UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________ .
Commission File Number: 0-30002
RAVENSWOOD WINERY, INC.
(Exact name of small business as specified in its charter)
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California 94-3026706
(State or other jurisdiction incorporation or organization) (I.R.S. Employer Identification No.)
18701 Gehricke Road 95476
Sonoma, California (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (707) 938-1960
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Title of each exchange on which registered
---------------------- -------------------------------------------
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ].
Check if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (section 229.405 of this chapter) is not contained herein, and
no disclosure will be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-KSB. [ ].
The issuer's revenues for its most recent fiscal year. $35,615,207.
The aggregate market value of voting stock held by non-affiliates of the
issuer as of September 11, 2000 was $39,475,248.
There were 4,858,929 shares of the issuer's Common Stock outstanding as of
September 11, 2000.
DOCUMENTS INCORPORATED BY REFERENCE
Items 10 through 13 are incorporated by reference to the issuer's Proxy
Statement for the 2000 annual meeting of shareholders to be filed with the SEC
and mailed to shareholders by October 6, 2000.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [X].
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RAVENSWOOD WINERY, INC.
TABLE OF CONTENTS
2000 FORM 10-KSB
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Item No. Page
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PART I
Item 1. Business ....................................................................... 1
Item 2. Properties ..................................................................... 15
Item 3. Legal Proceedings .............................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders ............................ 16
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters ....... 17
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations ..................................................................... 18
Item 7. Financial Statements ........................................................... 23
Item 8. Changes In and Disagreements With Accountants on Accounting and Financial
Disclosure ..................................................................... 43
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act .............................................. 43
Item 10. Executive Compensation ......................................................... 43
Item 11. Security Ownership of Certain Beneficial Owners and Management ................. 43
Item 12. Certain Relationships and Related Transactions ................................. 43
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................ 43
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This Report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), regarding future events and Ravenswood's plans and
expectations that involve risks and uncertainties. When used in this Report,
the words "estimate," "project," "intend," "expect" and "anticipate" and
similar expressions are intended to identify such forward-looking statements.
Such statements are subject to certain risks and uncertainties, including those
discussed below, that could cause actual results to differ materially from
those projected. Factors that may cause actual results to vary include, but are
not limited to: (i) future and past weather and general farming conditions
affecting the annual grape harvest; (ii) variations in consumer taste and
preference: (iii) changes in the wine industry regulatory environment; and (iv)
changes in the market value of Ravenswood's common stock. Other factors that
may cause or contribute to such differences include, but are not limited to,
those discussed below under "Risk Factors," as well as those discussed
elsewhere in this Report and in the documents incorporated herein by reference.
In light of the important factors that can materially affect results, including
those set forth in this paragraph and below, the inclusion of forward-looking
information herein should not be regarded as a representation by Ravenswood or
any other person that the objectives or plans for Ravenswood will be achieved.
The reader is therefore cautioned not to place undue reliance on the
forward-looking statements contained herein, which speak only as of the date
hereof. Ravenswood undertakes no obligation to publicly release updates or
revisions to these statements.
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PART I
Item 1. Business
General Overview
Ravenswood produces, markets and sells premium California wines
exclusively under the Ravenswood brand name. The vast majority of the wines
Ravenswood produces and sells are red wines, including Merlot, Cabernet
Sauvignon and, particularly, Zinfandel. To a lesser extent, Ravenswood produces
white wines, including Chardonnay, French Colombard and Gewurztraminer.
Ravenswood produces wines in three series:
* The value-priced Vintners Blend Series, with a suggested retail price of
approximately $9.75 to $11.25 per 750 ml bottle;
* The intermediate-priced County Series, with a suggested retail price of
approximately $13.25 to $18.50 per 750 ml bottle; and
* The higher-priced Vineyard Designate Series, with a suggested retail
price of approximately $22.00 to $35.00 per 750 ml bottle.
The actual price of any particular wine may be either higher or lower than
suggested retail, depending upon the type of retail outlet and location where
it is sold. All of these products are within the super-premium and
ultra-premium categories of the premium wine market generally recognized by the
wine industry. "Premium" wines typically retail for more than $3.00 per 750 ml
equivalent unit. The premium category is often divided into three major
segments: (a) "popular premium" wines, which retail for between $3.00 and $7.00
per 750 ml equivalent unit; (b) "super-premium" wines, which retail for between
$7.00 and $14.00 per 750 ml equivalent unit; and (c) "ultra-premium" wines,
which retail for $14.00 or more per 750 ml equivalent unit. These categories
were originally created by Gomberg, Fredrickson and Associates and are now
commonly used in the wine industry.
For its 1998 and 1999 vintages, which the Company released in 2000,
Ravenswood marketed and sold 39 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.
Although Ravenswood currently owns and manages 14 acres of planted vineyards,
over 95% of its grapes are supplied by third parties. Ravenswood also purchases
bulk wine of superior quality, which is incorporated into its products,
particularly its Vintners Blend Series.
Ravenswood believes this strategy has enabled it to sustain the growth
necessary to capitalize on favorable trends in the demand for California
premium wines, while minimizing the need to invest large amounts of capital in
the acquisition and development of land and capital equipment until its
production levels warranted further investment. As a result Ravenswood enjoys
returns on equity and assets that are above normal for the wine industry.
Ravenswood Products
Ravenswood has 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 geographic locations in California.
Ravenswood purchases grapes from independent growers
in premium grape-growing regions in Northern
California. These grapes are vinified by Ravenswood
and blended with bulk wine
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derived from grapes grown in California to produce a
wine of distinct varietal character at a reasonable
price to the consumer. Ravenswood currently produces
Vintners Blend Zinfandel, Merlot and Chardonnay, as
well as other white wines in a similar price range.
Because of its price, the Vintners Blend Series
provides lower margins than Ravenswood's other
products; however, the flexibility of 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 2000 fiscal
year, gross sales of the Vintners Blend Series totaled
$22.4 million, or 63% of Ravenswood's gross sales, and
is the fastest growing series in Ravenswood's
portfolio of products.
County Series Ravenswood's County Series consists of specific
varietal wines vinted primarily by Ravenswood and
blended from grapes acquired from independent growers
within the specific appellations of Napa County, Sonoma
County, Amador County, Mendocino County, Alexander
Valley and Lodi. Ravenswood believes that its County
Series provides consumers with reasonably priced,
ultra-premium wines that have distinct varietal and
geographic character and are derived solely from grapes
of highly regarded appellations. For its 1998 vintage,
Ravenswood offered 13 different wines within the County
Series. In the 2000 fiscal year, gross sales of the
County Series totaled $7.8 million, or 22% of
Ravenswood's gross sales.
Vineyard Designate Ravenswood's Vineyard Designate Series consists of
Series ultra-premium varietal and Meritage wines derived from
grapes supplied by specific vineyards within Napa and
Sonoma counties. Ravenswood believes that each Vineyard
Designate wine reflects the unique flavor
characteristic of a specific, designated vineyard.
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 1998 and 1999 vintages,
Ravenswood offered 20 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 2000 fiscal year, gross sales of
the Vineyard Designate Series totaled $5.1 million, or
14% of Ravenswood's gross sales.
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The table below summarizes the number of wines offered in each product
series, by varietal, for the Ravenswood 1998 and 1999 vintages:
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Vintners Vineyard
Blend County Designate Total
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Zinfandel ........................................... 1 6 9 16
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 1 2
Miscellaneous whites ................................ 3 1 1 5
- -- -- --
TOTAL ............................................... 6 13 20 39
= == == ==
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The vast majority of Ravenswood's products are red wines, particularly
Zinfandel. Ravenswood's red wines accounted for approximately 94% of its gross
sales in the 2000 fiscal year, with sales of Zinfandel accounting for
approximately 65% of its gross sales for that period. Ravenswood estimates that
future vintages will continue to consist primarily of red wines. However,
Ravenswood expects a lesser percentage of Ravenswood's total production will
consist of Zinfandel, as it expects production of other red varietal wines to
increase more rapidly. Ravenswood will continue to attempt to expand its sales
and name recognition selectively. Ravenswood believes that its current mix of
products is well-suited to the growing demand for red wines, and intends to
continue to devote a majority of its production to its existing red wines.
Ravenswood believes that by focusing on traditional, old-world French
winemaking processes 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 Winemaking Process
In producing its premium wine products, Ravenswood employs traditional
old-world French winemaking techniques modified to embrace important aspects of
modern winemaking. Ravenswood defines traditional old-world French winemaking
as an approach that embraces natural processes and in which human and
mechanical intervention is minimized. For example, Ravenswood allows wild
yeasts to assist in fermentation and manually mixes its fermenting wines when
feasible.
Ravenswood's winemaking techniques demand careful attention to the wines
from the vineyard through the bottling and shipping of its finished products.
Grape Acquisition
Substantially all of the grapes utilized in the production of Ravenswood's
wines are purchased from independent growers. Ravenswood plays an active role,
however, in the management of the grapes that it purchases by monitoring the
development of the crop and working directly with vineyard owners to determine
optimal plans for nurturing and harvesting grapes. Ravenswood also purchases
bulk wine, which is wine vinted by third parties, to incorporate into some of
its products. Most of the bulk wine purchased by Ravenswood is incorporated
into its Vintners Blend Series. To a limited extent, Ravenswood may incorporate
bulk wine that it believes to be of exceptional quality into its County Series.
Fermentation
After the grapes are harvested, they are immediately crushed and pumped
into fermenting tanks. Using wild, natural yeasts found on the grapes, a
combination of the grapes, juice, seeds and stems is left to ferment for a
period ranging from one to four weeks, during which time the sugar in the
grapes is
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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, resulting in wines with full
extraction of color and flavor. Ravenswood's fermentation procedures, by
product series, are described below:
Vineyard Designate 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. A majority of
the Vineyard Designate Series is currently crushed and
fermented at the Gehricke Road Facility.
County Series Ravenswood's County Series is fermented in a mix of
open-top redwood and stainless steel fermentation tanks
ranging in size from six to 20 tons. A majority of the
County Series is currently crushed and fermented at the
Quarry Facility.
Vintners Blend Series The portion of Ravenswood's Vintners Blend Series
vinted by Ravens-wood is fermented exclusively in 20-
to 60-ton stainless steel fermenting tanks. Ravenswood
currently utilizes independent crush and fermentation
facilities for the production of a portion of the
Vintners Blend Series. Ravenswood expects a portion of
the Vintners Blend program to be crushed and fermented
at the Quarry Facility.
Aging
When the fermentation process is completed, the wine is gently pressed to
separate the juice from the grape skins and stems. It is then stored for aging.
Ravenswood's aging procedures, by product series, are described below:
Vineyard Designate All of Ravenswood's Vineyard Designate Series is stored
Series in 60-gallon French oak barrels of various ages.
Approximately 30-60% of the Vineyard Designate Series
is stored in new barrels. Ravenswood believes that
storage in new oak barrels provides superior flavor
characteristics in comparison to other storage
alternatives. The Vineyard Designate Series is aged in
barrels for up to two years.
County Series Substantially all of Ravenswood's County Series is
stored in 60-gallon French oak barrels and
approximately 25-30% of the County Series is stored in
new barrels. The County Series is typically aged in
barrels for approximately 18 months.
Vintners Blend 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.
Most of Ravenswood's wines are allowed to go through malolactic
fermentation, a secondary fermentation which adds complexity and flavor to the
wines.
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Blending and Bottling
After aging is completed, Ravenswood's wines are blended prior to bottling
and sale. Ravenswood's blending procedures, by product series, are described
below:
Vineyard Designate The Vineyard Designate Series is produced by blending
Series wine vinted from a particular vineyard based on
proportions of that wine stored in new and older
barrels. The percentage of wine stored in new and older
barrels that are blended in a particular Vineyard
Designate Series product is determined by Ravenswood's
winemaker.
County Series The County Series is produced by blending wines vinted
from specific 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.
