmly underwritten initial public
offering of 4,300,000 shares of Class B Common Stock, of which 2,150,000 shares
were sold by GSV and 2,150,000 shares were sold by certain stockholders of the
Company. The Company realized net proceeds of approximately $32 million from the
offering.

20
<PAGE>
SEASONALITY AND QUARTERLY RESULTS

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 reported its highest revenues and net income
in its first and second fiscal quarters, as the Company sells most of its grapes
in the first quarter, immediately after harvest, sells most of its bulk wine in
the second quarter, immediately after crush, and performs many of its wine
processing services in the first and second quarters. As a result, the Company
typically reports lower revenues and net income (loss) in the third and fourth
fiscal quarters.

The following table illustrates the seasonality of the Company's revenues
and net income (loss) for each of the four fiscal quarters of the Company's 1998
fiscal year:

QUARTERLY REVENUES AND NET INCOME (LOSS)

<TABLE>
<CAPTION>
FISCAL 1998 QUARTER ENDED
------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
--------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................................. $ 41,297 $ 48,233 $ 12,145 $ 10,319
Percent of revenues for the year ended
June 30, 1998........................... 36.9% 43.1% 10.8% 9.2%
Net income (loss)......................... $ 6,462 $ (1,565) $ (159) $ (554)
Percentage of net income (loss)........... 154.4% (37.4)% (3.8)% (13.2)%
</TABLE>

RESULTS OF OPERATIONS

The following table illustrates the Company's revenues by source for the
periods indicated:

REVENUES BY SOURCE
(IN THOUSANDS)

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Revenues:
Bulk wine and related services............................ $ 33,816 $ 50,228 $ 58,928
Grape sales............................................... 15,183 18,585 22,817
Case goods and related services........................... 11,335 15,829 19,941
Brandy.................................................... 11,421 11,143 10,308
--------- --------- ----------
Total revenues.......................................... $ 71,755 $ 95,785 $ 111,994
--------- --------- ----------
--------- --------- ----------
</TABLE>

21
<PAGE>
The following table illustrates the Company's revenues by source for the
periods indicated, expressed
as a percentage of revenues:

PERCENTAGE OF REVENUES BY SOURCE

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Bulk wine and related services..................................... 47.1% 52.5% 52.6%
Grape sales........................................................ 21.2 19.4 20.4
Case goods and related services.................................... 15.8 16.5 17.8
Brandy............................................................. 15.9 11.6 9.2
--------- --------- ---------
Total revenues................................................... 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
</TABLE>

FISCAL YEARS ENDED JUNE 30, 1998 AND 1997

REVENUES

Revenues for the fiscal year ended 1998 were $112.0 million, an increase of
$16.2 million or 16.9%, as compared to revenues of $95.8 million in the fiscal
year ended 1997. As a result of the restructuring of the Company's grape supply
relationship with Gallo, grape sales revenues will decline significantly in the
Company's 1999 fiscal year, though management believes that such decline in
grape sales revenues will be at least partially offset by increased bulk wine
sales.

BULK WINE AND RELATED SERVICES. For the Company's 1998 fiscal year,
revenues from bulk wine and related services were $58.9 million, an increase of
$8.7 million or 17.3%, as compared to revenues of $50.2 million in fiscal 1997.
This increase in revenues is primarily due to higher customer demands for
contracted bulk wines and the initiation of bulk wine production and processing
and storage service operations at the Company's Monterey facility, along with
increases in wine processing revenues from the Company's Fresno facility and
barrel fermentation and storage fees at the Company's recently purchased Napa
warehouse.

GRAPE SALES. In fiscal 1998, revenues from grape sales were $22.8 million,
an increase of $4.2 million or 22.7%, as compared to revenues of $18.6 million
in fiscal 1997. The increase in revenues for grape sales is primarily due to the
significant increase in grapes harvested at the Company's vineyards, which
exceeded historical averages by more than 20%. Due to the reallocation of a
significant portion of the Company's wine grapes to the internal production of
bulk wine, the Company expects revenues from grape sales to decline
significantly in fiscal 1999.

CASE GOODS AND RELATED SERVICES. For fiscal 1998, revenues from case goods
and related services were $20.0 million, an increase of $4.2 million or 26.6%,
as compared to revenues of $15.8 million the first nine months of fiscal 1997.
This increase in case goods and related services revenues is evidence of the
Company's strategy to generate significant case goods sales and reflects an
increase in the sale of private label case goods and an expansion in the
Company's proprietary labels (which tend to have higher margins) in the popular
premium and superpremium segments of the premium wine market.

BRANDY. For fiscal 1998, revenues from the sale of brandy and grape spirits
were $10.3 million, a decline of $0.8 million or 7.2%, as compared to $11.1
million in revenues from the previous period. This decline primarily resulted
from the reduction in the contracted demand for brandy from period to period.

22
<PAGE>
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 fiscal 1998, total cost of sales was $83.7 million, an increase of $12.0
million or 16.7%, from $71.7 million in fiscal 1997. As a percentage of
revenues, for fiscal 1998, cost of sales was 74.7%, a decrease from 74.8% for
fiscal 1997. Factors contributing to this dollar increase in cost of sales
included an increase in the overall level of Company operations, the impact of
the cost of certain premium varietal grapes used in the production of bulk wine,
start-up costs related to the initiation of operations at the Company's Monterey
facility and the expansion of the Company's case goods sales. In addition, cost
of sales was impacted by amounts reserved by the Company in connection with
disputes with two customers concerning the quality of wine products delivered by
the Company. The increase in cost of sales was partially offset by a reduction
in farming costs per acre, which was largely due to the optimal wine grape
growing and harvesting conditions during calendar 1997.

GROSS PROFIT

Gross profit generally represents revenues less cost of sales. In fiscal
1998, the Company realized gross profit of $28.3 million, an increase of $4.2
million or 17.4%, as compared to gross profit of $24.1 million for fiscal 1997.
As a percentage of revenues, in fiscal 1998 gross margin improved to 25.3%, from
25.2% in fiscal 1997. The primary factors contributing to the improvement in
gross profit and gross margin were an increase in yields at the Company's
vineyards, and a decrease with respect to certain grape prices. Margin growth
was adversely affected by declining market prices for certain premium varietal
wine that were not entirely offset by lower grape prices, a number of
operational start up costs associated with the initiation of wine processing
services at the Monterey facility and a reserve for product quality claims.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses include general administrative
items, corporate overhead and expenses relating to the Management Incentives.
For fiscal 1998, selling, general and administrative expenses were $14.5
million, an increase of $7.1 million or 95.9%, from $7.4 million for fiscal
1997.

INTEREST EXPENSE

For fiscal 1998, interest expense was $6.9 million, an increase of $1.0
million or 16.9%, as compared to interest expense of $5.9 million in fiscal
1997. Interest expense increased primarily due to an increase in long term
borrowings used to acquire the Company's Monterey facility and its Napa
warehouse, and, to a lesser extent, by an increase in inventory and working
capital borrowings consistent with the Company's increased level of revenues.

NET INCOME

For fiscal 1998 net income was $4.2 million, a decrease of $2.0 million or
32.3%, as compared to net income of $6.2 million for fiscal 1997. As a
percentage of revenues, for fiscal 1998, net income was 3.7%, as compared to
6.4% for fiscal 1997. This decrease in net income is attributable to a
substantial increase in selling, general and administrative expenses, which
increase was partially offset by the growth of profit in the Company's bulk wine
and related services, grape sales and case goods and related services
businesses.

EARNINGS PER SHARE

For fiscal 1998, basic earnings per share were $.42, a decline of $.23 or
35.4%, as compared to basic earnings per share of $.65 for fiscal 1997. Net
earnings available to common shareholders for fiscal 1998

23
<PAGE>
was impacted by the decrease in net income described above and by dividends paid
on shares of Senior Preferred Stock during such period. For each of the years
ended June 30, 1997 and 1998 such dividends equalled $1.3 million.

In connection with the redemption of Senior Preferred Stock with proceeds
from this offering and the conversion of all outstanding Junior Preferred Stock,
the excess of the redemption value of $10.0 million over the carrying amount of
$8.2 million will be treated similarly to a dividend and will be a deduction
from net earnings in the computation of net earnings available to common
shareholders for use in earnings per share calculations for periods including
such redemption.

FISCAL YEARS ENDED JUNE 30, 1997 AND 1996

REVENUES

For the Company's 1997 fiscal year, revenues were $95.8 million, an increase
of $24.0 million or 33.5%, as compared to revenues of $71.8 million in the 1996
fiscal year.

BULK WINE AND RELATED SERVICES. For the Company's 1997 fiscal year,
revenues from bulk wine and related services were $50.2 million, an increase of
$16.4 million or 48.5%, as compared to revenues of $33.8 million in fiscal 1996.
The increase in bulk wine and related services revenues are primarily due to a
significant increase in the demand for bulk wine which resulted from the
execution of bulk wine supply contracts with a number of customers, and the
increase in wine processing and storage fees, which resulted from an increase in
custom crushing contracts executed by the Company.

GRAPE SALES. In fiscal 1997, grape sales revenues were $18.6 million, an
increase of $3.4 million or 22.4%, over revenues of $15.2 million in fiscal
1996. The increase in grape sales revenues are primarily due to an increase in
the average sales price per ton of grapes sold and, in fiscal 1997, an increase
in grapes harvested at the Company's vineyards and the maturation of certain
grafted acreage.

CASE GOODS AND RELATED SERVICES. For fiscal 1997, revenues from case goods
and related services were $15.8 million, an increase of $4.5 million or 39.6%,
over case goods and related services revenues of $11.3 million in fiscal 1996.
The increase in case goods and related services revenues are evidence of the
Company's strategy to generate additional case goods sales and reflects a
significant increase in the sale of private label case goods and an expansion in
the Company's proprietary labels in the popular premium and superpremium
segments of the wine market.

BRANDY. For fiscal 1997, revenues from the sale of brandy were $11.1
million, a decrease of $0.3 million or 2.4%, from revenues of $11.4 million in
fiscal 1996, primarily as a result of a decrease in contracted brandy sales.

COST OF SALES

Total cost of sales in fiscal 1997 were $71.7 million, an increase of $13.2
million or 22.6%, over cost of sales of $58.5 million in fiscal 1996. As a
percentage of revenues, in fiscal 1997, cost of sales was 74.8%, as compared to
81.5% in fiscal 1996. From 1996 to 1997, cost of sales grew primarily due to the
growth in the Company's revenues, principally in bulk wine sales.

GROSS PROFIT

In fiscal 1997, the Company realized gross profit of $24.1 million, an
increase of $10.8 million or 81.6%, over gross profit of $13.3 million in fiscal
1996. As a percentage of revenues, in 1997 gross margin improved to 25.2%, as
compared to 18.5% in fiscal 1996. Gross profit and margin increased from 1996 to
1997 primarily due to the growth in bulk wine sales, as both bulk wine prices
and volumes increased year-to-year.

24
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

In fiscal 1997, selling, general and administrative expenses were $7.4
million, an increase of $2.4 million or 46.9%, over selling, general and
administrative expenses of $5.0 million in fiscal 1996. As a percentage of
revenues, in fiscal 1997, selling, general and administrative expenses were
7.7%, as compared to 7.0% in fiscal 1996.

INTEREST EXPENSE

In fiscal 1997 interest expense was $5.9 million, an increase of $0.6
million or 10.0%, as compared to an interest expense of $5.3 million in fiscal
1996.

NET INCOME

In fiscal 1997, net income was $6.2 million, an increase of $4.3 million or
221.0%, from net income of $1.9 million in fiscal 1996. As a percentage of
revenues, in fiscal 1997 net income was 6.4%, as compared to 2.7% in fiscal
1996.

EARNINGS PER SHARE

In fiscal 1997, basic earnings per share were $.65, an increase of $.56 or
22.2%, over basic earnings per share of $.09 in fiscal 1996. Net earnings
available to common shareholders for fiscal 1997 was impacted by the increase in
net income described above, which increase was partially offset by dividends
paid on shares of Senior Preferred Stock during such period. For each of fiscal
1996 and fiscal 1997, such dividends equalled $1.3 million.

LIQUIDITY AND CAPITAL RESOURCES

The Company's working capital position at June 30, 1998 was $8.8 million, as
compared to $9.4 million at June 30, 1997. The decrease in working capital is
primarily due to the increase in current liabilities reflecting the recognition
of $8.8 million of expenses related to Management Incentives. 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 as of June 30, 1998 are adequate for
the Company's working capital line of credit. Borrowings under the line
typically peak in November, during the Company's second fiscal quarter.
Revolving line of credit balances were $12.8 million and $18.2 million at June
30, 1997 and 1998, respectively. Unused availability under the line of credit
was $4.3 million at June 30, 1998. The Company was not in compliance with the
additional indebtedness and capital expenditures limitations of its bank credit
agreements as of June 30, 1998, but a waiver until June 30, 1999 was
subsequently obtained on September 25, 1998.

Operating cash flow for the year ended June 30, 1998 was $0.4 million, as
compared to cash flow from operations of $6.4 million for the year ended June
30, 1997. The decrease in operating cash flow is primarily due to an increase in
accrued deferred compensation expense relating to Management Incentives and an
increase in accounts receivable and inventory balances reflective of the
Company's revenue growth.

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 cash
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.

The Company recently authorized capital expenditures of up to $20 million,
primarily to upgrade, maintain and expand its existing winemaking facilities
over the next two years. Of the $20 million authorized, the Company has expended
approximately $12 million to date. The Company intends to continue to finance
these expenditures through cash generated from operations and various other

25
<PAGE>
financing sources. In July 1998, the Company paid to Messrs. O'Neill and
Thompson an aggregate of $5.4 million, plus interest, pursuant to the Executive
Promissory Notes. See Note 9 of Notes to Consolidated Financial Statements.

