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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 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)
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
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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 / /
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 September 23, 1999, based on the
closing sales price of the Class B Common Stock as reported by Nasdaq on such
date was $29,000,990. 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 September 23, 1999 was 4,342,528 and 5,155,733 shares,
respectively.
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PART I
THIS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 1999 (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.
RECENT DEVELOPMENTS
On April 28, 1999 and again on June 28, 1999 Golden State Vintners, Inc.
("GSV" or the "Company") publicly announced that the Company's earnings for the
second half of fiscal 1999 would be below analysts' earnings estimates for a
number of reasons, including a softness in the premium bulk wine market.
Additionally, on June 28, 1999 the Company announced that it had retained
Goldman, Sachs & Co. to assist the Company in exploring strategic and financial
alternatives to enhance shareholder value.
INTRODUCTION
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"), UDV 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, Robert Mondavi Winery ("Mondavi"),
The Wine Group, 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 Wente
Vineyards, Smith Anderson, Trader Joe's and Archer Daniels Midland Co. ("ADM").
In fiscal 1999, the Company derived approximately 11% 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 primarily a single customer
pursuant to a long-term agreement and is one of the largest brandy producers in
the United States.
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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 primarily 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 five years, the Company has greatly expanded its
presence in the California wine industry by acquiring vineyards and wine and
brandy processing facilities and effectively integrating these assets into GSV's
winemaking operations.
Management believes the Company's recent financial performance has 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. 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.
FISCAL 1999 REVENUES
(dollars in millions)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
BULK WINE AND RELATED SERVICES -
$65.1 60%
<S> <C>
Grape Sales - $13.3 12%
Case Goods and Related Services -
$15.8 15%
Brandy - $13.6 13%
</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 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.
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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 Canandaigua, Sutter Home, Sebastiani and
Heublein, and to a number of international wineries, including Vincor. 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. 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.
In fiscal 1999, approximately 50% of the grapes grown at the Company's
vineyards were used internally for the production of bulk wine and brandy.
Additionally, the Company purchases grapes in the marketplace in order to meet
the needs of its bulk wine and brandy customers. The Company typically buys
grapes from numerous growers pursuant to a variety of short-term, long-term, and
evergreen grape purchase contracts entered into prior to grape harvest.
Additionally, after analyzing anticipated grape yields and grape prices during a
harvest, the Company sometimes elects to purchase needed grapes on the spot
market.
The Company produces more than half of its bulk wine at its wine processing
facility in Fresno, which has the capacity to handle approximately 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 31,000 tons of red wine grapes (the equivalent of 2.2 million
cases) were processed for the production of bulk red wine in fiscal 1999. 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 commissioned wine brokers to sell bulk wine and
services.
The Company also delivers various wine processing, barrel fermentation and
storage services primarily 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. The Company offers a number of
processing and storage services, including crushing grapes, wine production,
fermentation and storage in stainless steel tanks and oak barrels and other
winemaking services. Under a typical wine processing and storage contract, a
wine processing customer will deliver grapes for crushing, fermentation and
storage in separately labeled tanks or barrels. Recently, growth in the "special
natural" category of wines has adversely impacted the bulk wine market,
especially with respect to the lower priced popular premium segment. The Company
believes that the continued popularity of special natural wines may have an
adverse impact on bulk wine sales and values of certain varietal grapes grown by
the Company in future periods.
GRAPE SALES
In May 1995, the Company entered into 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.
These contracts call for payment in full within 30 days of delivery of the crop
to Gallo.
Approximately 50% of the Company's grapes from the 1998 harvest were
retained by the Company for internal use in the production of bulk wine and
brandy. Thus, revenues from grape sales declined significantly in GSV's 1999
fiscal year. The Company believes this use of grapes is a potentially more
profitable allocation of the Company's resources. Certain of the Company's grape
purchase contracts
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require GSV to purchase the entire grape production of a number of small
vineyards. Thus, the Company must purchase varieties of grapes in excess of
quantities required in its production of bulk wine. The Company generally
resells these grapes into the market at approximate cost.
CASE GOODS AND RELATED SERVICES
The Company produces proprietary and private label products and provides
custom bottling and storage services. 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 900,000 cases of wine and wine related
products and services in its 1999 fiscal year. In fiscal 1999, the sale of case
goods produced and bottled for third parties, or "private" case goods, accounted
for more than 50% 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 1999 were derived from three customers based on short-term
arrangements that may terminate at any time. Private label case goods are
produced and bottled at the Company's St. Helena and Cutler facilities.
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 jug category, the Company's
GOLDEN STATE VINTNERS, CUTLER CREEK, J. WILE, MUIRFIELD, SUMMERFIELD and WESTON
brands sell in the popular premium category, the Company's MONTHAVEN, and
DIAMOND GROVE labels compete in the superpremium category and the Company's
EDGEWOOD ESTATE label is sold in the ultrapremium category. The Company's
proprietary wines include 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 grapes into wine, distilling the wine and
aging the product in oak barrels for a minimum of two years until declared
brandy. The Company is among the largest brandy processors in the United States
and has a long-term brandy production agreement to produce brandy for sale under
the CHRISTIAN BROTHERS label currently owned by Heaven Hill Distilleries, Inc.
The Christian Brothers label was previously owned by Heublein through May, 1999.
Under the terms of this agreement, GSV is paid for all aspects of the brandy
distillation process, including the purchase of grapes, storage and various
processing charges. The Company also produces limited quantities of brandy for
other customers.
INTERNATIONAL
Approximately 11% of the Company's revenues in its 1999 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.
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WINEMAKING FACILITIES
The Company's five winemaking, distilling and processing facilities are
located in Fresno, Monterey, Napa and Tulare counties and are adjacent to
primary grape growing and winemaking regions in California.
The table below identifies the name of each of the Company's facilities and
the approximate tonnage of grapes crushed, the number of gallons of wine or
brandy produced, 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 1998
harvest, which are reflected in the Company's 1999 fiscal year.
PRODUCTION AT THE COMPANY'S WINEMAKING FACILITIES
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GALLONS OF
TONS OF GRAPES CASE COOPERAGE
FACILITY NAME CRUSHED EQUIVALENT(1) CAPACITY
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<S> <C> <C> <C>
(IN MILLIONS)
Fresno........................................... 73,200 5.2 21.6
Cutler........................................... 31,500 2.3 15.9
Reedley.......................................... 56,900 2.5(2) 17.4
Monterey......................................... 16,200 1.2 8.6
Napa Valley...................................... 3,400 0.2 1.1
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Total........................................ 181,200 11.4 64.6
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</TABLE>
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(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
grape spirits.
FRESNO. The Company's Fresno winery is situated on six acres within the
Company's 4,400 acre Fresno vineyard and is located approximately 10 miles
southwest of the city of Fresno. The Fresno winery serves as the Company's bulk
wine processing center for primarily varietal white wines, including Chardonnay
and White Zinfandel.
CUTLER. The Company's Cutler facility is the original GSV winery and is
located on approximately 120 acres in Tulare County north of the town of
Visalia. The Cutler winery serves as the Company's primary bulk red wine
processing center including Cabernet Sauvignon and Merlot. Additionally, the
Cutler facility also has a bottling facility servicing the jug and popular
premium segments.
REEDLEY. The Company's Reedley facility is located on a 246-acre parcel in
southern Fresno County, northwest of the town of Reedley. The Company uses the
Reedley facility primarily for the production and storage of brandy.
Additionally, the Reedley facility produces red and dessert wines.
MONTEREY. The Monterey winery is located on 81 acres in the town of
Soledad, in Monterey County, near California's central coast wine region. The
Company uses the winery primarily for custom processing of small lots of
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 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.
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NAPA VALLEY WAREHOUSE. The Company uses the Napa Valley warehouse primarily
for third-party oak barrel storage and related services. The Napa Valley
warehouse has a 24,000-barrel storage capacity, which was virtually full in
fiscal 1999.
FACILITY EXPANSION. The Company has nearly completed its two year, $20
million capital expenditure program. The purpose of the program has been
primarily to upgrade and expand its facilities by the 1999 crush in order to
meet the anticipated increasing capacity and quality needs of its customers.
VINEYARD OPERATIONS
The Company owns more than 9,600 acres of vineyard properties, of which
approximately 8,700 acres are permanently planted. The table below identifies
the name of each of the Company's vineyards and the acres of wine grapes at each
vineyard.
THE COMPANY'S VINEYARD PROPERTIES
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APPROXIMATE
VINEYARD NAME COUNTY LOCATION ACRES PLANTED
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<S> <C> <C>
Fresno Vineyard....................................................... Fresno 3,853
Gravelly Ford Vineyard................................................ Madera 2,136
Lost Hills Vineyard................................................... Kern 1,410
Cawelo Vineyard....................................................... Kern 661
Mazzie Vineyard....................................................... Kern 619
Monterey Vineyard..................................................... Monterey 57
St. Helena Vineyard................................................... Napa 20
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Total............................................................. 8,756(1)
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(1) Includes 376 vineyard acres under development.
GRAPE PRODUCTION. The following table shows GSV's net vine production by
grape variety from the 1994 to 1998 harvest years and the total grape tonnage
produced by GSV following each summer grape harvest. Information regarding the
Company's 1999 harvest is not yet available, however management believes that
the 1999 harvest will be below historical per acre yields.
NET PRODUCTION ACRES OWNED BY GSV AND TONS PRODUCED
<TABLE>
<CAPTION>
NET PRODUCTION ACRES
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GRAPE VARIETY 1994 1995 1996 1997 1998
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<S> <C> <C> <C> <C> <C>
French Colombard................................................. 3,162 3,114 3,114 2,965 2,965
Zinfandel (1).................................................... 135 1,211 1,211 1,211 1,211
Chardonnay (2)................................................... 0 875 875 1,124 1,124
Ruby Cabernet.................................................... 941 941 941 941 941
Merlot (1)....................................................... 125 537 687 687 687
Barbera.......................................................... 379 379 379 379 379
Carnelian........................................................ 344 344 344 344 344
Chenin Blanc..................................................... 861 418 418 313 313
Other............................................................ 1,110 371 416 416 416
--------- --------- --------- --------- ---------
Total Net Production Acres................................... 7,057 8,190 8,385 8,380 8,380
Total Tons Produced.......................................... 68,311 59,183 72,896 88,209 84,122
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(1) Grafted in 1995.
