Back to GetFilings.com

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Commission File Number: 1-14305

GOLDEN STATE VINTNERS, INC.
(Exact name of registrant as specified in its charter)

        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 ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        The number of shares of the Registrant's Class A and Class B Common Stock outstanding as of May 13, 2004 was 4,342,528 and 5,170,459 shares, respectively.

GOLDEN STATE VINTNERS, INC.
TABLE OF CONTENTS

2

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

GOLDEN STATE VINTNERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED, IN THOUSANDS)

See accompanying notes to condensed consolidated financial statements.

3

GOLDEN STATE VINTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE DATA)

See accompanying notes to condensed consolidated financial statements.

4

GOLDEN STATE VINTNERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED, IN THOUSANDS)

See accompanying notes to condensed consolidated financial statements.

5

GOLDEN STATE VINTNERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Note 1—Basis of Presentation:

        In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which include all normal and recurring adjustments) necessary to present fairly the Company's financial position at March 31, 2004 and its results of operations for the three and nine-month periods ended March 31, 2004 and 2003 and its cash flows for the nine-month periods ended March 31, 2004 and 2003. Certain information and disclosures normally included in the notes to 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, 2003, on file at the Securities and Exchange Commission ("SEC"). The Company's results for the nine-months ended March 31, 2004 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2004.

        Certain reclassifications have been made to the fiscal 2003 amounts in order for them to conform to the fiscal 2004 presentation.

Note 2—Inventories:

        Inventories consist of the following (in thousands):

Note 3—Assets Held for Sale

        In June 2002, the Company's Board of Directors approved a plan to sell certain excess assets. Such assets included a bulk wine and bottling facility, a warehouse, a tasting room and certain vineyards. After operations started at the new American Canyon facility in December 2001, the bulk wine and bottling facility and the other warehouse facility were no longer necessary for custom crushing, bottling or storage. All such assets were sold except the warehouse located in Napa, California. In October 2003, Company management elected to retain the Napa Warehouse facility for continuing barrel warehousing activities. Because assets classified as held for sale were not subject to depreciation, the reclassification of this asset required depreciation expense recognition of approximately $113,000 in the first quarter of fiscal 2004 for the period from July 2002 through September 2003.

        In July 2003, the Company sold the bulk wine and bottling facility, tasting room and vineyards located in St. Helena, California. The sales price of $11.7 million was applied to the loan principal due to an insurance company ($10.6 million) and a prepayment penalty ($1.1 million). The sale resulted in a gain before tax of approximately $4.2 million and is reflected in first quarter results of fiscal 2004. This transaction including the net effect of the gain on sale less the prepayment penalty increased net income by approximately $1.9 million.

6

        Assets held for sale, at the lower of carrying value or fair value, were $2.0 million and $9.4 million at March 31, 2004 and June 30, 2003, respectively.

        In April 2004, the Company sold approximately 1,500 acres (approximately 500 acres planted in vineyards) of farmland located in Madera County, California. Proceeds from the sale were $2.5 million and the gain on the sale was approximately $0.4 million before income taxes. The transaction will be reflected in the fourth quarter of fiscal 2004.

Note 4—Bank Line of Credit

        On September 18, 2003, the Company renewed its revolving line of credit to provide $22.0 million through January 31, 2004, $14.0 million from February 1, 2004 through March 31, 2004, $10.0 million from April 1, 2004 through June 30, 2004 and $14.0 million thereafter with variable interest based on interest rate options elected by the Company. The balance outstanding under the line was $8.5 and $5.8 million at March 31, 2004 and June 30, 2003, respectively. The line expires on October 5, 2004. Management intends and expects to renew the line prior to that time.

Note 5—Long-Term Debt

        In March 2004, the Company repaid the remaining balance on a loan agreement with an insurance company. The final payment included principal of $2.7 million and a prepayment penalty of $72,000.

Note 6—New Accounting Pronouncements

        In January 2003, the FASB issued FASB Interpretation No. 46, ("FIN 46") Consolidation of Variable Interest Entities. This interpretation clarifies existing accounting principles related to the preparation of consolidated financial statements when the equity investors in an entity do not have the characteristics of a controlling financial interest or when the equity at risk is not sufficient for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 requires a company to evaluate all existing arrangements to identify situations where a company has a "variable interest" (commonly evidenced by a guarantee arrangement or other commitment to provide financial support) in a "variable interest entity" (commonly a thinly capitalized entity) and further determine when such variable interests require a company to consolidate the variable interest entities' financial statement with its own. The Company performed this assessment and identified no variable interest entities that require consolidation.

Note 7—Business Segment Information

        The Company's chief decision makers evaluate performance based on the gross profit of the following four segments: bulk wine, wine grapes, case goods, and brandy. The bulk wine segment includes production and sale of bulk wine, custom crushing services, storage of bulk wine in tanks and barrels and 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 production of proprietary and private label bottled wine, custom bottling and storage services and custom bottling services for malt-based alcoholic beverages to a major customer. The Company's brandy segment includes production of brandy and spirits and 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.

7

        Segment information as of March 31, 2004 and June 30, 2003 and for the three and nine month periods ended March 31, 2004 and 2003 is as follows (unaudited, in thousands):

8

        The net book value of assets held for sale as of March 31, 2004 and June 30, 2003 are included in the following business segments (in thousands):

Note 8—Contingencies

       On March 10, 2004, a purported class action complaint was filed by Milton Pfeiffer in the Delaware Court of Chancery against the Company and its current directors (the "Pfeiffer Action"). The plaintiff in the Pfeiffer Action alleges, among other things, that the individual defendants breached their fiduciary duties by agreeing to a plan of merger with the O'Neill Group and challenges the fairness of both the process and the merger price. The Pfeiffer Action seeks certification of a class action of Company stockholders, an injunction to prevent a merger with the O'Neill Group, monetary damages if such a merger is allowed to proceed, compensatory damages, interest, attorneys fees and expenses.

        On March 17, 2004, a purported class action complaint was filed by Jonathan Kathrein in Napa County Superior Court of California for the County of Napa against the Company and its current directors (the "Kathrein Action"). The Kathrein Action alleges similar claims as the Pfeiffer Action in addition to preferential treatment of management insiders. The Kathrein Action seeks a declaration that the merger agreement with the O'Neill Group is unlawful as well as relief similar to that sought in the Pfeiffer Action.