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 the efforts will be between $100,000 and $150,000 over the 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.

26
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company holds no market risk sensitive trading instruments. All Company
balance sheet items and sales are in U.S. dollars, therefore the Company has no
foreign currency exchange rate risk related to these financial data. The Company
does not use financial instruments for trading purposes.

Certain Company debt is subject to variable interest rate options. The
following chart indicates the Company's fixed and variable rate long and
short-term debt at fiscal year ended June 30, 1998, and estimates the balances
of such debt in future periods ($ millions):

<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 2003
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bank line of credit:
Average Outstanding $ 17.0 $ 13.0 $ 5.0 $ -- $ -- $ --
Weighted average rate for year 7.47% 7.00% 7.00% --

Long-term Debt:
Fixed Rate:
Average Outstanding $ 10.6 $ 12.2 $ 9.9 $ 8.3 $ 7.9 $ 6.5
Weighted average rate for year 8.64% 8.50% 8.44% 8.41% 8.36% 7.36%
Variable Rate:
Average Outstanding $ 43.4 $ 36.7 $ 30.0 $ 27.9 $ 26.1 $ 24.1
Weighted average rate for year 9.27% 9.64% 9.00% 9.00% 9.00% 9.00%
</TABLE>

At June 30, 1998, the balance on a portion of the Company's variable rate
long-term debt was $31.7 million and carried an interest rate of 9.7%. On April
21, 2000, the interest rate on the estimated outstanding balance of $29 million
will convert from 9.7% to an interest rate equal to 275 basis points over the
then five-year U.S. Treasury note rate. The current rate of 9.7% was 275 basis
points over the five-year U.S. Treasury note rate at the loan's inception in
April 1995. For each 100 basis point rate increase or decrease at the variable
rate reset date on April 21, 2000, the Company's interest charge will
respectively increase or decrease in the subsequent one-year period by
approximately $290,000. At October 16, 1998, the five-year U.S. treasury note
interest rate was approximately 4.5%.

At June 30, 1998, the Company had approximately $10.5 million of other
variable rate long-term debt, which was subsequently repaid in full from
proceeds from the Company's initial public offering during the first quarter of
fiscal 1999. Prior to retirement, such debt carried an interest rate of
approximately 8.0%.

During its annual business cycle, the Company utilizes a variable interest
rate working capital line at various borrowing levels. The Company's existing
working capital loan agreement offers interest rate options at spreads over
LIBOR and/or lender cost of funds, at maturities selected by the Company. For
fiscal 1998, the average outstanding balance under this line was approximately
$17 million, with a weighted average interest rate of approximately 7.5%. The
Company estimates an average outstanding balance under such line of $13 million
for fiscal 1999 and a 7% weighted average interest rate. The Company intends to
apply cash generated from operations to reduce the outstanding balance on its
line of credit after fiscal 1999.

At June 30, 1998, the balance on the Company's fixed rate long-term debt was
$10.6 million and carried a weighted average interest rate of approximately
8.6%. The Company estimates that the outstanding balance on such debt will be
$12.2 million at June 30, 1999 and will bear interest at a weighted average rate
of 8.5%.

For strategic reasons, the Company enters into forward product sales and
material supply contracts, most of which generally have staggered maturity
dates. Of the Company's four primary lines of business, bulk wine, grape sales
and brandy production are subject to multi-year contracts, while case goods
sales generally occur on a short-term basis. As the primary raw material
component for most Company product is wine grapes, the Company enters into long
and short-term grape purchase contracts to ensure an

27
<PAGE>
adequate and cost effective source of raw material for production. Product sales
contracts are substantially fixed over the term of the contract as to quantity
and price. Wine grape contract terms are similarly fixed at inception for the
term of the contract, although a portion of these contracts contain annual
harvest market price adjustment clauses, against individual harvest year minimum
pricing. For the fiscal year ended June 30, 1998, or the 1997 harvest year,
approximately 3% of the Company's total wine grape purchases on a dollar basis
were adjusted upward against contract minimum prices following the harvest. The
Company expects to experience similar grape price adjustments during the 1999
fiscal year, with respect to the 1998 harvest year. The Company's annual budget
anticipates these upward wine grape price adjustments, based on management's
knowledge of movements in anticipated wine grape supply and quality during each
harvest year's wine grape crop maturation.

Although the Company's annual wine and brandy production is substantially
committed under sales contracts prior to harvest and production, the Company
intentionally maintains uncommitted product inventory to meet customer demand.
At June 30, 1998, the Company's reported inventory value was $23.6 million, of
which approximately $10 million, or 42%, is contractually committed to future
production programs. The uncommitted amount of inventory, approximately $13.6
million, or 58%, is reserved primarily for future case goods sales, which are
generally not subject to written preproduction purchase contracts, and for spot
market bulk wine sales. While the Company generally matches preproduction
contractual sales with contracted material supply agreements, the Company will
continue to maintain certain uncommitted inventory to service short-term
customer needs.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

See the Index included at "Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K."

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.

28
<PAGE>
PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The executive officers, directors and key employees of the Company are as
follows:

<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- ------------------------------------------------------------------------
<S> <C> <C>
Jeffrey B. O'Neill (1)........... 41 President, Chief Executive Officer and Director
Brian R. Thompson................ 47 Chief Financial Officer and Secretary
Jeffrey J. Brown (1)(2).......... 37 Chairman of the Board of Directors, Assistant Secretary and Director
Nicholas B. Binkley (2).......... 52 Director
Douglas R. Wolter................ 31 Director
Keith R. Fox (1)................. 44 Director
W. Scott Hedrick................. 52 Director
Peter W. Mullin.................. 57 Director
John G. McDonald................. 61 Director
Gregory J. Forrest............... 52 Director
Lawrence E. Brink................ 51 Vice President, Production Operations
Michael B. Drobnick.............. 41 Vice President, Bulk Sales
Jeffrey L. Dye................... 44 Vice President, Case Goods
Peter M. Byck.................... 35 Vice President, Strategy and Business Development
Donald L. Stanley................ 61 General Manager, Reedley and Director of Wine Grape Procurement
Robert Darby..................... 56 Plant Manager, Fresno
</TABLE>

- ------------------------

(1) Member of the Compensation Committee.

(2) Member of the Audit Committee.

JEFFREY B. O'NEILL has been a director of the Company since April 1995 and
has served as the Company's President and Chief Executive Officer since October
1996. From July to October of 1996, Mr. O'Neill served as Executive Vice
President of the Company. Mr. O'Neill joined the predecessor to the Company in
1981 as a grape buyer and has held a number of executive positions with the
Company's predecessor entities, most recently serving as the President and Chief
Executive Officer of Golden State Vintners since 1986. He currently serves on
the Board of Directors of several leading agricultural concerns, including Fresh
International Corp.

BRIAN R. THOMPSON joined the Company in November 1995 as Chief Financial
Officer and Secretary. From 1988 to November 1995, Mr. Thompson served in a
number of executive positions, including Executive Vice President and Chief
Financial Officer, of Sun World International, Inc., a proprietary produce
company, which filed a petition under Federal bankruptcy laws in October 1994.

JEFFREY J. BROWN has been a director of the Company since April 1995 and
became Chairman of the Board and Assistant Secretary in October 1996. Since June
1993, Mr. Brown has been an executive officer and director of Forrest Binkley &
Brown Venture Co. ("Venture Co."), the general partner of Forrest Binkley &
Brown L.P. ("FBB"), the managing partner of SBIC Partners. Prior to the
formation of FBB in June 1993, Mr. Brown was a Senior Vice President of
BankAmerica Venture Capital Corporation, a position he held from April 1992 to
May 1993. He currently serves on the Board of Directors of a number of private
companies.

NICHOLAS B. BINKLEY joined the Company's Board of Directors in October 1996.
Since June 1993, Mr. Binkley has been an executive officer and director of
Venture Co. Prior to the formation of FBB,

29
<PAGE>
Mr. Binkley was Vice Chairman of the Board of Directors of BankAmerica
Corporation, a position he held from April 1992 through May 1993. He currently
serves on the Board of Directors of Vista Medical Company, a medical device
company, as well as a number of private companies.

DOUGLAS R. WOLTER joined the Company's Board of Directors in October 1996.
He currently is a principal at Forrest Binkley & Brown Venture Advisor Co.
("Advisor Co."), an affiliate of FBB. Prior to that time, Mr. Wolter had been a
senior analyst at Advisor Co. since August 1994 and prior to joining Advisor
Co., he attended the Graduate School of Business at Stanford University,
graduating with a Masters in Business Administration in June 1994.

KEITH R. FOX has been a director of the Company since April 1995. Since
February 1994, Mr. Fox has been an executive officer of Exeter Venture Advisors,
Inc., Exeter Equity Advisors, Inc. and Exeter Venture Management Corporation.
Mr. Fox serves on the Boards of Directors of a number of private companies and
is an independent trustee of more than 20 Scudder Kemper mutual funds.

W. SCOTT HEDRICK joined the Company's Board of Directors in April 1998.
Since 1979, Mr. Hedrick has served as a general partner of InterWest Partners, a
venture capital firm that he co-founded. Mr. Hedrick also serves on the Board of
Directors of Il Fornaio (America) Corporation and Office Depot, Inc., as well as
a number of private companies.

PETER W. MULLIN joined the Company's Board of Directors in April 1998. Since
1969, Mr. Mullin has served as Chief Executive Officer and Chairman of the Board
of Directors of Mullin Consulting, Inc., a consulting firm specializing in
executive compensation and benefit issues. Mr. Mullin serves on the Board of
Directors of Avery Dennison Corporation, as well as several private companies
and foundations.

JOHN G. MCDONALD joined the Company's Board of Directors in May 1998.
Professor McDonald is the Industrial Bank of Japan Professor of Finance at the
Graduate School of Business at Stanford University. Professor McDonald has
served on the faculty at Stanford's Graduate School of Business since 1968 and
received an endowed chair in 1978. Professor McDonald was elected to the Board
of Governors of the National Association of Securities Dealers, Inc. (the
"NASD") in 1987 and became Vice Chairman of the NASD in 1989. Professor McDonald
serves on the Board of Directors of Varian Associates, Inc., Scholastic Corp.,
and TriNet Corp. Realty Trust Inc. and is an independent trustee of eight mutual
funds managed by The American Funds.

GREGORY J. FORREST joined the Company's Board of Directors in May 1998.
Since June 1993, Mr. Forrest has been an executive officer and director of
Venture Co. Prior to the formation of FBB, Mr. Forrest was Chief Executive
Officer of BankAmerica Venture Capital Corporation, a position he held from
April 1992 to May 1993. Mr. Forrest currently serves on the Board of Directors
of a number of private companies.

LAWRENCE E. BRINK joined GSV in April 1994 as Vice President, Production
Operations. Prior to that time, Mr. Brink served as Executive Vice President,
Winemaking of Joseph E. Seagram & Sons.

MICHAEL B. DROBNICK joined the Company in 1985 and has served as Vice
President, Bulk Sales since January 1996. Prior to joining the Company, Mr.
Drobnick held various sales management positions with different wine
distributors.

JEFFREY L. DYE has served as Vice President, Case Goods of GSV since
November 1992. Prior to joining the Company, Mr. Dye served in various executive
positions for several wineries and wine distributors.

PETER M. BYCK joined GSV in November 1997 as Vice President, Strategy and
Business Development. From 1992 to 1996, Mr. Byck served as Chief Executive
Officer of Applied Scanning Technology, Inc., a proprietary software and
scanning company. From 1990 to 1992, Mr. Byck was a Senior Consultant at the LEK
Partnership.

30
<PAGE>
DONALD L. STANLEY joined the Company in 1989 and is currently the General
Manager at the Company's Reedley facility and Director of Wine Grape
Procurement. Prior to joining the Company, Mr. Stanley served in various
positions at Christian Brothers Winery.

ROBERT DARBY has been with the Company serving in various plant and
operating positions since 1987. Prior to that time, Mr. Darby was the Chief
Winemaker and Plant Manager for the JFJ Bronco Wine Company.

Each member of the Board is elected to hold office until the next annual
meeting of stockholders and until his respective successor is elected and
qualified. Officers serve at the discretion of the Board of Directors. There are
no family relationships among any of the directors or executive officers of the
Company.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

Section 16(a) of the Exchange Act ("Section 16") requires the Company's
executive officers, directors and beneficial owners of more than 10% of the
Company's Common Stock (collectively, "Insiders") to file reports of ownership
and changes in ownership of Common Stock of the Company with the Securities and
Exchange Commission and to furnish the Company with copies of all Section 16(a)
forms they file. The Company became subject to Section 16 in conjunction with
the registration of its Common Stock under the Exchange Act effective July 21,
1998.

31
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION.

The following table summarizes all compensation earned by the Company's
Chief Executive Officer and to the Company's most highly compensated officers
other than the Chief Executive Officer whose total annual salary and bonus
exceeded $100,000, for services rendered in all capacities to the Company and to
Golden State Vintners during each of the fiscal years ended June 30, 1998 and
June 30, 1997 (collectively, the "Named Officers").