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(2) Grafted in 1995 and 1996.
Typically, the Company's vineyards yield approximately 9.5 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 10.5 tons of
grapes per acre. The Company's 1998 harvest was at more typical levels and
management believes that the 1999 harvest will be below 1998 yields.
In the Company's 1999 fiscal year, approximately $1.6 million was spent on
the Company's vineyards, primarily on vineyard development costs. 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.
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. Management believes 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 contracted to multiple service providers.
WATER SUPPLY. The Company's Fresno, Gravelly Ford, Mazzie and Cawelo
Vineyards benefit from deep aquifers that provide a 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. 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.
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. The grape production from
the Company's phylloxera-infested acres in the 1998 harvest did not evidence
lower yields than in other, unaffected acres. Thus, the Company does not believe
phylloxera will have a material adverse effect on vineyard operations and
production, though there can be no assurances phylloxera will not adversely
affect the Company's future harvests.
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Other pests that may infest vineyards include leafhoppers, thrips,
nematodes, mites, insects, orange tortrix and various grapevine diseases, such
as Pierce's disease, which has destroyed portions of a number of vineyards in
Southern California and elsewhere. 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. 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 pose 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, nine wineries account
for approximately 61% of California wine sales, based on total volume of
California wine shipments in 1998. 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. Most
imports are bottled wines; however, some wineries have imported bulk wine for
bottling and sale in the United States. According to Gomberg, Fredrikson and
Associates, a wine industry consulting firm, bulk table wine imports into the
United States for these purposes increased from approximately 605,000 gallons in
1995 to approximately 8.0 million gallons in 1998.
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.
Further, the growth in the special natural wine category, which is an alcoholic
beverage made up of less than 50% wine, will increase competition for shelf
space with the popular premium segment of the market, which could adversely
impact the Company's bulk wine and certain varietal grape sales.
CUSTOMERS
The Company provides premium bulk wine pursuant to long-term supply
agreements to wineries such as Canandaigua, Sutter Home, Sebastiani, and
Heublein and sells wine grapes to Gallo and others pursuant to long-term grape
purchase contracts. Boisset, Wente, Smith Anderson, Trader Joe's and ADM
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were among the Company's private label case goods customers in fiscal 1999. 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 sells bulk wine internationally to Vincor, Calona Wines
Limited and Vin & Sprit AB among other wineries.
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, MONTHAVEN, DIAMOND GROVE, SUMMERFIELD, WESTON, CUTLER
CREEK, BOUNTY, J. WILE, MUIRFIELD, LEBLANC and GOLDEN GATE VINEYARDS.
EMPLOYEES
As of June 30, 1999, the Company had approximately 180 full-time equivalent
employees. The Company believes that its employee relations are good. GSV also
employs seasonal labor for wine processing services and other related tasks,
primarily during the late summer and early fall months and contract labor
through independent sources as needed for vineyard development, pruning and
harvesting.
9
<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 1999, five of the Company's customers accounted for
approximately 51% of the Company's revenues, with Heublein and Canandaigua
accounting for approximately 17% and 12%, respectively. While some 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 1999 fiscal year, approximately 50% of the Company's grape
production (on a per ton basis) was contracted for sale to Gallo. Such grape
sales accounted for approximately 9% of the Company's revenues in fiscal 1999.
The Company restructured its grape supply arrangements with Gallo, and as the
Company went into the 1998 harvest, most of its grape production was not subject
to guaranteed purchase contracts with Gallo or with any other customer. As a
result of these restructuring efforts, GSV experienced a significant decline in
grape sale revenues for the Company's 1999 fiscal year. Further, if the wine
industry were to experience a significant decline in the price of wine 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 certain 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 small 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
10
<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, 1998 harvest 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, such
as Pierce's disease, which has destroyed portions of a number of vineyards in
Southern California and elsewhere. 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, such as
special natural wines, 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.
11
<PAGE>
DEMAND FOR BULK WINE
Bulk wine and related services accounted for approximately 60% of GSV's
revenues in its 1999 fiscal year. Recently, the Company has focused its
resources on expanding this portion of its business. Any loss of a major bulk
wine customer could 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 15% of
revenues in its 1999 fiscal year. A significant portion of the Company's case
goods revenues consists 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
The Company believes the demand for wine grapes has 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 1998 harvest. However, a number of recent
developments, including (1) plantings of new vineyards, (2) yield enhancements
through technological advances, (3) denser plantings of vines, and (4)
availability of wine from foreign sources, should greatly increase grape supply,
resulting in likely downward price pressure following the 1999 harvest. Such
increases in supply have resulted in certain 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 68% of its revenues during the first six months of the
Company's 1999 fiscal year. GSV has historically operated at a loss in the last
two fiscal quarters due to limited sales during such quarters. In fiscal 1999,
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. Seasonality of revenues also affects the Company's cash
flow requirements. In the past, GSV has borrowed funds under lines of credit
from late summer through the fall to finance inventory build-up during the fall
crush season. GSV also historically borrows funds through the spring and summer
to finance crop production costs through harvest. Such seasonality in revenues
and borrowings may lead to significant fluctuations in the Company's reported
12
<PAGE>
quarterly results. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
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.
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.
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.
13
<PAGE>
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 could 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
completed 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 core, non-information technology systems will be Year 2000
compliant in sufficient time to avoid business interruption, though no
assurances can be given 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".
14
<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 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.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
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................................................................................. $ 12.31 $ 6.88
Third Quarter.................................................................................. $ 15.50 $ 10.25
Fourth Quarter................................................................................. $ 12.00 $ 4.75
</TABLE>
The last reported sale price of the Class B Common Stock on the Nasdaq
National Market on September 23, 1999 was $5.625 per share. As of September 23,
1999, there were 51 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 September 23, 1999, 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.
15
<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
--------- ---------------------------------------------
JULY 1, APRIL 27, YEAR ENDED
1994 TO 1995 TO JUNE 30,
APRIL 26, JUNE 30, ----------------------------------
1995 1995 1996 1997 1998 1999
--------- --------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................ $42,851 $ 4,037 $71,755 $95,785 $111,994 $107,755
Cost of sales (1)....................... 34,772 3,949 58,468 71,662 83,684 83,383
Gross profit............................ 8,079 88 13,287 24,123 28,310 24,372
Selling, general, and administrative
expenses (2).......................... 3,364 951 5,042 7,408 14,451 8,126
Income (loss) from operations........... 4,715 (863 ) 8,245 16,715 13,859 16,246
Interest expense........................ 2,797 920 5,344 5,880 6,867 4,522
Other expense (income), net............. 44 1 394 677 356 15
Income (loss) before income taxes....... 1,874 (1,784 ) 2,507 10,158 6,636 11,709
Net income (loss)....................... 1,874 (1,784 ) 1,924 6,170 4,184 8,261
Redeemable preferred stock dividends.... -- -- (1,290) (1,314) (1,272) (400)
Accretion on preferred stock............ -- -- -- -- -- (1,928)
Redemption of Junior Preferred Stock.... -- -- -- (405) -- --
--------- --------- ------- ------- ------- -------
Income (loss) available to common
stockholders.......................... 1,874 (1,784 ) 634 4,451 2,912 5,933
--------- --------- ------- ------- ------- -------
Earnings (loss) per common share (3):
Basic................................. $ (.26 ) $ .09 $ .65 $ .42 $ .63
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Diluted............................... $ (.26 ) $ .09 $ .65 $ .41 $ .62
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Weighted average shares outstanding (3):
Basic................................. 6,856 6,856 6,860 6,918 9,349
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
Diluted............................... 6,856 6,856 6,860 7,325 9,621
--------- ------- ------- ------- -------
--------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
NEW GSV
-----------------------------------------------------
JUNE 30,
-----------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................................... $ 8,735 $ 9,335 $ 9,386 $ 8,846 $ 22,025
Total assets........................................ 80,941 90,435 102,111 124,519 128,520
Total long-term debt................................ 44,322 42,973 49,781 51,918 39,250
Redeemable preferred stock.......................... 9,978 10,034 8,813 8,951 --
Stockholders' equity................................ 10,037 10,670 12,574 18,136 57,483
</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.
16
<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, 1995 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, could 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.
17
<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 12 of Notes to Consolidated Financial
Statements.
The table below sets forth summary statement of operations data for the
three fiscal years ended June 30, 1999:
SUMMARY STATEMENT OF OPERATIONS DATA
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Revenues................................................... $ 95,785 $ 111,994 $ 107,755
Cost of sales.............................................. 71,662 83,684 83,383
--------- ---------- ----------
Gross profit............................................... 24,123 28,310 24,372
Selling, general and administrative expenses............... 7,408 14,451 8,126
--------- ---------- ----------
Income (loss) from operations.............................. 16,715 13,859 16,246
Interest expense........................................... 5,880 6,867 4,522
Other expense (income), net................................ 677 356 15
--------- ---------- ----------
Income before income taxes................................. 10,158 6,636 11,709
Income taxes............................................... 3,988 2,452 3,448
--------- ---------- ----------
Net income................................................. $ 6,170 $ 4,184 $ 8,261
--------- ---------- ----------
--------- ---------- ----------
</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,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0%
Cost of sales........................................................ 74.8 74.7 77.4
--------- --------- ---------
Gross profit......................................................... 25.2 25.3 22.6
Selling, general and administrative expenses......................... 7.7 12.9 7.5
--------- --------- ---------
Income (loss) from operations........................................ 17.5 12.4 15.1
Interest expense..................................................... 6.2 6.2 4.2
Other expense, net................................................... 0.8 0.3 0.0
--------- --------- ---------
Income before income taxes........................................... 10.6 5.9 10.9
Income taxes (benefit)............................................... 4.2 2.2 3.2
--------- --------- ---------
Net income........................................................... 6.4 3.7 7.7
--------- --------- ---------
--------- --------- ---------
</TABLE>
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.
