As filed with the Securities and Exchange Commission on April 5, 1999
Registration No. 333-71729
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment No. 3 to
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RAVENSWOOD WINERY, INC.
(Exact name of registrant as specified in its charter)
California 94-3026706
------------------------- -------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2080
-------------------------
(Primary Standard Industrial
Classification Code)
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18701 Gehricke Road
Sonoma, California 95476
(707) 938-1960
(Address, including zip code and telephone number,
including area code of registrant's principal executive offices)
---------------
Justin M. Faggioli
Executive Vice President and Secretary
18701 Gehricke Road
Sonoma, California 95476
(707) 938-1960
(Name, address, including zip code and
telephone number, including area code of agent for service)
---------------
Copies to:
Bruce Maximov, Esq. Mark P. Tanoury, Esq.
Maria L. Pizzoli, Esq. Vincent P. Pangrazio, Esq.
David E. Stoll, Esq. Nicole C. Deiger, Esq.
Farella Braun & Martel LLP Cooley Godward LLP
235 Montgomery Street 3000 Sand Hill Road
San Francisco, California 94104 Building 3, Suite 230
Menlo Park, California 94025
Approximate date of commencement of proposed sale to public: As soon as
practicable after the registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: [ ]
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<TABLE>
CALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
Proposed Maximum Proposed Maximum
Title of Securities to Amount to be Offering Aggregate Offering Amount of
be Registered Registered(1) Price Per Share(2) Price(1)(2) Registration Fee(3)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par value per share 1,150,000 shares $13.50 $15,525,000 $4,315.95
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Includes up to 150,000 shares of Common Stock that the Underwriters have
the option to purchase to cover over-allotments, if any. See
"Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act, as amended.
(3) Previously paid.
</FN>
</TABLE>
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
================================================================================
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an
offer to sell securities, and we are not soliciting offers to buy these
securities, in any state where the offer or sale is not permitted.
Initial Public Offering Prospectus
Subject to Completion, April 5, 1999
1,000,000 shares of common stock
$ __________________ per share
[Ravenswood Logo] Ravenswood Winery
Ravenswood Winery, Inc. We produce, market and sell premium
18701 Gehricke Road California wines exclusively under the
Sonoma, California 95476 Ravenswood brand name.
(707) 938-1960
The Offering
Per Share Total
----------- -------
Public Price ............... $ $
Underwriting discounts and
commissions ............... $ $
Proceeds to Ravenswood ...... $ $
This is our initial public offering and no
public market currently exists for our
shares. We expect that the price will be
between $10.50 and $13.50 per share. That
price may not reflect the market price of our
shares after the offering.
Proposed Trading Symbol:
The Nasdaq National Market -- RVWD
------------
This offering involves a high degree of risk. You should purchase shares only
if you can afford a complete loss. See "Risk Factors" beginning on page 4.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
We have entered into a firm commitment underwriting agreement with W.R.
Hambrecht & Company, LLC for the sale of the shares in this offering. We have
granted the underwriter a 30-day option to purchase up to an additional 150,000
shares of common stock to cover over-allotments. The underwriter expects to
deliver the shares to purchasers on _____________________, 1999.
WR HAMBRECHT & CO
_____________________, 1999
<PAGE>
[GRAPHIC OMITTED]
(Full-page photograph of three bottles of Ravenswood wine)
<PAGE>
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
------------
TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY ........................................................ 1
THE OFFERING .............................................................. 2
SUMMARY FINANCIAL DATA .................................................... 3
RISK FACTORS .............................................................. 4
FORWARD-LOOKING STATEMENTS ................................................ 9
RAVENSWOOD ................................................................ 10
USE OF PROCEEDS ........................................................... 10
DIVIDEND POLICY ........................................................... 10
CAPITALIZATION ............................................................ 11
DILUTION .................................................................. 12
SELECTED FINANCIAL DATA ................................................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................................... 14
BUSINESS .................................................................. 23
MANAGEMENT ................................................................ 42
CERTAIN TRANSACTIONS ...................................................... 49
PRINCIPAL SHAREHOLDERS .................................................... 51
DESCRIPTION OF CAPITAL STOCK .............................................. 53
SHARES ELIGIBLE FOR FUTURE SALE ........................................... 56
PLAN OF DISTRIBUTION ...................................................... 58
LEGAL MATTERS ............................................................. 60
EXPERTS ................................................................... 60
ENGAGEMENT OF NEW AUDITORS ................................................ 60
ADDITIONAL INFORMATION .................................................... 61
INDEX TO FINANCIAL STATEMENTS ............................................. F-1
------------
"Ravenswood," the Ravenswood logo and the slogan "No Wimpy Wines" are federally
registered trademarks of Ravenswood Winery, Inc. All other trademarks or
tradenames referred to in this prospectus are the property of their respective
owners.
<PAGE>
PROSPECTUS SUMMARY
Our Business: We produce, market and sell premium California wines
exclusively under the Ravenswood brand name. The majority of
the wines we produce and sell are red wines, including Merlot,
Cabernet Sauvignon and, particularly, Zinfandel. Our 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.
Our Market: Gomberg, Fredrickson and Associates, a consulting firm that
collects and publishes information about the wine industry,
estimates that shipments of California premium wines within
the United States have grown from approximately $866 million
in 1987 to $3.6 billion in 1997. We believe this growth can be
attributed, among other things, to an increasingly
discriminating customer base that is willing to pay for higher
quality wines. By focusing our product portfolio on red wines,
which have accounted for the majority of the growth in the
market for premium wines in the United States in recent years,
we believe we are well positioned to benefit from the
favorable trend in the demand for California premium wines.
Our Products: Our wines target specific varietals and prices within the
super-premium and ultra-premium categories of the premium wine
market. We believe our products offer our customers high
quality and demonstrable value withing each of our three
product series:
o the value-priced Vintners Blend Series, with a suggested
retail price of approximately $9.75 to $11.25 per 750 ml
bottle;
o the intermediate-priced County Series, with a suggested
retail price of approximately $12 to $18.50 per 750 ml
bottle; and
o the higher-priced Vineyard Designate Series, with a
suggested retail price of approximately $18 to $31.50 per
750 ml bottle.
We rely almost exclusively upon grapes supplied by third
parties, and we use leased storage and crush facilities for a
substantial portion of our wine production. We also purchase
bulk wine of superior quality from third parties to
incorporate into some of our products. We believe that this
approach has enabled us to sustain the growth necessary to
capitalize on favorable trends in the demand for California
premium wines, while minimizing our investment of capital in
the acquisition and development of land and capital equipment
until our production levels warranted further investment.
1
<PAGE>
Our Brand: We have made significant investments in the development of the
Ravenswood brand name, packaging and trademarks, and expect to
continue to do so in the future. We believe that the
distinctive Ravenswood name, our unique logo, and our
trademarked slogan, "No Wimpy Wines," convey a recognizable
and high-quality image that has contributed to our success.
Our Distribution: We do not have an in-house sales staff. We have developed a
broad network of brokers and distributors throughout the
United States and in more than 15 export markets. We sell our
products directly in California, using five warehouses
throughout the state and seven brokers. Elsewhere, we use a
network of over 75 distributors. We also sell our wines
directly through mail order in the United States, where
permitted by law, as well as through the tasting room in our
Gehricke Road Facility in Sonoma, California.
THE OFFERING
Type of security ........................... Common stock
Shares to be offered ....................... 1,000,000 shares
Common stock to be outstanding after the
offering ...................................4,550,852 shares
Use of proceeds ........................... For wine inventory, for expansion
of production facilities, for
general corporate purposes and for
retirement of indebtedness
Proposed Nasdaq National Market symbol ..... RVWD
The common stock to be outstanding after the offering as shown above is based on
shares outstanding on December 31, 1998, excluding:
o 500,000 shares of common stock reserved for issuance under our 1999
Equity Incentive Plan
o 50,000 shares of common stock reserved for issuance under our Employee
Stock Purchase Plan
o up to 454,622 shares of common stock issuable upon conversion of
outstanding convertible debentures
o 150,000 shares of common stock issuable upon the exercise of the
underwriter's over-allotment option
The method of distribution being used by the underwriter in this offering
differs somewhat from that traditionally employed in firm commitment
underwritten public offerings. In particular, the public offering price and
allocation of shares will be determined primarily by an auction process
conducted by the underwriter and other securities dealers participating in this
offering. A more detailed description of this process is included in "Plan of
Distribution."
We have applied to list the common stock on The Nasdaq National Market; however,
cannot assure you that a trading market for the common stock will develop or how
liquid that market might be. You may not be able to resell your shares at or
above the initial public offering price.
2
<PAGE>
<TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data and Other Data)
<CAPTION>
Six Months Ended
Fiscal Year Ended June 30, December 31,
------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
Gross Sales ..................................... $ 6,340 $ 8,548 $ 11,028 $ 12,247 $ 17,017 $ 8,855 $ 12,195
Less Excise Taxes .............................. 142 237 249 330 553 197 276
Less Discounts, Returns and
Allowances .................................... 440 409 556 394 574 273 337
-------- -------- -------- -------- -------- -------- --------
Net Sales ....................................... 5,758 7,902 10,223 11,523 15,890 8,385 11,582
Cost of Goods Sold .............................. 2,826 3,834 4,886 5,196 7,397 3,652 5,066
-------- -------- -------- -------- -------- -------- --------
Gross Profit .................................... 2,932 4,068 5,337 6,327 8,493 4,733 6,516
Operating Expenses:
Deferred Compensation Expense .................. 72 166 207 93 2,206 -- --
Other Operating Expenses ....................... 1,890 1,930 2,642 3,262 4,034 1,852 2,340
-------- -------- -------- -------- -------- -------- --------
Operating Income ................................ 970 1,972 2,488 2,972 2,253 2,881 4,176
Other Income (Expense) .......................... 55 (192) (297) (437) (474) (114) (147)
-------- -------- -------- -------- -------- -------- --------
Income Before Income Taxes ...................... 1,025 1,780 2,190 2,535 1,779 2,767 4,029
Provision for Income Taxes ...................... 433 763 921 1,067 1,592 1,133 1,744
-------- -------- -------- -------- -------- -------- --------
Net Income ...................................... $ 592 $ 1,017 $ 1,269 $ 1,468 $ 187 $ 1,634 $ 2,285
======== ======== ======== ======== ======== ======== ========
Basic Earnings per Share ........................ $ 0.16 $ 0.28 $ 0.35 $ 0.40 $ 0.05 $ 0.47 $ 0.66
======== ======== ======== ======== ======== ======== ========
Weighted Average Number of
Common Shares Outstanding ...................... 3,636 3,636 3,636 3,636 3,492 3,505 3,479
Diluted Earnings per Share ...................... $ 0.16 $ 0.27 $ 0.33 $ 0.39 $ 0.05 $ 0.44 $ 0.61
======== ======== ======== ======== ======== ======== ========
Weighted Average Number of
Common Shares and Equivalents
Outstanding .................................... 3,636 3,884 3,939 3,939 3,795 3,808 3,847
June 30, December 31, 1998
------------------------------------------------------- --------------------
As
1994 1995 1996 1997 1998 Actual Adjusted
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (Audited) (Unaudited)
Balance Sheet Data:
Cash & Cash Equivalents ......................... $ 213 $ 925 $ 766 $ 212 $ 102 $ 3,171 $ 14,401
Inventories ..................................... 2,787 3,979 5,144 7,158 10,427 12,931 12,931
Property, Plant and Equipment, Net .............. 84 2,075 2,445 2,647 2,974 3,870 3,870
Total Assets .................................... 4,161 9,068 10,591 12,040 15,977 23,224 34,454
Current Liabilities ............................. 2,054 3,135 3,231 3,159 4,693 5,532 5,532
Long-Term Liabilities ........................... 79 2,723 2,662 2,622 2,910 5,345 5,345
Total Shareholders' Equity ...................... 2,028 3,210 4,698 6,259 8,374 12,347 23,577
</TABLE>
Fiscal Year
Ended June 30,
------------------------ Six Months Ended
1997 1998 December 31, 1998
---------- --------- -----------------
(Unaudited) (Unaudited)
Other Data:
Cases Sold ................. 131,175 191,655 130,493
Average Price Per Case ..... $ 91.58 $ 87.37 $ 92.03
Earnings per share and outstanding share amounts are computed on the basis
described in notes 1 and 15 to our financial statements.
As adjusted balance sheet data reflects the sale of the 1,000,000 shares of
common stock in this offering at an assumed initial public offering price of
$12.00 per share after deducting underwriting fees and commissions and estimated
offering expenses payable by us, and the receipt and application of the
estimated net proceeds from this offering.
3
<PAGE>
RISK FACTORS
A reduction in consumer demand for premium red wines could harm our business.
Because a large percentage of the wines we produce are premium red wines,
including Merlot, Cabernet Sauvignon and in particular, Zinfindel, our business
would be harmed if consumer demand for red wines in general, or Zinfandel in
particular, failed to grow or declined. An overall reduction in consumer demand
for premium wine would also harm our business.
A reduction in the supply of grapes and bulk wine available to us from the
independent grape growers and bulk wine suppliers on whom we rely could reduce
our annual production of wine
We rely on annual contracts, many of which are not in writing, with over 60
independent growers to purchase substantially all of the grapes used in our wine
production. We cannot assure you that we will be able to contract for the
purchase of grapes at acceptable prices from these or other suppliers in the
future. The terms of many of our purchase agreements also constrain our ability
to discontinue purchasing grapes in circumstances where we might want to do so.
Those agreements provide that, while either party may terminate the agreement at
any time, both parties must continue to abide by its terms for three years
following termination.
We are dependent on bulk wine suppliers for the production of several of our
wines, particularly our Vintners Blend Series. We do not have contracts with
bulk wine suppliers or agreements that would protect us from fluctuations in the
price or availability of bulk wine. The availability and price of bulk wine
significantly affect the quality and production levels of our products that
contain bulk wine. The price, quality and available quantity of bulk wine have
fluctuated in the past. It is possible that we will not be able to purchase bulk
wine of acceptable quality at acceptable prices and quantities in the future,
which could increase the cost or reduce the amount of wine we produce for sale.
This could cause reductions in our sales and profits.
Bad weather, plant diseases and other factors could reduce the amount or quality
of the grapes we need to produce our wines
A shortage in the supply of quality grapes may result from the occurence 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
4
<PAGE>
harvest. Therefore, the inventory of our 1998 vintage may be less than that of
our 1997 vintage. As a result, the growth of our sales may be limited in fiscal
years 2000 and 2001, when most of our 1998 vintage will be released for sale.
Factors which reduce the quantity of grapes may also reduce their quality, which
in turn could reduce the quality or amount of wine we produce. A deterioration
in the quality of our wines could harm our brand name, and a decrease in our
production could reduce our sales and profits.
Although we grow only a small portion of the grapes we use, our business is
still subject to numerous agricultural risks. Most of the vineyards that supply
our grapes are primarily planted to rootstocks believed to be resistant to
Phylloxera, a pest that feeds on susceptible grape rootstocks. However, we
cannot be certain that these vineyards, or vineyards from which we obtain grapes
in the future, will not become susceptible to current or new strains of
Phylloxera, plant insects or diseases. Any resulting reduction in grape supply
could reduce our sales and profits.
An oversupply of grapes may also harm our business by increasing the supply of
wine sold by our competitors
The recent increase in demand for premium wine has resulted in the planting of
additional vineyards, both domestically and internationally, and the replanting
of existing vineyards to greater densities, which could result in a significant
increase in the supply of premium wine grapes. An oversupply of grapes may
significantly increase the amount of premium wine produced. An increase in the
supply of premium wine may reduce the price of premium wines. This oversupply of
premium wines could harm our business because we only produce premium wines.
Oversupply may also increase the amount of premium wine available to our
distributors and retail outlets, which would increase competition in our
distribution channels.
The loss of Mr. Foster, Mr. Peterson or other key employees would damage our
reputation and business
We believe that our success largely depends on the continued employment of a
number of our key employees, including W. Reed Foster, our chairman and chief
executive officer, and Joel E. Peterson, our president and winemaker. Any
inability or unwillingness of Mr. Foster, Mr. Peterson or other key management
team members to continue in their present capacities could harm our business and
our reputation. For instance, if Mr. Peterson's relationship with Ravenswood
were to terminate for any reason, we would need to find a successor winemaker.
We cannot be certain that we could find or hire a successor winemaker with
skills equivalent to those of Mr. Peterson.
Because a significant amount of our sales is made through brokers, a change in
our relationship with any of them could harm our business
In the 1998 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
21% of our gross sales in the 1998 fiscal year, and our ten most successful
brokers were responsible for 69% of our gross sales in the 1998 fiscal year.
5
<PAGE>
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 accounted for approximately 23% of our gross sales for
the 1998 fiscal year, and we expect that sales to our ten largest distributors
will continue to represent a substantial portion of our sales in the future. The
laws and regulations of several states prohibit distributor changes except under
limited circumstances. As a result, it may be difficult for us to replace
distributors that do not perform adequately, which may reduce our sales and
profits.
Our business may be harmed if our distributors fail to market our products
effectively
We depend largely on our distributors in areas outside California to market our
products to the restaurants and retail outlets they service. Other premium wine
producers, as well as the producers of alternative beverages, compete for our
distributors' marketing resources. A failure by our distributors to market our
products as effectively as they, or other distributors, market our competitors'
products could harm our business.
The market price of our stock may fluctuate due to seasonal fluctuations in our
wine sales, operating expenses and net income
We experience seasonal and quarterly fluctuations in sales, operating expenses
and net income. Generally, the second and third quarters of our fiscal year have
lower sales volumes than the first and fourth quarters. We have managed, and
will continue to manage, our business to achieve long-term objectives. In doing
so, we may make decisions that we believe will enhance our long-term
profitability, even if these decisions may reduce quarterly earnings. These
decisions include: (a) when to release our wines for sale; (b) how to position
our wines competitively; and (c) which grape and bulk wine sources to use to
produce our wines. In addition, fluctuations in our distributors' inventory
levels may affect our sales volume. These and other factors relating to
seasonality and business decisions may cause fluctuations in the market price of
our common stock.
We also compete with popular low-priced "generic" wines and with beer and other
alcoholic and non-alcoholic beverages both for demand and for access to
distribution channels. Many of the producers of these beverages also have
significantly greater financial, technical, marketing and public relations
resources than we do. Our sales may be harmed to the extent any alternative
beverages are introduced that compete with wine. We may not be able to compete
successfully against these wine or alternative beverage producers.
A reduction in our access to, or an increase in the cost of, the third-party
services we use to produce our wine could harm our business
We utilize several third-party facilities, of which there is a limited supply,
for the production activities associated with our wines. Our inability in the
future to use these or alternative facilities, at reasonable prices or at all,
could increase the cost or reduce the amount of our production, which could
reduce our sales and our profits. We do not have long-term agreements with any
of these facilities. The activities conducted at outside facilities include: (a)
crushing; (b) fermentation; (c) storage; (d) blending; and (e) bottling. Our
reliance on these third parties varies according to the type of production
activity. As production increases, we must increasingly rely upon these
third-party production facilities. Reliance on third parties will also vary with
annual harvest volumes.
6
<PAGE>
A failure to complete the expansion of our facilities as planned could limit our
production of wine and harm our business
We are currently building a new facility, which we are calling the Quarry
Facility, in order to increase our production capacity. 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. Although we believe that we will have access
to sufficient capital to complete the facility, we may need additional
financing. For instance, unpredicted cost overruns or uninsured losses incurred
during construction could consume all budgeted capital and reserves before
completion. If additional capital were needed, we cannot assure you that we
would be able to obtain it.