        On March 19, 2004, a purported class action complaint was filed by Richard Gundersen in the Delaware Court of Chancery against the Company and its current directors (the "Gundersen Action"). The Gundersen Action alleges that the individual defendants breached their fiduciary duties by agreeing to a termination fee payable to the O'Neill Group if the plan of merger with the O'Neill Group were terminated. The Gundersen Action seeks (1) certification of a class action; (2) an order voiding the termination fee provisions; (3) an order requiring the Company's directors to cooperate with any party having bona fide interest in acquiring the Company at a competitive price, undertake a valuation of the Company and take steps to create an active auction for the Company; and (4) monetary damages, attorneys fees and expenses.

        On May 6, 2004, the Delaware Chancery Court ordered that the Pfeiffer Action and the Gundersen Action be consolidated for all purposes. GSV believes that each of the foregoing lawsuits lack merit and intends to defend each piece of litigation vigorously.

        Additionally, the Company is subject to litigation in the ordinary course of business. In the opinion of management, the ultimate outcome of existing litigation will not have a material adverse effect on the Company's consolidated financial condition, the results of its operations or its cash flows.

9

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. ("we" or "us" or the "Company") contains "Forward-Looking Statements," as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-Looking Statements are statements other than historical information or statements of current condition and relate to future events or the future financial performance of the Company. Some Forward-Looking Statements may be identified by use of such terms as "believes," "anticipates," "intends" or "expects." Such Forward-Looking Statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such Forward-Looking Statements. Our results may differ materially from those anticipated in such Forward-Looking Statements as a result of a number of factors, including without limitation, (i) difficulties in the bulk wine market; (ii) loss of key customers or contracts and ability of customers to pay; (iii) competition from various domestic and foreign wine producers; (iv) interest rates and other business and economic conditions which could increase significantly the costs and risks of projected capital spending; and (v) the effect of weather and other natural forces on growing conditions and, in turn, the quality and quantity of grapes we produce. Each of these factors, and other risks pertaining to our business, 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 our Annual Report on Form 10-K, for the year ended June 30, 2003. We undertake no obligation to publicly update or revise any Forward-Looking Statements, whether as a result of new information, future events or otherwise.

Significant Accounting Policies

Critical Accounting Policies

        Our significant accounting policies are described in Note 2 to the Consolidated Financial Statements included in our Annual Report on Form 10-K. Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our revenue recognition policy, the collectibility of accounts receivable, the valuation of inventories, and the valuation of its long-lived assets and deferred tax assets. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. In the past, actual results have not been materially different from our estimates.

        Some of our significant accounting policies involve a higher degree of judgment or complexity than our other accounting policies. The policies described below have been identified as critical to our business operations and the understanding of our results of operations. The impact and associated risks related to these policies on our business operations are discussed throughout Management's Discussion and Analysis of Financial Condition and Results of Operations.

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 specify that we store such product after it has been sold and 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.

10

Trade Receivables

        Substantially all accounts receivable are due from wine distributors and major wineries located in California. We perform periodic credit evaluations of our customers' financial condition and generally do not require collateral for our sales. We maintain an allowance for doubtful accounts to reflect expected credit losses resulting from the inability of customers to make required payments on such accounts. A considerable amount of judgment is required to assess the ultimate realization of the customer accounts receivable and the credit-worthiness of each customer. Furthermore, these judgments must be continually updated and evaluated. Estimates of potential losses are based on historical as well as current data, including the aging of the receivables, recent bankruptcy trends, delinquency rates, historical charge-off patterns, recovery rates and other data. Other factors, including the general economic environment in the wine industry, are also considered. Historically, our credit losses on receivables have been consistent and within expectations. However, if the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payment, adjustment to those estimates may be required.

Inventories

        Bulk wine, case goods and brandy are stated at the lower of average cost or net realizable value. Inventories of supplies are stated at the lower of the first-in, first-out method 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. We review our inventory for estimated obsolescence or unmarketable inventory based upon assumptions about historical usage, future demand and market conditions. If required, the inventory is written down to estimated market value less costs to sell.

        Our bulk wine inventory at March 31, 2004 is approximately $18 million and in excess of committed sales contracts. Although our case goods inventory quantities at March 31, 2004 are consistent with a year ago at this time, we have reduced pricing on certain labels and implemented various sales discount and incentive programs given current challenging market conditions. Although management believes that excess inventory can be sold on the spot market at prices at or above the carrying value, no assurance can be given that the Company will not experience losses on the sale or disposition of a portion of the inventory, and such losses could be material.

Impairment of Long-Lived Assets

        Our long-lived assets consist primarily of property and equipment, assets held for sale and other assets. Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. With respect to vineyards, we perform an evaluation of whether an impairment charge should be made whenever particular vineyards experience unfavorable operating results. A vineyard's assets are evaluated for impairment by comparing its estimated undiscounted cash flows over its estimated life to its carrying value. If the cash flows are not sufficient to recover the carrying value, a loss equal to the difference between the carrying value and the discounted future cash flows of the vineyard is recognized. Estimates of future cash flows are based on a variety of factors, including historical experience with yields and expected grape sales prices. Various uncertainties, including but not limited to bad weather, pests and diseases, and excess inventory levels in the industry could adversely impact the expected cash flows to be generated by a vineyard. If actual performances of the remaining vineyards are less favorable than our projections, future asset impairment charges may be necessary. Similar procedures are used when analyzing other corporate assets for impairment. In fiscal 2002, we recognized an impairment reserve of approximately $1.9 million to reflect the anticipated loss on the sale of Lost Hills Vineyard. This loss was partially offset by a reversal of a contingent note payable to a related party of $0.9 million. Also, in

11

2002, an impairment charge of approximately $5.6 million was recorded as the Company elected not to implement the bulk wine module of its new enterprise-wide technology platform due to significant remaining programming and training costs and additional ongoing resources needed to operate the bulk wine module. We are currently pursuing our options to recover funds expended on this module from the implementation vendor, however, no assurances can be given whether any such efforts will be successful. In fiscal 2003, an impairment charge of $8.0 million was recorded in connection with our RTD facility. In June 2002 the Company's Board of Directors approved a plan to sell certain excess assets. These assets, which included a bulk wine and bottling facility, a warehouse, a tasting room and certain vineyards, were included in the June 30, 2003 financial statements as assets held for sale. We sold the bulk wine and bottling facility, tasting room and vineyards located in St. Helena, California in July 2003 as more fully discussed under "Recent Developments." In October 2003, we elected to retain the warehouse located in Napa, California for continuing barrel warehousing activities.

