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SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
Commission file number: 0-30002
RAVENSWOOD WINERY, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
California 94-3026706
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
18701 Gehricke Road
Sonoma, California 95476
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number: 707-938-1960
Check whether the registrant (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
The number of shares outstanding of the Issuer's Common Stock on November 8,
1999 was 4,568,352.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
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<PAGE>
RAVENSWOOD WINERY, INC.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS Page
----
Balance Sheets as of September 30, 1999 and June 30, 1999. 2
Statements of Income for the three months ended
September 30, 1999 and 1998. 3
Statements of Cash Flows for the three months ended
September 30, 1999 and 1998. 4
Notes to Financial Statements. 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
FACTORS THAT MAY AFFECT FUTURE RESULTS 14
PART II. OTHER INFORMATION 19
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
1
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RAVENSWOOD WINERY, INC.
BALANCE SHEET
<CAPTION>
September 30, June 30,
1999 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 8,910,861 $11,390,903
Accounts receivable, less allowance for doubtful accounts of $10,000 3,967,575 2,763,418
Prepaid income taxes -- 15,850
Inventories 16,438,952 14,581,973
Prepaid expenses 153,784 100,826
Deferred tax assets 155,000 162,800
----------- -----------
Total current assets 29,626,172 29,015,770
Property, plant and equipment, less accumulated depreciation, net 11,700,114 9,001,147
Notes receivable from shareholder 318,583 314,475
Other assets 156,240 186,921
----------- -----------
$41,801,109 $38,518,313
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 79,200 $ 109,722
Current portion of capital lease obligations 134,934 368,203
Short-term borrowings 750,000 1,700,000
Accounts payable 4,028,628 3,382,118
Income taxes payable 929,480 --
Accrued commissions 492,669 396,358
Accrued liabilities 523,508 433,011
----------- -----------
Total current liabilities 6,938,419 6,389,412
Long-term liabilities:
Long-term debt, net 4,827,770 4,525,231
Capital lease obligations, net 2,431,642 1,551,762
Convertible debentures 2,502,500 2,502,500
Other long-term liabilities 15,989 --
----------- -----------
Total liabilities 16,716,320 14,968,905
----------- -----------
Shareholders' equity:
Preferred stock, no par value; 1 million shares authorized, none issued -- --
Common stock, no par value; 20 million shares authorized; 4,568,352
issued and outstanding 14,211,018 14,211,018
Retained earnings 10,836,204 9,338,390
Unrealized gain on available-for-sale securities 37,567 --
----------- -----------
Total shareholders' equity 25,084,789 23,549,408
----------- -----------
$41,801,109 $38,518,313
=========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
2
<PAGE>
RAVENSWOOD WINERY, INC.
STATEMENT OF INCOME
(UNAUDITED)
Three Months Three Months
September 30, September 30,
1 9 9 9 1 9 9 8
----------- -----------
Gross sales $ 8,288,976 $ 6,341,947
Less excise taxes (334,645) (225,059)
Less discounts, returns and allowances (262,148) (155,110)
----------- -----------
Net sales 7,692,183 5,961,778
Cost of goods sold 3,463,418 2,528,325
----------- -----------
Gross profit 4,228,765 3,433,453
Operating expenses 1,739,850 1,214,826
----------- -----------
Operating income 2,488,915 2,218,627
----------- -----------
Other (expense):
Interest expense (123,766) (97,768)
Other, net 85,796 24,567
----------- -----------
(37,970) (73,201)
----------- -----------
Income before income taxes 2,450,945 2,145,426
Provision for income taxes 953,130 928,500
----------- -----------
Net income $ 1,497,815 $ 1,216,926
=========== ===========
Net income per common share:
Basic $ 0.33 $ 0.35
=========== ===========
Diluted $ 0.31 $ 0.32
=========== ===========
Weighted average number of shares used in
income per share computation:
Basic 4,568,352 3,498,945
=========== ===========
Diluted 5,006,581 3,801,694
=========== ===========
See accompanying notes to financial statements.
3
<PAGE>
RAVENSWOOD WINERY, INC.
STATEMENT OF CASH FLOWS
(UNAUDITED)
Three Months Three Months
September 30, September 30,
1 9 9 9 1 9 9 8
------------ ------------
Operations:
Net income $ 1,497,815 $ 1,216,926
Items not requiring the current use of cash:
Depreciation and amortization 143,390 50,536
Unrealized capital appreciation 37,568 --
Changes in other operating items:
Accounts receivable (1,204,158) (703,486)
Inventories (1,856,979) 733,589
Prepaid expenses and deferred cost (37,108) 46,093
Other assets 3,628 --
Accounts payable 350,165 (1,252,700)
Income taxes payable 929,480 --
Accrued liabilities and accrued commissions 477,061 944,148
------------ ------------
Cash provided by operations 340,862 1,035,106
------------ ------------
Investments:
Shareholder receivables (4,108) (468)
Additions to plant and equipment (2,102,449) (261,311)
------------ ------------
Cash used for investing activities (2,106,557) (261,779)
------------ ------------
Financing:
Short-term borrowings, net (950,000) (700,000)
Proceeds from long-term debt 318,527 --
Repayments of long-term debt (82,874) (42,285)
------------ ------------
Cash used by financing activities (714,347) (742,285)
------------ ------------
Increase (decrease) in cash and cash equivalents (2,480,042) 31,042
Cash and cash equivalents at beginning of period 11,390,903 102,272
------------ ------------
Cash and cash equivalents at end of period $ 8,910,861 $ 133,314
============ ============
Cash paid during the period for:
Interest, net of amount capitalized $ 123,989 $ 95,615
============ ============
Income taxes $ -- $ --
============ ============
Noncash investing and financing information:
Equipment purchased with capital leases $ 705,055 $ --
============ ============
See accompanying notes to financial statements.