18
<PAGE>
As a result, the Company typically reports lower revenues and net income (loss)
in the third and fourth fiscal quarters. In fiscal 1999, 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.
The following table illustrates the seasonality of the Company's revenues,
gross profit and net income (loss) for each of the four fiscal quarters of the
Company's 1999 fiscal year:
QUARTERLY REVENUES, GROSS PROFIT AND NET INCOME (LOSS)
<TABLE>
<CAPTION>
FISCAL 1999 QUARTER ENDED
------------------------------------------------
SEPT. 30 DEC. 31 MAR. 31 JUNE 30
--------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................................. $ 17,756 $ 56,008 $ 22,607 $ 11,384
Percent of revenues for the year ended
June 30, 1999........................... 16.5% 52.0% 21.0% 10.5%
Gross profit.............................. $ 4,953 $ 13,185 $ 6,050 $ 184
Percent of gross profit for the year ended
June 30, 1999........................... 20.3% 54.1% 24.8% .8%
Net income (loss)......................... $ 1,186 $ 6,150 $ 1,981 $ (1,056)
Percent of net income (loss) for the year
ended June 30, 1999..................... 14.4% 74.4% 24.0% (12.8)%
</TABLE>
Through the third quarter of fiscal 1999, the Company had projected certain
levels of inventory as of June 30, 1999 for use in its calculation of its
last-in, last-out (LIFO) inventory valuation. However, actual inventory levels
at June 30, 1999 were substantially higher than the projected levels.
Consequently, a year-end adjustment of approximately $2.6 million in the fourth
quarter of fiscal 1999 was recognized for the change between interim and final
year end LIFO balances.
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,
---------------------------------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Revenues:
Bulk wine and related services........................... $ 50,228 $ 58,928 $ 65,116
Grape sales.............................................. 18,585 22,817 13,261
Case goods and related services.......................... 15,829 19,941 15,795
Brandy................................................... 11,143 10,308 13,583
--------- ---------- ----------
Total revenues......................................... $ 95,785 $ 111,994 $ 107,755
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
19
<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,
-------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues:
Bulk wine and related services..................................... 52.5% 52.6% 60.4%
Grape sales........................................................ 19.4 20.4 12.3
Case goods and related services.................................... 16.5 17.8 14.7
Brandy............................................................. 11.6 9.2 12.6
--------- --------- ---------
Total revenues................................................... 100% 100% 100%
--------- --------- ---------
--------- --------- ---------
</TABLE>
FISCAL YEARS ENDED JUNE 30, 1999 AND 1998
REVENUES
Revenues for the fiscal year ended 1999 were $107.8 million, a decrease of
$4.2 million or 3.8%, as compared to revenues of $112.0 million in the fiscal
year ended 1998. The overall decrease in revenues was primarily due to the
restructuring of the Company's grape supply relationship with Gallo and a
smaller grape harvest in general, and, to a lesser extent, a reduction in case
goods revenues.
BULK WINE AND RELATED SERVICES. For the Company's 1999 fiscal year,
revenues from bulk wine and related services were $65.1 million, an increase of
$6.2 million or 10.5%, as compared to revenues of $58.9 million in fiscal 1998.
This increase in revenues is primarily due to higher customer demands for
contracted premium red varietal bulk wines and the increase of bulk wine
production and processing and storage service operations at the Company's
Monterey facility.
GRAPE SALES. In fiscal 1999, revenues from grape sales were $13.3 million,
a decrease of $9.5 million or 41.7%, as compared to revenues of $22.8 million in
fiscal 1998. Grape tons delivered to customers decreased to approximately 41,000
tons in fiscal 1999 compared to approximately 76,000 tons in fiscal 1998. This
was primarily a result of the Company's planned re-allocation 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, year-to-year comparisons were affected by
the above-average grape harvest in the summer and autumn of 1997, which resulted
in greater than normal grape revenues in the Company's 1998 fiscal year, and the
following season's average harvest in 1998, reducing grape revenues in fiscal
year 1999.
CASE GOODS AND RELATED SERVICES. For fiscal 1999, revenues from case goods
and related services were $15.8 million, a decrease of $4.2 million or 21.0%, as
compared to revenues of $20.0 million in fiscal 1998. The period-to-period
decline in case goods and related services revenues was primarily due to a
decline in certain Far East 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 fiscal 1999, revenues from the sale of brandy and grape spirits
were $13.6 million, an increase of $3.3 million or 32.0%, as compared to $10.3
million in revenues from the previous period. Brandy sales volume increased to
approximately 2.4 million proof gallons for fiscal 1999 compared to
approximately 1.7 million proof gallons in fiscal 1998, due to an increase in
customer demand.
20
<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 1999, total cost of sales was $83.4 million, a decrease of $.3
million or 0.4%, from $83.7 million in fiscal 1998. As a percentage of revenues,
for fiscal 1999, cost of sales was 77.4%, an increase from 74.7% for fiscal
1998. The increase in cost of sales on a percentage of revenue basis resulted
from a lower than planned fixed costs absorption caused by reduced wine grape
tonnage crushed and processed and a lower volume of case goods sold, decreased
yields in the conversion of wine grapes to bulk wine and brandy, lower average
selling prices of bulk spot market 1997 and 1998 vintage product sold in 1999,
and by a substantial increase in the Company's LIFO reserve, offset by the
impact of amounts reserved in fiscal 1998 for wine product contingent
liabilities.
GROSS PROFIT
In fiscal 1999, the Company realized gross profit of $24.4 million, a
decrease of $3.9 million or 13.8%, as compared to gross profit of $28.3 million
for fiscal 1998. As a percentage of revenues, in fiscal 1999 gross margin
declined to 22.6%, from 25.3% in fiscal 1998. The Company's gross margin for
fiscal 1999 was primarily impacted by the items discussed above under "Cost of
Sales".
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 1999, selling, general and administrative expenses were $8.1 million,
a decrease of $6.4 million or 44.1%, from $14.5 million for fiscal 1998.
Selling, general and administrative expense was substantially lower in fiscal
1999 than in fiscal 1998, due to a one-time management incentive restructuring
charge equaling $8.8 million in fiscal 1998.
INTEREST EXPENSE
For fiscal 1999, interest expense was $4.5 million, a decrease of $2.4
million or 34.8%, as compared to interest expense of $6.9 million in fiscal
1998. At the beginning of fiscal 1999, the Company used a portion of the net
proceeds from its initial public offering to repay approximately $11.9 million
in long-term debt, $5.4 million in officer notes and to reduce its outstanding
line of credit balance by $4.7 million, thereby reducing interest expense for
fiscal 1999, and in future years.
NET INCOME
For fiscal 1999 net income was $8.3 million, an increase of $4.1 million or
97.6%, as compared to net income of $4.2 million for fiscal 1998. As a
percentage of revenues, for fiscal 1999, net income was 7.7%, as compared to
3.7% for fiscal 1998. This increase is largely due to lower interest and
selling, general and administrative expenses in fiscal 1998, lower income taxes,
as a percentage of pre-tax earnings, as a result of a substantial reduction of
the valuation allowance on deferred tax assets, partially offset by a lower
gross profit in fiscal 1999, in each case as explained above.
EARNINGS PER SHARE
For fiscal 1999, basic earnings per share were $.63, an increase of $.21 or
50.0%, as compared to basic earnings per share of $.42 for fiscal 1998. Net
earnings available to common shareholders for fiscal 1999 was impacted by the
increase in net income offset by dividend payments of $0.4 million on shares of
Senior Preferred Stock and, as a result of Company's initial public offering,
accretion of $1.9 million with respect to senior preferred stock redeemed and
junior preferred stock converted in the first quarter of fiscal 1999.
21
<PAGE>
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.
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 22.6%, 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%.
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 in 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.
COST OF SALES
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 the 1997 growing season.
GROSS PROFIT
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.
22
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
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. Selling, general and administrative expenses increased from period to
period primarily as a result of Management Incentives.
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 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position at June 30, 1999 was $22.0 million,
as compared to $8.8 million at June 30, 1998. The increase in working capital is
primarily due to a reduction of current liabilities reflecting the use of public
offering 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. Collateral balances as of June 30, 1999 are adequate for the
Company's working capital line of credit. Borrowings under the line typically
peak in December, during the Company's second fiscal quarter. Revolving line of
credit balances were $18.2 million and $8.1 million at June 30, 1998 and 1999,
respectively. Unused availability under the line of credit was $24.4 million at
June 30, 1999.
Operating cash flow for the year ended June 30, 1999 was $9.4 million, as
compared to cash flow from operations of $0.4 million for the year ended June
30, 1998. The increase in operating cash flow is primarily due to a decrease in
the inventory balance reflective of the reduced 1998 crush as compared to the
1997 crush.
Management expects the Company's working capital requirements will grow as
the business expands and peak borrowing needs will continue to occur in the
second quarter of the Company's fiscal year. Management believes 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 2000 fiscal year.
23
<PAGE>
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 completed a comprehensive program to identify, evaluate and
address issues associated with the ability of its information technology and
core 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 has conducted comprehensive tests of all of its software programs
for Year 2000 compliance as part of its Year 2000 readiness program. The Company
believes that its core non-information technology systems, such as its bottling
and production equipment, air conditioning/refrigeration units, telephones and
faxes will not be adversely affected by the Year 2000, due to the completion of
its tests and evaluation of such equipment. As part of its Year 2000 compliance
program, the Company is contacting its significant vendors, suppliers and
customers to ascertain whether the systems used by such third parties are Year
2000 compliant. The Company has completed virtually all Year 2000 compliance
software testing.