Deferred Tax Assets

        We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing and prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we were to determine that they would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

Recent Developments

Sale of the Company

        We signed an agreement and plan of merger, dated April 22, 2004 (the "Agreement") with The Wine Group LLC ("TWG") to acquire the Company at a cash price of $8.25 per fully diluted share. Under the terms of the Merger Agreement each outstanding share of the Company's Class A and Class B Common Stock will be entitled to receive merger consideration of $8.25 per share in cash. The transaction value is approximately $111 million, consisting of an equity valuation of approximately $82 million and total debt (as of December 31, 2003) of approximately $29 million. The Merger Agreement includes a "fiduciary out" provision and a "break-up fee" of $1.8 million payable in certain circumstances upon exercise of the fiduciary out.

        The Company had previously entered into an amended and restated plan and agreement of merger with O'Neill Acquisition Co. LLC, and certain affiliated parties (the "O'Neill Group"), dated April 14, 2004. The Company has notified the O'Neill Group that it has terminated that plan and agreement of merger. As a result, the O'Neill Group is entitled to receive a $1.8 million termination fee and up to $500,000 of expense reimbursement in connection with the termination of its amended and restated plan and agreement of merger, In addition, SBIC Partners, L.P. ("SBIC"), which exercises voting control over approximately 62% of the votes entitled to be cast in favor of the merger, has been released from the terms of the voting agreement, dated April 14, 2004, with the O'Neill Group. SBIC has entered into a voting agreement with TWG that requires SBIC to provide a written consent to the merger transaction, which SBIC has provided.

        Our board of directors, based upon the unanimous recommendation of a Special Committee of the board of directors, unanimously approved the Merger Agreement, except for Mr. O'Neill who recused himself from the meeting.

        In March 2004, we were named in three separate lawsuits filed in connection with the proposed merger transaction. The ultimate resolution of this litigation is not expected to have a material impact on the financial statements. See Legal Proceedings.

12

Loan Prepayment

        In March 2004, we repaid the remaining balance on a loan agreement with an insurance company. The final payment included principal of $2.7 million and a prepayment penalty of $72,000.

Operations

        Our core business products include serving as an outsourcer to bulk wine and spirits industry and a producer of propriety and private label case goods. To focus on core business segments and products, we have been in the process of selling assets which either had marginal operating results or were no longer considered strategic to future operations, including certain vineyards and a bulk wine and bottling facility.

        Case goods industry trends continue to indicate downward pressure on sales volumes and margins resulting in surplus case goods inventories. Total cases included in our case goods inventories at March 31, 2004 are consistent with a year ago at this time, however remain in excess of optimum inventory levels. Although we believe that this excess inventory can be sold on the spot market at sales prices at or above the carrying value, no assurance can be given that we will not experience losses on the sale or disposition of a portion of the inventory, and such losses could be material.

Asset Sales

        In April 2004, we sold approximately 1,500 acres (approximately 500 acres of which are vineyards) of farmland located in Madera County, California. Proceeds from the sale were $2.5 million and the gain on the sale was approximately $0.4 million before income taxes. This transaction will be reflected in the fourth quarter of fiscal 2004.

        We sold the bulk wine and bottling facility, tasting room and vineyards located in St. Helena, California in July 2003. Proceeds of $11.7 million were applied to the loan principal due to an insurance company ($10.6 million) and a prepayment penalty ($1.1 million). The sale resulted in a gain of approximately $4.2 million and was reflected in our first quarter results for fiscal 2004.

Seasonality and Quarterly Results

        We have experienced and expect to continue to experience seasonal and quarterly fluctuations in our revenues. Because of the inherent seasonality of our operations, we have historically reported our highest revenues and net income in our second fiscal quarter as we sell most of our bulk wine in the second quarter, immediately after crush, and perform many of our wine processing services in the first and second quarters. As a result, we typically report lower revenues and net income (loss) in the third and fourth fiscal quarters. In the current fiscal year, we continue to anticipate decreased bulk wine revenues as a result of a reduced number of long-term bulk wine sales contracts relative to previous years. We believe such decrease in long-term bulk sales contracts is attributable to 1) plantings of new vineyards 2) current and anticipated lower bulk wine market prices 3) higher levels of wine inventory held by our customers and 4) increased international competition. We anticipate that these market pressures will continue.

International

        Approximately 11% of our revenues in the nine months ended March 31, 2004 were derived from the sale of wine and wine products internationally. We export bulk wine and case goods to Europe, Canada and Asia.

13

Three Months Ended March 31, 2004

Revenues

        Total revenues for the third quarter of fiscal 2004 were $22.1 million, an increase of $5.5 million or 33.1%, as compared to revenues of $16.6 million for the third quarter of 2003. The overall increase in revenues is due to increases in bulk wine and case goods revenues as partially offset by decreased brandy and wine grape revenues.

        Bulk Wine and Related Services.    For the third quarter of fiscal 2004, revenues from bulk wine and related services were $15.4 million, an increase of $4.7 million or 43.9%, as compared to revenues of $10.7 million in the third quarter of 2003. The period to period increase was a result of increased gallons sold of 2.8 million gallons or approximately $5.6 million partially offset by decreased bulk wine and spot sales average prices per gallon totaling approximately $0.9 million. The increase in gallons sold has been favorably impacted by international spot sales due to favorable foreign currency exchange rates.

        Case Goods and Related Services.    For the third quarter of fiscal 2004, revenues from case goods and related services were $6.4 million, an increase of $1.6 million or 33.3%, as compared to revenues of $4.8 million in the third quarter of fiscal 2003. The period to period increase was a result of increased sales volume of $2.2 million partially offset by (1) lower average sale prices per case totaling $0.2 million and (2) period to period decreases in RTD production revenues of $0.3 million.

