Golden State Vintners

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Golden State Vintners (NasdaqNM:VINT)

Golden State Vintners, Inc. (GSV), formed in 1995, is a supplier of bulk wines, wine processing and storage services, as well as case goods in the United States . The Company's operations are divided into four groups: bulk wine and related services, grape sales, case goods and related services and brandy. Bulk wine and related services includes the production and sale of bulk wine, custom crushing services, storage of bulk wine in tanks and barrels and bulk wine barreling services, such as racking and topping. GSV's grape sales consist of the sale of grapes grown at its vineyards, as well as grapes purchased by it from third-party growers. Case goods and related services include the production of proprietary and private-label bottled wine, wine-related and malt-based alcoholic beverage custom bottling and storage services. The Company's brandy business includes the production of brandy and grape spirits and brandy barrel storage and related barreling services.

The Company has 6,843 producing acres of vineyard properties primarily in California's San Joaquin Valley that allow GSV to source wine grapes at a competitive cost. The Company's wine processing facilities are generally modern, efficient and automated, and allow for large scale, low-cost production of bulk wine and case goods and the delivery of a full line of winemaking, processing and storage services.

Bulk Wine and Related Services

GSV provides a broad range of winemaking and processing services, barrel fermentation and bottling and storage services to many branded wineries in California and to a number of international wineries and customers. The Company supplies bulk wine pursuant to long-term supply agreements with Constellation Brands, Inc., Diageo, Trinchero Family Estates, Fetzer Vineyards, Beringer Blass Wine Estates and other wineries. The Company also delivers contract wine processing, barrel fermentation and storage services under contracts with, among others, Robert Mondavi, Seagram Chateau and Estate Wines, as well as Villa Mt. Eden Winery.

The Company's standard bulk wine supply contract establishes the variety of wine, source of grapes and vintage and generally calls for the delivery of a set number of gallons of wine or processed grape juice at an agreed upon price per ton of grapes. GSV supplies, crushes and processes the grapes and typically stores the wine for six months or more following production. Winemaking standards are usually agreed to by the parties in advance. The Company generally guarantees the quality of the wine produced.

GSV produces more than half of its bulk wine at its wine processing facility in Fresno , which has the capacity to handle approximately 100,000 tons of grapes annually (the equivalent of 7.2 million cases) and is used primarily for the production of white and red wines. The Company also processes smaller quantities of bulk wine at its St. Helena , Monterey and Reedley facilities. As is customary in the industry, the Company is engaged in the services of commissioned wine brokers to sell bulk wine and services.

The Company also delivers various wine processing, barrel fermentation and storage services mostly under long-term contracts. GSV is flexible with respect to providing these services and customizes its products and services to meet the needs of its customers. The Company offers a number of processing and storage services, including crushing grapes, wine production, fermentation and storage in stainless steel tanks and oak barrels and other winemaking services. Under a typical wine processing and storage contract, a wine processing customer will deliver grapes for crushing, fermentation and storage in separately labeled tanks or barrels.

Wine Grape Sales

Approximately 94% of GSV-grown grapes for the 2001 harvest were retained by the Company for internal use in the production of bulk wine, brandy and case goods in the fiscal year ended June 30, 2002 (fiscal 2002), an increase from 73% in the fiscal year ended June 30, 2001 (fiscal 2001). Thus, revenues from grape sales to third parties declined significantly in fiscal 2002. Certain of the Company's grape purchase contracts require it to purchase the entire grape production of a number of small vineyards. Thus, GSV may purchase varieties of grapes in excess of quantities required in its production of bulk wine. The Company may resell these grapes into the market at approximate market prices.

A long-term contract with EJ Gallo Winery covering certain Ruby Cabernet grapes will continue through 2007. This contract requires the Company to deliver grapes meeting specified sugar levels and other quality measurements.

Case Goods and Related Services

The Company produces proprietary and private-label products and provides custom bottling and storage services. These case goods sales are comprised of wine bottled and sold in a case containing 12 750-milliliter bottles or the volume equivalent. GSV produced more than 1.3 million cases of wine and wine-related products and services in fiscal 2002 and approximately 5.8 million cases (2.25 gallons per case) of ready-to-drink product.

The sale of private-label case goods may include any or all of the various steps in the winemaking process, from the purchase and processing of grapes, aging and storage of wine to the bottling and labeling of the finished product. The majority of the Company's private-label case goods revenues in fiscal 2002 were derived from three customers based on short-term arrangements that may terminate at any time. Private-label case goods are produced and bottled at the Company's St. Helena and American Canyon facilities.

The Company sells proprietary wine products under a variety of brands in the generic and premium wine categories. Generally, GSV's J. Wile, Summerfield and Weston brands sell in the premium category and its Monthaven and Diamond Grove labels compete in the super-premium category. In addition, its Edgewood Estate label is sold in the ultra-premium category. GSV's proprietary wines include different types of premium varietal wines, including vintage Cabernet Sauvignon, Chardonnay, Merlot and Zinfandel. Many of the Company's proprietary wines are produced, processed and/or bottled at its American Canyon and St. Helena wineries. GSV's proprietary products are sold primarily through third-party distributors and directly to specific wine and general merchandise retailers.

GSV also offers its proprietary brands to retailers, such as large supermarket chains, for sale on an exclusive basis in certain defined geographic regions. The terms of the exclusive arrangements for these control brands vary from customer to customer and are negotiated directly with retailers, rather than through wine wholesalers.

Brandy

Brandy is produced by processing grapes into wine, distilling the wine and aging the product in oak barrels for a minimum of two years until the product can be declared as brandy. The Company is a brandy processor in the United States and has a long-term brandy production agreement to produce brandy for sale under the Christian Brothers label, owned by Heaven Hill Distilleries, Inc. Under the terms of this agreement, GSV is paid for all aspects of the brandy distillation process, including the purchase of grapes, storage and various processing charges. The Company also produces brandy for other customers.

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