UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
[ ] 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 as specified in its charter)
California 94-3026706
(State or other jurisdiction (I.R.S. Employer Identification No.)
incorporation or organization)
18701 Gehricke Road 95476
Sonoma, California (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (707) 938-1960
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Title of each exchange on which registered
- - ------------------- ------------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ].
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein, and
no disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-KSB. [X].
State issuer's revenues for its most recent fiscal year. $23,729,787.
State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the
common equity was sold, or the average bid and asked price of such common
equity, as of a specified date within the past 60 days. For purposes of the
foregoing calculation only, the issuer has included in the shares owned by
affiliates the beneficial ownership of common equity of officers and directors
of the registrant and members of their families, and such inclusion shall not
be construed as an admission that any such person is an affiliate for any other
purpose. $25,298,973.
As of September 5, 1999, there were 4,568,352 outstanding shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the issuer's Proxy Statement related to the 1999 Annual
Meeting of Shareholders, to be filed subsequent to the date hereof--Part III
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
TABLE OF CONTENTS
1999 FORM 10-KSB
<CAPTION>
Item No. Page
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PART I
<S> <C> <C>
Item 1. Business .............................................................. 1
Item 2. Properties .............................................................. 15
Item 3. Legal Proceedings ..................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders ...................... 16
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters 16
Item 6. Management's Discussion and Analysis of Financial Condition and
Results of Operations .................................................. 17
Item 7. Financial Statements ................................................... 22
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure ............................................... 40
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act ..................... 40
Item 10. Executive Compensation ................................................. 40
Item 11. Security Ownership of Certain Beneficial Owners and Management .......... 40
Item 12. Certain Relationships and Related Transactions ......................... 40
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K ......... 40
</TABLE>
This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities
Act"),and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), regarding future events and Ravenswood's plans and
expectations that involve risks and uncertainties. When used in this Report,
the words "estimate," "project," "intend," "expect" and "anticipate" and
similar expressions are intended to identify such forward-looking statements.
Such statements are subject to certain risks and uncertainties, including those
discussed below, that could cause actual results to differ materially from
those projected. 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: (iii) changes in the wine industry regulatory environment; and (iv)
changes in the fair market value of Ravenswood's common stock. Other factors
that may cause or contribute to such differences include, but are not limited
to, those discussed below under "Risk Factors," as well as those discussed
elsewhere in this Report and in the documents incorporated herein by reference.
In light of the important factors that can materially affect results, including
those set forth in this paragraph and below, the inclusion of forward-looking
information herein should not be regarded as a representation by Ravenswood or
any other person that the objectives or plans for Ravenswood will be achieved.
The reader is therefore cautioned not to place undue reliance on the
forward-looking statements contained herein, which speak only as of the date
hereof. Ravenswood undertakes no obligation to publicly release updates or
revisions to these statements.
<PAGE>
PART I
Item 1. Business
General Overview
Ravenswood produces markets and sells premium California wines exclusively
under the Ravenswood brand name. The vast majority of the wines Ravenswood
produces and sells 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 produces wines in three series:
* The valued-priced Vintners Blend Series, with a suggested retail price of
approximately $9.75 to $11.25 per 750 ml bottle;
* The intermediate-priced County Series, with a suggested retail price of
approximately $13.75 to $18.50 per 750 ml bottle; and
* The higher-priced Vineyard Designate Series, with a suggested retail
price of approximately $22.00 to $32.50 per 750 ml bottle.
The actual price of any particular wine may be either higher or lower than
suggested retail, depending upon the type of retail outlet and location where
it is sold. All of these products are within the super-premium and
ultra-premium categories of the premium wine market generally recognized by the
wine industry. "Premium" wines typically retail for more than $3.00 per 750 ml
equivalent unit. The premium category is often divided into three major
segments: (a) "popular premium" wines, which retail for between $3.00 and $7.00
per 750 ml equivalent unit; (b) "super-premium" wines, which retail for between
$7.00 and $14.00 per 750 ml equivalent unit; and (c) "ultra-premium" wines,
which retail for $14.00 or more per 750 ml equivalent unit. These categories
were originally created by Gomberg, Fredrickson and Associates and are now
commonly used in the wine industry.
For its 1997 vintage, which the Company released in 1999, Ravenswood
marketed and sold 38 different wines within its three product series.
Ravenswood's approach focuses on using old-world French winemaking
techniques to produce premium wines of exceptional quality and on building
awareness and loyalty for the Ravenswood brand. Ravenswood has traditionally
concentrated investment in developing its brand name, building inventory and
expanding distribution channels, rather than developing vineyard holdings and
production facilities. Although Ravenswood currently owns and manages 14 acres
of planted vineyards, over 95% of its grapes are supplied by third parties.
Ravenswood also purchases bulk wine of superior quality, which is incorporated
into its products, particularly its Vintners Blend Series.
Ravenswood believes this strategy has enabled it to sustain the growth
necessary to capitalize on favorable trends in the demand for California
premium wines, while minimizing the need to invest large amounts of capital in
the acquisition and development of land and capital equipment until its
production levels warranted further investment.
Ravenswood Products
Ravenswood has traditionally focused on the production of wines within the
super-premium and ultra-premium categories of the premium wine market.
Ravenswood's wines target specific varietals, appellations and prices within
these categories.
Vintners Blend Series Ravenswood's Vintners Blend Series consists of wines
produced from grapes of specific varietals but
sourced from a variety of appellations. Ravenswood uses
grapes obtained from independent growers in premium
grape-growing regions in Northern California, and bulk
wine derived from grapes grown in various California
appellations. Ravenswood currently produces Vintners
Blend Series wines in Zinfandel, Merlot and Chardonnay
varietals. Its Vintners Blend Series
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provides lower margins than Ravenswood's other
products; however, the flexibility provided by using
grapes and bulk wine of varying appellations enables
Ravenswood to produce its Vintners Blend Series on a
larger scale than its other products. As a result,
Ravenswood is able to generate greater sales. In the
1999 fiscal year, gross sales of the Vintners Blend
Series totaled $13.7 million, or 58% of Ravenswood's
gross sales.
County Series Ravenswood's County Series consists of specific
varietal wines primarily vinted by Ravenswood and
blended from grapes acquired from various independent
growers within the specific appellations of Napa
County, Sonoma County, Amador County and Lodi.
Ravenswood believes that its County Series provides
consumers with reasonably priced ultra-premium wines
derived solely from grapes of highly regarded
appellations of the California premium wine industry.
For its 1997 vintage, Ravenswood offered fourteen
different wines within the County Series. In the 1999
fiscal year, gross sales of the County Series totaled
$6.3 million, or 26% of Ravenswood's gross sales.
Vineyard Designate Ravenswood's Vineyard Designate Series consists of
Series ultra-premium varietal and Meritage wines derived from
grapes supplied by specific vineyards within Napa and
Sonoma counties. Ravenswood believes that Vineyard
Designate Series wines represent the unique
characteristics of each designated vineyard and its
respective grape varietal. Ravenswood also believes
that its Vineyard Designate Series' emphasis on
old-world French winemaking techniques sets a standard
for high quality that enhances the perceived value of
the products in each of its product series. For its
1997 vintage, Ravenswood offered 21 different wines
within its Vineyard Designate Series. The number of
products offered within the Vineyard Designate Series
varies from year to year. This variation results from
two factors: the number of vineyards available for
designation and the winemakers' discretion as to
whether harvested grapes merit Vineyard Designate
Series status. In the 1999 fiscal year, gross sales of
the Vineyard Designate Series totaled $3.4 million, or
14% of Ravenswood's gross sales.
The table below summarizes the number of wines offered in each product
series, by varietal, for the Ravenswood 1997 vintage:
Vintners Vineyard
Blend County Designate Total
----- ------ --------- -----
Zinfandel ........................... 1 4 10 15
Merlot .............................. 1 2 4 7
Cabernet Sauvignon, Cabernet Franc and
Bordeaux varietal blends ............ 0 3 4 7
Miscellaneous reds/blends ............ 0 1 1 2
Chardonnay ........................... 1 1 1 3
Miscellaneous whites ................. 0 3 1 4
- --- --- ---
TOTAL ................................ 3 14 21 38
= === === ===
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The vast majority of Ravenswood's products in all of its product series
are red wines, particularly Zinfandel. Ravenswood's red wines accounted for
approximately 93% of its gross sales in the 1999 fiscal year, with sales of
Zinfandel accounting for approximately 67% of its gross sales for that period.
Ravenswood estimates that production of future vintages will continue to
consist primarily of red wines, although it expects that a lesser percentage of
Ravenswood's total production will consist of Zinfandel, as Ravenswood expects
production of other red varietal wines to increase more rapidly. Ravenswood
will continue to attempt to expand its sales and name recognition selectively.
Ravenswood believes that its current mix of products is well-suited to the
growing demand for red wines, and it intends to continue to devote a majority
of its production to its existing red wines.
Ravenswood believes that by focusing on its unique winemaking process and
emphasizing red wine, it has achieved a reputation for high quality and
distinctive flavors within the market for red wines, particularly with respect
to its Zinfandel and its Vineyard Designate Series. Ravenswood intends to
maintain its position as a prominent supplier in the product categories in
which it has already established itself. It also plans to explore additional
opportunities to produce alternative varietal or blended products in those
areas where its focus can enable Ravenswood to establish a similar reputation
for excellence and build favorable awareness for the Ravenswood brand.
Ravenswood's Red Winemaking Process
In producing its premium wine products, Ravenswood employs traditional
old-world French winemaking techniques modified to embrace important aspects of
modern winemaking. Ravenswood defines traditional old-world French winemaking
as an approach that embraces natural processes and in which human and
mechanical intervention is minimized. For example, Ravenswood allows wild
yeasts to assist in fermentation and manually mixes its fermenting wines when
feasible. Ravenswood's winemaking techniques demand careful attention to the
wines from the vineyard through the bottling and shipping of its finished
products.
Grape Acquisition
Substantially all of the grapes utilized in the production of Ravenswood's
wines are purchased from independent growers. Ravenswood plays an active role,
however, in the management of the grapes that it purchases by monitoring the
development of the crop and working directly with vineyard owners to determine
optimal plans for nurturing and harvesting grapes. Ravenswood also purchases
bulk wine, which is wine vinted by third parties, to incorporate into some of
its products. Most of the bulk wine purchased by Ravenswood is incorporated
into its Vintners Blend Series. To a limited extent, Ravenswood may incorporate
bulk wine that it believes to be of exceptional quality into its County Series.
Fermentation
After the grapes are harvested, they are immediately crushed and pumped
into fermenting tanks. Using wild, natural yeasts found on the grapes, a
combination of the grapes, juice, seeds and stems is left to ferment for a
period ranging from one to four weeks, during which time the sugar in the
grapes is converted to alcohol. During fermentation, the grape skins are mixed
with the fermenting juice through a process known as "punching down", which
provides maximum contact between the skins and the juice. Ravenswood's
fermentation procedures, by product series, are described below:
Vineyard Designate Ravenswood's Vineyard Designate Series is fermented
Series in open-top redwood fermentation tanks of
approximately five- to eight-ton capacity that permit
punching down to be done by hand and optimize the
distribution of heat throughout the fermentation
process. A majority of the Vineyard Designate Series
is currently crushed and fermented at the Gehricke
Road Facility.
County Series Ravenswood's County Series is fermented in a mix of
open-top redwood and stainless steel fermentation
tanks ranging in size from six to 20 tons. A majority
of the County Series is currently crushed and
fermented at the Gehricke Road Facility.
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Vintners Blend Series The portion of Ravenswood's Vintners Blend Series
vinted by Ravens-wood is fermented exclusively in 20-
to 60-ton stainless steel fermenting tanks. Ravenswood
currently utilizes independent crush and fermentation
facilities for the production of this portion of the
Vintners Blend Series. Ravenswood expects much of the
Vintners Blend program to be crushed and fermented at
its new Quarry Facility in the future. See "Item 2.
Properties" for further discussion of the Quarry
Facility.
Most of Ravenswood's wines are allowed to go through malolactic
fermentation, a secondary fermentation which adds complexity and flavor to the
wines.
Aging
When the fermentation process is completed, the wine is gently pressed to
separate the juice from the grape skins and stems. It is then stored for aging.
