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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-24651
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GOLDEN STATE VINTNERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 77-0412761
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or organization) No.)
500 DRAKE'S LANDING ROAD, GREENBRAE, CALIFORNIA 94904
(Address of principal executive offices, including zip code)
Registrant's telephone number, including area code: (415) 461-4400
None
(Former name, former address and former
fiscal year, if changed since last report)
------------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES /X/ NO / /
The number of shares of the Registrant's Class A and Class B Common Stock
outstanding as of February 12, 1999 was 4,342,528 and 5,136,733 shares,
respectively.
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GOLDEN STATE VINTNERS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I -- FINANCIAL INFORMATION:
Item 1: Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three and Six
Month Periods Ended December 31, 1998 and 1997. . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Six Months
Ended December 31, 1998 and 1997. . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . 6
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations . . . . . . . . . . . . . . . . . . . . 7
Item 3: Quantitative and Qualitative Disclosures About Market Risk. . . . . 12
PART II -- OTHER INFORMATION
Item 1: Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 13
Item 6: Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . . 13
</TABLE>
2
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PART 1 -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLDEN STATE VINTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 71 $ 40
Trade and other receivables 33,990 7,586
Inventories 36,721 30,685
Refundable income taxes - 4,658
Deferred income taxes 359 566
Prepaid expenses and other current assets 763 1,359
---------- ----------
Total current assets 71,904 44,894
PROPERTY, PLANT AND EQUIPMENT - Net 80,756 77,641
NOTE RECEIVABLE 1,722 1,722
OTHER ASSETS 404 462
---------- ----------
TOTAL ASSETS $ 154,786 $ 124,719
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ 22,500 $ 18,200
Cash overdraft 3,867 801
Accounts payable 2,350 3,920
Grower payable 9,936 924
Payroll and related liabilities 602 6,352
Other accrued liabilities 300 1,404
Accrued interest 857 1,127
Income taxes payable 2,172 -
Current portion of long-term debt 2,108 3,520
---------- ----------
Total current liabilities 44,692 36,248
LONG-TERM DEBT 43,109 51,918
DEFERRED INCOME TAXES 10,573 9,467
REDEEMABLE PREFERRED STOCK:
12% Senior Exchangeable (no shares outstanding at 12/31/98) - 8,219
8% Junior Exchangeable (no shares outstanding at 12/31/98) - 731
---------- ----------
Total redeemable preferred stock - 8,950
STOCKHOLDERS' EQUITY:
Class A common stock, par value $.01; 6,000,000 and 0 shares
authorized at December 31, 1998 and June 30, 1998, respectively;
4,342,528 and 0 shares issued and outstanding at December 31, 1998
and June 30, 1998, respectively. 44 -
Class B common stock, par value $.01; 54,000,000 and 7,250,000 shares
authorized at December 31, 1998 and June 30, 1998, respectively;
5,136,733 and 5,868,612 shares issued and outstanding at December 31,
1998 and June 30, 1998, respectively. 51 20
Class E common stock, par value $.01; 0 and 2,900,000 shares authorized
at December 31, 1998 and June 30, 1998, respectively; 0 and 1,200,829
shares issued and outstanding at December 31, 1998 and June 30, 1998,
respectively. - 4
Class K common stock; par value $.01; 0 and 1,450,000 shares authorized
at December 31, 1998 and June 30, 1998, respectively; 0 and 99,860 shares
issued and outstanding at December 31, 1998 and June 30, 1998,
respectively. - 1
Paid-in capital 44,691 11,493
Retained earnings 11,626 6,618
---------- ----------
Total stockholders' equity 56,412 18,136
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 154,786 $ 124,719
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
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GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
----------------------------- -----------------------------
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Bulk wine and juice $ 34,662 $ 32,360 $ 39,237 $ 46,404