4
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Financial statements:
The balance sheet as of September 30, 1999, the statements of income for the
three months ended September 30, 1999, and 1998, and the statements of cash
flows for the three months ended September 30, 1999, and 1998 have been prepared
by the Company, without audit. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly
the Company's financial position, results of operations and cash flow at
September 30, 1999, and for all periods presented above have been made.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. For further information, reference should be
made to the Company's Form 10-KSB for the fiscal year ended June 30, 1999, filed
with the Securities and Exchange Commission.
NOTE 2 - Reclassifications:
Certain prior period amounts have been reclassified in order to conform with the
current period presentation.
NOTE 3 - Inventories:
Inventories are summarized as follows:
September 30, June 30,
1999 1999
-------------- ---------------
(unaudited)
Bulk wine $ 10,670,328 $ 10,355,759
Bottled wine 5,382,174 3,870,548
Crop costs 156,796 88,725
Supplies 89,070 124,298
Tasting room merchandise 140,584 142,463
-------------- ----------------
$ 16,438,952 $ 14,581,973
============== ================
5
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NOTE 4 - Property, plant and equipment:
Property, plant and equipment is summarized as follows:
September 30, June 30,
1999 1999
-------------- --------------
(unaudited)
Land $ 245,135 $ 245,135
Vineyards 134,033 134,033
Vineyards under development 217,659 211,440
Building and improvements 1,647,637 1,647,637
Leasehold improvements 174,331 174,331
Machinery and equipment 835,850 835,850
Barrels and equipment held under
capital leases 3,329,032 2,623,977
Tanks 145,688 145,688
Office equipment 131,127 131,127
Transportation equipment 38,469 38,469
-------------- --------------
6,898,961 6,187,687
Less - accumulated depreciation 1,761,611 1,653,074
-------------- --------------
5,137,350 4,534,613
Construction in progress 6,562,764 4,466,534
-------------- --------------
$ 11,700,114 $ 9,001,147
============== ==============
NOTE 5 - Comprehensive income:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 - Reporting Comprehensive Income ("SFAS
130"). SFAS 130 requires the additional reporting of a new measure of income
which takes into account certain elements otherwise recorded as part of equity.
For all periods presented, the difference between net income and comprehensive
income consists of the changes in the unrealized gain in securities
available-for-sale included as part of the Company's equity.
The following is a reconciliation of net income and comprehensive income:
Three Months Ended September 30,
------------------------------------
1999 1998
-------------- ---------------
(unaudited)
Net income $ 1,497,815 $ 1,216,926
Change in unrealized gain on
available-for-sale securities 37,567 --
-------------- ---------------
Comprehensive income $ 1,535,382 $ 1,216,926
============== ===============
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
From time to time, statements made by Ravenswood's employees or information
included in Ravenswood's filings with the Securities and Exchange Commission
(including this Form 10-QSB) may contain statements that are not historical
facts, so called "forward-looking statements," which are subject to risks and
uncertainties that could cause actual results to differ materially.
Forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. When used in this Form
10-QSB, the terms "anticipates," "expects," "estimates," "believes," and other
similar terms as they relate to Ravenswood or its management are intended to
identify such forward-looking statements. For example, statements made herein
relating to operating expenses, gross sales attributable to specific product
series, and future capital expenditures, are forward-looking statements. Factors
that may cause actual results to vary include, but are not limited to: (i)
future and past weather and general farming conditions affecting the annual
grape harvest; (ii) variations in consumer taste and preference; and (iii)
changes in the wine industry regulatory environment. Each of these factors, and
others, are discussed beginning on page 14 of this report and in the section
entitled "Factors that May Affect Future Results" in Ravenswood's Form 10-KSB
for the fiscal year ended June 30, 1999, filed with the Securities and Exchange
Commission. Readers are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. Ravenswood
undertakes no obligation to update or revise these statements.
Overview
Ravenswood produces, markets and sells premium California wines exclusively
under the Ravenswood brand name. The vast majority of wines produced and sold by
Ravenswood are red wines, including Merlot, Cabernet Sauvignon and,
particularly, Zinfandel. To a lesser extent, Ravenswood produces white wines,
including Chardonnay, French Colombard and Gewurztraminer. Ravenswood's red
wines accounted for approximately 93% of gross sales in the 1999 fiscal year,
with sales of Zinfandel accounting for approximately 67% of gross sales for that
period. Ravenswood believes that sales of its red wines, particularly Zinfandel,
will continue to account for a significant portion of its sales in the future.
Since its inception in 1976, Ravenswood has grown by increasing its production
volume and its portfolio of wine products. For the fiscal year ended June 30,
1999, Ravenswood realized total gross sales of $23.7 million from the sale of
270,760 cases of wine and Ravenswood branded merchandise.
The mix of products sold in any given period affects Ravenswood's gross profit
as a percentage of net sales, or gross margin. In particular, as sales of the
value-priced Vintners Blend Series have increased as a percentage of gross
sales, Ravenswood's gross margin has decreased. The gross margin for the
Vintners Blend Series traditionally is also more variable than that of
Ravenswood's higher-priced product series because a significant portion of the
wine used in the Vintners Blend Series is purchased in the bulk market rather
than produced by Ravenswood from grapes acquired from its traditional grape
suppliers. Ravenswood has no bulk wine purchase contracts. The price, quality
and available quantity of bulk wine have fluctuated in the past and Ravenswood
expects that they will continue to fluctuate in the future.