        Brandy.    For the third quarter of fiscal 2004, revenues from the sale of brandy and grape spirits were $0.4 million, a decrease of $0.7 million or 63.6%, as compared to revenues of $1.1 million in the third quarter of fiscal 2003. The period to period decrease was due to decreased proof gallons sold of $0.7 million.

        Wine Grapes.    Our wine grape business segment realized only a modest amount of revenues in the third quarter of fiscal 2004 consistent with seasonal trends.

Cost of Sales

        For the third quarter of fiscal 2004, total cost of sales was $16.2 million, an increase of $0.9 million or 5.9%, from $15.3 million in the third quarter of fiscal 2003. As a percentage of revenues, cost of sales for the third quarter of fiscal 2004 was 73.4%, a decrease from 92.3% for the third quarter of fiscal 2003. The decrease in cost of sales as a percentage of revenues resulted as follows: (1) Cost of sales as a percentage of revenues in the cased goods segment reduced from 121.3% in the third quarter of fiscal 2003 to 91.6% in the third quarter of fiscal 2004. Additional costs in fiscal 2003 included unabsorbed fixed costs due to reduced production volumes and adjustments to reduce case inventories to estimated market value; (2) the bulk segment experienced decreased costs of sales as a percentage of revenues due to a greater reduction in costs per gallon relative to reduced average sales prices and; (3) in the third quarter of fiscal 2003, we recognized the removal of 400 acres of vineyards resulting in a $1.0 million charge to cost of sales.

Gross Profit

        In the third quarter of fiscal 2004, we realized gross profit of $5.9 million, an increase of $4.6 million or 353.8%, as compared to $1.3 million for the third quarter of fiscal 2003. As a percentage of revenues, gross profit for the third quarter of fiscal 2004 was 26.6%, an increase from 7.7% in the third quarter of fiscal 2003, for reasons discussed above under "Cost of Sales."

Selling, General and Administrative Expenses

        For the third quarter of fiscal 2004, selling, general and administrative expenses were $3.6 million, an increase of $0.7 million or 24.1%, from $2.9 million in the third quarter of fiscal 2003. The period

14

to period increase was due principally to increased legal and professional expenses related to the merger transaction discussed in Recent Developments.

Loss on Impairment of RTD Assets

        As a result of our unfavorable operating results and inability to locate new customers, assets with a net book value of $9.5 million were written down by $8.0 million in the third quarter of fiscal 2003 based on estimated fair value of such assets supported by an outside appraisal.

Interest Expense

        For the third quarter of fiscal 2004, interest expense was $0.4 million, a decrease of $0.3 million or 42.9%, as compared to interest expense of $0.7 million in the third quarter of fiscal 2003. The period to period decrease was due to decreased average borrowings on our line of credit and long-term debt at lower overall interest rates. We capitalized interest of approximately $7,000 in the third quarter of fiscal 2004. We did not capitalize any interest in the third quarters of 2003.

Income Taxes

        The effective tax rate of our income tax expense was 31.4% and 38.1% for the third quarters of fiscal 2004 and 2003 respectively. The decrease in the rate is due to the third quarter effect of a reduction in the year to date income tax rate from 39.8% to 38.5%.

Net Income (Loss)

        For the third quarter of fiscal 2004, net income was $1.3 million, an increase of $7.6 million, as compared to net loss of $6.3 million in the third quarter of fiscal 2003. Net income for the third quarter of fiscal 2004 was impacted by factors covered above.

Earnings (Loss) Per Share

        For the third quarter of fiscal 2004, diluted earnings per share was $0.13 compared to diluted loss per share of $0.67 for the third quarter of fiscal 2003.

Nine Months Ended March 31, 2004

Revenues

        Total revenues for the first nine months of fiscal 2004 were $74.1 million, an increase of $8.3 million or 12.6%, as compared to revenues of $65.8 million for the first nine months of fiscal 2003. The overall increase in revenues is due to increases in bulk wine, brandy and case goods revenues as partially offset by decreased wine grape revenues.

        Bulk Wine and Related Services.    For the first nine months of fiscal 2004, revenues from bulk wine and related services were $46.0 million, an increase of $6.2 million or 15.6%, as compared to revenues of $39.8 million for the first nine months of 2003. The period to period increase was a result of increased gallons sold of 3.9 million gallons or approximately $7.9 million as partially offset by decreased bulk wine contract and spot sales average prices per gallon totaling approximately $1.5 million. The increase in gallons sold has been favorably impacted by international spot sales due to favorable foreign currency exchange rates.

        Wine Grapes.    For the first nine months of fiscal 2004, revenues from wine grape sales were $0.7 million, a decrease of $0.7 million or 50.0%, as compared to revenues of $1.4 million in the first nine months of fiscal 2003. The decrease in revenues is primarily a result of decreased resold grape revenues of $0.6 million.

15

        Case Goods and Related Services.    For the first nine months of fiscal 2004, revenues from case goods and related services were $16.7 million, an increase of $0.8 million or 5.0%, as compared to revenues of $15.9 million in the first nine months of fiscal 2003. The increase was due to increased sales volume of $8.8 million as partially offset by (1) lower average sale prices per case totaling $4.4 million, (2) period to period decreases in RTD production revenues of $2.7 million (fiscal 2003 case revenues included a $1.4 million termination settlement from a certain customer to buy out the remaining contract production requirement and a $0.5 million excise tax small brewers credit) and (3) decreases in custom case bottling of $0.6 million.

        Brandy.    For the first nine months of fiscal 2004, revenues from the sale of brandy and grape spirits were $10.6 million, an increase of $1.9 million or 21.8%, as compared to revenues of $8.7 million in the first nine months of fiscal 2003. The period to period increase was due to (1) increased sales prices per proof gallon of $1.0 million, (2) custom processing increases of approximately $0.6 million and (3) increased brandy sales volume of $0.3 million.