Brandy and spirits 9,748 4,612 12,970 9,664
Wine grapes 7,303 5,825 13,369 22,820
Case goods 4,295 5,436 8,188 10,642
--------- --------- --------- ---------
Total revenues 56,008 48,233 73,764 89,530
COST OF SALES 42,823 39,707 55,626 66,391
--------- --------- --------- ---------
GROSS PROFIT 13,185 8,526 18,138 23,139
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,624 6,672 3,173 11,549
--------- --------- --------- ---------
INCOME FROM OPERATIONS 11,561 1,854 14,965 11,590
INTEREST EXPENSE 1,180 1,824 2,575 3,446
OTHER (INCOME) EXPENSE (7) (12) (1) 124
--------- --------- --------- ---------
INCOME BEFORE INCOME TAXES 10,388 42 12,391 8,020
INCOME TAXES 4,238 175 5,055 3,123
--------- --------- --------- ---------
NET INCOME (LOSS) 6,150 (133) 7,336 4,897
ACCRETION ON PREFERRED STOCK - - (1,928) -
REDEEMABLE PREFERRED STOCK DIVIDENDS - (635) (400) (635)
--------- --------- --------- ---------
INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 6,150 $ (768) $ 5,008 $ 4,262
--------- --------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ 0.65 $ (0.11) $ 0.54 $ 0.62
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED $ 0.63 $ (0.11) $ 0.53 $ 0.59
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 9,479 6,862 9,207 6,862
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED 9,751 6,862 9,489 7,318
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
4
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GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
DECEMBER 31,
-----------------------------
1998 1997
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,336 $ 4,897
Adjustments:
Depreciation and amortization 3,224 3,560
Deferred compensation - 6,300
Loss on disposal of assets 9 -
Deferred income taxes 1,313 (1,450)
Changes in assets and liabilities:
Receivables (26,404) (23,288)
Inventories (6,926) (9,676)
Prepaid expenses and other current assets (531) 6
Accounts payable (1,570) 219
Grower payable 9,012 11,103
Payroll and related liabilities (5,750) 1,682
Other accrued liabilities (1,104) 2,138
Accrued interest (270) 98
Income taxes refundable/payable 6,830 883
--------- ---------
Net cash used in operating activities (14,831) (3,528)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (2,435) (2,248)
Refund of deposits - 142
--------- ---------
Net cash used in investing activities (2,435) (2,106)
FINANCING ACTIVITIES:
Borrowings on line of credit 41,950 35,900
Payments on line of credit (37,650) (30,100)
Increase in cash overdraft 3,066 1,129
Repayments of long-term debt (13,175) (1,018)
Redemption of Sr. Preferred Stock (10,000) -
Payment of dividends (400) (635)
Proceeds from the sale of common stock 33,992 -
Public offering costs (486) -
Payment of financing costs - (10)
--------- ---------
Net cash provided by financing activities 17,297 5,266
--------- ---------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS 31 (368)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 40 1,219
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 71 $ 851
--------- ---------
--------- ---------
OTHER CASH FLOW INFORMATION:
Interest paid $ 2,891 $ 3,111
--------- ---------
--------- ---------
Income taxes paid $ - $ 3,690
--------- ---------
--------- ---------
Notes/leases issued to acquire property and equipment $ 2,984 $ 1,136
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
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GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which include all normal and
recurring adjustments) necessary to present fairly the Company's financial
position at December 31, 1998 and its results of operations for the three and
six month periods ended December 31, 1998 and 1997 and its cash flows for the
six month periods ended December 31, 1998 and 1997. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted from the accompanying consolidated financial statements. The
unaudited consolidated financial statements set forth in this quarterly
report on Form 10-Q should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K (the "10-K") for the fiscal year ended June 30,
1998, on file at the Securities and Exchange Commission. The Company's
results for the three and six month periods ended December 31, 1998 are not
necessarily indicative of the results that may be expected for the fiscal
year ending June 30, 1999.