To date, the Company has spent approximately $182,000 to reprogram, replace
and test its information technology software for Year 2000 compliance. The
Company estimates costs of these efforts will be between $195,000 and $200,000.
Costs and expenses arising in connection with the Company's Year 2000 compliance
efforts have been, and will be, expensed as incurred.
The Company currently anticipates that both its core information technology
and non-information technology systems will be Year 2000 compliant in sufficient
time to avoid business interruptions, though no assurances can be given that the
Company's compliance testing will not detect unanticipated Year 2000 compliance
problems. Furthermore, the Company does not yet know the Year 2000 compliance
status of all third parties that are integral to the Company's business and is
therefore currently unable to assess the likelihood or the risk to the Company
of third party system failures. However, a system failure by any of the
Company's significant customers, suppliers or vendors could result in a material
adverse effect on the Company's business and operations.
The Company has developed contingency plans to handle a Year 2000 system
failure experienced by its information technology systems. These backup
procedures, including manual record keeping and processing, have been tested and
utilized by the Company in the past during times of unplanned system failure.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company holds no market risk sensitive trading instruments. All Company
balance sheet items and sales are in U.S. dollars, therefore the Company has no
foreign currency exchange rate risk related to these financial data. The Company
does not use financial instruments for trading purposes.
24
<PAGE>
Certain Company debt is subject to variable interest rate options. The
following chart indicates the Company's fixed and variable rate long and
short-term debt at fiscal year ended June 30, 1999, and estimates the balances
of such debt in future periods ($ millions):
<TABLE>
<CAPTION>
1999 2000 2001 2002 2003 2004
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Bank line of credit:
Average Outstanding* $ 13.4 $ 12.5 $ -- $ -- $ -- $ --
Weighted average rate for year 6.67% 6.60% -- -- -- --
Long-term Debt:
Fixed Rate:
Average Outstanding $ 12.8 $ 12.2 $ 9.8 $ 8.5 $ 6.3 $ 4.1
Weighted average rate for year 8.13% 8.09% 8.14% 8.21% 7.31% 7.33%
Variable Rate:
Average Outstanding $ 31.0 $ 29.5 $ 27.9 $ 26.1 $ 24.2 $ 22.1
Weighted average rate for year 9.69% 9.69% 9.00% 9.00% 9.00% 9.00%
</TABLE>
- ------------------------
* Based on current anticipated cash flow, the Company believes that its bank
line of credit will be fully repaid and retired in fiscal 2000.
At June 30, 1999, the balance of the Company's variable rate long-term debt
was $30.3 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
September 23, 1999, the five-year U.S. treasury note interest rate was
approximately 5.75%.
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 1999, the average outstanding balance under this line was approximately
$13.4 million, with a weighted average interest rate of approximately 6.7%. The
Company estimates an average outstanding balance under such line of $12.5
million for fiscal 2000 and a 6.6% 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 2000.
At June 30, 1999, the balance on the Company's fixed rate long-term debt was
$13.8 million and carried a weighted average interest rate of approximately
8.1%. The Company estimates that the outstanding balance on such debt will be
$10.5 million at June 30, 2000 and will bear interest at a weighted average rate
of 8.1%.
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 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, 1999, or the 1998 harvest year, approximately 3% of
the Company's total wine grape purchases on
25
<PAGE>
a dollar basis were adjusted upward against contract minimum prices following
the harvest. The Company expects to experience similar grape price adjustments
during the 2000 fiscal year, with respect to the 1999 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, 1999, the Company's reported inventory value excluding unharvested
crop costs was $20.0 million, of which approximately $7.3 million, or 37%, is
contractually committed to future production programs. The uncommitted amount of
inventory, approximately $12.7 million, or 63%, 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.
26
<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............... 42 President, Chief Executive Officer and Director
Brian R. Thompson................ 48 Chief Financial Officer and Secretary
Jeffrey J. Brown (1)(2).......... 38 Chairman of the Board of Directors, Assistant Secretary and Director
Nicholas B. Binkley (2).......... 53 Director
Douglas R. Wolter................ 32 Director
Keith R. Fox..................... 45 Director
W. Scott Hedrick (2)............. 53 Director
Peter W. Mullin (1).............. 58 Director
Gregory J. Forrest............... 53 Director
Lawrence E. Brink................ 53 Vice President, Production Operations
Michael B. Drobnick.............. 43 Vice President, Bulk Sales
Jeffrey L. Dye................... 45 Vice President, Case Goods
Phillip L. Hurst................. 36 Vice President, International Sales
Peter M. Byck.................... 36 Vice President, Strategy and Business Development
Donald L. Stanley................ 62 General Manager, Reedley and Director of Wine Grape Procurement
Robert Darby..................... 58 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,
27
<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.
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.
PHILLIP L. HURST joined the Company in July 1998 as Vice President,
International Sales. Prior to that time, Mr. Hurst held various sales management
positions at Fetzer Vineyards from 1985 to 1998.
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.
DONALD L. STANLEY joined the Company in 1989 and is currently the General
Manager at the Company's Reedley and Cutler facilities 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.
28
<PAGE>
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. Based solely on its review of the copies of such forms received by it, the
Company believes that its Insiders complied with all applicable Section 16
filing requirements during fiscal 1999.
29
<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, 1999, 1998
and 1997 (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS(1)
COMPENSATION ------------
-------------------------------- SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS COMPENSATION(5)
- --------------------------------------------- ------ -------- ------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Jeffrey B. O'Neill (2) ...................... 1999 $350,012 $ 30,000 -- $ 37,015
President and Chief Executive Officer 1998 323,551 9,466,888(3) 649,347(4) 35,757
1997 309,331 802,040 670,434 14,947
Jeffrey L. Dye .............................. 1999 125,000 90,000 -- 4,794
Vice President, Case Goods 1998 128,946 73,435 -- --
1997 75,000 65,000 17,400 --
Michael B. Drobnick ......................... 1999 140,000 75,000 -- 2,933
Vice President, Bulk Sales 1998 144,805 58,435 -- --
1997 75,000 65,000 17,400 --
Brian R. Thompson ........................... 1999 190,000 -- -- --
Chief Financial Officer and Secretary 1998 191,962 1,445,000(3) 145,000(4) --
1997 165,000 40,000 -- --
Phillip L. Hurst (6) ........................ 1999 108,365 56,000 6,000 2,194
</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
$50,000 or 10% of the total of such officer's salary and bonus, nor did any
such Named Officer receive any restricted stock award, stock appreciation
right or payment under any long-term incentive plan.
(2) This table sets forth all compensation awarded to, earned by or paid to Mr.
O'Neill for services rendered as an officer of the Company and as an officer
of Golden State Vintners during the fiscal years ended June 30, 1998 and
1999, which compensation was paid by the Company.
(3) Bonus as earned by Messrs. O'Neill and Thompson in fiscal 1998 were in
connection with the Replacement Incentives issued to them on January 1,
1998. Such bonus amounts were invested by Messrs. O'Neill and Thompson in
the Company's Common Stock. See "Certain Relationships and Related
Transactions--Other Transactions with Executive Officers, Directors and
Principal Stockholders."
(4) The options granted to Messrs. O'Neill and Thompson in fiscal 1998 were made
in connection with the Replacement Incentives issued to them on January 1,
1998.
(5) Consists of disability insurance premiums and/or car expenses paid by the
Company.
(6) Mr. Hurst commenced employment with the Company in July 1998, at the
beginning of the Company's 1999 fiscal year.
30
<PAGE>
STOCK OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information concerning stock options granted
to the Named Officers of the Company during fiscal 1999. No stock appreciation
rights were granted to such persons during such period.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE OF FOR OPTION TERM (2)
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION ---------------------
NAME GRANTED (#) FISCAL YEAR ($/SH)(1) DATE 5% 10%
- ------------------------------- ------------- ------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Philip L. Hurst................ 6,000 100% 17.00 7/13/08 $ 64,147 $ 162,562
</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.
STOCK OPTION EXERCISES IN LAST FISCAL YEAR
During the last fiscal year, no stock options were exercised by the Named
Officers.
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.
In fiscal 1999, the Company's Compensation Committee consisted of Messrs.
Brown, Mullin and Hedrick. During the Company's last completed fiscal year, the
Compensation Committee met once. In fiscal 1999, the Company's Audit Committee
consisted of Messrs. Binkley and Brown. In the last fiscal year, the Audit
Committee met once.
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.
31
<PAGE>
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 531,093 shares of Class B Common Stock and 362,832 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, 1999, options to purchase a total of 362,832 shares of Class
A Common Stock and 146,500 shares of Class B Common Stock are outstanding under
the 1996 Option Plan. Such options have per share exercise prices ranging from
$3.62 to $17.00, or a weighted average per share exercise price of $5.16.
Expiration dates range from December, 2006 to July, 2008.
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.
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, 1999, 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.
Expiration dates range from April, 2008 to May, 2008.
32
<PAGE>
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 each of its
eight independent directors, 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. See "Certain
Relationships and Related Transactions".
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
33
<PAGE>
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.
