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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
(MARK ONE)
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<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER: 000-24651
------------------------
GOLDEN STATE VINTNERS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0412761
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
607 AIRPARK ROAD, NAPA, CALIFORNIA 94558
(Address of principal executive offices) (Zip Code)
</TABLE>
(707) 254-4900
(Registrant's telephone number,
including area code)
NONE
(Former name, former address and former fiscal year,
if changed since last report)
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
/X/ Yes / / No
The number of shares of the Registrant's Class A and Class B Common Stock
outstanding as of November 13, 2000 was 4,342,528 and 5,155,733 shares,
respectively.
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GOLDEN STATE VINTNERS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ITEM NO. PAGE
-------- --------
<S> <C>
PART I--FINANCIAL INFORMATION
Item 1--Financial Statements
Consolidated Balance Sheets as of September 30, 2000
and June 30, 2000................................... 3
Consolidated Statements of Operations for the Three
Months Ended September 30, 2000 and 1999............ 4
Consolidated Statements of Cash Flows for the Three
Months Ended September 30, 2000 and 1999............ 5
Notes to Consolidated Financial Statements.......... 6
Item 2-- Management's Discussion and Analysis of Financial
Condition and Results of Operations................. 9
Item 3-- Quantitative and Qualitative Disclosures About
Market Risk......................................... 11
PART II--OTHER INFORMATION
Item 5--Other Information................................... 18
Item 6--Exhibits and Reports on Form 8-K.................... 18
</TABLE>
2
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PART I--FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GOLDEN STATE VINTNERS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
-------------- --------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 61 $ 39
Trade and other receivables--net.......................... 14,539 7,441
Inventories............................................... 36,926 22,070
Refundable income taxes................................... 2,198 2,420
Deferred income taxes..................................... 404 --
Prepaid expenses and other current assets................. 300 755
-------- --------
Total current assets.................................. 54,428 32,725
PROPERTY, PLANT AND EQUIPMENT--Net.......................... 84,864 83,688
OTHER ASSETS................................................ 307 330
-------- --------
TOTAL ASSETS................................................ $139,599 $116,743
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank line of credit....................................... $ 6,400 $ --
Cash overdraft............................................ 2,690 --
Accounts payable.......................................... 5,301 2,964
Grower payable............................................ 11,422 360
Payroll and related liabilities........................... 1,132 961
Accrued interest.......................................... 659 823
Other accrued liabilities................................. 862 617
Deferred income taxes..................................... -- 95
Current portion of long-term debt......................... 3,298 3,256
-------- --------
Total current liabilities............................. 31,764 9,076
LONG-TERM DEBT.............................................. 35,125 36,102
DEFERRED INCOME TAXES....................................... 11,961 11,359
STOCKHOLDERS' EQUITY:
Class A common stock, par value $.01; 6,000,000 shares
authorized; 4,342,528 shares issued and outstanding at
September 30, 2000 and at June 30, 2000, respectively... 44 44
Class B common stock, par value $.01; 54,000,000 shares
authorized; 5,155,733 shares issued and outstanding at
September 30, 2000 and at June 30, 2000, respectively... 51 51
Paid-in capital........................................... 44,837 44,837
Retained earnings......................................... 15,817 15,274
-------- --------
Total stockholders' equity............................ 60,749 60,206
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $139,599 $116,743
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
REVENUES:
Bulk wine and juice....................................... $ 8,423 $ 5,259
Wine grapes............................................... 5,219 6,211
Case goods................................................ 4,069 4,579
Brandy and spirits........................................ 1,157 307
------- -------
Total revenues........................................ 18,868 16,356
COST OF SALES............................................... 15,151 13,273
------- -------
GROSS PROFIT................................................ 3,717 3,083
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES................................... 2,012 1,509
------- -------
INCOME FROM OPERATIONS...................................... 1,705 1,574
INTEREST EXPENSE............................................ 854 1,007
OTHER EXPENSE (INCOME)...................................... (17) 28