NOTE 2 - INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1998
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<S> <C> <C>
Bulk wine $ 28,654 $ 15,730
Cased and bottled wine 3,828 3,823
Brandy 1,245 2,429
Juice, supplies and other 1,233 1,174
Unharvested crop costs 1,761 7,529
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Total $ 36,721 $ 30,685
------------- -------------
------------- -------------
</TABLE>
NOTE 3 - PREFERRED STOCK AND STOCKHOLDERS' EQUITY
On April 23, 1998 and April 28, 1998, the Board of Directors and the
Company's stockholders, respectively, approved a recapitalization and stock
split, which resulted in each share of the Company's common stock being split
into 2.9 shares of common stock. The recapitalization and stock split was
effected by the filing of the Amended and Restated Certificate of
Incorporation of the Company with the Delaware Secretary of State on July 20,
1998. The recapitalization was in the form of (i) the creation by the Company
of a new Class A Common Stock and a new Class B Common Stock, (ii) the
conversion of all of the Company's outstanding shares of old Class B Common
on a one-for-one basis into shares of Company's newly-created Class A Common
Stock, (iii) the conversion of all of the Company's outstanding shares of old
Class E and old Class K Common Stock on a one-for-one basis into shares of
the Company's newly-created Class B Common Stock, (iv) a 2.9-for-1 stock
split for each of the Company's outstanding shares of newly-created Class A
Common Stock and newly-created Class B Common Stock, and (v) the conversion
of all of the Company's outstanding shares of Junior Preferred Stock into
130,343 shares of the Company's newly-created Class B Common Stock.
On July 21, 1998, the Company completed an underwritten public offering of
4,300,000 shares of Class B Common Stock, at a public offering price of
$17.00 per share (the "Offering"). The proceeds to the Company from the
offering of approximately $34.0 million were primarily used to repay the
Company's line of credit, certain bank term loans, senior redeemable
preferred stock, including related dividends and certain costs and expenses
of the offering.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
Effective July 1, 1998 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130 "Reporting Comprehensive Income" which
would require that all items required to be recognized as components of
comprehensive income be reported in the financial statements, but had no
effect on the Company's disclosures as net income and comprehensive income
were the same for the periods presented.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," which
establishes annual and interim reporting standards for an enterprise's
operating segments and related disclosures about its products, services,
geographic areas, and major customers; and SFAS No. 132 "Employers'
Disclosures about Pension and Other Postretirement Benefits," which
standardizes the disclosure requirements for pensions and other
postretirement benefits and expands disclosures on changes in benefit
obligations and fair values of plan assets. The Company will implement SFAS
No. 131 in fiscal 2000 and SFAS 132 in fiscal 1999. Adoption of these
statements will not impact the Company's consolidated financial position,
results of operations or cash flows, and any effect will be limited to the
form and content of its disclosures.
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," which
standardizes the accounting for derivatives, requiring recognition as either
assets or liabilities on the balance sheet and measurement at fair value.
The Company plans to adopt this statement in fiscal 2001. The Company has
not yet determined the effect adoption of this statement will have on the
Company's consolidated financial position, results of operations or cash
flows.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS OF THE FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF GOLDEN STATE VINTNERS, INC. (THE "COMPANY") CONTAINS
"FORWARD-LOOKING STATEMENTS," AS DEFINED IN SECTION 27A OF THE SECURITIES ACT
OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934,
AS AMENDED. FORWARD-LOOKING STATEMENTS ARE STATEMENTS OTHER THAN HISTORICAL
INFORMATION OR STATEMENTS OF CURRENT CONDITION AND RELATE TO FUTURE EVENTS
OR THE FUTURE FINANCIAL PERFORMANCE OF THE COMPANY. SOME FORWARD-LOOKING
STATEMENTS MAY BE IDENTIFIED BY USE OF SUCH TERMS AS "BELIEVES,"
"ANTICIPATES," "INTENDS" OR "EXPECTS." SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS THAT MAY
CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO BE
MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE COMPANY'S
RESULTS MAY DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING
STATEMENTS AS A RESULT OF A NUMBER OF FACTORS, INCLUDING WITHOUT LIMITATION,
THOSE FACTORS DISCUSSED IN THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE
FISCAL YEAR ENDED JUNE 30, 1998, AS FILED WITH SECURITIES AND EXCHANGE
COMMISSION ON OCTOBER 19, 1998. THE COMPANY UNDERTAKES NO OBLIGATION TO
PUBLICLY UPDATE OR REVISE ANY FORWARD-LOOKING STATEMENTS, WHETHER AS A RESULT
OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
Recent Developments
On July 21, 1998, the Company consummated a firmly underwritten initial
public offering of 4.3 million shares of its Class B Common Stock (the
"IPO"), of which 2.15 million were sold by the Company and 2.15 million were
sold by certain stockholders of the Company. The Company realized net
proceeds of approximately $32 million from the IPO.
