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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 MARCH 31, 1999
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 May 14, 1999 was 4,342,528 and 5,155,733 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 March 31, 1999
and June 30, 1998 . . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three and Nine
Month Periods Ended March 31, 1999 and 1998 . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Nine Months
Ended March 31, 1999 and 1998 . . . . . . . . . . . . . . . . . . 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>
MARCH 31, JUNE 30,
1999 1998
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents $ 52 $ 40
Trade and other receivables 13,148 7,586
Inventories 29,296 30,685
Refundable income taxes 559 4,658
Deferred income taxes 301 566
Prepaid expenses and other current assets 801 1,359
---------- ----------
Total current assets 44,157 44,894
PROPERTY, PLANT AND EQUIPMENT - Net 81,344 77,641
NOTE RECEIVABLE 1,722 1,722
OTHER ASSETS 390 462
---------- ----------
TOTAL ASSETS $ 127,613 $ 124,719
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit $ 8,700 $ 18,200
Cash overdraft - 801
Accounts payable 1,878 3,920
Grower payable 679 924
Payroll and related liabilities 678 6,352
Other accrued liabilities 509 1,404
Accrued interest 848 1,127
Current portion of long-term debt 2,904 3,520
---------- ----------
Total current liabilities 16,196 36,248
LONG-TERM DEBT 42,022 51,918
DEFERRED INCOME TAXES 10,912 9,467
REDEEMABLE PREFERRED STOCK:
12% Senior Exchangeable (no shares outstanding at 3/31/99) - 8,219
8% Junior Exchangeable (no shares outstanding at 3/31/99) - 731
---------- ----------
Total redeemable preferred stock - 8,950
STOCKHOLDERS' EQUITY:
Class A common stock, par value $.01; 6,000,000 and 0 shares
authorized at March 31, 1999 and June 30, 1998, respectively;
4,342,528 and 0 shares issued and outstanding at March 31, 1999
and June 30, 1998, respectively. 44 -
Class B common stock, par value $.01; 54,000,000 and 7,250,000 shares
authorized at March 31, 1999 and June 30, 1998, respectively;
5,155,733 and 5,868,612 shares issued and outstanding at March 31,
1999 and June 30, 1998, respectively. 51 20
Class E common stock, par value $.01; 0 and 2,900,000 shares authorized
at March 31, 1999 and June 30, 1998, respectively; 0 and 1,200,829
shares issued and outstanding at March 31, 1999 and June 30, 1998,
respectively. - 4
Class K common stock; par value $.01; 0 and 1,450,000 shares authorized
at March 31, 1999 and June 30, 1998, respectively; 0 and 99,860 shares
issued and outstanding at March 31, 1999 and June 30, 1998,
respectively. - 1
Paid-in capital 44,781 11,493
Retained earnings 13,607 6,618
---------- ----------
Total stockholders' equity 58,483 18,136
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 127,613 $ 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 NINE MONTHS ENDED
MARCH 31, MARCH 31,
----------------------------- -----------------------------
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES:
Bulk wine and juice $ 18,793 $ 7,411 $ 58,030 $ 53,815
Brandy and spirits 320 298 13,290 9,962
Wine grapes (127) (3) 13,242 22,817
Case goods 3,621 4,439 11,809 15,081
--------- --------- --------- ---------
Total revenues 22,607 12,145 96,371 101,675
COST OF SALES 16,557 9,234 72,183 75,625
--------- --------- --------- ---------
GROSS PROFIT 6,050 2,911 24,188 26,050
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,607 1,517 4,780 13,066
--------- --------- --------- ---------
INCOME FROM OPERATIONS 4,443 1,394 19,408 12,984
INTEREST EXPENSE 1,102 1,757 3,678 5,203
OTHER (INCOME) EXPENSE (6) 41 (7) 165
--------- --------- --------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 3,347 (404) 15,737 7,616
INCOME TAXES 1,366 (245) 6,421 2,878
--------- --------- --------- ---------
NET INCOME (LOSS) 1,981 (159) 9,316 4,738
ACCRETION ON PREFERRED STOCK - - (1,928) -
REDEEMABLE PREFERRED STOCK DIVIDENDS - - (400) (635)
--------- --------- --------- ---------
INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS $ 1,981 $ (159) $ 6,988 $ 4,103
--------- --------- --------- ---------
EARNINGS (LOSS) PER COMMON SHARE:
BASIC $ 0.21 $ (0.02) $ 0.75 $ 0.60
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED $ 0.20 $ (0.02) $ 0.73 $ 0.57
--------- --------- --------- ---------
--------- --------- --------- ---------
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC 9,488 6,862 9,299 6,862
--------- --------- --------- ---------
--------- --------- --------- ---------
DILUTED 9,835 6,862 9,592 7,319
--------- --------- --------- ---------
--------- --------- --------- ---------
</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>
NINE MONTHS ENDED
MARCH 31,
-----------------------------
1999 1998
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 9,316 $ 4,738