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS(1)
-------------
COMPENSATION SECURITIES
---------------------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION FISCAL YEAR SALARY BONUS OPTIONS/SARS COMPENSATION
- ---------------------------------------------- ----------- ---------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Jeffrey B. O'Neill (3) ....................... 1998 $ 323,551 $ 9,466,888(4) 649,347(5) $ 35,757(6)
President and Chief Executive Officer 1997 309,331 802,040 670,433 14,947(6)
Brian R. Thompson ............................ 1998 191,962 1,445,000(4) 145,000(5) --
Chief Financial Officer and Secretary 1997 165,000 40,000 -- --
Lawrence E. Brink ............................ 1998 127,419 25,000 -- 9,600(7)
Vice President, Production Operations 1997 125,000 20,000 17,400 9,600(7)
Jeffrey L. Dye ............................... 1998 128,946 73,435 -- --
Vice President, Case Goods 1997 75,000 65,000 17,400 --
Michael B. Drobnick .......................... 1998 144,805 58,435 -- --
Vice President, Bulk Sales 1997 75,000 65,000 17,400 --
</TABLE>

- ------------------------

(1) For each of the periods set forth in the table above, no Named Officer
received aggregate Other Annual Compensation in excess of the lesser of
$50,000 or 10% of the total of such officer's salary and bonus, nor did any
such Named Officer receive any restricted stock award, stock appreciation
right or payment under any long-term incentive plan.

(2) These options were granted pursuant to the Company's 1996 Option Plan.

(3) This table sets forth all compensation awarded to, earned by or paid to Mr.
O'Neill for services rendered as an officer of the Company and as an officer
of Golden State Vintners during the fiscal years ended June 30, 1997 and
1998, which compensation was paid by the Company.

(4) Bonus as earned by Messrs. O'Neill and Thompson in fiscal 1998 were in
connection with the Replacement Incentives issued to them on January 1,
1998. Such bonus amounts were invested by Messrs. O'Neill and Thompson in
the Company's Common Stock. See "Certain Relationships and Related
Transactions--Other Transactions with Executive Officers, Directors and
Principal Stockholders."

(5) The options granted to Messrs. O'Neill and Thompson in fiscal 1998 were made
in connection with the Replacement Incentives issued to them on January 1,
1998.

(6) Consists of disability insurance premiums and car expenses paid by the
Company.

(7) Consists of a car allowance paid by the Company.

32
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR

The following table sets forth information concerning stock options granted
to the Named Officers of the Company during fiscal 1998. No stock appreciation
rights were granted to such persons during such period.

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------- POTENTIAL REALIZABLE VALUE
NUMBER OF % OF TOTAL AT ASSUMED ANNUAL RATES OF
SECURITIES OPTIONS STOCK PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OR FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE 5% 10%
- ----------------------------------- ----------- ------------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Jeffrey B. O'Neill................. 649,347 79.7% $ 12.07 1/1/08 $ 4,929,036 $ 12,491,145
Brian R. Thompson.................. 145,000 17.8% $ 12.07 1/1/08 1,100,660 2,789,288
</TABLE>

- ------------------------

(1) The exercise price per share of these options was equal to or greater than
the fair market value of the Common Stock on the date of grant.

(2) The potential realizable value is calculated based on the term of the option
at its time of grant. It is calculated assuming that the stock price on the
date of grant appreciates at the indicated annual rate compounded annually
for the entire term of the option, and that the option is exercised and sold
on the last day of its term for the appreciated stock price. No gain to the
optionee is possible unless the stock price increases over the option term,
which will benefit all stockholders.

AGGREGATED STOCK OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END OPTION
VALUES

The following table sets forth information concerning stock options
exercised by the Named Officers of the Company during fiscal 1998 and the fiscal
year-end value of unexercised options held by the Named Officers of the Company.
In connection with the issuance of the Replacement Incentives, the O'Neill SARs
and the Thompson SARs were terminated as of December 31, 1997. No stock
appreciation rights were issued by the Company during the 1998 fiscal year.

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
OPTIONS AT FISCAL OPTIONS AT FISCAL YEAR-
YEAR-END END
----------------- ------------------------
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE REALIZED UNEXERCISABLE UNEXERCISABLE
- ------------------------------------- --------------- ------------ ----------------- ------------------------
<S> <C> <C> <C> <C>
Jeffrey B. O'Neill................... 307,600 $ 2,212,971 649,345/362,836 $ 3,201,930/$4,464,416
Brian R. Thompson.................... 29,617 409 115,383/ -- 568,949/ --
Lawrence E. Brink.................... -- -- 4,360/13,050 53,131/159,393
Jeffrey L. Dye....................... -- -- 4,360/13,050 53,131/159,393
Michael B. Drobnick.................. -- -- 4,360/13,050 53,131/159,393
</TABLE>

BOARD COMMITTEES, COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee reviews the results and scope of the annual audit
and the services provided by the Company's independent accountants. The
Compensation Committee makes recommendations to the Board of Directors with
respect to the Company's general and specific compensation policies and
administers the Company's stock option plan.

The Company's Compensation Committee consists of Messrs. Brown, O'Neill and
Fox. During the Company's last completed fiscal year, Mr. O'Neill was an
executive officer of the Company and of Golden

33
<PAGE>
State Vintners and Mr. Brown was an executive officer of the Company. See
"Certain Relationships and Related Transactions" for information regarding the
interests of Messrs. O'Neill, Brown and Fox in certain transactions and
arrangements involving the Company.

No executive officer of the Company serves as a member of the Board of
Directors or Compensation Committee of any other entity which has one or more
executive officers serving as a member of the Company's Board of Directors or
Compensation Committee.

STOCK OPTION PLANS

1996 STOCK PLAN. The Company's 1996 Option Plan became effective in
December 1996 upon adoption by the Board of Directors. The 1996 Option Plan
provides for the grant of options in the form of incentive stock options and
nonstatutory stock options to officers, key employees and consultants of the
Company or its subsidiaries and members of the Board of Directors of the
Company. A total of 223,491 shares of Class B Common Stock and 362,833 shares of
Class A Common Stock have been reserved for issuance under the 1996 Option Plan.

The 1996 Option Plan is administered by a committee (the "Committee")
constituted so as to permit the 1996 Option Plan to comply with Rule 16b-3 of
the Exchange Act. The Board of Directors may amend the 1996 Option Plan and,
with the consent of each participant adversely affected, the Committee may make
such changes in the terms and conditions of granted options as it shall deem
advisable.

The purchase price per share of the shares of Common Stock underlying each
option granted under the 1996 Option Plan is established by the Committee but
shall not be less than 100% of the fair market value of the Common Stock on the
date of grant, provided that if the optionee is a 10% stockholder of the Company
(as defined in Section 422(b)(6) of the Internal Revenue Code of 1986, as
amended) at the time such optionee is granted an incentive stock option, the
purchase price per share of the shares of Common Stock shall be not less than
110% of said fair market value.

The 1996 Option Plan provides that, in the event of the dissolution,
liquidation or sale of the Company, any merger or reorganization of the Company,
or acquisition by any person or group of beneficial ownership of more than 50%
of the Company's then outstanding shares of capital stock, the 1996 Option Plan
and each outstanding option granted thereunder shall terminate. Upon the
happening of such event, each participant under the 1996 Option Plan who is not
tendered a substitute option by the entity surviving such event or who does not
accept any such substituted option, shall have the right to exercise, in whole
or in part, any vested and exercisable options which have not then expired.

As of June 30, 1998, options to purchase a total of 362,833 shares of Class
A Common Stock and 161,676 shares of Class B Common Stock have been granted
under the 1996 Option Plan. Such options have per share exercise prices ranging
from $3.62 to $12.07, or a weighted average per share exercise price of $5.01.

DIRECTOR PLAN. The Company's Director Plan became effective in April 1998
upon adoption by the Board of Directors and approval by the stockholders. The
Director Plan provides for the grant of options in the form of nonstatutory
stock options to the non-employee members of the Board of Directors of the
Company. A total of 348,000 shares of Class B Common Stock have been reserved
for issuance under the Director Plan.

The purchase price per share of the shares of Common Stock underlying each
option granted under the Director Plan shall be the closing sale price of such
shares on the date of grant if the Common Stock is listed on any established
stock exchange or national market system or the price established by the
committee administering the Director Plan, which shall not be less than 100% of
the fair market value of the Common Stock on the date of grant.

34
<PAGE>
The Director Plan provides that, in the event of the dissolution or
liquidation of the Company, the merger or sale of all or substantially all
assets of the Company requiring shareholder approval, or acquisition by any
person or group of beneficial ownership of the securities of the Company
representing 50% or more of the combined voting power of the Company's then
outstanding shares, any options outstanding under the Director Plan that are not
yet exercisable and vested shall become fully exercisable and vested.

As of June 30, 1998, options to purchase a total of 74,975 shares of Class B
Common Stock have been granted under the Director Plan. Such options have per
share exercise prices of $12.08. None of such options have been exercised.

KEY MAN LIFE INSURANCE

The Company, through Golden State Vintners, currently maintains a life
insurance policy in the amount of $10 million on the life of Mr. O'Neill. The
Company has agreed to assign a $2 million portion of this policy to Mr.
O'Neill's family trust.

EMPLOYMENT AGREEMENT

From April 27, 1995 until December 31, 1997, Mr. O'Neill served as President
and Chief Executive Officer of Golden State Vintners pursuant to the Old
Agreement, which provided him with an annual salary of at least $300,000,
subject to annual increases, and an annual bonus based on a sliding scale of
EBITDA (as defined in the Old Agreement). Effective as of January 1, 1998, the
Company and Mr. O'Neill entered into a new employment agreement (the "New
Employment Agreement"), which provides for Mr. O'Neill to serve as President and
Chief Executive Officer of the Company on the terms and subject to the
conditions set forth therein. Under the New Employment Agreement, Mr. O'Neill
will receive annual compensation of $350,000, a bonus to be paid in the
discretion of the Board and the reimbursement of certain expenses. The New
Employment Agreement also provides for the payment of severance to Mr. O'Neill
equal to two years of his base compensation and for the acceleration of any
unvested options then held by Mr. O'Neill if his employment is terminated for
certain reasons, including any termination of his employment within six months
of a "Change in Control". The New Employment Agreement defines a Change in
Control to include the sale by the Company of all or substantially all of its
capital stock or assets or the consummation of any transaction or series of
related transactions, including any merger, reorganization or recapitalization,
in which any person or group acquires beneficial ownership of more than 50% of
the outstanding capital stock of the Company. The term of the New Employment
Agreement expires June 30, 2001.

COMPENSATION OF DIRECTORS

Through fiscal year 1998, the Company paid those directors who were
directors at the beginning of the fiscal year, other than Mr. O'Neill, $12,500
per year, plus full reimbursement for certain out-of-pocket expenses incurred in
connection with attendance at board and committee meetings. For the Company's
current fiscal year, the Board has determined it appropriate to pay its
independent directors, Messrs. McDonald, Mullin and Hedrick, a director fee of
$12,500. In October 1996, an affiliate of Messrs. Brown, Binkley, Wolter and
Forrest entered into a management agreement with the Company, which calls for
the annual payment of $125,000 to such affiliate for management services
rendered to the Company. In April 1998, the Company adopted the Director Plan.
Under the Director Plan, in April 1998, options to purchase an aggregate of
59,982 shares of Class B Common Stock at an exercise price of $12.08 were
granted to all of the then-current members of the Board of Directors, other than
Mr. O'Neill. In May 1998, options to purchase 14,993 shares of Class B Common
Stock were granted to Mr. McDonald at an exercise price of $12.08. See "Certain
Relationships and Related Transactions".

35
<PAGE>
INDEMNIFICATION OF DIRECTORS AND OFFICERS

Under Section 145 of the Delaware General Corporation Law ("Delaware Law"),
the Company can indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act.
The Company's Certificate of Incorporation provides that the Company will
indemnify its directors, officers, employees and other agents to the fullest
extent permitted by law.

The Company has entered into indemnification agreements with each of its
directors and executive officers in addition to the indemnification provided for
in the Company's Certificate of Incorporation. These agreements, among other
things, indemnify the Company's directors and certain of its officers for
certain expenses (including attorneys' fees), judgments, fines and settlement
amounts incurred by such person in any action or proceeding, including but not
limited to any action by or in the right of the Company, on account of services
as a director or officer of the Company, or as a director or officer of any
other company or enterprise to which the person provides services at the request
of the Company. The Company has also purchased liability insurance covering its
directors and officers.

In addition, the Company's Certificate of Incorporation provides that the
Company's directors shall not be liable for monetary damages for breach of such
directors' fiduciary duty of care to the Company and its stockholders except for
liability for breach of the director's duty of loyalty to the Company or its
stockholders, for acts or omissions not in good faith or involving intentional
misconduct or knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware Law. This
provision in the Certificate of Incorporation does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as injunctive or
other forms of non-monetary relief will remain available under Delaware Law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal or state securities or environmental laws.

There is no pending litigation or proceeding involving a director, officer,
employee or other agent of the Company as to which indemnification is being
sought, nor is the Company aware of any pending or threatened litigation that
may result in claims for indemnification by any director, officer, employee or
other agent.

36
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The following table sets forth certain information regarding beneficial
ownership of the Company's Class A and Class B Common Stock as of July 21, 1998
(the date of the Company's initial public offering), by: (1) each person who is
known by the Company to beneficially own more than 5% of the Company's Class A
and Class B Common Stock, (2) each of the Company's directors, (3) each of the
Named Officers and (4) all directors and Named Officers of the Company, as a
group.