1998 Vintage
It would have been easy to become disoriented in 1998. You might have
thought that California was bounded by the North Atlantic, with its
unpredictable weather, rather than the benevolent, somewhat Mediterranean-like
Pacific. But then again, it was an El Nino year. Throughout the growing season,
weather events challenged our grape growers' abilities and reduced what might
have been an average size crop to a small crop. The wines from 1998 tend to
show the complexity associated with this small crop size and fresh fruit
qualities with higher acidities found in cooler vintages. These are qualities
more commonly found in the cooler, fine wine growing regions of Europe rather
than California.
How good are Ravenswood's wines in 1998? In the much-loved vintage of
1997, independent wine writers gave Ravenswood's vineyard designated Zinfandels
scores between 86 and 92. In 1998, the scores range from 87 to 95. Even a
consumer advocacy group not known for wine snobbery, gave the 1998 Vintners
Blend Zinfandel a "very good" rating (it was the only Zinfandel that they
reviewed from the 1998 vintage that received a "very good" rating). Clearly,
the conclusion is that Ravenswood has maintained high quality standards and
that the wines are delicious. Need more be said?
One of the unique things about being in the wine business is that (with
apologies to Abe Lincoln) even if you can't please all of the people all of the
time, you can please all of the people some of the time. Since winemakers that
make red wine always have two vintages in cellar, there is the opportunity to
look ahead to the vintage still in barrel. In this case, the dark, brooding
wines of 1999. Bud break was late, spring and early summer were cool, crop
levels were below average, the skies were clear except for a minor shower in
September, and harvest started three weeks later than normal. In short, we had
perfect conditions for growing highly flavorful grapes. The 1999 wines are a
fine way to punctuate the end of a great decade for California wines and raise
our expectations for wines in the twenty first century. Intense, full flavored,
complex and most assuredly California-esque, this vintage is sure to please
most of the
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people, all of the time. Many of the wines taste so good in barrel that there
is the temptation to rush them to bottle. However, we must remind ourselves
that delayed gratification is both moral and good.
Marketing
A primary focus of Ravenswood's marketing is to force an association in
the consumer's mind between the Ravenswood brand name and 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 wine for
purchase. Ravenswood intends to continue to invest in the promotion of its
brand name, logo and slogan in the future to increase the familiarity and
favorable impression of the Ravenswood brand.
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Sales and Distribution
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The following table summarizes Ravenswood's sales by geographic area
during the 2000 fiscal year.
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SUMMARY OF GROSS SALES BY GEOGRAPHIC AREA
For Fiscal Years Ended
June 30,2000 June 30, 1999 June 30, 1998
Geographic Area Percent of Gross Sales Percent of Gross Sales Percent of Gross Sales
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<S> <C> <C> <C>
California
Chains .......................... 24% 23% 24%
Restaurants ..................... 6% 7% 7%
General Retail .................. 7% 9% 9%
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Total California ............. 37% 39% 40%
U.S., excluding California ......... 51% 48% 45%
Export ............................. 4% 4% 5%
Tasting Room ....................... 8% 9% 10%
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Total .............................. 100% 100% 100%
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Ravenswood's wines are purchased by consumers:
* At "on-premise" restaurants
* At "off-premise" retailers such as specialty wine stores, supermarkets,
discounters and liquor stores
* At Ravenswood's tasting room
* Over the internet in states where it is legal to do so
Consumers can purchase Ravenswood's wines at on- and off-premise accounts
in all 50 states and in over 20 foreign countries located in North America,
Europe and Asia. Ravenswood's sales and distribution strategy varies by
geographic location.
Within the United States, Ravenswood utilizes distributors in every state
except California. In California Ravenswood sells directly to retail accounts,
which include stores, restaurants and chains, with the aid of brokers. Brokers
are used to assist the sales effort in California and 31 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 2000 fiscal year, approximately 75% of Ravenswood's gross sales
were made using brokers, with Ravenswood's most successful broker 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 four warehouses located throughout the state. For the 2000 fiscal
year, approximately 45% of Ravenswood's gross sales resulted from sales within
California. Of this amount, approximately 8% of gross sales were purchases by
California and non-California consumers through Ravenswood's tasting room and
approximately 37% were sales to chains, restaurants and retail accounts.
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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 6% of gross sales for the 2000 fiscal
year, its ten largest distributors accounted for approximately 23% of its gross
sales for that period. In order to facilitate broad distribution of its
products throughout various geographic markets, Ravenswood has traditionally
allocated its available production among its brokers and distributors.
Ravenswood believes that the breadth of its distribution network, which
accounted for approximately 55% (including export) of Ravenswood's gross sales
for the 2000 fiscal year, ensures that the elimination of any one specific
distribution relationship will not adversely affect out-of-state sales.
In April, 2000, Ravenswood established a 32,000 square-foot warehouse
approximately 3 miles from the Gehricke Road Facility to service California,
out-of-state and export customers. Although Ravenswood still utilizes
third-party warehouses throughout California, all out-of-state, export and a
majority of California orders are shipped from this facility. Additionally,
Ravenswood plans to incorporate an order fulfillment center within the
warehouse to centralize processing and shipping of direct sales to consumers
for internet and wine club orders.
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 and represented approximately 8% of gross sales for the 2000 fiscal year.
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 mail sales to consumers in the near
future.
In May of 2000, Ravenswood signed an agreement with Winetasting.com to
sell Ravenswood's wines through the Winetasting.com website. Because of the
complexity of laws regulating direct shipments of alcoholic beverages to
consumers, Winetasting.com has developed sophisticated software to assist
wineries in complying with these regulations. Ravenswood believes that
Winetasting.com has the expertise and experience to promote its Internet
presence and facilitate order processing and shipping. In July, 2000 Ravenswood
received its first orders through Winetasting.com and anticipates that it will
continue to develop its ability to sell its wines over the Internet for the
foreseeable future. This partnership with Winetasting.com gives Ravenswood
access to detailed information regarding Ravenswood's customers and allows
Ravenswood to develop specific marketing programs to attract customers through
the Internet.
Grape and Bulk Wine Supply
Ravenswood obtains its grapes for wine production from more than 80
suppliers located primarily in Sonoma and Napa counties, and other Northern
California premium grape-growing counties and is dependent upon independent
grape growers and bulk wine suppliers for substantially all of its annual wine
production. Ravenswood is not dependent upon any one supplier for a significant
portion of its total required grape supply in any given harvest season.
Ravenswood's largest supplier typically accounts for no more than 7% 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. The
Gehricke Road Facility includes 14 acres of vineyards, 5.2 of which are
producing grapes regularly and nine of which were recently replanted with
Phylloxera-resistant vines. Ravenswood expects to receive approximately ten
tons of Zinfandel from these replanted acres this Fall.
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.
8
<PAGE>
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 1998 and 1999 vintages, Ravenswood produced 20 separate wines within the
Vineyard Designate Series. The vast majority of growers supplying grapes for
Ravenswood's Vineyard Designate Series have entered into grape supply
agreements with Ravenswood. Ravenswood believes that the pricing arrangements
with these growers and the prestige and acclaim related to the production of a
wine within the Vineyard Designate Series have led to stable and long-term
relationships with those suppliers.
In the Fall of 1999, Ravenswood crushed approximately 4,878 tons, a 73%
increase over the 1998 harvest of 2,826 tons. A majority of the products from
the 1999 harvest will be released in fiscal years 2001 and 2002. As a result,
Ravenswood expects to have an adequate supply of products to meet expected
demand for those years.
Ravenswood is also dependent on bulk wine suppliers for the production of
several of its wines, particularly its Vintners Blend Series. Ravenswood does
not have contracts with bulk wine suppliers or agreements that would protect it
from fluctuations in the price or availability of bulk wine. The availability
and price of bulk wine significantly affect the quality and production level of
Ravenswood's products that contain bulk wine. The price, quality and available
quantity of bulk wine have fluctuated in the past and Ravenswood believes they
will continue to do so in the future.
The 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. Oversupply may also increase the amount of premium
wine available to its distributors and retail outlets, which could increase
competition in its distribution channels.
Significant Events
In December 1999, $815,000 in convertible debentures were converted into
285,250 shares of Ravenswood common stock. Each $10,000 debenture was
convertible into 3,500 shares of common stock, or $2.86 per share, at any time
prior to December 31, 1999 upon request of the holder. If the debentures were
not converted, Ravenswood could have redeemed them at face value at any time
during the period from January 1, 2000 until the maturity date of December 31,
2004.
On June 12, 2000 Ravenswood filed a notice of completion for its Quarry
Facility at 26200 Arnold Drive, Sonoma, California. The Quarry facility was
designed and constructed as a fully integrated winery and consists of
approximately 47,000 square feet capable of producing 250,000 cases annually.
Additionally, the facility provides offices for administrative and production
staffs.
Management Information Systems
Our management information systems integrate compliance, sales reporting,
merchandise analysis and stock replenishment, as well as accounting functions.
Ravenswood believes that its management information systems allow it to
efficiently support Ravenswood's growth and maintain a competitive industry
position.
Competition
In recent months several major consolidation transactions have been
announced within the wine industry, such as Foster's Brewing Group's proposed
acquisition of Beringer Wine Estates and Vincor
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<PAGE>
International Inc.'s proposed acquisition of R.H Phillips. Although these
acquisitions, if consummated, will change the landscape within the industry,
Ravenswood believes that it will nevertheless remain intensely competitive and
highly fragmented. In addition, channels of distribution have increased access
to wines from foreign sources. Ravenswood's wines compete in the premium wine
market with hundreds of other California wineries, producers of domestic
premium wines and producers of imported wines, primarily from France, Italy,
Spain, Australia, New Zealand, South Africa 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. Ravenswood believes it is competitive in each of these
areas, with high brand recognition, exceptional products, loyal and effective
channels of distribution and competitive pricing policies. While consolidation
within the wine industry will give other brands access to significantly greater
capital resources, more extensive promotional practices, and substantially
larger and more developed distribution networks, Ravenswood believes that it
can compete effectively, particularly with respect to its higher-end products,
with much larger-scale wine producers that rely on larger distributors or
internal sales forces. In recent years, an increasing number of smaller
wineries have adopted an approach to winemaking similar to Ravenswood's, which
emphasizes production processes and brand awareness over investment in land and
production capacity. Ravenswood believes that these competitors, such as
Kenwood, Rabbit Ridge, Ridge Vineyards and Rosenblum Cellars, appeal to many of
the same consumers as those targeted by Ravenswood.
Ravenswood believes that while brand awareness is an important component
to core wine consumers, most wine consumers are loyal to more than one brand of
premium wine. As a result, Ravenswood must constantly promote its wines to its
existing customer base and expects to continue to invest in brand awareness to
reinforce its image with core wine consumers.
Trademarks
Ravenswood maintains U.S. Federal trademark registrations for its brands.
Ravenswood also maintains international trademark registrations where it is
appropriate to do so. Each of the United States trademark registrations is
renewable indefinitely so long as Ravenswood is making a bona fide usage of the
trademark.
Shareholder Benefits
Ravenswood has initiated a program which provides certain benefits to
holders of record including: an opportunity to purchase wines at discounted
prices at specific times throughout the year, invitations to special events and
VIP tours & tastings.
Employees
As of June 30, 2000, Ravenswood had approximately 60 full-time employees,
30 of whom were salaried, with the remaining employees paid an hourly wage.
There were approximately 32 part-time, seasonal employees at June 30, 2000.
Executive Officers of the Company
W. Reed Foster co-founded Ravenswood in 1976. He has served as chairman,
chief executive officer and a director since Ravenswood's incorporation in
1986. From 1970 until joining Ravenswood, Mr. Foster operated a commercial real
estate firm in San Francisco. He also co-founded the San Francisco Vintner's
Club, serving as its president for six years, and served as an officer of
Draper & Esquin, a retail wine shop, for 15 years. He received a B.A. in
philosophy from Williams College and an M.B.A. from the Harvard Graduate School
of Business Administration.
Joel E. Peterson co-founded Ravenswood in 1976. He has served as
president, winemaker and a director since Ravenswood's incorporation in 1986.
Mr. Peterson's duties as winemaker involve managing and directing the
winemaking process. Mr. Peterson was a wine writer and a consultant in the art
10
<PAGE>
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.