Ravenswood's aging procedures, by product series, are described below:
Vineyard Designate All of Ravenswood's Vineyard Designate Series is
Series stored in 60-gallon French oak barrels of various
ages. Approximately 30-60% of the Vineyard Designate
Series is stored in new barrels. Ravenswood believes
that storage in new oak barrels provides superior
flavor characteristics in comparison to other storage
alternatives. The Vineyard Designate Series is aged in
barrels for up to two years.
County Series Substantially all of Ravenswood's County Series is
stored in 60-gallon French oak barrels and
approximately 25-30% of the county Series is stored in
new barrels. The County Series is typically aged in
barrels for approximately 18 months.
Vintners Blend Approximately 30% of Ravenswood's Vintners Blend
Series Series is stored in French oak barrels, but Ravenswood
does not typically store wines in this series in new
barrels. The remaining wine used to produce the
Vintners Blend Series is stored in stainless steel
tanks or purchased as bulk wine from third parties.
The portion of the Vintners Blend Series that is
vinted by Ravenswood and stored in barrels is
typically aged for approximately one year.
Blending and Bottling
After aging is completed, Ravenswood's wines are blended prior to bottling
and sale. Ravenswood's blending procedures, by product series, are described
below:
Vineyard Designate The Vineyard Designate Series is produced by blending
Series the wine vinted from a particular vineyard based on
proportions of that wine stored in new and older
barrels. The decision as to what percentage of wine
stored in new and older barrels is included in a
particular Vineyard Designate Series product is
determined by Ravenswood's winemaker.
County Series The County Series is blended by mixing wines vinted
from particular appellations based on proportions of
wine from particular vineyards and stored in barrels
of various ages. To a very limited extent, Ravenswood
may incorporate some bulk wine that it believes to be
of exceptional quality into its County Series.
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Vintners Blend Series The Vintners Blend Series is blended using a
proportion of French oak barreled wine, wine stored in
stainless steel tanks and bulk wine acquired from
independent wineries.
After bottling, Ravenswood's winemakers release the wines for distribution
at times they deem appropriate.
Although Ravenswood currently uses a variety of production facilities to
complete the production of its annual wine volume, it prescribes the processes
used at these facilities in order to maintain consistency in the flavor and
quality of its products. Ravenswood believes this approach has enabled it to
establish a reputation for value at each price segment within the premium wine
market in which Ravenswood currently competes. As Ravenswood expands production
of its existing wines and adds new wines to its product portfolio, it intends
to continue to use these same practices to ensure the quality of its wines and
to enhance awareness of the Ravenswood brand name.
1997 Vintage
Many of the wines bottled and sold in Ravenswood's 1999 fiscal year are
from the 1997 vintage. 1997 is a year that has yielded a series of large,
sturdily built wines with ample body and refined tannic structure. It is a
vintage that has received substantial critical acclaim in the wine press. This
acclaim has included many Ravenswood wines.
An early and unusually warm spring set the stage for a growing season that
promised an early and large harvest. As summer wound its way toward fall,
temperatures unexpectedly soared. Then, just as the Chardonnay and Zinfandel
grapes were nearing full ripeness, a tropical storm moved in delaying harvest
and causing some loss of fruit in the vineyard. In most years there is a
staggered ripening among varietals, some ripening early and others coming in
later. The weather conditions of 1997 resulted in something like harvest
gridlock. The fruit ripened all at once, resulting in a crush at crush.
In spite (or maybe because) of the pain and suffering endured by our crush
crew, the resulting wines have turned out to be nothing short of spectacular.
Rich, ripe and full-textured with well-integrated tannins, these top drawer
Zinfandels, Merlots and Cabernets, to name a few, are a worthy reward for the
trials and tribulations of that memorable season.
The 1997 Sangiacomo Merlot (southern Sonoma Valley) is a tremendous
mouthful of velvet textured, full throttle berry and plum fruit touched with
hints of spice, mineral, cedar and toasty oak. Luscious may be the best word to
describe this hedonistic wine. Also wonderful, if in a more Bordeaux-like mold,
is the 1997 Sonoma County Merlot. Drawn from several sources within the region
and blended with a bit of Cabernet Sauvignon and Cabernet Franc, this wine is
delicious to drink today but would be an excellent candidate for five to eight
years in the cellar--or under the bed--as the case may be.
The Zinfandels of this vintage are simply an embarrassment of riches. Once
again the classic 1997 Sonoma County-Old Vine Zinfandel is a winner. Drawn from
mature vineyards, the wine is notable for its full texture and lush wild berry
fruit accented with pepper, spice, toast and vanilla. In a more tightly focused
geographical mode, two new Vineyard designate Zins have debuted this year. Our
1997 Teldeschi Zinfandel, from Sonoma County's Dry Creek Valley, is a deep,
dark, substantial wine packed with wild berry fruit and cracked pepper spice.
From a little closer to home, the 1997 Barricia Zinfandel (Sonoma Valley) packs
a wallop, with a firm backbone of tannins supporting its massive flavors of
dark cherry, spice and cocoa.
By any definition, the vintage of 1997 is a classic in the Ravenswood "No
Wimpy Wines" mode.
Marketing
A primary focus of Ravenswood's marketing is associating the Ravenswood
brand name with high quality and distinctive flavor within the super-premium
and ultra-premium segments of the premium wine market. Ravenswood believes it
has developed a favorable reputation and strong brand awareness among wine
consumers and resellers for its red wines, in particular its Zinfandel, Merlot,
Cabernet
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Sauvignon and proprietary blends. Ravenswood has invested, and expects to
continue to invest significantly, in the development of its brand name
packaging and trademarks. Ravenswood believes that the distinctive Ravenswood
name, which is derived from a character in the opera Lucia di Lammermoor by
Gaetano Donizetti, and its distinctive logo, created by Berkeley poster artist
and printer David Lance Goines, convey a recognizable and high-quality image
that has contributed to its success.
In addition, Ravenswood has invested substantially in promoting its
trademarked slogan, "No Wimpy Wines", which it believes accurately and
humorously conveys its core marketing philosophy: to demystify wine and make it
intellectually accessible to a broad range of consumers. At the same time,
Ravenswood believes this slogan, which Ravenswood has idiosyncratically
translated into over a dozen languages in its promotional materials, portrays
the robust, full-bodied nature of its products, particularly its red wines.
The focus of Ravenswood's marketing strategy is to attract core wine
consumers. Consumer research indicates that the vast majority of the wine
consumed in the United States is consumed by a small percentage of the adult
population. While Ravenswood believes its promotional messages are appealing to
a wide audience of consumers, it also believes a marketing effort focused upon
core wine consumers is more effective than campaigns aimed at broadening the
population of wine consumers in general. As a result, Ravenswood has not
traditionally relied on broad-based advertising in the promotion of its wine
and instead has relied on targeted marketing strategies aimed at the core
population of wine consumers.
As part of its targeted marketing strategy, Ravenswood has traditionally
relied on its management's personal involvement in the marketing of its wines.
Mr. Foster, Ravenswood's chief executive officer, and Mr. Peterson, its
president and winemaker, as well as other employees, spend considerable time
each year leading tours at the Gehricke Road Facility, as well as traveling on
behalf of Ravenswood throughout the country to meet with consumers,
distributors, wholesalers, restaurateurs and wine writers. Although Ravenswood
expects to expand its marketing efforts in the future, it anticipates that its
executive management will continue to personally promote its products and brand
name.
A key element of Ravenswood's marketing is its tasting room located at its
Gehricke Road Facility. The tasting room, which is open seven days a week,
offers tastings of Ravenswood's product line, Ravenswood logo merchandise and a
daily tour of the winery operations. The tasting room also offers barbecues on
summer weekends, which encourage visitors to linger over lunch. Ravenswood
believes that this welcoming, relaxed atmosphere is an integral part of its
casual and approachable style and assists in the development of a favorable
image for the Ravenswood brand.
Consumer research also indicates that a majority of core wine consumers
rate brand name familiarity as a very important attribute in selecting wine for
purchase. Ravenswood intends to continue to invest in the promotion of its
brand name, logo and slogan in the future to increase the familiarity and
favorable impression of the Ravenswood brand.
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Sales and Distribution
The following table summarizes Ravenswood's sales by geographic area
during the 1999 fiscal year.
SUMMARY OF GROSS SALES BY GEOGRAPHIC AREA
(Fiscal Year Ended June 30, 1999)
Geographic Area Percent of Gross Sales
--------------- ----------------------
California
Chains ................... 23%
Restaurants .............. 7%
General Retail ........... 9%
----
39%
U.S., excluding California .... 48%
Export ........................ 4%
Tasting Room .................. 9%
----
Total ......................... 100%
====
Ravenswood's wines are purchased by consumers at:
* "on-premise" restaurants
* "off-premise" retailers such as specialty wine stores, supermarkets,
discounters and liquor stores
* Ravenswood's tasting room
Consumers can purchase Ravenswood's wines at on- and off-premise accounts
in all 50 states and in over 15 foreign countries located in North America,
Europe and Asia. Ravenswood's sales and distribution strategy varies by
geographic location.
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 wine 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 the distribution of its products, Ravenswood
believes that its relationships with its 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.
In the 1999 fiscal year, approximately 75% of Ravenswood's gross sales
were made using brokers. In the 1999 fiscal year, Ravenswood's most successful
broker was responsible for 22% of its gross sales and its ten most successful
brokers were responsible for 70% of its gross sales. Within California,
Ravenswood currently uses seven brokers and five warehouses located throughout
the state. For the 1999 fiscal year, approximately 48% of Ravenswood's gross
sales resulted from sales within California. Of this amount, approximately 9%
of gross sales were purchases by California and non-California consumers
through Ravenswood's tasting room and approximately 39% were sales to retail
accounts.
Whether or not Ravenswood uses a broker as a sales agent, Ravenswood's
sales outside of California generally require the use of distributors. While no
one distributor accounted for more than 7% of gross sales for the 1999 fiscal
year, its ten largest distributors accounted for approximately 23% of its gross
sales for that period. In order to facilitate broad distribution of its
products throughout various geographic markets, Ravenswood has traditionally
allocated its available production among its brokers and distributors.
Ravenswood believes that the breadth of its distribution network, which
accounted for approximately 52% (including export) of Ravenswood's gross sales
for the 1999 fiscal year, ensures that the elimination of any one specific
distribution relationship will not adversely affect out-of-state sales.
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Beginning in 1991, Ravenswood began selling wines and some merchandise
directly to consumers through the tasting room at its Gehricke Road Facility.
Ravenswood's gross sales from its tasting room have grown substantially since
1992. Although Ravenswood sells some of its products through direct mail
channels, where permitted by law, it does not anticipate a material increase in
the percentage of sales derived from direct sales to consumers in the near
future.
Grape and Bulk Wine Supply
Ravenswood obtains its grapes for wine production from more than 60
suppliers located in Sonoma and Napa counties, and other Northern California
premium grape-growing counties and is dependent upon independent grape growers
and bulk wine suppliers for substantially all of its annual wine production.
Ravenswood is not dependent upon any one supplier for a significant portion of
its total required grape supply in any given harvest season. Ravenswood's
largest supplier typically accounts for no more than 8% of the total grapes
crushed for Ravenswood's annual wine production and the top three suppliers
together generally account for no more than 20% of the total grapes crushed.
Ravenswood believes there are sufficient alternative supplies of high-quality
grape to ensure continuing production of high-quality wines in the event that
it cannot obtain grapes from any particular supplier. The Gehricke Road
Facility includes 14 acres of vineyards. Only 5.2 acres of these vineyards are
producing grapes. Nine acres were recently replanted with Phylloxera-resistant
vines and will resume production over the next three years.
In working with its growers, Ravenswood relies on both personal and
contractual relationships. Ravenswood has entered into grape purchase
agreements with the growers of a majority of the grapes used in its annual
production. The business terms of these purchase agreements vary, however, the
majority of Ravenswood's purchase agreements require that, while either party
may terminate the agreement at any time, both parties must abide by its terms
for three years following termination. The majority of these contracts provide
for pricing formulas tied to the Final Grape Crush Report published annually by
the California Department of Food and Agriculture.
Ravenswood also purchases grapes from some of its growers in amounts and
at prices that are negotiated from year to year. These year-to-year
arrangements are often not in writing. Ravenswood traditionally has relied on,
and continues to seek to establish, relationships with growers that have a
long-term perspective, whose vineyards have the potential for developing
distinctive wines, and for whom Ravenswood is an important customer.