34
<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 September 15,
1999, 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
----------------------------------------------------------
NUMBER PERCENTAGE
NUMBER OF PERCENT OF OF PERCENT OF 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 68.6% -- -- 31.6%
201 Main Street, Suite 2302
Fort Worth, TX 76102
Jeffrey B. O'Neill ................................... 934,388(2) 21.4% 673,728(3) 13.1% 16.9%
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 (4) ............................................ 435,757 10.0% -- -- 4.6%
10 East 53rd Street
New York, NY 10022
Jeffrey J. Brown (5) .................................. 3,000,000 68.6% -- -- 31.6%
Nicholas B. Binkley (5) ............................... 3,000,000 68.6% -- -- 31.6%
Douglas R. Wolter (5) ................................. 3,000,000 68.6% -- -- 31.6%
Keith R. Fox (4) ...................................... 435,757 10.0% -- -- 4.6%
W. Scott Hedrick ...................................... -- -- 27,000 * *
Peter W. Mullin ....................................... -- -- 30,972 * *
Gregory J. Forrest (5) ................................ 3,000,000 68.6% -- 31.6%
Brian R. Thompson (6) ................................. -- -- 144,999 2.8% 1.5%
Jeffrey L. Dye (7) .................................... -- -- 8,700 * *
Michael B. Drobnick (7) ............................... -- -- 8,700 * *
Phillip L. Hurst (8) .................................. 1,500 * *
All Directors and Named Officers as a group (13
persons) (9) ........................................ 4,370,145 100% 897,599 17.4% 55.5%
</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 9,498,261 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 27,617 shares of Class A Common Stock issuable upon exercise of
stock options exercisable within sixty days of September 27, 1999.
(3) 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 September 27, 1999.
35
<PAGE>
(4) 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.
(5) 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.
(6) 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 September 27, 1999.
(7) Represents 8,700 shares of Class B Common Stock issuable upon the exercise
of stock options exercisable within sixty days of September 27, 1999.
(8) Represents 1,500 shares of Class B Common Stock issuable upon the exercise
of stock options exercisable within sixty days of September 27, 1999.
(9) Includes shares held by SBIC Partners and Exeter, and 783,629 shares of
Class B Common Stock issuable under stock options exercisable within 60 days
of September 27, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
TRANSACTIONS WITH EXECUTIVE OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
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 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.
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 Mr. O'Neill, 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.
36
<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.............................................................. 39
Consolidated Balance Sheets as of June 30, 1998 and 1999.................................. 40
Consolidated Statements of Income for the Three Years in the Period Ended June 30, 1999... 41
Consolidated Statements of Stockholders' Equity for the Three Years in the Period Ended
June 30, 1999........................................................................... 42
Consolidated Statements of Cash Flows for the Three Years in the Period Ended
June 30, 1999........................................................................... 43
Notes to Consolidated Financial Statements................................................ 44
</TABLE>
(2) Index to Financial Statement Schedules:
<TABLE>
<S> <C>
Independent Auditors' Report on Supplementary Financial Schedule........ 62
Schedule II--Valuation and Qualifying Accounts.......................... 63
</TABLE>
(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>
37
<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>
38
<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.
23.1 Consent of Deloitte & Touche LLP
24.1 Power of Attorney (included on page 61).
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.
39
<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, 1998 and 1999,
and the related consolidated statements of income, stockholders' equity and cash
flows for each of the three years in the period ended June 30, 1999. 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, 1998
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended June 30, 1999, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Fresno, California
September 15, 1999
40
<PAGE>
GOLDEN STATE VINTNERS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents............................................................ $ 39,828 $ 29,594
Trade receivables--net.......................................................... 7,585,639 9,938,963
Inventories..................................................................... 30,684,769 27,171,992
Refundable income taxes......................................................... 4,657,987 4,131,544
Refundable deposits and prepaid expenses........................................ 1,359,435 728,549
Deferred income taxes........................................................... 566,183 388,151
------------- -------------
Total current assets.......................................................... 44,893,841 42,388,793
PROPERTY, PLANT AND EQUIPMENT--Net.................................................. 77,640,568 84,034,087
NOTE RECEIVABLE..................................................................... 1,722,322 1,722,322
DEFERRED FINANCING COSTS AND OTHER ASSETS........................................... 462,249 374,610
------------- -------------
TOTAL ASSETS........................................................................ $ 124,718,980 $ 128,519,812
------------- -------------
------------- -------------
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit............................................................... $ 18,200,000 $ 8,100,000
Cash overdraft.................................................................... 801,495 964,467
Accounts payable.................................................................. 3,919,595 4,029,023
Payable to growers................................................................ 923,686 659,838
Payroll and related liabilities................................................... 6,352,262 634,391
Accrued interest.................................................................. 1,127,022 886,177
Other accrued liabilities......................................................... 1,403,870 191,346
Current portion of long-term debt................................................. 3,520,049 4,898,757
------------- -------------
Total current liabilities....................................................... 36,247,979 20,363,999
LONG-TERM DEBT...................................................................... 51,917,664 39,250,458
DEFERRED INCOME TAXES............................................................... 9,467,014 11,422,201
REDEEMABLE PREFERRED STOCK.......................................................... 8,950,501 --
COMMITMENTS AND CONTINGENCIES (Notes 10 and 12)
STOCKHOLDERS' EQUITY:
Common stock:
Class A common stock; 0 issued and outstanding at June 30, 1998 and 4,342,528 at
June 30, 1999................................................................. -- 43,425
Class B common stock; 5,868,612 issued and outstanding at June 30, 1998 and
5,155,733 at June 30, 1999.................................................... 20,237 51,558
Class E common stock; 1,200,829 issued and outstanding at June 30, 1998 and 0 at
June 30, 1999................................................................. 4,141 --
Class K common stock; 129,477 issued and outstanding at June 30, 1998 and 0 at
June 30, 1999................................................................. 446 --
Additional paid-in capital........................................................ 11,492,808 44,836,541
Retained earnings................................................................. 6,618,190 12,551,630
------------- -------------
Total stockholders' equity.................................................... 18,135,822 57,483,154
------------- -------------
TOTAL LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY.............. $ 124,718,980 $ 128,519,812
------------- -------------
------------- -------------
</TABLE>
See notes to consolidated financial statements.
41
<PAGE>
GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
REVENUES, net:
Bulk wine...................................................... $ 50,227,982 $ 58,928,186 $ 65,116,190
Wine grapes.................................................... 18,585,126 22,817,043 13,260,863
Case goods..................................................... 15,829,183 19,941,205 15,794,918
Brandy and spirits............................................. 11,142,534 10,307,735 13,583,441
------------- -------------- --------------
Total revenues............................................... 95,784,825 111,994,169 107,755,412
COST OF SALES.................................................... 71,661,816 83,684,275 83,382,860
------------- -------------- --------------
GROSS PROFIT..................................................... 24,123,009 28,309,894 24,372,552
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES..................... 7,408,179 14,450,949 8,126,170
------------- -------------- --------------
INCOME FROM OPERATIONS........................................... 16,714,830 13,858,945 16,246,382
INTEREST EXPENSE................................................. (5,879,945) (6,867,209) (4,521,836)
OTHER EXPENSE, net............................................... (676,701) (356,113) (15,458)
------------- -------------- --------------
INCOME BEFORE INCOME TAXES....................................... 10,158,184 6,635,623 11,709,088
INCOME TAXES..................................................... 3,988,000 2,452,000 3,448,000
------------- -------------- --------------
NET INCOME....................................................... 6,170,184 4,183,623 8,261,088
REDEEMABLE PREFERRED STOCK DIVIDENDS............................. (1,314,218) (1,271,242) (400,000)
ACCRETION ON PREFERRED STOCK..................................... -- -- (1,927,648)
REDEMPTION OF JUNIOR PREFERRED STOCK............................. (404,682) -- --
------------- -------------- --------------
EARNINGS AVAILABLE TO COMMON STOCKHOLDERS........................ $ 4,451,284 $ 2,912,381 $ 5,933,440
------------- -------------- --------------
EARNINGS PER COMMON SHARE:
BASIC.......................................................... $ .65 $ 0.42 $ 0.63
------------- -------------- --------------
------------- -------------- --------------
DILUTED........................................................ $ .65 $ 0.41 $ 0.62
------------- -------------- --------------
------------- -------------- --------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
BASIC.......................................................... 6,860,237 6,917,904 9,348,628
------------- -------------- --------------
DILUTED........................................................ 6,860,237 7,325,324 9,621,144
------------- -------------- --------------
</TABLE>
See notes to consolidated financial statements.
42
<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,
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
Issuance of common
stock............ 43,425 29,827 (4,141) (446) 33,922,835 -- 33,991,500
Public offering
costs............ -- -- -- -- (1,614,294) -- (1,614,294)
Conversion of
Junior Preferred
Stock............ -- 1,304 -- -- 889,221 (156,694) 733,831
Stock option
exercise......... -- 190 -- -- 90,744 -- 90,934
Tax benefit of
stock option
exercise......... -- -- -- -- 55,227 -- 55,227
Accretion on Senior
Preferred
stock............ -- -- -- -- -- (1,770,954) (1,770,954)
Dividends paid on
redeemable
preferred
stock............ -- -- -- -- -- (400,000) (400,000)
Net income......... -- -- -- -- -- 8,261,088 8,261,088
---------- --------- --------- --------- -------------- -------------- -------------
BALANCE, JUNE 30,
1999................ $ 43,425 $ 51,558 $ -- $ -- $ 44,836,541 $ 12,551,630 $ 57,483,154
---------- --------- --------- --------- -------------- -------------- -------------
---------- --------- --------- --------- -------------- -------------- -------------
</TABLE>
See notes to consolidated financial statements.