Factors that May Affect Future Results
A reduction in consumer demand for premium red wines could affect our
business
Because a large percentage of the wines we produce are premium red wines,
including Merlot, Cabernet Sauvignon and, in particular, Zinfandel, our
business would be harmed if consumer demand for red wines in general, or
Zinfandel in particular, failed to grow or declined. An overall reduction in
consumer demand for premium wine would also 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, some of which are not in writing, with over
80 independent growers to purchase substantially all of the grapes used in our
wine production. We cannot provide assurance that we will be able to contract
for the purchase of grapes at acceptable prices from these or other suppliers
in the future. The terms of many of our purchase agreements also constrain our
ability to discontinue purchasing grapes in circumstances where we might want
to do so. Those agreements typically provide that, while either party may
terminate the agreement at any time, both parties must continue to abide by its
terms for three years following termination.
We are dependent on bulk wine suppliers for the production of several of
our wines, particularly our Vintners Blend Series. We do not have contracts
with bulk wine suppliers or agreements that would protect us from fluctuations
in the price or availability of bulk wine. The availability and price of bulk
wine significantly affect the quality and production levels of our products
that contain bulk wine. The price, quality and available quantity of bulk wine
have fluctuated in the past. It is possible that we will not be able to
purchase bulk wine of acceptable quality at acceptable prices and quantities in
the future, which could increase the cost or reduce the amount of wine we
produce for sale. This could cause reductions in our sales and profits.
Bad weather, plant diseases, pests, including the glassy-winged
sharpshooter, and other factors could reduce the amount or quality of the
grapes we need to produce our wines
A shortage in the supply of quality grapes may result from the occurrence
of any number of the factors which determine the quality and quantity of grape
supply, such as weather conditions, pruning methods, the existence of diseases
and pests, and the number of vines producing grapes, as well as the level of
consumer demand for wine. Any shortage could cause an increase in the price of
some or all of the grape varieties required for our wine production and/or a
reduction in the amount of wine we are able to produce, which could harm our
business and reduce our sales and profits.
For example, due to the effects of El Nino, the grape supply available to
us for the 1998 harvest was lower than for the 1997 harvest, which we believe
was an unusually large harvest. Therefore, the
11
<PAGE>
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 year 2001, when a
portion 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. We purchase
grapes from regions in California in which the glassy-winged sharpshooter has,
or may be encountered. The glassy-winged sharpshooter can transmit Pierce's
Disearse to vineyards. This disease is often fatal to wine grape vines. To
date, our access to supplies of grapes and bulk wine has not been negatively
impacted by the spread of the glassy-winged sharpshooter or Pierce's Disease.
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, such as the glassy-winged sharpshooter,
or diseases, such as Pierce's Disease. Any resulting reduction in grape supply
could reduce our sales and profits.
An oversupply of grapes may also harm our business by increasing the
supply of wine sold by our competitors
The recent increase in demand for premium wine has resulted in the
planting of additional vineyards, both domestically and internationally, and
the replanting of existing vineyards to greater densities, which could result
in a significant increase in the supply of premium wine grapes. An oversupply
of grapes may significantly increase the amount of premium wine produced. An
increase in the supply of premium wines could harm our business because we only
produce premium wines. Oversupply may also increase the amount of premium wine
available to our distributors and retail outlets, which would increase
competition in our distribution channels.
The loss of Mr. Foster, Mr. Peterson or other key employees 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 2000 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 2000 fiscal year, and our ten
most successful brokers were responsible for 69% of our gross sales in the 2000
fiscal year.
Because some states have laws that prohibit distributor changes, our sales
may be reduced if we cannot replace an under-performing distributor
Our sales outside of California largely depend on the use of distributors.
Our ten largest distributors accounted for approximately 23% of our gross sales
for the 2000 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
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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. 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 third-party facilities, of which there is a limited supply, for
the production activities associated with our wines. Our inability in the
future to use these or alternative facilities, at reasonable prices or at all,
could increase the cost or reduce the amount of our production, which could
reduce our sales and our profits. We do not have long-term agreements with any
of these facilities. The activities conducted at outside facilities include:
(a) crushing; (b) fermentation; (c) storage; (d) blending; and (e) bottling.
Our reliance on these third-parties varies according to the type of production
activity. As production increases, we may continue to rely upon these
third-party production facilities. Reliance on third-parties will also vary
with annual harvest volumes.
A failure to complete the expansion of our facilities as planned could
limit our production of wine and harm our business
We recently completed Phase I of our production facility, the Quarry
Facility, and are currently utilizing it to full capacity. We are currently
planning to expand the Quarry Facility, in order to increase our production
capacity. Our failure to complete the expansion of 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. We expect to utilize the entire Quarry
Facility fully upon the completion of the contemplated expansion. As a result,
any further expansion of our production capacity may require us to use
third-party production facilities or to continue to expand our own production
capacity. Our failure to expand our production capacity, or to secure capacity
from third parties, either at acceptable prices or at all, could limit our
production and reduce our sales and/or profits.
Adverse public opinion about alcohol may harm our business
While a number of research studies suggest that moderate alcohol
consumption may provide various health benefits, other studies conclude or
suggest that alcohol consumption has no health benefits and may increase the
risk of stroke, cancer or other illnesses. An unfavorable report on the health
effects of alcohol consumption could significantly reduce the demand for wine,
which could harm our business and reduce our sales and profits.
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In recent years, activist groups have used advertising and other methods
to inform the public about the societal harms associated with the consumption
of alcoholic beverages. These groups have also sought, and continue to seek,
legislation to reduce the availability of alcoholic beverages, to increase the
penalties associated with the misuse of alcoholic beverages, or to increase the
costs associated with the production of alcoholic beverages. Over time, these
efforts could cause a reduction in the consumption of alcoholic beverages
generally, which could harm our business and reduce or sales and profits.
Contamination of our wines would harm our business
Because our products are designed for human consumption, our business is
subject to hazards and liabilities related to food products, such as
contamination. A discovery of contamination in any of our wines, through
tampering or otherwise, could result in a recall of our products. Any recall
would significantly damage our reputation for product quality, which we believe
is one of our principal competitive assets, and could seriously harm our
business and sales. Although we maintain insurance to protect against these
risks, we may not be able to maintain insurance on acceptable terms and this
insurance may not be adequate to cover any resulting liability.
Increased regulatory costs or taxes would harm our financial performance
The wine industry is regulated extensively by the Federal Bureau of
Alcohol, Tobacco and Firearms, various foreign agencies, and state and local
liquor authorities. These regulations and laws dictate various matters,
including:
* Excise taxes
* Licensing requirements
* Trade and pricing practices
* Permitted distribution channels
* Permitted and required labeling
* Advertising
* Relationships with distributors and retailers
Recent and future zoning ordinances, environmental restrictions and other
legal requirements may limit our plans to expand our production capacity, as
well as any future development of new vineyards and wineries. Future legal or
regulatory challenges to the wine industry could also harm our business and
impact our operating results.
Because our directors and officers have significant control over
Ravenswood, other investors do not have as much influence on corporate
decisions as they would if control were less concentrated
Assuming all convertible debentures held by our directors and executive
officers and their respective affiliates will be converted, and all options
exercisable within 60 days of the date hereof by our directors and executive
officers, will be exercised, our directors and executive officers and their
respective affiliates would beneficially own 2,242,976 shares of common stock,
or approximately 46.5% of our outstanding common stock and common stock
equivalents. As a result, our directors and executive officers and their
respective affiliates 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
California experiences earthquake activity from time to time, such as the
recent earthquake in Napa. 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
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wine prior to its sale or distribution as a result of earthquake activity, we
would lose our investment in, and anticipated profits and cash flows from, that
wine. Such a loss would seriously harm our business and reduce our sales and
profits.
In addition, we must store our wine in a limited number of locations for a
period of time prior to its sale or distribution. Any intervening catastrophes,
such as fire, that result in the destruction of all or a portion of our wine
would result in a loss of our investment in, and anticipated profits and cash
flows from, that wine. Such a loss would seriously harm our business and reduce
our sales and profits.
Our small market size and relatively low trading volume may limit the
market price, liquidity or trading volume of our stock
Our small size and relatively low trading volume may reduce the amount of
research coverage from market analysts. This reduced level of coverage may
limit the market price, liquidity or trading volume of our common stock.
Risks associated with potential Year 2000 problems
Even though to date Ravenswood has not experienced any adverse impact from
the transition to the Year 2000, Ravenswood cannot provide assurance that its
suppliers and customers have not been affected in a manner that is not yet
apparent. As a result, Ravenswood will continue to monitor its Year 2000
compliance and Year 2000 compliance of its suppliers and customers. Ravenswood
will always face the risk presented by our, and our vendors' and suppliers'
reliance on technology and technologic services supplied by third parties.
Item 2. Properties
Ravenswood currently operates one owned and four leased locations in
Sonoma and one leased location in Emeryville, California. The Gehricke Road
Facility, which Ravenswood owns, is composed of two buildings totaling
approximately 12,600 square feet. This facility houses tanks, barrrels,
bottling line and production equipment as well as administrative offices, a
small laboratory, a retail tasting room, and warehouse space for limited cased
goods storage. Ravenswood expects to crush and ferment small lots, such as the
Vineyard Designate Series, as well as some County series at this location. The
Gehricke Road Facility is situated on approximately 25 acres, 14 of which are
Zinfandel and Merlot vineyards.
During fiscal 2000 Ravenswood completed construction of Phase I of the
Quarry Facility, which is located on leased land consisting of approximately 20
acres in Sonoma County. Ravenswood leases this property from the spouse and
brother-in-law of Justin Faggioli, its executive vice president. The lease
expires on December 31, 2032. Current monthly lease payments are $3,697,
subject to annual adjustment. In addition, the lease provides Ravenswood with a
right of first refusal to purchase a portion of the property and a first option
to rent upon its expiration, if specific conditions are met.
The Quarry Facility was designed and built as a fully integrated winery
and provides space for administrative and production offices. The facility
consists of a 47,000 square foot building, capable of producing 250,000 cases
of wine annually, with the necessary exterior infrastructure, including grape
crush equipment, mechanical equipment, truck docks, septic system, wastewater
system, fire suppression equipment, access roads and elements commonly
associated with a winery operation. The building includes space for the
fermentation, storage and blending of wine, barrel storage for wine aging,
bottling equipment and limited case goods storage. The use permit does not
include public tours and tasting or retail sales, although it does permit
marketing events and similar industry-related activities.
Phase I of the Quarry Facility was completed at a cost of approximately
$9.7 million, with capital equipment purchases of approximately $3.3 million.
Ravenswood is currently planning an expansion of the Quarry Facility of
approximately 25,000 square feet. This expansion will be used for additional
barrel and tank storage and Ravenswood expects to use the same design and
structure as the existing barrel and cased goods areas. Ravenswood is currently
working with its architect, engineers and general contractor to submit the
project for design review and to obtain the necessary permits. Preliminary
estimates of the costs of the project range from $2.2 million to $2.7 million.
Ravenswood expects construction of the expansion to begin in late Spring or
early Summer of calendar 2001.
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Ravenswood leases approximately 25,900 square feet at two locations that
are used for barrel storage and aging of wines. The lease for one of these
properties provides for monthly payments of $5,445 for 9,900 square feet,
subject to annual adjustment, and expires on September 30, 2002, with an option
to the extend the lease two years to September 30, 2004. The lease for the
other barrel storage and wine aging property provides for monthly payments of
$7,299 for 16,000 square feet, subject to annual adjustments, and expires on
September 30, 2002 with a three-year option for renewal.
In April, 2000 Ravenswood secured approximately 32,000 square feet for
cased goods storage. This facility services Ravenswood's California,
out-of-state and export customers. As a result, Ravenswood is able to more
closely monitor shipping and logistics operations and is less reliant upon
third-party cased goods storage facilities. The lease provides for monthly
payments of $14,171 and expires on January 31, 2003, with two three-year
renewal options. Ravenswood also leases approximately 1,880 square feet of
office space in Emeryville for administrative and sales purposes. The lease for
the office provides for monthly payments of $3,380, subject to annual
adjustment and expires on April 30, 2005.
Item 3. Legal Proceedings
There are no material legal proceedings pending to which Ravenswood is a
party. Ravenswood's management knows of no legal actions being contemplated by
or against Ravenswood.