Cost of Sales

        For the first nine months of fiscal 2004, total cost of sales was $55.0 million, an increase of $2.6 million or 5.0%, from $52.4 million in the first nine months of fiscal 2003. As a percentage of revenues, cost of sales for the first nine months of fiscal 2004 was 74.2%, a decrease from 79.6% for the first nine months of fiscal 2003. The decrease in cost of sales as a percentage of revenues resulted as follows: (1) Cost of sales as a percentage of revenues in the cased goods segment reduced from 100.9% in fiscal 2003 to 93.4% in fiscal 2004. Additional costs in fiscal 2003 included unabsorbed fixed costs due to reduced production volumes and adjustments to reduce case inventories to estimated market value; (2) brandy segment cost of sales as a percentage of revenues decreased as costs of sales per proof gallon in fiscal 2004 remained consistent with fiscal 2003 while sales prices per proof gallon increased; (3) in fiscal 2003, we recognized the removal of 400 acres of vineyards resulting in a $1.0 million charge to cost of sales. Partially offsetting these decreases, cost of sales as a percentage of revenues increased in the RTD bottling unit due to decreased production volume on fixed operating expenses.

Gross Profit

        In the first nine months of fiscal 2004, we realized gross profit of $19.1 million, an increase of $5.7 million or 42.5%, as compared to $13.4 million in the first nine months of fiscal 2003. As a percentage of revenues, gross profit for the first nine months of fiscal 2004 was 25.8%, an increase from 20.4% in the first nine months of fiscal 2003, for reasons discussed above under "Cost of Sales."

Selling, General and Administrative Expenses

        In the first nine months of fiscal 2004, selling, general and administrative expenses were $9.1 million, an increase of $1.1 million or 13.8%, from $8.0 million in the first nine months of fiscal 2003. The period to period increase was due principally to increased legal and professional expenses related to the merger transaction discussed in Recent Developments in addition to increased payroll and related expenses.

Gain on Sale of Assets

        In July 2003, we sold the bulk wine and bottling facility, tasting room and vineyards located in St. Helena, California. The sales price of $11.7 million was applied to the loan principal due to an insurance company ($10.6 million) and a prepayment penalty ($1.1 million). The sale resulted in a gain of approximately $4.2 million and is reflected in the first nine month results for the period ended March 31, 2004. This transaction including the net effect of the gain on sale less the prepayment penalty (included in interest expense) increased net income be approximately $1.9 million.

16

Interest Expense

        In the first nine months of fiscal 2004, interest expense was $2.2 million, a decrease of $0.7 million or 24.1%, as compared to interest expense of $2.9 million in the first nine months of fiscal 2003. The period to period decrease was due to decreased average borrowings on our line of credit and long-term debt and lower overall interest rates. Such decrease was partially offset by a prepayment penalty of $1.1 million that was incurred in the first quarter of fiscal 2004 due to lender requirement to pay down long-term debt with proceeds on sale of certain assets located in St. Helena, California. We capitalized interest of approximately $7,000 in the first nine months of fiscal 2004. We did not capitalize any interest in the first nine months of fiscal 2003.

Income Taxes

        The effective tax rate of our income tax expense was 38.5% and 42.5% for the first nine months of fiscal 2004 and 2003, respectively. The decrease in the rate is due to utilization of foreign extraterritorial income exclusion and other permanent items.

Net Income

        In the first nine months of fiscal 2004, net income was $7.4 million, an increase of $9.6 million, as compared to net loss of $2.2 million in the first nine months of fiscal 2003. Net income for the first nine months of fiscal 2004 was impacted by factors covered above.

Earnings Per Share

        In the first nine months of fiscal 2004, diluted earnings per share was $0.77 compared to diluted loss per share of $0.24 for the first nine months of fiscal 2003.

Liquidity and Capital Resources

        Our working capital position at March 31, 2004 was $23.1 million, compared to $22.5 million at June 30, 2003. The increase in working capital is due to decreased current portion of long-term debt and increased accounts receivable and inventories partially offset by increased line of credit and other current liabilities which arise from normal seasonal fluctuations. We maintain 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. Borrowings under the line typically peak in November, during our second fiscal quarter. The revolving line of credit balance was $8.5 million at March 31, 2004 and $5.8 million at June 30, 2003. Unused availability under the line of credit was $5.5 million at March 31, 2004. On September 18, 2003, we renewed the revolving bank line of credit to provide $22.0 million through January 31, 2004, $14.0 million from February 1, 2004 through March 31, 2004, $10.0 milion from April 1, 2004 through June 30, 2004 and $14.0 million thereafter. The line expires on October 5, 2004. Our existing line of credit financing agreement contains restrictive financial covenants. These covenants require us, among other things, to maintain specified levels of net income, working capital, tangible net worth and financial ratios. We were out of compliance as of June 30, 2003 with certain financial covenants. We received waivers on events of non-compliance of such covenants in August and September 2003, as well as an amendment to our loan agreement with an insurance company to modify a financial covenant effective for each quarter beginning September 30, 2003. We were in compliance with such financial covenants as of March 31, 2004.

        Net cash provided by operating activities for the first nine months of fiscal 2004 was $5.7 million, compared to net cash provided by operations of $11.1 million for fiscal 2003. The decrease in cash provided by operations resulted from decreased inventory change relative to the prior year.

17

        We sold the bulk wine and bottling facility, tasting room and vineyards located in St. Helena, California in July 2003. Proceeds of $11.7 million from the St. Helena sale were applied to the loan principal ($10.6 million) and a prepayment penalty ($1.1 million).

        Capital expenditures for the first nine months of fiscal 2004 were $1.5 million, compared to $1.3 million in fiscal 2003. We are in the process of replanting certain vineyards with an expected total cost of $1.4 million of which $0.6 million has been expended through March 31, 2004. We have funded these expenditures in 2004 from our working capital line and issuance of capital lease obligations. We intend to finance future major capital expenditures through long-term financing arrangements.

        We believe that cash flows from operations, asset sales and the line of credit are sufficient to cover operating needs for the year.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

        We can choose from several variable rate options on certain of our debt. All of our balance sheet items and sales are in U.S. dollars, therefore we have no foreign currency exchange rate risk related to these financial data. We do not use financial instruments for trading purposes.

        Certain of our debt is subject to variable interest rate options. The following chart indicates our fixed and variable rate long and short-term debt at March 31, 2004, and estimates the balances of such debt in future periods assuming no additional debt will be obtained or required. This analysis does not, therefore, constitute in any way our forward plan and should not be used by investors as such ($ millions):

*

Based on current anticipated cash flow, we believe that our bank line of credit (including anticipated renewals) will be periodically used to fund operations in our peak season.

