As filed with the Securities and Exchange Commission on February 4, 1999
Registration No. 333-_______
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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RAVENSWOOD WINERY, INC.
(Exact name of registrant as specified in its charter)
California 2080 94-3026706
- ------------------------------ -------------------------- -------------------
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code) Identification No.)
---------------
18701 Gehricke Road
Sonoma, California 95476
(707) 938-1960
(Address, including zip code and telephone number,
including area code of registrant's principal executive offices)
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Justin M. Faggioli
Executive Vice President and Secretary
18701 Gehricke Road
Sonoma, California 95476
(707) 938-1960
(Name, address, including zip code and
telephone number, including area code of agent for service)
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Copies to:
Mark P. Tanoury, Esq.
Bruce Maximov, Esq. Vincent P. Pangrazio, Esq.
Maria L. Pizzoli, Esq. Nicole C. Deiger, Esq.
David E. Stoll, Esq. Cooley Godward LLP
Farella Braun & Martel LLP 3000 Sand Hill Road
235 Montgomery Street Building 3, Suite 230
San Francisco, California 94104 Menlo Park, California 94025
Approximate date of commencement of proposed sale to public: As soon as
practicable after the Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering: [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, check the following box: [ ]
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CALCULATION OF REGISTRATION FEE
=====================================================================================================================
Proposed Maximum Proposed Maximum
Title of Securities to Amount to be Offering Aggregate Offering Amount of
be Registered Registered(1) Price Per Share(2) Price(1)(2) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------
Common Stock, no par value per share 1,150,000 shares $13.50 $15,525,000 $4,315.95
=====================================================================================================================
<FN>
(1) Includes up to 150,000 shares of Common Stock that the Underwriters have
the option to purchase to cover over-allotments, if any. See
"Underwriting."
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act, as amended.
</FN>
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION ACTING PURSUANT TO SAID SECTION 8(A)
MAY DETERMINE.
================================================================================
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell securities, and we are not soliciting offers to buy these securities, in
any state where the offer or sale is not permitted.
Initial Public Offering Prospectus
Subject to Completion, February 4, 1999
1,000,000 Shares of Common Stock
$ __________________ per share
[Ravenswood logo] RAVENSWOOD
WINERY
Ravenswood Winery, Inc.
18701 Gehricke Road
Sonoma, California 95476
We produce, market and sell
premium California wines
exclusively under the
Ravenswood brand name.
The Offering
Per Share Total
----------- -------
Public Price .................. $ $
Underwriting discounts and
commissions .................. $ $
Proceeds to Ravenswood ......... $ $
This is our initial public offering
and no public market currently
exists for our shares. The
offering price may not reflect the
market price of our shares after
the offering. We expect that the
public offering price in the
offering will be between $10.50
and $13.50 per share.
Proposed Trading Symbol:
The Nasdaq National Market -- RVWD
------------
This offering involves a high degree of risk. You should purchase shares only if
you can afford a complete loss. See "Risk Factors" beginning on page 5.
The Securities and Exchange Commission and state securities regulators have not
approved or disapproved these securities, or determined if this prospectus is
truthful or complete. Any representation to the contrary is a criminal offense.
Ravenswood has granted the underwriter a 30-day option to purchase up to an
additional 150,000 shares of common stock to cover over-allotments. W.R.
Hambrecht & Company, LLC expects to deliver shares of common stock to purchasers
on ________________, 1999.
WR HAMBRECHT + CO
_________________________, 1999
[GRAPHIC OMITTED]
(Full-page photograph of three bottles of Ravenswood wine)
You should rely only on the information contained in this prospectus. We have
not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock. In this prospectus, the words
"Ravenswood," "we," "us" and "our" refer to Ravenswood Winery, Inc. (unless the
context indicates otherwise).
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TABLE OF CONTENTS
Page
----
PROSPECTUS SUMMARY ......................................................... 1
THE OFFERING ............................................................... 3
SUMMARY FINANCIAL DATA ................................................... 4
RISK FACTORS ............................................................... 5
THE COMPANY ............................................................... 14
USE OF PROCEEDS ............................................................ 14
DIVIDEND POLICY ............................................................ 14
CAPITALIZATION ............................................................ 15
DILUTION .................................................................. 16
SELECTED FINANCIAL DATA ................................................... 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ................................................... 18
BUSINESS ................................................................... 26
MANAGEMENT ................................................................. 44
CERTAIN TRANSACTIONS ....................................................... 50
PRINCIPAL SHAREHOLDERS ..................................................... 52
DESCRIPTION OF CAPITAL STOCK ............................................... 54
SHARES ELIGIBLE FOR FUTURE SALE ............................................ 57
PLAN OF DISTRIBUTION ....................................................... 59
LEGAL MATTERS .............................................................. 60
EXPERTS .................................................................... 61
ENGAGEMENT OF NEW AUDITORS ................................................. 61
ADDITIONAL INFORMATION ..................................................... 61
INDEX TO FINANCIAL STATEMENTS .............................................. F-1
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Until ______________, 1999 (25 days after the date of this prospectus) all
dealers that buy, sell or trade our common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This requirement is
in addition to the dealers' obligation to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
"Ravenswood," the Ravenswood logo and the slogan "No Wimpy Wines" are federally
registered trademarks of Ravenswood Winery, Inc. All other trademarks or
tradenames referred to in this prospectus are the property of their respective
owners.
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. This
summary is not complete and may not contain all of the information that you
should consider before investing in our common stock. You should read the entire
prospectus carefully. Unless otherwise indicated, any information contained in
this prospectus assumes that: (i) the underwriter will not exercise its
over-allotment option and (ii) we will complete a 63-for-1 split in our common
stock prior to the closing of this offering. This prospectus contains
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Exchange Act of 1934 which involve risks and
uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of certain factors, including
those set forth under "Risk Factors" and elsewhere in this prospectus.
Our Business: We produce, market and sell premium California wines
exclusively under the Ravenswood brand name. The majority of
the wines we produce and sell are red wines, including Merlot,
Cabernet Sauvignon and, particularly, Zinfandel. To a lesser
extent, we produce white wines, including Chardonnay, French
Colombard and Gew -urztraminer. Our approach focuses on the
use of old-world French winemaking techniques to produce
premium wines of exceptional quality and on building awareness
and loyalty for the Ravenswood brand.
Our Strategy: We concentrate on producing wines that enhance our reputation
for high quality and further establish our brand identity, in
order to achieve a competitive advantage in every segment of
the premium wine market in which we operate. To this end, we
have adopted the following strategies:
* Focus on Product Offerings that Give the Consumer
Demonstrable Value
* Strategically Manage Our Brand
* Produce High-Quality Products that Emphasize the
Winemaking Process
* Maintain Broad, Efficient Distribution Channels
* Selectively Invest in Vineyards and Production
Facilities
* Retain and Further Develop Our Professional
Management Team
Our Market: Industry analysts estimate that United States sales of
California premium wines have grown from approximately $866
million in 1987 to $3.6 billion in 1997. We believe this
growth can be attributed, among other things, to an
increasingly discriminating customer base that is willing to
pay for higher quality wines.
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1
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Increased sales of red wines, the category on which we focus
our product portfolio, have caused the majority of growth in
the market for premium wines. Industry analysts estimate that
sales of nine liter cases of red wine (which include twelve,
750 ml bottles per case) grew 158% from 1991 to 1997, from
22.1 million cases to 57.2 million cases. This increase in
sales represents approximately 67% of the total growth in the
premium wine industry during this period.
Our Products: Our wines target specific varietals and prices within the
super-premium and ultra-premium categories of the premium wine
market. We offer our products 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 $12 to $18.50
per 750 ml bottle; and
* the higher-priced Vineyard Designate Series, with a
suggested retail price of approximately $18 to $31.50
per 750 ml bottle.
The actual price of any particular wine may be either higher
or lower than suggested retail, depending upon the type of
retail outlet and location where it is sold.
Red wines, particularly Zinfandel, comprise the vast majority
of our products. Our red wines accounted for approximately 91%
of our gross sales in the 1998 fiscal year, with sales of
Zinfandel accounting for approximately 63% of our gross sales
for that period.
Although we currently own and manage 14 acres of planted
vineyards, we rely almost exclusively upon grapes supplied by
third parties, and we use leased storage and crush facilities
for a substantial portion of our wine production. We also
purchase bulk wine of superior quality from third parties to
incorporate into some of our products. We believe that this
approach has enabled us to sustain the growth necessary to
capitalize on favorable trends in the demand for California
premium wines, while minimizing our investment of capital in
the acquisition and development of land and capital equipment
until our production levels warranted such investment.
Our Brand: We have made significant investments in the development of the
Ravenswood brand name, packaging and trademarks, and expect to
continue to do so in the future. We believe that the
distinctive Ravenswood name, which is derived from a character
in the opera Lucia di Lammermoor by Gaetano Donizetti, our
unique logo, and our trademarked slogan, "No Wimpy Wines,"
convey a recognizable and high-quality image that has
contributed to our success.
- --------------------------------------------------------------------------------
2
- --------------------------------------------------------------------------------
Our Distribution: We do not have an in-house sales staff. We have developed a
broad network of brokers and distributors throughout the
United States and in more than 15 export markets. We sell our
products directly in California, using five warehouses
throughout the state and seven brokers. Elsewhere, we use a
network of over 75 distributors. We also sell our wines
directly through mail order in the United States, where
permitted by law, as well as through the tasting room in our
Gehricke Road facility in Sonoma, California.
Our History: We released our first wines, consisting of 327 cases of the
1976 vintage Zinfandel, in 1979. Thereafter, our production
and sales levels have increased substantially, to
approximately 191,655 cases and $17.0 million in gross sales
for the fiscal year ended June 30, 1998.
THE OFFERING
Type of Security ........................ Common Stock
Shares to be Offered .................... 1,000,000 shares
Common Stock to be Outstanding after the
Offering ............................... 4,550,852 shares(1)
Use of Proceeds ......................... For working capital, to expand our
production facilities and for general
corporate purposes, including retiring
indebtedness. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol .. RVWD
- ----------
(1) Based on shares outstanding on December 31, 1998. Excludes: (i) 500,000
shares of common stock reserved for issuance under our 1999 Equity
Incentive Plan; (ii) 50,000 shares of common stock reserved for issuance
under our Employee Stock Purchase Plan; and (iii) up to 454,622 shares of
common stock issuable upon conversion of outstanding convertible
debentures. See "Capitalization," "Management--1999 Equity Incentive Plan,"
"--Employee Stock Purchase Plan" and "Description of Capital
Stock--Debentures."
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3
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SUMMARY FINANCIAL DATA
(in thousands, except per share data and Other Data)
Six Months Ended
Fiscal Year Ended June 30, December 31,
-------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (Audited) (Unaudited)
Statement of Income Data:
Gross Sales ...................................... $ 6,340 $ 8,548 $ 11,028 $ 12,247 $ 17,017 $ 8,855 $ 12,195
Less Excise Taxes ............................... 142 237 249 330 553 197 276
Less Discounts, Returns and Allowances .......... 440 409 556 394 574 273 337
-------- -------- -------- -------- -------- -------- --------
Net Sales ........................................ 5,758 7,902 10,223 11,523 15,890 8,385 11,582
Cost of Goods Sold ............................... 2,826 2,633 4,886 5,196 7,397 3,652 5,066
-------- -------- -------- -------- -------- -------- --------
Gross Profit ..................................... 2,932 5,269 5,337 6,327 8,493 4,733 6,516
Operating Expenses ............................... 1,962 3,297 2,849 3,355 4,105 1,852 2,340
-------- -------- -------- -------- -------- -------- --------
Operating Income ................................. 970 1,972 2,488 2,972 4,388 2,881 4,176
Other Income (Expense) ........................... 55 (192) (297) (437) (474) (114) (147)
-------- -------- -------- -------- -------- -------- --------
Income Before Income Taxes ....................... 1,025 1,780 2,190 2,535 3,914 2,767 4,029
Provision for Income Taxes ....................... 433 763 921 1,067 1,592 1,133 1,744
-------- -------- -------- -------- -------- -------- --------
Net Income ....................................... $ 592 $ 1,017 $ 1,269 $ 1,468 $ 2,322 $ 1,634 $ 2,285
======== ======== ======== ======== ======== ======== ========
Basic Earnings per Share (1) ..................... $ 0.16 $ 0.28 $ 0.35 $ 0.40 $ 0.67 $ 0.47 $ 0.66
======== ======== ======== ======== ======== ======== ========
Weighted Average Number of
Common Shares Outstanding (1) ................... 3,636 3,636 3,636 3,636 3,492 3,505 3,479
Diluted Earnings per Share (1) ................... $ 0.16 $ 0.27 $ 0.33 $ 0.39 $ 0.63 $ 0.44 $ 0.61
======== ======== ======== ======== ======== ======== ========
Weighted Average Number of
Common Shares and Equivalents
Outstanding (1) ................................. 3,636 3,884 3,939 3,939 3,795 3,808 3,847
June 30, December 31, 1998
--------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 Actual As Adjusted(2)
------- ------- ------- ------- ------- ------- --------------
(Unaudited) (Audited) (Unaudited)
Balance Sheet Data:
Cash & Cash Equivalents .............................. $ 103 $ 542 $ 766 $ 212 $ 102 $ 3,171 $14,401
Inventories .......................................... 2,787 3,979 5,144 7,158 10,427 12,931 12,931
Property, Plant and Equipment, Net ................... 84 2,075 2,445 2,647 2,974 3,870 3,870
Total Assets ......................................... 4,051 8,685 10,591 12,040 15,977 23,224 34,454
Current Liabilities .................................. 1,944 2,752 3,231 3,159 4,693 6,112 6,112
Long-Term Liabilities ................................ 79 2,723 2,662 2,622 2,910 4,765 4,765
Total Shareholders' Equity ........................... 2,028 3,210 4,698 6,259 8,374 12,347 23,577
Fiscal Year
Ended June 30,
-------------------- Six Months Ended
1997 1998 December 31, 1998
------- ------- -----------------
(Unaudited) (Unaudited)
Other Data:
Cases Sold ......................... 131,175 191,655 130,493
Average Price Per Case ............. $ 91.58 $ 87.37 $ 92.03
- ----------
(1) Computed on the basis described in Notes 1 and 15 to our Financial
Statements.
(2) Adjusted to reflect the sale of the 1,000,000 shares of common stock
offered hereby at an assumed initial public offering price of $12.00 per
share after deducting underwriting fees and commissions and estimated
offering expenses payable by us, and the receipt and application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
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4
RISK FACTORS
Investing in our common stock is risky. You should carefully consider the
following risks before making an investment decision. The risks described below
are not the only ones that we face. Additional risks that generally apply to
publicly traded companies and companies in our industry, that we have not yet
identified or that we think are immaterial may also impair our business
operations. Our business, operating results and financial condition could be
adversely affected by any of the following risks. The trading price of our
common stock could decline due to any of these risks, and you could lose all or
part of your investment. You should also refer to the other information set
forth in this prospectus, including our financial statements and the related
notes. This prospectus contains forward-looking statements that involve risks
and uncertainties. These forward-looking statements are usually accompanied by
words such as "believes," "anticipates," "plans," "expects" and similar
expressions. Our actual results may differ materially from the results discussed
in the forward-looking statements because of factors such as the risks described
below.
Our Profits Depend Largely on Sales of Our Red Wines
Our red wines accounted for approximately 91% of our gross sales in the 1998
fiscal year, with sales of Zinfandel accounting for approximately 63% of our
gross sales for that period. Over the past decade, the demand for premium wine,
particularly red wine such as Zinfandel, has increased considerably. We cannot
assure you, however, that consumer demand for red wines will continue to grow in
the future or remain at current levels.
Research by wine industry sources indicates that a small segment of the
population that frequently drinks wine has generated most of the growth in wine
consumption. We cannot assure you that the demand for premium wine within this
segment of the population, or within the rest of the population, will continue
to grow or remain at current levels. See "Business--Ravenswood Products."
We Rely on Independent Grape Growers and Bulk Wine Suppliers for Substantially
All of Our Annual Production
We contract with over 60 independent growers annually to obtain grapes for our
wine production. Although we believe we have good relationships with these
independent grape growers, we may not be able to contract for the purchase of
grapes at acceptable prices from these or other suppliers in the future. The
business terms of our purchase agreements vary; however, many of them require
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. In
addition, many of our purchase agreements are not in writing.
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. See "Business--Grape and
Bulk Wine Supply."
We May Not Be Able to Acquire Enough Quality Grapes for Our Wines
A number of factors 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
5
producing grapes. The level of consumer demand for wine also determines the
adequacy of grape supply. Although we believe that we can secure a sufficient
supply of grapes from independent growers, grape supply shortages may occur. A
shortage in the supply of wine grapes 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.
An oversupply of grapes may also adversely affect our business. 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. Although this increase in supply
may cause a decrease in the prices we pay 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 we produce, which could reduce our sales.
Oversupply may also increase the amount of premium wine available to our
distributors and retail outlets, thereby increasing competition in our
distribution channels.