We expect to utilize the Quarry Facility fully upon its completion. As a result,
any further expansion of our production capacity may require us to use
third-party production facilities or to continue to expand our own production
capacity. Our failure to expand our production capacity, or to secure capacity
from third parties, either at acceptable prices or at all, could limit our
production and reduce our sales and/or profits.
Adverse public opinion about alcohol may harm our business
While a number of research studies suggest that moderate alcohol consumption may
provide various health benefits, other studies conclude or suggest that alcohol
consumption has no health benefits and may increase the risk of stroke, cancer
and other illnesses. An unfavorable report on the health effects of alcohol
consumption could significantly reduce the demand for wine, which could harm our
business and reduce our sales and profits.
In recent years, activist groups have used advertising and other methods to
inform the public about the societal harms associated with the consumption of
alcoholic beverages. These groups have also sought, and continue to seek,
legislation to reduce the availability of alcoholic beverages, to increase the
penalties associated with the misuse of alcoholic beverages, or to increase the
costs associated with the production of alcoholic beverages. Over time, these
efforts could cause a reduction in the consumption of alcoholic beverages
generally, which could harm our business and reduce our sales and profits.
Contamination of our wines would harm our business
Because our products are designed for human consumption, our business is subject
to hazards and liabilities related to food products, such as contamination. A
discovery of contamination in any of our wines, through tampering or otherwise,
could result in a recall of our products. Any recall would significantly damage
our reputation for product quality, which we believe is one of our principal
competitive assets, and could seriously harm our business and sales. Although we
maintain insurance to protect against these risks, we may not be able to
maintain insurance on acceptable terms and this insurance may not be adequate to
cover any resulting liability.
7
<PAGE>
Increased regulatory costs or taxes would harm our financial performance
The wine industry is regulated extensively by the Federal Bureau of Alcohol,
Tobacco and Firearms, various foreign agencies, and state and local liquor
authorities. These regulations and laws dictate various matters, including:
o Excise taxes
o Licensing requirements
o Trade and pricing practices
o Permitted distribution channels
o Permitted and required labeling
o Advertising
o Relationships with distributors and retailers
Recent and future zoning ordinances, environmental restrictions and other legal
requirements may limit our plans to expand our production capacity, as well as
any future development of new vineyards and wineries. In addition, federal
legislation has been proposed that could significantly increase excise taxes on
wine. Other federal legislation has been proposed which would prevent us from
selling wine directly through the mail. 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.
Because our existing shareholders will retain significant control over
Ravenswood after this offering, new investors will not have as much influence on
corporate decisions as they would if control were less concentrated
Following this offering and assuming that all debentures held by our directors
and executive officers and their respective affiliates have been converted, our
directors and executive officers and their respective affiliates will
beneficially own 2,225,641 shares of common stock, or approximately 48.5% of our
outstanding common stock. Of these shares, 2,131,151 shares, plus an additional
19,530 shares not held of record by Ravenswood's affiliates, have been placed in
a voting trust. The trustees of this voting trust are Messrs. Foster, Peterson,
Faggioli, and Wisner, all of whom serve as directors of Ravenswood. As a result,
Messrs. Foster, Peterson, Faggioli and Wisner have significant influence in the
election of directors and the approval of corporate actions that must be
submitted for a vote of shareholders.
The interests of these affiliates may conflict with the interests of other
shareholders, and the actions they take or approve may be contrary to those
desired by the other shareholders. This concentration of ownership may also have
the effect of delaying, preventing or deterring an acquisition of Ravenswood by
a third party.
Natural disasters, including earthquakes or fires, could destroy our facilities
or our inventory
The Gehricke Road Facility, the Quarry Facility and all of the third-party
facilities we use to produce and store our wine are located in areas that are
subject to earthquake activity. If we lost all or a portion of our wine prior to
its sale or distribution as a result of earthquake activity, we would lose our
investment in, and anticipated profits and cash flows from, that wine. Such a
loss would seriously harm our business and reduce our sales and profits.
In addition, we must store our wine in a limited number of locations for a
period of time prior to its sale or distribution. Any intervening catastrophies,
such as a fire, that result in
8
<PAGE>
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.
The fact that the offering is relatively small in size, is being managed by a
single underwriter and involves some novel aspects of distribution could limit
the market price, liquidity or trading volume of our stock
We are offering only 1,000,000 shares and these shares are being sold by a
single underwriter, W.R. Hambrecht & Company, LLC. These factors may prevent us
from obtaining as much research coverage from market analysts after the offering
as we might obtain for an offering of greater size or for one managed by
multiple underwriters. This reduced level of coverage may limit the market
price, liquidity or trading volume of our common stock. In addition, the
approach being used by the underwriter for the distribution of the shares
differs somewhat from the distribution approach currently used in traditional
underwritten offerings of equity securities. The novel aspects of this
distribution approach could affect the pricing of the shares, which could cause
greater price volatility than if the distribution were done in the traditional
manner.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are usually accompanied by words
such as "believes," "anticipates," "plans," "expects" and similar expressions.
Our actual results could differ materially from those anticipated in these
forward-looking statements as a result of many factors, including those set
forth under "Risk Factors" and elsewhere in this prospectus.
Investing in our common stock is risky. You should carefully consider the
preceding risks before making an investment decision. These risks are not the
only ones that we face. Additional risks that generally apply to publicly traded
companies and companies in our industry, that we have not yet identified or that
we think are immaterial may also impair our business operations. Our business,
operating results and financial condition could be adversely affected by any of
the preceding risks. The trading price of our common stock could decline due to
any of these risks, and you could lose all or part of your investment. You
should also refer to the other information set forth in this prospectus,
including our financial statements and the related notes.
9
<PAGE>
RAVENSWOOD
We originally formed Ravenswood as a partnership in 1976 and reorganized as a
limited partnership in 1979. We were incorporated in the State of California in
1986. We maintain our principal executive offices at 18701 Gehricke Road,
Sonoma, California 95476. Our telephone number is (707) 938-1960 and our Web
site is located at www.ravenswood-wine.com. Information contained on our Web
site does not constitute a part of this prospectus.
USE OF PROCEEDS
We estimate that we will receive net proceeds of $11,230,000 from the sale of
the 1,000,000 shares of common stock in this offering, assuming an initial
public offering price of $12.00 per share and after deducting estimated
underwriting discounts and offering expenses. While we cannot predict with
certainty how the net proceeds of this offering will be used, we currently
intend to use them approximately as follows:
Amount Percent
----------- -----------
For wine inventory ................................ $ 6,000,000 53%
For expansion of production facilities ............ $ 4,000,000 36%
For general corporate purposes and retirement of
indebtedness .................................... $ 1,230,000 11%
----------- -----------
Total ............................................. $11,230,000 100%
As of December 31, 1998, borrowings of an aggregate of approximately $1,529,887
were outstanding under our two lines of credit and we expect that approximately
the same amounts will be outstanding under the lines of credit on the closing
date of this offering. As of December 31, 1998, the lines of credit had the
following maturities, balances, interest rates and uses:
Maturity Balance Interest Rate Use
- ------------------------- ---------- ------------- ------------------------
June 1, 2001 ............ $ 950,000 8.3% For working capital
December 1, 2024 ........ $ 579,887 7.1% To fund the construction
of the Quarry Facility
The cost, timing and amount of funds required cannot be precisely determined at
this time and will be based on numerous factors. Our board of directors has
broad discretion in determining how the proceeds of this offering will be
applied. We intend to invest the net proceeds in short-term, investment grade
interest-bearing obligations until they are used.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not anticipate
paying cash dividends in the foreseeable future. We currently intend to retain
any future earnings to develop and expand our business. The terms of our credit
agreements impose restrictions on our ability to declare and pay dividends.
10
<PAGE>
CAPITALIZATION
<TABLE>
The following table sets forth our capitalization as of December 31, 1998, (a)
on an actual basis and (b) on an as adjusted basis after giving effect to the
sale of the 1,000,000 shares of common stock in this offering at an assumed
public offering price of $12.00 per share and the receipt of the estimated net
proceeds from this offering. This table only presents summary information. In
reading it, you should refer to our financial statements and related notes,
which are included elsewhere in this prospectus.
<CAPTION>
December 31, 1998
-------------------------
As
Actual Adjusted
------- -------
(in thousands)
<S> <C> <C>
Long-Term Debt--including current portion ...................................................... $ 5,544 $ 5,544
------- -------
Shareholders' Equity:
Preferred Stock, no par value; 1,000,000 shares authorized and none
outstanding (actual and as adjusted) ....................................................... -- --
Common Stock, no par value; 20,000,000 shares authorized and
3,550,852 outstanding (actual); 20,000,000 authorized and 4,550,852
outstanding (as adjusted) .................................................................. 4,627 15,857
Retained Earnings ........................................................................... 7,720 7,720
------- -------
Total Shareholders' Equity .................................................................. 12,347 23,577
======= =======
Total Capitalization ........................................................................... $17,891 $29,121
======= =======
</TABLE>
Authorized and outstanding share information reflects board and shareholder
approval in February 1999 of the authorization of 1,000,000 shares of preferred
stock and an increase in the number of authorized shares of common stock from
1,000,000 to 20,000,000.
The common stock outstanding as shown above is based on shares outstanding as of
December 31, 1998 and excludes:
o 500,000 shares of common stock reserved for issuance under our 1999
Equity Incentive Plan
o 50,000 shares of common stock reserved for issuance under our Employee
Stock Purchase Plan
o up to 454,622 shares of common stock issuable upon conversion of
outstanding convertible debentures
o 150,000 shares of common stock issuable upon the exercise of the
underwriter's over-allotment option
11
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1998 was approximately $12.2
million, or $3.44 per share of outstanding common stock. Net tangible book value
per share is equal to our total tangible assets less our total liabilities,
divided by the number of outstanding shares of common stock. Dilution per share
represents the difference between the price per share paid by investors in this
offering and the as adjusted net tangible book value per share immediately after
this offering.
<TABLE>
After giving effect to the sale of the 1,000,000 shares of common stock in this
offering at an assumed initial public offering price of $12.00 per share, after
deducting the estimated fees payable to the underwriter and offering expenses
payable by us, our as adjusted net tangible book value at December 31, 1998
would have been approximately $23.4 million, or $5.15 per share. This represents
an immediate dilution of $6.85 per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution:
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share .................... $ 12.00
--------
Net tangible book value per share as of December 31, 1998 ....... $ 3.44
Increase per share attributable to new investors ................ 1.71
-------
As adjusted net tangible book value after this offering ......... 5.15
--------
Dilution per share to new investors in this offering ............... $ 6.85
========
</TABLE>
<TABLE>
The following table summarizes, on a pro forma basis after giving effect to the
offering, the number of shares purchased from us, the total consideration paid
and the average price per share paid by existing shareholders and by the new
investors purchasing the shares offered in this offering, assuming an initial
public offering price of $12.00 per share:
<CAPTION>
Shares Purchased Total Consideration Average
------------------------- --------------------------- Price Paid
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders .................... 3,550,852 78.0% $ 4,626,400 27.8% $ 1.30
New public investors ..................... 1,000,000 22.0% $12,000,000 72.2% $ 12.00
--------- ----- ----------- -----
Total ................................. 4,550,852 100.0% $16,626,400 100.0%
</TABLE>
This information is based on shares outstanding on December 31, 1998, and
excludes:
o 500,000 shares of common stock reserved for issuance under our 1999
Equity Incentive Plan
o 50,000 shares of common stock reserved for issuance under our Employee
Stock Purchase Plan
o up to 454,622 shares of common stock issuable upon conversion of
outstanding convertible debentures
o 150,000 shares of common stock issuable upon the exercise of the
underwriter's over-allotment option
12
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth our selected financial data as of and for each of
the fiscal years in the five-year period ended June 30, 1998, as of December 31,
1998 and for the six-month periods ended December 31, 1997 and 1998. The
statements of operations data for each of the fiscal years in the two-year
period ended June 30, 1998 and the balance sheet data as of June 30, 1997 and
1998 have been derived from our financial statements, audited by Odenberg,
Ullakko, Muranishi & Co. LLP, independent auditors, which are included elsewhere
in this prospectus. The statements of operations data for each of the fiscal
years in the three-year period ended June 30, 1996 and the balance sheet data as
of June 30, 1994, 1995 and 1996 have been derived from our unaudited financial
statements, which are not included in this prospectus.
The statements of operations data for the six-month periods ended December 31,
1997 and 1998 and the balance sheet data as of December 31, 1998 have been
derived from our unaudited financial statements that include, in the opinion of
our management, all normal and recurring adjustments that our management
considers necessary for a fair statement of the quarterly results. The operating
results for the six months ended December 31, 1998 are not necessarily
indicative of results that may be expected for the year ending June 30, 1999.
Earnings per share and outstanding share amounts were computed on the basis
described in notes 1 and 15 to our financial statements.
<TABLE>
The following information is qualified by reference to, and should be read in
conjunction with, "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the financial statements and related notes
included in this prospectus.
<CAPTION>
Six Months Ended
Fiscal Year Ended June 30, December 31,
------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (Audited) (Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
(In thousands, except per share data)
Gross Sales ..................................... $ 6,340 $ 8,548 $ 11,028 $ 12,247 $ 17,017 $ 8,855 $ 12,195
Less Excise Taxes .............................. 142 237 249 330 553 197 276
Less Discounts, Returns and Allowances ......... 440 409 556 394 574 273 337
-------- -------- -------- -------- -------- -------- --------
Net Sales ....................................... 5,758 7,902 10,223 11,523 15,890 8,385 11,582
Cost of Goods Sold .............................. 2,826 3,834 4,886 5,196 7,397 3,652 5,066
-------- -------- -------- -------- -------- -------- --------
Gross Profit .................................... 2,932 4,068 5,337 6,327 8,493 4,733 6,516
Operating Expenses:
Deferred Compensation Expense .................. 72 166 207 93 2,206 -- --
Other Operating Expenses ....................... 1,890 1,930 2,642 3,262 4,034 1,852 2,340
-------- -------- -------- -------- -------- -------- --------
Operating Income ................................ 970 1,972 2,488 2,972 2,253 2,881 4,176
Other Income (Expense) .......................... 55 (192) (297) (437) (474) (114) (147)
-------- -------- -------- -------- -------- -------- --------
Income Before Income Taxes ...................... 1,025 1,780 2,190 2,535 1,779 2,767 4,029
Provision for Income Taxes ...................... 433 763 921 1,067 1,592 1,133 1,744
-------- -------- -------- -------- -------- -------- --------
Net Income ...................................... $ 592 $ 1,017 $ 1,269 $ 1,468 $ 187 $ 1,634 $ 2,285
======== ======== ======== ======== ======== ======== ========
Basic Earnings per Share ........................ $ 0.16 $ 0.28 $ 0.35 $ 0.40 $ 0.05 $ 0.47 $ 0.66
======== ======== ======== ======== ======== ======== ========
Weighted Average Number of Common Shares
Outstanding .................................... 3,636 3,636 3,636 3,636 3,492 3,505 3,479
Diluted Earnings per Share ...................... $ 0.16 $ 0.27 $ 0.33 $ 0.39 $ 0.05 $ 0.44 $ 0.61
======== ======== ======== ======== ======== ======== ========
Weighted Average Number of Common Shares
and Equivalents Outstanding .................... 3,636 3,884 3,939 3,939 3,795 3,808 3,847
June 30,
-------------------------------------------------------
1994 1995 1996 1997 1998 December 31, 1998
-------- -------- -------- -------- -------- --------------------
(Unaudited) (Audited) (Unaudited)
Balance Sheet Data:
(In thousands)
Cash & Cash Equivalents .......................... $ 213 $ 925 $ 766 $ 212 $ 102 $ 3,171
Inventories ...................................... 2,787 3,979 5,144 7,158 10,427 12,931
Property, Plant and Equipment, Net ............... 84 2,075 2,445 2,647 2,974 3,870
Total Assets ..................................... 4,161 9,068 10,591 12,040 15,977 23,224
Current Liabilities .............................. 2,054 3,135 3,231 3,159 4,693 5,532
Long-Term Liabilities ............................ 79 2,723 2,662 2,622 2,910 5,345
Total Shareholders' Equity ....................... 2,028 3,210 4,698 6,259 8,374 12,347
</TABLE>
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus.
Except for historical information, the discussion in this prospectus contains
forward-looking statements that involve risks and uncertainties. Ravenswood's
actual results could differ materially from those discussed below. Factors that
could cause or contribute to these differences include, among others, those
discussed below, in "Risk Factors" and elsewhere in this prospectus.
Overview
Ravenswood produces, markets and sells premium California wines exclusively
under the Ravenswood brand name. The vast majority of wines produced and sold by
Ravenswood are red wines, including Merlot, Cabernet Sauvignon and,
particularly, Zinfandel. To a lesser extent, Ravenswood produces white wines,
including Chardonnay, French Colombard and Gewurztraminer. Ravenswood's red
wines accounted for approximately 91% of its gross sales in the 1998 fiscal
year, with sales of Zinfandel accounting for approximately 63% of its gross
sales for that period. Ravenswood believes that sales of its red wines,
particularly Zinfandel, will continue to account for a significant portion of
its sales in the future.
Ravenswood was founded as a partnership in 1976 by W. Reed Foster, Ravenswood's
chairman and chief executive officer, and Joel E. Peterson, Ravenswood's
president and winemaker. In its initial year of operation, Ravenswood harvested
and crushed Zinfandel grapes from two Sonoma County vineyards. In 1979,
Ravenswood converted to a limited partnership and released its first wines,
consisting of 327 cases of the 1976 vintage Zinfandel. Ravenswood incorporated
in California in 1986.
Since its inception, Ravenswood has grown by increasing its production volume
and its portfolio of wine products. For the fiscal year ended June 30, 1998,
Ravenswood realized gross sales of $17.0 million from the sale of 191,655 cases
and Ravenswood branded merchandise.
The mix of products sold in any given period affects Ravenswood's gross profit
as a percentage of net sales, or gross margin. In particular, as sales of the
value-priced Vintners Blend Series have increased as a percentage of gross
sales, Ravenswood's gross margin has decreased. The gross margin for the
Vintners Blend Series is traditionally more variable than Ravenswood's
higher-priced product series because a significant portion of the wine used in
these products is purchased in the bulk market rather than produced by
Ravenswood from grapes acquired from its traditional grape suppliers. Ravenswood
has no bulk wine purchase contracts, and the price, quality and available
quantity of bulk wine have fluctuated in the past and Ravenswood expects that
they will continue to fluctuate in the future.
The timing for release of Ravenswood's products, particularly its County Series
and Vineyard Designate Series, also significantly affects Ravenswood's sales in
specific periods. Ravenswood traditionally releases new vintages of its Vineyard
Designate Series in the fourth fiscal quarter or the first fiscal quarter of the
subsequent fiscal year. In addition, the release dates of some of Ravenswood's
County Series wines fluctuate between the third and fourth fiscal quarters of
each fiscal year. The timing of these release dates is based upon the
winemakers' determination as to the optimal flavor characteristics of these
wines. Release dates have fluctuated in the past and can be expected to continue
to fluctuate from year to year, which may make comparison of results on a
period-to-period basis less meaningful.
14
<PAGE>
The nature of the winemaking process, including the need for wine to be aged
before it is released, requires Ravenswood to incur significant expenses in
producing products which may not generate revenues until up to two years later.
Any factors that may prevent or delay the sale of Ravenswood's wines at the
prices anticipated at the time of their production could adversely affect its
liquidity and reduce its profits.
The pricing for grapes obtained from Ravenswood's suppliers is determined
annually by reference to benchmark price quotations or through negotiation. As a
result, the cost of grapes used in Ravenswood's wine production has fluctuated
and is expected to continue to fluctuate. Ravenswood has traditionally attempted
to moderate and stabilize price increases from year to year. Consequently, gross
margins realized by Ravenswood have fluctuated in the past and are expected to
continue to fluctuate with the price of grapes used in production.