43
<PAGE>
GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income............................................................. $ 6,170,184 $ 4,183,623 $ 8,261,088
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 4,206,932 4,144,814 4,453,503
Provision for doubtful accounts...................................... 43,000 90,000 1,100,000
Loss on disposal of assets........................................... 25,629 45,463 61,392
Deferred income taxes................................................ 10,319 2,723,240 3,384,182
Change in deferred tax valuation allowance........................... -- (571,992) (1,250,963)
Changes in operating assets and liabilities, net of effects of
dissolution of GSVI Partnership in 1998:
Trade receivables.................................................. 1,803,692 (3,042,528) (3,453,324)
Inventories........................................................ (5,198,884) (8,436,654) 4,128,111
Prepaid expenses................................................... (216,586) (1,210,992) (495,439)
Accounts payable................................................... (3,039,970) 2,053,866 109,428
Payable to growers................................................. 126,942 (139,363) (263,848)
Accrued interest................................................... (32,162) 526,536 (240,845)
Payroll and related liabilities.................................... 632,724 4,961,258 (5,717,871)
Deferred compensation.............................................. 1,338,506 (1,989,112) --
Other accrued liabilities.......................................... (1,769) 1,474,228 (1,212,524)
Income taxes payable............................................... 547,612 (4,417,067) 581,670
----------- ----------- -----------
Net cash provided by operating activities.......................... 6,416,169 395,320 9,444,560
----------- ----------- -----------
INVESTING ACTIVITIES:
Purchases of property, plant and equipment............................. (4,777,797) (5,537,312) (8,128,184)
Partnership dissolution................................................ -- (97,576) --
Refund (payment) of deposits........................................... 727,000 142,000 (2,750)
----------- ----------- -----------
Net cash used in investing activities................................ (4,050,797) (5,492,888) (8,130,934)
----------- ----------- -----------
FINANCING ACTIVITIES:
Borrowings on line of credit........................................... 24,708,097 61,800,000 56,350,000
Payments on line of credit............................................. (20,908,097) (56,400,000) (66,450,000)
Cash overdraft increase................................................ -- 801,495 162,972
Borrowings on long-term debt........................................... 2,568,922 -- --
Payments on long-term debt............................................. (3,022,213) (2,862,685) (14,581,297)
Payment of financing costs............................................. (114,208) (10,000) --
Proceeds from stock option exercises................................... -- 1,861,303 90,934
Payment of dividends on redeemable preferred stock..................... (1,314,218) (1,271,242) (400,000)
Issuance of capital stock.............................................. 7,199,994 -- 33,991,500
Public offering costs.................................................. -- -- (487,969)
Repurchase of common stock............................................. (9,747,910) -- --
Redemption of preferred stock.......................................... (1,729,375) -- (10,000,000)
----------- ----------- -----------
Net cash provided by (used in) financing activities.................. (2,359,008) 3,918,871 (1,323,860)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND EQUIVALENTS.............................. 6,364 (1,178,697) (10,234)
CASH AND EQUIVALENTS, BEGINNING OF PERIOD................................ 1,212,161 1,218,525 39,828
----------- ----------- -----------
CASH AND EQUIVALENTS, END OF PERIOD...................................... $ 1,218,525 $ 39,828 $ 29,594
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
44
<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 through June 1998 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
graduating monthly interest payments commencing at 11% and increasing to 15%
from July 1, 2000 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, 1999
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. At June 30, 1998 it was not practicable to
estimate the fair value of the redeemable preferred stock because it was not
traded in the open market and hence its value was 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 wine distributors and
major wineries located principally in California. The Company performs periodic
credit evaluations of its customers' financial
45
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
condition and generally does not require collateral for its sales. Trade and
other receivables at June 30, 1998 and 1999 are net of an allowance for doubtful
accounts of approximately $176,000 and $1,272,000, 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. Inventories at June 30, 1998 and 1999 would
have been higher by $1,928,275 (including $866,774 for brandy inventories) and
$3,909,047 (including $336,237 for brandy inventories), respectively, had the
Company used FIFO cost rather than LIFO cost for valuation of its inventories.
Such difference at June 30, 1999 includes a $2,576,051 year end adjustment to
recognize changes between estimated interim and final year end LIFO balances.
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, 1998 and 1999, such costs were
$454,249 and $427,140, respectively, which were net of accumulated amortization
of $408,075 and $286,440, respectively.
46
<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 in the contract. 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. Revenues relating to product stored
by the Company after it has been sold totalled approximately $17,100,000,
$18,800,000 and $24,000,000 in the years ended June 30, 1997, 1998 and 1999,
respectively. At June 30, 1998 and 1999 accounts receivable includes
approximately $1,400,000 and $4,900,000, respectively, pertaining to product
sales in which the products were stored by the Company at such dates.
MAJOR CUSTOMERS
Wine grape sales are primarily to one customer that accounted for
approximately 15%, 17% and 9% of total revenues in the years ended June 30,
1997, 1998 and 1999, respectively.
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%, 13% and 17% of total revenues in the years ended June 30,
1997, 1998 and 1999, respectively. In addition, a bulk wine customer accounted
for approximately 7%, 8% and 12% of total revenues in the years ended June 30,
1997, 1998 and 1999 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. Deferred tax assets are reduced by a valuation
allowance if it is more likely than not that some portion or all of the deferred
tax asset will not be realized.
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 had adopted the
fair value method of accounting for stock-based compensation prescribed by FAS
123 (see Note 8).
EARNINGS (LOSS) PER COMMON SHARE
Basic earnings per share is computed by dividing earnings available to
common stockholders by the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed by dividing earnings
available to common stockholders adjusted for the effects of preferred stock
dividends, interest on 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
47
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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,
-------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
BASIC EPS COMPUTATION
Numerator:
Net income......................................................... $ 6,170,184 $ 4,183,623 $ 8,261,088
Less: Redeemable preferred stock dividends......................... (1,314,218) (1,271,242) (400,000)
Accretion on preferred stock.................................. -- -- (1,927,648)
Redemption of Junior Preferred Stock.......................... (404,682) -- --
------------- ------------- -------------
Income available to common stockholders............................ $ 4,451,284 $ 2,912,381 $ 5,933,440
------------- ------------- -------------
------------- ------------- -------------
Denominator:
Weighted average common shares..................................... 6,860,237 6,917,904 9,348,628
------------- ------------- -------------
------------- ------------- -------------
Basic EPS............................................................ $ .65 $ .42 $ .63
------------- ------------- -------------
------------- ------------- -------------
DILUTED EPS COMPUTATION
Numerator:
Income available to common stockholders............................ $ 4,451,284 $ 2,912,381 $ 5,933,440
Add: Junior Preferred Stock dividends.............................. -- 71,242 --
------------- ------------- -------------
Income available to common stockholders and assumed conversions.... $ 4,451,284 $ 2,983,623 $ 5,933,440
------------- ------------- -------------
------------- ------------- -------------
Denominator:
Weighted average common shares outstanding......................... 6,860,237 6,917,904 9,348,628
Junior Preferred Stock............................................. -- 130,343 --
Stock options...................................................... -- 277,077 272,516
------------- ------------- -------------
Adjusted weighted average common shares............................ 6,860,237 7,325,324 9,621,144
------------- ------------- -------------
------------- ------------- -------------
Diluted EPS.......................................................... $ .65 $ .41 $ .62
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
Options to purchase approximately 860,000 and 866,000 shares of common stock
at various prices per share were outstanding at June 30, 1998 and 1999,
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 periods then ended.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board (the "FASB") adopted
Statement of Financial Accounting Standards ("SFAS") 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. The Company does not have any items of other
comprehensive income and therefore comprehensive income equals net income.
48
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative
Instruments." SFAS 137 extends the effective date of SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities." SFAS 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The statement requires that an entity recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. As amended by SFAS 137, SFAS 133 is effective for the
Company's fiscal year ending June 30, 2001. The Company is currently evaluating
what impact, if any, this statement may have on its financial statements.
3. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Bulk wine...................................................... $ 15,730,294 $ 14,249,675
Cased and bottled wine......................................... 3,822,811 3,584,337
Brandy......................................................... 2,428,910 916,606
Juice, supplies and other...................................... 1,174,283 1,213,724
Unharvested crop costs......................................... 7,528,471 7,207,650
------------- -------------
Total........................................................ $ 30,684,769 $ 27,171,992
------------- -------------
------------- -------------
</TABLE>
4. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1999
------------- --------------
<S> <C> <C>
Land and improvements......................................... $ 12,381,200 $ 13,339,381
Vineyards..................................................... 26,442,289 27,232,624
Buildings..................................................... 11,097,317 11,596,989
Cooperage..................................................... 14,857,968 21,304,910
Equipment..................................................... 15,125,231 19,023,385
Construction in progress...................................... 9,355,832 7,971,248
------------- --------------
Total....................................................... 89,259,837 100,468,537
Less accumulated depreciation and amortization................ 11,619,269 16,434,450
------------- --------------
Property, plant and equipment--net............................ $ 77,640,568 $ 84,034,087
------------- --------------
------------- --------------
</TABLE>
For the year ended June 30, 1999, the Company capitalized approximately
$325,000 of interest primarily related to vineyards under development included
in construction in progress.
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 $32,500,000 with variable interest based on interest rate
options elected by the Company (7.47% and 6.14% at June 30, 1998 and 1999,
respectively). Borrowings on the line were $18,200,000 and $8,100,000 at June
30, 1998 and
49
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BANK LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
1999, respectively. Unused availability under the line of credit was $24,400,000
at June 30, 1999. The line of credit expires in March 2000.
Long-term debt is as follows:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1998 1999
------------- -------------
<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.................................................... $ 31,729,780 $ 30,308,342
Bank term loan at variable market interest rate options elected
by the Company (7.88% at June 30, 1998), interest payable
monthly, principal repaid in fiscal 1999 with proceeds from public offering (See
Note 8).......................................................................... 5,462,000 --
Bank term loan at variable interest rate options elected
by the Company (7.88% at June 30, 1998), interest payable
monthly, principal repaid in fiscal 1999 with proceeds from public offering (See
Note 8).......................................................................... 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................................................ 2,524,156 2,324,156
Bank term loan, interest payable monthly at 8.19%, principal
and interest payable $19,790 monthly, balance of $1,888,000
due January 15, 2000............................................................. 1,960,119 1,910,749
Unsecured loan due to related party, non-interest bearing,
discounted (at 10%) to present value, payable based on
excess cash flows (as defined)................................................... 850,568 732,490
Note payable, interest at 10%, payable semi-annually, principal
repaid in fiscal 1999 with proceeds from public offering (See Note 8)............ 500,000 --
Note payable, interest at 8% payable annually, principal repaid in fiscal 1999 with
proceeds from public offering (See Note 8)....................................... 500,000 --
Capital lease obligations and other loans, interest principally at 6.6% (See Note
10).............................................................................. 6,871,090 8,873,478
------------- -------------
Total............................................................................ 55,437,713 44,149,215
Less current portion............................................................... (3,520,049) (4,898,757)
------------- -------------
Long-term portion.................................................................. $ 51,917,664 $ 39,250,458
------------- -------------
------------- -------------
</TABLE>
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
50
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. BANK LINE OF CREDIT AND LONG-TERM DEBT (CONTINUED)
certain investments. Further, dividends may not be declared and paid without
prior approval. The Company was in compliance with the covenants of its bank
credit agreements as of June 30, 1999.