Ravenswood relies on several specific grape suppliers for its Vineyard
Designate Series in order to produce wines from those specific vineyards. For
the 1997 vintage, Ravenswood produced 21 separate wines within the Vineyard
Designate Series. The vast majority of growers supplying grapes for
Ravenswood's Vineyard Designate Series have entered into grape supply
agreements with Ravenswood. Ravenswood believes that the pricing arrangements
with these growers and the prestige and acclaim related to the production of a
wine within the Vineyard Designate Series have led to stable and long-term
relationships with those suppliers.
Ravenswood is also dependent on bulk wine suppliers for the production of
several of its wines, particularly its Vintners Blend Series. Ravenswood does
not have contracts with bulk wine suppliers or agreements that would protect it
from fluctuations in the price or availability of bulk wine. The availability
and price of bulk wine significantly affect the quality and production level of
Ravenswood's products that contain bulk wine. The price, quality and available
quantity of bulk wine have fluctuated in the past and Ravenswood believes they
will continue to do so in the future.
The quality and quantity of grape supply is determined by a combination of
factors, including weather conditions during the growing season, pruning
methods, diseases and pests, and the number of vines producing grapes. The
adequacy of grape supply is further influenced by consumer demand for wine.
While Ravenswood believes that it can secure a sufficient supply of grapes from
grape supply contracts with independent growers, there can be no assurance that
grape supply shortages will not occur as a result of agricultural risks.
Due to the effects of El Nino, the grape supply available to Ravenswood
for the 1998 harvest was lower than for the 1997 harvest, which Ravenswood
believes was an unusually large harvest. Although
8
<PAGE>
Ravenswood expects to compensate in part for this shortfall by the purchase of
bulk wine, the inventory of Ravenswood's 1998 vintage may be less than that of
the 1997 vintage. As a result, the growth of Ravenswood's sales may be limited
in fiscal years 2000 and 2001, when most of its 1998 vintage will be released
for sale.
Ravenswood believes it has maintained good relationships with its grape
suppliers in the past and it expects no material adverse change in these
relationships for the foreseeable future. Nevertheless, shortages in the supply
of wine grapes could result in an increase in the price of some or all grape
varieties and a corresponding increase in the cost to Ravenswood of its wine
production as well as a potential shortfall in Ravenswood's inventory. An
increase in the cost of producing Ravenswood's wines or a shortfall in
inventory could reduce the amount of wine Ravenswood produces for sale, and
could result in reductions in its sales and profits.
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. Many industry sources
expect a significant increase in the supply of premium wine grapes in the next
few years. Although this increase in supply may cause a decrease in the prices
Ravenswood pays independent growers for their 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, including
those Ravenswood produces, which could affect its business and reduce its
sales. Oversupply may also increase the amount of premium wine available to its
distributors and retail outlets, which could increase competition in its
distribution channels.
Significant Events
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 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%.
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 proceeds of
the offering are being used for wine inventory, expansion of production
facilities, general corporate purposes, retirement of indebtedness, and to pay
for expenses and underwriting discounts associated with the offering.
Ravenswood's shares are listed on the Nasdaq National Market System under the
trading symbol "RVWD".
Management Information Systems
Our management information systems integrate compliance, sales reporting,
merchandise analysis and stock replenishment, as well as accounting functions.
Ravenswood believes that its management information systems allow it to
efficiently support Ravenswood's growth and maintain a competitive industry
position.
Competition
The premium wine industry is intensely competitive and highly fragmented.
Ravenswood's wines compete in the premium wine market with the hundreds of
other wineries producing and marketing California wine as well as other
producers of domestic premium wines and producers of imported wines coming
primarily from France, Italy, Spain, Australia and Chile. Ravenswood's wines
also compete with popular-priced generic wines and with other alcoholic and, to
a lesser degree, non-alcoholic beverages for shelf space in retail stores and
for marketing focus by Ravenswood's independent brokers and distributors, many
of which carry extensive brand portfolios.
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<PAGE>
Ravenswood believes that the primary competitive factors in the wine
industry tend to be brand recognition, product quality and access to
distribution channels and price. Although Ravenswood believes it is competitive
in each of these areas, there can be no assurance that it will be able to
compete effectively in the future. The wine industry has experienced
significant consolidation in recent years. Despite numerous brand labels,
industry analysts estimate that seven wineries accounted for approximately 53%
of the total California premium wine shipments in 1997, by volume. Large volume
competitors, such as Beringer Wine Estates, Gallo, Kendall Jackson and Robert
Mondavi, which compete directly with Ravenswood in the premium wine market,
have significantly greater capital resources, more extensive promotional
practices, and substantially larger and more developed distribution networks
than Ravenswood. As a result, Ravenswood may find it diificult to compete
successfully against these producers of premium wines.
As a result of its distribution strategy, Ravenswood believes that it has
been able to compete effectively, particularly with respect to its higher-end
products, with much larger-scale wine producers that rely on larger
distributors or internal sales forces. In recent years, an increasing number of
smaller wineries have adopted an approach to winemaking similar to
Ravenswood's, which emphasizes production processes and brand awareness over
investment in land and production capacity. Ravenswood believes that these
competitors, such as Kenwood, Rabbit Ridge, Ridge Vineyards and Rosenblum
Cellars, appeal to many of the same consumers as those targeted by Ravenswood.
Ravenswood believes that while brand awareness is an important component
to core wine consumers, most wine consumers are loyal to more than one brand of
premium wine. As a result, Ravenswood must constantly promote its wines to its
existing customer base. The increase in the number of Ravenswood's competitors
may prevent it from successfully establishing its brand name or obtaining
sufficient marketed focus from its independent brokers and distributors, which
could jeopardize its business and reduce its sales and profits.
Trademarks
"Ravenswood", the Ravenswood logo and the slogan "No Wimpy Wines" are
federally registered trademarks owned by Ravenswood. Ravenswood's wines are
branded consumer products.
Shareholder Benefits
Ravenswood has initiated a program which provides certain benefits to
holders of record including: an opportunity to purchase wines at discounted
prices at specific times throughout the year, invitations to special events and
VIP tours & tastings.
Employees
As of June 30, 1999, Ravenswood had approximately 37 full-time employees,
25 of whom were salaried, with the remaining employees paid an hourly wage.
There were approximately 22 part-time, seasonal employees at June 30, 1999.
Executive Officers of the Company
W. Reed Foster co-founded Ravenswood in 1976. He has served as chairman,
chief executive officer and a director since Ravenswood's incorporation in
1986. From 1970 until joining Ravenswood, Mr. Foster operated a commercial real
estate firm in San Francisco. He also co-founded the San Francisco Vintner's
Club, serving as its president for six years, and served as an officer of
Draper & Esquin, a retail wine shop, for 15 years. He received a B.A. in
philosophy from Williams College and an M.B.A. from the Harvard Graduate School
of Business Administration.
Joel E. Peterson co-founded Ravenswood in 1976. He has served as
president, winemaker and a director since Ravenswood's incorporation in 1986.
Mr. Peterson's duties as winemaker involve managing and directing the
winemaking process. Mr. Peterson was a wine writer and a consultant in the art
of traditional winemaking as practiced in Bordeaux and Burgundy. Mr. Peterson
holds a B.S. in Microbiology and Biochemistry from Oregon State University and
a Medical Technology degree from the University of California, San Francisco.
Mr. Peterson was actively involved in immunology research at Mt. Zion Hospital
until 1977.
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<PAGE>
Justin M. Faggioli has served as executive vice president of Ravenswood
since January 1995 and as secretary and a director since October, 1996. Prior
to joining Ravenswood, from May 1991 until January 1995, Mr. Faggioli operated
a 2,600-acre ranch in Sonoma County owned by his wife's family and helped
develop a 175-acre vineyard on that property. Mr. Faggioli holds B.S. and M.S.
degrees in Earth Sciences from Stanford University and an M.B.A. from the
Harvard Graduate School of Business Administration.
Callie S. Konno has served as Ravenswood's chief financial officer since
1996 and has served as a director since February, 1999. From 1993 until her
appointment as chief financial officer, Ms. Konno served as secretary of
Ravenswood and was responsible for various accounting and administrative
duties. She holds an A.B. in History and International Relations from
Occidental College and an M.L.I.S. in Library and Information Studies from the
University of California, Berkeley. In addition, Ms. Konno has passed the
Certified Public Accountants examination.
Factors that May Affect Future Results
A reduction in consumer demand for premium red wines could affect 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 affect 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 be assured 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 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 disease 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 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.
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<PAGE>
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 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 could 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 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.
Because some states have laws that prohibit distributor changes, our sales may
be reduced if we cannot replace an under-performing distributor
Our sales outside of California largely depend on the use of distributors.
Our ten largest distributors account 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.
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<PAGE>
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
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 may continue to 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
We are currently building a new facility, which we are calling the Quarry
Facility, in order to increase our production capacity. 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
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 will need to make significant capital investments for the construction
and completion of the Quarry Facility. We believe that we will have access to
sufficient capital to complete the facility. However, unpredicted cost overruns
may increase the total cost of the facility, thereby reducing capital available
for other purposes. If additional capital were needed, we cannot assure you
that we would be able to obtain it. Additionally, increased costs of the Quarry
Facility may also increase our future cost of goods sold.
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 or 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.
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<PAGE>
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 or 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:
* Excise taxes
* Licensing requirements
* Trade and pricing practices
* Permitted distributor channels
* Permitted and required labeling
* Advertising
* 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 which would restrict us from selling wine
directly through the mail or by other means including the Internet. This
proposed legislation, or other new regulations, requirements or taxes could
harm our business and operating results. Future legal or regulatory challenges
to the wine industry could also harm our business and impact our operating
results.
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 catastrophes,
such as 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.
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 on January 1, 2000 from dates prior
14
<PAGE>
to the Year 2000. Many companies' software and computer systems may need to be
upgraded or replaced in order to process correctly dates beginning in 2000 and
to comply with the Year 2000 requirements. Ravenswood is reviewing its
information systems for any potential Year 2000 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.
Item 2. Properties
Ravenswood currently operates one owned and three leased locations in
Sonoma. The Gehricke Road Facility, which Ravenswood owns, is composed of two
buildings totaling approximately 12,600 square feet. This facility houses the
majority of Ravenswood's production equipment, its administrative offices, a
small laboratory, a retail tasting room, and a warehouse space for barrel and
tank storage. The Gehricke Road Facility is situated on approximately 25 acres,
14 of which are Zinfandel and Merlot vineyards.
Ravenswood's three additional facilities, which it leases, are used for
barrel storage and aging of wines and for the storage of cased goods to support
sales in California. These facilities comprise a total of approximately 35,800
square feet. Two of the three leased facilities are used for barrel storage and
aging of wines. The lease for one of these properties provides for monthly
payments of $4,100 for 9,900 square feet, subject to annual adjustment, and
expires on September 30, 2000. Effective August 1, 1999, the lease for the
other barrel storage and wine aging property provides for monthly payments of
$6,800 for 16,000 square feet, subject to annual adjustments, and expires on
September 30, 2002 with a three-year option for renewal. The lease for the
property used to store cased goods provides for monthly payments of $4,200,
subject to annual adjustment, and expires on April 30, 2002 with a three-year
renewal option. Ravenswood also leases a 1,000 square foot office in San
Francisco for administrative and sales purposes. The lease for the office
provides for monthly payments of $1,217, subject to annual adjustment and
expires on January 31, 2000.
In addition, Ravenswood is currently constructing the Quarry Facility,
which is located on leased land consisting of approximately 20 acres in Sonoma
County. Upon completion of the Quarry Facility, Ravenswood expects to use the
Quarry Facility and the Gehricke Road Facility for its operations. Ravenswood
leases this property from the spouse and brother-in-law of Justin Faggioli, its
executive vice president. The lease expires on December 31, 2032. Current
monthly payments are $3,547, subject to annual adjustment. In addition, the
lease provides Ravenswood with a right of first refusal to purchase a portion
of the property and a first option to rent upon its expiration, if specific
conditions are met.
The Quarry Facility has been designed, and is being constructed, as a
fully integrated winery. It will also provide space for administrative and
production offices. The project consists of an approximately 47,000 square foot
building capable of producing 250,000 cases of wine annually. It also includes
the necessary exterior infrastructure, including grape crush equipment,
mechanical equipment, truck docks, septic system, wastewater system, fire
suppression equipment, access roads and elements commonly associated with a
winery operation. The building includes space for the fermentation, storage and
blending of wine, barrel storage for wine aging, bottling equipment and limited
case goods storage.