Adjustments:
Depreciation and amortization 4,729 3,768
Deferred compensation - 8,800
Loss on disposal of assets 27 25
Deferred income taxes 1,710 1,794
Changes in assets and liabilities:
Receivables (5,562) (4,446)
Inventories 499 (8,047)
Prepaid expenses and other current assets (569) (510)
Accounts payable (2,042) 1,203
Grower payable (245) 134
Payroll and related liabilities (5,674) (712)
Other accrued liabilities (895) 2,346
Accrued interest (279) 316
Income taxes refundable/payable 4,099 (4,257)
--------- ---------
Net cash provided by operating activities 5,114 5,152
INVESTING ACTIVITIES:
Purchases of property, plant and equipment (4,080) (5,524)
Refund of deposits (3) 142
--------- ---------
Net cash used in investing activities (4,083) (5,382)
FINANCING ACTIVITIES:
Borrowings on line of credit 51,550 52,000
Payments on line of credit (61,050) (46,500)
Increase in cash overdraft (801) -
Repayments of long-term debt (13,914) (2,418)
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) -
Stock option exercises 90 -
Payment of financing costs - (10)
--------- ---------
Net cash provided by (used in) financing activities (1,019) 2,437
--------- ---------
INCREASE IN CASH AND EQUIVALENTS 12 2,207
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 40 1,219
--------- ---------
CASH AND EQUIVALENTS, END OF PERIOD $ 52 $ 3,426
--------- ---------
--------- ---------
OTHER CASH FLOW INFORMATION:
Interest paid $ 4,134 $ 4,641
--------- ---------
--------- ---------
Income taxes paid $ 3,700 $ 5,340
--------- ---------
--------- ---------
Notes/leases issued to acquire property and equipment $ 3,411 $ 1,281
--------- ---------
--------- ---------
</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 March 31, 1999 and its results of operations for the three and
nine month periods ended March 31, 1999 and 1998 and its cash flows for the
nine month periods ended March 31, 1999 and 1998. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed
or omitted from the accompanying consolidated financial statements. 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 nine month periods ended March 31, 1999 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>
March 31, June 30,
1999 1998
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<S> <C> <C>
Bulk wine $ 18,795 $ 15,730
Cased and bottled wine 3,908 3,823
Brandy 1,379 2,429
Juice, supplies and other 1,129 1,174
Unharvested crop costs 4,085 7,529
------------- -------------
Total $ 29,296 $ 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 and
third quarters of fiscal 1999 as compared to the second and third quarters of
fiscal 1998.
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 1999 WITH THE THREE MONTHS
ENDED MARCH 31, 1998
Revenues
Total revenues for the third quarter of fiscal 1999 (three months ended
March 31, 1999) were $22.6 million, an increase of $10.5 million or 86.8%, as
compared to revenues of $12.1 million for the third quarter of fiscal 1998
(three months ended March 31, 1998). The overall period to period increase in
revenues was primarily due to the delay in the production and sales of bulk wine
resulting from the delayed harvest of wine grapes.
Bulk Wine and Related Services. For the third quarter of fiscal 1999,
revenues from bulk wine and related services were $18.8 million, an increase of
$11.4 million or 154.1%, as compared to revenues of $7.4 million in the third
quarter of fiscal 1998. Such increase primarily resulted from the delay in the
California wine grape harvest, as noted above.
Case Goods and Related Services. In the third quarter of fiscal 1999,
revenues from case goods and related services were $3.6 million, a decrease of
$.8 million or 18.2%, as compared to revenues of $4.4 million in the third
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.
Grape Sales and Brandy. The Company's grape sales and brandy business
segments did not realize a material amount of revenues in the third quarter
of fiscal 1999.
7
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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 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 third quarter of fiscal 1999, total cost of sales was
$16.6 million, an increase of $7.4 million or 80.4%, from $9.2 million in the
third quarter of fiscal 1998. The dollar increase in cost of sales resulted
from the delay in the production and sales of bulk wine due to the delayed
harvest of wine grapes. As a percentage of revenues, cost of sales for the
third quarter of fiscal 1999 was 73.2%, a decrease from 76.0% in the third
quarter of fiscal 1998. Cost of sales decreased on a percentage of revenue
basis primarily as a result of the Company's intentional restructuring of its
grape contracts to utilize a greater percentage of its own grapes toward the
internal production of bulk wine and brandy.