Seasonality and Quarterly Results
Historically, the Company has experienced and expects to continue to
experience seasonal and quarterly fluctuations in its revenues. Because of
the inherent seasonality of its operations, the Company has traditionally
reported its highest revenues and net income in the first and second fiscal
quarters as, historically, the Company sold most of its grapes in its first
fiscal quarter, and following harvest, sold most of the Company's bulk wine
and brandy in its second fiscal quarter. Also, during and after crush, the
Company performed many of its wine processing services in the first and
second fiscal quarters. In the Company's current fiscal year, El Nino-related
weather conditions, among other things, caused an approximate four week delay
in the California wine grape harvest as compared to the prior year's harvest.
The late harvest of grapes resulted in increased revenues in the second
quarter of fiscal 1999 as compared to the second quarter of fiscal 1998 and
the Company anticipates further recognition of revenues relating directly to
the 1998 crush into the third fiscal quarter of 1999, though there can be no
assurance in that regard.
THREE MONTHS ENDED DECEMBER 31, 1998 VERSUS THREE MONTHS ENDED DECEMBER 31,
1997
Revenues
Total revenues for the second quarter of fiscal 1999 (three months ended
December 31, 1998) were $56.0 million, an increase of $7.8 million or 16.2%,
as compared to revenues of $48.2 million for the second quarter of fiscal
1998 (three months ended December 31, 1997). The overall period-to-period
increase in revenues was primarily due to the delay in the production and
sales of bulk wine and brandy resulting from the delayed harvest of wine
grapes.
Bulk Wine and Related Services. For the second quarter of fiscal 1999,
revenues from bulk wine and related services were $34.7 million, an increase
of $2.3 million or 7.1%, as compared to revenues of $32.4 million in the
second quarter of fiscal 1998. Such increase primarily resulted from the
delay in the California wine grape harvest, as noted above.
Grape Sales. In the second quarter of fiscal 1999, revenues from grape
sales were $7.3 million, an increase of $1.5 million or 25.9%, as compared to
revenues of $5.8 million in the second quarter of fiscal 1998. Due to the
late grape harvest, approximately 50% of the grapes sold by the Company were
delivered in the second quarter of fiscal 1999 as compared to approximately
13% that were delivered in the second quarter of fiscal 1998.
Case Goods and Related Services. For the second quarter of fiscal 1999,
revenues from case goods and related services were $4.3 million, a decrease
of $1.1 million or 20.4%, as compared to revenues of $5.4 million in the
second quarter of fiscal 1998. Such period to period decline was primarily
due to a decline in private label case goods sales, and the absence of
consolidated revenues from the Company's former 80% owned partnership, GSV
International Trading Company.
Brandy and Spirits. During the second quarter of fiscal 1999, revenues
from the sale of brandy and grape spirits were $9.7 million, an increase of
$5.1 million or 110.9%, as compared to revenues of $4.6 million during the
second quarter of fiscal 1998. The period to period increase was due to the
late brandy grape harvest and accordingly, the deferral of a significant
portion of brandy revenues into the second quarter of fiscal 1999.
Cost of Sales
Cost of sales includes all direct and certain indirect costs to produce
the Company's marketed products. Bulk wine, case goods and brandy cost of
sales generally includes wine grape costs, direct and indirect plant
production costs and certain allocated overhead items such as depreciation
and insurance. Vineyard costs include farming expenses and direct and
allocated indirect costs. For the second quarter of fiscal 1999, total cost
of sales was $42.8 million, an increase of $3.1 million or 7.8%, from $39.7
million in the second quarter of fiscal 1998. The dollar increase in cost of
sales resulted from the delay in the production and sales of brandy and
spirits due to the delayed harvest of wine grapes. As a percentage of
revenues, cost of sales for the second quarter of fiscal 1999 was 76.5%, a
decrease from 82.3% in the second quarter of fiscal 1998. The decrease of
cost of sales on a percentage of revenue basis was as a result of the
Company's restructuring of its grape sales contracts to utilize a greater
percentage of its own grapes in the internal production of bulk wine and
brandy. In addition, in the second quarter of fiscal 1998, cost of sales
was impacted by amounts reserved by the Company in connection with disputes
concerning the production of certain wine products delivered by the Company.