<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
----------------------------------------------------------------
PERCENTAGE OF
NUMBER OF PERCENT OF NUMBER OF PERCENT OF SHARES
CLASS A CLASS A CLASS B CLASS B BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNERS SHARES SHARES SHARES SHARES OWNED(1)
- ------------------------------------------------------ ---------- ----------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C>

SBIC Partners, L.P. ................................. 3,000,000 69.1% -- -- 31.6%
201 Main Street, Suite 2302
Fort Worth, TX 76102
Jeffrey B. O'Neill .................................. 906,771 20.9% 673,728(2) 13.1% 16.7%
500 Drake's Landing Road
Greenbrae, CA 94904
John Hancock Mutual Life
Insurance Company .................................. -- -- 658,595 12.8% 6.9%
John Hancock Place
200 Clarendon Street
Boston, MA 02117
Exeter (3) ........................................... 435,757 10.0% -- -- 4.6%
10 East 53rd Street
New York, NY 10022
Jeffrey J. Brown (4) ................................. 3,000,000 69.1% -- -- 31.6%
Nicholas B. Binkley (4) .............................. 3,000,000 69.1% -- -- 31.6%
Douglas R. Wolter (4) ................................ 3,000,000 69.1% -- -- 31.6%
Keith R. Fox (3) ..................................... 435,757 10.0% -- -- 4.6%
W. Scott Hedrick ..................................... -- -- -- -- --
Peter W. Mullin ...................................... -- -- 19,972 * *
John G. McDonald ..................................... -- -- -- -- --
Gregory J. Forrest (4) ............................... 3,000,000 69.1% -- -- 31.6%
Brian R. Thompson (5) ................................ -- -- 144,999 2.8% 1.5%
Lawrence E. Brink (6) ................................ -- -- 4,350 * *
Jeffrey L. Dye (6) ................................... -- -- 4,350 * *
Michael B. Drobnick (6) .............................. -- -- 4,350 * *
All Directors and Named Officers as a group (13
persons) (7) ....................................... 4,342,528 100% 851,749 16.6% 54.8%
</TABLE>

- ------------------------

* Represents beneficial ownership of less than 1% of the outstanding voting
power of all shares of Common Stock.

(1) Percent ownership is based on 9,479,261 shares of Common Stock outstanding,
and does not take into account the relative voting power of shares of Class
A Common Stock (ten votes per share) and Class B Common Stock (one vote per
share).

(2) Includes 24,381 shares of Class B Common Stock owned by Mr. O'Neill and
649,347 shares of Class B Common Stock issuable upon the exercise of stock
options exercisable within sixty days of July 21, 1998.

37
<PAGE>
(3) Represents 362,014 and 73,743 shares of Class A Common Stock held by EE
Partners and EV Lenders, respectively. Keith R. Fox, a director of the
Company, is an executive officer of Exeter Equity Advisors, Inc., which is
the general partner of Exeter Equity Advisors, L.P., the general partner of
EE Partners. Mr. Fox is also an executive officer of Exeter Venture
Advisors, Inc., which is the general partner of EV Lenders, and an executive
officer of Exeter Venture Management Corporation, which is an affiliate of
EV Partners and EV Lenders. Mr. Fox disclaims beneficial ownership of the
shares held by EV Partners and EV Lenders, except to the extent of his
pecuniary interest therein.

(4) Represents 3,000,000 shares of Class A Common Stock held by SBIC Partners.
Gregory J. Forrest and Nicholas B. Binkley, each a director of the Company,
and Jeffrey J. Brown, an officer and director of the Company, are each
executive officers, directors and shareholders of Venture Co. Messrs.
Forrest, Binkley and Brown collectively hold all of the outstanding limited
partnership interests in FBB. Mr. Wolter is a principal of Advisor Co., an
affiliate of each of SBIC Partners, FBB and Venture Co. Each of Messrs.
Forrest, Binkley, Brown and Wolter disclaims beneficial ownership of the
shares held by SBIC Partners, except to the extent of his pecuniary interest
therein, if any.

(5) Includes 29,617 shares of Class B Common Stock held by Mr. Thompson and
115,382 shares of Class B Common Stock issuable upon the exercise of stock
options exercisable within sixty days of July 21, 1998.

(6) Includes 4,350 shares of Class B Common Stock issuable upon the exercise of
stock options exercisable within sixty days of July 21, 1998.

(7) Includes shares held by SBIC Partners and Exeter, and 777,779 shares of
Class B Common Stock issuable under stock options exercisable within 60 days
of July 21, 1998.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

INCORPORATION OF THE COMPANY

In connection with the formation and initial capitalization of the Company
in April 1995, the Company issued an aggregate of 1,885,000 shares of its
previously outstanding Class A Common Stock (the "Old Class A Stock") and
3,770,000 shares of its previously outstanding Class B Common Stock (the "Old
Class B Stock"), in each case at $1.72 per share, for an aggregate purchase
price of $9.75 million. Certain of these shares of Old Class B Stock were issued
to the following holders of record of more than five percent of the outstanding
stock of the Company (each, a "5% Stockholder") associated with Jeffrey J.
Brown, an officer and director of the Company, and Gregory J. Forrest, Nicholas
B. Binkley and Douglas R. Wolter, directors of the Company, and to the following
5% Stockholders associated with Keith R. Fox, a director of the Company:

<TABLE>
<CAPTION>
SHARES OF OLD CLASS B
NAME STOCK
- ------------------------------------------------------------------ --------------------------
<S> <C>
SBIC Partners..................................................... 1,885,000
EE Partners....................................................... 1,566,000
EV Lenders........................................................ 319,000
</TABLE>

GOLDEN STATE VINTNERS PURCHASE

Pursuant to a Stock Purchase Agreement dated April 27, 1995 (the "Stock
Purchase Agreement"), the Company purchased all of the outstanding capital stock
of Golden State Vintners (the "Golden State Vintners Purchase") from certain
shareholders of Golden State Vintners. Pursuant to the terms of the Stock
Purchase Agreement, the Company paid the purchase price for the Golden State
Vintners Purchase by delivering $20.9 million in cash and 523,980 shares of 6%
Junior Exchangeable Preferred Stock of the Company in the aggregate face amount
of $2.6 million. Certain of the shares of Golden State Vintners were sold to the
Company by Mr. O'Neill and an affiliated entity.

38
<PAGE>
The execution of the Stock Purchase Agreement occurred substantially
contemporaneously with the closing of the refinancing of Golden State Vintners'
then-existing indebtedness. Pursuant to a Securities Purchase Agreement dated
April 21, 1995 (the "Hancock SPA"), the John Hancock Mutual Life Insurance
Company ("John Hancock") purchased for an aggregate consideration of $45 million
(1) senior secured first mortgage notes of Golden State Vintners with an
aggregate principal face amount of $35.0 million and (2) 100,000 shares of the
Company's 12% Senior Redeemable Exchangeable Preferred Stock ("Senior Preferred
Stock") and 1,200,829 shares of the Company's previously outstanding Class E
Common Stock for an aggregate consideration of $10.0 million. The Company
guaranteed the obligations of Golden State Vintners to John Hancock under the
Hancock SPA.

GRAPE GROUP TRANSACTION

In May 1995, the Company acquired the Lost Hills Vineyard, 1,750 acres of
wine grape vineyards located in Kern County, from the Grape Group, Inc. (the
"Grape Group") for a purchase price of approximately $4.6 million, payable via
the assumption of approximately $2.9 million of debt and the delivery of a
non-interest bearing promissory note in the principal amount of $1.7 million.
Mr. O'Neill owned 100% of the Grape Group at the time of the transaction. The
Company believes that the purchase of the Lost Hills Vineyard from the Grape
Group was negotiated at arms' length and that the Company paid a price equal to
the fair market value of such property.

SE VINEYARDS

The Company historically purchased grapes from SE Vineyards, a 300 acre
vineyard located in Kern County. Each of Messrs. Mullin and O'Neill owned 33.33%
of SE Vineyards until October 1996. For the Company's 1995, 1996 and 1997 fiscal
years, the Company purchased approximately $275,000, $400,000 and $1.4 million
of such grapes, respectively. The Company believes such grape purchases were at
competitive market prices negotiated at arms' length.

GSAC RECAPITALIZATION

In October 1996, the Company entered into a series of transactions to effect
the recapitalization of its capital structure (the "1996 Recapitalization").
Pursuant to a Securities Purchase Agreement dated as of August 22, 1996, the
Company acquired from certain stockholders 1,885,000 shares of Old Class A Stock
and 985,156 shares of Old Class B Stock, at a price of $2.50 per share, for an
aggregate purchase price of approximately $7.2 million. Of the entities selling
stock to the Company, the following 5% Stockholders are associated with Mr. Fox:

<TABLE>
<CAPTION>
NAME SHARES OF OLD CLASS B STOCK SOLD
- ---------------------------------------------------------- ----------------------------------
<S> <C>
EE Partners............................................... 818,438
EV Lenders................................................ 166,718
</TABLE>

As part of the 1996 Recapitalization, the Company redeemed 345,875 shares of
Junior Preferred Stock for an aggregate purchase price of approximately $1.7
million. Certain of these shares were held by Mr. O'Neill and by the following
entity associated with Mr. O'Neill and with a member of Mr. O'Neill's immediate
family:

<TABLE>
<CAPTION>
SHARES OF JUNIOR PREFERRED STOCK
NAME SOLD
- ---------------------------------------------------------- ----------------------------------
<S> <C>
Jeffrey B. O'Neill........................................ 42,793
Mid-State Horticultural Company........................... 70,892
</TABLE>

Pursuant to a Stock Purchase Agreement dated October 10, 1996, the Company
sold an aggregate of 2,776,170 shares of Old Class B Stock at $2.50 per share,
for an aggregate purchase price of approximately

39
<PAGE>
$6.9 million. These shares were sold to Mr. O'Neill and to the following 5%
Stockholder associated with Messrs. Forrest, Brown, Binkley and Wolter:

<TABLE>
<CAPTION>
NAME SHARES OF OLD CLASS B STOCK SOLD
- ---------------------------------------------------------- ----------------------------------
<S> <C>
Jeffrey B. O'Neill........................................ 599,171
SBIC Partners............................................. 2,176,998
</TABLE>

OTHER TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS

As compensation for certain investment banking services provided with
respect to the 1996 Recapitalization and certain related credit matters, the
Company paid approximately $400,000 in fees to Exeter Venture Management
Corporation ("EV Management"), which is an affiliate of a 5% Stockholder and
associated with Mr. Fox. The Company paid EV Management $375,000 in fees in
February 1997 as consideration for certain investment banking services.

In October 1996, the Company agreed to pay an annual fee of $125,000 to
Forrest Binkley & Brown Partners L.P., an affiliate of SBIC Partners, a 5%
Stockholder, and of Messrs. Forrest, Brown, Binkley and Wolter, as compensation
for management services to be provided with respect to the Company's operations.

In December 1996, the Compensation Committee of the Board of Directors
granted to Mr. O'Neill options to purchase an aggregate of 670,433 shares of the
Company's Old Class B Stock. The options are exercisable for up to 167,608
shares at a price of $3.62 per share up to an additional 167,608 shares at a
price of $4.31 per share, up to an additional 167,608 shares at a price of $5.17
per share, and up to an additional 167,609 shares at a price of $6.03 per share.
The options vest in four equal annual installments commencing October 10, 1997,
though vesting on certain of these options has been accelerated, as further
described below.

In connection with the Golden State Vintners Acquisition, the Board of
Directors granted to Mr. O'Neill stock appreciation rights with respect to
145,000 shares of Old Class B Stock at a base price of $.003 per stock
appreciation right and 504,347 shares of Old Class B Stock, at a base price of
$1.72 per stock appreciation right. In November 1995, the Board of Directors
granted Mr. Thompson stock appreciation rights with respect to 145,000 shares of
Old Class B Stock at a base price of $2.59 per stock appreciation right.
Effective as of December 31, 1997, the Company and Messrs. O'Neill and Thompson
agreed to terminate such stock appreciation rights in exchange for certain
compensation and the grant of non-qualified stock options. Pursuant to such
agreement, Messrs. O'Neill and Thompson were entitled to receive $6.97 million
and $1.38 million, respectively. In connection with the issuance of the
Replacement Incentives, Messrs. O'Neill and Thompson received their respective
portions of the Executive Cash Payments, as well as their respective Executive
Promissory Notes. Messrs. O'Neill and Thompson also received options to purchase
649,347 and 145,000 shares of Class B Common Stock, respectively. The stock
options were fully-vested on the date of grant and are exercisable at $12.07 per
share of Common Stock. Further, in connection with the issuance of the
Replacement Incentives, (1) the Company accelerated the vesting of 139,991
options to purchase shares of Class A Common Stock held by Mr. O'Neill, (2) Mr.
O'Neill used his Executive Cash Payment to immediately exercise options with
respect to an aggregate of 307,600 shares of Class A Common Stock and to pay
certain income tax amounts arising from such exercises and (3) Mr. Thompson used
his Executive Cash Payment to exercise options with respect 29,617 shares of
Class B Common Stock.

In April 1998, SBIC Partners and Exeter agreed to certain co-sale rights and
rights of first refusal and Mr. O'Neill agreed not to seek to participate in the
next registered sale of Class B Common Stock by SBIC Partners and Exeter, if
any.

40
<PAGE>
In April 1998, in connection with its participation in the Company's initial
public offering, John Hancock agreed to waive all prepayment penalties due with
respect to the Company's repurchase of the shares of Senior Preferred Stock held
by John Hancock.

The Company's directors, other than Messrs. O'Neill and Forrest, have been
granted nonqualified stock options under the Director Plan. See
"Management--Stock Option Plans--Director Plan".

The Company has entered into indemnification agreements with each of its
directors and executive officers. The agreements require the Company to
indemnify such individuals for certain liabilities to which they may be subject
as a result of their affiliation with the Company, to the fullest extent
permitted by Delaware Law.

The Company believes that the foregoing transactions were in its best
interests and on terms no less favorable to the Company than could be obtained
from unaffiliated third parties.

41
<PAGE>
PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) Documents filed as part of this Report:

(1) Index to Consolidated Financial Statements:

<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report.............................................................. 45

Consolidated Balance Sheets as of June 30, 1997 and 1998.................................. 46

Consolidated Statements of Operations for the Three Years in the Period Ended June 30,
1998.................................................................................... 47

Consolidated Statements of Stockholders' Equity for the Three Years in the Period Ended
June 30, 1998........................................................................... 48

Consolidated Statements of Cash Flows for the Three Years in the Period Ended
June 30, 1998........................................................................... 49

Notes to Consolidated Financial Statements................................................ 50
</TABLE>

(2) Index to Financial Statement Schedules:
Independent Auditors' Report on Supplementary Financial Schedule
Schedule II--Valuation and Qualifying Accounts

(3)(a) Exhibits:

(b) Reports on Form 8-K:

None

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -----------------------------------------------------------------------------------
<C> <S>
2.1+ Stock Purchase Agreement dated as of April 27, 1995 by and among the
Registrant, Golden State Vintners and certain shareholders of Golden State
Vintners.