        During our annual business cycle, we utilize a variable interest rate working capital line at various borrowing levels. Our existing working capital loan agreement offers interest rate options at spreads over LIBOR and/or lender cost of funds, at maturities we selected. For the first nine months of fiscal 2004, the average outstanding balance under this line was approximately $8.6 million, with a weighted average interest rate of approximately 2.9%.

        At March 31, 2004, the balance on our fixed rate long-term debt was $8.9 million and carried a weighted average interest rate of approximately 6.9%. The weighted average interest rate at March 31, 2004 for all our debt was approximately 4.5%.

        For strategic reasons, we enter into forward product sales and material supply contracts, most of which have staggered maturity dates. Under SFAS 133 and related pronouncements, these contracts qualify as normal sales and purchases contracts, under which we expect to take physical delivery. Of our 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 of our products is wine grapes. We enter into long and short-term grape purchase contracts to ensure an adequate and cost effective source of raw material for production. We currently have several contracts to purchase grapes at costs that exceed the anticipated market for the 2004 crush. We are in

18

the process of renegotiating such contracts but no assurance can be given that such efforts will be successful. 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 contains annual harvest market price adjustment clauses, including individual harvest year minimum pricing. The harvest market adjustment for fiscal 2004 (harvest 2003) increased grape purchase costs under these contracts by approximately $1.2 million.

        Our grape purchase contracts, which extend through fiscal 2009, the 2008 harvest year, are primarily for California appellation grapes which were negotiated when grape prices were historically low and therefore are expected to be favorable to the Company. Management believes that its exposure from certain contracts for the purchase of premium grapes (Napa and Coastal) is not material due to favorable related storage/processing contracts and an expectation of improved market conditions. Wine produced from premium grapes would not be sold as cased goods until fiscal years 2006 through 2010. While there can be no assurances that the market for premium case goods will improve from current conditions, management believes it has other options for minimizing the exposure.

        A certain portion of our annual wine and brandy production is committed under sales contracts. Bulk wine sold under long-term contracts decreased from 10.0 million gallons in fiscal 2002 to 4.1 million gallons in fiscal 2003. At June 30, 2003, our reported inventory value of bulk wine and brandy was approximately $16.3 million, of which approximately $7.6 million, or 47%, is committed to sales contracts. We generally match preproduction contractual sales with contracted material supply agreements. Uncommitted inventory of approximately $8.7 million, or 53% is available for future case goods sales and for spot market bulk wine sales. We maintain a certain amount of uncommitted product inventory to meet customer demand.

Item 4.    Controls and Procedures.

        As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in timely alerting them to material information required to be disclosed in our periodic reports filed with or submitted to the SEC. There have been no significant changes in our internal or other factors that could significantly affect these controls subsequent to the evaluation date, including any corrective actions with regard to significant deficiencies and material weaknesses.

19

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.

Our Business and Stock Price May Be Adversely Affected if the Merger with TWG Is Not Timely Completed

        If the planned merger with TWG is not timely completed, the Company could be subject to a number of risks that may adversely affect its business and stock price, including: we would not realize the benefits expected by being part of a combined company with TWG, as well as the potentially enhanced financial and competitive position as a result of being part of the combined company; the diversion of management attention from day-to-day business and the unavoidable disruption to our employees and our relationships with customers as a result of efforts and uncertainties relating to the anticipated merger may detract from our ability to grow revenues and minimize costs; the market price of shares of our common stock may decline to the extent that the current market price of those shares reflects a market assumption that the merger will be completed; and we must pay the costs related to the merger, such as legal and accounting fees and a portion of the investment banking fees.

        A delay in closing the planned merger could have an adverse effect on our revenues in the near-term if customers delay, defer, or cancel purchases pending completion of the planned merger with TWG. To the extent a prolonged delay in completing the planned merger creates uncertainty among those contemplating purchases such that several large customers, or a significant group of small customers, delay purchase decisions pending resolution of the planned merger, this could have an adverse effect on our results of operations and could cause a reduction in our stock price.

Much of Our Revenues Are Derived From Only a Few Customers, the Loss of Any One of Which Would Harm Our Business

        During fiscal 2003, five of our customers accounted for approximately 39% of our revenues, with Diageo and Heaven Hill accounting for approximately 14% and 10%, respectively. While some of our largest customers have entered into some form of long-term contract with us, there can be no assurance that each of these relationships will continue following the expiration of these contracts or that the volume of business we are currently conducting with such customers will continue at such levels. The loss of any one of our major customers or a significant reduction in the sales prices or volume of their business with us could have a material adverse effect on our business, financial condition and results of operations.

Loss of a Major Bulk Wine Customer Could Adversely Affect Our Operations

        Bulk wine and related services accounted for approximately 59% of our revenues in fiscal 2003. We continue to provide resources for expanding this portion of our business. Any loss of a major bulk wine customer could reduce our bulk wine revenues, which could have a material adverse effect on our business, financial condition and results of operations.

Our Customers Inability to Pay Would Adversely Affect Our Revenues and Operating Results

        From time to time we have provided extended payment terms to certain of our customers subject to the credit risks of such customers. If one of these customers fails to pay amounts owed us, or does not pay such amounts on time, our revenue, operating results and/or liquidity would suffer.

20

Inability to Sell Our Inventory Would Harm Our Business

        Due to continued surplus domestic and international bulk wine and case goods inventories and a reduction in the number of our long-term bulk wine sales contracts compared to previous years, our bulk wine inventory is substantially in excess of committed sales contracts. In addition, our case goods inventories, including private label inventories, have remained at higher than optimal quantities over the past year. There can be no assurance that we will be able to sell this excess inventory on the spot market at prices at or above our carrying value. As a result, we may experience losses on the disposition of this inventory which would have an adverse affect on the results of our operations.

Decreasing Amounts of Our Bulk Wine Revenues Are Derived From Long-Term Contracts

        We continue to experience decreasing gallons sold under long-term contracts. In fiscal 2001, approximately 11.7 million gallons were sold under long-term contracts. In fiscal 2003, only 4.1 million gallons were sold under long-term contracts. As a result of our decreasing reliance on long-term contracts, our ability to accurately predict our future revenues, required inventory levels and the volume of our business has declined. Furthermore, our operating expenses are relatively fixed and cannot be reduced on short notice to compensate for unanticipated variation in the demand of bulk wine and related services. As a result, any termination, significant reduction or modification of our business relationships with any of our significant customers, or with a number of smaller customers, could have a material adverse effect on our business, financial condition or results of operations.