Ravenswood does not have an in-house sales staff. It markets and sells its wine
both to "on-premise" restaurants and "off-premise" retailers, such as liquor
stores, specialty wine stores, supermarkets and discounters. Ravenswood sells
its products directly in California, utilizing five warehouses throughout the
state and a network of seven brokers. Ravenswood realizes significantly greater
gross margins in areas, such as California, where it relies on direct sales
facilitated through brokers without the use of distributors. Sales within
California, accounted for approximately 50% of Ravenswood's gross sales in the
1998 fiscal year. Of this amount, approximately 11% of gross sales were
purchases by California and non-California consumers through Ravenswood's
tasting room and approximately 39% of gross sales were sales to retail accounts.
Ravenswood believes that sales within California will continue to account for a
substantial portion of its sales in the future.
15
<PAGE>
Results of Operations
<TABLE>
The following table sets forth items from Ravenswood's statement of income,
expressed as a percentage of net sales, for the periods indicated:
<CAPTION>
Fiscal Year Six Months Ended
Ended June 30, December 31,
------------------------ ------------------------
Statement of Income Data: 1997 1998 1997 1998
- ------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
Net Sales .............................................. 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold ..................................... 45.1 46.6 43.6 43.7
----- ----- ----- -----
Gross Profit ........................................... 54.9 53.4 56.4 56.3
Operating Expenses:
Deferred Compensation Expense ......................... 0.8 13.9 -- --
Other Operating Expenses .............................. 28.3 25.3 22.1 20.2
----- ----- ----- -----
Operating Income ....................................... 25.8 14.2 34.3 36.1
Other Expense, net ..................................... 3.8 3.0 1.3 1.3
----- ----- ----- -----
Income Before Income Taxes ............................. 22.0 11.2 33.0 34.8
Provision for Income Taxes ............................. 9.3 10.0 13.5 15.1
----- ----- ----- -----
Net Income ............................................. 12.7% 1.2% 19.5% 19.7%
===== ===== ===== =====
</TABLE>
Six Months Ended December 31, 1998 and 1997
Sales
Net sales consist of gross sales of Ravenswood's wines and merchandise, less
excise taxes, discounts, returns and allowances. Net sales of Ravenswood's
products increased to $11.6 million in the six months ended December 31, 1998,
from $8.4 million in the six months ended December 31, 1997. This increase is
primarily attributable to an increase in the volume of wines produced and sold
by Ravenswood. In the six months ended December 31, 1998, case sales of
Ravenswood's products increased to 130,493 cases, from 91,681 cases in the six
months ended December 31, 1997, while the average price per case decreased by
approximately 2.7%. 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 and, to a lesser extent, to the
respective release dates of Vineyard Designate Series Zinfandel products in each
of these periods.
The percentages of gross sales attributable to Ravenswood's Vintners Blend
Series, County Series and Vineyard Designate Series were approximately 48%, 26%
and 24%, respectively, in the six months ended December 31, 1998, as compared to
43%, 31% and 24%, respectively, in the corresponding period in 1997. Sales of
Ravenswood branded merchandise accounted for approximately 2% of gross sales in
each of these periods. 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.
16
<PAGE>
Cost of Goods Sold
Cost of goods sold includes the costs of:
o Grapes
o Bulk wine
o Packaging materials
o Labor used in wine production
o Bottling expenses
o Overhead allocated to 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 $5.1 million, or 43.7% of net sales,
in the six-month period ended December 31, 1998, from $3.7 million, or 43.6% of
net sales, in the corresponding period in 1997. 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.
Gross Profit
Ravenswood's gross profit increased to $6.5 million in the six months ended
December 31, 1998, from $4.7 million in the corresponding period in 1997, but
decreased as a percentage of net sales to 56.3% from 56.4% in these respective
periods. The increase in the amount of gross profit is primarily attributable to
increases in sales volumes across all product lines, particularly the Vintners
Blend Series.
Operating Expenses
Deferred Compensation Expense: No deferred compensation expenses were
recognized in the six months ended December 31, 1997 and December 31, 1998.
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 $2.3 million in the six months ended December 31, 1998,
from $1.9 million in the corresponding period in 1997. As a percentage of net
sales, other operating expenses decreased to 20.2% of net sales in the six
months ended December 31, 1998, from 22.1% of net sales in the six months ended
December 31, 1997. The increase in other operating expenses is primarily
attributable to increases in 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 as it continues to increase production and becomes 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 $113,588 and
$146,955 in the six months ended December 31, 1997 and 1998, 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. Ravenswood expects that this expense may be
offset in part by interest earned on that portion of the proceeds of this
offering that is retained as working capital. 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.
17
<PAGE>
Provision for Income Taxes
The provision for income taxes reflects the estimated annualized effective tax
rate of 43.3% at December 31, 1998, and 40.9% at December 31, 1997. Ravenswood
does not expect a material change in its effective tax rate in the near future.
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.
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
18
<PAGE>
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 25.3% 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.
Selected Quarterly Results of Operations
<TABLE>
The following table presents Ravenswood's results of operations for each of the
six quarters prior to and including the quarter ended December 31, 1998. The
quarterly information is unaudited, but management believes that the information
regarding these quarters has been prepared on the same basis as the audited
financial statements appearing elsewhere in this prospectus. In the opinion of
management, all necessary adjustments have been included to present fairly the
unaudited quarterly results when read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31,
1997 1997 1998 1998 1998 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Statement of Income Data:
(In thousands)
Gross Sales ................................... $ 4,578 $ 4,277 $ 3,795 $ 4,367 $ 6,342 $ 5,853
Less Excise Taxes ........................... 129 68 84 272 225 51
Less Discounts, Allowances and
Returns .................................... 123 150 135 165 155 182
------- ------- ------- ------- ------- -------
Net Sales ..................................... 4,325 4,059 3,576 3,930 5,962 5,620
Cost of Goods Sold ............................ 1,804 1,848 1,787 1,958 2,528 2,538
------- ------- ------- ------- ------- -------
Gross Profit .................................. 2,521 2,211 1,789 1,972 3,434 3,082
------- ------- ------- ------- ------- -------
Operating Expenses:
Deferred Compensation Expense ................ -- -- -- 2,206 -- --
Other Operating Expenses ..................... 880 972 914 1,269 1,215 1,125
------- ------- ------- ------- ------- -------
Operating Income (Loss) ....................... 1,642 1,239 875 (1,503) 2,219 1,957
Other (Income) Expense ........................ 34 79 100 260 73 74
------- ------- ------- ------- ------- -------
Income (Loss) Before Income Taxes ............. 1,607 1,160 775 (1,763) 2,146 1,884
Provision for Income Taxes .................... 658 475 315 144 929 815
------- ------- ------- ------- ------- -------
Net Income (Loss) ............................. $ 949 $ 685 $ 460 $(1,907) $ 1,217 $ 1,068
======= ======= ======= ======= ======= =======
</TABLE>
19
<PAGE>
Ravenswood has experienced seasonal and quarterly fluctuations in sales,
operating expenses and net income. Because Ravenswood manages its business to
achieve long-term strategic objectives, it may make decisions that it believes
will enhance its long-term growth and profitability, even if these decisions
adversely affect quarterly earnings. These decisions include: (a) when to
release its wines for sale; (b) how to position its wines competitively; and (c)
which grape and bulk wine sources to use to produce its wines. In addition, the
release dates of Ravenswood's Vineyard Designate Series and County Series have
resulted in fluctuations in Ravenswood's results on a quarter-to-quarter basis.
Ravenswood's sales volume may also change depending upon its distributors'
inventory levels. The results of operations for any quarter are not necessarily
indicative of the results of any future period. The market price of Ravenswood's
common stock may fluctuate significantly in response to these quarter-to-quarter
variations.
Results of operations for the quarter ended June 30, 1998 were materially
affected by expenses recognized in connection with a deferred compensation
arrangement with W. Reed Foster, Ravenswood's chairman and chief executive
officer. This arrangement was terminated as of July 1, 1998. No additional
deferred compensation expenses relating to this arrangement have been or will be
incurred in subsequent periods.
Liquidity and Capital Resources
Ravenswood has funded its capital requirements primarily with cash flows from
operations, a mix of short-term and long-term borrowings, and the sale of its
securities. Cash and cash equivalents totaled $3.2 million at December 31, 1998,
as compared to $102,272 at June 30, 1998. The increase in cash and cash
equivalents is primarily due to the receipt of the net proceeds from
Ravenswood's sale of securities completed in December 1998.
Net cash provided by operations was $655,773 in the six months ended December
31, 1998, as compared to $124,197 in the six months ended December 31, 1997. For
the 1998 fiscal year, net cash used for operations was $357,171, as compared to
net cash provided by operations of $265,809 in the 1997 fiscal year. The
principal use of cash from operations in each of these respective periods was
the acquisition of additional inventory through increased production, while the
principal source of cash in each period was net income.
Net cash used for investing activities totaled $891,336 in the six months ended
December 31, 1998, as compared to $243,229 in the six months ended December 31,
1997. Net cash used for investing activities was $490,621 for the 1998 fiscal
year, as compared to $312,386 in the 1997 fiscal year. The increases were
primarily a result of costs associated with the Quarry Facility. 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 Facility.
Net cash provided by financing activities was $3.3 million in the six months
ended December 31, 1998, as compared to $72,923 in the six months ended December
31, 1997. Net cash provided by financing activities totaled $738,103 in the 1998
fiscal year, as compared to $507,595 used for financing activities in the 1997
fiscal year. The principal sources of cash provided by financing activities in
each of these respective periods were short- and long-term borrowings under two
lines of credit with Pacific Coast Farm Credit Services and long-term
borrowings, including additional obligations to Pacific Coast. In addition, in
the six months ended December 31, 1998, a principal source of cash was
Ravenswood's sale of securities completed in December 1998. The principal use of
cash from financing activities in each of
20
<PAGE>
these respective periods was for repayment obligations under Ravenswood's
various short- and long-term borrowing arrangements. In addition, Ravenswood
used $278,255 in cash for the repurchase of outstanding shares of common stock
from one of its former officers in the 1998 fiscal year.
The majority of Ravenswood's grape purchases occur in the second fiscal quarter,
when the fruit is harvested. Most grape purchase contracts specify the timing of
payment for these purchases. Ravenswood typically makes several payments to each
grower in the quarters following each harvest. The actual dates vary depending
upon the terms of the individual contract. Based upon its grape purchase
contracts for the 1998 harvest, these payments will be made in the following
manner: 42%, 19% and 21% in the second, third and fourth quarters of fiscal
1999, respectively, and 18% in the first quarter of fiscal 2000. As a result of
harvest costs and the timing of grape and bulk purchase payments, Ravenswood's
inventory and related cash requirements generally peak during the second or
third fiscal quarters. Cash requirements also fluctuate depending upon the level
and timing of capital spending and tax payments.
Ravenswood leases barrels and other equipment used in the production of its
wines. Ravenswood estimates that aggregate lease payments for barrels and other
equipment will be $222,844 for the 1999 fiscal year. Ravenswood anticipates that
it will enter into additional leasing arrangements as it increases its
production.
In December 1994, Ravenswood completed a sale of $865,000 of convertible
debentures due December 31, 2004. Each $10,000 debenture is convertible into
3,500 shares of common stock at any time prior to December 31, 1999 upon request
of the holder. If the debentures are not converted, Ravenswood may redeem them
at face value at any time during the period from January 1, 2000 until the
maturity date. Ravenswood pays interest quarterly on the debentures based on a
floating index tied to prime bank rates for a five-year period. The interest
rate is adjusted every 18 months, except that in no period may the interest rate
adjustment exceed 2%, or the maximum interest rate exceed 11%.
In December 1998, Ravenswood completed a sale of $1.7 million of convertible
debentures due December 31, 2008 and $1.7 million of common stock. Each $10,000
debenture is convertible into 900 shares of common stock at any time prior to
December 31, 2003, upon request of the holder. If the debentures are not
converted, Ravenswood may redeem them at face value at any time during the
period from January 1, 2004 until the maturity date. Ravenswood pays interest
quarterly on the debentures in an amount equal to the prime interest rate quoted
by Bank of America NT&SA plus 1%. The interest rate is adjusted every 18 months,
except that in no period may the interest rate adjustment exceed 2%, or the
maximum interest rate exceed 11%.
Ravenswood has two lines of credit with Pacific Coast Farm Credit Association,
under which Ravenswood may borrow up to a total of $2.8 million. As of December
31, 1998, Ravenswood had $1.5 million outstanding under these lines of credit.
In addition, Ravenswood expects to receive an additional $4.6 million
construction loan from Pacific Coast Farm Credit Association for the purpose of
financing the construction of the Quarry Facility. The loan will be secured by
the Quarry Facility and its lease. Since 1989, Ravenswood has periodically
borrowed funds for short-term working capital from its executive officers. As of
December 31, 1998, Ravenswood had outstanding promissory notes in the principal
amount of $50,250 payable to Mr. Foster, its chairman and chief executive
officer, and additional promissory notes in the principal amount of $46,143
payable to Mr. Peterson, its president and winemaker.
21
<PAGE>
Ravenswood anticipates that its capital expenditures will increase substantially
in the 1999 fiscal year as it undertakes to complete the Quarry Facility. 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, its proposed additional line of credit, and proceeds from this
offering and other recent financing activities will be sufficient to fund its
capital requirements, including its planned expansion, for at least the next 12
months. In the event that additional capital is required, Ravenswood may seek to
raise that capital through public or private equity or debt financings. Future
capital funding transactions may result in dilution to purchasers in this
offering.
There can be no assurance that additional capital will be available on favorable
terms, if at all. Ravenswood's inability to obtain additional capital on
acceptable terms would limit its growth and could have a negative impact on its
business. Ravenswood uses substantial amounts of its working capital to purchase
grapes and bulk wine supplies from third parties and to pay for the use of
third-party production facilities in its wine production. Ravenswood also needs
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 beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to 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 problems that might arise as a result of these
requirements, and does not believe its systems will be affected by the upcoming
change in century. However, Ravenswood utilizes third-party equipment and
software that may not be Year 2000 compliant. If this third-party equipment or
software fails to process dates for the year 2000 and dates that follow
properly, Ravenswood could incur unanticipated expenses to remedy any problems,
which could harm its business.
In addition, Ravenswood relies on various service providers, including banks,
and on grape and bulk wine suppliers, third-party production facilities and
distributors. The software and computer systems of any of these entities could
have Year 2000 problems. A disruption in the supply of services or products
Ravenswood receives from any of these entities due to Year 2000 problems could
harm its business.
22
<PAGE>
BUSINESS
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:
o the value-priced Vintners Blend Series, with a suggested retail price
of approximately $9.75 to $11.25 per 750 ml bottle;
o the intermediate-priced County Series, with a suggested retail price of
approximately $12 to $18.50 per 750 ml bottle; and
o the higher-priced Vineyard Designate Series, with a suggested retail
price of approximately $18 to $31.50 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.
Ravenswood believes that the scope of its product offerings, coupled with its
emphasis on red wines, has positioned it well within the fast-growing premium
red wine market. Since its inception, Ravenswood has continued to expand its
product portfolio by including new labels in its County Series and its Vineyard
Designate Series and by developing and steadily increasing the production of its
Vintners Blend Series. For its 1996 vintage, Ravenswood marketed and sold 37
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. A majority of
these grapes are crushed and fermented at facilities owned by third parties, in
accordance with Ravenswood's prescribed winemaking practices. Ravenswood also
purchases bulk wine of superior quality, which is incorporated into its
products, particularly its Vintners Blend Series. A substantial portion of
Ravenswood's wines is stored at facilities leased for this purpose by
Ravenswood.
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.
23
<PAGE>
Ravenswood was founded in 1976 by Messrs. Foster and Peterson when Mr. Peterson
harvested and crushed Zinfandel grapes from two Sonoma County vineyards. In
1979, Ravenswood released its first wines, consisting of 327 cases of the 1976
vintage Zinfandel. Since its founding, and particularly since 1991, Ravenswood's
production and sales levels have increased substantially, to approximately
191,655 cases sold and $17.0 million in gross sales for the 1998 fiscal year.
From the 1994 fiscal year to the 1998 fiscal year, the compound annual growth
rate of Ravenswood's gross sales was approximately 28%.
Ravenswood has occupied the Gehricke Road Facility in Sonoma, California since
1991. This facility includes a tasting room, which Ravenswood uses to promote
consumer demand and generate direct retail sales, as well as a wine production
facility, a barrel storage warehouse and executive offices. Recognizing its
anticipated growth and the potential scarcity of future winemaking capacity in
the Napa and Sonoma counties of California, Ravenswood is building a new winery
facility in Sonoma County, which is referred to as the Quarry Facility.
Ravenswood believes that the Quarry Facility will reduce its reliance on leased
storage space and custom crush production facilities and improve its ability to
control the quality of its wines and operate efficiently.
Varietal Wines
In the United States, wines are classified as "non-varietal" or "varietal."
Non-varietal wines contain less than 75% of a single grape variety. While there
are non-varietal blends sold within the premium category, non-varietal wines are
often sold as "generic" or "jug" wines and include wines named after European
regions, such as Burgundy and Chablis, as well as wines simply labeled "red" or
"white." Generic or jug wines are packaged primarily in large-size containers,
which usually are offered in three-, four- and five-liter sizes and often retail
for less than $3.00 per 750 ml equivalent unit.
As prescribed by United States Federal Bureau of Alcohol, Tobacco, and Firearms
regulation, varietal wines must contain at least 75% of the single grape variety
for which they are named. Wine production outside the United States relies on a
significant number of grape varieties, and most of the better known wines are
not varietally designated. The majority of high-quality wine produced in the
United States is varietal and, particularly in California, is comprised of a
limited number of grape varieties with distinct characteristics.
Federal regulations also require that wines be identified by the region from
which the grapes were sourced. These regions are called appellations. Ravenswood
offers varietal wines in appellations ranging in size from California to areas
like the Sonoma Valley.
The predominant varietal wines produced in California include the following:
Cabernet Sauvignon: The Cabernet Sauvignon varietal, which is the most
famous grape of France's Bordeaux region, is a hybrid
of Cabernet Franc, a red grape, and Sauvignon Blanc, a
white grape. It produces red wines that are highly
aromatic, with significant depth and intensity of
flavor. Cabernet Sauvignon has traditionally been
blended with other select grape varieties, but in the
United States, and particularly California, it is not
unusual to have wines that contain 90% to 100% of this
varietal. The most highly regarded Cabernet Sauvignon
wines are generally stored in French or American oak
barrels for 18 to 30 months prior to bottling in order
to impart a
24
<PAGE>
distinctive flavor, while softening the effect of the
natural grape skin astringent, or tannin, that is
highly concentrated in the Cabernet Sauvignon grape.
Chardonnay: The Chardonnay grape is a versatile varietal that grows
well in a variety of locations throughout the world,
including California. The Chardonnay grape produces
white wines that winemakers can relatively easily
manipulate in order to produce distinctive flavors.
Chardonnay is often highly regarded for the significant
impact oak aging can have on enhancing the fruit and
spice flavors of the grape. Chardonnay is the most
plentiful white grape in California and is planted in
virtually all of its wine growing regions, producing
wines that range from jug to ultra-premium quality.
Merlot: Like Cabernet Sauvignon, Merlot's prominence originated
in the Bordeaux region of France, where it is mainly
blended with other varietals according to local
winemaking traditions. It is the predominant grape of
the Pomerol appellation in Bordeaux, and Chateau
Petrus, the most famous wine of that appellation, is
nearly 100% Merlot. Wide-scale production of Merlot in
California has developed over the last 15 to 20 years.