The project received a use permit for a winery with 250,000 case annual
capacity from the County of Sonoma in January 1997. Ravenswood anticipates that
it will expand the facility in the future to increase its production and that
it will be able to increase its permitted capacity. The use permit does not
include public tours and tasting or retail sales, although it does permit
marketing events and similar industry-related activities. Completion is
currently scheduled for November 1999; however, Ravenswood anticipates that it
will be able to obtain a temporary occupancy permit in time to allow its use
during the 1999 harvest.
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<PAGE>
Construction costs for the facility are currently estimated to be
approximately $9 million and additional capital equipment purchases funded by
capital leases will total approximately $3 million. These values are higher
than previous estimates. The increases are attributable to several factors
including: further definition of program requirements, the addition of capacity
in certain production processes and a tight market for construction services.
Upon completion of the Quarry Facility, Ravenswood believes that it will
use both its Gehricke Road Facility and the Quarry Facility to full capacity.
Ravenswood believes that the construction of the Quarry Facility will result in
immediate and substantial savings because in-house production will cost less
than paying outside vendors for custom crushing, fermentation, storage and
bottling. Ravenswood anticipates that consolidating its facilities will improve
the management and coordination of production staff and facilities. In
addition, Ravenswood believes this consolidation will allow it to reduce its
future reliance upon production facilities owned by independent third parties.
Ravenswood believes the increased control over the production process
provided by the completion of the Quarry Facility will enhance its ability to
apply its traditional winemaking process on a consistent basis. Use of the
Quarry Facility will also assist Ravenswood in maintaining the label
terminology "Produced and Bottled by Ravenswood Winery, Sonoma, CA." Production
of wine at non-Ravenswood locations sometimes requires different labeling.
Ravenswood anticipates that the Quarry Facility will initially be
primarily dedicated to production. The Gehricke Road Facility will remain as a
fully-integrated winery, focusing on the production of the Vineyard Designate
Series, Ravenswood's tasting room and administrative offices.
Item 3. Legal Proceedings
There are no material legal proceedings pending to which Ravenswood is a
party. Ravenswood's management knows of no legal actions being contemplated by
or against Ravenswood.
Item 4. Submission of Matters to a Vote of Security Holders
None
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
Our common stock is listed on the NASDAQ National Market System ("Nasdaq")
under the symbol "RVWD". Our common stock was first traded on Nasdaq on April
9, 1999, concurrent with the underwritten initial public offering of shares of
our common stock at an initial price to the public of $10.50 per share (the
"Offering"). Prior to the Offering there was no established public trading
market for our shares.
Shareholders
The number of common shareholders of record as of September 5, 1999 was
86. This number excludes shareholders whose stock is held in nominee or street
name by brokers.
Dividend Policy
No dividends have been declared on our common stock since the Offering. It
is not anticipated that we will pay any dividends in the foreseeable future.
The terms of our credit agreements impose restrictions on our ability to
declare and pay dividends.
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Stock Price Information
Set forth below are the high and low closing sale prices for our common
stock for the quarter ended June 30, 1999, as reported by NASDAQ. These prices
do not include retail markups, markdowns or commissions.
Quarter Ended High Low
------------- ---- ---
June 30, 1999 ........ $11.00 $10.25
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 Commissions Charged
to the Company: $420
Other issuance costs: $552
Net offering proceeds to the Company: $9,528
Approximate use of net offering proceeds through
June 30, 1999: Temporary investments: Cash and
cash equivalents: $9,528
<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. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Fiscal years ended June 30, 1999 and 1998
Results of Operations
Sales
Net sales consist of gross sales of Ravenswood's wines and merchandise,
less excise taxes, discounts and returns and allowances. Net sales of
Ravenswood's products increased to $22.1 million in the fiscal year ended June
30, 1999, from $15.9 million in the fiscal year ended June 30, 1998. This
increase is primarily attributable to an increase in the volume of wines
produced and sold by Ravenswood. In the fiscal year ended June 30, 1999, case
sales of Ravenswood's products increased to 270,760 cases from 191,655 cases in
the fiscal year ended June 30, 1998, while the average price per case decreased
by approximately 1% from $87.37 per case in fiscal 1998 to $86.39 per case for
fiscal 1999 (stated as gross sales.) This decrease in average price per case is
primarily attributable to the increase in sales of Ravenswood's value-priced
Vintners Blend Series as a percentage of gross sales.
17
<PAGE>
The percentages of gross sales attributable to the Vintners Blend Series,
County Series and Vineyard Designate Series were approximately 58%, 26% and
14%, respectively, in the fiscal year ended June 30, 1999, as compared to 56%,
27% and 16%, respectively, in fiscal 1998. Sales of Ravenswood branded
merchandise accounted for approximately 1% of gross sales for the fiscal year
ended June 30, 1999, compared to 2% in the fiscal year ended June 30, 1998.
Ravenswood expects that the percentage of gross sales attributable to sales of
its Vintners Blend Series and, to a lesser extent, its County Series will
increase relative to sales of Ravenswood's Vineyard Designate Series as
Ravenswood continues to expand its production and product offerings within
these segments.
Cost of Good Sold
Cost of goods sold includes the cost of:
* Grapes
* Bulk wine
* Packaging materials
* Labor used in wine production
* Bottling expense
* Overhead allocated in production costs from winery facilities and
equipment
These costs are capitalized as inventory and depleted as costs of goods
sold are recognized. Cost of goods sold increased to $10.3 million, or 46.5% of
net sales, in the fiscal year ended June 30, 1999, from $7.4 million, or 46.6%
of net sales, in the fiscal year ended June 30, 1998. The increase in the
amount of cost of goods sold is primarily due to an increase in the total
volume of wine sold.
Gross Profit
Ravenswood's gross profit increased to $11.8 million in the fiscal year
ended June 30, 1999, from $8.5 million in the fiscal year ended June 30, 1998,
and increased slightly as a percentage of net sales to 53.5% from 53.4% in
these respective periods. The increase in the amount of gross profit is
primarily attributable to an increase in sales volumes across all product
lines.
Operating Expenses
Deferred Compensation Expenses: Deferred compensation expense of $2.2
million was incurred in the fiscal year ending June 30, 1998. No deferred
compensation expense was incurred in the fiscal year ended June 30, 1999.
Other Operating Expenses: Other operating expenses consist of sales and
marketing overhead, commissions paid to independent brokers, advertising and
merchandising expenses, salaries and facilities expenses unrelated to wine
production, insurance and professional services expenses. Other operating
expenses increased to $5.2 million in the fiscal year ended June 30, 1999, from
$4.0 million in the fiscal year ended June 30, 1998. As a percentage of net
sales, other operating expenses decreased to 23.7% of net sales in the fiscal
year ended June 30, 1999, from 25.4% of net sales in the fiscal year ended June
30, 1998. This increase is primarily attributable to brokerage commissions
related to Ravenswood's increased sales volumes, particularly in California.
The decrease in other operating expenses as a percentage of net sales is
primarily attributable to increased sales volumes without corresponding
increases in administrative staff or other overhead expenses. Ravenswood
expects other operating expenses to increase (a) as it continues to increase
production and (b) now that it is a public company.
Other Expense, Net:
Other expense consists of non-operating income and expense items, which
primarily consist of interest on outstanding indebtedness. These items have
tended to fluctuate from year to year. Other expense amounted to $474,340 and
$226,370 in the fiscal years ended June 30, 1998 and 1999, respectively.
Ravenswood expects that these expenses will increase as it is required to pay
interest on $1,687,500 worth of convertible debentures issued in the second
quarter of the 1999 fiscal year and on
18
<PAGE>
funds borrowed in connection with the construction of the Quarry Facility.
Ravenswood expects that this expense may be offset in part by interest earned
on that portion of the proceeds for its initial public offering in April 1999
that is retained as working capital, as well as interest earned from proceeds
from the sale of common stock in 1998 that was not used for the Quarry
Facility. Interest payments on the debentures commenced in January 1999 and
will continue to be paid on a quarterly basis until the debentures are
converted or redeemed, or until they mature.
Provision for Income Taxes
The provision for income taxes reflects an estimated annualized effective
tax rate of 38.5% at June 30, 1999, and 89.5% at June 30, 1998. The decrease in
effective tax rate is attributable to $2.1 million of deferred compensation
expense that was recorded in fiscal 1998 as a permanent difference between
financial statements reported under generally accepted accounting principles
and our tax return filed for fiscal 1998. Ravenswood does not expect a material
change in its effective tax rate in the near future.
Net Income and Earnings Per Share
Net income for the fiscal year ended June 30, 1999 increased to $3.9
million, as compared to $186,891 for the fiscal year ended June 30, 1998. Net
income for the fiscal year ended June 30, 1998 without the effect of the
deferred compensation expense was $2.3 million. The increase was due to
increased volume in sales. No deferred compensation expense was recognized for
the year ended June 30, 1999. Diluted earnings per share for the fiscal year
ended June 30, 1999 increased to $.96 per share from $.05 per share for the
fiscal year ended June 30, 1998. Diluted earnings per share for fiscal 1998
without the effect of the deferred compensation expense was $.63.
Fiscal Years Ended June 30, 1998 and 1997
Sales
Net sales of Ravenswood's products increased to $15.9 million in the 1998
fiscal year, from $11.5 million in the 1997 fiscal year. This increase is
primarily attributable to an increase in the volume of wines produced and sold
by Ravenswood. In the 1998 fiscal year, case sales increased to 191,655 cases
from 131,175 cases in the 1997 fiscal year, while the average price per case
decreased from $91.58 to $87.37 in these respective periods. The decrease in
average price per case is primarily attributable to the increase in sales of
the value-priced Vintners Blend Series as a percentage of gross sales and, to a
lesser extent, the timing of release dates for some of Ravenswood's Vineyard
Designate Series Zinfandel products in these respective periods.
The percentages of gross sales attributable to the Vintners Blend Series,
County Series and Vineyard Designate Series were 56%, 27% and 16%,
respectively, in the 1998 fiscal year, as compared to 43%, 32% and 22%,
respectively, in the 1997 fiscal year. Sales of Ravenswood branded merchandise
accounted for approximately 2% of gross sales in each of these periods.
Cost of Goods Sold
Cost of goods sold increased to $7.4 million, or 46.6% of net sales, in
the 1998 fiscal year, from $5.2 million, or 45.1% of net sales, in the 1997
fiscal year. The increase in the amount of cost of goods sold over these
respective periods is primarily due to increases in the total volume of wine
sold. The increase in cost of goods sold as a percentage of net sales is
primarily attributable to the increase in sales of Ravenswood's lower-margin
Vintners Blend Series as a percentage of gross sales.
Gross Profit
Ravenswood's gross profit increased to $8.5 million in the 1998 fiscal
year, from $6.3 million in the 1997 fiscal year, but decreased as a percentage
of net sales, to 53.4% from 54.9% in these respective periods. The increase in
aggregate gross profit is primarily attributable to increases in sales volumes
across all of Ravenswood's product lines, particularly the Vintners Blend
Series. The decrease in gross profit as a percentage of net sales is primarily
attributable to an increase in sales of the lower-margin Vintners Blend Series
as a percentage of gross sales.
19
<PAGE>
Operating Expenses
Deferred Compensation Expense: Deferred compensation expense consists of
non-cash expenses recognized by Ravenswood in connection with a deferred
compensation agreement with W. Reed Foster, Ravenswood's chairman and chief
executive officer. Deferred compensation expense increased to $2.2 million in
the 1998 fiscal year from $93,292 in the 1997 fiscal year, and increased as a
percentage of net sales to 13.9% in the 1998 fiscal year from 0.8% in the 1997
fiscal year. The increase in deferred compensation expense is attributable to
an increase in the common stock per share value recognized by Ravenswood at
June 30, 1998. The deferred compensation arrangement was terminated as of July
1, 1998 and Ravenswood will not incur any additional deferred compensation
expense from this arrangement.
Other Operating Expenses: Other operating expenses increased to $4.0
million in the 1998 fiscal year, from $3.3 million in the 1997 fiscal year, but
decreased as a percentage of net sales to 25.4% in the 1998 fiscal year from
28.3% in the 1997 fiscal year. The increase in the amount of other operating
expenses is primarily attributable to increases in brokerage commissions
related to Ravenswood's increased sales volumes and, to a lesser extent,
increased expenditures on advertising and promotional efforts. The decrease in
other operating expenses as a percentage of net sales is primarily attributable
to increased sales volumes without corresponding increases in administrative
staff or other overhead expenses.