The timing for release of Ravenswood's products, particularly its County Series
and Vineyard Designate Series, also significantly affects Ravenswood's sales in
specific periods. Ravenswood traditionally releases new vintages of its Vineyard
Designate Series in the fourth fiscal quarter or the first fiscal quarter of the
subsequent fiscal year. In addition, the release dates of some of Ravenswood's
County Series wines fluctuate between the third and fourth fiscal quarters of
each fiscal year. The timing of these release dates is based
7
<PAGE>
upon the winemakers' determination as to the optimal flavor characteristics of
these wines and available inventory. Fluctuation of release dates may make
comparison of results on a period-to-period basis less meaningful. The nature of
the winemaking process, including the need for wine to be aged before it is
released, requires Ravenswood to incur significant expenses in producing
products which may not generate revenues until up to two years later. Any
factors that may prevent or delay the sale of Ravenswood's wines at the prices
anticipated at the time of their production could adversely affect its liquidity
and reduce its profits.
Pricing for grapes purchased by Ravenswood is determined annually by reference
to benchmark price quotations or through negotiation. As a result, the cost of
grapes used in Ravenswood's wine production has fluctuated and is expected to
continue to fluctuate. Ravenswood has traditionally attempted to moderate and
stabilize price increases from year to year. Consequently, gross margins
realized by Ravenswood have fluctuated in the past and are expected to continue
to fluctuate with the price of grapes used in production.
Within the United States, Ravenswood utilizes distributors in every state except
California. Brokers are used to assist the sales effort in California and 29
other states. Ravenswood uses both brokers and distributors in most of the
foreign countries in which Ravenswood's wines are sold.
Brokers act as an independent sales force and receive commissions as
compensation for their sales. Brokers do not take title to the wines they sell.
Distributors purchase wine from Ravenswood and sell the wine to their own retail
accounts such as restaurants, grocery stores and wines shops.
Ravenswood primarily uses smaller, well-positioned brokers and distributors for
whom Ravenswood is a key brand. Although Ravenswood has very few long-term
agreements for distribution of its products, Ravenswood believes that its
relationships with existing brokers and distributors are excellent. Ravenswood's
executive management also takes an active role in assisting brokers and
distributors with sales within California and within major geographic markets
outside California.
Ravenswood sells its products directly in California, utilizing five warehouses
throughout the state and a network of seven brokers. Ravenswood realizes
significantly greater gross margins in areas, such as California, where it
relies on direct sales facilitated through brokers without the use of
distributors. Sales within California accounted for approximately 48% of
Ravenswood's gross sales in the 1999 fiscal year. Of this amount, approximately
9% of gross sales were purchases by California and non-California consumers
through Ravenswood's tasting room and approximately 39% of gross sales were
sales to retail accounts. Ravenswood expects similar results for fiscal 2000.
Ravenswood believes that sales within California will continue to account for a
substantial portion of its sales in the future.
8
<PAGE>
Results of Operations
The following table sets forth items from Ravenswood's statement of income,
expressed as a percentage of net sales, for the periods indicated:
Three Months Ended
September 30,
(unaudited)
-------------
Statement of Income Data: 1999 1998
Net Sales 100.0% 100.0%
Cost of Goods Sold 45.0 42.4
----- -----
Gross Profit 55.0 57.6
Operating Expenses 22.6 20.4
----- -----
Operating Income 32.4 37.2
Other Expense, net .5 1.2
----- -----
Income Before Income Taxes 31.9 36.0
Provision for Income Taxes 12.4 15.6
----- -----
Net Income 19.5% 20.4%
===== =====
Three Months Ended September 30, 1999 and 1998
Sales
Net sales of Ravenswood's products increased to $7.7 million in the three months
ended September 30, 1999, from $6.0 million in the three months ended September
30, 1998. This increase is primarily attributable to an increase in the volume
of wines produced and sold by Ravenswood. In the three months ended September
30, 1999, case sales increased to 86,687 cases from 63,463 cases in the three
months ended September 30, 1998, while the average price per case decreased to
$94.37 from $98.33 in these respective periods. While there was an increase in
gross sales of all three product series, Vintners Blend grew at a faster rate
than the Vineyard Designate and County series. The decrease in average price per
case is primarily attributable to the increase in sales of the Vintners Blend
Series as a percentage of gross sales.
The percentages of gross sales attributable to the Vintners Blend Series, County
Series and Vineyard Designate Series were 50%, 21% and 27%, respectively, for
the three months ended September 30, 1999, as compared to 41%, 25% and 32%,
respectively, in the three months ended September 30, 1998. Sales of Ravenswood
branded merchandise accounted for approximately 2% of gross sales for the three
months ended September 30, 1999, and September 30, 1998.
Cost of Goods Sold
Cost of goods sold increased to $3.5 million, or 45.0% of net sales, for the
three months ended September 30, 1999, from $2.5 million, or 42.4% of net sales,
for the three months ended September 30, 1998. The increase in cost of goods
sold as a percentage of net sales is primarily attributable to the increase in
sales of Ravenswood's Vintners Blend Series as a percentage of gross sales.
Gross Profit
Ravenswood's gross profit increased to $4.2 million for the three months ended
September 30, 1999, from $3.4 million for the three months ended September 30,
1998, and decreased as a percentage of net sales to 55.0% from 57.6% in these
respective periods. The increase in aggregate gross profit is primarily
attributable to increases in sales volumes across all of Ravenswood's product
series. Traditionally Vintners Blend series wines have a lower percentage gross
margin than those of the Vineyard Designate and County series wines. The
9
<PAGE>
decrease in gross profit as a percentage of net sales is primarily attributable
to an increase in sales of the Vintners Blend Series as a percentage of gross
sales.