Due to the effects of El Ni -no, 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. Although we expect to compensate in part for this shortfall by
purchasing bulk wine, the inventory of our 1998 vintage may be less than that of
our 1997 vintage. As a result, the growth of our sales may be limited in fiscal
years 2000 and 2001, when most of our 1998 vintage will be released for sale.
See "Business--Grape and Bulk Wine Supply."
Bad Weather, Pests and Plant Diseases Would Limit Our Grape Supply
Although we grow only a small portion of the grapes we use, our business is
still subject to numerous agricultural risks. Various diseases affecting
vineyards, pests and extreme weather conditions could reduce the quality and
quantity of grapes available to us, 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.
Phylloxera, a pest that feeds on susceptible grape rootstocks, has infested, and
may in the future infest, some vineyards from which we purchase grapes.
Phylloxera can cause a grapevine to become economically unproductive within two
or three years of infestation. Replanted vines generally take from three to five
years to bear grapes in commercial amounts. Phylloxera infestations or the
spread of other plant insects or diseases, such as Pierce's Disease or Fan Leaf
Virus, may reduce the supply of grapes available to us. Most of the vineyards
that supply our grapes are primarily planted to rootstocks believed to be
resistant to Phylloxera. However, we cannot be certain that these vineyards, or
vineyards from which we obtain grapes in the future, will not become susceptible
to current or new strains of Phylloxera, plant insects or diseases. Any
resulting reduction in grape supply could reduce our sales and profits.
The Loss of 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.
6
Foster, Mr. Peterson or other key management team members to continue in their
present capacities could harm our business and our reputation. See "Management."
We Depend on Third Parties to Sell Our Wine
In many states, including California, and in Europe, we use brokers who act as
our sales agents in exchange for commissions. Whether or not we use a broker as
a sales agent, our sales outside of California largely depend on the use of a
distributor.
In the 1998 fiscal year, approximately 75% of our gross sales were made through
brokers. Our most successful broker was responsible for 21% of our gross sales
in the 1998 fiscal year, and our ten most successful brokers were responsible
for 69% of our gross sales in the 1998 fiscal year. A change in our relationship
with any of our brokers could harm our business and reduce our sales.
Our sales outside of California largely depend on the use of distributors. While
no one distributor accounted for more than 7% of our gross sales for the 1998
fiscal year, our ten largest distributors accounted for approximately 23% of our
gross sales for that period. 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 certain limited circumstances, making it difficult to
terminate a distributor. As a result, it may be difficult for us to replace
distributors that do not perform adequately, which may reduce our sales and
profits.
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. See "Business--Sales and Distribution."
Our Business is Seasonal
We experience seasonal and quarterly fluctuations in sales, operating expenses
and net income. Generally, the second and third quarters of our fiscal year have
lower sales volumes than the first and fourth quarters. We have managed, and
will continue to manage, our business to achieve long-term objectives. In doing
so, we may make decisions that we believe will enhance our long-term
profitability, even if such decisions may reduce quarterly earnings. Such
decisions include: when to release our wines for sale; how to position our wines
competitively; and 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Our Ever-Increasing Competition May Hurt Our Business
The premium wine industry is intensely competitive and highly fragmented. Some
of the competitive factors in the market for premium wine are:
* Brand recognition
* Product quality
* Access to distribution channels
* Price
7
The increase in the number of our competitors may prevent us from successfully
establishing our brand name or obtaining sufficient marketing and sales support
from our distributors. In addition, many of our competitors have greater name
recognition, larger customer bases, significantly broader distribution and
substantially more financial and marketing resources than we do. As a result, we
may not be able to compete successfully against these other producers of premium
wines.
We have traditionally competed with high-quality wineries from the Napa and
Sonoma counties of California and, to a lesser extent, French and Italian
wineries. Increasingly, we are also facing competition from wineries in other
regions of California and the United States, as well as new international
competition from wineries located in other European countries, South America and
Australia.
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 such wine or alternative beverage producers. See
"Business--Competition."
We Will Need More Working Capital to Grow
Our inability to obtain additional working capital on acceptable terms would
limit our growth and could have a negative impact on our business. We use
substantial amounts of our working capital to purchase our grape and bulk wine
supplies from third parties and to pay for the use of third-party production
facilities in our wine production. We also need capital to fund our own
grape-growing and winemaking activities. We expect that we will need an
increased amount of working capital over the next several years to fund
increases in our production level and inventory. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
We Depend on Third Parties to Produce Our Wine
We currently rely substantially on the assistance of third parties in various
stages of our wine production. We use third-party facilities for the crushing
and fermentation of a majority of our grapes and the storage of some of our
wine. We do not have long-term agreements with any of these facilities. 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. See "Business--Wine
Production Facilities."
Our Facilities Expansion Plans May Not be Successful
We are currently building a new facility (the "Quarry Facility") in order to
increase our production capacity. Our failure to complete the Quarry Facility,
or otherwise expand our production capabilities, would limit our production
capacity, would require greater use of third-party production facilities, and
could reduce our sales and/or profits. Upon its completion, we expect to use
both the Quarry Facility and our current facility (the
8
"Gehricke Road Facility") for a majority of our operations. We will need to make
significant capital investments for the construction and completion of the
Quarry Facility. Although we believe that we will have access to sufficient
capital to complete the facility, we may need additional financing.
We expect to utilize the Quarry Facility fully upon its completion. As a result,
any further expansion of our production capacity may require us to use
third-party production facilities or to continue to expand our own production
capacity. Our failure to expand our production capacity, or to secure capacity
from third parties, either at acceptable prices or at all, could limit our
production and reduce our sales and/or profits. See "Business--Wine Production
Facilities," and "Certain Transactions."
Infringement of Our Trademarks May Damage Our Brand Name or Our Business
Our wines are branded consumer products. Our ability to distinguish our brand
name from those of our competitors depends, in part, on the strength and
vigilant enforcement of our trademarks. Competitors may use trademarks,
trade-names or trade dress which are similar to those we use, thereby weakening
our intellectual property rights. If our competitors infringe on our trademark
rights, we may have to litigate in order to protect such rights. Litigation may
result in significant expense and divert our attention from business operations.
In addition, we cannot assure you that we would be successful in protecting our
trademark rights. See "Business--Trademarks."
Adverse Public Opinion About Alcohol May Harm Our Business
While a number of research studies suggest that moderate alcohol consumption may
provide various health benefits, other studies conclude or suggest that alcohol
consumption has no health benefits and may increase the risk of stroke, cancer
and other illnesses. An unfavorable report on the health effects of alcohol
consumption could significantly reduce the demand for wine, which could harm our
business and reduce our sales and profits.
In recent years, certain activist groups have used advertising and other methods
to inform the public about the societal harms associated with the consumption of
alcoholic beverages. Such 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 such beverages, or to increase the costs
associated with the production of alcoholic beverages. Over time, such efforts
could cause a reduction in the consumption of alcoholic beverages generally,
which could harm our business and reduce our sales and profits.
Contamination of Our Wines Would Harm Our Business
Because our products are designed for human consumption, our business is subject
to certain 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 such
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 such
risks, we may not be able to maintain such insurance on acceptable terms and
such 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
9
and laws dictate such matters as licensing requirements, trade and pricing
practices, permitted distribution channels, permitted and required labeling,
advertising, and relationships with distributors and retailers. Recent and
future zoning ordinances, environmental restrictions and other legal
requirements may limit our plans to expand our production capacity, as well as
any future development of new vineyards and wineries. In addition, new
regulations or requirements, or increases in excise taxes, income taxes,
property and sales taxes, or international tariffs, could harm our business and
operating results. Future legal or regulatory challenges to the wine industry
could also harm our business and impact our operating results. See "Business
- --Government Regulation."
Our Existing Shareholders Will Retain Significant Control Over Our Company After
This Offering
Following this offering and assuming that all debentures held by our directors
and executive officers and their respective affiliates that are convertible
within 60 days of December 31, 1998 have been converted, our directors and
executive officers and their respective affiliates will beneficially own
2,225,641 shares of common stock, or approximately 48.5% of our outstanding
common stock. Of these shares, 2,131,151 shares, plus an additional 19,530
shares not held of record by management, have been placed in a voting trust. The
trustees of this voting trust are Messrs. Foster, Peterson and Faggioli, and Mr.
James F. Wisner, all of whom serve as directors of Ravenswood. As a result,
Messrs. Foster, Peterson, Faggioli and Wisner have significant influence in the
election of directors and the approval of certain corporate actions that must be
submitted for a vote of shareholders. The interests of these management
shareholders 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. Such concentration of ownership may also have the effect of
delaying, preventing or deterring an acquisition of our company by a third
party. See "Principal Shareholders."
Natural Disasters Could Destroy Our Facilities or Our Inventory
The Gehricke Road Facility, the Quarry Facility and all of the third-party
facilities we use to produce and store our wine are located in areas that are
subject to earthquake activity. If we lost all or a portion of our wine prior to
its sale or distribution as a result of earthquake activity, we would lose our
investment in, and anticipated profits and cash flows from, such wine. Such a
loss would seriously harm our business and reduce our sales and profits.
In addition, we must store our wine in a limited number of locations for a
period of time prior to its sale or distribution. Any intervening catastrophies,
such as a fire, that result in the destruction of all or a portion of our wine
would result in a loss of our investment in, and anticipated profits and cash
flows from, such wine. Such a loss would seriously harm our business and reduce
our sales and profits.
The Success of this Offering Depends on a New Underwriter and a Novel Plan of
Distribution
The offering price for the shares being sold in this offering will be determined
by negotiations between our company and W.R. Hambrecht & Company, LLC, an
underwriter that has been in business for less than one year, by reference to
the results of an auction process conducted by W.R. Hambrecht & Company, LLC.
This novel plan of distribution by a relatively newly formed underwriter may
result in price and volume volatility in the market for our common stock after
the completion of this offering, which may reduce the market price of our common
stock. In addition, we may not be able to obtain sufficient research
10
coverage from market analysts after the offering. The lack of such coverage may
reduce or limit the market price, liquidity or trading volume of our common
stock. See "Plan of Distribution."
Our Management Will Retain Broad Discretion in the Use of the Proceeds from this
Offering
We expect to use a portion of the proceeds from this offering for general
corporate purposes, including working capital. As a result, our board of
directors and management will have significant flexibility in using these funds.
In addition, our shareholders face the risk that the proceeds from this offering
may not be invested in a manner that will generate a return. See "Use of
Proceeds."
Sales of Additional Shares Could Cause the Price of Our Stock to Decline and
Could Harm Our Ability to Raise Funds from Stock Offerings in the Future
Sales of a large number of shares of common stock in the market after the
offering, or a belief that such sales could occur, could cause a drop in the
market price of our common stock and could impair our ability to raise capital
through offerings of our equity securities. Upon completion of this offering,
there will be 4,550,852 shares of our common stock outstanding. All of the
1,000,000 shares sold in this offering will be freely tradable without
restrictions or further registration under the Securities Act, unless such
shares are purchased by our "affiliates," as that term is defined in Rule 144
under the Securities Act. The remaining 3,550,852 shares of common stock held by
existing shareholders will be "restricted securities" as that term is defined in
Rule 144. These restricted shares will be available for sale in the public
market as follows:
* 866,248 restricted shares will be eligible for sale on the date of this
prospectus pursuant to Rule 144(k);
* 1,810,620 restricted shares will be eligible for sale 90 days after the
date of this prospectus pursuant to Rule 144 and Rule 701 of the Securities
Act; and
* the remainder of the restricted shares will be eligible for sale from time
to time thereafter upon expiration of one-year holding periods and subject
to the requirements of Rule 144.
Upon completion of this offering, there will be 454,622 shares issuable upon
conversion of outstanding convertible debentures, all of which are immediately
convertible. Shares issuable upon conversion of the convertible debentures will
be available for sale in the public market as follows:
* 273,000 of such shares will be eligible for sale on the date of this
prospectus pursuant to Rule 144(k);
* 12,250 of such shares will be eligible for sale 90 days after the date of
this prospectus pursuant to Rule 144; and
* the remainder of such shares will be eligible for sale from time to time
thereafter upon expiration of one-year holding periods and subject to the
requirements of Rule 144.
After the completion of this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register 500,000 shares
reserved for issuance under our 1999
11
Equity Incentive Plan and 50,000 shares reserved for issuance under our
Employee Stock Purchase Plan. Upon registration, all of these shares will be
freely tradeable when issued. See "Shares Eligible for Future Sale."
We May be Harmed by Year 2000 Hardware and Software Problems
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to process correctly dates beginning in 2000 and to comply
with the Year 2000 requirements. We are reviewing our information systems for
any potential Year 2000 problems that might arise as a result of these
requirements, and do not believe such systems will be affected by the upcoming
change in century. However, we use third-party equipment and software that may
not be Year 2000 compliant. If such third-party equipment or software fails to
process dates for the year 2000 and thereafter properly, such a failure could
cause us to incur unanticipated expenses to remedy any problems, which could
harm our business. In addition, we rely on various service providers, including
banks, and on grape and bulk wine suppliers, third-party production facilities
and distributors. The software and computer systems of any of these entities
could have Year 2000 problems. A disruption in the supply of services or
products we receive from any of these entities due to Year 2000 problems could
harm our business. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Prior to this Offering There Has Been No Public Market for Our Common Stock
While we have applied to list the common stock on The Nasdaq National Market, we
cannot assure you that a trading market for the common stock will develop or how
liquid that market might be. The initial public offering price of the common
stock has been determined through negotiations between our company and W.R.
Hambrecht & Company, LLC, as underwriter for the offering. You may not be able
to resell your shares at or above the initial public offering price. See "Plan
of Distribution."
Certain Provisions Contained in Our Charter and Bylaws May Delay or Prevent a
Takeover of Our Company
Certain provisions of our Amended and Restated Articles of Incorporation could
make it more difficult for a third party to acquire control of our company, even
if such change in control would be beneficial to our shareholders. For example,
our board of directors is authorized to issue up to 1,000,000 shares of
preferred stock, and to determine the rights of those shares, without any
shareholder vote. The issuance of such preferred stock may hinder any
acquisition of our company by a third party.
In addition, our Articles and Amended and Restated Bylaws require that
shareholder actions occur at duly called meetings of the shareholders, do not
permit cumulative voting in the election of directors once we have met certain
thresholds, and require advance notice of shareholder proposals and nominations.
These provisions may make it more difficult for shareholders to replace current
members of our board of directors and may make the acquisition of our company by
a third party more difficult. See "Description of Capital Stock."
Investors in this Offering Will Suffer Immediate Dilution
The initial public offering price will be substantially higher than the book
value per share of our common stock. Investors purchasing common stock in this
offering will therefore incur
12
immediate and substantial dilution in the net tangible book value of their
shares equal to $6.85 per share, assuming an initial public offering price of
$12.00 per share. In addition, to the extent outstanding debentures are
converted into common stock, investors in this offering will incur additional
dilution. See "Dilution."
We Do Not Anticipate Paying Any Cash Dividends
We are restricted from paying cash dividends on our common stock under our
credit agreements and do not anticipate paying any cash dividends in the
foreseeable future. See "Dividend Policy."
13
THE COMPANY
We originally formed Ravenswood as a partnership in 1976 and reorganized as a
limited partnership in 1979. We were incorporated in the State of California in
1986. We maintain our principal executive offices at 18701 Gehricke Road,
Sonoma, California 95476. Our telephone number is (707) 938-1960 and our Web
site is located at www.ravenswood-wine.com. Information contained on our Web
site does not constitute a part of this prospectus.
USE OF PROCEEDS
We estimate that we will receive net proceeds of $11,230,000 from the sale of
the 1,000,000 shares of common stock offered hereby, assuming an initial public
offering price of $12.00 per share and after deducting estimated underwriting
discounts and offering expenses. We currently intend to use the net proceeds of
this offering for working capital, to expand our production facilities and for
general corporate purposes, including retiring indebtedness under our lines of
credit. As of December 31, 1998, borrowings of an aggregate of approximately
$1,529,887 were outstanding under our two lines of credit and we expect that
approximately the same amounts will be outstanding under the lines of credit on
the closing date of this offering.
As of December 31, 1998, the lines of credit had the following maturities,
balances, interest rates and uses:
Maturity Balance Interest Rate Use
- -------- ------- ------------- ---
June 1, 2001 ............. $950,000 8.3% For working capital
December 1, 2024 ......... $579,887 7.1% To fund the construction of
the Quarry Facility
The cost, timing and amount of funds required by our company cannot be precisely
determined at this time and will be based on numerous factors. Our board of
directors has broad discretion in determining how the proceeds of this offering
will be applied. We intend to invest the net proceeds in short-term, investment
grade interest-bearing obligations until they are used.
DIVIDEND POLICY
We have never paid cash dividends on our common stock and do not anticipate
paying such dividends in the foreseeable future. We currently intend to retain
any future earnings to develop and expand our business. The terms of our credit
agreements impose restrictions on our ability to declare and pay dividends.
14
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998, (i)
on an actual basis and (ii) on an as adjusted basis after giving effect to the
sale of the 1,000,000 shares of common stock offered hereby at an assumed public
offering price of $12.00 per share and the receipt of the estimated net proceeds
therefrom. This table only presents summary information. In reading it, you
should refer to our financial statements and related notes, which are included
elsewhere in this prospectus.