Due to its popularity, Merlot is being widely planted
in California and Chile, even though it is considered
difficult to grow because of its uneven crop
production. Merlot is typically considered softer and
more supple tasting than Cabernet Sauvignon.
Zinfandel: Zinfandel arrived in California in the mid-1800s from a
horticultural collection in New York. The origins of
Zinfandel are unknown, although it is closely related
to the ancient Plavic Mali varietal from Croatia.
Zinfandel is well suited to the California climate and
is widely planted throughout the state. Much of the
Zinfandel grown in California is used in the production
of white Zinfandel, a blush-colored slightly sweet wine
that is served chilled. Traditional Zinfandel, a red
wine, can range from short-lived wines with light berry
flavors and mild tannins to robust, intensely flavored
wines with strong tannins that are vinted to improve
with age. California has a number of old Zinfandel
vineyards that range from 50 to 100 years old. Many of
these vineyards are farmed without irrigation, are
planted relatively densely, and are frequently planted
in prime grape-growing locations. These vines produce
smaller, more uniform crops of superior quality and are
highly sought after by wineries such as Ravenswood.
While these varietal grapes are widely produced and the wines produced from them
are generally considered the most popular with consumers, other varietals,
including Sauvignon Blanc, Gew -urztraminer, Pinot Noir, Sangiovese, Petite
Sirah, Syrah, and Grenache, are also produced in significant quantities
throughout the world, including California. In addition, wines blended from
varietal grapes that do not consist of 75% or more of one varietal are commonly
produced worldwide.
California has experienced a growing trend toward producing more ultra-premium
non-varietal wines. Perhaps the most well known of these are the "Meritage,"
which rhymes
25
<PAGE>
with "heritage," wines that use varietal grapes commonly associated with
Bordeaux. These Meritage wines are both white and red. The whites are usually a
combination of Sauvignon Blanc and Semillion, while the reds are some
combination of Cabernet Sauvignon, Cabernet Franc, Merlot, Petite Verdot and
Malbec. There has also been a trend in California to produce Rhone-style blends.
These blends include grapes such as Rousanne and Marsanne for white wines, and
Syrah, Grenache, Mourvedre and Cinsault for red wines.
The Premium Wine Market
Industry analysts estimate that in 1997, shipments of popular-premium,
super-premium and ultra-premium wines accounted for 66%, 27% and 7%,
respectively, of premium wine cases shipped in the United States and 46%, 35%
and 19%, respectively, of premium wine revenues, as indicated in the chart
below. Ravenswood's products fall exclusively into the super-premium and
ultra-premium segments of the premium wine category.
The United States Premium Wine Shipments By Segment: 1997*
[GRAPHIC OMITTED]
(Two pie charts showing percentages of cases and revenues by popular,
super-premium and ultra-premium)
* Source: Gomberg, Fredrickson and Associates (1998)
During the last ten years, consumer preferences for wine in the United States
have shifted significantly away from generic jug wines toward premium wines sold
in 750 ml bottles. Industry analysts estimate that United States shipments of
California premium wines have grown from approximately $866 million in 1987 to
approximately $3.6 billion in 1997. Ravenswood believes this growth in the
premium wine category can be attributed to, among other things, an increasingly
discriminating customer base that appreciates higher quality wines and is
willing to pay for them.
As a result of changing consumer preferences, as well as several studies
suggesting various health benefits from the moderate consumption of red wine,
the vast majority of the recent growth in the wine industry has been in the
sales of red wine. Industry analysts estimate that sales of nine-liter cases of
red wine grew 158% from 1991 to 1997, from 22.1 million cases to 57.2 million
cases, as indicated in the following chart. This amounts to approximately 67% of
the growth in the premium wine industry during this period.
26
<PAGE>
[GRAPHIC OMITTED] Percentage Increase: 1991 - 1997*
(Bar graph showing
United States table Red: 158%
wine shipments White: 15%
by color, Blush: 16%
from 1991 to 1997
(in millions of cases))
* Source: Gomberg, Fredrickson and Associates (1998)
Within the red wine category, Cabernet Sauvignon has historically dominated
sales relative to other varietals. In recent years, however, other varietals,
including Merlot and, more recently, Zinfandel, have fueled much of the growth
in sales of red wines. The following table sets forth estimated shipments for
particular red wines by varietal, as measured in millions of nine-liter cases.
<TABLE>
United States Shipments of California Premium Red Wines by Varietal*
(millions of nine-liter cases)
<CAPTION>
Compound
Annual
Growth Rate
1990 1991 1992 1993 1994 1995 1996 1997 1990-1997
---- ---- ---- ---- ---- ---- ---- ---- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cabernet Sauvignon ................... 4.6 5.0 6.7 7.5 8.7 9.8 11.3 11.8 14.4%
Merlot ............................... 0.6 0.8 1.4 2.0 2.8 3.8 5.3 7.0 42.0%
Red Zinfandel ........................ 0.6 0.7 0.8 0.9 1.2 1.6 2.1 2.4 21.9%
Pinot Noir ........................... 0.3 0.3 0.4 0.5 0.6 0.7 0.8 0.9 17.0%
<FN>
- ------------
* Source: Gomberg, Fredrickson and Associates (1998)
</FN>
</TABLE>
The Ravenswood Strategy
Ravenswood believes that its mix of premium wine products of different varietals
and different price segments has positioned it to take advantage of the rapid
growth in the consumption of premium wines, particularly California red
varietals. Ravenswood's objectives are to continue to concentrate on producing
wines that enhance its reputation for high quality and further establish its
brand identity in order to achieve a competitive advantage in every segment of
the premium wine market in which Ravenswood operates. To achieve these
objectives, Ravenswood has developed the following strategies:
Focus on Product Offerings Although demand for premium California wine
that Give the Consumer has increased across the spectrum of wine
Demonstrable Value: varietals in the last decade, the most
prominent growth in the past six years has
been in the demand for red wines. Red wines
accounted for approximately 91% of
Ravenswood's gross sales in the 1998 fiscal
year. As a result, Ravenswood believes it has
been and continues to be well positioned to
take advantage of the growing consumer
preference for premium red wine. In
particular, Ravenswood believes its emphasis
on the
27
<PAGE>
production of Zinfandel has allowed it to
become recognized as a quality leader in this
segment of the wine market. Ravenswood
intends to continue to focus on meeting
consumer demand by producing wines that
enhance its reputation for expertise,
demonstrable value and high quality.
Ravenswood believes this approach will
further promote the favorable image of its
products.
Strategically Manage Consumer research indicates that the majority
the Brand: of wine consumers prefer wines with which
they are familiar and consider a recognizable
brand name very important when purchasing
wine. Ravenswood believes the quality of its
wines, its distinctive Ravenswood brand and
logo, and the irreverent image created
through its "No Wimpy Wines" slogan have
resulted in high brand awareness relative to
other wineries of equivalent size. Ravenswood
intends to continue to invest in the
promotion of its brand name and image in
order to continue to generate favorable brand
awareness.
Produce High-Quality Ravenswood believes it has consistently
Products that Emphasize the offered consumers high-quality wines of
Winemaking Process: excellent value in each price segment of the
premium wine market in which it operates.
Ravenswood's team of winemakers produces
these wines by using high-quality premium
wine grapes, and by strictly adhering to
Ravenswood's traditional winemaking
techniques. Ravenswood believes that its
old-world French winemaking techniques impart
a distinctive style to its wines, which is
evident even when blended with purchased bulk
wine. Many of Ravenswood's grapes are
purchased from dry-farmed vineyards that
yield low crops with concentrated fruit
flavors. In addition, younger vineyards from
which Ravenswood acquires grapes are
regularly thinned at the request of
Ravenswood to ensure the premium quality of
the grapes they produce. Ravenswood often
pays a premium for grapes that are grown
according to these specifications. Ravenswood
intends to continue to emphasize the
high-quality results of its winemaking
process as it promotes its existing products
and develops additional product offerings.
Maintain Broad, Efficient Ravenswood has developed a broad network of
Distribution Channels: brokers and distributors throughout the
United States and in more than 15 export
markets. Ravenswood sells its products
directly in California, using five warehouses
throughout the state and a network of seven
brokers. Elsewhere throughout the United
States and internationally, Ravenswood uses a
network of over 75 distributors. Ravenswood
has concentrated on the establishment of
relationships with smaller, regionally-based
brokers and distributors for which Ravenswood
is a
28
<PAGE>
prominent brand. Ravenswood believes these
arrangements create incentives for its
distribution partners to position the
Ravenswood brand optimally.
Selectively Invest in Ravenswood has historically focused on
Vineyards and Production promoting the Ravenswood brand and
Facilities: implementing the winemaking process, rather
than on investing in vineyards and production
facilities. Ravenswood relies upon
independent grape growers and bulk wine
suppliers for substantially all of its wine
production, and leases storage and crush
facilities for a substantial portion of its
wine production. For example, for the 1998
harvest, Ravenswood crushed at the Gehricke
Road Facility approximately one-third of the
total grapes crushed, and relied on
third-party facilities for the remainder of
its crush requirements for that harvest.
While Ravenswood believes that it will
continue to focus primarily on the
development of the Ravenswood brand, it is
building the Quarry Facility to accommodate
the increase in its wine production and to
reduce its reliance upon the limited capacity
available at third-party production
facilities. Upon completion of the Quarry
Facility, Ravenswood expects to utilize fully
both the Quarry Facility and the Gehricke
Road Facility for its wine production.
Ravenswood believes the addition of the
Quarry Facility will present several
benefits, including: (a) consolidation of
operations so as to improve coordination of
management and staff; (b) substantial cost
savings; and (c) closer control of
Ravenswood's winemaking techniques to ensure
continued high-quality standards.
Retain and Further Develop Ravenswood believes its professional
the Professional management team's depth and experience in
Management Team: winemaking, marketing and business strategy
will be important in guiding Ravenswood's
growth. Since its establishment in 1976,
Ravenswood has been operated by a management
team dedicated to the production of the
highest quality wines in each of the
categories of the premium wine market in
which it competes. Ravenswood believes that
in order to meet its objectives, it must
continue to attract and retain qualified
winemaking experts and management through
compensation benefits as well as
opportunities for advancement.
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 in California. In producing its
Vintners Blend Series, Ravenswood uses grapes
obtained
29
<PAGE>
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 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 1998 fiscal year, sales of the
Vintners Blend Series totaled $9.5 million,
or 56% 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 County.
Ravenswood believes that its County Series
provides consumers with a reasonably priced
ultra-premium varietal wine derived solely
from grapes of highly regarded appellations
of the California premium wine industry. For
its 1996 vintage, Ravenswood offered twelve
different wines within its County Series. In
the 1998 fiscal year, sales of the County
Series totaled $4.5 million, or 27% of
Ravenswood's gross sales.
Vineyard Designate Series: Ravenswood's Vineyard Designate Series
consists of 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 1996 vintage, Ravenswood
offered 22 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 1998 fiscal year, sales
of the Vineyard Designate Series totaled $2.7
million, or 16% of Ravenswood's gross sales.
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<TABLE>
The table below summarizes the number of wines offered in each product series,
by varietal, for the Ravenswood 1996 vintage:
<CAPTION>
Vintners Blend County Vineyard Designate Total
-------------- ------ ------------------ -----
<S> <C> <C> <C> <C>
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 0 2 3
Miscellaneous whites ........................................... 0 2 1 3
-- -- -- --
TOTAL .......................................................... 3 12 22 37
== == == ==
</TABLE>
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 91% of its gross sales in the 1998 fiscal year, with sales of
Zinfandel accounting for approximately 63% 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. While
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
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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 Series: Ravenswood's Vineyard Designate Series is
fermented 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. All 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.
Vintners Blend Series: The portion of Ravenswood's Vintners Blend
Series vinted by Ravenswood 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.
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 Series: All of Ravenswood's Vineyard Designate Series
is 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 French oak barrels provides superior
flavor characteristics in comparison
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<PAGE>
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 Series: Approximately 30% of Ravenswood's Vintners
Blend 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 Series: The Vineyard Designate Series is produced by
blending 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.
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.
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<PAGE>
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
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 a 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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<PAGE>
Sales and Distribution
Ravenswood's wines are purchased by consumers at:
o "on-premise" restaurants
o "off-premise" retailers such as specialty wine stores, supermarkets,
discounters and liquor stores
o 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 distributions 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 1998 fiscal year, approximately 75% of Ravenswood's gross sales were made
using brokers. In the 1998 fiscal year, its most successful broker was
responsible for 21% of its gross sales, and its ten most successful brokers were
responsible for 69% of its gross sales. Within California, Ravenswood currently
uses seven brokers and five warehouses located throughout the state. For the
1998 fiscal year, approximately 50% of Ravenswood's gross sales resulted from
sales within California. Of this amount, approximately 11% 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 its sales for the 1998 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 distributor network, which participated in approximately
49% of Ravenswood's gross sales for the 1998 fiscal year, ensures that the
elimination of any one specific distribution relationship will not adversely
affect out-of-state sales.
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.
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<PAGE>
Grape and Bulk Wine Supply
The Gehricke Road Facility includes 14 acres of vineyards. Currently only three
acres of these vineyards are producing grapes. The remaining eleven acres were
infested with Phylloxera. They were recently replanted with Phylloxera-resistant
vines and will resume production over the next three years. Ravenswood is
dependent upon independent grape growers and bulk wine suppliers for
substantially all of its annual wine production. 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.
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
grapes to ensure continuing production of high-quality wines in the event that
it cannot obtain grapes from any particular supplier.
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 1996
vintage, Ravenswood produced 22 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 notoriety 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. It is possible that
Ravenswood will not be able to purchase bulk wine of acceptable quality at
acceptable prices and quantities 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,
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<PAGE>
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 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 in 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 harm 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.
Wine Production Facilities
Ravenswood currently uses the Gehricke Road Facility, which it owns, two leased
barrel-storage warehouses and three production facilities operated by third
parties to crush, ferment, store and bottle its annual wine production.
Ravenswood also leases production equipment, including French oak barrels, under
various capital leases.
Typically, Ravenswood's agreements with third-party production partners have
one-year terms. Ravenswood believes these arrangements are acceptable because of
the excellent relationships maintained with these producers. Ravenswood believes
access to third-party production facilities may be limited in the future due to
several factors, including:
o Growth in demand for these facilities
o Anti-development sentiments in Napa and Sonoma counties
o Unavailability of sites for additional facilities
o Significant growth in the wine industry
If Ravenswood were not able to secure the use of these facilities, and could not
undertake increased production activities through its own facilities, its
production, sales and profits could be limited.
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Due to the increase in Ravenswood's production over the past several years and
its increasing dependence on third-party production facilities, Ravenswood has
undertaken to increase its own production capacity. Its Gehricke Road Facility
is currently operating at full capacity. Ravenswood is in the process of
building the Quarry Facility as an additional production facility on a leased,
approximately 30-acre location in the Sonoma Valley approximately nine miles
southwest of the Gehricke Road Facility.
Portions of the Quarry Facility are located immediately adjacent to a working
quarry. The winery and quarry operations will be physically separated and will
not share any improvements with the exception of an access road. Ravenswood's
management does not believe that the quarry will negatively affect its
operations in any material way. Preliminary site work began on the Quarry
Facility during the fall of 1998, and construction commenced in February 1999.
Prior to the commencement of construction, the site was undeveloped. Ravenswood
anticipates that the facility will be operational by late summer or early autumn
of 1999. Ravenswood estimates that construction costs for the facility will
total approximately $7 million, and additional equipment purchases and capital
leases will total approximately $2 million.
Ravenswood has developed a master plan for the Quarry Facility, which includes a
45,000 square-foot building with facilities capable of crushing 2,700 tons of
grapes and storing 11,000 barrels of wine. Ravenswood initially plans to bottle
a maximum of 250,000 cases of wine annually at the Quarry Facility, which is the
maximum amount allowed under its current use permit. Ravenswood anticipates that
it will expand the facility in the future to increase its production and
believes that it will be able to increase its permitted capacity. The Quarry
Facility will also support warehouse and administrative office activities.
Ravenswood believes that it will require additional production personnel in
connection with this expansion. Any hiring will take place when the new facility
is operational.
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 processes 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 believes that it will have access to adequate capital to complete the
Quarry Facility. Ravenswood's failure to complete the facility, or otherwise
expand its production capabilities, could limit its production and therefore its
sales and profits.
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.
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<PAGE>
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.
Ravenswood believes that the primary competitive factors in the wine industry
tend to be brand recognition, product quality, 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
Estates, Gallo, Kendall Jackson and Robert Mondavi, which compete directly with
Ravenswood in the premium wine market, have significantly greater capital
resources, more sophisticated promotional practices, and substantially larger
and more developed distribution networks than Ravenswood. As a result,
Ravenswood may not be able 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 Cline
Cellars, 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 marketing focus from its independent brokers and distributors, which
could harm its business and reduce its sales and profits.
Government Regulation
The wine industry is subject to extensive regulation by the Federal Bureau of
Alcohol, Tobacco and Firearms, various foreign agencies, and state and local
liquor authorities. These regulations and laws dictate matters such as:
o Excise taxes
o Licensing requirements
o Trade and pricing practices
o Permitted distribution channels
o Permitted and required labeling
o Advertising
o Relations with wholesalers and retailers
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Federal regulation of Ravenswood's activities is partially overseen by the BATF.
Ravenswood is required by the BATF to carry a license and bond to produce
alcoholic beverages. The BATF also must approve all labels on wine products
destined for wholesale and retail distribution. It also regulates some elements
of wine production.
The State of California regulates Ravenswood's activities through the Alcoholic
Beverage Control. Ravenswood holds a permit with the ABC to produce and sell
alcoholic beverages. The State of California also regulates the sales and
distribution of Ravenswood's products in the state.
In addition, Ravenswood is subject to regulation by each state in which its
products are sold, and many of those states restrict the shipment of alcoholic
beverages by Ravenswood directly to consumers. The laws and regulations of
several states also prohibit changes of distributors except under limited
circumstances, making it difficult to terminate a distributor without reasonable
cause, as defined by applicable statutes.
Ravenswood periodically uses various chemical herbicides, fungicides and
pesticides on the vineyards it cultivates, some of which contain hazardous or
toxic substances. The use and storage of these chemicals are, to varying
degrees, subject to federal and state regulation.
The expansion of the Gehricke Road Facility and Quarry Facility, and the
development of new vineyards and winery facilities, may be limited by zoning
ordinances, environmental restrictions and other legal requirements. In
addition, new regulations or requirements or increases in excise taxes, income
taxes, property and sales taxes and international tariffs could materially
adversely affect the financial results of Ravenswood. Ravenswood can provide no
assurance that there will not be future legal or regulatory challenges to the
industry, which could have a material adverse effect on Ravenswood's business,
financial condition and results of operations.
Properties
Ravenswood currently operates one owned and two leased locations in Sonoma. The
Gehricke Road Facility, which Ravenswood owns, is comprised 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 two additional production and operation facilities, which it
leases, are used primarily for barrel storage and aging of wines. These
facilities comprise a total of approximately 29,900 square feet. The lease for
one of the properties provides for monthly payments of $3,960 for 9,900 square
feet, subject to annual adjustment, and expires on September 30, 2000. The lease
for the other facility provides for monthly payments of $8,200 for 20,000 square
feet, subject to annual adjustment, and expires on September 30, 1999, with a
two-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 February 28, 2000.
In addition, Ravenswood is currently constructing the Quarry Facility, which is
located on leased land consisting of approximately 30 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
40
<PAGE>
brother-in-law of Justin Faggioli, its executive vice president. The lease
expires on December 31, 2032. Current monthly payments are $1,723, and will
increase to $3,445 on August 1, 1999, subject to annual adjustment. In addition,
the lease provides Ravenswood with a right of first refusal to purchase a
portion of the property and an option to extend the lease upon its expiration,
if specific conditions are met.