------- -------
INCOME BEFORE INCOME TAXES.................................. 868 539
INCOME TAXES................................................ 325 208
------- -------
NET INCOME.................................................. $ 543 $ 331
======= =======
EARNINGS PER COMMON SHARE:
BASIC..................................................... $ 0.06 $ 0.03
======= =======
DILUTED................................................... $ 0.06 $ 0.03
======= =======
WEIGHTED AVERAGE SHARES OUTSTANDING:
BASIC..................................................... 9,498 9,498
======= =======
DILUTED................................................... 9,638 9,603
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
4
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GOLDEN STATE VINTNERS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED, IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income................................................ $ 543 $ 331
Adjustments to reconcile net income to net cash used in
operating activities:
Depreciation and amortization........................... 1,906 1,195
Loss on disposal of assets.............................. -- 20
Deferred income taxes................................... 103 208
Changes in assets and liabilities:
Trade and other receivables........................... (7,098) (4,309)
Inventories........................................... (15,096) (15,383)
Prepaid expenses and other current assets............. 455 146
Accounts payable...................................... 2,337 (1,243)
Grower payable........................................ 11,062 15,699
Payroll and related liabilities....................... 171 (89)
Other accrued liabilities............................. 245 209
Accrued interest...................................... (164) (165)
Income taxes refundable/payable....................... 222 --
-------- --------
Net cash used in operating activities............. (5,314) (3,381)
INVESTING ACTIVITIES:
Purchases of property, plant and equipment................ (2,811) (3,543)
Change in deposits........................................ 8 --
-------- --------
Net cash used in investing activities............. (2,803) (3,543)
FINANCING ACTIVITIES:
Borrowings on line of credit.............................. 9,200 7,300
Payments on line of credit................................ (2,800) (1,500)
Change in cash overdraft.................................. 2,690 2,024
Repayments of long-term debt.............................. (951) (879)
-------- --------
Net cash provided by financing activities......... 8,139 6,945
-------- --------
INCREASE IN CASH AND EQUIVALENTS............................ 22 21
CASH AND EQUIVALENTS, BEGINNING OF PERIOD................... 39 30
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD......................... $ 61 $ 51
======== ========
OTHER CASH FLOW INFORMATION:
Interest paid............................................. $ 1,014 $ 1,265
======== ========
Income taxes paid......................................... $ -- $ --
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
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GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1--BASIS OF PRESENTATION:
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all adjustments (which include all normal and
recurring adjustments) necessary to present fairly the Company's financial
position at September 30, 2000 and its results of operations and its cash flows
for the three month periods ended September 30, 2000 and 1999. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted from the accompanying financial statements. The unaudited
financial statements set forth in this quarterly report on Form 10-Q should be
read in conjunction with the audited financial statements and notes thereto
included in the Company's Annual Report on Form 10-K (the "10-K") for the fiscal
year ended June 30, 2000, on file at the Securities and Exchange Commission. The
Company's results for the three months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the fiscal year
ending June 30, 2001.
NOTE 2--INVENTORIES:
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
------------- --------
<S> <C> <C>
Bulk wine............................................. $27,130 $ 9,379
Cased and bottled wine................................ 3,585 2,510
Brandy................................................ 3,077 1,276
Juice, supplies and other............................. 1,762 1,355
Unharvested crop costs................................ 1,372 7,550
------- -------
Total............................................... $36,926 $22,070
======= =======
</TABLE>
NOTE 3--NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 defines
derivatives, requires that derivatives be carried at fair value and provides
hedge accounting when certain conditions are met. In June 2000, the FASB issued
SFAS No. 138, which amends certain provisions of SFAS 133 to address several
issues causing implementation difficulties for entities in the application of
SFAS No. 133. The Company adopted SFAS 133 and the corresponding amendments
under SFAS 138 on July 1, 2000. Adoption of this standard had no material impact
on the Company's consolidated financial position, results of operations or cash
flows.