Item 4. Submission of Matters to a Vote of Security Holders
None
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PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
Our common stock is listed on the Nasdaq National Market System ("Nasdaq")
under the symbol "RVWD". The table below states the high and low closing sale
prices on the Nasdaq National Market from our initial public offering on April
9, 1999 through the fiscal year ending June 30, 2000:
Fiscal 2000 High Low
----------- ---- ---
Fourth Quarter $ 14.25 $ 10.375
Third Quarter $ 12.00 $ 10.50
Second Quarter $ 11.00 $ 10.438
First Quarter $ 10.875 $ 10.375
Fiscal 1999 High Low
----------- ---- ---
April 9 to June 30 $ 11.00 $ 10.438
Shareholders
The number of common shareholders of record as of September 11, 2000 was
118. This number excludes shareholders whose stock is held in nominee or street
name by brokers.
Dividend Policy
No dividends have been declared on our common stock since incorporation.
It is not anticipated that Ravenswood will pay any dividends in the foreseeable
future. The terms of Ravenswood's credit agreements impose restrictions on
Ravenswood's ability to declare and pay dividends.
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Use of Proceeds
<TABLE>
The following table describes the use of proceeds from Ravenswood's
initial public offering in April 1999.
<CAPTION>
(IN THOUSANDS)
<S> <C>
Effective Date of the Company's Registration Statement: April 8, 1999
Commission File Number: 333-71729
Date Offering Commenced: April 9, 1999
Date Offering Completed: Upon the sale of all the shares
registered.
Names of Managing Underwriters: W.R. Hambrecht & Co., LLP
Class of Securities Registered: Common Stock
Shares Registered and Sold: 1,000 *
Sold by Company: 1,000 *
Sold by Shareholders: 0
Aggregate Price of Offering Amount Registered and Sold: $10,500
Gross Proceeds to Company: $10,500
Gross Proceeds to Selling Shareholders: 0
Underwriter's Discounts and Commissions Charged to the
Company: $ 420
Other issuance costs: $ 546
Net offering proceeds to the Company: $ 9,534
Approximate use of net offering proceeds through June 30,
2000:
Working capital $ 1,265
Retirement of debt $ 1,000
Expansion of production facilities $ 3,350
<FN>
----------------
* In connection with the initial public offering, Ravenswood granted the
underwriters an over-allotment option to purchase 150,000 additional shares of
Ravenswood's Common Stock at the original initial public offering price. The
option was not exercised.
</FN>
</TABLE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Fiscal years ended June 30, 2000 and 1999
Results of Operations
Sales
Net sales consist of gross sales of Ravenswood's wines and merchandise,
less excise taxes, discounts, returns and allowances. Net sales increased to
$33.2 million in the fiscal year ended June 30, 2000, from $22.1 million in the
fiscal year ended June 30, 1999. This increase is primarily attributable to an
increase in the volume of wines produced and sold by Ravenswood. In the fiscal
year ended June 30, 2000, case sales of Ravenswood's products increased to
412,866 cases from 270,760 cases in the fiscal year ended June 30, 1999, while
the average price per case decreased by approximately 1% from $86.39 per case
in fiscal 1999 to $85.39 per case for fiscal 2000 (based on gross sales.) This
decrease in average price per case is primarily attributable to the increase in
sales of Ravenswood's value-priced Vintners Blend Series as a percentage of
gross sales.
The percentages of gross sales attributable to the Vintners Blend Series,
County Series and Vineyard Designate Series were approximately 63%, 22% and
14%, respectively, in the fiscal year ended
18
<PAGE>
June 30, 2000, as compared to 58%, 26% and 14%, respectively, in fiscal 1999.
Sales of Ravenswood branded merchandise accounted for approximately 1% of gross
sales for the fiscal years ended June 30, 1999 and June 30, 2000. Ravenswood
expects that the percentage of gross sales attributable to its Vintners Blend
Series will continue to increase relative to sales of Ravenswood's other
product series as Ravenswood continues to expand its production and product
offerings in this segment.
Cost of Goods Sold
Cost of goods sold includes the cost of:
* Grapes
* Bulk wine
* Packaging materials
* Labor used in wine production
* Bottling expense
* Overhead allocated in production costs from winery facilities and
equipment
These costs are capitalized as inventory, and depleted as costs of goods
sold are recognized. Cost of goods sold increased to $15.7 million, or 47.2% of
net sales, in the fiscal year ended June 30, 2000, from $10.3 million, or 46.5%
of net sales, in the fiscal year ended June 30, 1999. The increase in the
amount of cost of goods sold is primarily due to an increase in the total
volume of wine sold. The increase in cost of goods sold as a percentage of net
sales is attributable to the increase in sales of the Vintners Blend Series as
a percentage of gross sales. The Vintners Blend Series results in a lower
margin because it is sold at a lower price point than Ravenswood's other
product series.
Gross Profit
Ravenswood's gross profit increased to $17.5 million in the fiscal year
ended June 30, 2000, from $11.8 million in the fiscal year ended June 30, 1999,
and decreased as a percentage of net sales to 52.8% from 53.5% in these
respective periods. The increase in the amount of gross profit is primarily
attributable to an increase in sales volumes across all product lines. The
decrease in gross profit as a percentage of sales is due to a change in product
mix sold from fiscal 1999 to fiscal 2000, with the Vintners Blend Series
accounting for a larger percentage of sales in fiscal 2000.
Operating Expenses
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. Operating expenses increased to $7.7 million in the
fiscal year ended June 30, 2000, from $5.2 million in the fiscal year ended
June 30, 1999. As a percentage of net sales, operating expenses decreased
slightly to 23.3% of net sales in the fiscal year ended June 30, 2000, from
23.7% of net sales in the fiscal year ended June 30, 1999. The increase in
operating expenses is primarily attributable to brokerage commissions related
to Ravenswood's increased sales, increased administrative expenses from
increased sales and production, additional expenses incurred in moving into the
Quarry Facility and the additional costs associated with becoming a public
company in April, 1999. The decrease in 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 total operating expenses to increase as it continues to
increase production and sales.
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 $589,723 and
$226,370 in the fiscal years ended June 30, 2000 and 1999, respectively. The
increase in other expenses is primarily attributable to increased interest
expense. In fiscal 2000 Ravenswood was required to pay interest on $1,687,500
in convertible debentures for an entire year, while in fiscal 1999 interest
expense was recognized for approximately six months of the year. Additionally,
Ravenswood recognized interest expense for funds borrowed in connection with
the construction of the Quarry Facility as well as on capital leases used to
fund the purchase of equipment
19
<PAGE>
installed at the Quarry Facility. Ravenswood expects that other expenses will
continue to increase as it is required to pay interest on those funds borrowed
to construct the Quarry Facility and on capital leases used to purchase
additional equipment.
Provision for Income Taxes
The provision for income taxes reflects an estimated annualized effective
tax rate of 36.6% at June 30, 2000, and 38.5% at June 30, 1999. The decrease in
the effective tax rate reflects California State tax benefits realized from
manufacturer's tax credits resulting from equipment purchases made for the
Quarry facility. Although Ravenswood normally experiences an effective tax rate
of approximately 39.5%, it believes it will have a slight tax benefit from
equipment put into service during fiscal 2001.
Net Income and Earnings Per Share
Net income for the fiscal year ended June 30, 2000 increased to $5.8
million, as compared to $3.9 million for the fiscal year ended June 30, 1999.
The increase was primarily due to increased volume in sales. Fully diluted
earnings per share for the fiscal year ended June 30, 2000 increased to $1.19
per share from $.96 per share for the fiscal year ended June 30, 1999.
Fiscal Years Ended June 30, 1999 and 1998
Results of Operations
Sales
Net sales of Ravenswood's products increased to $22.1 million in the 1999
fiscal year, from $15.9 million in the 1998 fiscal year. This increase is
primarily attributable to an increase in the volume of wines produced and sold
by Ravenswood. In the 1999 fiscal year, case sales increased to 270,760 cases
from 191,655 cases in the 1998 fiscal year, while the average price per case
decreased from $87.37 to $86.39 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.
The percentages of gross sales attributable to the Vintners Blend Series,
County Series and Vineyard Designate Series were 58%, 26% and 14%,
respectively, in the 1999 fiscal year, as compared to 56%, 27% and 16%,
respectively, in the 1998 fiscal year. Sales of Ravenswood branded merchandise
accounted for approximately 1% of gross sales for the fiscal year ended June
30, 1999, compared to 2% in the fiscal year ended June 30, 1998.
Cost of Goods Sold
Cost of goods sold increased to $10.3 million, or 46.5% of net sales, in
the 1999 fiscal year, from $7.4 million, or 46.6% of net sales, in the 1998
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.
Gross Profit
Ravenswood's gross profit increased to $11.8 million in the 1999 fiscal
year, from $8.5 million in the 1998 fiscal year, and increased slightly as a
percentage of net sales, to 53.5% from 53.4% 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.
Operating Expenses
Deferred Compensation Expenses: Deferred compensation expense of $2.2
million was incurred in the fiscal year ending June 30, 1998. No deferred
compensation expense was incurred in the fiscal year ended June 30, 1999.
Other Operating Expenses: Other operating expenses increased to $5.2
million in the 1999 fiscal year, from $4.0 million in the 1998 fiscal year, and
decreased as a percentage of net sales to 23.7% in the 1999 fiscal year from
25.4% in the 1998 fiscal year. The increase in the amount of other operating
expenses is primarily attributable to increases in brokerage commissions
related to Ravenswood's
20
<PAGE>
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.
Other Expense, Net
Other expense amounted to $226,370 and $474,340 in the 1999 and 1998
fiscal years, respectively, and consists primarily of interest expense. These
items have tended to fluctuate from year to year. The decrease is partially
attributable to the increase in sales. Additionally, in fiscal 1999, Ravenswood
was able to offset some interest expense with interest income from funds raised
in their private placement offering in December of 1998 as well as the funds
received in their initial public offering in April, 1999.
Provision for Income Taxes
The provision for income taxes reflects the estimated annualized effective
tax rate of 38.5% in the 1999 fiscal year and 89.5% in the 1998 fiscal year.
The decrease in effective tax rate is attributable to $2.1 million of deferred
compensation expense that was recorded in fiscal 1998 as a permanent difference
between financial statements reported under generally accepted accounting
principles and Ravenswood's tax return filed for fiscal 1998.
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 $5.8 million at June 30,
2000, as compared to $11.4 million at June 30, 1999. The decrease in cash and
cash equivalents is primarily due to expenses related to building the Quarry
Facility and to increasing inventory.
Net cash used for operations was $527,634 for the fiscal year ended June
30, 2000 and net cash provided by operations was $650,009 for the fiscal year
ended June 30, 1999. The principal use of cash from operations for the periods
ended June 30, 2000 and June 30, 1999 was the acquisition of additional
inventory through increased production, while the principal source of cash was
net income for both periods.
Net cash used for investing activities totaled $5.4 million for the fiscal
year ended June 30, 2000, as compared to $4.7 million for the fiscal year ended
June 30, 1999. The principal use of cash for both periods was the costs
associated with constructing the Quarry Facility which was completed in June,
2000. The Quarry Facility was completed for a cost of approximately $9.7
million with capital equipment expenditures of approximately $3.3 million.
Ravenswood expects to use additional cash in fiscal 2001 to complete the
bottling line at the Quarry Facility and to expand the Quarry Facility for
production capacity. Approximately $286,000 was used to repay outstanding loans
from Ravenswood's officers in March, 1999.
During the fiscal year ended June 30, 1999, Ravenswood loaned W. Reed
Foster, our Chief Executive Officer, $310,000 to pay income taxes due from the
receipt of shares issued upon termination of a deferred compensation agreement.
Net cash provided by financing activities was $311,441 for the fiscal year
ended June 30, 2000, as compared to $15.3 million for the fiscal year ended
June 30, 1999. For the fiscal year ended June 30, 2000, the principal source of
cash was proceeds from long-term debt associated with construction of the
Quarry Facility while the principal uses of cash were payment of short-term
borrowings and payment of long-term debt. In the fiscal year ended June 30,
1999, the principal sources of cash were Ravenswood's private sale of
securities completed in December 1998 and proceeds from its initial public
offering in April 1999. Additionally, during fiscal 1999, Ravenswood received
funds through long-term debt arrangements. The principal use of cash from
financing activities in this period was for repayment of obligations under
Ravenswood's various short- and long-term borrowing arrangements and payment of
expenses associated with the initial public offering.