Trademarks
"Ravenswood," the Ravenswood logo and the slogan "No Wimpy Wines" are federally
registered trademarks owned by Ravenswood. These registered trademarks are
important to Ravenswood in its efforts to solidify and increase awareness of the
Ravenswood brand and to compete effectively in the premium wine industry.
Ravenswood's wines are branded consumer products. Ravenswood's ability to
distinguish its brand name from those of its competitors depends, in part, on
the strength and vigilant enforcement of its trademarks. Competitors may use
trademarks, trade-names or trade dress similar to those Ravenswood uses, which
could weaken its intellectual property rights. If its competitors infringe its
trademark rights, it may have to litigate in order to protect its rights.
Litigation may result in significant expense and divert its attention from
business operations. In addition, Ravenswood cannot assure you that it would be
successful in protecting its trademark rights.
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.
Employees
As of December 31, 1998, Ravenswood had approximately 32 full-time employees, 23
of whom were salaried, with the remaining employees paid an hourly wage. From
time to time, Ravenswood needs to hire part-time employees, primarily for
bottling wines and harvesting and maintaining vineyards. The number of part-time
employees typically ranges between seven and eight persons, is generally for a
short duration of time, up to three months, and does not materially affect
Ravenswood's operations. The tasting room employs approximately ten part-time
employees annually, in addition to its three full-time employees. Ravenswood
expects that the number of employees will not increase substantially in the next
12 months.
None of Ravenswood's employees are represented by a union. Ravenswood believes
salaries paid and benefits provided to its employees are competitive for the
wine industry. Ravenswood believes that its relationship with its employees is
excellent.
41
<PAGE>
MANAGEMENT
Executive Officers and Directors
Ravenswood's executive officers and directors and their ages as of February 1,
1999 are as follows:
Name Age Position
- ---- --- --------
W. Reed Foster ............... 67 Chairman, chief executive officer and
director
Joel E. Peterson ............. 51 President, winemaker and director
Justin M. Faggioli ........... 47 Executive vice president, secretary and
director
Callie S. Konno .............. 45 Chief financial officer, treasurer and
director
James F. Wisner .............. 65 Director
Robert E. McGill, III ........ 67 Director
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 and staff, and sourcing grape and bulk wine supplies. From 1973 until
joining Ravenswood, 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.
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.
James F. Wisner has served as a director since Ravenswood's incorporation in
1986. Mr. Wisner has practiced law as a sole practitioner since 1992. From 1972
until 1992, Mr. Wisner was a partner in the law firm of Bancroft, Avery &
McAllister in San Francisco, California. He holds an A.B. in American History
from Yale University, a J.D. from Stanford University and an M.B.A. from Golden
Gate University.
42
<PAGE>
Robert E. McGill, III has served as a director of Ravenswood since February
1999. Mr. McGill currently serves as a director of Connecticut Surety
Corporation, an insurance company, and Chemfab Corporation, a specialty
materials manufacturing company. In addition, he currently serves as a trustee
of Travelers Mutual & Variable Annuity Funds, an investment company. From 1975
to 1995, Mr. McGill served in various senior management positions, including,
most recently, as executive vice president, finance and administration, and,
from 1983 to 1995 as a director, of The Dexter Corporation, a specialty
materials and chemical manufacturing company. Mr. McGill received a B.A. in
Economics from Williams College and an M.B.A. from the Harvard Graduate School
of Business Administration.
Each director holds office until the next annual meeting of shareholders or
until the director's successor is duly elected and qualified. Officers are
elected by the board of directors at each annual meeting and serve at the
pleasure of the board of directors.
Audit Committee
The board of directors has established an audit committee consisting of Ms.
Konno and Messrs. Wisner and McGill. The audit committee reviews with
Ravenswood's independent auditors the scope and timing of their audit services
and any other services that they are asked to perform, the auditor's report on
Ravenswood's financial statements following completion of their audit, and
Ravenswood's policies and procedures with respect to internal accounting and
financial controls. In addition, the audit committee makes annual
recommendations to the board of directors for the appointment of independent
auditors for the ensuing year.
Compensation Committee
The board of directors has established a compensation committee consisting of
Messrs. Wisner and McGill. Ravenswood expects that the compensation committee
will make recommendations to the board of directors regarding executive
compensation.
Director Compensation
Directors receive no cash compensation for serving as directors of Ravenswood.
Ravenswood intends to grant stock options under its 1999 Equity Incentive Plan
to purchase 5,000 shares of common stock to each of Messrs. Wisner and McGill on
the effective date of this offering at the initial public offering price. These
options will vest annually over five years from the date of grant.
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<PAGE>
Executive Compensation
The following table sets forth information for the fiscal year ended June 30,
1998, regarding the compensation earned by the chief executive officer and each
of Ravenswood's three most highly compensated executive officers other than the
chief executive officer whose salary plus bonus exceeded $100,000 for the fiscal
year ended June 30, 1998. No stock options were granted to or exercised by any
of the named executive officers in the fiscal year ended June 30, 1998.
Ravenswood has not entered into employment agreements with any of its officers.
Ravenswood has purchased key-man life insurance policies with respect to Messrs.
Peterson and Foster, in the amounts of $7 million and $2 million, respectively.
<TABLE>
Summary Compensation Table
<CAPTION>
Annual Compensation
--------------------------------------------------------
401(k) Matching
Name and Principal Position Salary($) Bonus($) Contributions($)
- --------------------------- --------- -------- ----------------
<S> <C> <C> <C>
W. Reed Foster ................................................... $149,942 $ 35,000 $ 7,398
Chairman and chief executive officer
Joel E. Peterson ................................................. $149,942 $ 35,000 $ 1,467
President and winemaker
Justin M. Faggioli ............................................... $108,654 $ 35,000 $ 5,749
Executive vice president and secretary
Callie S. Konno .................................................. $ 76,047 $ 35,000 $ 4,442
Chief financial officer and treasurer
</TABLE>
In accordance with the rules of the Securities and Exchange Commission, the
compensation described in the above table does not include perquisites and other
personal benefits received by the named executive officers which do not exceed
the lesser of $50,000 or 10% of the total salary and bonus reported for the
named executive officer.
1999 Equity Incentive Plan
Ravenswood's 1999 Equity Incentive Plan was adopted by Ravenswood's board of
directors and approved by its shareholders in February 1999. There are 500,000
shares of common stock reserved for issuance under the plan and no options have
been granted under the plan as of February 1, 1999. Ravenswood intends to grant
stock options to purchase an aggregate of 279,500 shares of common stock on the
effective date of this offering, including the following grants to its named
executive officers:
Number of Shares
Name Granted as Options
---- ------------------
W. Reed Foster .................. 50,000
Joel E. Peterson ................ 50,000
Justin M. Faggioli .............. 37,500
Callie S. Konno ................. 37,500
The remaining 104,500 shares will be granted as follows:
o Options to purchase 5,000 shares of common stock will be granted to
each of Messrs. Wisner and McGill, as described under "Director
Compensation"
o Options to purchase the remaining 94,500 shares of common stock will be
granted to individuals who are employees of, or independent contractors
or consultants to, Ravenswood
44
<PAGE>
All of these options will vest annually over five years from the date of grant.
The exercise prices will be equal to the initial public offering price, except
in the case of Messrs. Foster and Peterson, whose stock option exercise prices
will be equal to 110% of the initial public offering price.
No awards may be granted under the plan after February 2009, but the vesting and
effectiveness of awards previously granted may extend beyond that date.
The plan provides for the grant of incentive stock options intended to qualify
under Section 422 of the Internal Revenue Code, non-statutory stock options,
restricted stock awards and other stock-based awards. All officers, employees,
directors, independent contractors and consultants to Ravenswood are eligible to
receive awards under the plan. Under present law, however, incentive stock
options may be granted only to employees. No participant may receive an award
for more than 100,000 shares in any calendar year.
Ravenswood may grant options at an exercise price equal to or greater than the
fair market value of the common stock on the date of grant. Under present law,
incentive stock options and options intended to qualify as performance-based
compensation under Section 162(m) of the Internal Revenue Code may not be
granted at an exercise price less than the fair market value of the common stock
on the date of grant, or less than 110% of the fair market value in the case of
incentive stock options granted to optionees holding more than 10% of the
outstanding securities of Ravenswood. In addition, for each participant, the
maximum aggregate fair market value on the date of grant of all shares subject
to ISOs first exercisable in any one year may not exceed $100,000. The plan
permits the board of directors to determine how optionees may pay the exercise
price of their options, including by:
o Cash
o Delivery to Ravenswood of a promissory note
o Surrender to Ravenswood of shares of common stock, or, in connection
with a "cashless exercise" through a broker
o Delivery of an irrevocable notice of exercise
o Any combination of the permitted forms of payment
Options will expire on a date determined by the board of directors, provided
that the expiration date for incentive stock options may not be more than ten
years from the date of grant, or five years in the case of incentive stock
options granted to optionees holding more than 10% of the outstanding securities
of Ravenswood. Each option is exercisable only by the optionee during the
optionee's lifetime, except as permitted by the board of directors.
The board of directors may grant restricted shares, which are shares of common
stock that are subject to transfer restrictions determined by the board of
directors and subject to substantial risk of forfeiture unless and until
specific conditions established by the board at the time of grant are met. These
conditions may be based upon continuing employment or achievement of
pre-established performance goals, or both, as determined by the board of
directors.
The plan also authorizes the board of directors to award or offer bonuses of
shares of common stock, either restricted or non-restricted, as current or
deferred compensation, in lieu of all or any portion of the cash compensation to
which the employee is entitled.
The board of directors administers the plan. The board also has the authority to
adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions; provided, however, that no
amendment, suspension or termination
45
<PAGE>
of the plan may alter or impair an interest granted to a beneficiary under the
plan without the beneficiary's written consent. The board may delegate its
authority under the plan to a committee of the board.
In the event of a merger, liquidation or other acquisition event as described in
the plan, the board of directors is authorized to provide for outstanding
options or other stock-based awards to be assumed or replaced by the acquiror
and to take other actions, including accelerating the vesting schedule of
awards.
Stock options granted under the plan are intended to be "performance-based
compensation" that are not subject to the deduction limitation of Section 162(m)
of the Internal Revenue Code. Under generally accepted accounting principles, as
currently applied, Ravenswood will not incur accounting charges with respect to
stock options granted or exercised under the plan. Ravenswood will, however,
incur accounting charges for the fair market value of stock options granted to
non-employee directors, consultants or independent contractors, as well as
restricted stock grants or stock bonus awards, as of the date of each grant or
award. Stock options will also affect the amount of diluted earnings per share,
in accordance with Financial Accounting Standard 128. Under Financial Accounting
Standard 123, Ravenswood will provide footnote disclosure in its financial
statements of the assumed value of all options granted under the plan and the
actual value of restricted stock and stock bonus awards granted under the plan.
Employee Stock Purchase Plan
Ravenswood's Employee Stock Purchase Plan was adopted by Ravenswood's board of
directors and approved by its shareholders in February 1999. Ravenswood has
reserved 50,000 shares of common stock for issuance under the Employee Stock
Purchase Plan.
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
Ravenswood, including directors of Ravenswood 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 Ravenswood are not eligible to participate. As of February
1, 1999, approximately 31 employees would have been eligible to participate in
the plan. The plan may be amended solely by the board of directors, except with
respect to an increase in the number of shares reserved for issuance under the
plan, which would require shareholder approval.
On the first day of the offering period, Ravenswood will grant to each eligible
employee who has elected to participate in the plan an option to purchase shares
of common stock. The employee may authorize an amount ranging from 1% to 10% of
his or her base pay to be deducted by Ravenswood during the offering period. On
the last day of the offering period, the employee is deemed to have exercised
the option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the plan, the option price may be set at an
amount as low as 85% of the average market price per share of the common stock
on either the first day or the last day of the offering period, whichever is
lower. An employee may not purchase more than 500 shares in any one offering
period. The board of directors may, in its discretion, choose an offering period
of any length not exceeding 27 months.
An employee who is not a participant in the plan on the last day of the offering
period is not entitled to exercise any option, and the employee's accumulated
payroll deductions will be
46
<PAGE>
refunded. An employee's rights under the plan terminate upon voluntary
withdrawal from the plan at any time, or when the employee ceases employment for
any reason, except that upon termination of employment because of death, the
employee's beneficiary has the right to elect to exercise the option to purchase
the shares that the accumulated payroll deductions in the participant's account
would purchase at the date of death.
Because participation in the plan is voluntary, Ravenswood cannot now determine
the number of shares of common stock to be purchased by any particular executive
officer, by all current executive officers as a group, or by non-executives as a
group.
All shares of common stock purchased by an employee will be held by Ravenswood
or by an agent of Ravenswood and will be registered in the name of the plan.
Ravenswood or its agent will abstain from voting any shares held under the plan.
An employee's interest in the amount of cash and/or shares held on his or her
behalf will be fully vested and non-forfeitable at all times.
An employee may have any shares of common stock held on his or her behalf under
the plan distributed to that employee, as provided under the plan.
401(k) Savings Plan
In April 1995 Ravenswood instituted a defined contribution retirement plan,
intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue
Code. All full-time employees of Ravenswood are eligible to participate in the
retirement plan on the first day of the semi-annual period following one year of
employment. The retirement plan provides that each participant may contribute
from 1% to 15% of compensation, subject to statutory limitations. Under the
retirement plan, Ravenswood may also make discretionary contributions based on a
percentage of a participant's contributions as determined by Ravenswood or
additional amounts as Ravenswood may deem appropriate. In connection with the
adoption of the retirement plan, the board of directors approved a matching
contribution of 66% of the first 6% of employee contributions. Ravenswood's
contributions under the retirement plan totaled $53,089 for the 1998 fiscal
year.
Limitation of Liability and Indemnification Matters
Ravenswood's bylaws provide that Ravenswood will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by California law. Ravenswood is also
empowered under its bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Under this provision, Ravenswood has entered
into indemnity agreements with each of its directors and executive officers.
Ravenswood has obtained officer and director liability insurance, which covers
various areas of liability, including matters arising under the Securities Act.
In addition, Ravenswood's articles provide that, to the fullest extent permitted
by California law, Ravenswood's directors will not be liable for monetary
damages for breach of the directors' fiduciary duties to Ravenswood and its
shareholders. This provision in the articles does not eliminate the duty of
care, and in appropriate circumstances equitable remedies such as an injunction
or other forms of non-monetary relief would remain available under California
law.
Each director will continue to be subject to liability for:
o Breach of the director's duty of loyalty to Ravenswood
o Acts or omissions involving intentional misconduct or bad faith
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<PAGE>
o Knowing violations of law
o Any transaction from which the director derived an improper personal
benefit
o Improper transactions between the director and Ravenswood
o Improper distributions to shareholders and loans to directors and
officers
This provision also does not affect a director's responsibilities under any
other laws, such as the federal securities laws or state or federal
environmental laws. There is no pending litigation or proceeding involving a
director or officer of Ravenswood as to which indemnification is being sought,
nor is Ravenswood aware of any pending or threatened litigation that may result
in claims for indemnification by any director or officer.
48
<PAGE>
CERTAIN TRANSACTIONS
On August 25, 1992, Ravenswood entered into a deferred compensation agreement
with Mr. Foster, its chairman and chief executive officer, entitling him to
receive upon termination of his employment the value of 345,731 shares of common
stock, payable in shares or cash at Ravenswood's discretion. Effective July 1,
1998, Ravenswood and Mr. Foster mutually terminated this arrangement upon
Ravenswood's issuing to Mr. Foster the 345,731 shares of common stock, and
agreeing to lend him up to $335,000 to pay taxes related to his receipt of these
shares. The loan, which was partially funded in December 1998, with the balance
to be drawn in April 1999, is due on December 21, 2008, with interest payable
annually at 5.3% per annum. The loan is unsecured. See notes 11 and 16 of the
notes to financial statements.
From August until December 1998, the following officers and directors of
Ravenswood participated in a private placement of an aggregate of $1.7 million
of convertible debentures and $1.7 million of common stock by Ravenswood:
Name Security Amount Purchased
---- -------- ----------------
W. Reed Foster .......... Convertible Debentures $ 62,500
Common Stock $ 62,500
Justin M. Faggioli ...... Convertible Debentures $134,283
Common Stock $187,500
Robert E. McGill, III ... Convertible Debentures $ 62,500
Common Stock $ 62,500
Each $10,000 convertible debenture is convertible into 900 shares of common
stock. The per share price of the common stock sold in the private placement was
$7.94 per share. The purchase price of the securities sold to these officers and
directors in the private placement was determined based on Ravenswood's board of
directors' good faith determination of the fair market value of the securities,
and was equivalent to the price paid for the securities by unrelated third
parties in the transaction.
In connection with the proposed expansion of the Quarry Facility, Ravenswood has
entered into an agreement to lease approximately 30 acres of land in Sonoma
County, California from Sandra D. Donnell and Bruce B. Donnell, the wife and
brother-in-law, respectively, of Mr. Faggioli, Ravenswood's executive vice
president. The lease, which is dated as of January 1, 1999, provides for monthly
payments and expires on December 31, 2032. Payments under the lease from
Ravenswood to Ms. Donnell and Mr. Donnell totaled $20,672 for calendar 1998, and
are expected to total $29,255 for calendar 1999, and approximately $41,344 for
calendar 2000, subject to annual adjustments.
Mr. Faggioli, Ms. Donnell and Mr. Donnell, together, are 15% partners in
Sangiacomo-El Novillero Vineyards. This partnership leases land from Ms. Donnell
and Mr. Donnell and sells a portion of its grapes to Ravenswood. Grape payments
by Ravenswood to the partnership totaled $88,872 in calendar 1997 and $147,490
in calendar 1998.
Ravenswood has periodically borrowed funds for short-term working capital from
some of its executive officers. As of December 31, 1998, Ravenswood had
outstanding promissory notes in the principal amount of $50,250 payable to Mr.
Foster, and promissory notes in the principal amount of $46,143 payable to Mr.
Peterson, Ravenswood's president and winemaker. With the exception of two notes
in the principal amount of $25,000 payable to each of Mr. Foster and Mr.
Peterson, respectively, which are due in June 30, 2004, each of the notes is
payable upon demand by the holder. The notes bear interest at rates ranging from
10% to 11% per annum.
49
<PAGE>
Mr. Peterson has two outstanding promissory notes payable to Ravenswood for an
aggregate principle amount of $22,000. The notes bear interest at 8.5% per annum
and are due in January 2004 and April 2004.
Mr. Peterson's wife, Madeleine Deininger, serves as a broker for Ravenswood in
the New England states. Under this arrangement, Ms. Deininger received sales
commissions totaling $154,575 in calendar 1997 and $214,018 in calendar 1998.
Ravenswood believes these transactions were in its best interest. As a matter of
policy, the transactions were, and all future transactions between Ravenswood
and any of its officers, directors or principal shareholders will be, approved
by a majority of the disinterested members of the board of directors, will be on
terms no less favorable to Ravenswood than could be obtained from unaffiliated
third parties and will be to serve bona fide business purposes of Ravenswood.
50
<PAGE>
PRINCIPAL SHAREHOLDERS
The following tables set forth information regarding beneficial ownership of
Ravenswood's common stock as of December 31, 1998, and as adjusted to reflect
the sale of the 1,000,000 shares of common stock in this offering, for:
o each person who is known by Ravenswood to beneficially own more than 5%
of the outstanding shares of common stock
o each director of Ravenswood
o each named executive officer
o all directors and executive officers of Ravenswood as a group
The address of each of the directors and executive officers of Ravenswood is c/o
Ravenswood Winery, Inc., 18701 Gehricke Road, Sonoma, California 95476.