2.2+ Preferred Stock Exchange Agreement dated as of April 27, 1995 among the
Registrant and the parties signatory thereto.

2.3+ Agreement for Purchase and Sale of Reedley Facility dated March 15, 1995
between the Registrant and Heublein, Inc.

2.4+ Vineyard Purchase Agreement dated May 16, 1995 between the Registrant and
The Grape Group, Inc.

2.5+ Asset Purchase Agreement of Soledad Facility dated September 4, 1996
between the Registrant and Vintners International Company, Inc., as
amended.

2.6+ Common Stock Subscription Agreement dated as of April 27, 1995 among the
Registrant and each of the signatories thereto.

2.7+ Purchase Agreement dated as of March 10, 1997 among the Registrant,
William D. Reid and Johnye B. Reid.

3.1+ Intentionally omitted.

3.2+ Amended and Restated Certificate of Incorporation of the Registrant.

3.3+ Bylaws of the Registrant.

3.4+ Certificate of Designations of the 12% Senior Redeemable Preferred Stock
of the Registrant, as amended and currently in effect.
</TABLE>

42
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -----------------------------------------------------------------------------------
<C> <S>
3.5+ Certificate of Powers, Designations, Preferences and Relative,
Participating, Optional and Other Special Rights of Junior Exchangeable
Preferred Stock and Qualifications, Limitations and Restrictions Thereof
of the Registrant, as amended and currently in effect.

4.1+ Form of Class B Common Stock Certificate of the Registrant.

4.2+ Registration Rights Agreement dated as of April 27, 1995 by and among the
Registrant and certain holders of the Registrant's Common Stock.

4.3+ Registration Rights Agreement dated October 10, 1996 by and among the
Registrant and certain holders of the Registrant's Common Stock.

4.4+ Amended and Restated Stockholders Agreement dated as of October 10, 1996
by and among the Registrant and certain holders of the Registrant's
capital stock.

10.1+ 1996 Stock Option Plan ("1996 Stock Plan") of the Registrant.

10.2+ Form of Incentive Stock Option Agreement under the 1996 Stock Plan.

10.3+ Form of Nonqualified Stock Option Agreement under the 1996 Stock Plan.

10.4+ Form of Indemnity Agreement between the Registrant and its officers and
directors.

10.5+ Employment Agreement dated as of April 27, 1995 between the Registrant and
Jeffrey B. O'Neill.

10.6+ Securities Purchase Agreement dated April 21, 1995 among the Registrant,
Golden State Vintners and John Hancock Mutual Life Insurance Company
("John Hancock"), as amended.

10.7+ First Mortgage Note Due April 1, 2005 issued by Golden State Vintners in
favor of John Hancock in the principal amount of $35,000,000.00.

10.8+ Continuing Corporate Guaranty dated April 27, 1995 entered into by the
Registrant in favor of John Hancock.

10.9+ Security Agreement dated as of April 21, 1995 entered into by Golden State
Vintners in favor of John Hancock.

10.10+ Intercreditor Agreement dated as of April 21, 1995 among Golden State
Vintners, John Hancock and Sanwa Bank California ("Sanwa"), as amended.

10.11+ Demand Promissory Note dated April 27, 1995 issued by the Registrant in
favor of Golden State Vintners in the principal amount of $1,300,000.00.

10.12 Intentionally omitted.

10.13+ Accounts Receivable Credit Agreement dated as of April 21, 1998 between
Sanwa and the Registrant.

10.14+ Continuing Guaranty dated as of April 21, 1998 between the Registrant and
Sanwa.

10.15+ Term Loan Agreement dated as of May 1, 1995 between the Registrant and
Sanwa, as amended.

10.16+ Term Loan Agreement dated as of December 18, 1996 between the Registrant
and Sanwa, as amended.

10.17+ Sublease and Consent among the Registrant, Richard C. McKenzie and 100 Sir
Francis Drake Boulevard, Inc.

10.18+ Promissory Note dated May 5, 1995 between the Registrant and Heublein,
Inc.

10.19+ Securities Purchase Agreement dated as of August 22, 1996 among the
Registrant and the parties signatory thereto.
</TABLE>

43
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- -----------------------------------------------------------------------------------
<C> <S>
10.20+ Stock Purchase Agreement dated as of October 10, 1996 among the
Registrant, SBIC Partners, L.P. and Jeffrey B. O'Neill, together with
Supplemental Signature Page thereto dated November 26, 1996 executed by
R&M Partners/GSV, G.P., Victor Palmieri and Peter Mullin.

10.21+ Letter Agreement dated October 9, 1996 between the Registrant and Exeter
Venture Management Corporation.

10.22+ Management Agreement dated May 31, 1997 between the Registrant and Forrest
Binkley & Brown Partners L.P.

10.23+ 1998 Director Stock Option Plan (the "Director Plan").

10.24+ Stock Option Agreement dated as of December 31, 1997 between the
Registrant and Jeffrey B. O'Neill.

10.25+ Stock Option Agreement dated as of December 31, 1997 between the
Registrant and Brian R. Thompson.

10.26+ Employment Agreement dated as of January 1, 1998 between the Registrant
and Jeffrey B. O'Neil.

10.27+ Promissory Note issued by the Registrant in favor of Cottonwood Vineyard
in the principal amount of $452,791.17.

10.28+ Promissory Note issued by the Registrant in favor of Vintners
International Company, Inc.

10.29+ Form of Stock Option Agreement under the Director Plan.

10.30+ Promissory Note dated September 30, 1986 between the Registrant, as
assignee of original maker, The Grape Group and The Prudential Insurance
Company of America.

10.31+ Loan Note dated January 17, 1990 between the Registrant, as assignee of
original makers, William E. Reid and Johnye B. Reid, and Sumitomo Bank of
California.

10.32+ Promissory Note dated June 15, 1995 between the Registrant, as assignee of
original makers, William E. Reid and Johnye B. Reid, and Sumitomo Bank of
California.

10.33+ Promissory Note dated January 1, 1998 between the Registrant and Jeffrey
B. O'Neill.

10.34+ Promissory Note dated January 1, 1998 between the Registrant and Brian R.
Thompson.

21.1+ Subsidiaries of the Registrant.

24.1 Power of Attorney (included on page 44).

27.1 Financial Data Schedule.
</TABLE>

- ------------------------

+ Filed as an exhibit to the Company's Registration Statement on Form S-1
(Registration No. 333-51443) and incorporated by reference herein.

44
<PAGE>
INDEPENDENT AUDITORS' REPORT

To the Stockholders and Board of Directors
of Golden State Vintners, Inc.

We have audited the accompanying consolidated balance sheets of Golden State
Vintners, Inc. and subsidiaries (the "Company") as of June 30, 1997 and 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended June 30, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at June 30, 1997
and 1998, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles.

DELOITTE & TOUCHE LLP

Fresno, California
August 21, 1998
(September 25, 1998 as to the last sentence of the third paragraph of Note 5)

45
<PAGE>
GOLDEN STATE VINTNERS, INC.

CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents............................................................ $ 1,218,525 $ 39,828
Trade receivables............................................................... 5,640,252 7,585,639
Inventories..................................................................... 23,424,008 30,684,769
Refundable income taxes......................................................... -- 4,657,987
Deferred income taxes........................................................... 219,154 566,183
Refundable deposits and prepaid expenses........................................ 869,996 1,359,435
------------- -------------
Total current assets.......................................................... 31,371,935 44,893,841
PROPERTY, PLANT AND EQUIPMENT -- Net................................................ 70,193,214 77,640,568
NOTE RECEIVABLE..................................................................... -- 1,722,322
DEFERRED FINANCING COSTS AND OTHER ASSETS........................................... 546,186 462,249
------------- -------------
TOTAL ASSETS........................................................................ $ 102,111,335 $ 124,718,980
------------- -------------
------------- -------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit............................................................... $ 12,800,000 $ 18,200,000
Cash overdraft.................................................................... -- 801,495
Accounts payable.................................................................. 2,526,870 3,919,595
Payable to growers................................................................ 1,063,049 923,686
Payroll and related liabilities................................................... 1,391,004 6,352,262
Other accrued liabilities......................................................... 282,869 1,403,870
Income taxes payable.............................................................. 547,612 --
Current portion of long-term debt................................................. 2,773,984 3,520,049
Accrued interest.................................................................. 600,486 1,127,022
------------- -------------
Total current liabilities....................................................... 21,985,874 36,247,979
LONG-TERM DEBT...................................................................... 49,780,591 51,917,664
DEFERRED INCOME TAXES............................................................... 6,968,737 9,467,014
DEFERRED COMPENSATION............................................................... 1,989,112 --
REDEEMABLE PREFERRED STOCK.......................................................... 8,813,415 8,950,501
COMMITMENTS AND CONTINGENCIES (Notes 10 and 11).....................................
STOCKHOLDERS' EQUITY:...............................................................
Common stock:
Class B common stock; 5,561,012 issued and outstanding at June 30, 1997 and
5,868,612 at June 30, 1998.................................................... 19,176 20,237
Class E common stock; 1,200,829 shares issued and outstanding................... 4,141 4,141
Class K common stock; 99,860 shares issued and outstanding at June 30, 1997 and
129,477 at June 30, 1998...................................................... 344 446
Additional paid-in capital........................................................ 8,844,136 11,492,808
Retained earnings................................................................. 3,705,809 6,618,190
------------- -------------
Total stockholders' equity.................................................... 12,573,606 18,135,822
------------- -------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY.............. $ 102,111,335 $ 124,718,980
------------- -------------
------------- -------------
</TABLE>

See notes to consolidated financial statements.

46
<PAGE>
GOLDEN STATE VINTNERS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1996 1997 1998
------------- ------------- --------------
<S> <C> <C> <C>
REVENUES, net:
Bulk wine........................................................ $ 33,816,249 $ 50,227,982 $ 58,928,186
Wine grapes...................................................... 15,183,028 18,585,126 22,817,043
Case goods....................................................... 11,335,407 15,829,183 19,941,205
Brandy and spirits............................................... 11,420,661 11,142,534 10,307,735
------------- ------------- --------------
Total revenues................................................. 71,755,345 95,784,825 111,994,169
COST OF SALES...................................................... 58,468,362 71,661,816 83,684,275
------------- ------------- --------------
GROSS PROFIT....................................................... 13,286,983 24,123,009 28,309,894
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....................... 5,042,425 7,408,179 14,450,949
------------- ------------- --------------
INCOME FROM OPERATIONS............................................. 8,244,558 16,714,830 13,858,945
INTEREST EXPENSE................................................... (5,343,637) (5,879,945) (6,867,209)
OTHER EXPENSE, net................................................. (394,370) (676,701) (356,113)
------------- ------------- --------------
INCOME BEFORE INCOME TAXES......................................... 2,506,551 10,158,184 6,635,623
INCOME TAXES....................................................... 583,000 3,988,000 2,452,000
------------- ------------- --------------
NET INCOME......................................................... 1,923,551 6,170,184 4,183,623
REDEEMABLE PREFERRED STOCK DIVIDENDS............................... (1,289,962) (1,314,218) (1,271,242)
REDEMPTION OF JUNIOR PREFERRED STOCK............................... -- (404,682) --
------------- ------------- --------------
INCOME AVAILABLE TO COMMON STOCKHOLDERS............................ $ 633,589 $ 4,451,284 $ 2,912,381
------------- ------------- --------------
EARNINGS PER SHARE:
BASIC............................................................ $ .09 $ .65 $ 0.42
------------- ------------- --------------
------------- ------------- --------------
DILUTED.......................................................... $ .09 $ .65 $ 0.41
------------- ------------- --------------
------------- ------------- --------------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC............................................................ 6,855,829 6,860,237 6,917,904
------------- ------------- --------------
DILUTED.......................................................... 6,855,829 6,860,237 7,325,324
------------- ------------- --------------
</TABLE>

See notes to consolidated financial statements.

47
<PAGE>
GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
--------------------------------------------- PAID-IN EARNINGS
CLASS A CLASS B CLASS E CLASS K CAPITAL (DEFICIT) TOTAL
--------- --------- --------- ------------ ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JUNE 30,
1995................. $ 6,500 $ 13,000 $ 4,141 $ -- $ 11,796,754 $ (1,783,745) $ 10,036,650
Dividends paid on
redeemable
preferred stock... -- -- -- -- -- (1,289,963) (1,289,963)
Net income.......... -- -- -- -- -- 1,923,551 1,923,551
--------- --------- --------- ------------ ------------- ------------- -------------
BALANCE, JUNE 30,
1996................. 6,500 13,000 4,141 -- 11,796,754 (1,150,157) 10,670,238
Repurchase of common
stock............. (6,500) (3,397) -- -- (9,738,013) -- (9,747,910)
Issuance of common
stock............. -- 9,573 -- 344 7,190,077 -- 7,199,994
Redemption of Junior
Preferred Stock... -- -- -- -- (404,682) -- (404,682)
Dividends paid on
redeemable
preferred stock... -- -- -- -- -- (1,314,218) (1,314,218)
Net income.......... -- -- -- -- -- 6,170,184 6,170,184
--------- --------- --------- ------------ ------------- ------------- -------------
BALANCE, JUNE 30,
1997................. -- 19,176 4,141 344 8,844,136 3,705,809 12,573,606
Stock option
exercise.......... -- 1,061 -- 102 1,860,140 -- 1,861,303
Tax benefit of stock
option exercise... -- -- -- -- 788,532 -- 788,532
Dividends paid on
redeemable
preferred stock... -- -- -- -- -- (1,271,242) (1,271,242)
Net income.......... -- -- -- -- -- 4,183,623 4,183,623
--------- --------- --------- ------------ ------------- ------------- -------------
BALANCE, JUNE 30,
1998................. $ -- $ 20,237 $ 4,141 $ 446 $ 11,492,808 $ 6,618,190 $ 18,135,822
--------- --------- --------- ------------ ------------- ------------- -------------
--------- --------- --------- ------------ ------------- ------------- -------------
</TABLE>

See notes to consolidated financial statements.