Gross Profit
Gross profit represents revenues less cost of sales. In the second
quarter of fiscal 1999, the Company's realized gross profit of $13.2 million,
an increase of $4.7 million or 55.3%, as compared to gross profit of $8.5
million in the second quarter of fiscal 1998. As a percentage of revenues,
gross profit for the second quarter of fiscal 1999 was 23.5%, an increase
from 17.7% in the second quarter of fiscal
7
<PAGE>
1998. Period to period margin growth was positively impacted by reduced cost
of sales in bulk wine and brandy production, resulting from the Company's
internal use of grapes from the Company's vineyards. The second quarter of
fiscal 1998 was negatively impacted by the product reserve charge discussed
above.
Selling, General and Administrative Expenses
Selling, general and administrative expenses includes general
administrative items, corporate overhead and in fiscal 1998, expenses
relating to certain management incentives. For the second quarter of fiscal
1999, selling, general and administrative expenses were $1.6 million, a
decrease of $5.1 million or 76.1%, from $6.7 million for the second quarter
of fiscal 1998. The second fiscal quarter of 1998 included a one-time
management incentive restructuring charge equaling $5.4 million.
Interest Expense
For the second quarter of fiscal 1999, interest expense was $1.2
million, a decrease of $.6 million or 33.3%, as compared to interest expense
of $1.8 million in the second quarter of fiscal 1998. In the first quarter
of fiscal 1999, the Company used net proceeds from the IPO to repay
approximately $11.9 million in long-term debt, $5.7 million in officer notes
and to reduce its outstanding line of credit balance by $4.7 million, thereby
reducing interest expense during the first and second quarters of fiscal
1999.
Net Income
For the second quarter of fiscal 1999, net income was $6.2 million, an
increase of $6.3 million, as compared to net loss of $.1 million in the
second quarter of fiscal 1998. Net income in the second quarter of fiscal
1999 was favorably impacted by revenues that shifted from the first to the
second quarter due to the delayed grape harvest and the significant
reduction in selling, general and administrative expenses related to the
management incentive restructuring charge discussed above.
Earnings Per Share
For the second quarter of fiscal 1999, the basic earnings per share was
$.65, as compared to basic loss per share of $.11 for the second quarter of
fiscal 1998. Net income available to common shareholders for the second
quarter of fiscal 1999 was favorably impacted by the increase in net income.
8
<PAGE>
SIX MONTHS ENDED DECEMBER 31, 1998 VERSUS SIX MONTHS ENDED DECEMBER 31, 1997
Revenues
Total revenues for the first six months of fiscal 1999 were $73.8 million,
a decrease of $15.7 million or 17.5%, as compared to revenues of $89.5
million for the first six months of fiscal 1998. The overall decrease in
revenues was primarily due to 1) the delayed harvest of wine grapes, 2) the
restructuring of the Company's grape supply relationship with EJ Gallo Winery
and 3) lower bulk wine revenues due to reduced processing demands that
resulted from an overall decrease in the California grape harvest.
Bulk Wine and Related Services. For the first six months of fiscal
1999, revenues from bulk wine and related services were $39.2 million, a
decrease of $7.2 million or 15.5%, as compared to revenues of $46.4 million
in the first six months of fiscal 1998. Such decrease primarily resulted
from the delay in the California wine grape harvest, as noted above and an
overall reduction in processing as a result of the reduced California grape
harvest.
Grape Sales. In the first six months of fiscal 1999, revenues from
grape sales were $13.4 million, a decrease of $9.4 million or 41.2%, as
compared to revenues of $22.8 million in the first six months of fiscal 1998.