Gross Profit
Gross profit represents revenues less cost of sales. In the third
quarter of fiscal 1999, the Company realized gross profit of $6.1 million,
an increase of $3.2 million or 110.3%, as compared to gross profit of $2.9
million in the third quarter of fiscal 1998. As a percentage of revenues,
gross profit for the third quarter of fiscal 1999 was 27.0%, an increase from
24.0% in the third quarter of fiscal 1998. Period to period margin growth
was positively impacted by reduced costs of sales in bulk wine, resulting
from the Company's internal use of grapes from the Company's vineyards.
Interest Expense
For the third quarter of fiscal 1999, interest expense was $1.1 million, a
decrease of $.7 million or 38.9%, as compared to interest expense of $1.8
million in the third 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 three quarters of fiscal 1999.
Net Income
For the third quarter of fiscal 1999, net income was $2.0 million, an
increase of $2.2 million, as compared to net loss of $.2 million in the third
quarter of fiscal 1998. Net income in the third quarter of fiscal 1999 was
favorably impacted by revenues that shifted from the second quarter to the
third quarter, due to the delayed grape harvest, as well as by the reduction
of interest expense discussed above.
Earnings Per Share
For the third quarter of fiscal 1999, the basic earnings per share was
$.21, as compared to basic loss per share of $.02 for the third quarter of
fiscal 1998. Net income available to common shareholders for the third
quarter of fiscal 1999 was favorably impacted by the increase in net income.
As previously announced, management believes that net income for the
Company's 1999 fiscal year will be below market expectations by approximately
$.15 to $.25 per share.
8
<PAGE>
COMPARISON OF THE NINE MONTHS ENDED MARCH 31, 1999 WITH THE NINE MONTHS
ENDED MARCH 31, 1998
Revenues
Revenues for the first nine months of fiscal 1999 were $96.4 million, a
decrease of $5.3 million or 5.2%, as compared to revenues of $101.7 million for
the first nine months of fiscal 1998. The overall decrease in revenues was
primarily due to the restructuring of the Company's grape supply relationship
with EJ Gallo Winery.
Bulk Wine and Related Services. For the first nine months of fiscal 1999,
revenues from bulk wine and related services were $58.0 million, an increase of
$4.2 million or 7.8%, as compared to revenues of $53.8 million in the first nine
months of fiscal 1998 due to increased contracted sales of premium red varietal
wines.
Grape Sales. In the first nine months of fiscal 1999, revenues from grape
sales were $13.2 million, a decrease of $9.6 million or 42.1%, as compared to
revenues of $22.8 million in the first nine months of fiscal 1998. Grape tons
delivered to customers decreased to approximately 41,000 tons in the first nine
months of fiscal 1999 compared to approximately 76,000 tons in the first nine
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 nine months of the
Company's 1998 fiscal year.
Case Goods and Related Services. For the first nine months of fiscal 1999,
revenues from case goods and related services were $11.8 million, a decrease of
$3.3 million or 21.9%, as compared to revenues of $15.1 million in the first
nine 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. For the first nine months of fiscal 1999, revenues from the sale
of brandy and grape spirits were $13.3 million, an increase of $3.3 million or
33.0%, as compared to revenues of $10.0 million in the first nine months of
fiscal 1998. Brandy sales volume increased to approximately 2.4 million proof
gallons for the first nine months of fiscal 1999 compared to approximately 1.7
million proof gallons in the first nine months of fiscal 1998 due to an increase
in customer demand.
Cost of Sales
For the first nine months of fiscal 1999, total cost of sales was $72.2
million, a decrease of $3.4 million or 4.5%, from $75.6 million in the first
nine months of fiscal 1998. Cost of sales was significantly higher in the
first nine months of fiscal 1998 than for the same period in fiscal 1999 due
to reserves taken by the Company in fiscal 1998 in connection with disputes
concerning the Company's production of certain wine products. As a
percentage of revenues, cost of sales for the first nine months of fiscal
1999 was 74.9%, an increase from 74.3% in the first nine months of fiscal
1998. The increase in cost of sales on a percentage of revenue basis
resulted from a decrease in revenues due to reduced wine grape tonnage
crushed and processed, decreased yield in the conversion of wine grapes to
bulk wine and brandy and lower average selling prices of excess 1997 vintage
product in 1999, offset by the impact of amounts reserved in FY 98 for
disputes.
Gross Profit
In the first nine months of fiscal 1999, the Company's realized gross
profit of $24.2 million, a decrease of $1.9 million or 7.3%, as compared to
gross profit of $26.1 million in the first nine months of fiscal 1998. As a
percentage of revenues, gross profits for the first nine months of fiscal 1999
were 25.1%, a slight decrease from 25.6% in the first nine months of fiscal
1998. The Company's gross margin for the
9
<PAGE>
first nine months of fiscal 1999 was primarily impacted by the items
discussed above under "Cost of Sales."