Increased Environmental Requirements Could Adversely Affect Our Business

        Ownership of real property creates a potential for environmental liability. There is an increasing trend toward more stringent guidelines and regulation. If hazardous substances are discovered to have emanated from our properties, we could be subject to material liability arising from the remediation of such potential harm. We believe that our properties have been and continue to be in a material compliance with relevant environmental regulations. As environmental regulations tighten we cannot be assured our real property will continue to meet such standards.

We Use Pesticides and Other Hazardous Substances in Our Business

        Our 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. We believe that our 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 such operations, we could be subject to material liability arising from the remediation of such potential harm. As environmental regulations tighten we cannot be assured our current operating practices will meet such standards.

Decreased Demand for Our Case Goods Could Harm Our Business

        Sales of case goods and related services accounted for approximately 27% of revenues in fiscal 2003. A significant portion of our case goods revenues consists of short-term private label case goods sales. There is generally no contractual obligation for our private label customers to deplete all produced inventories. Accordingly, alternative market possibilities would have to be identified at possibly lower sales prices or destruction of such cases could become necessary. Additionally, our higher margin proprietary case goods revenues resulted from sales of our relatively unknown proprietary brands of premium wines. We have reduced pricing on certain labels and implemented various sales discount and incentive programs given current challenging market conditions. Any significant increase in the supply of premium wine in the California wine market that is not met by a

21

corresponding demand could adversely affect our case goods sales. See "Recent Developments" in Management's Discussion and Analysis where we discuss the effect of reduced demand in our case goods business.

Wine Grape and Bulk Wine Price Declines Would Harm Our Business

        Recent market developments resulted in oversupply and declining prices for certain wine grapes and bulk wine categories, which could have a material adverse effect on our business, financial condition and results of operations. Such developments include (1) plantings of new vineyards, (2) yield enhancements through technological advances and (3) denser plantings of vines. Anticipated high levels of grape production will continue to exert pressure on our bulk wine sales volume and margins. As a result, we may experience lower than expected revenues and increased inventories which would materially adversely affect our business and future results. See "Recent Developments" in Management's Discussion and Analysis where we discuss the effect of current difficulties in the bulk wine market on our business.

A Decrease in Customer Spending Would Harm Our Business

        The growth of the wine industry and the success of our business depend to a significant extent on a number of factors relating to discretionary consumer spending, including the general condition of the economy, general levels of consumer confidence, federal, state and local taxation, and the deductibility of business entertainment expenses under federal and state tax laws. The current economic downturn both in the U.S. and abroad could adversely affect discretionary consumer spending generally, or purchases of wine specifically, which could have a material adverse effect on our business. Current market pressures could negatively impact our lower of cost or market reserves for inventories. In addition, reduced sales could result in increased inventories on hand and possible deterioration of inventory quality.

Decreased Cash Flow Could Limit Our Ability to Service Our Debt

        As a result of incurring debt, we are subject to the risks normally associated with debt financing, including the risk that cash flow from operations will be insufficient to meet required payments of principal and interest. Our ability to satisfy our obligations to pay interest and to repay debt is dependent on our future performance. Our performance depends, in part, on prevailing economic conditions and financial, business and other factors, including factors beyond our control. To the extent we use a substantial portion of our cash flow from operations to pay the principal and interest on our indebtedness, that cash flow will not be available to fund future operations and capital expenditures. Our debt level may also limit our ability to obtain additional financing to fund future capital expenditures, debt service, working capital and other general corporate requirements. It could also make us more vulnerable to general economic downturns and competitive pressures. We can give no assurances that our operating cash flow will be sufficient to fund our future capital expenditure and debt service requirements or to fund future operations. In addition, our debt is secured by substantially all of our assets. If we are unable to meet our debt service obligations due to adverse economic conditions, we risk the loss of some or all of our assets to foreclosure. See "Liquidity and Capital Resources" in Management's Discussion and Analysis where we discuss our existing line of credit.

Our Debt Financing Agreements Contain Restrictive Covenants with Which We May Not Be Able to Comply

        Our ability to comply with restrictive financial covenants depends upon our future operating performance. Our future operating performance depends, in part, on general industry conditions and other factors beyond our control. We can give no assurance that we will be able to comply with these covenants. If we fail to comply with these covenants in the future, we may not succeed in renegotiating

22

our debt financing agreements or otherwise obtaining relief from the covenants. If we default under some or all of our debt financial agreements, our lenders may require that we immediately repay the full outstanding amount we owe them. In such event, we may have to pursue alternative financing arrangements. If we are not in compliance with financial covenants at the end of any compliance period, our future results of operations and liquidity could be materially adversely affected.

Bad Weather, Pests and Diseases Could Adversely Affect Our Business

        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. There can be no assurance that inclement weather in the future will not affect a substantial portion of our vineyards in any year and have a material adverse effect on our 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 our vineyards are planted on their own rootstock that is not phylloxera-resistant. In the fall of 1997, phylloxera was discovered in certain acres of our vineyards located in Fresno County. We believe that the scope of this phylloxera infestation is modest, though there can be no assurance in that regard. Additionally, we believe the climate, soil and water conditions in California's San Joaquin Valley slow the development of phylloxera in vineyard roots. Further, recent harvest yields from our 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, or infest any of our other vineyards which could 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. We have engaged a consultant to monitor the pest and advise regarding the latest research developments. To date, the GWSS has not been found on our vineyards and we believe 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 our vineyards would have a materially adverse effect on our operations and profitability.

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

23

Intense Competition in the Wine Industry Could Adversely Affect Our Business

        The wine industry is extremely competitive. We compete with several well-capitalized companies in the production of bulk wine. Further, many of our current and prospective competitors have substantially greater financial, production, personnel and other resources than us. 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 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, our 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.