The holders of $815,000 in convertible debentures issued in 1994 converted
to 285,250 shares of Ravenswood common stock in December, 1999. If the
debentures had not converted, Ravenswood would have been able to redeem them at
face value at any time during the period beginning on January 1, 2000 and
ending December 31, 2004.
21
<PAGE>
The full extent of Ravenswood's future capital requirements and the
adequacy of its available funds will depend on many factors, not all of which
can be accurately predicted. Although no assurance can be given, Ravenswood
believes that anticipated cash flow from operations, borrowings under its
existing credit agreements and proceeds from its recent public offering and
other recent financing activities will be sufficient to fund its capital
requirements, including its planned expansion, for at least the next year.
However, as a result of Ravenswood's expected growth and planned capital
investments, management expects to increase the utilization of Ravenswood's
credit facilities and potentially access alternative financing sources. Future
capital funding transactions may result in dilution to shareholders.
There can be no assurance that additional capital will be available on
favorable terms, if at all. Ravenswood's ability to obtain additional capital
on acceptable terms would limit its growth and could have a negative impact on
its business. Ravenswood uses substantial amounts of its working capital to
purchase grapes and bulk wine supplies from third parties and to pay for the
use of third-party production facilities in its wine production. Ravenswood
also uses capital to fund its own grape-growing and winemaking activities.
Ravenswood expects that it will need an increased amount of working capital
over the next several years to fund increases in its production level and
inventory.
Risks associated with potential Year 2000 problems
Even though to date Ravenswood has not experienced an adverse impact from
its transition to Year 2000, Ravenswood cannot provide assurance that its
suppliers and customers have not been affected in a manner that is not yet
apparent. As a result, Ravenswood will continue to monitor its Year 2000
compliance and Year 2000 compliance of its suppliers and customers.
22
<PAGE>
Item 7. Financial Statements and Supplementary Data
RAVENSWOOD WINERY, INC.
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
* * * * *
JUNE 30, 2000
23
<PAGE>
August 11, 2000
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, 2000
and 1999, and the results of its operations and its cash flows for each of the
fiscal years in the three-year period ended June 30, 2000, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
ODENBERG, ULLAKKO, MURANISHI & CO. LLP
San Francisco, California
24
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
BALANCE SHEET
ASSETS
<CAPTION>
June 30,
--------------------------------
2000 1999
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents .......................................... $ 5,769,373 $ 11,390,903
Accounts receivable, less allowance for doubtful accounts of
$10,000 at June 30, 2000 and 1999 ................................ 4,166,816 2,763,418
Inventories ........................................................ 20,521,284 14,581,973
Prepaid income taxes ............................................... 277,500 15,850
Prepaid expenses ................................................... 100,131 105,301
Deferred tax assets ................................................ -- 162,800
------------ ------------
Total current assets .......................................... 30,835,104 29,020,245
Property, plant and equipment, net .................................. 14,787,553 9,001,147
Deferred tax assets ................................................. 180,000 --
Note receivable from shareholder .................................... 310,000 310,000
Other assets ........................................................ 60,433 186,921
------------ ------------
$ 46,173,090 $ 38,518,313
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ................................ $ 83,597 $ 109,722
Current portion of capital lease obligations ..................... 617,979 368,203
Short-term borrowings ............................................ 500,000 1,700,000
Accounts payable ................................................. 3,217,036 3,382,118
Accrued commissions .............................................. 514,379 396,358
Accrued liabilities .............................................. 390,010 433,011
------------ ------------
Total current liabilities ..................................... 5,323,001 6,389,412
Long-term liabilities:
Long-term debt, net .............................................. 6,453,407 4,525,231
Capital lease obligations, net ................................... 2,392,497 1,551,762
Convertible debentures ........................................... 1,687,500 2,502,500
------------ ------------
Total liabilities ............................................. 15,856,405 14,968,905
------------ ------------
Shareholders' equity:
Preferred stock, no par value; 1 million shares authorized,
none issued ..................................................... -- --
Common stock, no par value, 20 million shares authorized ......... 15,054,373 14,211,018
Retained earnings ................................................ 15,176,560 9,338,390
Unrealized gain on available-for-sale securities ................. 85,752 --
------------ ------------
Total shareholders' equity .................................... 30,316,685 23,549,408
------------ ------------
Commitments and contingencies (See Note 14) ......................... $ 46,173,090 $ 38,518,313
============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
25
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
STATEMENT OF INCOME
<CAPTION>
Year ended June 30,
------------------------------------------------
2000 1999 1998
------------ ------------ ------------
<S> <C> <C> <C>
Gross sales .............................. $35,615,207 $23,729,787 $17,016,866
Less excise taxes ..................... 1,263,567 908,446 552,499
Less discounts, returns and
allowances ........................... 1,125,503 752,655 573,762
------------ ------------ ------------
Net sales ................................ 33,226,137 22,068,686 15,890,605
Cost of goods sold ....................... 15,696,651 10,259,357 7,397,362
------------ ------------ ------------
Gross profit ............................. 17,529,486 11,809,329 8,493,243
Operating expenses:
Deferred compensation expense ......... -- -- 2,206,096
Other operating expenses .............. 7,735,493 5,238,493 4,033,747
------------ ------------ ------------
Operating income ......................... 9,793,993 6,570,836 2,253,400
------------ ------------ ------------
Other income (expense):
Interest expense ...................... (861,992) (459,851) (523,551)
Other, net ............................ 272,269 233,481 49,211
------------ ------------ ------------
(589,723) (226,370) (474,340)
------------ ------------ ------------
Income before tax provision .............. 9,204,270 6,344,466 1,779,060
Provision for income taxes ............... 3,366,100 2,441,000 1,592,169
------------ ------------ ------------
Net income ............................... $ 5,838,170 $ 3,903,466 $ 186,891
============ ============ ============
Earnings per share:
Basic ................................. $ 1.24 $ 1.04 $ 0.05
============ ============ ============
Diluted ............................... $ 1.19 $ 0.96 $ 0.05
============ ============ ============
Weighted average number of common
shares outstanding:
Basic ................................. 4,712,478 3,763,765 3,512,069
============ ============ ============
Diluted ............................... 5,010,955 4,171,245 3,814,820
============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
26
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
<CAPTION>
Common Stock
------------------------------ Retained Unrealized
Shares Amount Earnings Gain Total
------------- -------------- --------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1997 ................ 3,149,998 $ 737,804 $ 5,521,288 $ -- $ 6,259,092
Repurchase of common shares
from former officer .................... (157,500) (5,000) (273,255) (278,255)
Compensation related to deferred
compensation plan ...................... 2,206,096 2,206,096
Net income .............................. 186,891 186,891
--------- ----------- ----------- -------- -----------
Balance at June 30, 1998 ................ 2,992,498 2,938,900 5,434,924 -- 8,373,824
Common stock issued:
Initial public offering, net ......... 1,000,000 9,534,618 9,534,618
Private placement .................... 212,623 1,687,500 1,687,500
Convertible debentures ............... 17,500 50,000 50,000
Deferred compensation ................ 345,731
Net income .............................. 3,903,466 3,903,466
--------- ----------- ----------- -------- -----------
Balance at June 30, 1999 ................ 4,568,352 14,211,018 9,338,390 -- 23,549,408
Common stock issued:
Convertible debentures ............... 285,250 815,000 815,000
Employee stock plan .................. 3,177 28,355 28,355
Unrealized gain on
available-for-sale securities .......... 85,752 85,752
Net income .............................. 5,838,170 5,838,170
--------- ----------- ----------- -------- -----------
Balance at June 30, 2000 ................ 4,856,779 $15,054,373 $15,176,560 $ 85,752 $30,316,685
========= =========== =========== ======== ===========
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
27
<PAGE>
<TABLE>
RAVENSWOOD WINERY, INC.
STATEMENT OF CASH FLOWS
<CAPTION>
Year ended June 30,
---------------------------------------------------
2000 1999 1998
-------------- ---------------- ---------------
<S> <C> <C> <C>
Operating activities:
Net income .............................................. $ 5,838,170 $ 3,903,466 $ 186,891
Items not requiring the current use of cash:
Depreciation and amortization ........................ 1,128,407 437,760 391,844
Deferred income taxes ................................ 301,800 108,022 (77,868)
Unrealized gain on available-for-sale securities ..... 85,752 -- --
Deferred compensation ................................ -- -- 2,206,096
Changes in other operating items:
Accounts receivable ............................... (1,403,398) (856,920) (338,007)
Inventories ....................................... (5,939,311) (4,154,614) (3,269,357)
Prepaid income taxes .............................. (580,650) 57,999 (39,963)
Prepaid expenses .................................. 5,170 (62,258) 9,202
Other assets ...................................... 126,488 (36,469) (8,220)
Accounts payable .................................. (165,082) 1,051,151 604,979
Accrued liabilities and accrued commission ........ 75,020 201,872 200,292
------------ ------------ ------------
Cash provided by (used for) operations ............... (527,634) 650,009 (134,111)
------------ ------------ ------------
Investing activities:
Additions to plant and equipment ........................ (5,405,337) (4,397,848) (490,621)
Officer receivables, net ................................ -- (286,163) --
------------ ------------ ------------
Cash used for investing activities ................... (5,405,337) (4,684,011) (490,621)
------------ ------------ ------------
Financing activities:
Short-term borrowings, net .............................. (1,200,000) 350,000 651,801
Proceeds from long-term debt ............................ 2,097,234 2,818,464 410,642
Repayment of long-term debt ............................. (614,148) (415,688) (269,145)
Issuance of common shares ............................... 28,355 12,091,489 --
Stock offering costs .................................... -- (965,382) --
Proceeds from convertible debentures .................... -- 1,443,750 --
Repurchase of common shares from former officer ......... -- -- (278,255)
------------ ------------ ------------
Cash provided by financing activities ................ 311,441 15,322,633 515,043
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents ........ (5,621,530) 11,288,631 (109,689)
Cash and cash equivalents at beginning of period ........ 11,390,903 102,272 211,961
------------ ------------ ------------
Cash and cash equivalents at end of period .............. $ 5,769,373 $ 11,390,903 $ 102,272
============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
</TABLE>
28
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--Organization, operations and summary of significant accounting policies:
Organization
Ravenswood Winery, Inc. (the "Company") was founded in 1976, became a
California Limited Partnership in 1979, and was subsequently incorporated in
the State of California on December 23, 1986. The Company produces, markets,
and sells premium California wines exclusively under the Ravenswood brand name.
Concentration of risk
The Company obtains its grapes from over eighty independent grape growers
and bulk wine suppliers located primarily in Sonoma, Napa and other Northern
California counties. These sources account for 95% or more of its annual wine
production. The Company relies upon certain varietals, notably Zinfandel, which
accounted for approximately 65% of the total dollar sales for the fiscal year
ended June 30, 2000 (67% of the total dollar sales for the fiscal year ended
June 30, 1999). In addition, the Company relies on the winemaking capacity of
other companies and typically enters into one-year contracts with all custom
crush facilities.
In fiscal 2000, approximately 75% of gross sales were made using brokers,
with one broker accounting for 21% of gross sales. (In fiscal 1999,
approximately 75% of gross sales were made using brokers, with one broker
accounting for 22% of gross sales.)
The Company performs ongoing credit evaluations of its distributors and
customers and generally does not require collateral. The Company's credit
losses have been within the reserves provided.
The Company places its cash and temporary cash investments with financial
institutions. At June 30, 2000 and periodically throughout the fiscal year,
such investments were in excess of FDIC insurance limits.
A summary of significant accounting policies follows:
Revenue recognition
Revenue is recognized when merchandise is shipped and title passes to the
customer. Revenue from products sold at our tasting room location is recognized
at the time of sale.
Cash and cash equivalents
The Company considers all short-term, interest-bearing investments with
original maturities of less than three months to be cash equivalents. These
investments are currently held in U.S. Treasuries, commercial paper, government
securities and money market funds.