Grape tons delivered to customers decreased to approximately 41,000 tons in
the first six months of fiscal 1999 compared to approximately 76,000 tons in
the first six months of fiscal 1998, primarily as a result of the Company's
reallocation of grape resources. For fiscal 1999, the Company restructured
its grape contracts to utilize a greater percentage of its own grapes in the
internal production of bulk wine and brandy. Additionally, period to period
comparisons were affected by the above average grape harvest in the summer of
1997, which resulted in greater than normal grape sales revenues in the first
six months of the Company's 1998 fiscal year.
Case Goods and Related Services. For the first six months of fiscal
1999, revenues from case goods and related services were $8.2 million, a
decrease of $2.4 million or 22.6%, as compared to revenues of $10.6 million
in the first six months of fiscal 1998. The period to period decline in case
goods and related services revenues was primarily due to a decline in certain
private label case goods sales and the absence of consolidated revenues from
the Company's former 80% owned partnership, GSV International Trading
Company.
Brandy and Spirits. For the first six months of fiscal 1999, revenues
from the sale of brandy and grape spirits were $13.0 million, an increase of
$3.3 million or 34.0%, as compared to revenues of $9.7 million in the first
six months of fiscal 1998. Brandy sales volume increased to approximately
2.1 million proof gallons for the first six months of fiscal 1999 compared to
approximately 1.6 million proof gallons in the first six months of fiscal
1998 due to an increase in customer demand.
Cost of Sales
For the first six months of fiscal 1999, total cost of sales was $55.6
million, a decrease of $10.8 million or 16.3%, from $66.4 million in the
first six months of fiscal 1998. The period-to-period dollar decrease in cost
of sales resulted from the delayed wine grape harvest, which had the effect
of delaying certain revenues from the first and second fiscal quarters to the
second and third fiscal quarters of fiscal 1999. In addition, in the first
six months of fiscal 1998, cost of sales was impacted by amounts reserved by
the Company in connection with disputes concerning the production of certain
wine products delivered by the Company. As a percentage of revenues, cost of
sales for the first six months of fiscal 1999 was 75.4%, an increase from
74.2% in the first six months of fiscal 1998. The increase in cost of sales
on a percentage of revenue basis was as a result of 1) reduced wine grape
tonnage crushed and processed, 2) the change in the mix of products sold
resulting from delayed sales of current vintage wines due to the timing of
the 1998 California grape harvest, 3) the shift, due to the grape contract
restructuring discussed above, in the timing of certain 1998 vintage revenues
and cost of sales from grapes in the first and second quarters of fiscal 1999
to bulk wine and case goods in the second and subsequent quarters of fiscal
1999, 4) decreased yield in the conversion of wine grapes to bulk wine and
brandy and 5) costs related to sales of excess 1997 vintage product at
reduced margins as a result of the large 1997 grape harvest.
9
<PAGE>
Gross Profit
In the first six months of fiscal 1999, the Company's realized gross
profit of $18.1 million, a decrease of $5.0 million or 21.6%, as compared to
gross profit of $23.1 million in the first six months of fiscal 1998. As a
percentage of revenues, gross profit for the first six months of fiscal 1999
was 24.6%, a slight decrease from 25.8% in the first six months of fiscal
1998. The Company's gross margin for the first six months of fiscal 1999 was
primarily impacted by the items discussed above under "Cost of Sales."
Selling, General and Administrative Expenses
For the first six months of fiscal 1999, selling, general and
administrative expenses were $3.2 million, a decrease of $8.3 million or
72.2%, from $11.5 million for the first six months of fiscal 1998. Selling,
general and administrative expense in the first six months of fiscal 1998
included a one-time management incentive restructuring charge equaling $8.8
million.
Interest Expense
For the first six months of fiscal 1999, interest expense was $2.6
million, a decrease of $.8 million or 23.5%, as compared to interest expense
of $3.4 million in the first six months of fiscal 1998. In the first quarter
of fiscal 1999, the Company used a portion of the net proceeds from the IPO
to repay approximately $11.9 million in long-term debt, $5.7 million in
officer notes and to reduce its outstanding line of credit balance by $4.7
million, thereby reducing interest expense for the first six months of fiscal
1999.