December 31, 1998
-----------------------
As
Actual Adjusted
------- --------
(in thousands)
Long-Term Debt--including current portion ................................................................. $ 4,964 $ 4,964
------- -------
Shareholders' Equity:
Preferred Stock, no par value; 1,000,000 shares authorized and none
outstanding (actual and as adjusted) (1) .............................................................. -- --
Common Stock, no par value; 20,000,000 shares authorized and
3,550,852 outstanding (actual); 20,000,000 authorized and 4,550,852
outstanding (as adjusted) (1)(2) ...................................................................... 2,492 13,722
Retained Earnings ...................................................................................... 9,855 9,855
------- -------
Total Shareholders' Equity ............................................................................. 12,347 23,577
======= =======
Total Capitalization ...................................................................................... $17,311 $28,541
======= =======
<FN>
- ------------
(1) Reflects board and shareholder approval in February 1999 of the
authorization of 1,000,000 shares of preferred stock and an increase in the
number of authorized shares of common stock from 1,000,000 to 20,000,000.
(2) Excludes: (i) 500,000 shares of common stock reserved for issuance under
our 1999 Equity Incentive Plan; (ii) 50,000 shares of common stock reserved
for issuance under our Employee Stock Purchase Plan; and (iii) up to
454,622 shares of common stock issuable upon conversion of outstanding
convertible debentures. See "Management--1999 Equity Incentive Plan,"
"--Employee Stock Purchase Plan" and "Description of Capital
Stock--Debentures."
</FN>
15
DILUTION
Our net tangible book value as of December 31, 1998 was approximately $12.2
million, or $3.44 per share of outstanding common stock. Net tangible book value
per share is equal to our total tangible assets less our total liabilities,
divided by the number of outstanding shares of common stock. Dilution per share
represents the difference between the price per share paid by investors in this
offering and the as adjusted net tangible book value per share immediately after
this offering.
After giving effect to the sale of the 1,000,000 shares of common stock offered
hereby, at an assumed initial public offering price of $12.00 per share (after
deducting the estimated fees payable to the underwriter and offering expenses
payable by us), our as adjusted net tangible book value at December 31, 1998
would have been approximately $23.4 million, or $5.15 per share. This represents
an immediate dilution of $6.85 per share to new investors purchasing shares in
this offering. The following table illustrates this per share dilution:
Assumed initial public offering price per share ...................... $ 12.00
--------
Net tangible book value per share as of December 31, 1998 ......... $ 3.44
Increase per share attributable to new investors .................. 1.71
-------
As adjusted net tangible book value after this offering ........... 5.15
--------
Dilution per share to new investors in this offering ................. $ 6.85
========
The following table summarizes, on a pro forma basis after giving effect to the
offering, the number of shares purchased from us, the total consideration paid
and the average price per share paid by existing shareholders and by the new
investors purchasing the shares offered hereby assuming an initial public
offering price of $12.00 per share:
Average
Price Paid
Shares Purchased Total Consideration (1) Per Share
-------------------------- ------------------------- ------------
Number Percent Amount Percent
------ ------- ------ -------
Existing shareholders 3,550,852 78.0% $ 2,491,646 17.2% $ 0.70
New public investors 1,000,000 22.0 12,000,000 82.8 12.00
--------- ------ ----------- -----
Total 4,550,852 100.00% $14,491,646 100%
<FN>
- ------------
(1) Based on shares outstanding on December 31, 1998. Excludes: (i) 500,000
shares of common stock reserved for issuance under our 1999 Equity
Incentive Plan; (ii) 50,000 shares of common stock reserved for issuance
under our Employee Stock Purchase Plan; and (iii) up to 454,622 shares of
common stock issuable upon conversion of outstanding convertible
debentures. See "Capitalization," "Management--1999 Equity Incentive Plan,"
"--Employee Stock Purchase Plan" and "Description of Capital
Stock--Debentures."
</FN>
16
SELECTED FINANCIAL DATA
The following table sets forth our selected financial data as of and for each of
the fiscal years in the five-year period ended June 30, 1998, as of December 31,
1998 and for the six-month periods ended December 31, 1997 and 1998. The
statements of operations data for each of the fiscal years in the two-year
period ended June 30, 1998 and the balance sheet data as of June 30, 1997 and
1998 have been derived from our financial statements, audited by Odenberg,
Ullakko, Muranishi & Co. LLP, independent auditors, which are included elsewhere
in this prospectus. The statements of operations data for each of the fiscal
years in the three-year period ended June 30, 1996 and the balance sheet data as
of June 30, 1994, 1995 and 1996 have been derived from our unaudited financial
statements, which are not included in this prospectus. The statements of
operations data for the six-month periods ended December 31, 1997 and 1998 and
the balance sheet data as of December 31, 1998 have been derived from our
unaudited financial statements that include, in the opinion of our management,
all normal and recurring adjustments that our management considers necessary for
a fair statement of the quarterly results. The operating results for the six
months ended December 31, 1998 are not necessarily indicative of results that
may be expected for the year ending June 30, 1999. The following information is
qualified by reference to, and should be read in conjunction with, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the financial statements and related notes included in this prospectus.
Six Months Ended
Fiscal Year Ended June 30, December 31,
-------------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1997 1998
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (Audited) (Unaudited)
Statement of Income Data:
(In thousands, except per share data)
Gross Sales ..................................... $ 6,340 $ 8,548 $ 11,028 $ 12,247 $ 17,017 $ 8,855 $ 12,195
Less Excise Taxes .............................. 142 237 249 330 553 197 276
Less Discounts, Returns and Allowances ......... 440 409 556 394 574 273 337
-------- -------- -------- -------- -------- -------- --------
Net Sales ....................................... 5,758 7,902 10,223 11,523 15,890 8,385 11,582
Cost of Goods Sold .............................. 2,826 2,633 4,886 5,196 7,397 3,652 5,066
-------- -------- -------- -------- -------- -------- --------
Gross Profit .................................... 2,932 5,269 5,337 6,327 8,493 4,733 6,516
Operating Expenses .............................. 1,962 3,297 2,849 3,355 4,105 1,852 2,340
-------- -------- -------- -------- -------- -------- --------
Operating Income ................................ 970 1,972 2,488 2,972 4,388 2,881 4,176
Other Income (Expense) .......................... 55 (192) (297) (437) (474) (114) (147)
-------- -------- -------- -------- -------- -------- --------
Income Before Income Taxes ...................... 1,025 1,780 2,190 2,535 3,914 2,767 4,029
Provision for Income Taxes ...................... 433 763 921 1,067 1,592 1,133 1,744
-------- -------- -------- -------- -------- -------- --------
Net Income ...................................... $ 592 $ 1,017 $ 1,269 $ 1,468 $ 2,322 $ 1,634 $ 2,285
======== ======== ======== ======== ======== ======== ========
Basic Earnings per Share (1) .................... $ 0.16 $ 0.28 $ 0.35 $ 0.40 $ 0.67 $ 0.47 $ 0.66
======== ======== ======== ======== ======== ======== ========
Weighted Average Number of Common Shares
Outstanding (1) ................................ 3,636 3,636 3,636 3,636 3,492 3,505 3,479
Diluted Earnings per Share (1) .................. $ 0.16 $ 0.27 $ 0.33 $ 0.39 $ 0.63 $ 0.44 $ 0.61
======== ======== ======== ======== ======== ======== ========
Weighted Average Number of Common Shares
and Equivalents Outstanding (1) ................ 3,636 3,884 3,939 3,939 3,795 3,808 3,847
June 30,
-----------------------------------------------------------
1994 1995 1996 1997 1998 December 31, 1998
------- ------- ------- ------- ------- -----------------
(Unaudited) (Audited) (Unaudited)
Balance Sheet Data:
(In thousands)
Cash & Cash Equivalents ............... $ 103 $ 542 $ 766 $ 212 $ 102 $ 3,171
Inventories ........................... 2,787 3,979 5,144 7,158 10,427 12,931
Proper, Plant and Equipment, Net ...... 84 2,075 2,445 2,647 2,974 3,870
Total Assets .......................... 4,051 8,685 10,591 12,040 15,977 23,224
Current Liabilities ................... 1,944 2,752 3,231 3,159 4,693 6,112
Long-Term Liabilities ................. 79 2,723 2,662 2,622 2,910 4,765
Total Shareholders' Equity ............ 2,028 3,210 4,698 6,259 8,374 12,347
<FN>
- ------------
(1) Computed on the basis described in Notes 1 and 15 to our Financial
Statements.
</FN>
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and related notes included elsewhere in this prospectus.
Except for historical information contained herein, the discussion in this
prospectus contains certain forward-looking statements that involve risks and
uncertainties. Ravenswood's actual results could differ materially from those
discussed below. Factors that could cause or contribute to such differences
include, among others, those discussed below, in "Risk Factors" and elsewhere in
this prospectus. Ravenswood does not intend to update these forward-looking
statements.
Overview
Ravenswood produces, markets and sells premium California wines exclusively
under the Ravenswood brand name. The vast majority of wines produced and sold by
Ravenswood are red varietals, including Merlot, Cabernet Sauvignon and,
particularly, Zinfandel. To a lesser extent, Ravenswood produces white wines,
including Chardonnay, French Colombard and Gew -urztraminer. Ravenswood's red
wines accounted for approximately 91% of its gross sales in the 1998 fiscal
year, with sales of Zinfandel accounting for approximately 63% of its gross
sales for that period. Ravenswood believes that sales of its red wines,
particularly Zinfandel, will continue to account for a significant portion of
its sales in the future.
Ravenswood was founded as a partnership in 1976 by W. Reed Foster, Ravenswood's
Chairman and Chief Executive Officer, and Joel E. Peterson, Ravenswood's
President and Winemaker. In its initial year of operation, Ravenswood harvested
and crushed Zinfandel grapes from two Sonoma County vineyards. In 1979,
Ravenswood converted to a limited partnership and released its first wines,
consisting of 327 cases of the 1976 vintage Zinfandel. Ravenswood incorporated
in California in 1986.
Since its inception, Ravenswood has grown by increasing its production volume
and its portfolio of premium wine products. For the fiscal year ended June 30,
1998, Ravenswood realized gross sales of $17.0 million from the sale of 191,655
cases (which include twelve, 750 ml bottles per case) and Ravenswood branded
merchandise. For the 1996 vintage, which was primarily sold in the 1998 fiscal
year, Ravenswood offered 37 different wine products within three series. These
product series include:
* 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 $12 to $18.50 per 750 ml bottle; and
* the higher-priced Vineyard Designate Series, with a suggested retail price
of approximately $18 to $31.50 per 750 ml bottle.
All of Ravenswood's products are priced within the super-premium and
ultra-premium categories of the premium wine market. 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. See
"Business--Ravenswood's Products."
The mix of products sold in any given period affects Ravenswood's gross profit
as a percentage of net sales (gross margin). In particular, as sales of the
value-priced Vintners Blend Series have increased as a percentage of gross
sales, Ravenswood's gross margin has decreased. The gross margin for the
Vintners Blend Series is traditionally more variable than
18
Ravenswood's higher-priced product series because a significant portion of the
wine used in these products is purchased in the bulk market rather than produced
by Ravenswood from grapes acquired from its traditional grape suppliers.
Ravenswood has no bulk wine purchase contracts, and the price, quality and
available quantity of bulk wine have fluctuated in the past and Ravenswood
expects that they will continue to fluctuate in the future.
The timing for release of certain of Ravenswood's products, particularly its
County Series and Vineyard Designate Series, also significantly affects
Ravenswood's sales in specific periods. Ravenswood traditionally releases new
vintages of its Vineyard Designate Series in the fourth fiscal quarter or the
first fiscal quarter of the subsequent fiscal year. In addition, the release
dates of some of Ravenswood's County Series wines fluctuate between the third
and fourth fiscal quarters of each fiscal year. The timing of these release
dates is based upon the winemakers' determination as to the optimal flavor
characteristics of these wines. Release dates have fluctuated in the past and
can be expected to continue to fluctuate from year to year, which may make
comparison of results on a period-to-period basis less meaningful.
The pricing for grapes obtained from Ravenswood's suppliers is determined
annually by reference to certain benchmark price quotations or through
negotiation. As a result, the cost of grapes used in Ravenswood's wine
production has fluctuated and is expected to continue to fluctuate. Ravenswood
has traditionally attempted to moderate and stabilize price increases from year
to year. Consequently, gross margins realized by Ravenswood have fluctuated in
the past and are expected to continue to fluctuate with the price of grapes used
in production. See "Business--Grape and Bulk Wine Supply."
Ravenswood does not have an in-house sales staff. It markets and sells its wine
both to "on-premise" restaurants and "off-premise" retailers, such as liquor
stores, specialty wine stores, supermarkets and discounters. Ravenswood sells
its products directly in California, utilizing five warehouses throughout the
state and a network of seven brokers. Ravenswood realizes significantly greater
gross margins in areas, such as California, where it relies on direct sales
facilitated through brokers without the use of distributors. Sales within
California, not including sales through Ravenswood's tasting room, accounted for
approximately 39% of Ravenswood's net sales in the 1998 fiscal year. Ravenswood
believes that sales within California will continue to account for a substantial
portion of its sales in the future.
19
Results of Operations
The following table sets forth certain items from Ravenswood's statement of
income, expressed as a percentage of net sales, for the periods indicated:
Fiscal Year Six Months Ended
Ended June 30, December 31,
-------------------- ------------------
Statement of Income Data: 1997 1998 1997 1998
- ---------------------------------- ------- ------- ------- -------
Net Sales ........................ 100.0% 100.0% 100.0% 100.0%
Cost of Goods Sold ............... 45.1 46.6 43.6 43.7
------- ------- ------- -------
Gross Profit ..................... 54.9 53.4 56.4 56.3
Operating Expenses ............... 29.1 25.8 22.1 20.2
------- ------- ------- -------
Operating Income ................. 25.8 27.6 34.3 36.1
Other Expense, net ............... 3.8 3.0 1.3 1.3
------- ------- ------- -------
Income Before Income Taxes ....... 22.0 24.6 33.0 34.8
Provision for Income Taxes ....... 9.3 10.0 13.5 15.1
------- ------- ------- -------
Net Income ....................... 12.7% 14.6% 19.5% 19.7%
======= ======= ======= =======
Six Months Ended December 31, 1998 and 1997
Sales
Net sales consist of gross sales of Ravenswood's wines and merchandise, less
excise taxes, discounts, returns and allowances. Net sales of Ravenswood's
products increased to $11.6 million in the six months ended December 31, 1998,
from $8.4 million in the six months ended December 31, 1997. This increase is
primarily attributable to an increase in the volume of wines produced and sold
by Ravenswood. In the six months ended December 31, 1998, case sales of
Ravenswood's products increased to 130,493 cases, from 91,681 cases in the six
months ended December 31, 1997, while the average price per case decreased by
approximately 2.7%. This decrease in average price per case is primarily
attributable to the increase in sales of Ravenswood's value-priced Vintners
Blend Series as a percentage of gross sales and, to a lesser extent, to the
respective release dates of certain Vineyard Designate Series Zinfandel products
in each of these periods.
The percentages of gross sales attributable to Ravenswood's Vintners Blend
Series, County Series and Vineyard Designate Series were approximately 48%, 26%
and 24%, respectively, in the six months ended December 31, 1998, as compared to
43%, 31% and 24%, respectively, in the corresponding period in 1997. Sales of
Ravenswood branded merchandise accounted for approximately 2% of gross sales in
each of these periods. Ravenswood expects that the percentage of gross sales
attributable to sales of its Vintners Blend Series and, to a lesser extent, its
County Series, will increase relative to sales of Ravenswood's Vineyard
Designate Series as Ravenswood continues to expand its production and product
offerings within these segments.
Cost of Goods Sold
Cost of goods sold includes the costs of raw materials (grapes and bulk wine),
packaging, labor used in wine production, bottling, warehousing and overhead on
winery facilities and equipment. These costs are capitalized as inventory and
depleted as costs of goods sold are recognized. Cost of goods sold increased to
$5.1 million, or 43.7% of net sales, in the six-month period ended December 31,
1998, from $3.7 million, or 43.6% of net sales, in the corresponding period in
1997. The increase in the amount of cost of goods sold over these respective
periods is primarily due to increases in the total volume of wine sold.
20
Gross Profit
Ravenswood's gross profit increased to $6.5 million in the six months ended
December 31, 1998, from $4.7 million in the corresponding period in 1997, but
decreased as a percentage of net sales to 56.3% from 56.4% in these respective
periods. The increase in the amount of gross profit is primarily attributable to
increases in sales volumes across all product lines, particularly the Vintners
Blend Series.
Operating Expenses
Operating expenses consist of sales and marketing overhead, commissions paid to
independent brokers, advertising and merchandising expenses, salaries and
facilities expenses unrelated to wine production, insurance and professional
services expenses. Operating expenses increased to $2.3 million in the six
months ended December 31, 1998, from $1.9 million in the corresponding period in
1997. As a percentage of net sales, operating expenses decreased to 20.2% of net
sales in the six months ended December 31, 1998, from 22.1% of net sales in the
six months ended December 31, 1997. The increase in operating expenses is
primarily attributable to increases in brokerage commissions related to
Ravenswood's increased sales volumes, particularly in California. 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 operating expenses to increase as
it continues to increase production and becomes a public company.