48
<PAGE>
GOLDEN STATE VINTNERS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................. $ 1,923,551 $ 6,170,184 $ 4,183,623
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 3,319,119 4,206,932 4,144,814
Provision for doubtful accounts...................................... 166,000 43,000 90,000
Loss on disposal of assets........................................... 583,885 25,629 45,463
Deferred income taxes................................................ 172,476 10,319 2,151,248
Changes in operating assets and liabilities, net of effects of
dissolution of GSVI Partnership:
Trade receivables.................................................. (4,571,082) 1,803,692 (3,042,528)
Inventories........................................................ (3,892,132) (5,198,884) (8,436,654)
Prepaid expenses................................................... (150,065) (216,586) (1,210,992)
Accounts payable................................................... 2,868,362 (3,039,970) 2,053,866
Payable to growers................................................. 693,674 126,942 (139,363)
Accrued interest................................................... 204,232 (32,162) 526,536
Payroll and related liabilities.................................... 519,755 632,724 4,961,258
Deferred compensation.............................................. 650,606 1,338,506 (1,989,112)
Other accrued liabilities.......................................... 185,632 (1,769) 1,474,228
Income taxes payable............................................... -- 547,612 (4,417,067)
----------- ----------- -----------
Net cash provided by operating activities.......................... 2,674,013 6,416,169 395,320
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................. (3,535,887) (4,777,797) (5,537,312)
Partnership dissolution................................................ -- -- (97,576)
Refund (payment) of deposits........................................... (117,000) 727,000 142,000
----------- ----------- -----------
Net cash used in investing activities................................ (3,652,887) (4,050,797) (5,492,888)
----------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings on line of credit........................................... 25,102,910 24,708,097 61,800,000
Payments on line of credit............................................. (19,602,910) (20,908,097) (56,400,000)
Cash overdraft increase (decrease)..................................... (410,557) -- 801,495
Borrowings on long-term debt........................................... -- 2,568,922 --
Payments on long-term debt............................................. (1,765,407) (3,022,213) (2,862,685)
Payment of financing costs............................................. (40,284) (114,208) (10,000)
Proceeds from stock option exercises................................... -- -- 1,861,303
Payment of dividends on redeemable preferred stock..................... (1,289,963) (1,314,218) (1,271,242)
Issuance of capital stock.............................................. -- 7,199,994 --
Repurchase of common stock............................................. -- (9,747,910) --
Redemption of preferred stock.......................................... -- (1,729,375) --
----------- ----------- -----------
Net cash provided by (used in) financing activities.................. 1,993,789 (2,359,008) 3,918,871
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 1,014,915 6,364 (1,178,697)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD................................ 197,246 1,212,161 1,218,525
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD...................................... $ 1,212,161 $ 1,218,525 $ 39,828
----------- ----------- -----------
----------- ----------- -----------
</TABLE>

See notes to consolidated financial statements.

49
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND OPERATIONS

Golden State Vintners, Inc. (the "Company"), formerly Golden State
Acquisition Corp., a Delaware corporation, was formed on April 26, 1995 for the
purpose of acquiring and holding for investment all of the outstanding capital
stock of Golden State Vintners ("GSV"), a California corporation. Such
acquisition occurred on April 27, 1995.

The Company processes and bottles wine, brandy and juice for sale, primarily
in bulk, to other wineries and processors located principally in California. The
Company experiences seasonal fluctuations in its revenues. Due to the inherent
seasonality of its grape harvesting and crushing operations, the Company
generally reports its highest revenues and net income in its first and second
fiscal quarters.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the Company, its wholly owned
subsidiary, GSV, and as of June 30, 1997 an 80% owned partnership, GSV
International Trading Company (GSVI). All significant intercompany transactions
and accounts have been eliminated. During June 1998, the Company dissolved its
partnership interest and received a note for $1,722,322 in exchange for its
investment in GSVI, cash advances and related interest. The note requires
monthly interest payments from 11% to 15% until June 30, 2001, at which time
principal is due in full. The note is secured by tangible and personal property.

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of certain financial instruments, including cash,
receivables, accounts payable, and other accrued liabilities, approximate the
amounts recorded in the balance sheet because of the relatively short-term
maturities of these financial instruments. The fair value of bank, insurance
company, note receivable and other long-term financing at June 30, 1998
approximate the amounts recorded in the balance sheet based on information
available to the Company with respect to current interest rates and terms for
similar financial instruments. It is not practicable to estimate the fair value
of the redeemable preferred stock because it is not traded in the open market
and hence its value is not readily determinable.

CASH EQUIVALENTS

For purposes of reporting cash flows, the Company considers cash equivalents
to include all short-term investments with an original maturity of three months
or less.

TRADE RECEIVABLES

Substantially all accounts receivable are due from major wineries and wine
distributors located principally in California. The Company performs periodic
credit evaluations of its customers' financial condition and generally does not
require collateral for its sales. Trade and other receivables at June 30,

50
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
1997 and 1998 are net of an allowance for doubtful accounts of approximately
$100,000 and $176,000, respectively.

INVENTORIES

The Company changed its method of costing wine inventories effective July 1,
1995 from the first-in, first-out ("FIFO") method, to the last-in, first-out
("LIFO") method. The Company also changed to the LIFO method for brandy
inventory effective July 1, 1996. Management believes that the LIFO method
matches current costs with current revenues and more clearly reflects the
Company's results of operations. Inventories at June 30, 1997 and 1998 would
have been higher by $1,694,299 (including $519,997 for brandy inventories) and
$1,928,275 (including $866,774 for brandy inventories), respectively, had the
Company used FIFO cost rather than LIFO cost for valuation of its inventories.
The cumulative effect of these changes to the LIFO method on the operating
results as of the beginning of 1996 and 1997 and the pro forma effects on the
operating results of prior years have not been presented as the effects are not
readily determinable. Juice is stated at the lower of average cost or net
realizable value. Inventories of supplies are stated at the lower of FIFO cost
or market. Costs associated with the current year's unharvested grape crop are
deferred and recognized in the subsequent year when the grapes are harvested.
Wine inventories are classified as current assets in accordance with recognized
trade practice although some products will not be sold in the following year.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the estimated
lives of the related assets, as follows:

<TABLE>
<S> <C>
Land Improvements.................................... 30 years
Vineyards............................................ 20 years
Buildings............................................ 7 to 48 years
10 to 30
Cooperage............................................ years
Equipment............................................ 7 to 20 years
</TABLE>

Costs incurred in developing vineyards, including related interest costs,
are capitalized until the vineyards become commercially productive. Maintenance
and repairs are charged to operating costs as incurred. The cost of betterments
is capitalized. Gains or losses on the disposition of assets are included in
income. Amortization of assets held under capital leases is included in
depreciation expense.

In the year ended June 30, 1997, the Company adopted Financial Accounting
Standard No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." The standard requires impairment losses to
be recorded on long-lived assets and certain intangible assets when the
undiscounted cash flows estimated to be generated by those assets are less than
the assets' carrying amount. Adoption of this standard had no impact on the
Company's financial statements.

DEFERRED FINANCING COSTS

Financing costs incurred to obtain new financing are deferred and amortized
over the term of the related loan. At June 30, 1997 and 1998, such costs were
$546,186 and $454,249, respectively, which were net of accumulated amortization
of $316,138 and $408,075, respectively.

51
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION

Sales of bulk wine, juice and brandy are recognized at the time the product
specifications of the purchase contract are met and the product has been
accepted by the buyer, title has passed to the buyer, and there is no right of
return of the product. In certain cases the contract requirements may specify
that the Company store such product after it has been sold and may require the
buyer to pay a storage fee. Sales of wine grapes and cased goods are recognized
at the time of delivery to the customer. Wine processing and storage fees are
recognized as those services are provided. At June 30, 1997 and 1998 revenues
relating to product owned by others but held by the Company were approximately
$27,646,000 and $38,210,000, respectively.

MAJOR CUSTOMERS

Wine grape sales are primarily to one customer that accounted for
approximately 15% and 17% of revenues in the years ended June 30, 1997 and 1998,
respectively. A significant portion of the Company's wine grape sales contracts
with this customer expires in 1998 such that revenues from sales of wine grapes
to such customer after 1998 will not be significant. The Company plans to use
the remaining wine grape tonnage for the production of bulk wine or cased goods.

The Company's brandy sales are primarily to one customer. Such sales,
together with bulk wine and case goods sales to such customer, accounted for
approximately 16% and 13% of revenues in the years ended June 30, 1997 and 1998,
respectively.

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes ("FAS 109"),
and provides deferred income taxes for the differences between the tax bases of
assets and liabilities and their related financial statement amounts using
current income tax rates.

STOCK-BASED COMPENSATION

The Company accounts for stock-based awards using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"), and recognizes compensation expense for certain
stock-based awards granted to employees as required by APB 25. Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"), became effective in fiscal year 1997 and requires
disclosure of certain pro forma information as if the Company adopted the fair
value method of accounting for stock-based compensation prescribed by FAS 123
(see Note 8).

EARNINGS (LOSS) PER SHARE

In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128").
This Statement simplifies the standards for computing earnings per share ("EPS")
and makes them comparable to international EPS standards. FAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS. In addition,
entities with complex capital structures are required to provide disclosure of
diluted EPS. Basic earnings per share is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share is computed by
dividing income available to common stockholders adjusted for the effects of
preferred stock dividends, interest on

52
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
convertible debt, and other changes in income or loss resulting from the
presumed conversion of potential common shares, if any, by the weighted average
common shares outstanding during the period plus potential common shares
outstanding. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then shared
in the earnings of the Company.

Basic and fully diluted earnings per share ("EPS") are determined as
follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------------
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Numerator:
Net income (loss).................................................. $ 1,923,551 $ 6,170,184 $ 4,183,623
Less: Redeemable preferred stock dividends......................... (1,289,962) (1,314,218) (1,271,242)
Redemption of Junior Preferred Stock.......................... -- (404,682) --
------------- ------------- -------------
Income (loss) available to common stockholders..................... $ 633,589 $ 4,451,284 $ 2,912,381
------------- ------------- -------------
------------- ------------- -------------
Denominator:
Weighted average common shares..................................... 6,855,829 6,860,237 6,917,904
------------- ------------- -------------
------------- ------------- -------------
Basic EPS............................................................ $ .09 $ .65 $ .42
------------- ------------- -------------
------------- ------------- -------------
DILUTED EPS COMPUTATION
Numerator:
Income available to common stockholders............................ $ 633,589 $ 4,451,284 $ 2,912,381
Add: Junior Preferred Stock dividends.............................. -- -- 71,242
------------- ------------- -------------
Income available to common stockholders and assumed conversions.... $ 633,589 $ 4,451,284 $ 2,983,623
------------- ------------- -------------
------------- ------------- -------------
Denominator:
Weighted average common shares outstanding......................... 6,855,829 6,860,237 6,917,904
Junior Preferred Stock............................................. -- -- 130,343
Stock options...................................................... -- -- 277,077
------------- ------------- -------------
Adjusted weighted average common shares............................ 6,855,829 6,860,237 7,325,324
------------- ------------- -------------
------------- ------------- -------------
Diluted EPS.......................................................... $ .09 $ .65 $ .41
------------- ------------- -------------
------------- ------------- -------------
</TABLE>

Options to purchase 800,933 and 860,007 shares of common stock at various
prices per share were outstanding at June 30, 1997 and 1998, respectively, but
were not included in diluted EPS computations because the exercise prices were
greater than the estimated fair values of the common shares for the period then
ended.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1997, the Financial Accounting Standards Board (the "Board') adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," which requires that an enterprise report, by major components and as a
single total, the change in its net assets during the period from nonowner
sources. In June 1997, the Board also adopted Statement of Financial Accounting
Standards No. 131, "Disclosures About Segments of an Enterprise or Related
Information," which

53
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. Adoption of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows. These statements are effective for the
Company's fiscal year beginning July 1, 1998.

RECLASSIFICATIONS

Certain prior year amounts have been reclassified to conform to the
presentations adopted for 1998.

3. INVENTORIES

Inventories consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Bulk wine...................................................... $ 12,033,151 $ 15,730,294
Cased and bottled wine......................................... 964,418 3,822,811
Brandy......................................................... 1,198,129 2,428,910
Juice, supplies and other...................................... 2,849,394 1,174,283
Unharvested crop costs......................................... 6,378,916 7,528,471
------------- -------------
Total........................................................ $ 23,424,008 $ 30,684,769
------------- -------------
------------- -------------
</TABLE>

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Land and improvements.......................................... $ 11,657,660 $ 12,381,200
Vineyards...................................................... 26,167,912 26,442,289
Buildings...................................................... 10,008,507 11,097,317
Cooperage...................................................... 14,188,452 14,857,968
Equipment...................................................... 11,840,733 15,125,231
Construction in progress....................................... 3,778,531 9,355,832
------------- -------------
Total........................................................ 77,641,795 89,259,837
Less accumulated depreciation and amortization................. 7,448,581 11,619,269
------------- -------------
Property, plant and equipment--net............................. $ 70,193,214 $ 77,640,568
------------- -------------
------------- -------------
</TABLE>

In December 1996, the Company purchased a wine processing facility,
including land, buildings, improvements, equipment and related personal
property, located near Soledad, California, for total consideration of
approximately $4,500,000. The Company financed approximately $3,800,000 and
$500,000 in two new debt agreements with a bank and the previous owner,
respectively.