Other Expense, Net
Other expense amounted to $474,340 and $437,258, or 3.0% and 3.8% of net
sales, in the 1998 and 1997 fiscal years, respectively.
Provision for Income Taxes
The provision for income taxes reflects the estimated annualized effective
tax rate of 89.5% in the 1998 fiscal year and 42.1% in the 1997 fiscal year.
The increase in the effective tax rate for fiscal 1998 was a result of
recognizing a portion of deferred compensation expense in the amount of $2.1
million in the 1998 fiscal year as a permanent difference for tax purposes.
Liquidity and Capital Resources
Ravenswood has funded is capital requirements primarily with cash flows
from operations, a mix of short-term and long-term borrowings, and the sale of
its securities. Cash and cash equivalents totaled $11.4 million at June 30,
1999 as compared to $102,272 at June 30, 1998. The increase in cash and cash
equivalents is primarily due to the receipt of net proceeds from Ravenswood's
sale of securities completed in December 1998 and the completion of its initial
public offering in April 1999.
Net cash provided by operations was $650,009 for the fiscal year ended
June 30, 1999 and net cash used by operations was $134,111 for the fiscal year
ended June 30, 1999. The principal use of cash from operations in this period
was the acquisition of additional inventory through increased production, while
the principal source of cash was net income.
Net cash used for investing activities totaled $4.7 million for the fiscal
year ended June 30, 1999, as compared to $490,621 for the fiscal year ended
June 30, 1998. The increase was primarily a result of $4.4 million of costs
associated with construction of the Quarry Facility. Approximately $286,000 was
used to repay outstanding loans from Ravenswood's officers in March 1999.
Ravenswood expects that net cash used for investing activities will increase in
the future as additional investments in plant and equipment are made in
completing the Quarry Facililty.
Construction costs for the Quarry facility are currently estimated to be
approximately $9 million and capital equipment purchases financed through
equipment leases are estimated to be $3 million. These values are higher than
previous estimates. The increases are attributable to several factors
including: further definition of program requirements, the addition of capacity
in certain production processes and a tight market for construction services.
Ravenswood intends to make every effort to manage these expenses and stay
within the current budget. Ravenswood does not anticipate any problems
completing the project.
20
<PAGE>
During the fiscal year ended June 30, 1999, Ravenswood agreed to loan W.
Reed Foster, our Chief Executive Officer, up to $335,000 to pay income taxes
due from the receipt of shares issued upon termination of a deferred
compensation agreement. The amount loaned at June 30, 1999 was $310,000.
Ravenswood does not anticipate that further loans will be required under the
agreement.
Net cash provided by financing activities was $15.3 million for the fiscal
year ended June 30, 1999, as compared to $515,043 for the fiscal year ended
June 30, 1998. In the fiscal year ended June 30, 1999, the principal sources of
cash were Ravenswood's sale of securities completed in December 1998 and
proceeds from its initial public offering in April 1999. Additionally, the
Company received funds through long-term debt arrangements. The principal use
of cash from financing activities in this period was for repayment of
obligations under Ravenswood's various short- and long-term borrowing
arrangements and payment of expenses associated with the initial public
offering.
The holders of convertible debentures issued in 1994 may convert to common
stock at any time prior to December 31, 1999. Ravenswood anticipates that all
$815,000 in 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
beginning on January 1, 2000 and ending December 31, 2004.
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 and proceeds from its recent public offering and
other recent financing activities will be sufficient to fund its capital
requirements, including its planned expansion, for at least the next year. 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 ability 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 fund increases in its production level 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 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 is reviewing its information systems for any
potential Year 2000 problem 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. Preliminary estimates of the compliance-related costs, based on
internal projections, are approximately $15,000.
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.
21
<PAGE>
Item 7. Financial Statements and Supplementary Data
RAVENSWOOD WINERY, INC.
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
* * * * *
JUNE 30, 1999
22
<PAGE>
August 13, 1999
To the Board of Directors and Shareholders of
Ravenswood Winery, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying balance sheet and the related statements
of income, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Ravenswood Winery, Inc. at June 30, 1999
and 1998, and the results of its operations and its cash flows for each of the
fiscal years in the three-year period ended June 30, 1999, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
ODENBERG, ULLAKKO, MURANISHI & CO. LLP
San Francisco, California
23
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
BALANCE SHEET
ASSETS
<CAPTION>
June 30,
------------------------------
1999 1998
------------- -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents .................................... $ 11,390,903 $ 102,272
Accounts receivable, less allowance for doubtful accounts of
$10,000 at June 30, 1999 and $10,000 at June 30, 1998 ......... 2,763,418 1,906,498
Prepaid income taxes .......................................... 15,850 73,849
Inventories ................................................... 14,581,973 10,427,359
Prepaid expenses ............................................. 100,826 38,569
Deferred tax assets .......................................... 162,800 270,822
------------- -------------
Total current assets ....................................... 29,015,770 12,819,369
------------- -------------
Property, plant and equipment, less accumulated
depreciation, net .......................................... 9,001,147 2,973,814
------------- -------------
Notes receivable from shareholder .............................. 314,475 28,312
Other assets ................................................... 186,921 155,615
------------- -------------
501,396 183,927
------------- -------------
$ 38,518,313 $ 15,977,110
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt .............................. $ 109,722 $ 194,464
Current portion of capital lease obligations .................. 368,203 189,975
Short-term borrowings .......................................... 1,700,000 1,350,000
Accounts payable ............................................. 3,382,118 2,330,967
Accrued commissions .......................................... 396,358 246,483
Accrued liabilities .......................................... 433,011 381,013
------------- -------------
Total current liabilities .................................... 6,389,412 4,692,902
Long-term liabilities:
Long-term debt, net .......................................... 4,525,231 1,795,665
Notes payable to shareholders, net ........................... -- 50,000
Capital lease obligations, net ................................. 1,551,762 199,719
Convertible debentures ....................................... 2,502,500 865,000
------------- -------------
Total liabilities .......................................... 14,968,905 7,603,286
------------- -------------
Shareholders' equity:
Preferred stock, no par value; 1 million shares authorized,
none issued ................................................ -- --
Common stock, no par value; 20 million shares authorized ...... 14,211,018 2,938,900
Retained earnings ............................................. 9,338,390 5,434,924
------------- -------------
Total shareholders' equity ................................. 23,549,408 8,373,824
------------- -------------
Commitments (See Note 15)
$ 38,518,313 $ 15,977,110
============= =============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
STATEMENT OF INCOME
<CAPTION>
Fiscal year ended June 30,
--------------------------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Gross sales ............................................. $ 23,729,787 $ 17,016,866 $ 12,246,716
Less excise taxes .................................... 908,446 552,499 330,133
Less discounts, returns and
allowances .......................................... 752,655 573,762 393,881
------------ ------------ ------------
Net sales ............................................... 22,068,686 15,890,605 11,522,702
Cost of goods sold ...................................... 10,259,357 7,397,362 5,196,152
------------ ------------ ------------
Gross profit ............................................ 11,809,329 8,493,243 6,326,550
Operating expenses:
Deferred compensation expense ........................ -- 2,206,096 93,292
Other operating expenses ............................. 5,238,493 4,033,747 3,261,303
------------ ------------ ------------
Operating income ........................................ 6,570,836 2,253,400 2,971,955
------------ ------------ ------------
Other income (expense):
Interest expense ..................................... (459,851) (523,551) (392,600)
Impairment loss on vineyard .......................... -- -- (136,144)
Other, net ........................................... 233,481 49,211 91,486
------------ ------------ ------------
(226,370) (474,340) (437,258)
------------ ------------ ------------
Income before income taxes .............................. 6,344,466 1,779,060 2,534,697
Provision for income taxes .............................. 2,441,000 1,592,169 1,066,503
------------ ------------ ------------
Net income .............................................. $ 3,903,466 $ 186,891 $ 1,468,194
============ ============ ============
Basic earnings per share ................................ $ 1.04 $ 0.05 $ 0.40
============ ============ ============
Weighted average number of common
shares outstanding ..................................... 3,763,765 3,512,069 3,656,444
============ ============ ============
Diluted earnings per share .............................. $ 0.96 $ 0.05 $ 0.39
============ ============ ============
Weighted average number of common
shares and equivalents outstanding ..................... 4,171,245 3,814,820 3,959,195
============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
25
<PAGE>
RAVENSWOOD WINERY, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------------- Retained
Shares Amount Earnings Total
---------- ------------- ----------- ------------
<S> <C> <C> <C> <C>
Balance at June 30, 1996 ......... 3,149,998 $ 644,512 $ 4,053,094 $ 4,697,606
Compensation related to deferred
compensation plan ............... 93,292 93,292
Net income ........................ 1,468,194 1,468,194
--------- ------------ ----------- ------------
Balance at June 30, 1997 ............ 3,149,998 737,804 5,521,288 6,259,092
Repurchase of common shares from
former officer .................. (157,500) (5,000) (273,255) (278,255)
Compensation related to deferred
compensation plan ............... 2,206,096 2,206,096
Net income ........................ 186,891 186,891
--------- ------------ ----------- ------------
Balance at June 30, 1998 ............ 2,992,498 2,938,900 5,434,924 8,373,824
Common stock issued:
Initial public offering, net ...... 1,000,000 9,534,618 9,534,618
Private placement .................. 212,623 1,687,500 1,687,500
Convertible debentures ............ 17,500 50,000 50,000
Deferred compensation ............ 345,731
Net income ........................ 3,903,466 3,903,466
--------- ------------ ----------- ------------
Balance at June 30, 1999 ......... 4,568,352 $ 14,211,018 $ 9,338,390 $ 23,549,408
========= ============ =========== ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
26
<PAGE>
RAVENSWOOD WINERY, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal year ended June 30,
-----------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Operations:
Net income .......................................... $ 3,903,466 $ 186,891 $ 1,468,194
Items not requiring the current use of cash:
Depreciation and amortization ..................... 437,760 391,844 395,805
Deferred income taxes .............................. 108,022 (77,868) (56,608)
Deferred compensation .............................. 2,206,096 93,292
Impairment loss on vineyard ........................ 136,144
Changes in other operating items:
Accounts receivable .............................. (856,920) (338,007) (12,721)
Inventories ....................................... (4,154,614) (3,269,357) (2,014,283)
Prepaid income taxes .............................. 57,999 (39,963) 22,006
Prepaid expenses ................................. (62,258) 9,202 (29,734)
Other assets ....................................... (36,469) (8,220) 15,586
Accounts payable ................................. 1,051,151 604,979 475,547
Accrued liabilities and accrued commissions ...... 201,872 200,292 (56,640)
------------ ------------ ------------
Cash provided by (used for) operations ............ 650,009 (134,111) 436,588
------------ ------------ ------------
Investments:
Additions to plant and equipment ..................... (4,397,848) (490,621) (312,386)
Officer receivables, net .............................. (286,163)
------------ ------------ ------------
Cash used for investing activities .................. (4,684,011) (490,621) (312,386)
------------ ------------ ------------
Financing:
Short-term borrowings, net ........................... 350,000 651,801 (351,801)
Proceeds from long-term debt ........................ 2,818,464 410,642
Repayments of long-term debt ........................ (415,688) (269,145) (326,573)
Issuance of common shares ........................... 12,091,489
Stock offering costs ................................. (965,382)
Proceeds from convertible debentures .................. 1,443,750
Repurchase of common shares from former officer (278,255)
------------ ------------ ------------
Cash provided by (used for) financing activities ..... 15,322,633 515,043 (678,374)
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ...... 11,288,631 (109,689) (554,172)
Cash and cash equivalents at beginning of period ...... 102,272 211,961 766,133
------------ ------------ ------------
Cash and cash equivalents at end of period ............ $11,390,903 $ 102,272 $ 211,961
============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
27
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--Organization, operations and summary of significant accounting policies:
Organization
Ravenswood Winery, Inc. (the "Company") was founded in 1976, became a
California Limited Partnership in 1979, and was subsequently incorporated in
the State of California on December 23, 1986. The Company produces, markets,
and sells premium California wines exclusively under the Ravenswood brand name.