Net Income
For the first six months of fiscal 1999, net income was $7.3 million, an
increase of $2.4 million or 49.0%, as compared to net income of $4.9 million
in the first six months of fiscal 1998.
Earnings Per Share
For the first six months of fiscal 1999, the basic earnings per share
was $.54, as compared to basic earnings per share of $.62 for the first six
months of fiscal 1998. Net income available to common shareholders for the
first six months of fiscal 1999 was impacted by the increase in net income
offset by dividend payments of $.4 million on shares of Senior Preferred
Stock and, as a result of the IPO, accretion of $1.9 million with respect to
Senior Preferred Stock redeemed and Junior Preferred Stock converted in the
first quarter of fiscal 1999.
10
<PAGE>
Liquidity and Capital Resources
The Company's working capital position at December 31, 1998 was $27.2
million, as compared to $8.6 million at June 30, 1998. The increase in
working capital is primarily due to the IPO, which occurred in July 1998.
The Company maintains a revolving line of credit for working capital purposes
which is secured by inventory, accounts receivable, the current year's wine
grape crop and other collateral. Management believes that collateral
balances at December 31, 1998 are adequate for the Company's working capital
requirements. Borrowings under the line typically peak in November and
December during the Company's second fiscal quarter. Revolving line of
credit balances were $22.5 million at December 31, 1998 and $18.2 million at
June 30, 1998. Unused availability under the line of credit was $5.5 million
at December 31, 1998.
Net cash used in operating activities for the first six months of fiscal
1999 was $14.8 million, as compared to net cash used in operations of $3.5
million for the first six months of fiscal 1998. In the first quarter of
fiscal 1999, the Company made payments on officer notes aggregating $5.7
million.
Management expects that the Company's working capital requirements will
grow as the business expands and that peak borrowing needs will continue to
occur in the second quarter of the Company's fiscal year. Management
believes that current working capital, cash generated from operations and
funds available under the Company's line of credit will be sufficient to fund
working capital requirements and operations during the Company's 1999 fiscal
year.
Year 2000 Compliance
A significant percentage of the software that runs most of the computers in
the United States relies on two-digit date codes to perform a number of
computation and decision making functions. Commencing on January 1, 2000, these
computer programs may fail from an inability to interpret date codes properly,
misreading "00" for the year 1900 instead of the year 2000.
The Company has initiated a comprehensive program to identify, evaluate
and address issues associated with the ability of its information technology
and non-information technology systems to properly recognize the Year 2000 in
order to avoid interruption of the operation of these systems and a material
adverse effect on the Company's operations as a result of the century change.
Each of the information technology software programs that the Company
currently uses has either been certified by its respective vendor as Year
2000 compliant or will be replaced with software that is so certified prior
to January 1, 2000. The Company intends to conduct comprehensive tests of all
of its software programs for Year 2000 compliance as part of its Year 2000
readiness program. The Company does not believe that its non-information
technology systems, such as its bottling and production equipment, air
conditioning/refrigeration units, telephones and faxes will be adversely
affected by the Year 2000, but will not know definitively until the Company
tests and evaluates such equipment early in calendar 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 $260,000 to reprogram,
replace and test its information technology software for Year 2000
compliance. The remainder of the costs associated with the Company's Year
2000 compliance efforts will be incurred during fiscal 1999 and 2000. The
Company estimates the costs of these efforts will be between $150,000 and
$200,000 over the remaining life of the project; though such expenditures may
increase following testing of non-information technology systems. Costs and
expenses arising in connection with the Company's Year 2000 compliance
efforts have been, and will be, expensed as incurred.
The Company currently anticipates that both its information technology and
non-information technology systems will be Year 2000 compliant in sufficient
time to avoid business interruptions, though no assurances can be given that the
Company's compliance testing will not detect unanticipated Year 2000 compliance
problems. Furthermore, the Company does not yet know the Year 2000 compliance
status of third parties that are integral to the Company's business and is
therefore currently unable to assess the likelihood or the risk to the Company
of third party system failures. However, a system failure by any of the
Company's significant customers, suppliers or vendors could result in a material
adverse effect on the Company's business and operations.