During 1998, the Company entered into a master leasing agreement with a bank
to finance up to $11 million of cooperage and processing equipment. The lease is
collateralized by the property and requires monthly principal and interest
payments. As of June 30, 1999, the cumulative amount of property financed
totaled $9,134,883.
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 principal amount of the Notes
plus accrued interest, plus a premium as defined in the agreement. 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, 1999 are as follows:
<TABLE>
<S> <C>
2000................................................... $4,898,757
2001................................................... 3,044,188
2002................................................... 3,265,114
2003................................................... 5,066,570
2004................................................... 3,733,518
Thereafter............................................. 24,141,068
----------
Total.............................................. $44,149,215
----------
----------
</TABLE>
6. INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Current:
Federal........................................... $ 3,114,991 $ 96,358 $ 871,717
State............................................. 862,690 204,394 443,064
------------ ------------ ------------
3,977,681 300,752 1,314,781
Deferred:
Federal........................................... 126,599 2,662,412 2,766,674
State............................................. (116,280) 60,828 617,508
------------ ------------ ------------
10,319 2,723,240 3,384,182
Change in valuation allowance....................... -- (571,992) (1,250,963)
------------ ------------ ------------
$ 3,988,000 $ 2,452,000 $ 3,448,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
The Company recognized certain tax benefits related to stock option
exercises in the amount of $788,532 in the year ended June 30, 1998 and $55,227
for the year ended June 30, 1999. These benefits were both recorded as a
decrease to income taxes payable and an increase in paid-in-capital.
51
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. INCOME TAXES (CONTINUED)
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,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Federal statutory tax (benefit) rate................... 35.00 % 35.00 % 35.00 %
Permanent items........................................ .29 .59 .30
State income taxes, net of federal..................... 4.85 2.64 5.98
Change in valuation allowance.......................... -- (8.62) (10.68)
Change in credit carryforwards......................... -- 3.52 --
Other.................................................. (.88) 3.82 (1.15)
------ ------ ------
39.26 % 36.95 % 29.45 %
------ ------ ------
------ ------ ------
</TABLE>
Deferred income tax assets and liabilities consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Current assets (liabilities):
Inventory costing............................................................... $ (291,733) $ (302,169)
State franchise taxes........................................................... (10,013) 132,153
Capitalized interest............................................................ 195,421 226,635
Reserves........................................................................ 564,132 --
Allowance for doubtful accounts................................................. 75,448 544,760
Property taxes.................................................................. (53,550) (290,935)
Other........................................................................... 86,478 77,707
-------------- --------------
Total......................................................................... $ 566,183 $ 388,151
-------------- --------------
-------------- --------------
Long-term assets (liabilities):
Purchase accounting............................................................. $ (4,700,893) $ (4,553,520)
Accelerated depreciation........................................................ (7,348,765) (8,807,610)
Operating loss carryforwards.................................................... 3,481,759 1,035,209
Tax credit carryforwards........................................................ 510,152 871,343
Other........................................................................... 191,604 382,285
Valuation allowance............................................................. (1,600,871) (349,908)
-------------- --------------
Total......................................................................... $ (9,467,014) $ (11,422,201)
-------------- --------------
-------------- --------------
</TABLE>
52
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company has federal alternative minimum tax ("AMT") credit carryforwards
of approximately $865,000 that may be used for an indefinite period.
As of June 30, 1999, the Company has federal operating loss carryforwards
which expire as follows:
<TABLE>
<S> <C>
2004............................................................................ $2,724,000
2005............................................................................ 321,000
----------
Total......................................................................... $3,045,000
----------
----------
</TABLE>
Use of these operating loss carryforwards in any one year is limited to
approximately $1,400,000.
7. REDEEMABLE PREFERRED STOCK
The Company's redeemable preferred stock as of June 30, 1998 was 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 had no voting rights, had liquidation
preferences to all classes of the Company's common stock, and were entitled to
cumulative dividends at the rate of 8% per year, payable semi-annually. In
October, 1996, 345,875 shares were redeemed for $1,729,375 ($5 per share). At
June 30, 1998, the balance outstanding, less nonaccreted discounts, was
$731,022. In July 1999, remaining Junior Preferred Stock was converted into
130,343 shares of Class B common stock.
The Senior Preferred shares had no voting rights, had liquidation
preferences to other shareholders, were subject to mandatory redemption
beginning in 2005 and were entitled to cumulative dividends at the rate of 12%
payable semiannually. At June 30, 1998, the balance outstanding, less accreted
discounts, was $8,219,479. In July 1999, the Senior Preferred Stock was redeemed
at its face amount of $10,000,000 with the proceeds from the Company's public
offering (see Note 8).
8. SHAREHOLDERS' EQUITY
COMMON STOCK
The Company's authorized capital stock is as follows at June 30, 1999:
<TABLE>
<CAPTION>
AUTHORIZED
PAR VALUE SHARES
------------- ------------
<S> <C> <C>
Class A.................................................... $ .01 6,000,000
Class B.................................................... $ .01 54,000,000
</TABLE>
Class A common stock have ten votes for each share and are convertible into
Class B common stock on a share-for-share basis at the option of the stockholder
or upon certain transfers of current stock ownership. Class B common stock have
one vote for each share. Class A and Class B common stock share equally in
dividend distributions (if declared by the Board of Directors) and liquidation
rights.
On July 21, 1998, the Company completed an underwritten public offering of
4,300,000 shares of Class B Common Stock, at an offering price of $17.00 per
share (the "Offering"). The proceeds to the
53
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY (CONTINUED)
Company from the Offering of $32,377,206, net of public offering costs of
$1,614,294, were primarily used to repay the Company's line of credit, certain
bank term loans, officers notes, and senior redeemable preferred stock,
including related dividends. The unamortized discount of $1,927,648, associated
with the redemption of the senior redeemable preferred stock and the conversion
of junior redeemable preferred stock was reflected as a deduction from net
income available to common stockholders in fiscal 1999.
Changes in the Company's common stock outstanding during the years ended
June 30, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
CLASS OF COMMON STOCK
------------------------------------------------
A B E K
----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
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 (options exercise)...... -- 307,600 -- 29,617
----------- ---------- ----------- ----------
Shares outstanding, June 30, 1998......... -- 5,868,612 1,200,829 129,477
Issuance of stock (public offering)....... 4,342,528 (862,222) (1,200,829) (129,477)
Conversion of Junior Preferred Stock...... -- 130,343 -- --
Issuance of stock (options exercise)...... -- 19,000 -- --
----------- ---------- ----------- ----------
Shares outstanding, June 30, 1999......... 4,342,528 5,155,733 -- --
----------- ---------- ----------- ----------
</TABLE>
INCENTIVE COMPANSATION 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 entitled 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, had an
unlimited term and generally became exercisable over a two year period.
Compensation expense accrued pursuant to the Company's incentive stock plan was
$1,338,506 and $6,300,000 for the years ended June 30, 1997 and 1998 (none in
1999), respectively. In 1998, the President's bonus was restructured resulting
in accrued compensation expense of $2.5 million. Such compensation was paid to
key employees in the amount of $5.4 million in 1998 and $5.4 million in 1999.
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 become exercisable 25% annually
and expire after 10 years.
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.
54
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY (CONTINUED)
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, 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
Granted ($4.41 weighted average fair value per
option)........................................ 6,000 -- $ 17.00
Exercised........................................ (19,000) -- $ 4.79
Terminated....................................... (2,175) -- $ 4.79
---------- ----------
Outstanding at June 30, 1999....................... 1,349,037 -- $ 9.46
---------- ----------
Exercisable at June 30, 1999....................... 922,997 -- $ 11.42
---------- ----------
Available for grant at June 30, 1999............... 331,018 --
---------- ----------
</TABLE>
The following table summarizes information about fixed stock options outstanding
at June 30, 1999.
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING -----------------------------------------
- -------------------------------------------- WEIGHTED WEIGHTED
RANGE OF NUMBER WEIGHTED AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING AVERAGE REMAINING EXERCISE EXERCISABLE EXERCISE
PRICES AT 6/30/99 CONTRACTUAL LIFE PRICE AT 6/30/99 PRICE
- ------------ ----------- ----------------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
$ 3 to $ 7 483,032 7.7 years $ 4.71 78,217 $ 4.37
$12 to $17 866,005 8.5 $ 12.11 844,780 $ 12.07
----------- -----------
$ 3 to $17 1,349,037 8.2 $ 9.46 922,997 $ 11.42
----------- -----------
----------- -----------
</TABLE>
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 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
55
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. SHAREHOLDERS' EQUITY (CONTINUED)
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.
FAS 123 requires the disclosure of pro forma net income amounts had the
Company adopted the fair value method for valuation of stock based compensation
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 as of June 30,
1997 and 5.0 years as of June 30, 1998 and 1999, respectively; risk free
interest rates, 5.9% as of June 30, 1997 and 6.0% as of June 30, 1998 and 1999,
respectively, no expected volatility during the years ended June 30, 1997 and
1998, 79% expected volatility for the year ended June 30, 1999, 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 years ended June 30, 1998 and 1999 would have been $217,166
and $404,837 respectively 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 and 1999 would have
been as follows: basic--$0.39 and $0.59 and diluted--$0.38 and $0.57
respectively.