Vineyard Removal and Replacement Could Affect Our Financial Condition

        We currently own 3,946 acres of vineyards in a number of grape varieties. From time to time, we remove underperforming vineyards due to age, variety and/or harvest yield trends. As all of our vineyards currently carry remaining net book value, removals incurred in the near term will result in loss recognition including removal costs. The development period for newly planted vineyards can range from 3-5 years and capital requirements are substantial. Historically, we have financed vineyard plantings through issuance of debt and internally generated funds. We anticipate finalizing a long-term vineyard strategy plan within the next twelve to twenty-four months resulting in identification of vineyards for removal, replacement and/or sale. For those vineyards designated for removal and/or replacement, depreciation will be accelerated for the revised remaining useful lives of those assets. In addition, possible external and/or internal capital sources will be identified to meet vineyard development cost requirements. As a result, our vineyard strategy will likely have a material effect on our business, results of operations and our financial condition.

Difficulties in Production of Bulk Wine Could Affect Our Financial Condition

        While we have substantial experience in producing and processing bulk wine, we may still experience production difficulties and delays with respect to the delivery of finished wine. We generally guarantee the quality of the wine produced, which could result in our bearing financial responsibility for wine that fails to meet agreed upon quality standards. From time to time, we have received claims from customers based on alleged defects in wine we produce. Such production difficulties could have a material adverse effect on our business, results of operations and financial condition.

Adverse Public Opinion About Alcohol May Harm Our Business

        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 our business, financial condition and results of operations.

24

The Seasonality of Our Business Could Cause Our Stock Price to Fluctuate

        The wine grape business is extremely seasonal and we recognize the vast majority of our revenues in the first six months of our fiscal year. We are not positioned to maximize quarter-to-quarter results, and our quarterly results should not be considered indicative of those to be expected for a full year. We recorded 61% of our revenues during the first six months of our 2003 fiscal year. We have historically operated at a loss in the last two fiscal quarters due to limited sales during such quarters. Seasonality of revenues also affects our cash flow requirements. In the past, we have borrowed funds under lines of credit from late summer through the fall to finance inventory build-up during the fall crush season. We also historically borrow 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 our reported quarterly results. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Because We Have Fixed Farming Costs, a Weak Harvest Would Reduce Our Profit

        We incur 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 our profitability.

Loss of Key Personnel Could Harm Our Operations

        We believe our continued success depends on the active involvement of Jeffrey B. O'Neill, the Company's Chief Executive Officer, and our key personnel, including John G. Kelleher, the Company's Chief Financial Officer. There can be no assurance that these persons will remain in their management positions, and the loss of the services of any of these persons could have an adverse effect on our business, financial condition and results of operations.

New or Changed Regulations Could Significantly Impact Our Business

        We are subject to a broad range of federal and state regulatory requirements regarding our 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 our 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 our business, financial condition and results of operations.

        Wine production and sales are subject to extensive regulation by the Federal Alcohol and Tobacco Tax and Trade Bureau, 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. In addition, imposition of excise or other taxes on wine could also negatively impact the wine industry by increasing wine prices for consumers. 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 our business.

25

Our Stock Price May Be Volatile

        The market price of the shares of our Class B Common Stock has declined sharply since our 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 our 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 our 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 our Class B Common Stock.

26

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

        On March 10, 2004, a purported class action complaint was filed by Milton Pfeiffer in the Delaware Court of Chancery against the Company and its current directors (the "Pfeiffer Action"). The plaintiff in the Pfeiffer Action alleges, among other things, that the individual defendants breached their fiduciary duties by agreeing to a plan of merger with the O'Neill Group and challenges the fairness of both the process and the merger price. The Pfeiffer Action seeks certification of a class action of Company stockholders, an injunction to prevent a merger with the O'Neill Group, monetary damages if such a merger is allowed to proceed, compensatory damages, interest, attorneys fees and expenses.

        On March 17, 2004, a purported class action complaint was filed by Jonathan Kathrein in Napa County Superior Court of California for the County of Napa against the Company and its current directors (the "Kathrein Action"). The Kathrein Action alleges similar claims as the Pfeiffer Action in addition to preferential treatment of management insiders. The Kathrein Action seeks a declaration that the merger agreement with the O'Neill Group is unlawful as well as relief similar to that sought in the Pfeiffer Action.

        On March 19, 2004, a purported class action complaint was filed by Richard Gundersen in the Delaware Court of Chancery against the Company and its current directors (the "Gundersen Action"). The Gundersen Action alleges that the individual defendants breached their fiduciary duties by agreeing to a termination fee payable to the O'Neill Group if the plan of merger with the O'Neill Group were terminated. The Gundersen Action seeks (1) certification of a class action; (2) an order voiding the termination fee provisions; (3) an order requiring the Company's directors to cooperate with any party having bona fide interest in acquiring the Company at a competitive price, undertake a valuation of the Company and take steps to create an active auction for the Company; and (4) monetary damages, attoneys fees and expenses.

        On May 6, 2004, the Delaware Chancery Court ordered that the Pfeiffer Action and the Gundersen Action be consolidated for all purposes. GSV believes that each of the foregoing lawsuits lack merit and intends to defend each piece of litigation vigorously.

Item 4. Submission of Matters to a Vote of Security Holders

        The Company's 2003 Annual Meeting of Stockholders was held at the Company's executive offices, 607 Airpark Road, Napa, California, on February 5, 2004. In attendance, in person or by proxy, were 3,000,000 shares of the Company's Class A Common Stock and 4,235,500 shares of the Company's Class B Common Stock, or, approximately 70.4% of the total votes outstanding. The following actions were taken:

        Election of Directors.    All eight positions on the Company's Board of Directors were to be filled for new one-year terms, and all nominees were duly elected, each nominee receiving in excess of 99% of total votes cast. The directors thus elected, with the precise votes for, against and abstaining, were:

        Ratification of Auditors.    The selection of Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending June 30, 2004, was ratified, with 34,200,970 votes for, 17,967 votes against, and 1,215 votes abstaining.

        Proposal to Effect Reverse Stock Split.    The proposal to amend the Company's Amended and Restated Certificate of Incorporation to effectuate a 5,900-to-1 reverse stock split was indefinitely suspended by the Company's board of directors prior to the meeting.

27

Item 6. Exhibits and Reports On Form 8-K.

(a)

Exhibits:

(b)

Reports on Form 8-K

28

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.

29

QuickLinks

Item 1. Financial Statements

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.

Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports On Form 8-K.