The Company has developed contingency plans to handle a Year 2000 system
failure experienced by its information technology systems. These backup
procedures, including manual record keeping and processing, have been tested
and utilized by the Company in the past during times of unplanned system
failure. The Company intends to develop any additional necessary contingency
plans for its non-information technology systems after it has adequately
evaluated the Year 2000 compliance status of these systems.
11
<PAGE>
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the Company's market risk
exposure from that reported in the Company's Form 10-K for the fiscal year
ended June 30, 1998.
12
<PAGE>
PART II
ITEM 1. 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. In October 1998, Golden State Vintners settled this
dispute for an amount substantially below the damages alleged by Treana.
The Company is subject to litigation in the ordinary course of its
business. In the opinion of management, the ultimate outcome of existing
litigation will not have a material adverse effect on the Company's
consolidated financial condition or the results of its operations.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
11 Statement Regarding Computation of Per Share Earnings
27 Summary Financial Information
13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: February 16, 1999 GOLDEN STATE VINTNERS, INC.
By: /s/ BRIAN R. THOMPSON
---------------------------------
Brian R. Thompson
Chief Financial Officer
(Principal Financial &
Accounting Officer and
Duly Authorized Officer)
14
<PAGE>
GOLDEN STATE VINTNERS, INC.
STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
EXHIBIT 11
Basic and fully diluted earnings per share ("EPS") are determined as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
December 31, December 31,
------------------------ -------------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator:
Net income (loss) $ 6,150 $ (133) $ 7,336 $ 4,897
Less: Accretion of redeemed senior preferred stock - - (1,771)
Accretion of converted junior preferred stock - - (157)
Redeemable preferred stock dividends - (635) (400) (635)
--------- --------- ---------- ----------
Income (loss) available to common stockholders $ 6,150 $ (768) $ 5,008 $ 4,262
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Denominator:
Weighted average common shares 9,479 6,862 9,207 6,862
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Basic EPS $ 0.65 $ (0.11) $ 0.54 $ 0.62
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Diluted EPS Computation
Numerator:
Income (loss) available to common stockholders $ 6,149 $ (768) $ 5,008 $ 4,262
Add: Junior preferred stock dividends - - - 35
--------- --------- ---------- ----------
Income (loss) available to common stockholders
and assumed conversions $ 6,149 $ (768) $ 5,008 $ 4,297
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Denominator:
Weighted average common shares outstanding 9,479 6,862 9,207 6,862
Stock options 272 - 282 326
Junior preferred stock - - - 130
--------- --------- ---------- ----------
Adjusted weighted average common shares 9,751 6,862 9,489 7,318
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Diluted EPS $ 0.63 $ (0.11) $ 0.53 $ 0.59
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND CONSOLIDATED STATEMENTS OF OPERATIONS FOUND ON
PAGES 2 AND 3 OF THE COMPANY'S FORM 10-Q FOR THE YEAR-TO-DATE AND ITS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-30-1998
<PERIOD-END> DEC-31-1998
<CASH> 71
<SECURITIES> 0
<RECEIVABLES> 34,174
<ALLOWANCES> 184
<INVENTORY> 36,721
<CURRENT-ASSETS> 71,904
<PP&E> 94,600
<DEPRECIATION> 13,844
<TOTAL-ASSETS> 154,786
<CURRENT-LIABILITIES> 44,692
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 56,317
<TOTAL-LIABILITY-AND-EQUITY> 154,786
<SALES> 0
<TOTAL-REVENUES> 73,764
<CGS> 0
<TOTAL-COSTS> 55,626
<OTHER-EXPENSES> 3,173
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,575
<INCOME-PRETAX> 12,391
<INCOME-TAX> 5,055
<INCOME-CONTINUING> 7,336
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,336
<EPS-PRIMARY> .54
<EPS-DILUTED> .53
</TABLE>