Operating Expenses
Operating expenses increased to $1.7 million for the three months ended
September 30, 1999, from $1.2 million for the three months ended September 30,
1998, and increased as a percentage of net sales to 22.6% from 20.4% in these
respective periods. The increase in the amount of other operating expenses is
attributable to several different factors. Increased sales volumes resulted in
increased brokerage commissions. A portion of estimated annual employee bonuses
will be accrued in each quarter of fiscal 2000. In fiscal 1999, these expenses
were accrued in the third and fourth quarters only. Ravenswood also incurred
start-up costs associated with preparing for and receiving a temporary permit to
begin operations at its new Quarry production facility which Ravenswood refers
to as the Quarry facility . During the first quarter of fiscal 2000, Ravenswood
also recognized the additional expenses of maintaining a public company.
Ravenswood became a public company in the fourth quarter of fiscal 1999.
Other Expense, Net
Other expense amounted to $37,970 and $73,201, or .5% and 1.2% of net sales, in
the three months ended September 30, 1999, and 1998, respectively. The decrease
as a percentage of sales was due to an offset of interest income generated from
investment of proceeds from Ravenswood's December 1998, private equity offering
and its initial public offering in April 1999.
Provision for Income Taxes
The provision for income taxes reflects an estimated annualized effective tax
rate of 38.9% for the three months ended September 30, 1999, and 43.3% for the
three months ended September 30, 1998. The decrease is due to the effective tax
rate for the three months ended September 30, 1998 not reflecting an adjustment
for deferred taxes and recognition of manufacturer's tax credit until the third
and fourth quarters of fiscal 1999.
10
<PAGE>
Selected Quarterly Results of Operations
<TABLE>
The following table presents Ravenswood's results of operations for each of the
six quarters prior to and including the quarter ended September 30, 1999. The
quarterly information is unaudited, but management believes that the information
regarding these quarters has been prepared on the same basis as the audited
financial statements appearing in Ravenswood's Form 10-KSB for the fiscal year
ended June 30, 1999. In the opinion of management, all necessary adjustments
(which include only normal recurring adjustments) have been included to present
fairly the unaudited quarterly results when read in conjunction with the
financial statements and related notes appearing elsewhere in this Form 10-QSB
filing.
<CAPTION>
Quarter Ended
(In Thousands)
------------------------------------------------------------------------------------------------
June 30, September 30, December 31, March 31, June 30, September 30,
1998 1998 1998 1999 1999 1999
---------- ---------- ---------- ---------- ---------- --------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Gross Sales $ 4,367 $ 6,342 $ 5,853 $ 5,415 $ 6,119 $ 8,289
Less Excise Taxes 272 225 51 272 361 335
Less Discounts,
Allowance and Returns 165 155 182 182 234 262
---------- ---------- ---------- ---------- ---------- --------
Net Sales 3,930 5,962 5,620 4,961 5,525 7,692
Cost of Goods Sold 1,958 2,528 2,538 2,405 2,788 3,463
---------- ---------- ---------- ---------- ---------- --------
Gross Profit 1,972 3,434 3,082 2,556 2,737 4,229
---------- ---------- ---------- ---------- ---------- --------
Operating Expenses:
Deferred Compensation
Expense 2,206 -- -- -- -- --
Other Operating Expenses 1,269 1,215 1,125 1,396 1,503 1,740
---------- ---------- ---------- ---------- ---------- --------
Operating Income (Loss) (1,503) 2,219 1,957 1,160 1,234 2,489
Other (Income) Expense 260 73 74 92 (12) 38
---------- ---------- ---------- ---------- ---------- --------
Income (Loss) Before Income Taxes (1,763) 2,146 1,884 1,068 1,247 2,451
Provision for Income Taxes 144 929 815 312 385 953
---------- ---------- ---------- ---------- ---------- --------
Net Income (Loss) $ (1,907) $ 1,217 $ 1,068 $ 756 $ 862 $ 1,498
=========== ========== ========== ========== ========== =========
</TABLE>
Ravenswood experiences seasonal and quarterly fluctuations in sales, operating
expenses and net income. Because Ravenswood manages its business to achieve
long-term strategic objectives, it may make decisions that it believes will
enhance its long-term growth and profitability, even if these decisions
adversely affect quarterly earnings. These decisions include: (a) when to
release its wines for sale; (b) how to position its wines competitively; and (c)
which grape and bulk wine sources to use to produce its wines. In addition, the
release dates of Ravenswood's Vineyard Designate Series and County Series have
resulted in fluctuations in Ravenswood's results on a quarter-to-quarter basis.
Ravenswood's sales volume may also change depending upon its distributors'
inventory levels. The results of operations for any quarter are not necessarily
indicative of the results of any future period. The market price of Ravenswood's
common stock may fluctuate significantly in response to these quarter-to-quarter
variations.
Results of operations for the quarter ended June 30, 1998, were materially
affected by a $2.2 million expense recognized in connection with a deferred
compensation arrangement with W. Reed Foster, Ravenswood's chairman and chief
executive officer. This arrangement was terminated as of July 1, 1998. No
additional deferred compensation expenses relating to this arrangement have been
or will be incurred in subsequent periods.
11
<PAGE>
FINANCIAL CONDITION
Assets
Ravenswood's total assets increased to $41.8 million at September 30, 1999, from
$38.5 million, or 8.5%, at June 30, 1999. Ravenswood's inventory increased by
12.7% or $1.9 million from $14.5 million at June 30, 1999 to $16.4 million on
September 30, 1999. Property, plant and equipment, net of depreciation,
increased 30.0% from $9.0 million at June 30, 1999 to $11.7 million at September
30, 1999. Ravenswood expects total assets to continue to increase as Ravenwood
expands inventory and builds its Quarry Facility.