The percentages of shares outstanding prior to the offering are based on
3,550,852 shares outstanding as of December 31, 1998. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Unless otherwise indicated, each person or entity named in the table
has sole voting power and investment power, or shares voting and investment
power with his or her spouse, with respect to all shares of capital stock listed
as owned by that person. Shares issuable upon conversion of debentures that are
currently convertible or become convertible within sixty days of December 31,
1998 are considered outstanding for the purpose of calculating the percentage of
outstanding shares of Ravenswood held by the individual, but not for the purpose
of calculating the percentage of outstanding shares of Ravenswood held by any
other individual.
<TABLE>
The total number of shares shown as beneficially owned by each of Messrs.
Foster, Peterson Faggioli and Wisner includes 2,150,681 shares of common stock
held in a voting trust, as to which Messrs. Foster, Peterson, Faggioli and
Wisner exercise voting control as trustees. Of those shares, Messrs. Foster,
Peterson, Faggioli and Wisner disclaim beneficial ownership of 1,732,500 shares,
746,411 shares, 2,059,331 shares and 1,993,181 shares, respectively.
<CAPTION>
Percentage of Shares
Outstanding
---------------------------
Number of Shares Beneficially Prior to After
Name Owned Offering Offering
- ---- ----- -------- --------
<S> <C> <C> <C>
W. Reed Foster ..................................................... 2,164,181 60.9% 47.5%
Joel E. Peterson ................................................... 2,150,681 60.6% 47.3%
Justin M. Faggioli ................................................. 2,186,391 61.4% 47.9%
James F. Wisner .................................................... 2,150,681 60.6% 47.3%
Callie S. Konno .................................................... 59,850 1.7% 1.3%
Robert E. McGill, III .............................................. 25,750 * *
All directors and executive officers
as a group (6 persons) ............................................ 2,225,641 62.1% 48.5%
<FN>
- ------------
* Less than 1%.
</FN>
</TABLE>
51
<PAGE>
Excluding the shares of common stock beneficially owned by Messrs. Foster,
Peterson, Faggioli and Wisner solely as a result of their status as trustees of
the voting trust, Messrs. Foster, Peterson, Faggioli and Wisner's beneficial
ownership disclosure would appear as follows:
Percentage of Shares
Outstanding
-----------------------
Number of Shares Prior to After
Name Beneficially Owned Offering Offering
- --------------------------- -------------------- ---------- ----------
W. Reed Foster ................. 431,681 12.1% 9.5%
Joel E. Peterson ............... 1,404,270 39.6% 30.9%
Justin M. Faggioli ............. 127,060 3.6% 2.8%
James F. Wisner ................ 157,500 4.4% 3.5%
The disclosure regarding the number of shares of common stock beneficially owned
in the two preceding tables:
o with respect to Mr. Foster, includes 5,625 shares issuable upon the
conversion of outstanding converted debentures and excludes 151,200
shares held by an irrevocable trust established for the benefit of Mr.
Foster's children
o with respect to Mr. Peterson, does not include 151,200 shares held by
an irrevocable trust established for the benefit of Mr. Peterson's
children
o with respect to Mr. Faggioli, includes 12,085 shares issuable upon the
conversion of outstanding convertible debentures, 4,789 shares of which
are issuable to Mr. Faggioli's spouse
o with respect to Mr. Wisner, includes 31,500 shares held by Mr. Wisner's
spouse
o with respect to Mr. McGill, includes 17,875 shares issuable upon the
conversion of outstanding convertible debentures and 13,500 shares held
in a family trust established for the benefit of Mr. McGill
o with respect to Ravenwood's directors and executive officers as a
group, includes 35,585 shares issuable upon conversion of outstanding
convertible debentures
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of Ravenswood
will consist of 20,000,000 shares of common stock, no par value, and 1,000,000
shares of preferred stock, no par value. As of December 31, 1998, there were
outstanding 3,550,852 shares of common stock held by approximately 60
shareholders of record and no shares of preferred stock. Of the 20,000,000
shares of common stock authorized: 500,000 are reserved for issuance under the
1999 Equity Incentive Plan, 50,000 are reserved for issuance under the Employee
Stock Purchase Plan, 454,622 are reserved for issuance upon the conversion of
outstanding debentures, and 1,000,000 are being sold in this offering.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive dividends as may be declared
by the board of directors out of legally available funds.
In the event of a liquidation, dissolution or winding up of Ravenswood, holders
of the common stock are entitled to share ratably in all assets remaining after
payment of liabilities and the liquidation preferences of any outstanding shares
of preferred stock. Holders of common stock have no preemptive rights and no
right to convert their common stock into any other securities. There are no
redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon the closing of this offering will be, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to the rights of holders of shares of any series of preferred stock
which Ravenswood may designate and issue in the future.
Voting Trust
A portion of Ravenswood's outstanding common stock, totaling 2,150,681 shares
and representing approximately 60.6% of the outstanding common stock prior to
the offering and approximately 47.3% after the offering, is held in a voting
trust, for which Messrs. Foster, Peterson, Faggioli and Wisner serve as
trustees. A total of 2,131,151 shares in the voting trust are held of record by
affiliates of Ravenswood. The remaining 19,530 shares are held by two
non-affiliated shareholders, William R. Hambrecht and John D. Nichols. The
address of each of the trustees is: c/o Ravenswood Winery, 18701 Gehricke Road,
Sonoma, California 95476. The trustees have the exclusive right to vote all of
the shares held by the voting trust on all matters presented to the shareholders
for a vote, as follows:
o As long as Mr. Peterson is a trustee of the voting trust, all decisions
except decisions to amend or terminate the voting trust require the
approval of Mr. Peterson and one other trustee; however, decisions to
amend or terminate the voting trust require the approval of Mr.
Peterson and two other trustees
o If Mr. Peterson is no longer a trustee of the voting trust, all
decisions require the approval of three 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
Shares may be released from the voting trust upon transfer of shares for
estate-planning purposes, in connection with the sale of shares, or upon the
approval of the trustees. The voting trust expires on May 26, 2008.
53
<PAGE>
Preferred Stock
Ravenswood's articles give the the board of directors the authority, without
further action by the shareholders, to issue up to 1,000,000 shares of preferred
stock in one or more series. The articles also allow the board of directors to
fix the designations, powers, preferences, privileges and rights of the
preferred stock, and the qualifications, limitations or restrictions on the
preferred stock, including dividend rights, conversion rights, voting rights,
terms of redemption and liquidation preferences, any or all of which may be
greater than the rights of the common stock.
The board of directors, without shareholder approval, may issue preferred stock
with voting, conversion or other rights that could adversely affect the voting
power and other rights of the holders of common stock. Preferred stock could be
issued quickly with terms which could delay or prevent a change in control of
Ravenswood or make removal of management more difficult. Additionally, the
issuance of preferred stock may have the effect of decreasing the market price
of the common stock and may adversely affect the voting and other rights of the
holders of common stock. Upon the closing of this offering, there will be no
shares of preferred stock outstanding, and Ravenswood currently has no plans to
issue any of its preferred stock.
Debentures
Ravenswood has outstanding $865,000 of convertible debentures due December 31,
2004. Each $10,000 debenture is convertible into 3,500 shares of common stock at
any time prior to December 31, 1999 upon request of the holder. If the
debentures are not converted, Ravenswood may redeem them at face value at any
time from January 1, 2000 until the maturity date. Ravenswood pays interest
quarterly on the debentures based on a floating index tied to prime bank rates
for a five-year period. The interest rate is adjusted every 18 months, except
that in no period may the interest rate adjustment exceed 2% or the maximum
interest rate exceed 11%.
Ravenswood has outstanding $1.7 million of 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, Ravenswood may redeem them at face value at any
time 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%.
Registration Rights
Upon conversion of debentures due December 31, 2004, shareholders holding an
aggregate of 302,750 shares of common stock will have registration rights with
respect to those shares. If Ravenswood proposes to register any of its common
stock under the Securities Act, except registrations relating to employee
benefit plans or acquisitions, the rights holders may require Ravenswood to
include all or a portion of these shares in that registration. All registration
expenses incurred in connection with these registrations will be borne by
Ravenswood. A holder of the registration rights must pay all underwriting
discounts, selling commissions and stock transfer taxes applicable to the sale
of his or her registrable shares of common stock. In connection with this
offering, each of the rights holders has waived his or her registration rights.
54
<PAGE>
Antitakeover Effects of Ravenswood's Articles and Bylaws
Ravenswood's articles and bylaws require that, effective upon the closing of
this offering, any action required or permitted to be taken by Ravenswood's
shareholders must be effected at a duly called annual or special meeting of the
shareholders, and may not be effected by a consent in writing. In addition, the
bylaws require advance notice of shareholder proposals and nominations for board
elections. Ravenswood's articles also specify that the authorized number of
directors within the range specified in Ravenswood's bylaws may be changed only
by resolution of the board of directors. Ravenswood's bylaws may be amended by
its board of directors or its shareholders; however, its shareholders may amend
the bylaws only by the affirmative vote of at least two-thirds of the
outstanding voting securities. These provisions may have the effect of deterring
hostile takeovers or delaying changes in the control or management of
Ravenswood.
Ravenswood's articles and its bylaws provide that Ravenswood will indemnify its
officers and directors as permitted by California law against losses that they
may incur in investigations and legal proceedings resulting from their service
to Ravenswood, which may include service in connection with takeover defense
measures. These provisions may have the effect of preventing changes in
Ravenswood's management.
In addition, once Ravenswood is qualified for listing on the Nasdaq National
Market and has at least 800 holders of its equity securities, its charter
documents will eliminate cumulative voting, which may make it more difficult for
a third party to gain control of Ravenswood's board of directors.
Transfer Agent and Registrar
ChaseMellon Shareholders Services, LLC has been appointed as the transfer agent
and registrar for Ravenswood's common stock.
Listing
Ravenswood has applied to list its common stock on the Nasdaq National Market
under the trading symbol "RVWD."
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a large number of shares of common stock in the market after the
offering, or a belief that these sales could occur, could cause a drop in the
market price of Ravenswood's common stock and could impair its ability to raise
capital through offerings of its equity securities.
Upon the closing of this offering, Ravenswood will have outstanding an aggregate
of 4,550,852 shares of common stock. Of these shares, the 1,000,000 shares sold
in this offering will be freely tradable without restrictions or further
registration under the Securities Act unless the shares are purchased by
"affiliates" of Ravenswood, as that term is defined under Rule 144 under the
Securities Act. The remaining 3,550,852 shares of common stock held by existing
shareholders will be "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted shares may be sold in the public market
only if registered or if they qualify for an exemption from registration under
Rule 144 or Rule 701 under the Securities Act.
The restricted shares will be available for sale in the public market as
follows:
o 866,248 restricted shares will be eligible for sale on the date of this
prospectus under Rule 144(k);
o 1,810,620 restricted shares will be eligible for sale 90 days after the
date of this prospectus under Rule 144 and Rule 701 of the Securities
Act; and
o the remaining restricted shares will be eligible for sale from time to
time upon expiration of one-year holding periods and subject to the
requirements of Rule 144.
Upon completion of this offering, there will be 454,622 shares issuable upon
conversion of outstanding convertible debentures, all of which are immediately
convertible. Debenture shares will be available for sale in the public market as
follows:
o 273,000 debenture shares will be eligible for sale on the date of this
prospectus under Rule 144(k);
o 12,250 debenture shares will be eligible for sale 90 days after the
date of this prospectus under Rule 144; and
o the remaining debenture shares will be eligible for sale from time to
time upon expiration of one-year holding periods and subject to the
requirements of Rule 144.
In general, beginning 90 days after the date of this prospectus, restricted
shares or debenture shares that are held for at least one year may be sold under
Rule 144, subject to volume limitations provided in the rule. Sales under Rule
144 are also subject to requirements relating to manner of sale, notice and
availability of current public information about Ravenswood. Additionally, a
shareholder who is not an affiliate of Ravenswood is entitled to sell shares
under Rule 144(k) without regard to the limitations described above, provided
the shareholder has held the restricted shares or debenture shares for at least
two years. This discussion is only a summary of Rule 144 and is not intended to
be a complete description of it.
The 345,731 shares issued to Mr. Foster in termination of his deferred
compensation arrangement were issued in reliance upon Rule 701. These shares may
be sold beginning 90 days after the date of this prospectus under Rule 144,
without compliance with the one-year minimum holding period requirement.
56
<PAGE>
As of February 1, 1999, no options had been granted under the 1999 Equity
Incentive Plan. Ravenswood intends to grant options to purchase an aggregate of
279,500 shares of common stock on the effective date of this offering at the
initial public offering price. After the completion of this offering, Ravenswood
intends to file a registration statement under the Securities Act to register
the 500,000 shares of common stock reserved for issuance under the 1999 Equity
Incentive Plan and the 50,000 shares of common stock reserved for issuance under
the Employee Stock Purchase Plan. Upon registration, all of these shares will be
freely tradeable when issued.
Prior to this offering, there has been no public market for the common stock of
Ravenswood, and the effect, if any, that the sale or availability for sale of
shares of additional common stock will have on the trading price of the common
stock cannot be predicted. Nevertheless, sales of substantial amounts of shares
in the public market, or the perception that these sales could occur, could
adversely affect the trading price of the common stock and could impair
Ravenswood's future ability to raise capital through an offering of its equity
securities.
57
<PAGE>
PLAN OF DISTRIBUTION
Subject to the terms and conditions of an underwriting agreement, W.R. Hambrecht
& Company, LLC, as underwriter, has agreed to purchase from Ravenswood all of
the shares of common stock offered. The underwriting agreement provides that the
obligations of the underwriter are subject to conditions, including the absence
of any material adverse change in Ravenswood's business, and the receipt of
certificates, opinions and letters from Ravenswood and its counsel and
independent auditors. Subject to those conditions, the underwriter is committed
to purchase all shares of common stock offered if any of the shares are
purchased.
The underwriter proposes to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus, as
this price is determined by the process described below, and to certain dealers
at this price less a concession not in excess of $[____________] per share. Any
dealers or agents that participate in the distribution of the common stock may
be deemed to be underwriters within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them and any provided by the
sale of the shares by them might be deemed to be underwriting discounts and
commissions under the Securities Act. After the completion of the initial public
offering of the shares, the public offering price and other selling terms may be
changed by the underwriter.
The public offering price set forth on the cover page of this prospectus will be
based on the results of an auction process, rather than solely through
negotiations between Ravenswood and the underwriter. The plan of distribution of
the offered shares differs somewhat from traditional underwritten public
offerings of equity securities.
The auction process will proceed as follows:
o Prior to effectiveness of the registration statement relating to this
offering, the underwriter and participating dealers will solicit
indications of interest from prospective investors through the Internet
as well as by traditional means. The indications of interest will
specify the number of shares the potential investor proposes to
purchase and the price the investor is willing to pay for the shares.
The public offering price will ultimately be determined by negotiation
between the underwriter and Ravenswood. The principal factor in
establishing the public offering price will be the price per share, or
clearing price, that equals the highest price set forth in valid
indications of interest at which all of the shares may be sold to
potential investors. The public offering price may be lower than the
clearing price based on negotiations between the underwriter and
Ravenswood. Valid indications of interest are those that meet the
requirements, including suitability, account status and size,
established by the underwriter or participating dealers.
o In determining the validity of indications of interest, in addition to
minimum account balances, a prospective investor submitting indications
of interest through a W.R. Hambrecht & Company, LLC brokerage account
may be required to maintain an account balance equal to or in excess of
the aggregate dollar amount of the prospective investor's indications
of interest. Although funds may be required to be in an account, the
funds will not be transferred to the underwriter until the closing of
the offering. Conditions for valid indications of interest, including
suitability standards and account funding requirements, of
participating dealers may vary.
o The offered shares will be purchased from Ravenswood by the underwriter
and offered through the underwriter and participating dealers to
investors who have
58
<PAGE>
submitted indications of interest at or in excess of the public
offering price. The number of shares offered to an investor submitting
an indication of interest precisely at the public offering price may be
subject to a pro rata reduction. Each participating dealer has agreed
with the underwriter to offer shares they purchase from the underwriter
in this manner, unless otherwise consented to by the underwriter.
Shares issued upon exercise of the underwriter's over-allotment option
will be allocated in the same manner. The underwriter reserves the
right, in exceptional circumstances, to alter this method of allocation
as it deems necessary to effect a fair and orderly distribution of the
offered shares. For example, large orders may be reduced to insure a
public distribution and indications of interest may be rejected by the
underwriter or participating dealers based on suitability or
creditworthiness criteria.
W.R. Hambrecht & Company, LLC is serving as the sole underwriter of this
offering. Price and volume volatility in the market for Ravenswood's common
stock may result from:
o A lack of sufficient analyst research resulting from the lack of
additional underwriters and the relatively small aggregate size of this
offering.
o The relatively few shares of Ravenswood's common stock available for
trading after this offering.
o The fact that the proposed plan of distribution is somewhat unique.
Price and volume volatility in the market for Ravenswood's common stock after
the completion of this offering may adversely affect the market price of
Ravenswood's common stock.
Ravenswood has granted to the underwriter an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to an aggregate of
150,000 additional shares of common stock at the offering price, less the
underwriting discount, set forth on the cover page of this prospectus. To the
extent that the underwriter exercises this option, the underwriter will have a
firm commitment to purchase the additional shares, and Ravenswood will be
obligated to sell the additional shares to the underwriter. The underwriter may
exercise the option only to cover over-allotments made in connection with the
sale of shares offered.
The underwriting agreement provides that Ravenswood will indemnify the
underwriter against specified liabilities, including liabilities under the
Securities Act, or contribute to payments that the underwriter may be required
to make.
Ravenswood has agreed not to offer, sell, contract to sell, or otherwise dispose
of any shares of common stock, or any options or warrants to purchase common
stock other than the shares of common stock or options to acquire common stock
issued under Ravenswood's 1999 Equity Incentive Plan, Employee Stock Purchase
Plan or upon the conversion of outstanding convertibles debentures, for a period
of 90 days after the date of this prospectus, except with the prior written
consent of the underwriter.
Prior to the offering, there has been no public market for Ravenswood's common
stock. The initial public offering price for the common stock will be determined
by the process described above and does not necessarily bear any direct
relationship to Ravenswood's assets, current earnings or book value or to any
other established criteria of value, although these factors were considered in
establishing the initial public offering price range. Among other factors
considered in determining the initial public offering price range:
59
<PAGE>
o Market conditions
o The industry in which Ravenswood operates
o An assessment of Ravenswood's management
o Its operating results
o Its capital structure
o The business potential of Ravenswood
o The demand for similar securities of comparable companies
o Other factors deemed relevant
Certain persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of Ravenswood's common stock,
including over-allotment, stabilizing and short-covering transactions in
Ravenswood's common stock, and the imposition of a penalty bid, in connection
with the offering.
W.R. Hambrecht & Company, LLC is an investment banking firm formed as a limited
liability company in February 1998. In addition to this offering, W.R. Hambrecht
& Company, LLC has engaged in the business of public and private equity
investing and financial advisory services since its inception. The manager of
W.R. Hambrecht & Company, LLC, William R. Hambrecht, has 40 years of experience
in the securities industry. Persons affiliated and associated with W.R.
Hambrecht & Company, LLC beneficially own an aggregate of approximately 36,765
shares of Ravenswood's common stock, including shares issuable upon the
conversion of convertible subordinated debentures.
LEGAL MATTERS
The validity of the shares issued in connection with this offering will be
passed upon for Ravenswood by Farella Braun & Martel LLP of San Francisco,
California. Certain legal matters in connection with the offering will be passed
upon for the underwriter by Cooley Godward LLP of Menlo Park, California.