Concentration of risk
The Company obtains its grapes from over sixty independent grape growers
and bulk wine suppliers located primarily in Sonoma, Napa and other Northern
California counties. These sources account for 95% or more of its annual wine
production. The Company relies upon certain varietals, notably Zinfandel, which
accounted for approximately 67% of the total dollar sales for the fiscal year
ended June 30, 1999 (63% for the fiscal year ended June 30, 1998). In addition,
the Company relies on the winemaking capacity of other companies and typically
enters into one-year contracts with all custom crush facilities.
The Company performs ongoing credit evaluations of its distributors and
customers and generally does not require collateral. The Company's credit
losses have been within the reserves provided.
The Company places its cash and temporary cash investments with financial
institutions. At June 30, 1999 and periodically throughout the fiscal year,
such investments were in excess of FDIC insurance limits.
A summary of significant accounting policies follows:
Revenue recognition
Sales are recorded when merchandise is shipped.
Cash and cash equivalents
The Company considers all short-term interest-bearing investments with
original maturities of less than three months to be cash equivalents. These
investments are currently held in U.S. Treasuries, commercial paper, government
securities and money market funds.
Inventories
Inventories are stated at the lower of cost or market (on the first-in,
first-out basis), and include finished goods, raw materials, packaging
materials and product merchandise. Finished goods include costs of raw
materials (grapes and bulk wine), packaging, labor used in wine production,
bottling, warehousing and overhead on winery facilities and equipment.
Costs associated with growing crops are recorded as inventory and are
recognized as inventory costs in the fiscal year in which the related crop is
harvested.
In accordance with general practice in the wine industry, wine inventories
are included in current assets although a portion of such inventories may be
aged for periods longer than one year.
Property, plant and equipment
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized. Costs incurred in developing vineyards, including interest costs,
are capitalized until the vineyards become commercially productive. When assets
are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts, and any resulting gains or losses are included in income in
the year of disposition. Depreciation is computed using both the straight-line
and accelerated methods over the estimated useful lives of the assets, ranging
from five to thirty-nine years. Leased equipment under capitalized leases are
generally amortized over the shorter of the terms of the leases or their
estimated useful lives.
28
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Interest is capitalized in connection with the construction of a new
facility (the "Quarry Facility"). The capitalized interest is recorded as part
of the Quarry Facility cost and will be amortized over the asset's estimated
useful life. In fiscal 1999, $30,992 in interest costs were capitalized and
included in construction in progress. No interest was capitalized in fiscal
1998 or 1997.
Impairment of long-lived assets is measured on the basis of anticipated
undiscounted cash flows for each asset. Based upon the Company's analysis, a
$136,144 impairment loss relating to its vineyards was reported for the fiscal
year ended June 30, 1997. The impairment loss can be found under other income
and expenses in the accompanying statement of income. No impairment loss was
recognized for the fiscal years ended June 30, 1999 and 1998.
Income taxes
Deferred income taxes are computed using the liability method. Under the
liability method, taxes are recorded based on the future tax effects of the
difference between the tax and financial reporting bases of the Company's
assets and liabilities.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results when ultimately realized could differ from
those estimates.
Fair value of financial instruments
The carrying amounts of accounts receivable, prepaid expenses, accounts
payable, accrued liabilities, short-term borrowings, long-term debt, capital
lease obligations and convertible debentures are reasonable estimates of the
fair value of these financial instruments.
Earnings per share
Basic earnings per share represents income available to common
shareholders divided by the weighted average number of common shares
outstanding during the measurement period, after giving retroactive effect to:
1) shares issued under a deferred compensation arrangement in July 1998 (see
Note 11); 2) the 63 to 1 stock split in February 1999 (see Note 13); and 3)
common stock issued in December 1998 (using the "treasury stock method") at
prices below the initial public offering price of $10.50 (see Note 13).
Diluted earnings per share represents the income available to common
shareholders divided by: 1) the weighted average number of common shares
outstanding during the measurement period, after giving retroactive effect to
a) shares issued under a deferred compensation arrangement in July 1998, b) the
stock split in February 1999, and c) common stock issued in December 1998
(using the "treasury stock method") at prices below the initial public offering
price of $10.50 per share; and 2) the potentially dilutive common shares
issuable for convertible debt that were outstanding during the measurement
period.
Stock-based compensation
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). As permitted by SFAS 123, the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. Accordingly, no accounting recognition is given to stock
options granted at fair market value until they are exercised. Upon exercise,
net proceeds, including income tax benefits realized, are credited to equity.
29
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Reclassification of financial statement presentation
Certain prior period amounts have been reclassified in order to conform to
the fiscal 1999 financial statement presentation.
New accounting pronouncements
SFAS No. 130, Reporting Comprehensive Income, establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general purpose financial
statements. SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same prominence as
other financial statements. The adoption of SFAS 130 is not expected to have a
material impact on the Company's financial statements.
SFAS No. 131, Disclosures about Segment Reporting of an Enterprise and
Related Information, establishes standards for reporting information about
operating segments in annual financial statements and requires that those
enterprises report selected information about segments in interim financial
reports issued to shareholders. This statement establishes a management
approach to segment reporting and requires quarterly reporting of selected
segment information and entity-wide disclosures about products and services and
major customers. The Company's business is managed on the basis of multiple
products and brands within one segment, the wine industry.
NOTE 2--Inventories:
Inventories are summarized as follows:
June 30,
-------------------------------
1999 1998
-------------- --------------
Bulk wine ............... $ 10,355,759 $ 7,898,937
Bottled wine ............ 3,870,548 2,285,862
Crop costs ............... 88,725 37,691
Supplies ................. 124,298 72,902
Tasting room merchandise . 142,643 131,967
------------- -------------
$ 14,581,973 $ 10,427,359
============= =============
Certain of the foregoing assets are pledged as security for certain
indebtedness (see Notes 5 and 6).
30
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 3--Property, plant and equipment:
Property, plant and equipment is summarized as follows:
June 30,
-----------------------------
1999 1998
------------- -------------
Land ................................. $ 245,135 $ 245,135
Vineyards ........................... 134,033 56,264
Vineyards under development ......... 211,440 235,879
Building and improvements ............ 1,647,637 1,647,637
Leasehold improvements ............... 174,331 94,828
Machinery and equipment ............ 835,850 706,164
Barrels and equipment held under
capital leases ..................... 2,623,977 870,468
Tanks .............................. 145,688 145,688
Office equipment ..................... 131,127 110,678
Transportation equipment ............ 38,469 12,409
------------ ------------
6,187,687 4,125,150
Less--accumulated depreciation ...... 1,653,074 1,220,480
------------ ------------
4,534,613 2,904,670
Construction in progress ............ 4,466,534 69,144
------------ ------------
$ 9,001,147 $ 2,973,814
============ ============
Included in property, plant and equipment are barrels and equipment leased
under capital leases with cost and accumulated depreciation totaling $2,623,977
and $691,493, respectively, at June 30, 1999; and $870,468 and $472,185,
respectively, at June 30, 1998.
Included in construction in progress is $30,992 in interest capitalized
for the fiscal year ended June 30, 1999. There was no interest capitalized for
the fiscal years ended June 30, 1998 and 1997.
Substantially all of the property, plant and equipment is pledged as
security for certain indebtedness (see Notes 5, 6, and 8).
NOTE 4--Notes receivable from officer:
The note receivable from officer at June 30, 1999 consists of a $310,000
note bearing annual interest at 5.3% ($4,475 at June 30, 1999), payable in
annual interest only installments commencing December 21, 1999 until maturity
on December 21, 2008. The Company provided the loan to the officer to pay taxes
related to his receipt of common stock under a deferred compensation plan (see
Note 11). The notes receivable at June 30, 1998 consist of two unsecured notes
bearing annual interest at 8.5% which were repaid in fiscal 1999.
NOTE 5--Short-term borrowing arrangements:
At June 30, 1999, the Company has a $2 million revolving line of credit
with Pacific Coast Farm Credit Services, ACA (the "Association") that expires on
June 1, 2001. The loan agreement provides that the principal advances under the
facility cannot exceed certain percentages of eligible accounts receivable and
wine inventories as defined in the agreement. The borrowings bear annual
interest at a variable rate established by the Association (8.11% and 8.86% at
June 30, 1999 and 1998, respectively). The borrowings are secured by the
Company's accounts receivable, wine inventories and equipment. Borrowings under
the line of credit at June 30, 1999 and 1998 were $1,700,000 and $1,350,000,
respectively.
31
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
The revolving credit line and certain of the long-term debt contain
various covenants which include, among other things, a requirement to maintain
a minimum working capital of $3.25 million, a ratio of liabilities to tangible
net worth of not greater than 1.5 to 1, a current ratio of at least 1.75 to 1
and restrictions on the payment of dividends and distributions to shareholders.
NOTE 6--Long-term debt:
<TABLE>
Long-term debt is summarized as follows:
<CAPTION>
June 30,
-----------------------------
1999 1998
------------- -------------
<S> <C> <C>
Note payable to Pacific Coast Farm Credit Services, ACA
("Association") with annual interest at a variable rate established by
the Association (6.9% and 7.65% at June 30, 1999 and 1998,
respectively), payable in quarterly interest installments until December
1, 1999 and commencing March 1, 2000 in quarterly principal and
interest installments of $34,795 through December 1, 2024, secured
by property and equipment (see Note 3) .............................. $ 1,552,500 $ 1,552,500
Construction mortgage loan payable ($4.58 million commitment) to the
Association with annual interest at a variable rate established by the
Association (6.9% at June 30, 1999), payable in quarterly interest
installments until January 1, 2001 and commencing April 1, 2001 in
quarterly principal and interest installments of $98,117 through
January 1, 2026, secured by leaseholds, property and equipment
(see Note 3) ......................................................... 2,013,353
Construction revolving equity line of credit payable to the Association
with annual interest at a variable rate established by the Association
(6.9% and 7.65% at June 30, 1999 and 1998, respectively), payable
in quarterly interest only installments until December 1, 1999 and
commencing March 1, 2000 in equal quarterly principal and interest
installments through December 1, 2024, secured by property and
equipment (see Note 3) ................................................ 835,000 29,887
Note payable to the Association with annual interest at a variable rate
established by the Association (8.11% and 8.86% at June 30, 1999
and 1998, respectively), payable in quarterly principal and interest
installments of $17,390 through June 1, 2002, secured by accounts
receivable and wine inventories ....................................... 175,459 227,265
Other notes payable with annual interest ranging from 10% to 11%,
payable in monthly principal and interest installments as defined to
November 2000 through June 2001 ....................................... 58,641 65,334
------------ ------------
4,634,953 1,874,986
Less--current portion ................................................ 109,722 79,321
------------ ------------
$ 4,525,231 $ 1,795,665
============ ============
</TABLE>
The construction mortgage loan payable includes $1.69 million in payables
to contractors that was funded on July 26, 1999; and $284,000 in retainage
payable expected to be funded upon completion of the Quarry Facility.
32
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Scheduled annual maturities of long-term debt are as follows:
$109,722--fiscal 2000; $129,715--fiscal 2001; $146,925--fiscal 2002; $89,601--
fiscal 2003; $92,541--fiscal 2004; and $4,066,449 thereafter.
NOTE 7--Notes payable to shareholders:
<TABLE>
Notes payable to shareholders are summarized as follows:
<CAPTION>
June 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Notes payable to Joel Peterson, unsecured, with annual interest ranging
from 10% to 11%, due on demand and on June 30, 2004 .................. $-- $ 46,143
Notes payable to W. Reed Foster, unsecured, with annual interest ranging
from 10% to 11%, due on demand and on June 30, 2004 .................. -- 119,000
----------- -----------
-- 165,143
Less--current portion ................................................ -- 115,143
----------- -----------
$-- $ 50,000
=========== ===========
</TABLE>
NOTE 8--Capital lease obligations:
The Company leases barrels and other equipment that are accounted for as
capital leases. Minimum future lease payments under the capital leases are as
follows:
Fiscal year
- - -----------
2000 ............................................. $ 447,611
2001 ............................................. 460,633
2002 ............................................. 396,313
2003 ............................................. 306,254
2004 ............................................. 265,460
Thereafter ....................................... 435,235
------------
Net minimum lease payments ........................ 2,311,506
Less--amount representing interest (7%) ......... 391,541
------------
Present value of net minimum lease payments ...... 1,919,965
Less--current portion ........................... 368,203
------------
$ 1,551,762
============
The net book value of leased barrels and equipment included in property,
plant and equipment at June 30, 1999 is $1,932,484 (see Note 3).
The Company has obtained a $3,250,000 lease line commitment for the
acquisition of oak barrels, various stainless steel cooperage and wine
production equipment. At June 30, 1999, approximately $1.5 million is available
under this agreement.