Liabilities
Ravenswood's total liabilities increased 11.7% to $16.7 million at September 30,
1999, from $15.0 million at June 30, 1999. At September 30, 1999, Ravenswood's
long-term liabilities outstanding were $9.8 million and $1.3 million was
available under the terms of Ravenswood's lines of credit.
Liquidity and Capital Resources
Ravenswood has funded its capital requirements primarily with cash flows from
operations, a mix of short-term and long-term borrowings, and the sale of its
securities, most recently with its initial public offering in April, 1999. Cash
and cash equivalents totaled $8.9 million at September 30, 1999, as compared to
$11.4 million at June 30, 1999. The decrease in cash and cash equivalents is
primarily due to cash required to expand inventory, to continue construction on
the Quarry Facility and to retire indebtedness.
Net cash provided by operations was $340,862 for the three months ended
September 30, 1999, as compared to $1.0 million for the three months ended
September 30, 1998. The principal use of cash from operations in this period was
the acquisition of additional inventory through increased production and funding
accounts receivable, while the principal source of cash was net income.
Net cash used for investing activities totaled $2.1 million for the three months
ended September 30, 1999, as compared to $261,779 for the three months ended
September 30, 1998. The increase was primarily a result of costs associated with
construction of the Quarry Facility. Ravenswood expects that net cash used for
investing activities will increase in the future as additional investments for
plant and equipment are made to complete the Quarry Facility.
Net cash used by financing activities was $714,347 for the three months ended
September 30, 1999, as compared to $742,285 for the three months ended September
30, 1998. The principal use of cash during these periods was to repay short-term
borrowings on the revolving line of credit.
The majority of Ravenswood's grape purchases occur in the second fiscal quarter,
when the fruit is harvested. Most grape purchase contracts specify the timing of
payment for these purchases. The actual payment dates vary depending upon the
terms of the individual contract. Based upon its grape purchase contracts for
the 1998 harvest, these payments were made in the following manner: 42%, 19% and
21% in the second, third and fourth quarters of fiscal 1999, respectively, and
the remaining 18% in the first quarter of fiscal 2000. As a result of harvest
costs and the timing of grape and bulk wine purchase payments, Ravenswood's
inventory and related cash requirements generally peak during the second or
third fiscal quarters. Cash requirements also fluctuate depending upon the level
and timing of capital spending and tax payments.
Ravenswood leases barrels and other equipment used in the production of its
wines. Ravenswood estimates that aggregate lease payments for barrels and other
equipment will be approximately $545,000 for the 2000 fiscal year. Ravenswood
anticipates that it will enter into additional leasing arrangements as it
increases its
12
<PAGE>
production.
In December 1994, Ravenswood completed a private sale of $865,000 of convertible
debentures due December 31, 2004. Each $10,000 debenture is convertible into
3,500 shares of common stock at any time prior to December 31, 1999, upon
request of the holder. Ravenswood anticipates that all $815,000 of outstanding
convertible debentures will convert to 285,250 shares of common stock prior to
December 31, 1999. If the debentures are not converted, Ravenswood may redeem
them at face value at any time during the period from January 1, 2000 until the
maturity date. Ravenswood pays interest quarterly on the debentures based on a
floating index tied to prime bank rates for a five-year period. The interest
rate is adjusted every 18 months, except that in no period may the interest rate
adjustment exceed 2%, or the maximum interest rate exceed 11%.
In December 1998, Ravenswood completed a private sale of $1.7 million of
convertible debentures due December 31, 2008 and $1.7 million of common stock.
Each $10,000 debenture is convertible into 900 shares of common stock at any
time prior to December 31, 2003, upon request of the holder. If the debentures
are not converted, Ravenswood may redeem them at face value at any time during
the period from January 1, 2004 until the maturity date. Ravenswood pays
interest quarterly on the debentures in an amount equal to the prime interest
rate quoted by Bank of America NT&SA plus 1%. The interest rate is adjusted
every 18 months, except that in no period may the interest rate adjustment
exceed 2%, or the maximum interest rate exceed 11%.
Ravenswood has a line of credit with Pacific Coast Farm Credit Association,
under which Ravenswood may borrow up to a total of $2 million. As of September
30, 1999, Ravenswood had $750,000 outstanding under this line of credit. In
addition, on April 26, 1999 Ravenswood obtained a $4.6 million construction loan
from Pacific Coast for the purpose of financing the construction of the Quarry
Facility. The loan will be used as funds for construction are needed. The loan
is secured by the Quarry Facility and its lease. The estimated $5 million in
remaining costs to complete the facility are to be funded from the December
1998, private equity offering and proceeds from Ravenswood's initial public
offering in April, 1999. Equipment will be acquired through a $3 million
commitment for leases.
In April, 1999 Ravenswood completed an initial public offering of one million
shares of its common stock at a price of $10.50 per share. W.R. Hambrecht &
Company, LLC acted as underwriter for the offering. The net proceeds from the
offering have been and will continue to be used for: investment in wine
inventory, expansion of production facilities, general corporate purposes, and
retirement of indebtedness. Ravenswood's shares are listed on the Nasdaq
National Market under the trading symbol RVWD.
The full extent of Ravenswood's future capital requirements and the adequacy of
its available funds will depend on many factors, not all of which can be
accurately predicted. Although no assurance can be given, Ravenswood believes
that anticipated cash flow from operations, borrowings under its existing credit
agreements, proceeds from its initial public offering and the private placements
in 1994 and 1998 described above, will be sufficient to fund its capital
requirements, including its planned expansion, for at least the next 12 months.
In the event that additional capital is required, Ravenswood may seek to raise
that capital through public or private equity or debt financings. Future capital
funding transactions may result in dilution to shareholders.