Inventories
Inventories are stated at the lower of cost or market (on the first-in,
first-out basis), and include finished goods, raw materials, packaging
materials and product merchandise. Finished goods include costs of raw
materials (grapes and bulk wine), packaging, labor used in wine production,
bottling, warehousing and overhead on winery facilities and equipment.
Costs associated with growing crops are recorded as inventory and are
recognized as inventory costs in the fiscal year in which the related crop is
harvested.
In accordance with general practice in the wine industry, wine inventories
are included in current assets, although a portion of such inventories may be
aged for periods longer than one year.
Property, plant and equipment
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized. Costs incurred in developing vineyards, including interest costs,
are capitalized until the vineyards become commercially productive.
29
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
When assets are retired or disposed of, the cost and accumulated depreciation
are removed from the accounts, and any resulting gains or losses are included
in income in the year of disposition.
Depreciation is computed using both the straight-line and accelerated
methods over the estimated useful lives of the assets, generally 7 years for
vineyards, 39 years for building and improvements, 5 to 15 years for machinery
and equipment and 3 to 7 years for office equipment. Leased equipment under
capitalized leases is generally amortized over the shorter of the terms of the
leases or their estimated useful lives. Leasehold improvements are amortized
over the estimated useful lives of the improvements or the terms of the related
lease, whichever is shorter.
Impairment of long-lived assets is measured on the basis of anticipated
undiscounted cash flows for each asset. No impairment loss was recognized for
the fiscal years ended June 30, 2000, 1999 and 1998.
Income taxes
Deferred income taxes are computed using the liability method. Under the
liability method, taxes are recorded based on the future tax effects of the
difference between the tax and financial reporting bases of the Company's
assets and liabilities.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the
reporting period. Actual results when ultimately realized could differ from
those estimates.
Fair value of financial instruments
The carrying amounts of accounts receivable, prepaid expenses, accounts
payable, accrued liabilities, short-term borrowings, long-term debt, capital
lease obligations and convertible debentures are reasonable estimates of the
fair value of these financial instruments.
Earnings per share
Basic earnings per share represents income available to common
shareholders divided by the weighted average number of common shares
outstanding during the measurement period, after giving retroactive effect to:
1) shares issued under a deferred compensation arrangement in July 1998; and 2)
common stock issued in December 1998 (using the "treasury stock method") at
prices below the initial public offering price of $10.50.
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; and b)
common stock issued in December 1998 (using the "treasury stock method") at
prices below the initial public offering price of $10.50 per share; and 2) the
potentially dilutive common shares issuable for convertible debt and stock
options that were outstanding during the measurement period.
Stock-based compensation
The Company has adopted SFAS No. 123, Accounting for Stock-Based
Compensation ("SFAS 123"). As permitted by SFAS 123, the Company measures
compensation cost in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees ("APB No. 25"), and related
interpretations. Accordingly, no accounting recognition is given to stock
options granted at fair market value until they are exercised. Upon exercise,
net proceeds, including income tax benefits realized, are credited to equity.
30
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Reclassification of financial statement presentation
Certain prior period amounts have been reclassified in order to conform to
the fiscal 2000 financial statement presentation.
Recent accounting pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
that establishes accounting and reporting standards for derivative instruments
and hedging activities. It requires that derivatives be recognized in the
balance sheet at fair value and specifies the accounting for changes in fair
value. In June 1999, the FASB issued SFAS No. 137, which defers the effective
date of SFAS No. 133 until fiscal years beginning after June 15, 2000. The
adoption of SFAS No. 133 is not expected to have a material effect on the
Company's financial statements.
NOTE 2--Inventories:
Inventories are summarized as follows:
June 30,
-------------------------------
2000 1999
-------------- --------------
Bulk wine ....................... $15,262,865 $10,355,759
Bottled wine .................... 4,716,701 3,870,548
Crop costs ...................... 137,051 88,725
Supplies ........................ 233,943 124,298
Tasting room merchandise ........ 170,724 142,643
----------- -----------
$20,521,284 $14,581,973
=========== ===========
Certain of the foregoing assets are pledged as security for certain
indebtedness (see Notes 5 and 6).
NOTE 3--Property, plant and equipment:
<TABLE>
Property, plant and equipment are summarized as follows:
<CAPTION>
June 30,
-----------------------------
2000 1999
-------------- ------------
<S> <C> <C>
Land ........................................ $ 245,135 $ 245,135
Vineyards ................................... 345,473 345,473
Buildings and improvements .................. 1,647,637 1,647,637
Leasehold improvements ...................... 9,832,748 174,331
Machinery and equipment ..................... 1,080,251 1,020,007
Equipment held under capital leases ......... 4,118,953 2,623,977
Office equipment ............................ 298,837 131,127
----------- ----------
17,569,034 6,187,687
Less accumulated depreciation ............... 2,781,481 1,653,074
----------- ----------
14,787,553 4,534,613
Construction in progress .................... -- 4,466,534
----------- ----------
$14,787,553 $9,001,147
=========== ==========
</TABLE>
31
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
Included in leasehold improvements are costs associated with the new
Quarry facility including the following: building core and shell, equipment
installation and related improvement costs and site improvements. Included in
equipment held under capital leases are barrels and other equipment with net
book values of $2,874,654 and $1,932,484, respectively, at June 30, 2000 and
1999.
Substantially all of the property, plant and equipment is pledged as
security for certain indebtedness (see Notes 5, 6 and 7).
NOTE 4--Note receivable from shareholder:
The note receivable from shareholder at June 30, 2000 and 1999 consists of
a $310,000 note bearing annual interest at 5.3%, payable in annual interest
only installments commencing December 21, 1999 until maturity on December 21,
2008. The Company provided the loan to the officer to pay taxes related to his
receipt of common stock under a deferred compensation plan.
NOTE 5--Short-term borrowing arrangements:
At June 30, 2000, the Company has a $2 million revolving line of credit
with Pacific Coast Farm Credit Services (the "Association") that expires on
June 1, 2001. The loan agreement provides that the principal advances under the
facility cannot exceed certain percentages of eligible accounts receivable and
wine inventories as defined in the agreement. The borrowings bear annual
interest at a variable rate established by the Association (9.02% and 8.11% at
June 30, 2000 and 1999, respectively). The borrowings are secured by the
Company's accounts receivable, wine inventories and equipment. Borrowings under
the line of credit at June 30, 2000 and 1999 were $500,000 and $1,700,000,
respectively.
The revolving credit line and certain of the long-term debt contain
various covenants which include, among other things, a requirement to maintain
a minimum working capital of $3.25 million, a ratio of liabilities to tangible
net worth of not greater than 1.5 to 1, a current ratio of at least 1.75 to 1
and restrictions on the payment of dividends and distributions to shareholders.
32
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 6--Long-term debt:
<TABLE>
Long-term debt is summarized as follows:
<CAPTION>
June 30,
-------------------------------
2000 1999
-------------- --------------
<S> <C> <C>
Note payable to Pacific Coast Farm Credit Services ("Association") with
annual interest at a variable rate established by the Association
(8.56% and 6.9% at June 30, 2000 and 1999, respectively), payable
in quarterly interest installments until December 1, 1999 and com-
mencing March 1, 2000 in quarterly principal and interest installments
of $34,795 through December 1, 2024, secured by property, plant
and equipment (see Note 3) ............................................... $ 1,543,775 $ 1,552,500
Construction mortgage loan payable ($4.58 million commitment) to the
Association with annual interest at a variable rate established by the
Association (8.56% and 6.9% at June 30, 2000 and 1999, respec-
tively), payable in quarterly interest installments until January 1, 2001;
and commencing April 1, 2001 in quarterly principal and interest in-
stallments of $98,117 through January 1, 2026, secured by property,
plant and equipment (see Note 3) ......................................... 4,125,000 2,013,353
Construction revolving equity line of credit payable to the Association
with annual interest at a variable rate established by the Association
(8.56% and 6.9% at June 30, 2000 and 1999, respectively), payable
in quarterly interest only installments until December 1, 1999 and
commencing March 1, 2000 in equal quarterly principal and interest
installments of $19,284 through December 1, 2024, secured by prop-
erty, plant and equipment (see Note 3) ................................... 829,550 835,000
Note payable to the Association with annual interest at a variable rate
established by the Association (8.11% at June 30, 1999), payable in
quarterly principal and interest installments of $17,390 through June
1, 2002, secured by accounts receivable and wine inventories. Paid
in full during fiscal 2000 ............................................... -- 175,459
Other notes payable with annual interest ranging from 10% to 11%,
payable in monthly principal and interest installments as defined to
November 2000 through June 2001 .......................................... 38,679 58,641
----------- -----------
6,537,004 4,634,953
Less current portion ...................................................... 83,597 109,722
----------- -----------
$ 6,453,407 $ 4,525,231
=========== ===========
</TABLE>
Scheduled annual maturities of long-term debt are as follows:
$83,597--fiscal 2001; $121,609--fiscal 2002; $121,505--fiscal 2003;
$127,509--fiscal 2004; $137,508--fiscal 2005; and $5,945,276 thereafter.
33
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 7--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
-----------
2001 ................................................ $ 864,744
2002 ................................................ 787,123
2003 ................................................ 708,322
2004 ................................................ 597,150
2005 ................................................ 424,587
Thereafter .......................................... 282,967
-----------
Net minimum lease payments .......................... 3,664,893
Less--amount representing interest (weighted
average--8.4%) ..................................... 654,417
-----------
Present value of net minimum lease payments ......... 3,010,476
Less--current portion ............................... 617,979
-----------
$ 2,392,497
===========
The net book value of leased barrels and equipment included in property,
plant and equipment at June 30, 2000 is $2,874,654 (see Note 3).
Subsequent to June 30, 2000, the Company has obtained a $2 million lease
line commitment for the acquisition of oak barrels, various stainless steel
cooperage and wine production equipment.
NOTE 8--Convertible debentures:
Convertible debentures are summarized as follows:
June 30,
-------------------------------
2000 1999
-------------- --------------
1998 convertible debentures ......... $ 1,687,500 $ 1,687,500
1994 convertible debentures ......... -- 815,000
----------- -----------
$ 1,687,500 $ 2,502,500
=========== ===========
In December 1998, the Company completed a sale of $1,687,500 in
convertible debentures due December 31, 2008. Each $10,000 debenture is
convertible into 900 shares of common stock at any time prior to December 31,
2003 upon request of the holder. If the debentures are not converted, the
Company may redeem them at face value at any time during the period from
January 1, 2004 until the maturity date. The Company pays interest quarterly on
the debentures in an amount equal to the prime interest rate quoted by Bank of
America NT & SA plus 1% (10% and 8.75% at June 30, 2000 and 1999). The interest
rate is adjusted every 18 months, except that in no period may the interest
rate adjustment exceed 2% or the maximum interest rate exceed 11%.
In December 1994, the Company completed a sale of $865,000 in convertible
debentures due December 31, 2004. Each $10,000 debenture was convertible into
3,500 shares of common stock at any time prior to December 31, 1999 upon
request of the holder. If the debentures were not converted, the Company could
redeem them at face value at any time during the period from January 1, 2000
until the maturity date. The Company paid interest quarterly on the debentures
in an amount equal to a floating index tied to prime bank rates for a five-year
period (9.25% at June 30, 1999). The interest rate was adjusted every 18
months, except that in no period could the interest rate adjustment exceed 2%,
or the
34
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
maximum interest rate exceed 11%. During the fiscal year ended June 30, 2000,
the remaining 1994 debentures ($815,000) were converted into 285,250 shares of
common stock.