Selling, General and Administrative Expenses
For the first nine months of fiscal 1999, selling, general and
administrative expenses were $4.8 million, a decrease of $8.3 million or
63.4%, from $13.1 million for the first nine months of fiscal 1998. Selling,
general and administrative expense was substantially greater in the first
nine months of fiscal 1998 than in the first nine months of fiscal 1999 due
to a one-time management incentive restructuring charge equaling $8.8 million
paid in fiscal 1998.
Interest Expense
For the first nine months of fiscal 1999, interest expense was $3.7
million, a decrease of $1.5 million or 28.8%, as compared to interest expense of
$5.2 million in the first nine 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 nine months of fiscal 1999.
Net Income
For the first nine months of fiscal 1999, net income was $9.3 million, an
increase of $4.6 million, as compared to net income of $4.7 million in the first
nine months of fiscal 1998.
Earnings Per Share
For the first nine months of fiscal 1999, the basic earnings per share was
$.75, as compared to basic earnings per share of $.60 for the first nine months
of fiscal 1998. Net income available to common shareholders for the first nine
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
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Liquidity and Capital Resources
The Company's working capital position at March 31, 1999 was $28.0
million, as compared to $8.7 million at June 30, 1998. The increase in
working capital is primarily due to the reduction of current liabilities
reflecting the use of IPO proceeds, 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 March
31, 1999 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 $8.7
million at March 31, 1999 and $18.2 million at June 30, 1998. Unused
availability under the line of credit was $23.8 million at March 31, 1999.
Net cash provided by operating activities for the first nine months of
fiscal 1999 was $5.1 million, as compared to net cash provided by operations
of $5.2 million for the first nine months of fiscal 1998.
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 for the foreseeable future.
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 is currently conducting 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 core
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 completes its tests and evaluates such equipment early in the next
few months. As part of its Year 2000 compliance program, the Company has
contacted or is contacting 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 $275,000 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 $125,000 and
$175,000 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 core 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.
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: May 14, 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>
EXHIBIT 11
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 Nine Months Ended
March 31, March 31,
------------------------ -------------------------
1999 1998 1999 1998
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Basic EPS Computation
Numerator:
Net income (loss) $ 1,981 $ (159) $ 9,316 $ 4,738
Less: Accretion of redeemed senior preferred stock - - (1,771) -
Accretion of converted junior preferred stock - - (157) -
Redeemable preferred stock dividends - - (400) (635)
--------- --------- ---------- ----------
Income (loss) available to common stockholders $ 1,981 $ (159) $ 6,988 $ 4,103
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Denominator:
Weighted average common shares 9,488 6,862 9,299 6,862
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Basic EPS $ 0.21 $ (0.02) $ 0.75 $ 0.60
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Diluted EPS Computation
Numerator:
Income (loss) available to common stockholders $ 1,981 $ (159) $ 6,988 $ 4,103
Add: Junior preferred stock dividends - - - 35
--------- --------- ---------- ----------
Income (loss) available to common stockholders
and assumed conversions $ 1,981 $ (159) $ 6,988 $ 4,138
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Denominator:
Weighted average common shares outstanding 9,488 6,862 9,299 6,862
Stock options 347 - 293 327
Junior preferred stock - - - 130
--------- --------- ---------- ----------
Adjusted weighted average common shares 9,835 6,862 9,592 7,319
--------- --------- ---------- ----------
--------- --------- ---------- ----------
Diluted EPS $ 0.20 $ (0.02) $ 0.73 $ 0.57
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</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> 9-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-30-1998
<PERIOD-END> MAR-31-1999
<CASH> 52
<SECURITIES> 0
<RECEIVABLES> 13,333
<ALLOWANCES> 185
<INVENTORY> 29,296
<CURRENT-ASSETS> 44,157
<PP&E> 96,455
<DEPRECIATION> 15,111
<TOTAL-ASSETS> 127,613
<CURRENT-LIABILITIES> 16,196
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 58,388
<TOTAL-LIABILITY-AND-EQUITY> 127,613
<SALES> 0
<TOTAL-REVENUES> 96,371
<CGS> 0
<TOTAL-COSTS> 72,183
<OTHER-EXPENSES> 4,780
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,678
<INCOME-PRETAX> 15,737
<INCOME-TAX> 6,421
<INCOME-CONTINUING> 9,316
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,316
<EPS-PRIMARY> .75
<EPS-DILUTED> .73
</TABLE>