There can be no assurance that additional capital will be available on favorable
terms, if at all. Ravenswood's inability to obtain additional capital on
acceptable terms would limit its growth and could have a negative impact on its
business. Ravenswood uses substantial amounts of its working capital to purchase
grapes and bulk wine supplies from third parties and to pay for the use of
third-party production facilities in its wine production. Ravenswood also uses
capital to fund its own grape-growing and winemaking activities. Ravenswood
expects that it will need an increased amount of working capital over the next
several years to
13
<PAGE>
fund increases in its production levels and inventory.
Risks associated with potential Year 2000 problems
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to correctly process dates beginning in 2000 and to comply
with the Year 2000 requirements. Ravenswood has reviewed its information systems
for any potential Year 2000 problems that might arise as a result of these
requirements, and does not believe its systems will be affected by the upcoming
change in century. However, Ravenswood utilizes third-party equipment and
software that may not be Year 2000 compliant. If this third-party equipment or
software fails to process dates for the year 2000 and dates that follow
properly, Ravenswood could incur unanticipated expenses to remedy any problems,
which could harm its business.
In addition, Ravenswood relies on various service providers, including banks,
and on grape and bulk wine suppliers, third-party production facilities and
distributors. The software and computer systems of any of these entities could
have Year 2000 problems. A disruption in the supply of services or products
Ravenswood receives from any of these entities due to Year 2000 problems could
harm its business.
FACTORS THAT MAY AFFECT FUTURE RESULTS
A reduction in consumer demand for premium red wines could harm our business
Because a large percentage of the wines we produce are premium red wines,
including Merlot, Cabernet Sauvignon and, in particular, Zinfandel, our business
would be harmed if consumer demand for red wines in general, or Zinfandel in
particular, failed to grow or declined. An overall reduction in consumer demand
for premium wine would also harm our business.
A reduction in the supply of grapes and bulk wine available to us from the
independent grape growers and bulk wine suppliers on whom we rely could reduce
our annual production of wine
We rely on annual contracts, many of which are not in writing, with over 60
independent growers to purchase substantially all of the grapes used in our wine
production. We cannot assure you that we will be able to contract for the
purchase of grapes at acceptable prices from these or other suppliers in the
future. The terms of many of our purchase agreements also constrain our ability
to discontinue purchasing grapes in circumstances where we might want to do so.
Those agreements typically provide that, while either party may terminate the
agreement at any time, both parties must continue to abide by its terms for
three years following termination.
We are dependent on bulk wine suppliers for the production of several of our
wines, particularly our Vintners Blend Series. We do not have contracts with
bulk wine suppliers or agreements that would protect us from fluctuations in the
price or availability of bulk wine. The availability and price of bulk wine
significantly affect the quality and production levels of our products that
contain bulk wine. The price, quality and available quantity of bulk wine have
fluctuated in the past. It is possible that we will not be able to purchase bulk
wine of acceptable quality at acceptable prices and quantities in the future,
which could increase the cost or reduce the amount of wine we produce for sale.
This could cause reductions in our sales and profits.
Bad weather, plant diseases and other factors could reduce the amount or quality
of the grapes we need to produce our wines
A shortage in the supply of quality grapes may result from the occurrence of any
number of the factors which
14
<PAGE>
determine the quality and quantity of grape supply, such as weather conditions,
pruning methods, the existence of diseases and pests, and the number of vines
producing grapes, as well as the level of consumer demand for wine. Any shortage
could cause an increase in the price of some or all of the grape varieties
required for our wine production and/or a reduction in the amount of wine we are
able to produce, which could harm our business and reduce our sales and profits.
For example, due to the effects of El Nino, the grape supply available to us for
the 1998 harvest was lower than for the 1997 harvest, which we believe was an
unusually large harvest. Therefore, the inventory of our 1998 vintage may be
less than that of our 1997 vintage. As a result, the growth of our sales may be
limited in fiscal years 2000 and 2001, when most of our 1998 vintage will be
released for sale.
Factors which reduce the quantity of grapes may also reduce their quality, which
in turn could reduce the quality or amount of wine we produce. A deterioration
in the quality of our wines could harm our brand name, and a decrease in our
production could reduce our sales and profits.
Although we grow only a small portion of the grapes we use, our business is
still subject to numerous agricultural risks. Most of the vineyards that supply
our grapes are primarily planted to rootstocks believed to be resistant to
Phylloxera, a pest that feeds on susceptible grape rootstocks. However, we
cannot be certain that these vineyards, or vineyards from which we obtain grapes
in the future, will not become susceptible to current or new strains of
Phylloxera, plant insects or diseases. Any resulting reduction in grape supply
could reduce our sales and profits.
An oversupply of grapes may also harm our business by increasing the supply of
wine sold by our competitors
The recent increase in demand for premium wine has resulted in the planting of
additional vineyards, both domestically and internationally, and the replanting
of existing vineyards to greater densities, which could result in a significant
increase in the supply of premium wine grapes. An oversupply of grapes may
significantly increase the amount of premium wine produced. An increase in the
supply of premium wine may reduce the price of premium wines. This oversupply of
premium wines could harm our business because we only produce premium wines.
Oversupply may also increase the amount of premium wine available to our
distributors and retail outlets, which would increase competition in our
distribution channels.
The loss of Mr. Foster, Mr. Peterson or other key employees would damage our
reputation and business
We believe that our success largely depends on the continued employment of a
number of our key employees, including W. Reed Foster, our chairman and chief
executive officer, and Joel E. Peterson, our president and winemaker. Any
inability or unwillingness of Mr. Foster, Mr. Peterson or other key management
team members to continue in their present capacities could harm our business and
our reputation. For instance, if Mr. Peterson's relationship with Ravenswood
were to terminate for any reason, we would need to find a successor winemaker.