NOTE 9--Income taxes:
The provision for income taxes is as follows:
Fiscal year ended June 30,
----------------------------------------------
2000 1999 1998
------------- ------------- --------------
Current tax expense:
Federal .................... $2,815,000 $ 1,831,000 $ 1,306,069
State and local ............ 576,100 502,000 363,968
---------- ----------- -----------
3,391,100 2,333,000 1,670,037
---------- ----------- -----------
Deferred tax expense (benefit):
Federal .................... 260,000 55,000 (71,875)
State and local ............ (285,000) 53,000 (5,993)
---------- ----------- -----------
(25,000) 108,000 (77,868)
---------- ----------- -----------
$3,366,100 $ 2,441,000 $ 1,592,169
========== =========== ===========
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,
---------------------------
2000 1999
------------ ------------
Deferred tax assets:
Basis difference in inventory ................... $ 190,000
California manufacturer's tax credit carryover .. 210,000
State taxes ..................................... 205,000 $ 170,000
---------- ---------
605,000 170,000
Deferred tax liabilities:
Depreciation and amortization ................... (425,000) (7,200)
---------- ---------
Net deferred tax asset (liability) ................ $ 180,000 $ 162,800
========== =========
35
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
A reconciliation of income tax computed at the federal statutory corporate
tax rate to the provision for income taxes follows (in thousands):
<CAPTION>
Fiscal year ended June 30,
-----------------------------------------------------------------------------
2000 1999 1998
----------------------- ------------------------- -----------------------
Amount % Amount % Amount %
---------- ---------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Income taxes at federal statutory rate ......... $ 3,130 34.0% $ 2,157 34.0% $ 605 34.0%
Increase (decrease) in income taxes
resulting from:
State and local income taxes, net of
federal benefit ............................... 534 5.8% 369 5.8% 228 12.9%
Permanent differences:
Deferred compensation .......................... -- -- -- -- 759 42.6%
California manufacturers' tax credit ........... (329) -3.5% (6) -0.1% -- --
Other .......................................... 31 0.3% (79) -1.2% -- --
------- ----- -------- ----- ------- ----
$ 3,366 36.6% $ 2,441 38.5% $ 1,592 89.5%
======= ===== ======== ===== ======= ====
</TABLE>
The Company has California manufacturer's tax credit carryforwards
available to offset future taxable income for California income tax purposes of
approximately $320,000, which do not expire.
NOTE 10--Deferred compensation agreement:
On August 25, 1992, the Company entered into a deferred compensation
agreement with its chairman and chief executive officer, W. Reed Foster. The
agreement established an account with 5,487.8 units. Each unit was the
equivalent value of one share of common stock and contained an equivalent right
to cash and common stock dividends and all stock splits and other benefits paid
to the shareholders of the Company. Compensation expense relating to this
agreement was $2,206,096 for fiscal 1998, and is included in operating expenses
in the accompanying statement of income.
As of July 1, 1998, the deferred compensation agreement was terminated and
the Company issued 345,731 shares of common stock to Mr. Foster. No
compensation expense was incurred for the fiscal years ended June 30, 2000 or
1999.
NOTE 11--Voting trust:
On August 25, 1992, the Board of Directors authorized the creation of a
Voting Trust for certain shares of the common stock of the Company. On November
1, 1993, the shareholders approved the terms and conditions contained in the
Trust which provided for four trustees (Joel Peterson, W. Reed Foster, Justin
Faggioli and Callie S. Konno). The original Voting Trust Agreement was amended
by a Voting Trust Agreement dated May 27, 1998 that extended the term to May
26, 2008. During fiscal 2000 the trustees voted to terminate the Voting Trust.
NOTE 12--Shareholders' equity:
In December 1998, the Company completed a sale of 212,623 shares of common
stock, resulting in proceeds to the Company of $1,687,500. In April 1999, the
Company completed a public offering of 1,000,000 shares of common stock,
resulting in net proceeds, after deducting underwriting fees and other costs,
to the Company of $9,534,618. In December 1999, the remaining 1994 debentures
($815,000) were converted into 285,250 shares of common stock.
36
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 13--Stock option and employee stock purchase plans:
Stock option plan
On February 1, 1999, the Company's Board of Directors established the 1999
Equity Incentive Plan to provide for the grant of incentive stock options,
non-qualified stock options, restricted stock awards and other stock-based
awards to the Company's officers, employees, directors, independent
contractors, consultants, vendors and suppliers. No awards may be granted under
the Plan after January 2009, but the vesting of awards previously granted may
extend beyond that date.
Under the Equity Incentive Plan, the Company is authorized to grant
incentive stock options, non-qualified stock options, restricted stock awards
and other stock based awards for a total of 750,000 shares of common stock. The
stock options may not be granted for less than the fair market value of the
common stock at the date of grant. The stock options are exercisable over a
period determined by the Board at the time of grant, but not to exceed ten
years after the date they are granted. These options generally vest over a
five-year period from the date of grant and expire five to ten years after the
date of grant.
The per share weighted average fair value of stock options granted during
the fiscal years ended June 30, 2000 and June 30, 1999 were $5.31 and $4.86
respectively. These amounts were determined using the Black-Scholes
option-pricing model, which values options based on the stock price at the date
of grant, the expected life of the option, the estimated volatility of the
stock, expected dividend payments, and the risk-free interest rate over the
expected life of the option. The assumptions used in the Black-Scholes model
for fiscal 2000 and 1999 were as follows: a weighted average expected life of 5
years; an expected volatility of common stock of 43.7% and 46.4% respectively;
and weighted average risk-free interest rate of 5.24%and 5.08% respectively. No
dividend yield was used, as the Company has not paid dividends in the past and
does not anticipate paying dividends in the future.
The Company applies APB No. 25 in accounting for its stock plan and,
accordingly, no compensation costs have been recognized in the Company's
financial statements for incentive or non-qualified stock options granted. If,
under SFAS 123, the Company determined compensation costs based on the fair
value at the grant date for its stock options, the net income of $5,838,170 as
reported for fiscal 2000 would compare to a pro forma net income of $5,424,716.
(Fiscal 1999 net income of $3,903,466 would compare to a pro forma net income
of $3,846,173). Basic and diluted earnings per share as reported for fiscal
2000 of $1.24 and $1.19, respectively, would compare to pro forma basic and
diluted earnings per share of $1.15 and $1.11, respectively. (Basic and diluted
earnings per share as reported for fiscal 1999 of $1.04 and $0.96,
respectively, would compare to pro forma basic and diluted earnings per share
of $1.02 and $0.94, respectively). The Equity Incentive Plan was established in
fiscal 1999 and had no effect on fiscal 1998 net income or earnings per share.
37
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
A summary of the status of the Equity Incentive Plan as of June 30, 2000
and changes during the fiscal year then ended are presented below:
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
----------- ---------------
<S> <C> <C>
Outstanding at June 30, 1998 ........................... -- $ --
Granted (weighted average fair value of $4.86) ......... 280,000 10.88
Exercised .............................................. -- --
Forfeited .............................................. (500) 10.50
-------
Outstanding at June 30, 1999 ........................... 279,500 10.88
Granted (weighted average fair value of $5.31) ......... 204,750 11.63
Exercised .............................................. -- --
Forfeited .............................................. (1,000) 10.50
-------
Outstanding at June 30, 2000 ........................... 483,250 11.20
-------
Options exercisable at June 30, 2000 ................... 55,700 $ 10.88
======= =======
</TABLE>
The Company granted 100,000 options in fiscal 2000 whose exercise price
was greater than its market price on the date of grant. The weighted average
fair value of these options was $5.16. No option was granted in fiscal 2000
whose exercise price was less than its market price on the date of grant.
<TABLE>
The following table summarizes information about stock options outstanding
at June 30, 2000:
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------- ---------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------------- ------------- ------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C>
$10.50 - $12.23 483,250 7.1 years $ 10.88 55,700 $ 10.88
</TABLE>
At June 30, 2000, the outstanding stock options expire as follows: 100,000
in April 2004; 178,500 in April 2009; 100,000 in February 2005; 10,750 in
August 2009; 93,000 in February 2010; and 1,000 in June 2010.
Employee Stock Purchase Plan
On February 1, 1999, the Company's Board of Directors adopted and the
Company's shareholders approved the Employee Stock Purchase Plan with 50,000
shares of common stock available for issuance thereunder. The Plan, which is
intended to qualify as an employee stock purchase plan under Section 423 of the
Internal Revenue Code, provides that all employees of the Company, including
directors of the Company who are employees, whose customary employment is more
than 20 hours per week for more than five months in any calendar year, are
eligible to participate in the Plan. Employees who would immediately after the
grant own 5% or more of the total combined voting power or value of the stock
of the Company or any subsidiary are not eligible to participate. Eligible
employees may elect to have up to 10% of their earnings withheld and applied to
the purchase of common stock at a price equal to a minimum of 85% of the
average market price per share (as defined in the Plan) of the common stock on
either the first day or the last day of the relevant offering period, whichever
is lower. An employee may not purchase more than 500 shares in any one offering
period. The Company issued 3,177 shares of common stock under the Plan in
fiscal 2000 (no shares of common stock were issued in fiscal 1999).
38
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 14--Commitments and contingencies:
The Company leases certain warehouse space under noncancellable operating
leases that terminate on dates ranging from September 2000 to January 2003.
Under the terms of certain of the leases, rent is contingent on the amount of
bulk wine and/or case goods stored at any given time and is adjusted annually
for increases in building operating costs.
In January 1999, the Company entered into an agreement to lease
approximately 20 acres of land in Sonoma County, California from Sandra D.
Donnell and Bruce B. Donnell, the wife and brother-in-law, respectively, of
Justin M. Faggioli, the Company's Executive Vice President. The Company has
built a new winery facility (the "Quarry Facility") on the leased property, to
expand its production capacity. The lease provides for monthly payments that
are adjusted annually for inflation (as defined) and for a lease term ending
December 31, 2032. In addition, the lease provides the Company with a right of
first refusal to purchase a portion of the property and a first option to rent
upon its expiration if specific conditions are met.
Rental expense (including contingent rent) was $920,571, $701,889, and
$468,616 for fiscal 2000, 1999, and 1998, respectively. Minimum future rental
payments for each of the next five fiscal years and thereafter are as follows:
$445,000--fiscal 2001; $448,000--fiscal 2002; $248,000--fiscal 2003;
$107,000--fiscal 2004; $101,000--fiscal 2005; and $1,203,000 thereafter.
The Company typically contracts with various growers and certain wineries
to supply its grape and bulk wine requirements. While most of these contracts
call for prices to be determined by market conditions, several long-term
contracts provide for minimum grape or bulk wine purchase prices.
The Company has exposure to legal actions arising in the ordinary course
of business. In the opinion of management, the Company has adequate legal
defenses or insurance coverage with respect to any such actions and does not
believe that they will materially affect the Company's results of operations or
financial position.
NOTE 15--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 $65,762, $67,866, and $53,089 for fiscal
2000, 1999, and 1998 respectively.
NOTE 16--Earnings per share:
Basic earnings per share represents income available to common
shareholders divided by the weighted average number of common shares
outstanding during the measurement period, after giving retroactive effect to:
1) shares issued under a deferred compensation arrangement in July 1998 (see
Note 10); and 2) common stock issued in December 1998 (using the "treasury
stock method") at prices below the initial public offering price of $10.50 (see
Note 12).
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; and b)
common stock issued in December 1998 (using the "treasury stock method") at
prices below the initial public offering price of $10.50; and 2) the
potentially dilutive common shares issuable for convertible debt and stock
options that were outstanding during the measurement period.
39
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------------------------
2000 1999 1998
---------------- ---------------- --------------
<S> <C> <C> <C>
BASIC
Average shares outstanding ................ 4,712,478 3,696,801 3,005,625
Shares issued under deferred compensation
arrangement[A] ........................... -- -- 345,731
Shares issued in December 1998[B] ......... -- 66,964 160,713
------------ ------------ -----------
Weighted average number of common shares
outstanding .............................. 4,712,478 3,763,765 3,512,069
============ ============ ===========
Net income ................................ $ 5,838,170 $ 3,903,466 $ 186,891
============ ============ ===========
Per share amount .......................... $ 1.24 $ 1.04 $ 0.05
============ ============ ===========
</TABLE>
<TABLE>
<CAPTION>
Fiscal year ended June 30,
----------------------------------------------------
2000 1999 1998
---------------- ---------------- --------------
<S> <C> <C> <C>
DILUTED
Average shares outstanding ............................... 4,712,478 3,696,801 3,005,625
Shares issued under deferred compensation
arrangement[A] .......................................... -- -- 345,731
Shares issued in December 1998[B] ........................ -- 66,964 160,713
Net effect of potentially dilutive common stock
issuable for convertible debentures ..................... 293,752 407,480 302,751
Net effect of potentially dilutive common stock
issuable for stock options .............................. 4,725 -- --
------------ ------------ -----------
Weighted average number of shares and
equivalents outstanding ................................. 5,010,955 4,171,245 3,814,820
============ ============ ===========
Net income ............................................... 5,838,170 $ 3,903,466 $ 186,891
Interest on convertible debt, net of tax benefit ......... 114,374 112,836 49,305
------------ ------------ -----------
Net income, after adding interest on debentures .......... $ 5,952,544 $ 4,016,302 $ 236,196
============ ============ ===========
Per share amount ......................................... $ 1.19 $ 0.96 $ 0.05
============ ============ ===========
<FN>
------------
[A] Reflects the retroactive effect of the shares issued under a deferred
compensation arrangement in July 1998.