33
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 9--Convertible debentures:
Convertible debentures are summarized as follows:
June 30,
---------------------------
1999 1998
------------- -----------
1998 convertible debentures ...... $ 1,687,500
1994 convertible debentures ...... 815,000 $ 865,000
------------ ----------
$ 2,502,500 $ 865,000
============ ==========
In December 1998, the Company completed a sale of $1,687,500 in
convertible debentures due December 31, 2008. 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, the
Company may redeem them at face value at any time during the period from
January 1, 2004 until the maturity date. The Company pays interest quarterly on
the debentures in an amount equal to the prime interest rate quoted by Bank of
America NT & SA plus 1% (8.75% at June 30, 1999). 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 1994, the Company completed a sale of $865,000 in 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. If the debentures are not converted, the Company may
redeem them at face value at any time during the period from January 1, 2000
until the maturity date. The Company pays interest quarterly on the debentures
in an amount equal to a floating index tied to prime bank rates for a five year
period (9.25% and 9.5% at June 30, 1999 and 1998, respectively). 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%. During the
fiscal year ended June 30, 1999, $50,000 of the 1994 debentures were converted
into 17,500 shares of common stock.
NOTE 10--Income taxes:
The provision for income taxes is as follows:
Fiscal year ended June 30,
----------------------------------------------
1999 1998 1997
------------- ------------- --------------
Current tax expense:
Federal .................. $ 1,831,000 $ 1,306,069 $ 868,184
State and local ......... 502,000 363,968 254,927
------------ ----------- -----------
2,333,000 1,670,037 1,123,111
------------ ----------- -----------
Deferred tax expense (benefit):
Federal .................. 55,000 (71,875) (48,771)
State and local ......... 53,000 (5,993) (7,837)
------------ ----------- -----------
108,000 (77,868) (56,608)
------------ ----------- -----------
$ 2,441,000 $ 1,592,169 $ 1,066,503
============ =========== ===========
Deferred income taxes are provided for the temporary differences between
the financial reporting and tax bases of the Company's assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
34
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Deferred tax assets and liabilities are comprised of the following:
June 30,
------------------------
1999 1998
----------- ---------
Deferred tax assets:
Deferred compensation .................. $ 240,882
State taxes ........................... $ 170,000 37,074
--------- ---------
170,000 277,956
--------- ---------
Deferred tax liabilities:
Depreciation and amortization ......... (7,200) (7,134)
--------- ---------
Net deferred tax asset ...................... $ 162,800 $ 270,822
========= =========
<TABLE>
A reconciliation of income tax computed at the federal statutory corporate
tax rate to the provision for income taxes follows:
<CAPTION>
Fiscal year ended June 30,
-------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ -----------------------
Amount % Amount % Amount %
------------- ---------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at federal statutory rate ...... $ 2,157,118 34.0 % $ 604,880 34.0 % $ 861,797 34.0 %
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of
federal benefit ........................... 368,613 5.81% 228,567 12.85% 155,630 6.14%
Permanent differences (including a
portion of deferred compensation
expense for fiscal 1998) .................. (84,731) (1.34)% 758,722 42.64% 49,076 1.94%
----------- --------- ------------ ------ ------------ ------
$ 2,441,000 38.47% $ 1,592,169 89.49% $ 1,066,503 42.08%
=========== ========= ============ ====== ============ ======
</TABLE>
NOTE 11--Deferred compensation agreement:
On August 25, 1992, the Company entered into a deferred compensation
agreement with its chairman and chief executive officer, W. Reed Foster. The
agreement established an account with 5,487.8 units. Each unit was the
equivalent value of one share of common stock and contained an equivalent right
to cash and common stock dividends and all stock splits and other benefits paid
to the shareholders of the Company. Compensation expense relating to this
agreement was $2,206,096 and $93,292 for fiscal 1998 and 1997, respectively,
and is included in operating expenses in the accompanying statement of income.
As of July 1, 1998, the deferred compensation agreement was terminated and
the Company issued 345,731 shares of common stock to Mr. Foster. No
compensation expense was incurred for the fiscal year ended June 30, 1999.
NOTE 12--Voting trust:
On August 25, 1992, the Board of Directors authorized the creation of a
Voting Trust for certain shares of the common stock of the Company. On November
1, 1993, the shareholders approved the terms and conditions contained in the
Trust which provides for four trustees, who currently are: Joel Peterson, W.
Reed Foster, Justin Faggioli and Callie S. Konno. The original Voting Trust
Agreement was replaced by a Voting Trust Agreement which is dated May 27, 1998
and which extends to May 26, 2008. As long as Mr. Peterson is a trustee, all
decisions except decisions to amend or terminate the Voting Trust require the
approval of Mr. Peterson and two other trustees. If Mr. Peterson is no longer a
trustee
35
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
of the Voting Trust, all decisions require the approval of the remaining
trustees; however, decisions to amend or terminate the Voting Trust require the
approval of the three remaining trustees and Mr. Peterson's successor trustee
(who shall be appointed by the three remaining trustees). At June 30, 1999,
2,150,681 shares of common stock primarily owned by members of the Board of
Directors were subject to the terms of the Voting Trust.
NOTE 13--Shareholders' equity:
In December 1998, the Company completed a sale of 212,623 shares of common
stock, resulting in proceeds to the Company of $1,687,500.
On February 1, 1999, the Board of Directors declared a 63 to 1 stock split
of the Company's common stock. All shares and per share data have been restated
to reflect the stock split.
In April 1999, the Company completed a public offering of 1,000,000 shares
of common stock, resulting in net proceeds, after deducting underwriting fees
and other costs, to the Company of $9,534,618.
NOTE 14--Stock option and employee stock purchase plans:
Stock option plan
On February 1, 1999, the Company's Board of Directors established the 1999
Equity Incentive Plan to provide for the grant of incentive stock options,
non-qualified stock options, restricted stock awards and other stock-based
awards to the Company's officers, employees, directors, independent
contractors, consultants, vendors and suppliers. No awards may be granted under
the Plan after January 2009, but the vesting of awards previously granted may
extend beyond that date.
Under the Equity Incentive Plan, the Company is authorized to grant
incentive stock options, non-qualified stock options, restricted stock awards
and other stock based awards for a total of 500,000 shares of common stock. The
stock options may not be granted for less than the fair market value of the
common stock at the date of grant. The stock options are exercisable over a
period determined by the Board at the time of grant, but not to exceed ten
years after the date they are granted. The Company has granted options to
purchase an aggregate of 279,500 shares of common stock in connection with its
initial public offering. These options generally vest over a five-year period
from the date of grant and expire five to ten years after the date of grant.
The per share weighted average fair value of stock options granted during
the fiscal year ended June 30, 1999 was $4.86. This amount was determined using
the Black-Scholes option-pricing model, which values options based on the stock
price at the date of grant, the expected life of the option, the estimated
volatility of the stock, expected dividend payments, and the risk-free interest
rate over the expected life of the option. The assumptions used in the
Black-Scholes model are as follows: a weighted average expected life of 5
years; an expected volatility of common stock of 46.4%; and a weighted average
risk-free interest rate of 5.24%. No dividend yield was used, as the Company
has not paid dividends in the past and does not anticipate paying dividends in
the future.
The Company applies APB No. 25 in accounting for its stock plan and,
accordingly, no compensation costs have been recognized in the Company's
financial statements for incentive or non-qualified stock options granted. If,
under SFAS 123, the Company determined compensation costs based on the fair
value at the grant date for its stock options, the net income of $3,903,466 as
reported for fiscal 1999 would compare to a pro forma net income of $3,846,173.
Basic and diluted earnings per share as reported for fiscal 1999 of $1.04 and
$0.96, respectively, would compare to pro forma basic and diluted earnings per
share of $1.02 and $0.94, respectively.
36
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
A summary of the status of the Equity Incentive Plan as of June 30, 1999
and changes during the fiscal year then ended is presented below:
<CAPTION>
June 30, 1999
--------------------------
Weighted
Number Average
of Exercise
Shares Price
------------- ----------
<S> <C> <C>
Outstanding at beginning of fiscal year ..................... --
Granted ...................................................... 279,500 $10.88
Exercised ................................................... -- --
-------- -------
Forfeited ................................................... -- --
-------- -------
Outstanding at end of fiscal year ........................... 279,500 $10.88
======== =======
Options exercisable at fiscal year-end ........................ None
Weighted average grant-date fair value of options granted during
the fiscal year whose exercise price equaled market price on
date of grant ................................................ $ 4.86
=======
</TABLE>
No option was granted in fiscal 1999 whose exercise price was greater or
less than its market price on the date of grant.
<TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1999:
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ -------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
- - -------------------- ------------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
$10.50 - $11.55 279,500 7.97 years $10.88 -- --
</TABLE>
At June 30, 1999, the outstanding stock options expire as follows: 100,000
on April 4, 2004 and 179,500 on April 4, 2009.
Employee Stock Purchase Plan
On February 1, 1999, the Company's Board of Directors adopted and the
Company's shareholders approved the Employee Stock Purchase Plan with 50,000
shares of common stock available for issuance thereunder. The Plan, which is
intended to qualify as an employee stock purchase plan under Section 423 of the
Internal Revenue Code, provides that all employees of the Company, including
directors of the Company who are employees, whose customary employment is more
than 20 hours per week for more than five months in any calendar year, are
eligible to participate in the Plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of the stock
of the Company or any subsidiary are not eligible to participate. Eligible
employees may elect to have up to 10% of their earnings withheld and applied to
the purchase of common stock at a price equal to a minimum of 85% of the
average market price per share (as defined in the Plan) of the common stock on
either the first day or the last day of the relevant offering period, whichever
is lower. An employee may not purchase more than 500 shares in any one offering
period. No shares of common stock have been issued pursuant to the Plan to
date.
37
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 15--Commitments and contingencies:
The Company leases certain warehouse space under noncancellable operating
leases that terminate on dates ranging from September 2000 to September 2002.
Under the terms of certain of the leases, rent is contingent on the amount of
bulk wine and/or case goods stored at any given time and is adjusted annually
for increases in building operating costs.
In January 1999, the Company entered into an agreement to lease
approximately 20 acres of land in Sonoma County, California from Sandra D.
Donnell and Bruce B. Donnell, the wife and brother-in-law, respectively, of
Justin M. Faggioli, the Company's Executive Vice President. The Company is in
the process of building a new winery facility (the "Quarry Facility") on the
leased property, to expand its production capacity. The lease provides for
monthly payments that are adjusted annually and for a lease term ending
December 31, 2032. In addition, the lease provides the Company with a right of
first refusal to purchase a portion of the property and a first option to rent
upon its expiration if specific conditions are met. Rent expense under this
lease was $31,007 for the fiscal year ended June 30, 1999.
At June 30, 1999, the estimated costs to complete the construction of the
Quarry Facility are approximately $4.5 million to $5.5 million.
Rental expense (including contingent rent) was $701,889, $468,616 and
$317,507 for fiscal 1999, 1998 and 1997, respectively. Minimum future rental
payments for each of the next five fiscal years and thereafter are as follows:
$306,089 - fiscal 2000; $257,688 - fiscal 2001; $246,077 - fiscal 2002;
$121,461 - fiscal 2003; $80,356 - fiscal 2004; and $894,828 thereafter.
The Company typically contracts with various growers and certain wineries
to supply its grape and bulk wine requirements. While most of these contracts
call for prices to be determined by market conditions, several long-term
contracts provide for minimum grape or bulk wine purchase prices.
NOTE 16--401(k) savings plan:
The Company has a 401(k) savings plan that is available to eligible
employees. Employer contributions to the plan are at the discretion of the
Board of Directors and amounted to $67,866, $53,089 and $41,057 for fiscal
1999, 1998 and 1997, respectively.
NOTE 17--Earnings per share:
Basic earnings per share represents income available to common
shareholders divided by the weighted average number of common shares
outstanding during the measurement period, after giving retroactive effect to:
1) shares issued under a deferred compensation arrangement in July 1998 (see
Note 11); 2) the 63 to 1 stock split in February 1999 (see Note 13); and 3)
common stock issued in December 1998 (using the "treasury stock method") at
prices below the initial public offering price of $10.50 (see Note 13).