Other Expense, Net
Other expense consists of non-operating income and expense items, which
primarily consist of interest on outstanding indebtedness. These items have
tended to fluctuate from year to year. Other expense amounted to $113,588 and
$146,955 in the six months ended December 31, 1997 and 1998, respectively.
Ravenswood expects that these expenses will increase as it is required to pay
interest on $1,687,500 worth of convertible debentures issued in the second
quarter of the 1999 fiscal year. Ravenswood expects that this expense may be
offset in part by interest earned on that portion of the proceeds of this
offering that is retained as working capital. Interest payments on the
debentures commenced in January 1999 and will continue to be paid on a quarterly
basis until such debentures are converted or redeemed, or mature. See
"Description of Capital Stock--Debentures."
Provision for Income Taxes
The provision for income taxes reflects the estimated annualized effective tax
rate of 43.3% at December 31, 1998, and 40.9% at December 31, 1997. Ravenswood
does not expect a material change in its effective tax rate in the near future.
Fiscal Years Ended June 30, 1998 and 1997
Sales
Net sales of Ravenswood's products increased to $15.9 million in the 1998 fiscal
year, from $11.5 million in the 1997 fiscal year. This increase is primarily
attributable to an increase in the volume of wines produced and sold by
Ravenswood. In the 1998 fiscal year, case sales increased to 191,655 cases from
131,175 cases in the 1997 fiscal year, while the average price per case
decreased from $91.58 to $87.37 in these respective periods. The decrease in
average price per case is primarily attributable to the increase in sales of the
value-priced
21
Vintners Blend Series as a percentage of gross sales and, to a lesser extent,
the timing of release dates for certain Vineyard Designate Series Zinfandel
products in these respective periods.
The percentages of gross sales attributable to the Vintners Blend Series, County
Series and Vineyard Designate Series were 56%, 27% and 16%, respectively, in the
1998 fiscal year, as compared to 43%, 32% and 22%, respectively, in the 1997
fiscal year. Sales of Ravenswood branded merchandise accounted for approximately
2% of gross sales in each of these periods.
Cost of Goods Sold
Cost of goods sold increased to $7.4 million, or 46.6% of net sales, in the 1998
fiscal year, from $5.2 million, or 45.1% of net sales, in the 1997 fiscal year.
The increase in the amount of cost of goods sold over these respective periods
is primarily due to increases in the total volume of wine sold. The increase in
cost of goods sold as a percentage of net sales is primarily attributable to the
increase in sales of Ravenswood's lower-margin Vintners Blend Series as a
percentage of gross sales.
Gross Profit
Ravenswood's gross profit increased to $8.5 million in the 1998 fiscal year,
from $6.3 million in the 1997 fiscal year, but decreased as a percentage of net
sales, to 53.4% from 54.9% in these respective periods. The increase in
aggregate gross profit is primarily attributable to increases in sales volumes
across all of Ravenswood's product lines, particularly the Vintners Blend
Series. The decrease in gross profit as a percentage of net sales is primarily
attributable to an increase in sales of the lower-margin Vintners Blend Series
as a percentage of gross sales.
Operating Expenses
Operating expenses increased to $4.1 million in the 1998 fiscal year, from $3.4
million in the 1997 fiscal year, but decreased as a percentage of net sales to
25.8% in the 1998 fiscal year from 29.1% in the 1997 fiscal year. The increase
in the amount of operating expenses is primarily attributable to increases in
brokerage commissions related to Ravenswood's increased sales volumes and, to a
lesser extent, increased expenditures on advertising and promotional efforts.
The decrease in operating expenses as a percentage of net sales is primarily
attributable to increased sales volumes without corresponding increases in
administrative staff or other overhead expenses.
Other Expense, Net
Other expense amounted to $474,340 and $437,258, or 3.0% and 3.8% of net sales,
in the 1998 and 1997 fiscal years, respectively.
Provision for Income Taxes
The provision for income taxes reflects the estimated annualized effective tax
rate of 40.7% in the 1998 fiscal year and 42.1% in the 1997 fiscal year.
22
Selected Quarterly Results of Operations
The following table presents Ravenswood's results of operations for each of the
six quarters prior to and including the quarter ended December 31, 1998. The
quarterly information is unaudited, but management believes that the information
regarding these quarters has been prepared on the same basis as the audited
financial statements appearing elsewhere in this prospectus. In the opinion of
management, all necessary adjustments have been included to present fairly the
unaudited quarterly results when read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.
Quarter Ended
-----------------------------------------------------------------------
September 30, December 31, March 31, June 30, September 30, December 31,
1997 1997 1998 1998 1998 1998
------ ------ ------ ------ ------ ------
Statement of Income Data:
(In thousands)
Gross Sales ............................................. $4,578 $4,277 $3,795 $4,367 $6,342 $5,853
Less Excise Taxes ..................................... 129 68 84 272 225 51
Less Discounts, Allowances and Returns ................ 123 150 135 165 155 182
------ ------ ------ ------ ------ ------
Net Sales ............................................... 4,325 4,059 3,576 3,930 5,962 5,620
Cost of Goods Sold ...................................... 1,804 1,848 1,787 1,958 2,528 2,538
------ ------ ------ ------ ------ ------
Gross Profit ............................................ 2,521 2,211 1,789 1,972 3,434 3,082
------ ------ ------ ------ ------ ------
Operating Expenses ...................................... 880 972 914 1,341 1,215 1,125
------ ------ ------ ------ ------ ------
Operating Income ........................................ 1,642 1,239 875 631 2,219 1,957
Other (Income) Expense .................................. 34 79 100 260 73 74
------ ------ ------ ------ ------ ------
Income Before Income Taxes .............................. 1,607 1,160 775 371 2,146 1,884
Provision for Income Taxes .............................. 658 475 315 144 929 815
------ ------ ------ ------ ------ ------
Net Income .............................................. $ 949 $ 685 $ 460 $ 228 $1,217 $1,068
====== ====== ====== ====== ====== ======
Ravenswood has experienced seasonal and quarterly fluctuations in sales,
operating expenses and net income. Because Ravenswood manages its business to
achieve long-term strategic objectives, it may make decisions that it believes
will enhance its long-term growth and profitability, even if such decisions
adversely affect quarterly earnings. Such decisions include: when to release its
wines for sale; how to position its wines competitively; and which grape and
bulk wine sources to use to produce its wines. In particular, the release dates
of Ravenswood's Vineyard Designate Series and County Series have resulted in
fluctuations in Ravenswood's results on a quarter-to-quarter basis. In addition,
Ravenswood's sales volume may change depending upon its distributors' inventory
levels. The results of operations for any quarter are not necessarily indicative
of the results of any future period. The market price of Ravenswood's common
stock may fluctuate significantly in response to these quarter-to-quarter
variations.
Liquidity and Capital Resources
Ravenswood has funded its capital requirements primarily with cash flows from
operations, a mix of short-term and long-term borrowings, and the sale of its
securities. Cash and cash equivalents totaled $3,171,374 at December 31, 1998,
as compared to $102,272 at June 30, 1998. The increase in cash and cash
equivalents is primarily due to the receipt of the net proceeds from
Ravenswood's sale of certain securities completed in December 1998.
Net cash provided by operations was $655,773 in the six months ended December
31, 1998, as compared to $124,197 in the six months ended December 31, 1997. For
the 1998 fiscal year, net cash used for operations was $357,171, as compared to
net cash provided by
23
operations of $265,809 in the 1997 fiscal year. The principal use of cash from
operations in each of these respective periods was the acquisition of additional
inventory through increased production, while the principal source of cash in
each such period was net income.
Net cash used for investing activities totaled $891,336 in the six months ended
December 31, 1998, as compared to $243,229 in the six months ended December 31,
1997. Net cash used for investing activities was $490,621 for the 1998 fiscal
year, as compared to $312,386 in the 1997 fiscal year. The increases were
primarily a result of costs associated with the Quarry Facility. Ravenswood
expects that net cash used for investing activities will increase in the future
as additional investments in plant and equipment are made in completing the
Quarry Facility.
Net cash provided by financing activities was $3,304,665 in the six months ended
December 31, 1998, as compared to $72,923 in the six months ended December 31,
1997. Net cash provided by financing activities totaled $738,103 in the 1998
fiscal year, as compared to $507,595 used for financing activities in the 1997
fiscal year. The principal sources of cash provided by financing activities in
each of these respective periods were short-term borrowings under two lines of
credit with Pacific Coast Farm Credit Services and long-term borrowings,
including additional obligations to Pacific Coast. In addition, in the six
months ended December 31, 1998, a principal source of cash was Ravenswood's sale
of certain securities completed in December 1998. The principal use of cash from
financing activities in each of these respective periods was for repayment
obligations under Ravenswood's various short- and long-term borrowing
arrangements. In addition, Ravenswood used $278,255 in cash for the repurchase
of outstanding shares of common stock from one of its former officers in the
1998 fiscal year.
The majority of Ravenswood's grape purchases occur in the second fiscal quarter,
when the fruit is harvested. Most grape purchase contracts specify the timing of
payment for these purchases. Ravenswood typically makes several payments to each
grower in the quarters following each harvest. The actual dates vary depending
upon the terms of the individual contract. Based upon its grape purchase
contracts for the 1998 harvest, these payments will be made in the following
manner: 42%, 19% and 21% in the second, third and fourth quarters of fiscal
1999, respectively, and 18% in the first quarter of fiscal 2000. As a result of
harvest costs and the timing of grape and bulk purchase payments, Ravenswood's
inventory and related cash requirements generally peak during the second or
third fiscal quarters. Cash requirements also fluctuate depending upon the level
and timing of capital spending and tax payments.
In December 1994, Ravenswood completed a sale of $865,000 of convertible
debentures due December 31, 2004. Each $10,000 debenture is convertible into
3,500 shares of common stock at any time prior to December 31, 1999 upon request
of the holder. If the debentures are not converted, Ravenswood may redeem them
at face value at any time during the period from January 1, 2000 until the
maturity date. Ravenswood pays interest quarterly on the debentures based on a
floating index tied to prime bank rates for a five-year period. The interest
rate is adjusted every 18 months, except that in no period may the interest rate
adjustment exceed 2%, or the maximum interest rate exceed 11%.
In December 1998, Ravenswood completed a sale of $1,687,500 of convertible
debentures due December 31, 2008 and $1,687,500 of common stock. Each $10,000
debenture is convertible into 900 shares of common stock at any time prior to
December 31, 2003, upon request of the holder. If the debentures are not
converted, Ravenswood may redeem them at face value at any time during the
period from January 1, 2004 until the maturity date.
24
Ravenswood pays interest quarterly on the debentures in an amount equal to the
prime interest rate quoted by Bank of America NT&SA plus 1%. The interest rate
is adjusted every 18 months, except that in no period may the interest rate
adjustment exceed 2%, or the maximum interest rate exceed 11%.
Ravenswood has two lines of credit with Pacific Coast Farm Credit Association,
pursuant to which Ravenswood may borrow up to a total of $2.8 million. As of
December 31, 1998, Ravenswood had $1,529,887 outstanding pursuant to these lines
of credit. In addition. Ravenswood is currently negotiating with Pacific Coast
Farm Credit Association for an additional $4 to $5 million line of credit to be
secured by the Quarry Facility. Since 1989, Ravenswood has periodically borrowed
funds for short-term working capital from certain of its executive officers. As
of December 31, 1998, Ravenswood had outstanding promissory notes in the
principal amount of $50,250 payable to Mr. Foster, its Chairman and Chief
Executive Officer, and additional promissory notes in the principal amount of
$46,143 payable to Mr. Peterson, its President and Winemaker. See "Certain
Transactions."
Ravenswood anticipates that its capital expenditures will increase substantially
in the 1999 fiscal year as it undertakes to complete the Quarry Facility. The
full extent of Ravenswood's future capital requirements and the adequacy of its
available funds will depend on many factors, not all of which can be accurately
predicted. Although no assurance can be given, Ravenswood believes that
anticipated cash flow from operations, borrowings under its existing credit
agreements, its proposed additional line of credit, and proceeds from this
offering and other recent financing activities will be sufficient to fund its
capital requirements, including its planned expansion, for at least the next 12
months. In the event that additional capital is required, Ravenswood may seek to
raise that capital through public or private equity or debt financings. Future
capital funding transactions may result in dilution to purchasers in this
offering. There can be no assurance that such capital will be available on
favorable terms, if at all. See "Business--Wine Production Facilities."
Risks Associated with Potential Year 2000 Problems
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field and cannot reliably
distinguish dates beginning on January 1, 2000 from dates prior to the year
2000. Many companies' software and computer systems may need to be upgraded or
replaced in order to process correctly dates beginning in 2000 and to comply
with the Year 2000 requirements. Ravenswood is reviewing its information systems
for any potential Year 2000 problems that might arise as a result of these
requirements, and does not believe such systems will be affected by the upcoming
change in century. However, Ravenswood utilizes third-party equipment and
software that may not be Year 2000 compliant. If such third-party equipment or
software fails to process dates for the year 2000 and thereafter properly, such
a failure could cause Ravenswood to incur unanticipated expenses to remedy any
problems, which could harm its business. In addition, Ravenswood relies on
various service providers, including banks, and on grape and bulk wine
suppliers, third-party production facilities and distributors. The software and
computer systems of any of these entities could have Year 2000 problems. A
disruption in the supply of services or products Ravenswood receives from any of
these entities due to Year 2000 problems could harm its business.
25
BUSINESS
Overview
Ravenswood produces, markets and sells premium California wines exclusively
under the Ravenswood brand name. The vast majority of the wines Ravenswood
produces and sells are red wines, including Merlot, Cabernet Sauvignon and,
particularly, Zinfandel. To a lesser extent, Ravenswood produces white wines,
including Chardonnay, French Colombard and Gewurztraminer.
Ravenswood produces wines in three series:
* 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 $12 to $18.50 per 750 ml bottle; and
* the higher-priced Vineyard Designate Series, with a suggested retail price
of approximately $18 to $31.50 per 750 ml bottle.
The actual price of any particular wine may be either higher or lower than
suggested retail, depending upon the type of retail outlet and location where it
is sold. All of these products are within the super-premium and ultra-premium
categories of the premium wine market generally recognized by the wine trade.
Ravenswood believes that the scope of its product offerings, coupled with its
emphasis on red wines, has positioned it well within the fastest growing
segments of the premium wine market. Since its inception, Ravenswood has
continued to expand its product portfolio by including new labels in its County
Series and its Vineyard Designate Series and by developing and steadily
increasing the production of its Vintners Blend Series. For its 1996 vintage,
Ravenswood marketed and sold 37 different wines within its three product series.
Ravenswood's approach focuses on using old-world French winemaking techniques to
produce premium wines of exceptional quality and on building awareness and
loyalty for the Ravenswood brand. Ravenswood has traditionally concentrated
investment in developing its brand name, building inventory and expanding
distribution channels, rather than developing vineyard holdings and production
facilities. Although Ravenswood currently owns and manages 14 acres of planted
vineyards, it relies almost exclusively on grapes supplied by third parties. A
majority of these grapes are crushed and fermented at facilities owned by third
parties, in accordance with Ravenswood's prescribed winemaking practices.
Ravenswood also purchases bulk wine of superior quality, which is incorporated
into its products, particularly its Vintners Blend Series. A substantial portion
of Ravenswood's wines is stored at facilities leased for this purpose by
Ravenswood.
Ravenswood believes this strategy has enabled it to sustain the growth necessary
to capitalize on favorable trends in the demand for California premium wines,
while minimizing the need to invest large amounts of capital in the acquisition
and development of land and capital equipment until its production levels
warranted such investment.
Ravenswood was founded in 1976 by Messrs. Foster and Peterson when Mr. Peterson
harvested and crushed Zinfandel grapes from two Sonoma County vineyards. In
1979, Ravenswood released its first wines, consisting of 327 cases of the 1976
vintage Zinfandel. Since its founding, and particularly since 1991, Ravenswood's
production and sales levels
26
have increased substantially, to approximately 191,655 cases sold and $17.0
million in gross sales for the 1998 fiscal year. From the 1994 fiscal year to
the 1998 fiscal year, the compound annual growth rate of Ravenswood's gross
sales was approximately 28%.
Ravenswood has occupied the Gehricke Road Facility in Sonoma, California since
1991. This facility includes a tasting room, which Ravenswood uses to promote
consumer demand and generate direct retail sales, as well as a wine production
facility, a barrel storage warehouse and executive offices. Recognizing its
anticipated growth and the potential scarcity of future winemaking capacity in
the Napa and Sonoma counties of California, Ravenswood is building a new winery
facility in Sonoma County, which is referred to as the Quarry Facility.
Ravenswood believes that the Quarry Facility will reduce its reliance on leased
storage space and custom crush production facilities and improve its ability to
control the quality of its wines and operate efficiently.
Varietal Wines
In the United States, wines are classified as "non-varietal" or "varietal."