EXPERTS
The financial statements of Ravenswood as of June 30, 1998 and 1997, and for
each of the two fiscal years ended June 30, 1997 and June 30, 1998, included in
the registration statement of which this prospectus is a part, have been
included here in reliance on the report of Odenberg, Ullakko, Muranishi & Co.
LLP, independent accountants, given on the authority of that firm as an expert
in accounting and auditing.
ENGAGEMENT OF NEW AUDITORS
Effective July 1, 1998, Odenberg, Ullakko, Muranishi & Co. LLP were engaged as
Ravenswood's independent accountants. Prior to that date, Field Accountancy
Corporation was Ravenswood's independent accountant, but did not conduct an
audit of, or issue an opinion concerning, Ravenswood's financial statements.
During its engagement as independent accountant for Ravenswood, there were no
disagreements with Field Accountancy Corporation on any matter of accounting
principles or practices, or financial statement disclosure. Field Accountancy
Corporation did not resign nor was it dismissed. In anticipation of this
offering, Odenberg, Ullakko, Muranishi & Co. LLP assumed the role of independent
accountants and Field Accountancy Corporation continued in its role as preparer
of Ravenswood's corporate tax returns. The decision to engage Odenberg, Ullakko,
Muranishi & Co. LLP was approved by Ravenswood's board of directors. Prior to
July 1, 1998, Ravenswood did not consult with Odenberg, Ullakko, Muranishi & Co.
LLP on items which involved Ravenswood's accounting principles or the form of
audit opinion to be issued on Ravenswood's financial statements.
60
<PAGE>
ADDITIONAL INFORMATION
Ravenswood has filed with the Securities and Exchange Commission, a registration
statement on Form SB-2 under the Securities Act with respect to the shares to be
sold in this offering. This prospectus does not contain all of the information
set forth in the registration statement and its exhibits and schedules. For
further information with respect to Ravenswood and the shares to be sold in this
offering, reference is made to the registration statement and its exhibits and
schedules filed through the EDGAR system. Statements contained in this
prospectus as to the content of any contract or other document referred to are
not necessarily complete, and, in each instance, if a contract or document is
filed as an exhibit, reference is made to the copy of the contract or document
filed as an exhibit to the registration statement. Each statement is qualified
in all respects by reference to the exhibit.
A copy of the registration statement and its exhibits and schedules may be
inspected without charge at the public reference facilities maintained by the
commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the commission's regional offices located at the Northwestern Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, New York 10048. Copies of all or any part of the
registration statement may be obtained from those offices upon the payment of
the fees prescribed by the commission. The public may obtain information on the
operation of the commission's public reference facilities by calling 1 (800)
SEC-0330. The commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the commission. The address of the commission's Web site is
www.sec.gov.
Ravenswood intends to furnish its shareholders with annual reports containing
audited financial statements and with quarterly reports for each of the first
three quarters of each fiscal year containing summary financial information.
61
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Report of Odenberg, Ullakko, Muranishi & Co. LLP, Independent Accountants .. F-2
Balance Sheets ........................................................... F-3
Statements of Income ..................................................... F-4
Statements of Shareholders' Equity ......................................... F-5
Statements of Cash Flows .................................................. F-6
Notes to Financial Statements ............................................ F-7
F-1
<PAGE>
September 15, 1998,
except for Note 16, which is as of
February 1, 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, 1998 and
1997, and the results of its operations and its cash flows for the fiscal years
then ended 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
audit 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
F-2
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
BALANCE SHEET
<CAPTION>
June 30, December 31,
------------------------------ ------------------------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 102,272 $ 211,961 $ 3,171,374 $ 165,852
Accounts receivable, less allowance
for doubtful accounts of $10,000 at
June 30, 1998 and December 31,
1998 and $31,213 at June 30, 1997
and December 31, 1997 .............................. 1,906,498 1,568,491 2,654,480 1,849,911
Refundable income taxes ............................. 73,849 33,886 240,882 160,808
Inventories ......................................... 10,427,359 7,158,002 12,931,338 10,290,223
Prepaid expenses .................................... 38,569 47,771 85,517 70,939
Deferred tax assets ................................. 270,822 192,954 29,940 209,687
----------- ----------- ----------- -----------
Total current assets ............................. 12,819,369 9,213,065 19,113,531 12,747,420
----------- ----------- ----------- -----------
Property, plant and equipment, less
accumulated depreciation ........................... 2,973,814 2,646,814 3,869,953 2,773,311
Notes receivable from shareholder ................... 28,312 26,442 87,747 27,377
Other assets ........................................ 155,615 154,429 153,034 158,407
----------- ----------- ----------- -----------
3,157,741 2,827,685 4,110,734 2,959,095
----------- ----------- ----------- -----------
$15,977,110 $12,040,750 $23,224,265 $15,706,515
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................... $ 194,464 $ 154,890 $ 86,103 $ 163,011
Current portion of capital lease
obligations ........................................ 189,975 153,102 112,707 160,179
Short-term borrowings ............................... 1,350,000 698,199 950,000 825,000
Accounts payable .................................... 2,330,967 1,725,988 3,760,686 3,580,116
Accrued commissions ................................. 246,483 148,628 375,252 263,526
Accrued liabilities ................................. 381,013 278,577 247,460 252,509
----------- ----------- ----------- -----------
Total current liabilities ........................ 4,692,902 3,159,384 5,532,208 5,244,341
Long-term liabilities:
Long-term debt, net ................................. 1,795,665 1,514,577 2,367,775 1,730,832
Notes payable to shareholders, net .................. 50,000 50,000 50,000 50,000
Capital lease obligations, net ...................... 199,719 192,697 375,226 201,604
Convertible debentures .............................. 865,000 865,000 2,552,500 865,000
----------- ----------- ----------- -----------
Total liabilities ................................ 7,603,286 5,781,658 10,877,709 8,091,777
----------- ----------- ----------- -----------
Shareholders' equity:
Preferred stock, no par value;
one million shares authorized, none
issued ............................................. -- -- -- --
Common stock, no par value; 20
million shares authorized .......................... 2,938,900 737,804 4,626,400 732,804
Retained earnings ................................... 5,434,924 5,521,288 7,720,156 6,881,934
----------- ----------- ----------- -----------
Total shareholders' equity ....................... 8,373,824 6,259,092 12,346,556 7,614,738
----------- ----------- ----------- -----------
Commitments (See notes 11, 13 and 16)
$15,977,110 $12,040,750 $23,224,265 $15,706,515
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-3
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
STATEMENT OF INCOME
<CAPTION>
Fiscal year ended June 30, Six months ended December 31,
--------------------------------- ---------------------------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Gross sales .................................... $ 17,016,866 $ 12,246,716 $ 12,194,996 $ 8,855,184
Less excise taxes ........................... 552,499 330,133 275,795 196,998
Less discounts, returns and
allowances ................................. 573,762 393,881 336,684 273,403
------------ ------------ ------------ ------------
Net sales ...................................... 15,890,605 11,522,702 11,582,517 8,384,783
Cost of goods sold ............................. 7,397,362 5,196,152 5,066,471 3,652,357
------------ ------------ ------------ ------------
Gross profit ................................... 8,493,243 6,326,550 6,516,046 4,732,426
Operating expenses:
Deferred Compensation
Expense .................................... 2,206,096 93,292 -- --
Other Operating Expenses .................... 4,033,747 3,261,303 2,340,009 1,851,859
------------ ------------ ------------ ------------
Operating income ............................... 2,253,400 2,971,955 4,176,037 2,880,567
------------ ------------ ------------ ------------
Other income (expense):
Interest expense ............................ (523,551) (392,600) (225,669) (164,388)
Impairment loss on vineyard ................. -- (136,144) -- --
Other, net .................................. 49,211 91,486 78,713 50,800
------------ ------------ ------------ ------------
(474,340) (437,258) (146,956) (113,588)
------------ ------------ ------------ ------------
Income before income taxes ..................... 1,779,060 2,534,697 4,029,081 2,766,979
Provision for income taxes ..................... 1,592,169 1,066,503 1,743,849 1,133,078
------------ ------------ ------------ ------------
Net income ..................................... $ 186,891 $ 1,468,194 $ 2,285,232 $ 1,633,901
============ ============ ============ ============
Basic earnings per share ....................... $ 0.05 $ 0.40 $ 0.66 $ 0.47
============ ============ ============ ============
Weighted average number of
common shares outstanding ..................... 3,491,981 3,636,356 3,478,954 3,505,106
============ ============ ============ ============
Diluted earnings per share ..................... $ 0.05 $ 0.39 $ 0.61 $ 0.44
============ ============ ============ ============
Weighted average number of
common shares and equivalents
outstanding ................................... 3,794,732 3,939,107 3,847,331 3,807,857
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-4
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
Common Stock
-------------------------------- Retained
Shares Amount Earnings Total
------------ ------------ ------------ ------------
(as restated)
<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
Shares issued related to deferred
compensation plan .............................. 345,731
Shares issued ................................... 212,623 1,687,500 1,687,500
Net income ...................................... 2,285,232 2,285,232
------------ ------------ ------------ ------------
Balance at December 31, 1998 (unaudited) ........... 3,550,852 $ 4,626,400 $ 7,720,156 $ 12,346,556
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-5
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
STATEMENT OF CASH FLOWS
<CAPTION>
Six months ended
Fiscal year ended June 30, December 31,
------------------------------ ------------------------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
----------- ----------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operations:
Net income ............................................ $ 186,891 $ 1,468,194 $ 2,285,232 $ 1,633,901
Items not requiring the current use
of cash:
Depreciation and amortization ....................... 168,784 225,026 170,668 119,314
Deferred income taxes ............................... (77,868) (56,608)
Deferred compensation ............................... 2,206,096 93,292
Impairment loss on vineyard ......................... 136,144
Changes in other operating items:
Accounts receivable ................................ (338,007) (12,721) (747,982) (281,420)
Refundable income taxes ............................ (39,963) 22,006 73,849 (126,922)
Inventories ........................................ (3,269,357) (2,014,283) (2,503,980) (3,132,222)
Prepaid expenses ................................... 9,202 (29,734) (46,947) (23,168)
Other assets ....................................... (8,220) 15,586 (6,560)
Accounts payable ................................... 604,979 475,547 1,429,719 1,854,128
Accrued liabilities ................................ 200,292 (56,640) (4,786) 87,146
----------- ----------- ----------- -----------
Cash provided by (used for)
operations ...................................... (357,171) 265,809 655,773 124,197
----------- ----------- ----------- -----------
Investments:
Additions to plant and equipment ...................... (490,621) (312,386) (831,901) (243,229)
Shareholder receivables ............................... (59,435)
----------- ----------- ----------- -----------
Cash used for investing activities ............... (490,621) (312,386) (891,336) (243,229)
----------- ----------- ----------- -----------
Financing:
Short-term borrowings, net ............................ 651,801 (351,801) (400,000) 126,801
Proceeds from long-term debt .......................... 410,642 550,000 278,225
Repayments of long-term debt .......................... (46,085) (155,794) (220,335) (53,878)
Proceeds from convertible debentures
and common shares issued ............................ 3,375,000
Repurchase of common shares from
former officer ...................................... (278,255) (278,225)
----------- ----------- ----------- -----------
Cash provided by (used for)
financing activities ............................ 738,103 (507,595) 3,304,665 72,923
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash
equivalents ........................................... (109,689) (554,172) 3,069,102 (46,109)
Cash and cash equivalents at beginning of
period ................................................ 211,961 766,133 102,272 211,961
----------- ----------- ----------- -----------
Cash and cash equivalents at end
of period ............................................. $ 102,272 $ 211,961 $ 3,171,374 $ 165,852
=========== =========== =========== ===========
Cash paid during the period for:
Interest .............................................. $ 484,670 $ 378,162 $ 209,497 $ 139,617
=========== =========== =========== ===========
Income taxes .......................................... $ 1,660,344 $ 1,125,404 $ 1,670,000 $ 1,260,000
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
F-6
<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
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 in Sonoma, Napa and other North Coast 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 63% of the total dollar sales for the fiscal year ended June 30,
1998. In addition, the Company relies on the winemaking capacity of other
companies and is limited to one-year contractual obligations with all custom
crush facilities.
The Company performs ongoing credit evaluations of its distributors and
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses have been within
management's expectations.
The Company places its cash and temporary cash investments with financial
institutions. At June 30, 1998 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.
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
F-7
<PAGE>
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. Leased equipment under capitalized leases are generally amortized over
the terms of the leases or their estimated useful lives, whichever is shorter.
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 the vineyards was reported for the fiscal
year ended June 30, 1997. The impairment loss is included in other income and
expenses in the accompanying statement of income.
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.
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 amount of accounts receivable, prepaid expenses, notes receivable
from shareholders, accounts payable, accrued liabilities, short-term borrowings,
long-term debt, capital lease obligations and convertible debentures is a
reasonable estimate 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 notes 11 and 16); (2) the
63-to-1 stock split approved in February 1999 (see note 16); and (3) common
stock issued in December 1998 (using the "treasury stock method") at prices
below the assumed initial public offering price (see note 16).
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
F-8
<PAGE>
arrangement in July 1998, (b) the stock split approved in February 1999, and (c)
common stock issued in December 1998 (using the "treasury stock method") at
prices below the assumed initial public offering price; and (2) the potentially
dilutive common shares issuable for convertible debt that was outstanding during
the measurement period.
Unaudited interim financial statements
The unaudited interim financial statements for the six month periods ended
December 31, 1998 and 1997 include, in the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of such financial information. Operating results for the
six-month period ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1999.
Reclassification of financial statement presentation
Certain reclassifications have been made to the fiscal 1997 financial statements
to conform to the fiscal 1998 financial statement presentation.
NOTE 2--Inventories:
Inventories are summarized as follows:
June 30,
--------------------------- December 31,
1 9 9 8 1 9 9 7 1 9 9 8
----------- ----------- -----------
(Unaudited)
Bulk wine ...................... $ 7,898,937 $ 5,341,378 $11,556,669
Bottled wine ................... 2,285,862 1,636,409 1,061,356
Crop costs ..................... 37,691 44,675 23,921
Supplies ....................... 72,902 41,161 131,542
Tasting room merchandise ....... 131,967 94,379 157,850
----------- ----------- -----------
$10,427,359 $ 7,158,002 $12,931,338
=========== =========== ===========
Certain of the foregoing assets are pledged as security for certain
indebtedness. See notes 5 and 6.
F-9
<PAGE>
NOTE 3--Property, plant and equipment:
<TABLE>
Property, plant and equipment is summarized as follows:
<CAPTION>
June 30, December 31,
-------------------------------- ----------
1 9 9 8 1 9 9 7 1 9 9 8
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
Land ............................................................. $ 245,135 $ 245,135 $ 245,135
Vineyards ........................................................ 56,264 56,264 56,264
Vineyards under development ...................................... 235,879 123,075 270,041
Building and improvements ........................................ 1,716,781 1,637,635 2,350,334
Leasehold improvements ........................................... 94,828 39,011 174,328
Machinery and equipment .......................................... 706,164 584,052 785,499
Barrels and equipment held under capital
leases .......................................................... 870,468 611,657 1,077,616
Tanks ............................................................ 145,688 68,874 145,688
Office equipment ................................................. 110,678 99,193 114,793
Transportation equipment ......................................... 12,409 13,309 40,145
---------- ---------- ----------
4,194,294 3,478,205 5,259,843
Less--accumulated depreciation ................................... 1,220,480 831,391 1,389,890
---------- ---------- ----------
$2,973,814 $2,646,814 $3,869,953
========== ========== ==========
</TABLE>
Included in property, plant and equipment are barrels and equipment leased under
capital leases with cost and accumulated depreciation totaling $870,468 and
$472,185, respectively, at June 30, 1998; and $611,657 and $249,125,
respectively, at June 30, 1997.
NOTE 4--Notes receivable from shareholder:
The notes receivable from shareholder at June 30, 1998 and 1997 consist of two
unsecured notes bearing annual interest at 8.5% and due January 2004 and April
2004.
NOTE 5--Short-term borrowing arrangements:
At June 30, 1998, the Company has a $2 million revolving line of credit with
Pacific Coast Farm Credit Services, ACA ("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 (8.86% and 9.57% at June 30, 1998
and 1997, respectively). The borrowings are secured by the Company's accounts
receivable, wine inventories and equipment. Borrowings under the line of credit
at June 30, 1998 and 1997 were $1,350,000 and $698,199, respectively.
The loan contains 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, and a current
ratio of at least 1.75 to 1, and provides for restrictions on the payment of
dividends and distributions to shareholders.
F-10
<PAGE>
NOTE 6--Long-term debt:
<TABLE>
Long-term debt is summarized as follows:
<CAPTION>
June 30, December 31,
------------------------------ ------------
1998 1997 1998
----------- ----------- ----------
(Unaudited)
<S> <C> <C> <C>
Note payable to Pacific Coast Farm Credit Services, ACA
("Association") with annual interest at a variable rate
established by the Association (7.65% at June 30, 1998),
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
Note payable to an individual with annual interest at 11%,
payable in monthly interest installments until January 1,
2000, thereafter payable in monthly principal and
interest installments (as defined in the agreement)
through October 1, 2009, secured by property and
equipment (see note 3) ............................................... $ 1,450,000
Note payable to the Association with annual interest at a
variable rate established by the Association (8.86% at
June 30, 1998), payable in quarterly principal and
interest installments of $17,390 through June 1, 2002,
secured by property and equipment (see note 3) ....................... 227,265 202,244
Revolving equity line of credit note payable ($835,000
commitment) to the Association with annual interest at a
variable rate established by the Association (7.65% at
June 30, 1998), 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) .................................. 29,887 579,887
Note payable to bank with annual interest at 10%, payable in
monthly principal and interest installments of $1,600
through November 11, 2000, secured by computer equipment
(see note 3) ......................................................... 39,304 53,513 31,499
Other unsecured notes payable with annual interest ranging
from 10% to 11%, payable in monthly principal and
interest installments as defined to January 31, 1999
through June 2001 .................................................... 26,030 40,816 41,355
----------- ----------- ----------
1,874,986 1,544,329 2,407,485
Less--current portion ................................................... 79,321 29,752 39,710
----------- ----------- ----------
$ 1,795,665 $ 1,514,577 $2,367,775
=========== =========== ==========
</TABLE>
Scheduled annual maturities of long-term debt are as follows: $79,321 - fiscal
1999; $124,281 - fiscal 2000; $90,443 - fiscal 2001; $84,161 - fiscal 2002;
$27,420 - fiscal 2003 and $1,469,360 thereafter.
F-11
<PAGE>
NOTE 7--Notes payable to shareholders:
<TABLE>
Notes payable to shareholders are summarized as follows:
<CAPTION>
June 30,
--------------------------- December 31,
1 9 9 8 1 9 9 7 1 9 9 8
-------- -------- --------
(unaudited)
<S> <C> <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 $ 56,138 $ 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 ......................................................... 119,000 119,000 50,250
-------- -------- --------
165,143 175,138 96,393
Less--current portion ..................................................... 115,143 125,138 46,393
-------- -------- --------
$ 50,000 $ 50,000 $ 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
-----------
1999 $ 222,844
2000 155,852
2001 59,935
2002 14,736
2003 1,994
---------
Net minimum lease payments 455,361
Less--amount representing interest 65,667
---------
Present value of net minimum lease payments 389,694
Less--current portion 189,975
---------
$ 199,719
=========
The net book value of leased barrels and equipment included in property, plant
and equipment at June 30, 1998 is $398,283.
NOTE 9--Convertible debentures:
At June 30, 1998 and 1997, the Company had $865,000 of convertible debentures
outstanding. The terms of the convertible debentures provide for current
interest payments to be made based on a floating index tied to prime bank rates
for a five-year period (9.5% at June 30, 1998). The initial rate and minimum
interest rate was set at 8% per annum, with a ceiling rate of 11%.