In December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin 101 (SAB) 101), "Revenue Recognition in Financial
Statements," which clarifies the SEC's view in applying generally accepted
accounting principles to revenue recognition in financial statements. Adoption
of this standard had no material impact on the Company's consolidated financial
position, results of operations or cash flows.
NOTE 4--BUSINESS SEGMENT INFORMATION
The Company's senior management 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
6
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GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 4--BUSINESS SEGMENT INFORMATION (CONTINUED)
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.
Segment information as of September 30, 2000 and June 30, 2000 and for the
three month periods ended September 30, 2000 and 1999 is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
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<S> <C> <C>
Revenues, net:
Bulk wine............................................... $ 8,423 $ 5,259
Wine grapes............................................. 5,219 6,211
Case goods.............................................. 4,069 4,579
Brandy.................................................. 1,157 307
------- -------
Total revenues, net................................... 18,868 16,356
Cost of Sales:
Bulk wine............................................... 6,790 4,301
Wine grapes............................................. 4,116 5,126
Case goods.............................................. 3,421 3,700
Brandy.................................................. 824 146
------- -------
Total cost of sales................................... 15,151 13,273
Gross Profit:
Bulk wine............................................... 1,633 958
Wine grapes............................................. 1,103 1,085
Case goods.............................................. 648 879
Brandy.................................................. 333 161
------- -------
Total gross profit.................................... $ 3,717 $ 3,083
======= =======
Capital Expenditures:
Bulk wine............................................... $ 784 $ 2,014
Wine grapes............................................. 21 198
Case goods.............................................. 1,040 767
Brandy.................................................. 119 553
Corporate............................................... 847 11
------- -------
Total................................................. $ 2,811 $ 3,543
======= =======
</TABLE>
7
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GOLDEN STATE VINTNERS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
NOTE 4--BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
SEPTEMBER 30,
-------------------
2000 1999
-------- --------
<S> <C> <C>
Depreciation and amortization:
Bulk wine............................................... $ 1,291 $ 535
Wine grapes............................................. 385 515
Case goods.............................................. 104 41
Brandy.................................................. 54 21
Corporate............................................... 72 83
------- -------
Total................................................. $ 1,906 $ 1,195
======= =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
2000 2000
-------------- --------
<S> <C> <C>
Total Assets:
Bulk wine.......................................... $ 76,438 $ 58,460
Wine grapes........................................ 32,684 35,949
Case goods......................................... 14,293 9,950
Brandy............................................. 11,226 8,554
Corporate.......................................... 4,958 3,830
-------- --------
Total............................................ $139,599 $116,743
======== ========
</TABLE>
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of the financial condition and results
of operations of Golden State Vintners, Inc. (the "Company" or "GSV") contains
"Forward-Looking Statements," as defined in Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-Looking Statements are statements other than historical
information or statements of current condition and relate to future events or
the future financial performance of the Company. Some Forward-Looking Statements
may be identified by use of such terms as "believes," "anticipates," "intends"
or "expects." Such Forward-Looking Statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
Forward-Looking Statements. The Company's results may differ materially from
those anticipated in such Forward-Looking Statements as a result of a number of
factors, including without limitation, (i) reduced consumer spending or a change
in consumer preferences, which could reduce demand for the Company's wines;
(ii) competition from various domestic and foreign wine producers which could
affect the Company's ability to sustain volume and revenue growth;
(iii) interest rates and other business and economic conditions which could
increase significantly the costs and risks of projected capital spending; and
(iv) the effect of weather and other natural forces on growing conditions and,
in turn, the quality and quantity of grapes produced by the Company. Each of
these factors, and other risks pertaining to the Company, the premium wine
industry and general business and economic conditions, are more fully discussed
herein and from time to time in other filings with the Securities and Exchange
Commission, including the Company's Annual Report on Form 10-K for the year
ended June 30, 2000. The Company undertakes no obligation to publicly update or
revise any Forward-Looking Statements, whether as a result of new information,
future events or otherwise.