Non-varietal wines contain less than 75% of a single grape variety. While there
are non-varietal blends sold within the premium category, non-varietal wines are
often sold as "generic" or "jug" wines and include wines named after European
regions (e.g., Burgundy and Chablis), as well as wines simply labeled "red" or
"white." Generic or jug wines are packaged primarily in large-size containers
(e.g., three-, four- and five-liter sizes) and usually retail for less than
$3.00 per 750 ml equivalent unit.
As prescribed by United States Federal Bureau of Alcohol, Tobacco, and Firearms
regulation, varietal wines must contain at least 75% of the single grape variety
for which they are named. Wine production outside the United States relies on a
significant number of grape varieties, and most of the better known wines are
not varietally designated. The majority of high-quality wine produced in the
United States is varietal and, particularly in California, is comprised of a
limited number of grape varieties with distinct characteristics. The predominant
varietal wines produced in California include the following:
Cabernet Sauvignon: The Cabernet Sauvignon varietal, which is the most famous
grape of France's Bordeaux region, is a hybrid of Cabernet
Franc (a red grape) and Sauvignon Blanc (a white grape). It
produces red wines that are highly aromatic, with
significant depth and intensity of flavor. Cabernet
Sauvignon has traditionally been blended with other select
grape varieties, but in the United States, and particularly
California, it is not unusual to have wines that contain
90% to 100% of this varietal. The most highly regarded
Cabernet Sauvignon wines are generally stored in French or
American oak barrels for 18 to 30 months prior to bottling
in order to impart a distinctive flavor, while softening
the effect of the natural grape skin astringent (tannin)
that is highly concentrated in the Cabernet Sauvignon
grape.
Chardonnay: The Chardonnay grape is a versatile varietal that grows
well in a variety of locations throughout the world,
including California. The Chardonnay grape produces white
wines that winemakers can relatively easily manipulate in
order to produce distinctive flavors. Chardonnay is often
highly regarded for the significant impact oak
27
aging can have on enhancing the fruit and spice flavors of
the grape. Chardonnay is the most plentiful white grape in
California and is planted in virtually all of its wine
growing regions, producing wines that range from jug to
ultra-premium quality.
Merlot: Like Cabernet Sauvignon, Merlot's prominence originated in
the Bordeaux region of France, where it is mainly blended
with other varietals according to local winemaking
traditions. It is the predominant grape of the Pomerol
appellation in Bordeaux, and Chateau Petrus, the most
famous wine of that appellation, is nearly 100% Merlot.
Wide-scale production of Merlot in California has developed
over the last 15 to 20 years. Due to its popularity, Merlot
is being widely planted in California and Chile, even
though it is considered difficult to grow because of its
uneven crop production. Merlot is typically considered
softer and more supple tasting than Cabernet Sauvignon.
Zinfandel: Zinfandel arrived in California in the mid-1800s from a
horticultural collection in New York. The origins of
Zinfandel are unknown, although it is closely related to
the ancient Plavic Mali varietal from Croatia. Zinfandel is
well suited to the California climate and is widely planted
throughout the state. Much of the Zinfandel grown in
California is used in the production of white Zinfandel, a
blush-colored slightly sweet wine that is served chilled.
Traditional Zinfandel, a red wine, can range from
short-lived wines with light berry flavors and mild tannins
to robust, intensely-flavored wines with strong tannins
that are vinted to improve with age. California has a
number of old Zinfandel vineyards that range from 50 to 100
years old. Many of these vineyards are farmed without
irrigation, are planted relatively densely, and are
frequently planted in prime grape-growing locations. Such
vines produce smaller, more uniform crops of superior
quality and are highly sought after by wineries such as
Ravenswood.
While these varietal grapes are widely produced and the wines produced from them
are generally considered the most popular with consumers, other varietals,
including Sauvignon Blanc, Gew -urztraminer, Pinot Noir, Sangiovese, Petite
Sirah, Syrah, and Grenache, are also produced in significant quantities
throughout the world, including California. In addition, wines blended from
varietal grapes that do not consist of 75% or more of one varietal are commonly
produced worldwide. California has experienced a growing trend toward producing
more ultra-premium non-varietal wines. Perhaps the most well known of these are
the "Meritage" (rhymes with "heritage") wines that use varietal grapes commonly
associated with Bordeaux. These Meritage wines are both white and red. The
whites are usually a combination of Sauvignon Blanc and Semillion, while the
reds are some combination of Cabernet Sauvignon, Cabernet Franc, Merlot, Petite
Verdot and Malbec. There has also been a trend in California to produce
Rhone-style blends. These blends include grapes such as Rousanne and Marsanne
for white wines, and Syrah, Grenache, Mourvedre and Cinsault for red wines.
28
The Premium Wine Market
Most varietal wines and blends of highly regarded varietals are generally
considered "premium" wines and typically retail for more than $3.00 per 750 ml
equivalent unit. The premium category is often divided into three major
segments: "popular premium" wines, which retail for between $3.00 and $7.00 per
750 ml equivalent unit; "super-premium" wines, which retail for between $7.00
and $14.00 per 750 ml equivalent unit; and "ultra-premium" wines, which retail
for $14.00 or more per 750 ml equivalent unit. Industry analysts estimate that
in 1997, shipments of popular-premium, super-premium and ultra-premium wines
accounted for 66%, 27% and 7%, respectively, of premium wine cases shipped in
the United States and 46%, 35% and 19%, respectively, of premium wine revenues
(as indicated in the chart below). Ravenswood's products fall exclusively into
the super-premium and ultra-premium segments of the premium wine category.
The United States Premium Wine Shipments By Segment: 1997*
[GRAPHIC OMITTED]
(Two pie charts showing percentages of cases and revenues by popular,
super-premium and ultra-premium)
* Source: Gomberg, Fredrickson and Associates
During the last ten years, consumer preferences for wine in the United States
have shifted significantly away from generic jug wines toward premium wines sold
in 750 ml bottles. Industry analysts estimate that United States shipments of
California premium wines have grown from approximately $866 million in 1987 to
approximately $3.6 billion in 1997. Ravenswood believes this growth in the
premium wine category can be attributed to, among other things, an increasingly
discriminating customer base that appreciates higher quality wines and is
willing to pay for them.
As a result of changing consumer preferences, as well as several studies
suggesting various health benefits from the moderate consumption of red wine,
the vast majority of the recent growth in the wine industry has been in the
sales of red wine. Industry analysts estimate that sales of nine-liter cases of
red wine grew 158% from 1991 to 1997, from 22.1 million cases to 57.2 million
cases (as indicated in the following chart). This amounts to approximately 67%
of the growth in the premium wine industry during this period.
29
[GRAPHIC OMITTED] Percentage Increase: 1991 - 1997*
(Bar graph showing
United States table Red: 158%
wine shipments White: 15%
by color, Blush: 16%
from 1991 to 1997
(in millions of cases))
* Source: Gomberg, Fredrickson and Associates
Within the red wine category, Cabernet Sauvignon has historically dominated
sales relative to other varietals. In recent years, however, other varietals,
including Merlot and, more recently, Zinfandel, have fueled much of the growth
in sales of red wines. The following table sets forth estimated shipments for
certain red wines by varietal, as measured in millions of nine-liter cases.
United States Shipments of California Premium Red Wines by Varietal*
(millions of nine-liter cases)
Compound
Annual
Growth Rate
1990 1991 1992 1993 1994 1995 1996 1997 1990-1997
------ ------ ------ ------ ------ ------ ------ ------ -------------
Cabernet Sauvignon ...... 4.6 5.0 6.7 7.5 8.7 9.8 11.3 11.8 14.4%
Merlot .................. 0.6 0.8 1.4 2.0 2.8 3.8 5.3 7.0 42.0%
Red Zinfandel ............ 0.6 0.7 0.8 0.9 1.2 1.6 2.1 2.4 21.9%
Pinot Noir ............... 0.3 0.3 0.4 0.5 0.6 0.7 0.8 0.9 17.0%
<FN>
- ------------
* Source: Gomberg, Fredrickson and Associates
</FN>
The Ravenswood Strategy
Ravenswood believes that its mix of premium wine products of different varietals
and different price segments has positioned it to take advantage of the rapid
growth in the consumption of premium wines, particularly California red
varietals. Ravenswood's objectives are to continue to concentrate on producing
wines that enhance its reputation for high quality and further establish its
brand identity in order to achieve a competitive advantage in every segment of
the premium wine market in which Ravenswood operates. To achieve these
objectives, Ravenswood has developed the following strategies:
Focus on Product Offerings Although demand for premium California wine has
that Give the Consumer increased across the spectrum of wine varietals
the Demonstrable Value: in the last decade, most prominent growth in the
past six years has been in the demand for red
wines. Red wines accounted for approximately 91%
of Ravenswood's gross sales in the 1998 fiscal
year. As a result, Ravenswood believes it has
been and continues to be well positioned to take
advantage of the growing consumer preference for
premium red wine. In particular, Ravenswood
believes its emphasis on the
30
production of Zinfandel has allowed it to become
recognized as a quality leader in this segment
of the wine market. Ravenswood intends to
continue to focus on meeting consumer demand by
producing wines which enhance its reputation for
expertise, demonstrable value and high quality,
thereby further promoting the favorable image of
its products.
Strategically Manage Consumer research indicates that the majority of
the Brand: wine consumers prefer wines with which they are
familiar and consider a recognizable brand name
very important when purchasing wine. Ravenswood
believes the quality of its wines, its
distinctive Ravenswood brand and logo, and the
irreverent image created through its "No Wimpy
Wines" slogan have resulted in high brand
awareness relative to other wineries of
equivalent size. Ravenswood intends to continue
to invest in the promotion of its brand name and
image in order to continue to generate favorable
brand awareness.
Produce High-Quality Ravenswood believes it has consistently offered
Products that Emphasize the consumers high-quality wines of excellent value
Winemaking Process: in each price segment of the premium wine market
in which it operates. Ravenswood's team of
winemakers produces these wines by using
high-quality premium wine grapes, while
maintaining strict adherence to Ravenswood's
artisinal winemaking techniques, which are
designed to produce the highest quality wine.
Ravenswood believes that its old-world French
winemaking techniques impart a distinctive style
to its wines, which is evident even when blended
with purchased bulk wine, as is Ravenswood's
practice with its Vintners Blend Series. Many of
Ravenswood's grapes are purchased from
dry-farmed vineyards that yield low crops with
concentrated fruit flavors. In addition, younger
vineyards from which Ravenswood acquires grapes
are regularly thinned at the request of
Ravenswood to ensure the premium quality of the
grapes they produce. Ravenswood often pays a
premium for grapes that are grown according to
these specifications. Ravenswood intends to
continue to emphasize the high-quality results
of its winemaking process as it promotes its
existing products and develops additional
product offerings.
Maintain Broad, Efficient Ravenswood has developed a broad network of
Distribution Channels: brokers and distributors throughout the United
States and in more than 15 export markets.
Ravenswood sells its products directly in
California, using five warehouses throughout the
state and a network of seven brokers. Elsewhere
throughout the United States and
internationally, Ravenswood uses a network of
over 75 distributors. Ravenswood has
concentrated on the establishment of
relationships with smaller, regionally-based
31
brokers and distributors for which Ravenswood is
a prominent brand. Ravenswood believes that such
arrangements create incentives for both
Ravenswood and its distribution partners to
position the Ravenswood brand optimally.
Selectively Invest in Ravenswood has focused on promoting the
Vineyards and Production Ravenswood brand and implementing its winemaking
Facilities: process while relying on independent growers for
grape supply and, to a certain extent, third
parties for wine production. In addition to
utilizing independent facilities, Ravenswood
currently produces a portion of its annual
volume at the Gehricke Road Facility. While
Ravenswood believes that it will continue to
focus primarily on the development of the
Ravenswood brand, it is building the Quarry
Facility to accommodate the increase in its wine
production and to reduce its reliance upon the
limited capacity available at third-party
production facilities. Upon completion of the
Quarry Facility, Ravenswood expects to utilize
fully both the Quarry Facility and the Gehricke
Road Facility for its wine production.
Ravenswood believes the addition of the Quarry
Facility will present several benefits,
including: consolidation of operations so as to
improve coordination of management and staff;
substantial cost savings; and closer control of
Ravenswood's winemaking techniques to ensure
continued high-quality standards.
Retain and Further Develop Ravenswood believes its professional management
the Professional team's depth and experience in winemaking,
Management Team: marketing and business strategy will be
important in guiding Ravenswood's growth. Since
its establishment in 1976, Ravenswood has been
operated by a management team dedicated to the
production of the highest quality wines in each
of the categories of the premium wine market in
which it competes. Ravenswood believes that in
order to meet its objectives, it must continue
to attract and retain qualified winemaking
experts and management through compensation
benefits as well as opportunities for
advancement.
32
Ravenswood Products
Ravenswood has traditionally focused on the production of wines within the
super-premium and ultra-premium categories of the premium wine market.
Ravenswood's wines target specific varietals and prices within these categories.
Ravenswood offers its products 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 $12 to $18.50 per 750 ml bottle; and
* the higher-priced Vineyard Designate Series, with a suggested retail price
of approximately $18 to $31.50 per 750 ml bottle.
The actual price of any particular wine may be either higher or lower than
suggested retail, depending upon the type of retail outlet and location where it
is sold.
Vintners Blend: Ravenswood's Vintners Blend Series consists of
wines produced from grapes of specific varietals
but sourced from a variety of locations
(appellations) in California. In producing its
Vintners Blend Series, Ravenswood uses grapes
obtained from independent growers in premium
grape-growing regions in Northern California and
bulk wine derived from grapes grown in various
California appellations. Ravenswood currently
produces Vintners Blend Series wines in
Zinfandel, Merlot and Chardonnay varietals.
While its Vintners Blend Series provides lower
margins than Ravenswood's other products, the
flexibility provided by using grapes and bulk
wine of varying appellations enables Ravenswood
to produce its Vintners Blend Series on a larger
scale than its other products and thereby
generate greater sales. In the 1998 fiscal year,
sales of the Vintners Blend Series totaled $9.5
million, or 56% of Ravenswood's gross sales.
County Series: Ravenswood's County Series consists of specific
varietal wines primarily vinted by Ravenswood
and blended from grapes acquired from various
independent growers within the specific
appellations of Napa County, Sonoma County,
Amador County and Lodi County. Ravenswood
believes that its County Series provides
consumers with a reasonably priced ultra-premium
varietal wine derived solely from grapes of
highly regarded appellations of the California
premium wine industry. For its 1996 vintage,
Ravenswood offered twelve different wines within
its County Series. In the 1998 fiscal year,
sales of the County Series totaled $4.5 million,
or 27% of Ravenswood's gross sales.
Vineyard Designate Series: Ravenswood's Vineyard Designate Series consists
of ultra-premium varietal and Meritage wines
derived from grapes supplied by specific
vineyards within Napa and
33
Sonoma counties. Ravenswood believes that
Vineyard Designate Series wines represent the
unique characteristics of each designated
vineyard and its respective grape varietal.
Ravenswood also believes that its Vineyard
Designate Series' emphasis on old-world French
winemaking techniques sets a standard for high
quality that enhances the perceived value of the
products in each of its product series. For its
1996 vintage, Ravenswood offered 22 different
wines within its Vineyard Designate Series. The
number of products offered within the Vineyard
Designate Series varies from year to year. This
variation results from two factors: the number
of vineyards available for designation and the
winemakers' discretion as to whether harvested
grapes merit Vineyard Designate Series status.
In the 1998 fiscal year, sales of the Vineyard
Designate Series totaled $2.7 million, or 16% of
Ravenswood's gross sales.
The table below summarizes the number of wines offered in each product series,
by varietal, for the Ravenswood 1996 vintage:
Vintners Blend County Vineyard Designate Total
---------------- -------- -------------------- -------
Zinfandel ..................................... 1 4 10 15
Merlot ........................................ 1 2 4 7
Cabernet Sauvignon, Cabernet Franc
and Bordeaux Varietal Blends ................. -- 3 4 7
Miscellaneous Reds/Blends .................... -- 1 1 2
Chardonnay .................................... 1 -- 2 3
Miscellaneous Whites .......................... -- 2 1 3
--- --- --- ---
TOTAL ......................................... 3 12 22 37
The vast majority of Ravenswood's products in all of its product series are red
wines, particularly Zinfandel. Ravenswood's red wines accounted for
approximately 91% of its gross sales in the 1998 fiscal year, with sales of
Zinfandel accounting for approximately 63% of its gross sales for that period.
Ravenswood estimates that production of future vintages will continue to consist
primarily of red wines, although it expects that a lesser percentage of
Ravenswood's total production will consist of Zinfandel. While Ravenswood will
continue to attempt to expand its sales and name recognition selectively,
Ravenswood believes that its current mix of products is well suited to the
growing demand for red wines, and it intends to continue to devote a majority of
its production to its existing red wines.
Ravenswood believes that by focusing on its unique winemaking process and
emphasizing red wine, it has achieved a reputation for high quality and
distinctive flavors within the market for red wines, particularly with respect
to its Zinfandel and its Vineyard Designate Series. Ravenswood intends to
maintain its position as a prominent supplier in the product categories in which
it has already established itself. It also plans to explore additional
opportunities to produce alternative varietal or blended products in those areas
where its focus can enable Ravenswood to establish a similar reputation for
excellence and build favorable awareness for the Ravenswood brand.