Conversion rights allow debenture holders to convert debt into 302,750 (as
restated for 63-to-1 stock split) shares of common stock at the option of the
debenture holders for a five-year period ending December 31, 1999. The
conversion price is stated at $2.857 per share. After the five-year conversion
period, the Company may redeem any convertible debt not converted to stock at
any time until the debenture's maturity on December 31, 2004.
F-12
<PAGE>
NOTE 10--Income taxes:
The provision for income taxes is as follows:
Fiscal year ended June 30,
--------------------------------
1 9 9 8 1 9 9 7
----------- -----------
Current tax expense:
Federal ......................... $ 1,306,069 $ 868,184
State and local ................. 363,968 254,927
----------- -----------
1,670,037 1,123,111
----------- -----------
Deferred tax benefit:
Federal ......................... (71,875) (48,771)
State and local ................. (5,993) (7,837)
----------- -----------
(77,868) (56,608)
----------- -----------
$ 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.
Deferred tax assets and liabilities are comprised of the following:
June 30,
--------------------------
1 9 9 8 1 9 9 7
--------- ---------
Deferred tax assets:
Deferred compensation ................... $ 240,882 $ 212,670
State taxes ............................. 37,074
--------- ---------
277,956 212,670
--------- ---------
Deferred tax liabilities:
Depreciation and amortization ........... (7,134)
Inventory costing ....................... (19,716)
--------- ---------
(7,134) (19,716)
--------- ---------
Net deferred tax asset .................. $ 270,822 $ 192,954
========= =========
<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,
---------------------------------------------------------
1 9 9 8 1 9 9 7
------------------------ ------------------------
Amount % Amount %
---------- ----- ---------- -----
<S> <C> <C> <C> <C>
Income taxes at federal statutory rate ........................... $ 604,880 34.0 % $ 861,797 34.0 %
Increase in income taxes resulting from:
State and local income taxes net of federal
benefit ......................................................... 228,567 12.85 155,630 6.14
Permanent differences (including a portion of
deferred compensation expense for fiscal 1998) .................. 758,722 42.64 49,076 1.94
---------- ----- ---------- -----
$1,592,169 89.49% $1,066,503 42.08%
========== ===== ========== =====
</TABLE>
Deferred compensation expense ($2,134,754) is recorded as a permanent difference
in fiscal 1998 since the Company has decided not to take a tax deduction for
this expense on its federal or state tax returns.
F-13
<PAGE>
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. At June 30, 1998, the estimated fair value of the units was $500
per unit, which is included in common stock in the accompanying balance sheet.
Compensation expense relating to this agreement is $2,206,096 and $93,292,
respectively, for the fiscal years ended June 30, 1998 and 1997 and is included
in operating expenses in the accompanying statement of income.
Under the terms of the agreement, upon termination of employment, the Company
had the option of paying the full amount of the account as follows: (1) in stock
within thirty days of termination of employment or (2) in equal cash
installments over a four-year period plus interest at prime rate (as defined in
the agreement). As of July 1, 1998, the deferred compensation agreement was
terminated and, the Company issued 345,731 (as restated for the 63-to-1 stock
split) shares of common stock to Mr. Foster. (see note 16).
NOTE 12--Voting trust:
On August 25, 1992, the Board of Directors authorized the creation of a voting
trust for all 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 James Wisner. 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 of the voting
trust, all decisions except decisions to amend or terminate the voting trust
require the approval of Mr. Peterson and one other trustee; however, 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 of the voting trust,
all decisions require the approval of three 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). As of December 31, 1998, 2,150,681 (as restated for
63-to-1 stock split) shares of common stock were subject to the terms of the
voting trust (see note 16).
NOTE 13--Commitments and contingencies:
The Company leases certain warehouse space under noncancellable operating leases
that expire on dates ranging from October 1999 to October 2008. 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. Rental expense (including contingent rent) was
$468,616 for 1998 and $317,507 for 1997. Minimum future rental payments for each
of the next five fiscal years and thereafter are as follows: $224,432 - fiscal
1999; $145,764 - fiscal 2000; $73,796 - fiscal 2001; $61,252 - fiscal 2002;
$61,252 - fiscal 2003 and $106,176 thereafter.
The Company has contracted with various growers and certain wineries to supply
approximately 95% of its future 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.
F-14
<PAGE>
The Company has established a plan to achieve Year 2000 compliance in its
electronic information systems and does not believe this plan will materially
affect the Company's results of operations or financial position.
NOTE 14--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 $53,089 in the 1998 fiscal year and $41,057 in the
1997 fiscal year.
NOTE 15--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 notes 11 and 16); (2) the
63-to-1 stock split approved in February 1999 (see note 16); and (3) common
stock issued in December 1998 (using the "treasury stock method") at prices
below the assumed initial public offering price (see note 16).
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 63-to-1 stock split approved in February 1999, and (c) common stock issued
in December 1998 (using the "treasury stock method") at prices below the assumed
initial public offering price; and (2) the potentially dilutive common shares
issuable for convertible debt that was outstanding during the measurement
period.
F-15
<PAGE>
<TABLE>
A summary of the basic and diluted earnings per share calculations is as
follows:
<CAPTION>
Fiscal year ended June 30, Six months ended December 31,
----------------------------- -----------------------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
---------- ---------- ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
BASIC
Average shares outstanding [A] ...................... 3,005,625 3,150,000 2,992,500 3,018,750
Shares issued under deferred
compensation arrangement [B] ....................... 345,731 345,731 345,731 345,731
Shares issued in December 1998 [C] .................. 140,625 140,625 140,723 140,625
---------- ---------- ---------- ----------
Weighted average number of common
shares outstanding ................................. 3,491,981 3,636,356 3,478,954 3,505,106
========== ========== ========== ==========
Net income .......................................... $ 186,891 $1,468,194 $2,285,232 $1,633,901
========== ========== ========== ==========
Per share amount .................................... $ 0.05 $ 0.40 $ 0.66 $ 0.47
========== ========== ========== ==========
DILUTED
Average shares outstanding [A] ...................... 3,005,625 3,150,000 2,992,500 3,018,750
Shares issued under deferred
compensation arrangement [B] ....................... 345,731 345,731 345,731 345,731
Shares issued in December 1998 [C] .................. 140,625 140,625 140,723 140,625
Net effect of potentially dilutive
common stock issuable for
convertible debentures ............................. 302,751 302,751 368,377 302,751
---------- ---------- ---------- ----------
Weighted average number of common
shares and equivalents outstanding ................. 3,794,732 3,939,107 3,847,331 3,807,857
========== ========== ========== ==========
Net income ............................................. $ 186,891 $1,468,194 $2,285,232 $1,633,901
Interest on convertible debt, net of tax
benefit ............................................... 49,305 55,793 45,168 24,653
---------- ---------- ---------- ----------
Net income, after adding interest on
debentures ............................................ $ 236,196 $1,523,987 $2,330,400 $1,658,554
========== ========== ========== ==========
Per share amount .................................... $ 0.05 $ 0.39 $ 0.61 $ 0.44
========== ========== ========== ==========
<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 agreement in July 1998.
[C] Represents the retroactive effect using the "treasury stock method" for
common stock issued in December 1998 at prices below the assumed initial
public offering price.
</FN>
</TABLE>
NOTE 16--Subsequent events:
As of July 1, 1998, the Company and its chairman and chief executive officer, W.
Reed Foster (see note 11), agreed to terminate his deferred compensation
agreement. Under the terms of the agreement, the Company issued Mr. Foster
345,731 (as restated for 63-to-1 stock split) shares of common stock and agreed
to loan Mr. Foster up to $335,000 to pay taxes related to his receipt of these
shares. The loan, which was partially funded in December 1998, with the balance
to be funded in April 1999, is due on December 21, 2008 with interest payable
annually at 5.3% per annum. In connection with the termination of the deferred
compensation agreement, the Company amended the Voting Trust to include the
345,731 shares issued to Mr. Foster.
In December 1998, the Company completed a sale of $1,687,500 of convertible
debentures due December 31, 2008 and $1,687,500 of common stock. Each $10,000
debenture is convertible into 900 (as restated for 63-to-1 stock split) shares
of common stock at any time prior to December 31, 2003 upon request of the
holder. If the debentures are not converted,
F-16
<PAGE>
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%. 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 January 1999, the Company entered into an agreement to lease approximately 30
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 on the leased property to expand its production capacity.
The lease provides for monthly payments that are adjusted annually and has a
term ending December 31, 2032. The Company is in the process of negotiating bank
financing required for the construction of the new facility.
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 addition, the Board of Directors has authorized one
million shares of preferred stock and increased the number of authorized shares
of common stock from one million to twenty million.
On February 1, 1999, the Company's Board of Directors adopted and the Company's
shareholders approved the 1999 Equity Incentive Plan to provide for the grant of
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), nonstatutory stock options,
restricted stock awards and other stock-based awards to the Company's officers,
employees, directors, independent contractors, consultants, vendors and
suppliers. There are 500,000 shares of common stock reserved for issuance under
the plan. No options have been granted under the plan to date, although the
Company intends to grant options to purchase an aggregate of 279,500 shares of
common stock in connection with its initial public offering. No awards may be
granted under the plan after January 2009, but the vesting of awards previously
granted may extend beyond that date.
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 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 as low as 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 purchase plan to date.
On February 1, 1999, the Company's board of directors approved a resolution to
conduct an initial public offering in early 1999.
F-17
<PAGE>
[GRAPHIC OMITTED]
(Ravenswood logo)
Until , 1999, 25 days after the date of this prospectus, all dealers
that buy, sell or trade our common stock, whether or not participating in this
offering, may be required to deliver a prospectus. This requirement is in
addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Articles 5 and 6 of Ravenswood's Articles provide for the indemnification of the
officers and directors of the company to the fullest extent permissible under
California law. In addition, Article 6 of Ravenswood's Bylaws, as amended,
requires that Ravenswood indemnify, and, in certain instances, advance expenses
to, its agents with respect to certain costs, expenses, judgments, fines,
settlements and other amounts incurred in connection with any proceeding, to the
fullest extent permitted by California law. Persons covered by this
indemnification provision include current and former directors, officers,
employees and other agents of Ravenswood, as well as persons who serve at the
request of Ravenswood as directors, officers, employees or agents of another
enterprise.
Section 317(b) of the California Corporations Code (the "Corporations Code")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any "proceeding" (as defined in Section 317(a)
of the Corporations Code), other than an action by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person is or was a director, officer, employee or other agent of the corporation
(collectively, an "Agent"), against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
proceeding if the Agent acted in good faith and in a manner the Agent reasonably
believed to be in the best interests of the corporation and, in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful.
Section 317(c) provides that a corporation shall have power to indemnify any
Agent who was or is a party or is threatened to be made a party to any
threatened, pending or completed action by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person is or was
an Agent, against expenses actually and reasonably incurred by the Agent in
connection with the defense or settlement of such action if the Agent acted in
good faith and in a manner such Agent believed to be in the best interests of
the corporation and its shareholders.
Section 317(c) further provides that no indemnification may be made thereunder
for any of the following: (i) in respect of any claim, issue or matter as to
which the Agent shall have been adjudged to be liable to the corporation, unless
and only to the extent that the court in which such proceeding is or was pending
shall determine that such Agent is fairly and reasonably entitled to
indemnification for expenses, (ii) of amounts paid in settling or otherwise
disposing of a pending action without court approval and (iii) of expenses
incurred in defending a pending action which is settled or otherwise disposed of
without court approval. Section 317(d) of the Corporations Code requires that an
Agent be indemnified against expenses actually and reasonably incurred to the
extent the Agent has been successful on the merits in the defense of proceedings
referred to in subdivisions (b) or (c) of Section 317.
Except as provided in Section 317(d), and pursuant to Section 317(e),
indemnification under Section 317 shall be made by the corporation only if
specifically authorized and upon a determination that indemnification is proper
in the circumstances because the Agent has met the applicable standard of
conduct set forth in Section 317(b) or (c), which determination is made by any
of the following: (i) a majority vote of a quorum consisting of directors who
are
II-1
<PAGE>
not parties to the proceeding, (ii) if such a quorum of directors is not
obtainable, by independent legal counsel in a written opinion, (iii) approval of
the shareholders, provided that any shares owned by the Agent may not vote
thereon, or (iv) the court in which such proceeding is or was pending. Pursuant
to Section 317(f) of the Corporations Code, the corporation may advance expenses
incurred in defending any proceeding upon receipt of an undertaking by the Agent
to repay such amount if it is ultimately determined that the Agent is not
entitled to be indemnified.
Section 317(h) provides, with certain exceptions, that no indemnification shall
be made under Section 317 where it appears that it would be inconsistent with a
provision of the corporation's articles or, bylaws, a shareholder resolution or
an agreement which prohibits or otherwise limits indemnification, or where it
would be inconsistent with any condition expressly imposed by a court in
approving a settlement.
In addition, Article 6 of Ravenswood's Bylaws authorizes Ravenswood to purchase
and maintain insurance on behalf of any person indemnified by Ravenswood.
Ravenswood expects to obtain a directors and officers liability insurance policy
prior to the closing of this offering.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses to be incurred in connection
with the sale and distribution of the securities being registered hereby, other
than underwriting discounts and commissions. All amounts are estimated except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
SEC registration fee .............................................. $ 4,316
National Association of Securities Dealers, Inc. filing fee ....... 2,053
Blue Sky fees and expenses ........................................ 2,000
Nasdaq National Market filing fee ................................. 63,725
Accounting fees and expenses ...................................... 25,000
Legal fees and expenses ........................................... 85,000
Printing and engraving expenses ................................... 60,000
Registrar and Transfer Agent's fees ............................... 5,000
Miscellaneous fees and expenses ................................... 42,906
--------
Total: ............................................................ $290,000
========
Item 26. Recent Sales of Unregistered Securities.
Since January 1996, Ravenswood has sold and issued the following unregistered
securities (share numbers and dollar amounts do not reflect the 63-for-1 split
to be effected in connection with this offering):
In April 1998, Ravenswood issued two promissory notes to Pacific Coast Farm
Credit Services in the aggregate amount of $2.8 million. The issuance of these
notes was made in reliance upon Section 4(2) of the Securities Act. The issuance
was made without general solicitation or advertising. Pacific Coast Farm Credit
Services is a commercial lender and was given access to all of the information
it requested regarding Ravenswood.
As of July 1, 1998, Ravenswood issued 5,487.8 shares of common stock to W. Reed
Foster, Ravenswood's chairman and chief executive officer, in connection with
the termination of
II-2
<PAGE>
a deferred compensation agreement entered into in August 1992. The issuance of
these shares was made in reliance upon Rule 701 of the Securities Act. The
issuance was made pursuant to a written contract relating to the compensation of
Mr. Foster.
From August until December 1998, Ravenswood sold a total of 3,375 shares of
common stock at a price of $500.00 per share and 168.75 convertible debentures
at a price of $10,000 per debenture, for aggregate consideration of $3,375,000
in cash. The shares and debentures were sold to the following investors:
William F. Aldinger, Bay Limited Partnership, Simon J. Blattner, James R. and
Mical Atz Brenzel, Paul J. Crowley, Bruce B. Donnell, Sandra D. Donnell, Justin
M. Faggioli and Sandra D. Donnell, W. Reed Foster, Dennis M. Malloy, Robert E.
and Daphne D. McGill, III, Nichols Family Foundation, Nichols Family Investment
Ltd. Partnership, Odyssey Capital, LLC, Mary F. Orben, Peter S. and Lorelei L.
Redding, Ronald G. Silva, Jean-Michel Valette, John R. Walter, Edith M. Wisner,
and W.R. Hambrecht & Company, LLC. These sales were made in reliance upon Rule
506 of the Securities Act. These sales were made without general solicitation
or advertising. Each purchaser was an accredited investor with access to all
information necessary to evaluate the investment and represented to Ravenswood
that the shares or debentures were being acquired for investment purposes only
and not with a view to distribution of those shares or debentures. Appropriate
legends were affixed to the stock certificates and convertible debentures
issued in this transaction.
Item 27. Exhibits and Financial Statement Schedules.
a. Index to Exhibits
Exhibit
Number Description of Document
- ------ -----------------------
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Articles of Incorporation of Ravenswood Winery,
Inc.
3.2 Amended and Restated Bylaws of Ravenswood Winery, Inc.
4.1 Specimen Stock Certificate
5.1 Opinion of Farella Braun & Martel LLP
9.1 Form of Voting Trust Agreement
10.1 1999 Equity Incentive Plan for Ravenswood Winery, Inc.
10.2 Employee Stock Purchase Plan for Ravenswood Winery, Inc.
10.3 Form of Indemnification Agreement for Ravenswood Winery, Inc.
10.4 Revolving Line of Credit Promissory Note and Agreement with Pacific
Coast Farm Credit Services, ACA, dated as of April 1, 1998.
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.
10.6 Notes payable from Ravenswood Winery, Inc. to W. Reed Foster
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
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.
10.10 Form of Convertible Subordinated Debenture dated as of January 1995
10.11 Form of Convertible Subordinated Debenture dated as of December 1998
10.12 Marketing, Sales Agency and Administration Services Agreement between
Ravenswood Winery, Inc. and Harvest Wines Inc.
11.1 Statement of Computation of Earnings Per Share
23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP
II-3
<PAGE>
Exhibit
Number Description of Document
- ------ -----------------------
23.2 Consent of Farella Braun & Martel LLP (included in Exhibit 5.1)
25.1 Power of Attorney (see p. II-6)
27.1 Financial Data Schedule
99.1 Former Accountant's Letter
99.2 Master Selected Dealers Agreement
Item 28. Undertakings.
(a) The undersigned registrant undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered here, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that it will:
(1) For purposes of determining any liability under the Securities Act, treat
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time as the initial bona fide offering of
those securities.
II-4
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorizes this amendment to be signed
on its behalf by the undersigned, in the County of Sonoma, State of California,
on April 5, 1999.
RAVENSWOOD WINERY, INC.
/s/ Justin M. Faggioli
-------------------------------------
Justin M. Faggioli
Executive Vice President,
Secretary and director
Pursuant to the requirements of the Securities Act, this amendment has been
signed below by the following persons in the capacities indicated on April 5,
1999.
Name Title
---- -----
/s/ W. Reed Foster* Chairman of the board and chief
--------------------------- executive officer (Principal Executive
W. Reed Foster Officer)
/s/ Joel E. Peterson* President, winemaker and director
---------------------------
Joel E. Peterson
/s/ Justin M. Faggioli Executive vice president, secretary and
--------------------------- director
Justin M. Faggioli
/s/ Callie S. Konno* Chief financial officer, treasurer and
--------------------------- director (Principal Financial and
Callie S. Konno Accounting Officer)
/s/ James F. Wisner* Director
---------------------------
James F. Wisner
/s/ Robert E. McGill, III* Director
---------------------------
Robert E. McGill, III
*By: /s/ Justin M. Faggioli
-----------------------------
Justin M. Faggioli
Attorney-in-fact
II-5
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------ -----------------------
23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP
Exhibit 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form SB-2 of our report dated September 15, 1998,
except as to certain subsequent events described in Note 16, which is as of
February 1, 1999, relating to the financial statements of Ravenswood Winery,
Inc., which appears in such Prospectus. We also consent to the references to us
under the headings "Experts" and "Selected Financial Data" in such Prospectus.
However, it should be noted that Odenberg, Ullakko, Muranishi & Co. LLP has not
prepared or certified such "Selected Financial Data."
ODENBERG, ULLAKKO, MURANISHI & CO. LLP
San Francisco, California
April 5, 1999