We cannot be certain that we could find or hire a successor winemaker with
skills equivalent to those of Mr. Peterson.
Because a significant amount of our sales is made through brokers and
distributors, a change in our relationship with any of them could harm our
business
In the 1999 fiscal year, approximately 75% of our gross sales were made through
brokers. A change in our relationship with any of our brokers could harm our
business and reduce our sales. Our most successful broker was responsible for
22% of our gross sales in the 1999 fiscal year, and our ten most successful
brokers were responsible for 70% of our gross sales in the 1999 fiscal year.
Our sales outside of California largely depend on the use of distributors. Our
ten largest distributors
15
<PAGE>
accounted for approximately 23% of our gross sales for the 1999 fiscal year, and
we expect that sales to our ten largest distributors will continue to represent
a substantial portion of our sales in the future. The laws and regulations of
several states prohibit distributor changes except under limited circumstances.
As a result, it may be difficult for us to replace distributors that do not
perform adequately, which may reduce our sales and profits.
Our business may be harmed if our distributors fail to market our products
effectively
We depend largely on our distributors in areas outside California to market our
products to the restaurants and retail outlets they service. Other premium wine
producers, as well as the producers of alternative beverages, compete for our
distributors' marketing resources. A failure by our distributors to market our
products as effectively as they, or other distributors, market our competitors'
products could harm our business.
The market price of our stock may fluctuate due to seasonal fluctuations in our
wine sales, operating expenses and net income
We experience seasonal and quarterly fluctuations in sales, operating expenses
and net income. Generally, the second and third quarters of our fiscal year have
lower sales volumes than the first and fourth quarters. We have managed, and
will continue to manage, our business to achieve long-term objectives. In doing
so, we may make decisions that we believe will enhance our long-term
profitability, even if these decisions may reduce quarterly earnings. These
decisions include: (a) when to release our wines for sale; (b) how to position
our wines competitively; and (c) which grape and bulk wine sources to use to
produce our wines. In addition, fluctuations in our distributors' inventory
levels may affect our sales volume. These and other factors relating to
seasonality and business decisions may cause fluctuations in the market price of
our common stock.
We also compete with popular low-priced "generic" wines and with beer and other
alcoholic and non-alcoholic beverages both for demand and for access to
distribution channels. Many of the producers of these beverages also have
significantly greater financial, technical, marketing and public relations
resources than we do. Our sales may be harmed to the extent any alternative
beverages are introduced that compete with wine. We may not be able to compete
successfully against these wine or alternative beverage producers.
A reduction in our access to, or an increase in the cost of, the third-party
services we use to produce our wine could harm our business
We utilize several third-party facilities, of which there is a limited supply,
for the production activities associated with our wines. Our inability in the
future to use these or alternative facilities, at reasonable prices or at all,
could increase the cost or reduce the amount of our production, which could
reduce our sales and our profits. We do not have long-term agreements with any
of these facilities. The activities conducted at outside facilities include: (a)
crushing; (b) fermentation; (c) storage; (d) blending; and (e) bottling. Our
reliance on these third parties varies according to the type of production
activity. As production increases, we must increasingly rely upon these
third-party production facilities. Reliance on third parties will also vary with
annual harvest volumes.
A failure to complete the expansion of our facilities as planned could limit our
production of wine and harm our business
We are currently building a new facility, which we are calling the Quarry
Facility, in order to increase our production capacity. While the Quarry
Facility is still under construction, we crushed and fermented a portion of the
1999 harvest at the facility. Our failure to complete the Quarry Facility, or
otherwise expand our production capabilities, would limit our production
capacity, would require greater use of third-party
16
<PAGE>
production facilities, and could reduce our sales and/or profits. Upon its
completion, we expect to use both the Quarry Facility and our current Gehricke
Road Facility for a majority of our operations.
We expect to utilize the Quarry Facility fully upon its completion. As a result,
any further expansion of our production capacity may require us to use
third-party production facilities or to continue to expand our own production
capacity. Our failure to expand our production capacity, or to secure capacity
from third parties, either at acceptable prices or at all, could limit our
production and reduce our sales and/or profits.
Adverse public opinion about alcohol may harm our business
While a number of research studies suggest that moderate alcohol consumption may
provide various health benefits, other studies conclude or suggest that alcohol
consumption has no health benefits and may increase the risk of stroke, cancer
and other illnesses. An unfavorable report on the health effects of alcohol
consumption could significantly reduce the demand for wine, which could harm our
business and reduce our sales and profits.
In recent years, activist groups have used advertising and other methods to
inform the public about the societal harms associated with the consumption of
alcoholic beverages. These groups have also sought, and continue to seek,
legislation to reduce the availability of alcoholic beverages, to increase the
penalties associated with the misuse of alcoholic beverages, or to increase the
costs associated with the production of alcoholic beverages. Over time, these
efforts could cause a reduction in the consumption of alcoholic beverages
generally, which could harm our business and reduce our sales and profits.
Contamination of our wines would harm our business
Because our products are designed for human consumption, our business is subject
to hazards and liabilities related to food products, such as contamination. A
discovery of contamination in any of our wines, through tampering or otherwise,
could result in a recall of our products. Any recall would significantly damage
our reputation for product quality, which we believe is one of our principal
competitive assets, and could seriously harm our business and sales. Although we
maintain insurance to protect against these risks, we may not be able to
maintain insurance on acceptable terms and this insurance may not be adequate to
cover any resulting liability.