34
Ravenswood's Red Winemaking Process
In producing its premium wine products, Ravenswood employs traditional old-world
French winemaking techniques modified to embrace important aspects of modern
winemaking. Ravenswood's red winemaking techniques are most closely patterned
after those used in France in the 19th century. Ravenswood believes that
winemaking, in large part, is a natural process, and that intervention into that
process should be minimal. Nevertheless, Ravenswood's winemaking techniques
demand careful attention to, and monitoring of, the wines from the vineyard
through the bottling and shipping of its finished products.
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.
After the grapes are harvested, they are immediately crushed and pumped into
fermenting tanks. Ravenswood currently utilizes independent crush and
fermentation facilities for the production of all of its Vintners Blend Series.
It currently crushes and ferments the majority of its County Series and all of
its Vineyard Designate Series at the Gehricke Road Facility. Using wild natural
yeasts found on the grapes, a combination of the grapes, juice, seeds and stems
is left to ferment for a period ranging from one to four weeks, during which
time the sugar in the grapes is converted to alcohol. During fermentation, the
grape skins are mixed with the fermenting juice through a process known as
"punching down," which provides maximum contact between the skins and the juice.
Ravenswood's 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. 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. Fermentation of Ravenswood's Vintners Blend Series takes
place exclusively in 20- to 60-ton stainless steel fermentation tanks. Most of
Ravenswood's wines are allowed to go through malolactic fermentation, a
secondary fermentation which adds complexity and flavor to the wines.
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.
All of Ravenswood's Vineyard Designate Series and substantially all of its
County Series are stored in 60-gallon French oak barrels of various ages.
Approximately 25-30% of Ravenswood's County Series and 30-60% of its Vineyard
Designate Series are stored in new French oak barrels. Ravenswood believes that
storage in new French oak barrels provides superior flavor characteristics in
comparison to other storage alternatives. Approximately 30% of Ravenswood's
annual production of Vintners Blend Series wine is stored in French oak barrels.
The remaining wine used to produce the Vintners Blend Series is stored in
stainless steel tanks or purchased as bulk wine from outside suppliers.
Ravenswood ages its red wines for various periods ranging from approximately one
year for its Vintners Blend Series to approximately two years for certain of the
wines in its Vineyard Designate Series. After aging is complete, the barrels are
emptied and the wines are blended and stored briefly in stainless steel tanks.
To a very limited extent, Ravenswood may blend bulk wine of superior quality
into a portion of its County Series. Ravenswood's Vintners Blend Series is
blended using a proportion of
35
French oak barreled wine, wine stored in stainless steel tanks and bulk wine
acquired from independent wineries. Once blended, Ravenswood's wines are bottled
at the Gehricke Road Facility and certain other custom bottling facilities.
After bottling, Ravenswood's winemakers release the wines for distribution at
such time as 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 such facilities in order to maintain consistency in the flavor and
quality of its products. Ravenswood believes that the hand-crafted techniques
employed in the production of its Vineyard Designate Series and County Series
and the inclusion of a prominent percentage of such hand-crafted wines into its
large volume, value-priced Vintners Blend Series has enabled Ravenswood 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.
Marketing
A primary focus of Ravenswood's marketing is associating the Ravenswood brand
name with high-quality and distinctive flavor within the super-premium and
ultra-premium segments of the premium wine market. Ravenswood believes it has
developed a favorable reputation and strong brand awareness among wine consumers
and resellers for its red wines, in particular its Zinfandel, Merlot, Cabernet
Sauvignon and proprietary blends. Ravenswood has invested, and expects to
continue to invest significantly, in the development of its brand name,
packaging and trademarks. Ravenswood believes that the distinctive Ravenswood
name, which is derived from a character in the opera Lucia di Lammermoor by
Gaetano Donizetti, and its distinctive logo, created by Berkeley poster artist
and printer David Lance Goines, convey a recognizable and high-quality image
that has contributed to its success.
In addition, Ravenswood has invested substantially in promoting its trademarked
slogan "No Wimpy Wines," which it believes accurately and humorously conveys its
core marketing philosophy: to demystify wine and make it intellectually
accessible to a broad range of consumers. At the same time, Ravenswood believes
this slogan, which Ravenswood has idiosyncratically translated into over a dozen
languages in its promotional materials, portrays the robust, full-bodied nature
of its products, particularly its red wines.
The focus of Ravenswood's marketing strategy is to attract core wine consumers.
Consumer research indicates that the vast majority of the wine consumed in the
United States is consumed by a small percentage of the adult population. While
Ravenswood believes its promotional messages are appealing to a wide audience of
consumers, it also believes a marketing effort focused upon core wine consumers
is more effective than campaigns aimed at broadening the population of wine
consumers in general. As a result, Ravenswood has not traditionally relied on
broad-based advertising in the promotion of its wine and instead has relied on
targeted marketing strategies aimed at the core population of wine consumers.
As part of its targeted marketing strategy, Ravenswood has traditionally relied
on its management's personal involvement in the marketing of its wines. Mr.
Foster, Ravenswood's Chief Executive Officer, and Mr. Peterson, its President
and Winemaker, as well as other employees, spend considerable time each year
leading tours at the Gehricke Road Facility as well as traveling on behalf of
Ravenswood throughout the country to meet with consumers,
36
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 encourages visitors to linger over lunch. Ravenswood
believes that this welcoming, relaxed atmosphere is an integral part of its
casual and approachable style and assists in the development of a favorable
image for the Ravenswood brand.
Consumer research also indicates that a majority of core wine consumers rate
brand name familiarity as a very important attribute in selecting a wine for
purchase. Ravenswood intends to continue to invest in the promotion of its brand
name, logo and slogan in the future to increase the familiarity and favorable
impression of the Ravenswood brand. Such investment is likely to include
increased strategic marketing and distribution efforts in key geographic regions
in the United States and select export markets, as well as an emphasis on
building brand awareness through its Internet presence.
Sales and Distribution
Ravenswood does not have an in-house sales staff. Its products are sold both at
"on-premise" restaurants and "off-premise" retailers such as liquor stores,
specialty wine stores, supermarkets and discounters. Ravenswood sells to
retailers directly through brokers in California and certain key geographic
markets and through a network of wholesale distributors elsewhere in the United
States and in 15 export markets. 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 many states, including California, and in Europe, Ravenswood uses brokers who
act as sales agents in exchange for commissions. In the 1998 fiscal year,
approximately 75% of Ravenswood's gross sales were made using brokers. In the
1998 fiscal year, its most successful broker was responsible for 21% of its
gross sales, and its ten most successful brokers were responsible for 69% of its
gross sales. Within California, Ravenswood currently uses seven brokers and five
warehouses located throughout the state. For the 1998 fiscal year, approximately
39% of Ravenswood's gross sales resulted from sales within California (excluding
sales through Ravenswood's tasting room).
Whether or not Ravenswood uses a broker as a sales agent, Ravenswood's sales
outside of California generally require the use of distributors. While no one
distributor accounted for more than 7% of its sales for the 1998 fiscal year,
its ten largest distributors accounted for approximately 23% of its gross sales
for that period. In order to facilitate broad distribution of its products
throughout various geographic markets, Ravenswood has traditionally
37
allocated its available production among its brokers and distributors.
Ravenswood believes that the breadth of its distributor network, which
participated in approximately 49% of Ravenswood's gross sales for the 1998
fiscal year, ensures that the elimination of any one specific distribution
relationship will not adversely affect out-of-state sales.
Beginning in 1991, Ravenswood began selling wines and some merchandise directly
to consumers through the tasting room at its Gehricke Road Facility.
Ravenswood's gross sales from its tasting room have grown substantially since
1992, and accounted for approximately 11% of its gross sales for the 1998 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 sales to consumers in the near
future.
Grape and Bulk Wine Supply
The Gehricke Road Facility includes 14 acres of vineyards, only three of which
are currently productive. The remaining acreage has been replanted and will
resume production over the next three years. Ravenswood is dependent upon
independent grape growers and bulk wine suppliers for substantially all of its
annual wine production. Ravenswood obtains its grapes for wine production from
more than 60 suppliers located in Sonoma and Napa counties, and other Northern
California premium grape-growing counties. Ravenswood is not dependent upon any
one supplier for a significant portion of its total required grape supply in any
given harvest season. Ravenswood's largest supplier typically accounts for no
more than 8% of the total grapes crushed for Ravenswood's annual wine
production, and the top three suppliers together generally account for no more
than 20% of the total grapes crushed. Ravenswood believes there are sufficient
alternative supplies of high-quality grapes to ensure continuing production of
high-quality wines in the event that it cannot obtain grapes from any particular
supplier.
In working with its growers, Ravenswood relies on both personal and contractual
relationships. Ravenswood has entered into grape purchase agreements with the
growers of a majority of the grapes used in its annual production. The business
terms of these purchase agreements vary; however, the majority of Ravenswood's
purchase agreements require that, while either party may terminate the agreement
at any time, both parties must abide by its terms for three years following
termination. The majority of such contracts provide for pricing formulas tied to
the Final Grape Crush Report published annually by the California Department of
Food and Agriculture. Ravenswood also purchases grapes from some of its growers
in amounts and at prices that are negotiated from year to year. These
year-to-year arrangements are often not in writing. Ravenswood traditionally has
relied on, and continues to seek to establish, relationships with growers that
have a long-term perspective, whose vineyards have the potential for developing
distinctive wines, and for whom Ravenswood is an important customer.
Ravenswood relies on several specific grape suppliers for its Vineyard Designate
Series in order to produce wines from those specific vineyards. For the 1996
vintage, Ravenswood produced 22 separate wines within the Vineyard Designate
Series. The vast majority of growers supplying grapes for Ravenswood's Vineyard
Designate Series have entered into grape supply agreements with Ravenswood.
Ravenswood believes that the pricing arrangements with these growers and the
prestige and notoriety related to the production of a wine within the Vineyard
Designate Series have led to stable and long-term relationships with those
suppliers.
38
Ravenswood is also dependent on bulk wine suppliers for the production of
several of its wines, particularly its Vintners Blend Series. Ravenswood does
not have contracts with bulk wine suppliers or agreements that would protect it
from fluctuations in the price or availability of bulk wine. The availability
and price of bulk wine significantly affect the quality and production level of
Ravenswood's products that contain bulk wine. The price, quality and available
quantity of bulk wine have fluctuated in the past. It is possible that
Ravenswood will not be able to purchase bulk wine of acceptable quality at
acceptable prices and quantities in the future.
The quality and quantity of grape supply is determined by a combination of
factors, including weather conditions during the growing season, pruning
methods, diseases and pests, and the number of vines producing grapes. The
adequacy of grape supply is further influenced by consumer demand for wine.
While Ravenswood believes that it can secure a sufficient supply of grapes from
grape supply contracts with independent growers, there can be no assurance that
grape supply shortages will not occur as a result of agricultural risks. Due to
the effects of El Ni -no, the grape supply available to Ravenswood for the 1998
harvest was lower than for the 1997 harvest, which Ravenswood believes was an
unusually large harvest. Although Ravenswood expects to compensate in part for
this shortfall by the purchase of bulk wine, the inventory of Ravenswood's 1998
vintage may be less than that of the 1997 vintage. As a result, the growth of
Ravenswood's sales may be limited in fiscal years 2000 and 2001, when most of
its 1998 vintage will be released for sale.
Ravenswood believes it has maintained good relationships with its grape
suppliers in the past, and it expects no material adverse change in these
relationships in the foreseeable future. Nevertheless, shortages in the supply
of wine grapes could result in an increase in the price of some or all grape
varieties and a corresponding increase in the cost to Ravenswood of its wine
production as well as a potential shortfall in Ravenswood's inventory. An
increase in the cost of producing Ravenswood's wines or a shortfall in inventory
could reduce the amount of wine Ravenswood produces for sale, and could result
in reductions in its sales and profits.
The recent increase in demand for premium wine has resulted in the planting of
additional vineyards both domestically and internationally and the replanting of
existing vineyards to greater densities. Many industry sources expect a
significant increase in the supply of premium wine grapes in the next few years.
Although this increase in supply may cause a decrease in the prices Ravenswood
pays independent growers for their grapes, an oversupply of grapes may
significantly increase the amount of premium wine produced. An increase in the
supply of premium wine may reduce the price of premium wines, including those
Ravenswood produces, and therefore may harm its business and reduce its sales.
Oversupply may also increase the amount of premium wine available to its
distributors and retail outlets, thereby increasing competition in its
distribution channels.
Wine Production Facilities
Ravenswood currently uses the Gehricke Road Facility, which it owns, two leased
barrel-storage warehouses and three production facilities operated by third
parties to crush, ferment, store and bottle its annual wine production.
Typically, Ravenswood's agreements with third-party production partners have
one-year terms. Ravenswood believes such arrangements are acceptable because of
the excellent relationships maintained with such producers. If, however,
Ravenswood were not able to secure the use of such facilities, and could not
undertake increased production activities through its own facilities, its
production, and therefore its sales and profits, could be limited.
39
Due to the increase in Ravenswood's production over the past several years and
its increasing dependence on a limited supply of independent production
facilities, Ravenswood has undertaken to increase its own production capacity.
Its Gehricke Road Facility is currently operating at full capacity. Ravenswood
is in the process of building the Quarry Facility as an additional production
facility on a leased, approximately 30-acre location in the Sonoma Valley.
Preliminary site work began on the Quarry Facility during the fall of 1998, and
construction commenced in February 1999. Ravenswood anticipates that the
facility will be operational by late summer or early autumn of 1999.
Ravenswood has developed a master plan for the Quarry Facility, which includes a
45,000 square-foot building with facilities capable of crushing 2,700 tons of
grapes and storing 11,000 barrels of wine. Although Ravenswood initially plans
to bottle a maximum of 250,000 cases of wine annually at the Quarry Facility, it
anticipates that it will be able to expand the facility in the future to
significantly increase production should Ravenswood seek to increase its
permitted capacity. The Quarry Facility will also support certain warehouse and
administrative office activities.
Upon completion of the Quarry Facility, Ravenswood believes that it will use
both its Gehricke Road Facility and the Quarry Facility to full capacity.
Ravenswood believes that the construction of the Quarry Facility will result in
immediate and substantial savings because in-house production will cost less
than paying outside vendors for custom crushing, fermentation, storage and
bottling. Ravenswood anticipates that consolidating its facilities will improve
the management and coordination of production staff and facilities. In addition,
Ravenswood believes such consolidation will allow it to reduce its future
reliance upon production facilities owned by independent third parties.
Ravenswood believes the increased control over the production process provided
by the completion of the Quarry Facility will enhance its ability to apply its
traditional winemaking processes on a consistent basis. Use of the Quarry
Facility will also assist Ravenswood in maintaining the label terminology
"Produced and Bottled by Ravenswood Winery, Sonoma, CA." Production of wine at
non-Ravenswood locations sometimes requires different labeling.
Ravenswood believes that it will have access to adequate capital to complete the
Quarry Facility. Ravenswood's failure to complete the facility, or otherwise
expand its production capabilities, could limit its production and therefore its
sales and profits.
Ravenswood anticipates that the Quarry Facility will initially be primarily
dedicated to production. The Gehricke Road Facility will remain as a
fully-integrated winery, focusing on the production of the Vineyard Designate
Series, Ravenswood's tasting room and administrative offices.
Competition
The premium wine industry is intensely competitive and highly fragmented.
Ravenswood's wines compete in the premium wine market with the hundreds of other
wineries producing and marketing California wine as well as other producers of
domestic premium wines and producers of imported wines coming primarily from
France, Italy, Spain, Australia and Chile. Ravenswood's wines also compete with
popular-priced generic wines and with other alcoholic and, to a lesser degree,
non-alcoholic beverages for shelf space in retail stores and for marketing focus
by Ravenswood's independent brokers and distributors, many of which carry
extensive brand portfolios.
Ravenswood believes that the primary competitive factors in the wine industry
tend to be brand recognition, product quality, access to distribution channels
and price. Although
40
Ravenswood believes it is competitive in each of these areas, there can be no
assurance that it will be able to compete effectively in the future. The wine
industry has experienced significant consolidation in recent years. Despite
numerous brand labels, industry analysts estimate that seven wineries accounted
for approximately 53% of the total California premium wine shipments in 1997, by
volume. Large volume competitors, such as Beringer Estates, Gallo, Kendall
Jackson and Robert Mondavi, which compete directly with Ravenswood in the
premium wine market, have significantly greater capital resources, more
sophisticated promotional practices, and substantially larger and more developed
distribution networks than Ravenswood. As a result, Ravenswood may not be able
to compete successfully against these producers of premium wines.
As a result of its distribution strategy, Ravenswood believes that it has been
able to compete effectively, particularly with respect to its higher-end
products, with much larger-scale wine producers that rely on larger distributors
or internal sales forces. In recent years, an increasing number of smaller
wineries have adopted an approach to winemaking similar to Ravenswood's, which
emphasizes production processes and brand awareness over investment in land and
production capacity. Ravenswood believes that these competitors, such as Cline
Cellars, Kenwood, Rabbit Ridge, Ridge Vineyards and Rosenblum Cellars, appeal to
many of the same consumers as those targeted by Ravenswood. Ravenswood believes
that, while brand awareness is an important component to core wine consumers,
most wine consumers are loyal to more than one brand of premium wine. As a
result, Ravenswood must constantly promote its wines to its existing customer
base. The increase in the number of Ravenswood's competitors may prevent it from
successfully establishing its brand name or obtaining sufficient marketing focus
from its independent brokers and distributors, which could harm its business and
reduce its sales and profits.