[B] Represents the retroactive effect using the "treasury stock method" for
common stock issued in December 1998 at prices below the initial public
offering price.
</FN>
</TABLE>
NOTE 17--Supplemental cash flow information:
Cash paid for interest, net of amounts capitalized, was $875,265,
$542,127, and $484,670 for the fiscal years ended June 30, 2000, 1999, and
1998, respectively. Cash paid for income taxes was $3,645,000, $2,275,000, and
$1,660,344 for the fiscal years ended June 30, 2000, 1999, and 1998,
respectively.
40
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
<TABLE>
A summary of non-cash investing and financing information is as follows:
<CAPTION>
Fiscal year ended June 30,
----------------------------------------------
2000 1999 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Plant and equipment purchased with capitalized
leases and notes payable ......................... $ 1,509,476 $ 1,778,569 $ 241,086
=========== =========== =========
Construction in progress acquired by issuing
convertible debentures and common shares to
related parties .................................. $ -- $ 283,511 $ --
=========== =========== =========
Convertible debentures redeemed for common
shares ........................................... $ 815,000 $ 50,000 $ --
=========== =========== =========
Convertible debentures issued by reclassifying
note and interest payable to shareholder ......... $ -- $ 56,250 $ --
=========== =========== =========
</TABLE>
NOTE 18--Comprehensive income:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 - Reporting Comprehensive Income ("SFAS
130"). SFAS 130 requires the additional reporting of a new measure of income
which takes into account certain elements otherwise recorded as part of equity.
For all years presented, the difference between net income and comprehensive
income consists of the changes in the unrealized gain in securities
available-for-sale included as part of the Company's equity.
<TABLE>
The following is a reconciliation of net income and comprehensive income:
<CAPTION>
Fiscal year ended June 30,
----------------------------------------------
2000 1999 1998
-------------- -------------- ------------
<S> <C> <C> <C>
Net income .................................... $ 5,838,170 $ 3,903,466 $ 186,891
Change in unrealized gain on available-for-sale
securities ................................... 85,752 -- --
----------- ----------- ---------
Comprehensive income .......................... $ 5,923,922 $ 3,903,466 $ 186,891
=========== =========== =========
</TABLE>
41
<PAGE>
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
NOTE 19--Quarterly Highlights (Unaudited):
<TABLE>
Selected highlights for each of the fiscal quarters during the years ended
June 30, 2000 and 1999 (in thousands, except per share data):
<CAPTION>
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended June 30, 2000:
Net sales ........................... $ 7,692 $ 9,924 $ 8,127 $ 7,484
Gross profit ........................ 4,229 5,110 4,230 3,961
Net income .......................... 1,498 1,780 1,317 1,243
Earnings per share--Basic ........... 0.33 0.39 0.27 0.26
Earnings per share--Diluted ......... 0.31 0.36 0.27 0.25
Year ended June 30, 1999:
Net sales ........................... $ 5,962 $ 5,621 $ 4,961 $ 5,525
Gross profit ........................ 3,433 3,083 2,556 2,737
Net income .......................... 1,217 1,068 756 862
Earnings per share--Basic ........... 0.35 0.31 0.22 0.19
Earnings per share--Diluted ......... 0.32 0.28 0.21 0.18
</TABLE>
Earnings per share calculations for each of the quarters are based on the
weighted average common and common share equivalents outstanding for each
period, and the sum of the quarters may not necessarily be equal to the
full-year earnings per share amount.
42
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Reference is made to the information regarding Directors appearing under
the caption "Nominees for the Board of Directors" in Ravenswood's proxy
statement for its 2000 annual meeting of shareholders to be mailed to
shareholders on or about September 29, 2000, which information is incorporated
herein by reference; and to the information under the heading "Executive
Officers of the Company" in Part I hereof.
Item 10. Executive Compensation
Reference is made to the information appearing under the caption
"Executive Compensation" in Ravenswood's proxy statement for its 2000 annual
meeting of shareholders to be mailed to shareholders on or about September 29,
2000, is incorporated herein by reference.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Reference is made to the information appearing under the caption
"Director's and Officer's Ownership of our common stock" in Ravenswood's proxy
statement for its 2000 annual meeting of shareholders to be mailed to
shareholders on or about September 29, 2000, is incorporated herein by
reference.
Item 12. Certain Relationships and Related Transactions
Reference is made to the information appearing under the caption "Certain
Transactions" in Ravenswood's proxy statement for its 2000 annual meeting of
shareholders to be mailed to shareholders on or about September 29, 2000, is
incorporated herein by reference.
PART IV
ITEM 13. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
a. The following documents are filed as a part of this Form 10-KSB.
1. Financial Statements: Reference is made to the Index to Consolidated
Financial Statements under Item 7 in Part II of this Form 10-KSB.
2. Financial Statement Schedules: Financial Statement schedules are omitted
because they are not applicable or the required information is shown in
the financial statements or notes thereto.
3. Exhibits: The Exhibits listed under Item 14(c) are required by Item 601
of Regulation S-B. Each management contract or compensatory plan or
arrangement required to be filed as an exhibit to this Form 10-KSB has
been identified.
b. Reports on Forms 8-K
On June 20, 2000, the Registrant filed a Report on Form 8-K under Item 5,
relating to the termination of the Ravenswood Voting Trust.
(c) Exhibits
43
<PAGE>
<TABLE>
The exhibits listed below are filed or incorporated by reference herein.
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Ravenswood Winery, Inc., filed as ex-
hibit 3.1 to our Registration Statement on Form SB-2 filed with the Commission on Febru-
ary 4, 1999 and incorporated herein by this reference.
3.2 Amended and Restated Bylaws of Ravenswood Winery, Inc., filed as exhibit 3.2 to our
Registration Statement on Form SB-2 filed with the Commission on February 4, 1999 and
incorporated herein by this reference.
4.1 Specimen Stock Certificate, filed as exhibit 4.1 to amendment no. 2 to our Registration
Statement on Form SB-2 filed with the Commission on April 2, 1999 and incorporated
herein by this reference.
10.1 1999 Equity Incentive Plan for Ravenswood Winery, Inc., filed as exhibit 10.1 to our Regis-
tration Statement on Form SB-2 filed with the Commission on February 4, 1999 and incor-
porated herein by this reference.*
10.2 Employee Stock Purchase Plan for Ravenswood Winery, Inc., filed as exhibit 10.2 to our
Registration Statement on Form SB-2 filed with the Commission on February 4, 1999 and
incorporated herein by this reference.*
10.3 Form of Indemnification Agreement for Ravenswood Winery, Inc., filed as exhibit 10.3 to
our Registration Statement on Form SB-2 filed with the Commission on February 4, 1999
and incorporated herein by this reference.
10.4 Revolving Line of Credit Promissory Note and Agreement with Pacific Coast Farm Credit
Services, ACA, dated as of April 1, 1998, filed as exhibit 10.4 to our Registration State-
ment on Form SB-2 filed with the Commission on February 4, 1999 and incorporated
herein by this reference.
10.5 Revolving Equity Line of Credit Promissory Note and Loan Agreement with Pacific Coast
Farm Credit Services, ACA, dated as of April 8, 1998, filed as exhibit 10.5 to our Registra-
tion Statement on Form SB-2 filed with the Commission on February 4, 1999 and incorpo-
rated herein by this reference.
10.6 Notes payable from Ravenswood Winery, Inc. to W. Reed Foster, filed as exhibit 10.6 to
our Registration Statement on Form SB-2 filed with the Commission on February 4, 1999
and incorporated herein by this reference.
10.7 Notes payable from Ravenswood Winery, Inc. to Joel E. Peterson and notes payable from
Joel E. Peterson to Ravenswood Winery, Inc.
10.8 Quarry Winery Lease Agreement, dated as of January 1, 1999, filed as exhibit 10.8 to our
Registration Statement on Form SB-2 filed with the Commission on February 4, 1999 and
incorporated herein by this reference. Exhibit Number Description of Document
10.9 Stock Agreement and Amendment of Voting Trust by and between Ravenswood Winery,
Inc. and W. Reed Foster effective as of July 1, 1998 and note payable from W. Reed Fos-
ter to Ravenswood Winery, Inc., filed as exhibit 10.9 to our Registration Statement on
Form SB-2 filed with the Commission on February 4, 1999 and incorporated herein by this
reference.
10.11 Form of Convertible Subordinated Debenture dated as of December 1998, filed as exhibit
10.11 to amendment no. 1 to our Registration Statement on Form SB-2 filed with the Com-
mission on March 18, 1999 and incorporated herein by this reference.
10.12 Marketing, Sales Agency and Administrative Services Agreement between Ravenswood
Winery, Inc. and Harvest Wines, Inc., filed as exhibit 10.12 to our Registration Statement
on Form SB-2 filed with the Commission on February 4, 1999 and incorporated herein by
this reference.
11.1 Statement of Computation of Earnings Per Share.
23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP.
25.1 Power of Attorney (see p. 28).
27.1 Financial Data Schedule.
<FN>
----------------
* Management contract or compensatory plan or arrangement.
</FN>
</TABLE>
44
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the issuer has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on September 27, 2000.
RAVENSWOOD WINERY, INC.
/s/ W. Reed Foster
----------------------------------------
W. Reed Foster, Chairman of the Board
and Chief Executive Officer
/s/ Callie S. Konno
----------------------------------------
Callie S. Konno, Chief Financial
Officer, Treasurer and Director
(Principal Financial Officer)
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints W. Reed Foster, Joel E. Peterson, Justin M.
Faggioli and Callie S. Konno, and each of them, such person's true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for such person and in such person's name, place and stead, in
any and all capacities, for such person in any and all capacities, to sign any
amendments to this Report on Form 10-KSB and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that said
attorney-in-fact, or such attorney-in-fact's substitute or substitutes, may do
or cause to be done by virtue hereof.
45
<PAGE>
<TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE ISSUER
AND IN THE CAPACITIES AND ON THE DATE INDICATED.
<CAPTION>
Signature Title Date
-------------------------------- ---------------------------------------- -------------------
<S> <C> <C>
/s/ W. Reed Foster Chairman of the Board and Chief September 27, 2000
-------------------------------- Executive Officer (Principal Executive
W. Reed Foster Officer)
/s/ Joel E. Peterson President, Winemaker and Director September 27, 2000
-------------------------------
Joel E. Peterson
/s/ Justin M. Faggioli Executive Vice President, Secretary September 27, 2000
-------------------------------- and Director
Justin M. Faggioli
/s/ Callie S. Konno Chief Financial Officer, Treasurer and September 27, 2000
-------------------------------- Director (Principal Financial and
Callie S. Konno Accounting Officer)
/s/ James F. Wisner Director September 27, 2000
--------------------------------
James F. Wisner
/s/ Robert E. McGill, III Director September 27, 2000
--------------------------------
Robert E. McGill, III
/s/ John D. Nichols Director September 27, 2000
--------------------------------
John D. Nichols
</TABLE>
46
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of Ravenswood Winery, Inc. (File No. 333-85735) of our
report dated August 11, 2000, on our audits of the financial statements of
Ravenswood Winery, Inc. as of June 30, 2000 and 1999 and for the three years in
the period ended June 30, 2000, which report is included in this 10-KSB.
Odenberg, Ullakko, Muranishi & Co. LLP
San Francisco, California
September 28, 2000