Increased regulatory costs or taxes would harm our financial performance
The wine industry is regulated extensively by the Federal Bureau of Alcohol,
Tobacco and Firearms, various foreign agencies, and state and local liquor
authorities. These regulations and laws dictate various matters, including:
o Excise taxes
o Licensing requirements
o Trade and pricing practices
o Permitted distribution channels
o Permitted and required labeling
o Advertising
o Relationships with distributors and retailers
Recent and future zoning ordinances, environmental restrictions and other legal
requirements may limit our plans to expand our production capacity, as well as
any future development of new vineyards and wineries. In addition, federal
legislation has been proposed that could significantly increase excise taxes on
wine. Other federal legislation has been proposed which would prevent us from
selling wine directly through the mail or the Internet. This proposed
legislation, or other new regulations, requirements or taxes could harm
17
<PAGE>
our business and operating results. Future legal or regulatory challenges to the
wine industry could also harm our business and impact our operating results.
Because our directors and officers have significant control over Ravenswood,
other investors do not have as much influence on corporate decisions as they
would if control were less concentrated
Assuming conversion of all debentures held by our directors and executive
officers and their respective affiliates, our directors and executive officers
and their respective affiliates would beneficially own 2,203,641 shares of
common stock, or approximately 44.02% of our outstanding common stock and common
stock equivalents. Of these shares, 2,085,651 shares, plus an additional 19,530
shares not held of record by Ravenswood's affiliates, have been placed in a
voting trust. The trustees of this voting trust are Messrs. Foster, Peterson,
and Faggioli, and Ms. Konno, all of whom serve as directors of Ravenswood. As a
result, Messrs. Foster, Peterson, and Faggioli and Ms. Konno have significant
influence in the election of directors and the approval of corporate actions
that must be submitted for a vote of shareholders.
The interests of these affiliates may conflict with the interests of other
shareholders, and the actions they take or approve may be contrary to those
desired by the other shareholders. This concentration of ownership may also have
the effect of delaying, preventing or deterring an acquisition of Ravenswood by
a third party.
Natural disasters, including earthquakes or fires, could destroy our facilities
or our inventory
The Gehricke Road Facility, the Quarry Facility and all of the third-party
facilities we use to produce and store our wine are located in areas that are
subject to earthquake activity. If we lost all or a portion of our wine prior to
its sale or distribution as a result of earthquake activity, we would lose our
investment in, and anticipated profits and cash flows from, that wine. Such a
loss would seriously harm our business and reduce our sales and profits.
In addition, we must store our wine in a limited number of locations for a
period of time prior to its sale or distribution. Any intervening catastrophies,
such as a fire, that result in the destruction of all or a portion of our wine
would result in a loss of our investment in, and anticipated profits and cash
flows from, that wine. Such a loss would seriously harm our business and reduce
our sales and profits.
Our small size and relatively low trading volume may limit the market price,
liquidity or trading volume of our stock
Our small size and relatively low trading volume may reduce the amount of
research coverage from market analysts. This reduced level of coverage may limit
the market price, liquidity or trading volume of our common stock.
18
<PAGE>
RAVENSWOOD WINERY, INC.
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
<TABLE>
The following table describes the use of proceeds from Ravenswood's initial
public offering in April, 1999.
<CAPTION>
(IN THOUSANDS)
<S> <C>
Effective Date of the Company's Registration Statement: April 8, 1999
Commission File Number 333-71729
Date Offering Commenced: April 9, 1999
Date Offering Completed: Upon the sale of all the shares
registered
Names of Managing Underwriters: W. R. Hambrecht & Co., LLP
Class of Securities Registered: Common Stock
Shares Registered and Sold: 1,000*
Sold by Company: 1,000*
Sold by Shareholders: 0
Aggregate Price of Offering Amount Registered and Sold: $10,500
Gross Proceeds to Company: $10,500
Gross Proceeds to Selling Shareholders 0
Underwriter's Discounts and Commission Charged to the Company: $ 420
Other issuance costs: $ 552
Net offering proceeds to the Company: $ 9,528
Approximate use of net offering proceeds through
September 30, 1999:
Working capital $ 500
Retirement of debt $ 1,000
<FN>
- - -------------
*In connection with the initial public offering, Ravenswood granted the
underwriters an over-allotment option to purchase 150,000 additional shares of
Ravenswood's common stock at the original initial public offering price. The
option was not exercised.
</FN>
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
Exhibit Number
--------------
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
None.
19
<PAGE>
RAVENSWOOD WINERY, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 11, 1999 Ravenswood Winery, Inc.
/s/ Callie S. Konno
-------------------------------
Callie S. Konno
Chief Financial Officer
Dated: November 11, 1999
/s/ W. Reed Foster
-------------------------------
W. Reed Foster
Chairman of the Board and Chief
Executive Officer
20
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 8,910,861
<SECURITIES> 0
<RECEIVABLES> 3,977,575
<ALLOWANCES> 10,000
<INVENTORY> 16,438,952
<CURRENT-ASSETS> 29,626,172
<PP&E> 13,461,725
<DEPRECIATION> 1,761,611
<TOTAL-ASSETS> 41,801,109
<CURRENT-LIABILITIES> 6,938,419
<BONDS> 9,777,901
0
0
<COMMON> 14,211,018
<OTHER-SE> 10,873,771
<TOTAL-LIABILITY-AND-EQUITY> 41,801,109
<SALES> 7,692,183
<TOTAL-REVENUES> 8,288,976
<CGS> 3,463,418
<TOTAL-COSTS> 1,739,850
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 123,766
<INCOME-PRETAX> 2,450,945
<INCOME-TAX> 953,130
<INCOME-CONTINUING> 1,497,815
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,497,815
<EPS-BASIC> 0.33
<EPS-DILUTED> 0.31
</TABLE>