9. RETIREMENT PLANS
The Company's 401(k) plan, established in 1996, provides retirement benefits
to full-time employees that meet certain eligibility requirements. 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 and Company contributions to the Plan vest immediately. The
Company also contributes to a winery workers' retirement plan which provides
retirement benefits for union employees. Retirement plan costs charged to
operations were $68,009, $78,323 and $101,220 for the years ended June 30, 1997,
1998, and 1999, respectively.
56
<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, 1999:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------------- ------------
<S> <C> <C>
2000............................................................. $ 1,805,403 $ 634,082
2001............................................................. 1,621,527 515,179
2002............................................................. 1,579,814 465,926
2003............................................................. 1,579,813 200,397
2004............................................................. 1,579,813 41,265
Thereafter....................................................... 2,972,316 --
------------- ------------
Total minimum lease payments..................................... 11,138,686 $ 1,856,849
------------
------------
Amount representing interest..................................... 2,273,291
-------------
Net present value of minimum lease payments...................... 8,865,395
-------------
Less current maturities.......................................... (1,214,460)
-------------
$ 7,650,935
-------------
-------------
</TABLE>
The following is a summary of cost and accumulated amortization on
capitalized cooperage and equipment leases:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
Cooperage......................................................... $ 1,265,614 $ 6,941,040
Equipment......................................................... 1,226,741 2,947,970
Less accumulated amortization..................................... (322,436) (834,567)
------------ ------------
$ 2,169,919 $ 9,054,443
------------ ------------
------------ ------------
</TABLE>
Rent expenses totaled approximately $667,616, $650,190 and $903,874 for the
years ended June 30, 1997, 1998 and 1999, respectively.
57
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. BUSINESS SEGMENT INFORMATION
Effective July 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information." This statement required that a public
business enterprise report financial and descriptive information about its
reportable operating segments. Adoption of this statement had no impact on the
Company's consolidated financial position, results of operations or cash flows.
The Company's chief decision maker evaluates performance based on gross
profit of the following four segments: bulk wine, wine grapes, case goods and
brandy. The bulk wine segment 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 wine grapes segment consists of the farming and
harvesting of Company owned vineyards and subsequent sales or internal use of
produced grapes as well as grapes purchased by the Company for resale. The case
goods segment 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 segment includes the production of brandy and
spirits and the provision of brandy barrel storage and related barreling
services. The Company also analyzes information on capital expenditures,
depreciation and amortization and assets utilized by each of the four segments.
58
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. BUSINESS SEGMENT INFORMATION (CONTINUED)
Segment information as of June 30, 1998 and 1999 and for the years ended
June 30, 1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
---------------------------------------------
1997 1998 1999
------------- -------------- --------------
<S> <C> <C> <C>
Revenues, net:...................................................
Bulk wine...................................................... $ 50,227,982 $ 58,928,186 $ 65,116,190
Wine grapes.................................................... 18,585,126 22,817,043 13,260,863
Case goods..................................................... 15,829,183 19,941,205 15,794,918
Brandy......................................................... 11,142,534 10,307,735 13,583,441
------------- -------------- --------------
Total revenues, net.......................................... 95,784,825 111,994,169 107,755,412
Cost of Sales:
Bulk wine...................................................... 39,176,886 49,357,853 51,872,756
Wine grapes.................................................... 11,950,000 11,199,483 9,238,208
Case goods..................................................... 11,899,694 14,783,877 12,433,359
Brandy......................................................... 8,635,236 8,343,062 9,838,537
------------- -------------- --------------
Total cost of sales.......................................... 71,661,816 83,684,275 83,382,860
Gross Profit:
Bulk wine...................................................... 11,051,096 9,570,333 13,243,434
Wine grapes.................................................... 6,635,126 11,617,560 4,022,655
Case goods..................................................... 3,929,489 5,157,328 3,361,559
Brandy......................................................... 2,507,298 1,964,673 3,744,904
------------- -------------- --------------
Total gross profit........................................... $ 24,123,009 $ 28,309,894 $ 24,372,552
------------- -------------- --------------
------------- -------------- --------------
Capital Expenditures:
Bulk wine...................................................... $ 11,325,550 $ 8,473,995 $ 7,381,021
Wine grapes.................................................... 421,558 1,638,440 1,620,255
Case goods..................................................... 42,972 86,814 742,397
Brandy......................................................... 412,158 272,704 808,403
Corporate...................................................... 490,608 789,365 987,015
------------- -------------- --------------
Total........................................................ $ 12,692,846 $ 11,261,318 $ 11,539,061
------------- -------------- --------------
------------- -------------- --------------
Depreciation and amortization:
Bulk wine...................................................... $ 1,845,424 $ 2,006,217 $ 3,008,156
Wine grapes.................................................... 1,499,883 1,223,898 680,068
Case goods..................................................... 47,665 98,945 113,881
Brandy......................................................... 413,983 427,358 486,561
Corporate...................................................... 399,977 388,396 164,837
------------- -------------- --------------
Total........................................................ $ 4,206,932 $ 4,144,814 $ 4,453,503
------------- -------------- --------------
------------- -------------- --------------
</TABLE>
59
<PAGE>
GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
JUNE 30
------------------------------
1998 1999
-------------- --------------
<S> <C> <C> <C>
Total Assets:
Bulk wine..................................................... $ 55,884,761 $ 61,737,483
Wine grapes................................................... 40,193,824 39,641,163
Case goods.................................................... 9,657,931 9,840,071
Brandy........................................................ 8,663,930 7,763,168
Corporate..................................................... 10,318,534 9,537,927
Total....................................................... $ 124,718,980 $ 128,519,812
-------------- --------------
-------------- --------------
</TABLE>
12. COMMITMENTS AND CONTINGENCIES
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, 1999, the Company had entered into contracts aggregating
approximately $3,396,000 for the purchase of processing equipment and cooperage.
13. RELATED PARTY TRANSACTIONS
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 year ended June 30, 1997, the Company made grape purchases
aggregating approximately $1,400,000, (none in 1998 and 1999), from a vineyard
partially owned by the Company's president.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
-------------------------------------
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Interest paid.............................................................. $ 5,578,895 $ 6,271,616 $ 5,138,846
Income taxes paid.......................................................... 3,206,000 4,728,372 3,700,000
Notes issued and assumed to acquire property, plant and equipment.......... 7,238,071 -- --
Property acquired under capital lease...................................... 778,593 5,724,006 3,410,877
Tax benefit of stock option exercises...................................... -- 788,532 55,227
Conversion of junior preferred stock to common stock....................... -- -- 733,831
</TABLE>
60
<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 28th day of September, 1999.
<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 September 28, 1999
Jeffrey B. O'Neill Officer)
Chief Financial Officer
/s/ BRIAN R. THOMPSON and Secretary (Principal
- ------------------------------ Financial Officer and September 28, 1999
Brian R. Thompson Accounting Officer)
/s/ JEFFREY J. BROWN Chairman of the Board,
- ------------------------------ Assistant Secretary and September 28, 1999
Jeffrey J. Brown Director
/s/ NICHOLAS B. BINKLEY
- ------------------------------ Director September 28, 1999
Nicholas B. Binkley
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
NAME TITLE DATE
- ------------------------------ -------------------------- -------------------
<C> <S> <C>
/s/ DOUGLAS R. WOLTER
- ------------------------------ Director September 28, 1999
Douglas R. Wolter
- ------------------------------ Director September , 1999
Keith R. Fox
/s/ W. SCOTT HEDRICK
- ------------------------------ Director September 28, 1999
W. Scott Hedrick
- ------------------------------ Director September , 1999
Peter W. Mullin
/s/ GREGORY J. FORREST
- ------------------------------ Director September 28, 1999
Gregory J. Forrest
</TABLE>
62
<PAGE>
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY FINANCIAL SCHEDULE
To the Stockholders and Board of Directors
of Golden State Vintners, Inc.
We have audited the consolidated financial statements of Golden State Vintners,
Inc. and subsidiaries (the "Company") as of June 30, 1998 and 1999, and for each
of the three years in the period ended June 30, 1999, and have issued our report
thereon dated September 15, 1999. Such consolidated financial statements and
report will be included in the 1999 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, presents fairly in all
material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Fresno, California
September 15, 1999
63
<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, 1997:
Allowance for uncollectible accounts......................... $ 180 $ 43 $ (123) $ 100
Year ended June 30, 1998:
Allowance for uncollectible accounts......................... 100 90 (14) 176
Year ended June 30, 1999:
Allowance for uncollectible accounts......................... 176 1,100 (4) 1,272
</TABLE>
64
<PAGE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement
No. 33-72293 of Golden State Vintners, Inc. on Form S-8 of our report dated
September 15, 1999, appearing in this Annual Report on Form 10-K of Golden
State Vintners, Inc. for the year ended June 30, 1999.
/s/ Deloitte & Touche LLP
Fresno, California
September 27, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUN-30-1998
<PERIOD-END> JUN-30-1999
<CASH> 30
<SECURITIES> 0
<RECEIVABLES> 11,211
<ALLOWANCES> 1,272
<INVENTORY> 27,172
<CURRENT-ASSETS> 42,389
<PP&E> 100,469
<DEPRECIATION> 16,435
<TOTAL-ASSETS> 128,520
<CURRENT-LIABILITIES> 20,364
<BONDS> 0
0
0
<COMMON> 95
<OTHER-SE> 57,388
<TOTAL-LIABILITY-AND-EQUITY> 128,520
<SALES> 0
<TOTAL-REVENUES> 107,755
<CGS> 0
<TOTAL-COSTS> 83,382
<OTHER-EXPENSES> 7,026
<LOSS-PROVISION> 1,100
<INTEREST-EXPENSE> 4,522
<INCOME-PRETAX> 11,709
<INCOME-TAX> 3,448
<INCOME-CONTINUING> 8,261
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,261
<EPS-BASIC> .63
<EPS-DILUTED> .62
</TABLE>