Government Regulation
The wine industry is subject to extensive regulation by the Federal Bureau of
Alcohol, Tobacco and Firearms ("BATF"), various foreign agencies, and state and
local liquor authorities. These regulations and laws dictate such matters as
licensing requirements, trade and pricing practices, permitted distribution
channels, permitted and required labeling, advertising and relations with
wholesalers and retailers.
Federal regulation of Ravenswood's activities is partially overseen by the BATF.
Ravenswood is required by the BATF to carry a license and bond to produce
alcoholic beverages. The BATF also must approve all labels on wine products
destined for wholesale and retail distribution. The BATF also regulates certain
elements of wine production.
The State of California regulates Ravenswood's activities through the Alcoholic
Beverage Control (the "ABC"). Ravenswood holds a permit with the ABC to produce
and sell alcoholic beverages. The State of California also regulates the sales
and distribution of Ravenswood's products in the state.
In addition, Ravenswood is subject to regulation by each state in which its
products are sold, and many of those states restrict the shipment of alcoholic
beverages by Ravenswood directly to consumers. The laws and regulations of
several states also prohibit changes of distributors except under certain
limited circumstances, making it difficult to terminate a distributor without
reasonable cause, as defined by applicable statutes.
Ravenswood periodically uses various chemical herbicides, fungicides and
pesticides on the vineyards it cultivates, some of which contain hazardous or
toxic substances. The use and storage of these chemicals are, to varying
degrees, subject to federal and state regulation.
41
The expansion of the Gehricke Road Facility and Quarry Facility, and the
development of new vineyards and winery facilities, may be limited by zoning
ordinances, environmental restrictions and other legal requirements. In
addition, new regulations or requirements or increases in excise taxes, income
taxes, property and sales taxes and international tariffs could materially
adversely affect the financial results of Ravenswood. Ravenswood can provide no
assurance that there will not be future legal or regulatory challenges to the
industry, which could have a material adverse effect on Ravenswood's business,
financial condition and results of operations.
Properties
Ravenswood currently operates one owned and two leased locations in Sonoma. The
Gehricke Road Facility, which Ravenswood owns, is comprised of two buildings
totaling approximately 12,600 square feet. This facility houses the majority of
Ravenswood's production equipment, its administrative offices, a small
laboratory, a retail tasting room, and a warehouse space for barrel and tank
storage. The Gehricke Road Facility is situated on approximately 25 acres, 14 of
which are Zinfandel and Merlot vineyards. Ravenswood's two additional production
and operation facilities, which it leases, are used primarily for barrel storage
and aging of wines. These facilities comprise a total of approximately 31,900
square feet. Ravenswood also leases a 1,000 square-foot office in San Francisco
for administrative and sales purposes.
In addition, Ravenswood is currently constructing the Quarry Facility, which is
located on leased land consisting of approximately 30 acres in Sonoma County.
Upon completion of the Quarry Facility, Ravenswood expects to use the Quarry
Facility and the Gehricke Road Facility for its operations. Ravenswood leases
this property from the spouse and brother-in-law of Justin Faggioli, its
Executive Vice President. The lease expires on December 31, 2032 and provides
for monthly payments that are adjusted annually. In addition, the lease provides
Ravenswood with a right of first refusal to purchase a portion of the property
and an option to extend the lease upon its expiration, under certain
circumstances. See "Certain Transactions."
Trademarks
"Ravenswood," the Ravenswood logo and the slogan "No Wimpy Wines" are federally
registered trademarks owned by Ravenswood. These registered trademarks are
important to Ravenswood in its efforts to solidify and increase awareness of the
Ravenswood brand and to compete effectively in the premium wine industry.
Legal Proceedings
There are no material legal proceedings pending to which Ravenswood is a party.
Ravenswood's management knows of no legal actions being contemplated by or
against Ravenswood.
Employees
As of December 31, 1998, Ravenswood had approximately 32 full-time employees, 23
of whom were salaried, with the remaining employees paid an hourly wage. From
time to time, Ravenswood needs to hire part-time employees, primarily for
bottling wines and harvesting and maintaining vineyards. The number of part-time
employees typically ranges between
42
seven and eight persons, is generally for a short duration of time (up to three
months), and does not materially affect Ravenswood's operations. The tasting
room employs approximately ten part-time employees annually, in addition to its
three full-time employees. Ravenswood expects that the number of employees will
not increase substantially in the next 12 months.
None of Ravenswood's employees are represented by a union. Ravenswood believes
salaries paid and benefits provided to its employees are competitive for the
wine industry. Ravenswood believes that its relationship with its employees is
excellent.
43
MANAGEMENT
Executive Officers and Directors
Ravenswood's executive officers and directors and their ages as of February 1,
1999 are as follows:
Name Age Position
- ------------------------------------ ----- -------------
W. Reed Foster ..................... 67 Chairman, Chief Executive Officer
and Director
Joel E. Peterson ................... 51 President, Winemaker and Director
Justin M. Faggioli ................. 47 Executive Vice President, Secretary
and Director
Callie S. Konno (1) ................ 45 Chief Financial Officer, Treasurer
and Director
James F. Wisner(1)(2) .............. 65 Director
Robert E. McGill, III(1)(2) ........ 67 Director
- ------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
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. From 1973
until joining Ravenswood, Mr. Peterson was a wine writer and a consultant in
the art of traditional winemaking (as practiced in Bordeaux and Burgundy). Mr.
Peterson holds a B.S. in Microbiology and Biochemistry from Oregon State
University and a Medical Technology degree from the University of California,
San Francisco. Mr. Peterson was actively involved in immunology research at Mt.
Zion Hospital until 1977.
Justin M. Faggioli has served as Executive Vice President of Ravenswood since
January 1995, and as Secretary and a director since October 1996. Prior to
joining Ravenswood, from May 1991 until January 1995, Mr. Faggioli operated a
2,600-acre ranch in Sonoma County owned by his wife's family and helped develop
a 175-acre vineyard on that property. Mr. Faggioli holds B.S. and M.S. degrees
in Earth Sciences from Stanford University and an M.B.A. from the Harvard
Graduate School of Business Administration.
Callie S. Konno has served as Ravenswood's Chief Financial Officer since 1996
and has served as a director since February 1999. From 1993 until her
appointment as Chief Financial Officer, Ms. Konno served as Secretary of
Ravenswood and was responsible for various accounting and administrative
duties. She holds an A.B. in History and International Relations from
Occidental College and an M.L.I.S. in Library and Information Studies from the
University of California, Berkeley. In addition, Ms. Konno has passed the
Certified Public Accountants examination.
James F. Wisner has served as a director since Ravenswood's incorporation in
1986. Mr. Wisner currently practices law as a sole practitioner. From 1972
until 1992, Mr. Wisner was a partner in the law firm of Bancroft, Avery &
McAllister in San Francisco, California. He holds an A.B. in American History
from Yale University, a J.D. from Stanford University and an M.B.A. from Golden
Gate University.
44
Robert E. McGill, III has served as a director of Ravenswood since February
1999. Mr. McGill currently serves as a director of Connecticut Surety
Corporation, an insurance company, and Chemfab Corporation, a specialty
materials manufacturing company. In addition, he currently serves as a trustee
of Travelers Mutual & Variable Annuity Funds, an investment company. From 1975
to 1995, Mr. McGill served in various senior management positions, including,
most recently, as Executive Vice President, Finance and Administration, and,
from 1983 to 1995 as a director, of The Dexter Corporation, a specialty
materials and chemical manufacturing company. Mr. McGill received a B.A. in
Economics from Williams College and an M.B.A. from the Harvard Graduate School
of Business Administration.
Each director holds office until the next annual meeting of shareholders or
until the director's successor is duly elected and qualified. Officers are
elected by the board of directors at each annual meeting and serve at the
pleasure of the board of directors.
Audit Committee
The board of directors has established an Audit Committee consisting of Ms.
Konno and Messrs. Wisner and McGill. The Audit Committee reviews with
Ravenswood's independent auditors the scope and timing of their audit services
and any other services that they are asked to perform, the auditor's report on
Ravenswood's financial statements following completion of their audit, and
Ravenswood's policies and procedures with respect to internal accounting and
financial controls. In addition, the Audit Committee makes annual
recommendations to the board of directors for the appointment of independent
auditors for the ensuing year.
Compensation Committee
The board of directors has established a Compensation Committee consisting of
Messrs. Wisner and McGill. Ravenswood expects that the Compensation Committee
will make recommendations to the board of directors regarding executive
compensation.
Director Compensation
Directors receive no cash compensation for serving as directors of Ravenswood.
Ravenswood intends to grant stock options to purchase 5,000 shares of common
stock to each of Messrs. Wisner and McGill on the effective date of this
offering at the initial public offering price. These options will vest annually
over five years from the date of grant.
45
Executive Compensation
The following table sets forth certain information for the fiscal year ended
June 30, 1998, regarding the compensation earned by the Chief Executive Officer
and each of Ravenswood's three most highly compensated executive officers other
than the Chief Executive Officer whose salary plus bonus exceeded $100,000 for
the fiscal year ended June 30, 1998 (together, the "Named Executive Officers").
No stock options were granted to or exercised by any of the Named Executive
Officers in the fiscal year ended June 30, 1998.
Summary Compensation Table
Annual Compensation (1)
-------------------------------------------
All Other
Name and Principal Position Salary($) Bonus($) Compensation($)(2)
- --------------------------- -------- -------- -------------------
W. Reed Foster ................................. $149,942 $ 35,000 $ 7,398
Chairman and Chief Executive Officer
Joel E. Peterson ............................... $149,942 $ 35,000 $ 1,467
President and Winemaker
Justin M. Faggioli ............................. $108,654 $ 35,000 $ 5,749
Executive Vice President and Secretary
Callie S. Konno ................................ $ 76,047 $ 35,000 $ 4,442
Chief Financial Officer and Treasurer
<FN>
- -------------------
(1) In accordance with the rules of the Securities and Exchange Commission, the
compensation described in this table does not include perquisites and other
personal benefits received by the Named Executive Officers which do not
exceed the lesser of $50,000 or 10% of the total salary and bonus reported
for such Named Executive Officer.
(2) Consists of matching contributions under Ravenswood's 401(k) retirement
plan.
</FN>
1999 Equity Incentive Plan
Ravenswood's 1999 Equity Incentive Plan was adopted by Ravenswood's board of
directors and approved by its shareholders in February 1999. There are 500,000
shares of common stock reserved for issuance under the plan and no options have
been granted under the plan as of February 1, 1999. Ravenswood intends to grant
stock options to purchase an aggregate of 279,500 shares of common stock on the
effective date of this offering at exercise prices equal to the initial public
offering price (except in the case of Messrs. Foster and Peterson, whose stock
option exercise prices will be equal to 110% of the initial public offering
price), including the following grants to its Named Executive Officers:
Number of Shares Granted
Name Pursuant to Options
- ---- -------------------
W. Reed Foster ................... 50,000
Joel E. Peterson ................. 50,000
Justin M. Faggioli ............... 37,500
Callie S. Konno .................. 37,500
These options will vest annually over five years from the date of grant.
No awards may be granted under the plan after February 2009, but the vesting and
effectiveness of awards previously granted may extend beyond that date.
The plan provides for the grant of incentive stock options ("ISOs") intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"),
46
non-statutory stock options ("NSOs"), restricted stock awards and other
stock-based awards. All officers, employees, directors, independent contractors
and consultants to Ravenswood and its subsidiaries are eligible to receive
awards under the plan. Under present law, however, ISOs may be granted only to
employees. No participant may receive an award for more than 100,000 shares in
any calendar year.
Ravenswood may grant options at an exercise price equal to or greater than the
fair market value of the common stock on the date of grant. Under present law,
ISOs and options intended to qualify as performance-based compensation under
Section 162(m) of the Code may not be granted at an exercise price less than the
fair market value of the common stock on the date of grant (or less than 110% of
the fair market value in the case of ISOs granted to optionees holding more than
10% of the outstanding securities of Ravenswood). In addition, for each
participant, the maximum aggregate fair market value on the date of grant of all
shares subject to ISOs first exercisable in any one year may not exceed
$100,000. The plan permits the board of directors to determine how optionees may
pay the exercise price of their options, including by cash, delivery to
Ravenswood of a promissory note, by surrender to Ravenswood of shares of common
stock, or, in connection with a "cashless exercise" through a broker, by
delivery of an irrevocable notice of exercise or by any combination of the
permitted forms of payment.
Options will expire on a date determined by the board of directors, provided
that the expiration date for ISOs may not be more than ten years from the date
of grant (or five years in the case of ISOs granted to optionees holding more
than 10% of the outstanding securities of Ravenswood). Each option is
exercisable during the lifetime of the optionee only by such optionee, except as
permitted by the board of directors.
The board of directors may grant restricted shares, which are shares of common
stock that are subject to transfer restrictions determined by the board of
directors and subject to substantial risk of forfeiture unless and until
specific conditions established by the board at the time of grant are met. Such
conditions may be based upon continuing employment or achievement of
pre-established performance goals, or both, as determined by the board of
directors.
The plan also authorizes the board of directors to award or offer bonuses of
shares of common stock, either restricted or non-restricted, as current or
deferred compensation, in lieu of all or any portion of the cash compensation to
which the employee is entitled.
The board of directors administers the plan. The board also has the authority to
adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions; provided, however, that no
amendment, suspension or termination of the plan may alter or impair an interest
granted to a beneficiary under the plan without such beneficiary's written
consent. The board may delegate its authority under the plan to a committee of
the board, subject to certain limitations.
In the event of a merger, liquidation or other "Acquisition Event" (as described
in the plan), the board of directors is authorized to provide for outstanding
options or other stock-based awards to be assumed or replaced by the acquiror
and to take certain other actions, including accelerating the vesting schedule
of awards.
Stock options granted under the plan are intended to be "performance-based
compensation" and therefore not subject to the deduction limitation of Section
162(m) of the Code. Under generally accepted accounting principles, as currently
applied, Ravenswood will not incur accounting charges with respect to stock
options granted or exercised under the plan.
47
Ravenswood will, however, incur accounting charges for the fair market value of
stock options granted to non-employee directors, consultants or independent
contractors, as well as restricted stock grants or stock bonus awards, as of the
date of each grant or award. Stock options will also affect the amount of
diluted earnings per share, in accordance with Financial Accounting Standard
128. Under Financial Accounting Standard 123, Ravenswood will provide footnote
disclosure in its financial statements of the assumed value of all options
granted under the plan and the actual value of restricted stock and stock bonus
awards granted under the plan.
Employee Stock Purchase Plan
Ravenswood's Employee Stock Purchase Plan was adopted by Ravenswood's board of
directors and approved by its shareholders in February 1999. Ravenswood has
reserved 50,000 shares of common stock for issuance under the Employee Stock
Purchase Plan.
The plan, which is intended to qualify as an "employee stock purchase plan"
under Section 423 of the Code, provides that all employees of Ravenswood,
including directors of Ravenswood who are employees, and all employees of
participating subsidiaries, whose customary employment is more than 20 hours per
week for more than five months in any calendar year, are eligible to participate
in the plan. Employees who would immediately after the grant own 5% or more of
the total combined voting power or value of the stock of Ravenswood or any
subsidiary are not eligible to participate. As of February 1, 1999,
approximately 31 employees would have been eligible to participate in the plan.
The plan may be amended solely by the board of directors, except with respect to
an increase in the number of shares reserved for issuance under the plan, which
would require shareholder approval.
On the first day of a designated payroll deduction period (the "Offering
Period"), Ravenswood will grant to each eligible employee who has elected to
participate in the plan an option to purchase shares of common stock. The
employee may authorize an amount (a whole percentage from between 1% and 10% of
his or her base pay) to be deducted by Ravenswood during the Offering Period. On
the last day of the Offering Period, the employee is deemed to have exercised
the option, at the option exercise price, to the extent of accumulated payroll
deductions. Under the terms of the plan, the option price may be set at an
amount as low as 85% of the average market price per share (as defined in the
plan) of the common stock on either the first day or the last day of the
Offering Period, whichever is lower. An employee may not purchase more than 500
shares in any one Offering Period. The board of directors may, in its
discretion, choose an Offering Period of any length not exceeding 27 months.
An employee who is not a participant in the plan on the last day of the Offering
Period is not entitled to exercise any option, and the employee's accumulated
payroll deductions will be refunded. An employee's rights under the plan
terminate upon voluntary withdrawal from the plan at any time, or when the
employee ceases employment for any reason, except that upon termination of
employment because of death, the employee's beneficiary has certain rights to
elect to exercise the option to purchase the shares that the accumulated payroll
deductions in the participant's account would purchase at the date of death.
Because participation in the plan is voluntary, Ravenswood cannot now determine
the number of shares of common stock to be purchased by any particular executive
officer, by all current executive officers as a group, or by non-executives as a
group.