RECENT DEVELOPMENTS
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 historically reported its highest revenues
and net income in its second fiscal quarter as the Company sells most of its
bulk wine in its second quarter, immediately after crush, and performs many of
its wine processing services in the first and second quarters. As a result, the
Company typically reports lower revenues and net income (loss) in the third and
fourth fiscal quarters.
THREE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
REVENUES
Total revenues for the first quarter of fiscal 2001 were $18.9 million, an
increase of $2.5 million or 15.2%, as compared to revenues of $16.4 million for
the first quarter of fiscal 2000. The overall increase in revenues is due to
increases in bulk wine and brandy revenues partially offset by decreased wine
grapes and case goods revenues.
BULK WINE AND RELATED SERVICES. For the first quarter of fiscal 2001,
revenues from bulk wine and related services were $8.4 million, an increase of
$3.1 million or 58.5%, compared to revenues of $5.3 million in the first quarter
of fiscal 2000. The period to period increase was a result of earlier processing
of custom processed grapes due to an earlier harvest than the prior period and a
higher volume of wine sales of previous vintages.
WINE GRAPES. In the first quarter of fiscal 2001, revenues from grape sales
were $5.2 million, a decrease of $1.0 million or 16.1%, compared to revenues of
$6.2 million in the first quarter of fiscal 2001. Wine grape revenues consist of
revenues from grapes grown on the Company's vineyards and grapes
9
<PAGE>
purchased from outside growers that are resold to various third parties or
"resold grapes." Company grown grape tons delivered to customers increased,
however, the price per ton decreased resulting in a moderate increase in
revenues from Company grown grapes. Resold grape revenue decreased to $1.0
million from $2.1 million for fiscal 2001 and 2000, respectively.
CASE GOODS AND RELATED SERVICES. For the first quarter of fiscal 2001,
revenues from case goods and related services were $4.1 million, a decrease of
$.5 million or 10.9%, compared to revenues of $4.6 million in the first quarter
of fiscal 2000. The period to period decrease in case goods and related services
revenues was primarily due to decreased private label case goods sales.
BRANDY. For the first quarter of fiscal 2001, revenues from the sale of
brandy and grape spirits were $1.2 million, an increase of $.9 million or
300.0%, compared to revenues of $.3 million in the first quarter of fiscal 2000.
The period to period increase in brandy revenue was due to earlier production of
brandy resulting from an earlier harvest.
COST OF SALES.
For the first quarter of fiscal 2001, total cost of sales was $15.2 million,
an increase of $1.9 million or 14.3%, from $13.3 million in the first quarter of
fiscal 2000. As a percentage of revenues, cost of sales for the first quarter of
fiscal 2001 was 80.3%, a decrease from 81.2% in the first quarter of fiscal
2000. The decrease in cost of sales on a percentage of revenue basis was
primarily as a result of higher margins on bulk wine sales favorably impacted by
management's estimate of its LIFO reserve.
GROSS PROFIT
In the first quarter of fiscal 2001, the Company realized gross profit of
$3.7 million, an increase of $.6 million or 19.4%, compared to $3.1 million in
the first quarter of fiscal 2000. As a percentage of revenues, gross profit for
the first quarter of fiscal 2001 was 19.7%, an increase from 18.8% in the first
quarter of fiscal 2000, for reasons discussed above under "Cost of Sales."
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
For the first quarter of fiscal 2001, selling, general and administrative
expenses were $2.0 million, an increase of $.5 million or 33.3%, from $1.5
million in the first quarter of fiscal 2000 as a result of increased
professional expenses.
INTEREST EXPENSE
For the first quarter of fiscal 2001, interest expense was $.9 million, a
decrease of $.1 million or 10.0%, as compared to interest expense of $1.0
million in the first quarter of fiscal 2000. The period to period decline is due
to reduced borrowings on the Company's line of credit.
NET INCOME
For the first quarter of fiscal 2001, net income was $.5 million, an
increase of $.2 million or 66.7%, compared to net income of $.3 million in the
first quarter of fiscal 2000. Net income for the first quarter of fiscal 2001
was impacted by factors covered above.