In May 1997, the Company purchased a wine warehouse located near the
Company's Napa processing facility. The purchase price approximated $2,200,000
which included land, building, improvements and personal property. In connection
with this acquisition, GSV assumed two existing notes of $1,994,000 and $62,000.

54
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. BANK LINE OF CREDIT AND LONG-TERM DEBT

The Company has a revolving bank line of credit which provides for
borrowings of up to $22,500,000 with variable interest based on interest rate
options elected by the Company (7.46% and 7.47% at June 30, 1997 and 1998,
respectively). Borrowings on the line were $12,800,000 and $18,200,000 at June
30, 1997 and 1998, respectively. Unused availability under the line of credit
was $4,300,000 at June 30, 1998. The line of credit expires in March 1999.

Long-term debt is as follows:

<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Insurance company Senior Secured First Mortgage Notes,
principal and interest (9.69% through April 2000 and at
2.75% above the short-term U.S. Treasury Note rate
thereafter) payable $370,000 monthly, balance of
$18,845,000 due April 1, 2005.................................................... $ 33,020,446 $ 31,729,780
Bank term loan at variable market interest rate options elected
by the Company (7.88% at June 30, 1998), interest payable
monthly, annual principal payments of $325,000 in 1996 and
1997 and $413,000 thereafter, balance of $2,983,000
due on March 5, 2005............................................................. 5,875,000 5,462,000
Bank term loan at variable interest rate options elected
by the Company (7.88% at June 30, 1998), interest payable
monthly, annual principal payments of $560,000, balance
of $1,680,000 due on March 5, 2005............................................... 5,600,000 5,040,000
Insurance company note payable, interest at 11.6% payable
annually, annual principal payments of $200,000, balance of
$1,724,000 due on October 1, 2002................................................ 2,724,156 2,524,156
Bank term loan, interest payable monthly at 8.19%, principal
and interest payable $19,790 monthly, balance of $1,926,000
due January 15, 2000............................................................. 1,992,521 1,960,119
Unsecured loan due to related party, non-interest bearing,
discounted (at 10%) to present value, payable based on
excess cash flows (as defined)................................................... 828,750 850,568
Note payable, interest at 10%, payable semi-annually, principal
due May 5, 2000.................................................................. 500,000 500,000
Note payable, interest at 8% payable annually, principal due
December 20, 1998................................................................ 500,000 500,000
Capital lease obligations and other loans, interest principally at 8%.............. 1,513,702 6,871,090
------------- -------------
Total............................................................................ 52,554,575 55,437,713
Less current portion............................................................... (2,773,984) (3,520,049)
------------- -------------
Long-term portion.................................................................. $ 49,780,591 $ 51,917,664
------------- -------------
------------- -------------
</TABLE>

55
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. BANK LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
Substantially all of the Company's assets are pledged as collateral for
revolving bank loans and long-term debt. The insurance company loan agreement,
as amended, and bank credit agreements include various financial covenants
which, among other things, require that the Company maintain certain specified
financial ratios and restrict the amount of capital expenditures, additional
indebtedness and certain investments. Further, dividends may not be declared and
paid without prior approval. The Company was not in compliance with the
additional indebtedness and the capital expenditures limitations of its bank
credit agreements as of June 30, 1998, but a waiver until June 30, 1999 was
subsequently obtained on September 25, 1998.

During 1998, the Company entered into a master leasing agreement with a bank
to finance the purchase of cooperage and processing equipment. The lease is
collateralized by the purchased property and will ultimately require monthly
principal and interest payments. As of June 30, 1998, the amount of purchases
financed totaled $4,442,217 although the cooperage project was still in
progress. The leasing agreement allows the Company to finance up to $11 million,
and the purchases are expected to be completed during 1999, at which time the
lease payments and terms will be finalized. Management estimates its fiscal 1999
lease payments will be approximately $1.1 million.

Under the terms of the insurance company Securities Purchase Agreement (the
"Agreement") dated April 21, 1995, the Company may, at its option, prepay the
outstanding Senior Secured First Mortgage Notes (the "Notes") in whole or in
part, after April 1, 1998 at a price equal to the aggregate principal amount of
the Notes being redeemed plus accrued interest thereon to the date of
redemption, plus a premium equal to the net present value of the excess of the
originally scheduled principal and related interest payments through the
original maturity date over the corresponding payments that would have been made
using the U.S. Treasury Notes rate (or the U.S. Treasury Note rate plus .75% if
redemption occurs after April 21, 2000), discounted at the U.S. Treasury Note
rate plus .75%. Prepayment of all outstanding Notes and accrued interest thereon
is required on the occurrence of certain events, as defined in the Agreement.

Scheduled annual maturities of long-term debt, including capital leases, as
of June 30, 1998 are as follows:

<TABLE>
<S> <C>
1999................................................... $3,520,049
2000................................................... 5,599,824
2001................................................... 3,162,429
2002................................................... 3,351,627
2003................................................... 5,669,727
Thereafter............................................. 29,691,840
----------
50,995,496
Capital leases (project in progress--terms not
finalized)........................................... 4,442,217
----------
Total.............................................. $55,437,713
----------
----------
</TABLE>

56
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

6. INCOME TAXES

The components of income tax expense are as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------
1996 1997 1998
----------- ------------ ------------
<S> <C> <C> <C>
Current:
Federal............................................ $ 113,736 $ 3,114,991 $ 96,358
State.............................................. 296,788 862,690 204,394
----------- ------------ ------------
410,524 3,977,681 300,752
Deferred:
Federal............................................ 347,074 126,599 2,090,420
State.............................................. (174,598) (116,280) 60,828
----------- ------------ ------------
172,476 10,319 2,151,248
----------- ------------ ------------
$ 583,000 $ 3,988,000 $ 2,452,000
----------- ------------ ------------
----------- ------------ ------------
</TABLE>

During the year ended June 30, 1998, the Company recognized certain tax
benefits related to stock option exercises and net operating loss carryforwards
in the amount of $788,532 and $481,217, respectively. These benefits were both
recorded as a decrease to income taxes payable and an increase in
paid-in-capital and decrease in deferred tax assets, respectively.

The Company's income tax provision differs from the amount determined by
applying the statutory federal income tax rate, due to the following:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory tax (benefit) rate.................. 35.00 % 35.00 % 35.00 %
Permanent items....................................... .78 .29 .59
State income taxes, net of federal.................... 3.22 4.85 2.64
Rate differential..................................... (1.00) (1.00) (1.00)
Change in valuation allowance......................... 8.62 -- (8.62)
Change in credit carryforwards........................ -- -- 3.52
Purchase accounting................................... (19.79) -- --
Other................................................. (3.57) .12 4.82
------------ ------ ------
23.26 % 39.26 % 36.95 %
------------ ------ ------
------------ ------ ------
</TABLE>

57
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Deferred income tax assets and liabilities consist of the following:

<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Current assets (liabilities):
Inventory costing................................................................. $ (373,872) $ (291,733)
State franchise taxes............................................................. 270,579 (10,013)
Compensation and benefits......................................................... 61,263 --
Capitalized interest.............................................................. 128,852 195,421
Reserves.......................................................................... -- 564,132
Other............................................................................. 132,332 108,376
------------- -------------
Total........................................................................... $ 219,154 $ 566,183
------------- -------------
------------- -------------
Long-term assets (liabilities):
Purchase accounting............................................................... $ (4,885,216) $ (4,700,893)
Accelerated depreciation.......................................................... (5,949,469) (7,348,765)
Operating loss carryforwards...................................................... 4,651,121 3,481,759
Tax credit carryforwards.......................................................... 450,246 510,152
Compensation and benefits......................................................... 861,286 --
Other............................................................................. 76,158 191,604
Valuation allowance............................................................... (2,172,863) (1,600,871)
------------- -------------
Total........................................................................... $ (6,968,737) $ (9,467,014)
------------- -------------
------------- -------------
</TABLE>

The Company's tax returns for years 1994 through 1997 have not been examined
by the taxing authorities. In the opinion of management, adequate accruals have
been made for taxes due in those years. The Company has state manufacturers
investment and state and federal alternative minimum tax ("AMT") credit
carryforwards of approximately $140,000, $102,000 and $258,000, respectively.
Credits of $140,000 expire in 2008 and remaining credits may be used for an
indefinite period. A valuation allowance has been provided for the tax benefits
of operating loss and tax credit carryforwards which may not be realizable, due
to certain limitations under section 382 of the Internal Revenue Code, as well
as uncertainty related to future taxable income.

As of June 30, 1998, the Company has federal operating loss carryforwards
which expire as follows:

<TABLE>
<S> <C>
2002................................................... $3,082,000
2003................................................... 3,623,000
2004................................................... 3,214,000
2005................................................... 321,000
----------
Total................................................ $10,240,000
----------
----------
</TABLE>

Use of these operating loss carryforwards in any one year is limited to
approximately $1,400,000.

58
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. REDEEMABLE PREFERRED STOCK

The Company's redeemable preferred stock as of March 31, 1998 is as follows:

<TABLE>
<CAPTION>
AUTHORIZED ISSUED OUTSTANDING
PAR VALUE SHARES SHARES SHARES
----- ----------- --------- -----------
<S> <C> <C> <C> <C>
8% Junior Preferred Stock............................................ $ .01 200,000 178,105 178,105
12% Senior Preferred Stock........................................... $ .01 100,000 100,000 100,000
</TABLE>

The Junior Preferred shares have no voting rights, have liquidation
preferences to all classes of the Company's common stock, and are entitled to
cumulative dividends at the rate of 8% per year, payable semi-annually.
Effective October 1, 1996, the rate was increased to 8% from 6%. Shares
remaining at June 30, 1998 that were issued in connection with the Company's
acquisition of GSV are exchangeable at any time into 130,349 shares of Class B
Common Stock. The Junior Preferred Stock is subject to mandatory redemption of
89,052 and 89,053 shares on December 31, 2001 and 2002, respectively, or earlier
if a change in control of the Company occurs. On October 10, 1996, 345,875
shares were redeemed for $1,729,375 ($5 per share). At June 30, 1997 and 1998,
the balance outstanding, less nonaccreted discounts, was $697,721 and $731,022,
respectively.

In the event of liquidation, dissolution or winding up of the Company,
Junior Preferred stockholders shall be entitled to receive out of the assets of
the Company an amount in cash equal to $5 per share plus accrued but unpaid
dividends.

The Senior Preferred shares have no voting rights, have liquidation
preferences to other shareholders, are subject to mandatory redemption beginning
in 2005 and are entitled to cumulative dividends at the rate of 12% payable
semiannually. Under certain circumstances, the Senior Preferred Stock is
redeemable, at a premium, beginning in 2000. The carrying value of the Senior
Preferred Stock is being increased ratably to its redemption value of
$10,000,000. The shares are also exchangeable at any time, at the Company's
option, into 13.2% notes due 2007. At June 30, 1997 and 1998, the balance
outstanding, less accreted discounts, was $8,115,694 and $8,219,479,
respectively.

In the event of liquidation, dissolution or winding up of the Company,
Senior Preferred stockholders shall be entitled to receive out of the assets of
the Company, before Junior Preferred stockholders, the amount of dividends
accrued and unpaid thereon to the date of final distribution to such holders,
whether or not declared to the date of such final distribution, $100 per share
plus a premium.

8. SHAREHOLDERS' EQUITY

COMMON STOCK

The Company's authorized capital stock is as follows at June 30, 1998:

<TABLE>
<CAPTION>
AUTHORIZED
PAR VALUE SHARES
----------- ----------
<S> <C> <C>
Class B..................................................... $ .003 7,250,000
Class E..................................................... $ .003 2,900,000
Class K..................................................... $ .003 1,450,000
</TABLE>

59
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. SHAREHOLDERS' EQUITY (CONTINUED)
Changes in the Company's common stock outstanding during the years ended
June 30, 1996, 1997 and 1998 are as follows:

<TABLE>
<CAPTION>
A B E K
----------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Shares outstanding, June 30, 1995.......... 1,885,000 3,770,000 1,200,829 --
----------- ---------- ---------- ---------
Shares outstanding, June 30, 1996.......... 1,885,000 3,770,000 1,200,829 --
Issuance of stock.......................... -- 2,776,169 -- 99,860
Repurchase of stock........................ (1,885,000) (985,157) -- --
----------- ---------- ---------- ---------
Shares outstanding, June 30, 1997.......... -- 5,561,012 1,200,829 99,860
Issuance of stock (option exercise)........ -- 307,600 -- 29,617
----------- ---------- ---------- ---------
Shares outstanding, June 30, 1998.......... -- 5,868,612 1,200,829 129,477
----------- ---------- ---------- ---------
</TABLE>

Class E and K common stock have no voting rights, except that effective
April 21, 2000, the Class E common stockholders will be entitled to vote. Upon
dissolution, liquidation or winding up of the Company, and subject to the
liquidation preferences of the senior and junior preferred stock, liquidation
proceeds will be divided equally among the Class B, E, and K shareholders.