Diluted earnings per share represents the income available to common
shareholders divided by: 1) the weighted average number of common shares
outstanding during the measurement period, after giving retroactive effect to
a) shares issued under a deferred compensation arrangement in July 1998, b) the
stock split in February 1999, and c) common stock issued in December 1998
(using the "treasury stock method") at prices below the initial public offering
price of $10.50; and the potentially dilutive common shares issuable for
convertible debt that was outstanding during the measurement period.
38
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
A summary of the basic and diluted earnings per share calculations is as follows:
<CAPTION>
Fiscal year ended June 30,
--------------------------------------------
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
BASIC
Average shares outstanding[A] ........................... 3,696,801 3,005,625 3,150,000
Shares issued under deferred compensation
arrangement[B] ........................ 345,731 345,731
Shares issued in December 1998[C] ..................... 66,964 160,713 160,713
------------ ----------- ------------
Weighted average number of common shares
outstanding .......................................... 3,763,765 3,512,069 3,656,444
============ =========== ============
Net income ............................................. $ 3,903,466 $ 186,891 $ 1,468,194
============ =========== ============
Per share amount ....................................... $ 1.04 $ 0.05 $ 0.40
Fiscal year ended June 30,
--------------------------------------------
1999 1998 1997
------------- ------------ -------------
DILUTED ................................................
Average shares outstanding[A] ........................ 3,696,801 3,005,625 3,150,000
Shares issued under deferred compensation
arrangement[B] ....................................... 345,731 345,731
Shares issued in December 1998[C] ..................... 66,964 160,713 160,713
Net effect of potentially dilutive common stock
issuable for convertible debentures .................. 407,480 302,751 302,751
------------ ----------- ------------
Weighted average number of shares and
equivalents outstanding .............................. 4,171,245 3,814,820 3,959,195
============ =========== ============
Net income ............................................. $ 3,903,466 $ 186,891 $ 1,468,194
Interest on convertible debt, net of tax benefit ...... 112,836 49,305 55,793
------------ ----------- ------------
Net income, after adding interest on debentures ...... $ 4,016,302 $ 236,196 $ 1,523,987
============ =========== ============
Per share amount ....................................... $ 0.96 $ 0.05 $ 0.39
============ =========== ============
<FN>
- - ------------
[A] Reflects the retroactive effect of the 63 to 1 stock split approved in February 1999.
[B] Reflects the retroactive effect of the shares issued under a deferred compensation arrangement in
July 1998.
[C] Represents the retroactive effect using the "treasury stock method" for common stock issued in
December 1998 at prices below the initial public offering price.
</FN>
</TABLE>
NOTE 18--Supplemental cash flow information:
Cash paid for interest, net of amounts capitalized, was $542,127, $484,670
and $378,162 for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively. Cash paid for income taxes was $2,275,000, $1,660,344 and
$1,125,404 for the fiscal years ended June 30, 1999, 1998 and 1997,
respectively.
39
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
A summary of non-cash investing and financing information is as follows:
<CAPTION>
Fiscal year ended June 30,
-----------------------------------------
1999 1998 1997
------------- ----------- -----------
<S> <C> <C> <C>
Plant and equipment purchased with capitalized
leases and notes payable ..................... $ 1,778,569 $ 241,086 $ 336,409
============ ========== ==========
Construction in progress acquired by issuing
convertible debentures and common shares to
related parties .............................. $ 283,511
============
Convertible debentures redeemed for common
shares ....................................... $ 50,000
============
Convertible debentures issued by reclassifying
note and interest payable to shareholder ...... $ 56,250
============
</TABLE>
40
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Reference is made to the information regarding Directors appearing under
the caption "Nominees for the Board of Directors" in Ravenswood's proxy
statement to be mailed to shareholders on or about September 29, 1999, which
information is incorporated herein by reference; and to the information under
the heading "Executive Officers of the Company" in Part I hereof.
Item 10. Executive Compensation
The information appearing under the caption "Executive Compensation" in
Ravenswood's proxy statement to be mailed to shareholders on or about September
29, 1999, is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information appearing under the caption "Director's and Officer's
Ownership of our common stock" in Ravenswood's proxy statement to be mailed to
shareholders on or about September 29, 1999, is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions
The information appearing under the caption "Certain Transactions" in
Ravenswood's proxy statement to be mailed to shareholders on or about September
29, 1999, is incorporated herein by reference.
PART IV
ITEM 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
<TABLE>
(a) 1. Financial Statements
<CAPTION>
<S> <C>
The financial statements listed below appear on the pages indicated:
Balance Sheets at June 30, 1998 and 1999..................................................23
Statements of Income for the years ended June 30, 1999, 1998 and 1997.....................24
Statements of Shareholders' Equity for the years ended June 30, 1999, 1998 and 1997.......25
Statements of Cash Flows for the years ended June 30, 1999, 1998 and 1997..............26
Notes to Financial Statements.............................................................27
</TABLE>
2. Financial Statement Schedules
None.
3. Exhibits
See the exhibits listed under Item 14(c), which are filed herewith or
incorporated by reference herein. Each management contract or
compensation plan or arrangement required to be filed has been
identified.
(b) Reports on Forms 8-K
During the fourth quarter of fiscal 1999, the Registrant had no Form
8-K filings.
41
<PAGE>
(c) Exhibits
The exhibits listed below are filed or incorporated by reference herein.
Exhibit
Number Description of Document
- - ------- -----------------------
3.1 Amended and Restated Articles of Incorporation of Ravenswood Winery,
Inc., filed as exhibit 3.1 to our Registration Statement on Form SB-2
filed with the Commission on February 4, 1999 and incorporated herein
by this reference.
3.2 Amended and Restated Bylaws of Ravenswood Winery, Inc., filed as
exhibit 3.2 to our Registration Statement on Form SB-2 filed with the
Commission on February 4, 1999 and incorporated herein by this
reference.
4.1 Specimen Stock Certificate, filed as exhibit 4.1 to amendment no. 2
to our Registration Statement on Form SB-2 filed with the Commission
on April 2, 1999 and incorporated herein by this reference.
9.1 Voting Trust Agreement, filed as exhibit 9.1 to amendment no. 2 to
our Registration Statement on Form SB-2 filed with the Commission on
April 2, 1999 and incorporated herein by this reference.
10.1 1999 Equity Incentive Plan for Ravenswood Winery, Inc., filed as
exhibit 10.1 to our Registration Statement on Form SB-2 filed with
the Commission on February 4, 1999 and incorporated herein by this
reference.*
10.2 Employee Stock Purchase Plan for Ravenswood Winery, Inc., filed as
exhibit 10.2 to our Registration Statement on Form SB-2 filed with
the Commission on February 4, 1999 and incorporated herein by this
reference.*
10.3 Form of Indemnification Agreement for Ravenswood Winery, Inc., filed
as exhibit 10.3 to our Registration Statement on Form SB-2 filed with
the Commission on February 4, 1999 and incorporated herein by this
reference.
10.4 Revolving Line of Credit Promissory Note and Agreement with Pacific
Coast Farm Credit Services, ACA, dated as of April 1, 1998, filed as
exhibit 10.4 to our Registration Statement on Form SB-2 filed with
the Commission on February 4, 1999 and incorporated herein by this
reference.
10.5 Revolving Equity Line of Credit Promissory Note and Loan Agreement
with Pacific Coast Farm Credit Services, ACA, dated as of April 8,
1998, filed as exhibit 10.5 to our Registration Statement on Form
SB-2 filed with the Commission on February 4, 1999 and incorporated
herein by this reference.
10.6 Notes payable from Ravenswood Winery, Inc. to W. Reed Foster, filed
as exhibit 10.6 to our Registration Statement on Form SB-2 filed with
the Commission on February 4, 1999 and incorporated herein by this
reference.
10.7 Notes payable from Ravenswood Winery, Inc. to Joel E. Peterson and
notes payable from Joel E. Peterson to Ravenswood Winery, Inc.
10.8 Quarry Winery Lease Agreement, dated as of January 1, 1999, filed as
exhibit 10.8 to our Registration Statement on Form SB-2 filed with
the Commission on February 4, 1999 and incorporated herein by this
reference.
42
<PAGE>
Exhibit
Number Description of Document
- - -------- -----------------------
10.9 Stock Agreement and Amendment of Voting Trust by and between
Ravenswood Winery, Inc. and W. Reed Foster effective as of July 1,
1998 and note payable from W. Reed Foster to Ravenswood Winery, Inc.,
filed as exhibit 10.9 to our Registration Statement on Form SB-2
filed with the Commission on February 4, 1999 and incorporated herein
by this reference.
10.10 Form of Convertible Subordinated Debenture dated as of January 1995,
filed as exhibit 10.10 to our Registration Statement on Form SB-2
filed with the Commission on February 4, 1999 and incorporated herein
by this reference.
10.11 Form of Convertible Subordinated Debenture dated as of December 1998,
filed as exhibit 10.11 to amendment no. 1 to our Registration
Statement on Form SB-2 filed with the Commission on March 18, 1999
and incorporated herein by this reference.
10.12 Marketing, Sales Agency and Administrative Services Agreement between
Ravenswood Winery, Inc. and Harvest Wines, Inc., filed as exhibit
10.12 to our Registration Statement on Form SB-2 filed with the
Commission on February 4, 1999 and incorporated herein by this
reference.
11.1 Statement of Computation of Earnings Per Share.
23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP.
25.1 Power of Attorney (see p. 43).
27.1 Financial Data Schedule.
- - ------------
* Management contract or compensation plan or arrangement.
43
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the issuer has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on September 27, 1999.
RAVENSWOOD WINERY, INC.
/s/ W. Reed Foster
-----------------------------------------
W. Reed Foster, Chairman of the Board and
Chief Executive Officer
/s/ Callie S. Konno
-----------------------------------------
Callie S. Konno, Chief Financial Officer,
Treasurer and Director (Principal Financial Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints W. Reed Foster, Joel E. Peterson, Justin M.
Faggioli and Callie S. Konno, and each of them, such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, for such person in any and all capacities, to sign any
amendments to this Report on Form 10-KSB and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or such attorney-in-fact's substitute or substitutes, may do
or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE ISSUER
AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ W. Reed Foster Chairman of the Board and Chief Executive September 27, 1999
- - ----------------------------- Officer (Principal Executive Officer)
W. Reed Foster
/s/ Joel E. Peterson President, Winemaker and Director September 27, 1999
- - -----------------------------
Joel E. Peterson
/s/ Justin M. Faggioli Executive Vice President, Secretary and Director September 27, 1999
- - -----------------------------
Justin M. Faggioli
/s/ Callie S. Konno Chief Financial Officer, Treasurer and September 27, 1999
- - ----------------------------- Director (Principal Financial and
Callie S. Konno Accounting Officer)
/s/ James F. Wisner Director September 27, 1999
- - -----------------------------
James F. Wisner
/s/ Robert E. McGill, III Director September 27, 1999
- - -----------------------------
Robert E. McGill, III
</TABLE>
44
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Ravenswood Winery, Inc. (File No. 333- 85735) of our
report dated August 13, 1999, on our audits of the financial statements of
Ravenswood Winery, Inc. as of June 30, 1999 and 1998 and for the three years in
the period ended June 30, 1999, which report is included in this 10-KSB.
Odenberg, Ullakko, Muranishi & Co. LLP
San Francisco, California
September 28, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
RAVENSWOOD WINERY, INC. APPENDIX A TO ITEM 601(c) OF
REGULATION S-B COMMERCIAL AND INDUSTRIAL COMPANIES ARTICLE 5
OF REGULATION S-X
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 11,390,903
<SECURITIES> 0
<RECEIVABLES> 2,773,418
<ALLOWANCES> 10,000
<INVENTORY> 14,581,973
<CURRENT-ASSETS> 29,015,770
<PP&E> 10,654,221
<DEPRECIATION> 1,653,074
<TOTAL-ASSETS> 38,518,313
<CURRENT-LIABILITIES> 6,389,412
<BONDS> 4,634,953
0
0
<COMMON> 14,211,018
<OTHER-SE> 9,338,390
<TOTAL-LIABILITY-AND-EQUITY> 38,518,313
<SALES> 22,068,686
<TOTAL-REVENUES> 22,068,686
<CGS> 10,259,357
<TOTAL-COSTS> 5,238,493
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 459,851
<INCOME-PRETAX> 6,344,466
<INCOME-TAX> 2,410,000
<INCOME-CONTINUING> 3,903,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,903,466
<EPS-BASIC> 1.04
<EPS-DILUTED> 0.96
</TABLE>