EARNINGS PER SHARE
For the first quarter of fiscal 2001, the basic earnings per share was $.06
compared to basic earnings per share of $.03 for the first quarter of fiscal
2000. Net income available to shareholders for the first quarter of fiscal 2001
was a result of increased net income.
10
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LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position at September 30, 2000 was $22.1
million, compared to $23.6 million at June 30, 2000. The decrease in working
capital is due to cash expenditures for fixed assets. 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 at September 30, 2000 are adequate for the
Company's working capital requirements. Borrowings under the line typically peak
in November, during the Company's second fiscal quarter. The revolving line of
credit balance was $6.4 million at September 30, 2000, with no outstanding
balance at June 30, 2000. Unused availability under the line of credit was
$21.6 million at September 30, 2000.
Net cash used in operating activities for the first quarter of fiscal 2001
was $5.3 million, compared to net cash used in operations of $3.4 million for
the first quarter of fiscal 2000. The increase in cash used in operations
resulted from increased receivables and seasonal requirements due to the earlier
harvest.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company holds no market risk sensitive trading instruments. All Company
balance sheet items and sales are in U.S. dollars, therefore the Company has no
foreign currency exchange rate risk related to these financial data. The Company
does not use financial instruments for trading purposes.
Certain Company debt is subject to variable interest rate options. The
following chart indicates the Company's fixed and variable rate long and
short-term debt at September 30, 2000, and estimates the balances of such debt
in future periods ($ millions):
<TABLE>
<CAPTION>
SEPT. 30, JUNE 30,
--------- ----------------------------------------------------
2000 2001 2002 2003 2004 2005
--------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Bank line of credit:
Average Outstanding*.......................... $ 1.7 $ 5.0 $ 5.0 $ 5.0 $ 5.0 $ 5.0
Weighted average rate for year................ 8.3%(1) 7.5% 7.5% 7.5% 7.5% 7.5%
Long-term Debt:
Fixed Rate:
Average Outstanding......................... $38.9 $37.9 $34.8 $30.9 $26.6 $22.7
Weighted average rate for year.............. 8.7% 8.8% 8.8% 8.5% 8.7% 8.8%
</TABLE>
------------------------
* Based on current anticipated cash flow, the Company believes that its bank
line of credit will be periodically used to fund operations in the Company's
peak season.
(1) First quarter borrowings were at higher interest rates than anticipated for
the full fiscal year due to seasonal short-term, higher rate borrowing
requirements.
11
<PAGE>
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
the quarter ended September 30, 2000, the average outstanding balance under this
line was approximately $1.7 million, with a weighted average interest rate of
approximately 8.3%.
At September 30, 2000, the balance on the Company's fixed rate long-term
debt was $38.4 million and carried a weighted average interest rate of
approximately 8.7%. The weighted average interest rate for the three months
ended September 30, 2000 for all Company debt was approximately 8.7%.
For strategic reasons, the Company enters into forward product sales and
material supply contracts, most of which have staggered maturity dates. Under
SFAS 133 and the corresponding amendments under SFAS 138, these contracts
qualify as normal sales and purchases contracts, under which the Company expects
to take physical delivery. 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 occur on a short-term basis. The primary raw material
component for most Company products 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 fiscal
2000, or the 1999 harvest year, approximately .4% of the Company's total wine
grape purchases on a dollar basis were adjusted upward against contract minimum
prices following the harvest. The Company may experience similar grape price
adjustments during the 2001 fiscal year, with respect to the 2000 harvest year,
which adjustments management does not believe will be material. The Company's
annual operating budget anticipates these 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.
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,
2000, the Company's reported inventory value of bulk wine and brandy was
$10.6 million, of which approximately $4.5 million, or 43%, is committed to
sales contracts. Uncommitted inventory of approximately $6.1 million, or 57% is
reserved for future case goods sales and for spot market bulk wine sales. The
Company generally matches preproduction contractual sales with contracted
material supply agreements and will continue to maintain certain uncommitted
inventory.
12
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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-Q. 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-Q.