INCENTIVE STOCK AND STOCK OPTION PLANS

An incentive stock plan (terminated in 1996) provided for grants of stock
appreciation rights ("SARs") to officers, directors and certain key employees.
The SARs entitle the holder to receive cash payments equal to the excess of the
fair market value of the rights over the base price for such rights. SARs
granted as of June 30, 1997 have an unlimited term and generally become
exercisable over a two year period. Compensation expense recognized pursuant to
the Company's incentive stock plans was $650,506, $1,338,506 and $6,300,000 for
the years ended June 30, 1996, 1997 and 1998, respectively. In connection with
the SAR termination and the president's bonus restructuring, which bonus
restructuring equaled a net present value of $2,500,000, such key employees
received cash of approximately $5.4 million, included in payroll and related
liabilities, during April 1998, and 7.5% promissory notes aggregating
approximately $5.4 million payable upon mutual agreement between the parties. In
connection with a prior GSV stock appreciation rights agreement, the president
of GSV (and the Company) was paid $1,162,384 at the time of GSV's acquisition.
The Company's 1996 Stock Option Plan covers 893,925 shares of authorized but
unissued Class B Common Stock. The Plan provides for the grant of incentive and
nonstatutory stock options to officers, key employees and others, at prices not
less than fair value. Options granted generally

60
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. SHAREHOLDERS' EQUITY (CONTINUED)
become exercisable 25% annually and expire after 10 years. A summary of SAR and
stock option activity is as follows:

<TABLE>
<CAPTION>
NUMBER OF
---------------------- WEIGHTED AVERAGE
STOCK EXERCISE PRICE
OPTIONS SARS PER RIGHT/ OPTION
---------- ---------- -----------------
<S> <C> <C> <C>
Outstanding at June 30, 1995....................... -- 649,347 $ 1.34
Granted.......................................... -- 145,000 $ 2.59
---------- ----------
Outstanding at June 30, 1996....................... -- 794,347 $ 1.57
Granted.......................................... 800,933 -- $ 4.79
---------- ----------
Outstanding at June 30, 1997....................... 800,933 794,347 $ 3.19
Granted ($3.02 weighted average fair value per
option)........................................ 907,021 -- $ 11.99
Exercised........................................ (337,217) -- $ 4.88
Terminated....................................... (6,525) (794,347) $ 1.59
---------- ----------
Outstanding at June 30, 1998....................... 1,364,212 -- $ 9.35
---------- ----------
Exercisable at June 30, 1997....................... -- 749,347 $ 1.57
---------- ----------
Exercisable at June 30, 1998....................... 799,530 -- $ 11.75
---------- ----------
Available for grant at June 30, 1998............... 334,843 --
---------- ----------
</TABLE>

In April 1998, the Company adopted the 1998 Director Stock Option Plan (the
"Plan"), which covers 348,000 shares of authorized but unissued Class K Common
Stock. Under the terms of the Plan, options may be granted to non-employee
members of the Company's Board of Directors at prices not less than fair market
value (as defined), are fully vested after one year and expire ten years after
issuance. The Plan also provides for annual grants of options to purchase 10,005
shares of common stock on May 1 of each year commencing May 1, 1999 to each
non-employee director who has remained in continuous service.

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 share of old Class B Common Stock 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 Common
Stock 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 a 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. All common stock related data
in the accompanying financial statements of the Company reflect the stock split
for all periods presented. The recapitalization and conversion will be recorded
in the Company's first quarter of fiscal 1999.

61
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

8. SHAREHOLDERS' EQUITY (CONTINUED)
FAS 123 requires the disclosure of pro forma net income amounts had the
Company adopted the fair value method prescribed by that statement. Under FAS
123, the fair value of stock-based awards to employees is calculated using
option pricing models, even though such models were developed to estimate the
fair value of freely tradable, fully transferable options without vesting
restrictions, which significantly differ from the Company's stock option awards.
These models require certain subjective assumptions which greatly affect the
calculated values. The Company's calculations were made using the Black-Scholes
option pricing model with the following weighted average assumptions: expected
life, 6.3 years and 5.0 years as of June 30, 1997 and 1998, respectively; risk
free interest rates, 5.9% and 6.0% as of June 30, 1997 and 1998, respectively,
no expected volatility, and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. Proforma net income for the year ended June 30,
1998 would have been $217,166 less than net income as reported if the computed
fair values of the stock option awards had been amortized to expense over the
vesting period of the awards (no effect on net income for the year ended June
30, 1997). Proforma earnings per share for the year ended June 30, 1998 would
have been as follows: basic--$0.39 and diluted--$0.38.

9. RETIREMENT PLANS

The Company's 401(k) plan provides retirement benefits to full-time
employees that meet certain eligibility requirements, was established in 1996.
Under the 401(k) plan, employees may elect to have up to 15% of their annual
eligible compensation, subject to certain limitations, deferred and deposited
with a qualified trustee. The Company may elect to make an annual discretionary
contribution to the Plan of up to 25% of each participant's eligible
compensation, subject to certain limitations. Participants' voluntary
contributions to the Plan vest immediately and Company contributions are 100%
vested (20% per year after two years of service) after six years of continuous
service. The Company also contributes to a winery workers' retirement plan which
provides retirement benefits for union employees. Retirement plan costs charged
to operations were $36,704, $68,009 and $78,323 for the years ended June 30,
1996, 1997, and 1998, respectively.

62
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

10. LEASES

The Company leases cooperage and equipment under both capital and operating
lease arrangements. Future minimum payments by fiscal year and in aggregate
under such capital leases and noncancellable operating leases with terms of one
year or more consist of the following at June 30, 1998:

<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------ ------------
<S> <C> <C>
1999.............................................................. $ 536,648 $ 371,351
2000.............................................................. 534,602 348,543
2001.............................................................. 353,475 229,593
2002.............................................................. 311,762 220,222
2003.............................................................. 311,762 24,914
Thereafter........................................................ 388,759 --
------------ ------------
Total minimum lease payments...................................... 2,437,008 $ 1,194,623
------------
------------
Amount representing interest...................................... 497,747
------------
Net present value of minimum lease payments....................... 1,939,261
Leases in progress................................................ 4,442,217
------------
Total future minimum lease payments............................... 6,381,478
------------
Less current maturities........................................... (536,648)
------------
$ 5,844,830
------------
------------
</TABLE>

The following is a summary of cost and accumulated amortization on
capitalized cooperage and equipment leases:

<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1997 1998
------------ ------------
<S> <C> <C>
Cooperage......................................................... $ 678,785 $ 1,265,614
Equipment......................................................... 598,924 1,226,741
Less accumulated amortization..................................... 151,731 322,436
------------ ------------
$ 1,125,978 $ 2,169,919
------------ ------------
------------ ------------
</TABLE>

Rent expenses totaled approximately $381,107, $667,616 and $650,190 for the
years ended June 30, 1996, 1997 and 1998, respectively.

11. COMMITMENTS AND CONTINGENCIES

EMPLOYMENT AGREEMENT

The Company has an employment agreement with its president which extends to
March 31, 2000 and specifies that the president receive a fixed salary
determined by the Board of Directors and an annual bonus based on the Company's
earnings, as defined. The agreement extends automatically on a year-to-year
basis thereafter unless terminated by either party.

63
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
GRAPE PURCHASE COMMITMENTS

The Company has certain grape purchase contracts with independent growers
that generally extend through 2000. Prices to be paid for grapes fluctuate with
prevailing market prices at the time of purchase. In certain cases, the Company
has contracted with its customers to sell a portion of these grapes at
prevailing market prices at the time of sale.

EQUIPMENT AND COOPERAGE PURCHASE COMMITMENTS

As of June 30, 1998, the Company had entered into contracts aggregating
approximately $6,819,150 for the purchase of processing equipment and cooperage
of which $4,442,217 had been financed as a capital lease as of June 30, 1998.

CLAIMS

The Company is a party to claims aggregating approximately $3,500,000
arising from alleged negligent performance of services. The Company and its
legal counsel are in the preliminary stages of investigating the merits of such
claims and the availability of insurance coverage, if needed. As of June 30,
1998, the Company has accrued, based on its evaluation, an amount presently
believed to be adequate to resolve these claims. Such amount is substantially
less than the aggregate of the amounts claimed.

12. RELATED PARTY TRANSACTIONS

In May 1995, the Company purchased a 1,750 acre vineyard located in Kern
County, California, from a company owned by the Company's president for
$4,590,000. In connection with this acquisition, the Company assumed two
existing promissory notes of $2,441,000 and $452,791 and executed a non-interest
bearing promissory note for $1,700,000 (discounted at 10% to $774,523) payable
to the seller.

The Company paid approximately $2,400,000 to affiliates of certain
stockholders during the year ended June 30, 1997 for investment banking and
financial advisory services related to certain capital stock repurchases.

During the years ended June 30, 1996 and 1997, the Company made grape
purchases aggregating approximately $400,000 and $1,400,000, respectively, from
a vineyard partially owned by the Company's president.

13. SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental cash flow information is as follows:

<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1996 1997 1998
----------- ----------- -----------
<S> <C> <C> <C>
Interest paid.............................................................. $ 4,938,618 $ 5,578,895 $ 6,271,616
Income taxes paid.......................................................... 388,250 3,206,000 4,728,372
Notes issued to acquire property, plant and equipment...................... -- 7,238,071 --
Property acquired under capital lease...................................... 407,503 778,593 5,724,006
Tax benefit of stock option exercise....................................... -- -- 788,532
</TABLE>

64
<PAGE>
GOLDEN STATE VINTNERS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

14. SUBSEQUENT EVENTS

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 $33,991,500 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. The unamortized discount of approximately $1,771,000, associated with
the senior redeemable preferred stock payoff will be reflected as a deduction
from net income available to common stockholders in calculation of the Company's
1999 first quarter earnings per share.

65
<PAGE>
SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-K to
be signed on its behalf by the undersigned, thereunto duly authorized in the
City of Greenbrae, State of California, on the 16th day of October, 1998.

<TABLE>
<S> <C> <C>
GOLDEN STATE VINTNERS, INC.

By: /s/ BRIAN R. THOMPSON
-----------------------------------------
Brian R. Thompson
CHIEF FINANCIAL OFFICER
</TABLE>

POWER OF ATTORNEY

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey B. O'Neill, Brian R. Thompson and Jeffrey
J. Brown, and each of them his true and lawful attorneys-in-fact and agents with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Report on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report on Form 10-K has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
Chief Executive Officer,
/s/ JEFFREY B. O'NEILL President and Director
- ------------------------------ (Principal Executive October 15, 1998
Jeffrey B. O'Neill Officer)

Chief Financial Officer
/s/ BRIAN R. THOMPSON and Secretary (Principal
- ------------------------------ Financial Officer and October 15, 1998
Brian R. Thompson Accounting Officer)

/s/ JEFFREY J. BROWN Chairman of the Board,
- ------------------------------ Assistant Secretary and October 15, 1998
Jeffrey J. Brown Director

/s/ NICHOLAS B. BINKLEY
- ------------------------------ Director October 15, 1998
Nicholas B. Binkley
</TABLE>

66
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------

<C> <S> <C>
/s/ DOUGLAS R. WOLTER
- ------------------------------ Director October 15, 1998
Douglas R. Wolter

/s/ KEITH R. FOX
- ------------------------------ Director October 15, 1998
Keith R. Fox

/s/ W. SCOTT HEDRICK
- ------------------------------ Director October 15, 1998
W. Scott Hedrick

/s/ PETER W. MULLIN
- ------------------------------ Director October 15, 1998
Peter W. Mullin

/s/ JOHN G. MCDONALD
- ------------------------------ Director October 15, 1998
John G. McDonald

/s/ GREGORY J. FORREST
- ------------------------------ Director October 15, 1998
Gregory J. Forrest
</TABLE>

67
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY FINANCIAL SCHEDULE

To the Stockholders and Board of Directors
of Golden State Vintners, Inc.

We have audited the financial statements of Golden State Vintners, Inc. and
subsidiaries (the "Company") as of June 30, 1997 and 1998, and for each of the
three years in the period ended June 30, 1998, and have issued our report
thereon dated August 21, 1998 (September 25, 1998 as to the last sentence of the
third paragraph of Note 5). Such consolidated financial statements and report
will be included in the 1998 Annual Report to Stockholders and are incorporated
herein by reference. Our audits also included the supplementary financial
schedule listed in Item 14(a)(2). This consolidated supplementary financial
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. In our opinion, such consolidated
supplementary financial schedule, when considered in relation to the basic
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.

DELOITTE & TOUCHE LLP

Fresno, California
August 21, 1998

68
<PAGE>
ITEM 14(A)(2)

GOLDEN STATE VINTNERS, INC.

SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COSTS AND END OF
YEAR EXPENSES DEDUCTIONS YEAR
--------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Year ended June 30, 1996:
Allowance for uncollectible accounts......................... $ 80 $ 166 $ (66) $ 180

Year ended June 30, 1997:
Allowance for uncollectible accounts......................... 180 43 (123) 100

Year ended June 30, 1998:
Allowance for uncollectible accounts......................... 100 90 (14) 176
</TABLE>

<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED JUNE 30, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>

<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 39,828
<SECURITIES> 0
<RECEIVABLES> 7,761,639
<ALLOWANCES> 176,000
<INVENTORY> 30,684,769
<CURRENT-ASSETS> 44,893,841
<PP&E> 89,259,837
<DEPRECIATION> 11,619,269
<TOTAL-ASSETS> 124,718,980
<CURRENT-LIABILITIES> 36,247,979
<BONDS> 0
8,950,501
0
<COMMON> 24,824
<OTHER-SE> 18,110,998
<TOTAL-LIABILITY-AND-EQUITY> 124,718,980
<SALES> 111,994,169
<TOTAL-REVENUES> 111,994,169
<CGS> 83,684,275
<TOTAL-COSTS> 98,135,224
<OTHER-EXPENSES> 266,113
<LOSS-PROVISION> 90,000
<INTEREST-EXPENSE> 6,867,209
<INCOME-PRETAX> 6,635,623
<INCOME-TAX> 2,452,000
<INCOME-CONTINUING> 4,183,623
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,183,623
<EPS-PRIMARY> .42
<EPS-DILUTED> .41

</TABLE>