CONCENTRATION OF CUSTOMERS
Due to the seasonality of the Company's operations, sales data is compared
on an annual basis. During fiscal 2000, five of the Company's customers
accounted for approximately 41% of the Company's revenues, with Heaven Hill and
Canandaigua Wine Company accounting for approximately 15% and 8%, 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 fiscal 2000, approximately 32% of the Company's grape production (on a
per ton basis) was contracted for sale to third parties, including EJ Gallo
Winery ("Gallo"), Canandaigua and The Wine Group. Such grape sales accounted for
approximately 5.6% of the Company's revenues in fiscal 2000. 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 fiscal 1999 and fiscal 2000. 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, Chardonnay and
Ruby Cabernet grapes. These contracts expire in May 2001.
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.
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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 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 and 1999 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.
In recent years the Glassy-Winged Sharpshooter ("GWSS") has emerged as an
efficient vector of Pierce's disease. Pierce's disease is a serious threat to
wine grapes and combined with large GWSS populations can destroy vineyards over
a several year period. The GWSS has been discovered in low populations
throughout many of California's grape regions. A number of vineyards in a small
grape growing region in Southern California have been destroyed by Pierce's
disease. The Company has engaged a consultant to monitor the pest and advise
regarding the latest research developments. To date the GWSS has not been found
on Company vineyards and the Company believes there is no immediate Pierce's
threat. While the grape industry is hopeful the spread of Pierce's disease can
be controlled, an infestation of Company vineyards would have a materially
adverse effect on Company operations and profitability.
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. 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.
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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.
DEMAND FOR BULK WINE
Bulk wine and related services accounted for approximately 58% of GSV's
revenues in fiscal 2000. The Company continues to focus 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 16% of
revenues in fiscal 2000. 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 1998 harvest and in some instances continued to rise through the 1999
harvest. However, a number of recent developments resulted in certain California
wine grape and bulk wine prices declining significantly, which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Such developments include (1) plantings of new vineyards,
(2) yield enhancements through technological advances, (3) denser plantings of
vines, and (4) growth in the special natural wine category.
ENVIRONMENTAL RISKS
The Company's current operations emit ethanol and require the periodic use
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. Additionally Company processing operations
generally require the disposal of water based effluents. As environmental
regulations tighten the Company cannot be assured its current waste water
management practices will meet such standards.
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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 72% of its revenues during the first six months of the
Company's 2000 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
and 2000, 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 and 2000 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 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 and Australia, 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, Mark A. Larson,
the Company's President and Chief Operating 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 any of these persons could have an adverse effect on the Company's
business, financial condition and results of operations.
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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, local and federal governmental authorities
that regulate licensing, trade and pricing practices, labeling, advertising and
other activities. In recent years, federal and state authorities have required
warning labels on beverages containing alcohol. Restrictions imposed by
government authorities on the sale of wine could increase the retail price of
wine, which could have an adverse effect on demand for wine in general. There
can be no assurance that there will not be new or revised laws or regulations
pertaining to the wine industry which could have a negative impact on the
Company's business.
VOLATILITY OF STOCK PRICE
The market price of the shares of Class B Common Stock has declined sharply
since the Company's initial public offering in late July 1998. The market price
for such shares 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.
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PART II--OTHER INFORMATION
ITEM 5. OTHER INFORMATION
The Company anticipates filed a proxy statement relating to the 2000 Annual
Meeting of Stockholders with the Securities and Exchange Commission on
September 28, 2000. The 2000 Annual Meeting of Stockholders is scheduled for
November 15, 2000 at 9:00 a.m. at the Company's offices.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
Exhibit Number
11 Statement Regarding Computation of Per Share Earnings
27 Summary Financial Information
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Golden State Vintners, Inc.
(Registrant)
<TABLE>
<C> <S> <C>
/S/ BRIAN R. THOMPSON
November 14, 2000 -------------------------------------------
---------------------------- Brian R. Thompson
Date CHIEF FINANCIAL OFFICER
</TABLE>
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