48
All shares of common stock purchased by an employee will be held by Ravenswood
or by an agent of Ravenswood and will be registered in the name of the Employee
Stock Purchase Plan. Ravenswood or its agent will abstain from voting any shares
held under the plan. An employee's interest in the amount of cash and/or shares
held on his or her behalf will be fully vested and non-forfeitable at all times.
An employee may have any shares of common stock held on his or her behalf under
the Employee Stock Purchase Plan distributed to him or her in certain
circumstances.
401(k) Savings Plan
In April 1995 Ravenswood instituted a defined contribution retirement plan,
intended to qualify under Sections 401(a) and 401(k) of the Code. All full-time
employees of Ravenswood are eligible to participate in the retirement plan on
the first day of the semi-annual period following one year of employment. The
retirement plan provides that each participant may contribute from 1% to 15% of
compensation, subject to statutory limitations. Under the retirement plan,
Ravenswood may also make discretionary contributions based on a certain
percentage of a participant's contributions, as determined by Ravenswood or such
additional amounts as Ravenswood may deem appropriate. In connection with the
adoption of the retirement plan, the board of directors approved a matching
contribution of 66% of the first 6% of employee contributions. Ravenswood's
contributions under the retirement plan totaled $53,089 for the 1998 fiscal
year.
Limitation of Liability and Indemnification Matters
Ravenswood's Bylaws provide that Ravenswood will indemnify its directors and
executive officers and may indemnify its other officers, employees and other
agents to the fullest extent permitted by California law. Ravenswood is also
empowered under its Bylaws to enter into indemnification contracts with its
directors and officers and to purchase insurance on behalf of any person it is
required or permitted to indemnify. Pursuant to this provision, Ravenswood has
entered into indemnity agreements with each of its directors and executive
officers.
Ravenswood has obtained officer and director liability insurance with respect to
liabilities arising out of certain matters, including matters arising under the
Securities Act. In addition, Ravenswood's Articles provide that, to the fullest
extent permitted by California law, Ravenswood's directors will not be liable
for monetary damages for breach of the directors' fiduciary duties to Ravenswood
and its shareholders. This provision in the Articles does not eliminate the duty
of care, and in appropriate circumstances equitable remedies such as an
injunction or other forms of non-monetary relief would remain available under
California law. Each director will continue to be subject to liability for
breach of the director's duty of loyalty to Ravenswood, for acts or omissions
involving intentional misconduct or bad faith, for knowing violations of law,
for any transaction from which the director derived an improper personal
benefit, for improper transactions between the director and Ravenswood and for
improper distributions to shareholders and loans to directors and officers. This
provision also does not affect a director's responsibilities under any other
laws, such as the federal securities laws or state or federal environmental
laws. There is no pending litigation or proceeding involving a director or
officer of Ravenswood as to which indemnification is being sought, nor is
Ravenswood aware of any pending or threatened litigation that may result in
claims for indemnification by any director or officer.
49
CERTAIN TRANSACTIONS
On August 25, 1992, Ravenswood entered into a deferred compensation agreement
with Mr. Foster, its Chairman and Chief Executive Officer, entitling him to
receive upon termination of his employment the value of 345,731 shares of common
stock, payable in shares or cash at Ravenswood's discretion. Effective July 1,
1998, Ravenswood and Mr. Foster mutually terminated this arrangement upon
Ravenswood's issuing to Mr. Foster the 345,731 shares of common stock, and
agreeing to lend him up to $335,000 to pay taxes related to his receipt of these
shares. The loan (which was partially funded in December 1998, with the balance
to be drawn in April 1999) is due on December 21, 2008, with interest payable
annually at 5.3% per annum. The loan is unsecured. See Notes 11 and 16 of the
notes to Ravenswood's financial statements.
From August until December 1998, certain officers and directors of Ravenswood
participated in a private placement of an aggregate of $1,687,500 of convertible
debentures and $1,687,500 of common stock by Ravenswood, as follows:
Name Security Amount Purchased
---- -------- ----------------
W. Reed Foster .......... Convertible Debentures $ 62,500
Common Stock $ 62,500
Justin M. Faggioli ...... Convertible Debentures $134,283
Common Stock $187,500
Robert E. McGill, III ... Convertible Debentures $ 62,500
Common Stock $ 62,500
Each $10,000 convertible debenture is convertible into 900 shares of common
stock. The per share price of the common stock sold in the private placement was
$7.94 per share. The purchase price of the securities sold to these officers and
directors in the private placement was determined based on Ravenswood's board of
directors' good faith determination of the fair market value of such securities,
and was equivalent to the price paid for such securities by unrelated third
parties in the transaction.
In connection with the proposed expansion of the Quarry Facility, Ravenswood has
entered into an agreement to lease approximately 30 acres of land in Sonoma
County, California from Sandra D. Donnell and Bruce B. Donnell, the wife and
brother-in-law, respectively, of Mr. Faggioli, Ravenswood's Executive Vice
President. The lease, which is dated as of January 1, 1999, provides for monthly
payments and expires on December 31, 2032. Payments under the lease from
Ravenswood to Ms. Donnell and Mr. Donnell totaled $20,672 for calendar 1998, and
are expected to total $29,255 for calendar 1999, and approximately $41,344 for
calendar 2000, subject to certain annual adjustments.
Mr. Faggioli, Ms. Donnell and Mr. Donnell, together, are 15% partners in
Sangiacomo-El Novillero Vineyards. This partnership leases land from Sandra D.
Donnell and sells a portion of its grapes to Ravenswood. Grape payments by
Ravenswood to the Sangiacomo Partnership totaled $88,872 in calendar 1997 and
$147,490 in calendar 1998.
Ravenswood has periodically borrowed funds for short-term working capital from
certain of its executive officers. As of December 31, 1998, Ravenswood had
outstanding promissory notes in the principal amount of $50,250 payable to Mr.
Foster, and promissory notes in the principal amount of $46,143 payable to Mr.
Peterson, Ravenswood's President and Winemaker. With the exception of two notes
in the principal amount of $25,000 payable to
50
each of Mr. Foster and Mr. Peterson, respectively, which are due in June 30,
2004, each of the notes is payable upon demand by the holder. The notes bear
interest at rates ranging from 10% to 11% per annum.
Mr. Peterson has two outstanding promissory notes payable to Ravenswood for an
aggregate principle amount of $22,000. The notes bear interest at 8.5% per
annum and are due in January 2004 and April 2004.
Mr. Peterson's wife, Madeleine Deininger, serves as a broker for Ravenswood in
the New England states. Pursuant to this agreement, Ms. Deininger received sales
commissions totaling $154,575 in calendar 1997 and $214,018 in calendar 1998.
Ravenswood believes that the foregoing transactions were in its best interest.
As a matter of policy, the transactions were, and all future transactions
between Ravenswood and any of its officers, directors or principal shareholders
will be, approved by a majority of the disinterested members of the board of
directors, will be on terms no less favorable to Ravenswood than could be
obtained from unaffiliated third parties and will be to serve bona fide business
purposes of Ravenswood.
51
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Ravenswood's common stock as of December 31, 1998, and as adjusted
to reflect the sale of the common stock offered hereby, for (i) each person who
is known by Ravenswood to beneficially own more than 5% of the outstanding
shares of common stock, (ii) each director of Ravenswood, (iii) each Named
Executive Officer and (iv) all directors and executive officers of Ravenswood as
a group.
Percentage of Shares
Outstanding
-----------------------
Number of Shares Beneficially Prior to After
Name(1) Owned (2) Offering Offering
- ------- --------- -------- --------
W. Reed Foster (3)(4)(5) ................................ 2,164,181 60.9% 47.5%
Joel E. Peterson (3)(4)(6) .............................. 2,150,681 60.6% 47.3%
Justin M. Faggioli (3)(4)(7) ............................ 2,186,391 61.4% 47.9%
James F. Wisner (3)(4)(8) ............................... 2,150,681 60.6% 47.3%
Callie S. Konno ......................................... 59,850 1.7% 1.3%
Robert E. McGill, III (9) ............................... 25,750 * *
All directors and executive officers as
a group (6 persons) (10) ............................... 2,225,641 62.1% 48.5%
<FN>
- ------------
* Less than 1%.
(1) The address of each of the directors and executive officers of Ravenswood
is c/o Ravenswood Winery, Inc., 18701 Gehricke Road, Sonoma, CA 95476.
(2) Based on 3,550,852 shares outstanding as of December 31, 1998. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment power with
respect to securities. Unless otherwise indicated, each person or entity
named in the table has sole voting power and investment power (or shares
such power with his or her spouse) with respect to all shares of capital
stock listed as owned by such person. Shares issuable upon the exercise of
outstanding options that are currently exercisable or become exercisable
within sixty days of December 31, 1998, or debentures that are currently
convertible or become convertible within sixty days of December 31, 1998
are considered outstanding for the purpose of calculating the percentage of
outstanding shares of Ravenswood held by such person, but not for the
purpose of calculating the percentage of outstanding shares of Ravenswood
held by any other person.
(3) Includes 2,150,681 shares of common stock held in a voting trust, as to
which Messrs. Foster, Peterson, Faggioli and Wisner, exercise voting
control as trustees. See "Description of Capital Stock--Voting Trust."
Messrs. Foster, Peterson, Faggioli and Wisner disclaim beneficial ownership
of 1,732,500 shares, 746,411 shares, 2,059,331 shares and 1,993,181 shares,
respectively, of such common stock.
(4) Excluding the shares of common stock beneficially owned by Messrs. Foster,
Peterson, Faggioli and Wisner solely as a result of their status as
trustees of the Voting Trust, Messrs. Foster, Peterson, Faggioli and
Wisner's beneficial ownership disclosure would appear as follows:
</FN>
Percentage of Shares
Outstanding
---------------------
Number of Shares Prior to After
Name(1) Beneficially Owned (2) Offering Offering
------- ---------------------- -------- --------
W. Reed Foster (5) ............ 431,681 12.1% 9.5%
Joel E. Peterson (6) .......... 1,404,270 39.6% 30.9%
Justin M. Faggioli (7) ........ 127,060 3.6% 2.8%
James F. Wisner (8) ........... 157,500 4.4% 3.5%
(5) Includes 5,625 shares of common stock issuable upon conversion of certain
outstanding convertible debentures. Does not include 151,200 shares held by
an irrevocable trust established for the benefit of Mr. Foster's children.
(6) Does not include 151,200 shares held by an irrevocable trust established
for the benefit of Mr. Peterson's children.
52
(7) Includes 12,085 shares of common stock issuable upon conversion of certain
outstanding convertible debentures, 4,789 shares of which are held by Mr.
Faggioli's spouse.
(8) Includes 31,500 shares held by Mr. Wisner's spouse.
(9) Includes 17,875 shares of common stock issuable upon conversion of certain
outstanding convertible debentures. Also includes 13,500 shares held in a
family trust established for the benefit of Mr. McGill.
(10) Includes 35,585 shares of common stock issuable upon conversion of certain
outstanding convertible debentures.
53
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of Ravenswood
will consist of 20,000,000 shares of common stock, no par value, and 1,000,000
shares of preferred stock, no par value. As of December 31, 1998, there were
outstanding 3,550,852 shares of common stock held by approximately 60
shareholders of record and no shares of preferred stock. Of the 20,000,000
shares of common stock authorized, 500,000 are reserved for issuance pursuant to
the 1999 Equity Incentive Plan, 50,000 are reserved for issuance pursuant to the
Employee Stock Purchase Plan, 454,622 are reserved for issuance upon the
conversion of outstanding debentures, and 1,000,000 are being offered hereby.
Common Stock
The holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. Subject to
preferences that may be applicable to any outstanding shares of preferred stock,
the holders of common stock are entitled to receive ratably such dividends as
may be declared by the board of directors out of funds legally available
therefor. See "Dividend Policy." In the event of a liquidation, dissolution or
winding up of Ravenswood, holders of the common stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preferences of any outstanding shares of preferred stock. Holders of common
stock have no preemptive rights and no right to convert their common stock into
any other securities. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are, and
all shares of common stock to be outstanding upon the closing of this offering
will be, fully paid and nonassessable. The rights, preferences and privileges of
holders of common stock are subject to the rights of holders of shares of any
series of preferred stock which Ravenswood may designate and issue in the
future.
Voting Trust
A portion of Ravenswood's outstanding common stock, totaling 2,150,681 shares
(representing approximately 60.6% of the outstanding common stock prior to the
offering and approximately 47.3% after the offering), is held in a voting trust,
for which Messrs. Foster, Peterson, Faggioli and Wisner serve as trustees. As
long as Mr. Peterson is a trustee of the voting trust, all decisions except
decisions to amend or terminate the voting trust require the approval of Mr.
Peterson and one other trustee; however, decisions to amend or terminate the
voting trust require the approval of Mr. Peterson and two other trustees. If Mr.
Peterson is no longer a trustee of the voting trust, all decisions require the
approval of three trustees; however, decisions to amend or terminate the voting
trust require the approval of the three remaining trustees and Mr. Peterson's
successor trustee (who shall be appointed by the three remaining trustees).
Shares may be released from the voting trust upon transfer of shares for
estate-planning purposes, in connection with the sale of shares, or upon the
approval of the trustees.
Preferred Stock
Pursuant to Ravenswood's Articles, the board of directors has the authority,
without further action by the shareholders, to issue up to 1,000,000 shares of
preferred stock in one or more series and to fix the designations, powers,
preferences, privileges and relative participating, optional or special rights
of such stock, and the qualifications, limitations or restrictions
54
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the common stock. The board of directors, without shareholder
approval, may issue preferred stock with voting, conversion or other rights that
could adversely affect the voting power and other rights of the holders of
common stock. Preferred stock could thus be issued quickly with terms which
could delay or prevent a change in control of Ravenswood or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock and may
adversely affect the voting and other rights of the holders of common stock.
Upon the closing of this offering, there will be no shares of preferred stock
outstanding, and Ravenswood currently has no plans to issue any of its preferred
stock.
Debentures
Ravenswood has outstanding $865,000 of convertible debentures due December 31,
2004. Each $10,000 debenture is convertible into 3,500 shares of common stock at
any time prior to December 31, 1999 upon request of the holder. If the
debentures are not converted, Ravenswood may redeem them at face value at any
time from January 1, 2000 until the maturity date. Ravenswood pays interest
quarterly on the debentures based on a floating index tied to prime bank rates
for a five-year period. The interest rate is adjusted every 18 months, except
that in no period may the interest rate adjustment exceed 2% or the maximum
interest rate exceed 11%.
Ravenswood has outstanding $1,687,500 of convertible debentures due December 31,
2008. Each $10,000 debenture is convertible into 900 shares of common stock at
any time prior to December 31, 2003 upon request of the holder. If the
debentures are not converted, Ravenswood may redeem them at face value at any
time from January 1, 2004 until the maturity date. Ravenswood pays interest
quarterly on the debentures in an amount equal to the prime interest rate quoted
by Bank of America NT&SA plus 1%. The interest rate is adjusted every 18 months,
except that in no period may the interest rate adjustment exceed 2% or the
maximum interest rate exceed 11%.
Registration Rights
Upon conversion of debentures due December 31, 2004, shareholders holding an
aggregate of 302,750 shares of common stock will have certain registration
rights with respect to those shares. If Ravenswood proposes to register any of
its common stock under the Securities Act, except registrations relating to
employee benefit plans or certain acquisitions, the rights holders may require
Ravenswood to include all or a portion of such shares in such registration. All
registration expenses incurred in connection with these registrations will be
borne by Ravenswood. A holder of the registration rights must pay all
underwriting discounts, selling commissions and stock transfer taxes applicable
to the sale of his or her registrable shares of common stock. In connection with
this offering, Ravenswood has requested that the rights holders waive their
registration rights.
Certain Antitakeover Effects
Ravenswood's Articles and Bylaws require that, effective upon the closing of
this offering, any action required or permitted to be taken by Ravenswood's
shareholders must be effected at a duly called annual or special meeting of the
shareholders, and may not be effected by a
55
consent in writing. In addition, the Bylaws require advance notice of
shareholder proposals and nominations for board elections. Ravenswood's Articles
also specify that the authorized number of directors within the range specified
in Ravenswood's Bylaws may be changed only by resolution of the board of
directors. Ravenswood's Bylaws may be amended by its board of directors or its
shareholders; however, its shareholders may amend the Bylaws only by the
affirmative vote of at least two-thirds of the outstanding voting securities.
These provisions may have the effect of deterring hostile takeovers or delaying
changes in the control or management of Ravenswood.
Ravenswood's Articles and its Bylaws provide that Ravenswood will indemnify its
officers and directors as permitted by California law against losses that they
may incur in investigations and legal proceedings resulting from their service
to Ravenswood, which may include service in connection with takeover defense
measures. Such provisions may have the effect of preventing changes in
Ravenswood's management.
In addition, once Ravenswood is qualified for listing on the Nasdaq National
Market and has at least 800 holders of its equity securities, its charter
documents will eliminate cumulative voting, which may make it more difficult for
a third party to gain control of Ravenswood's board of directors.
Transfer Agent and Registrar
ChaseMellon Shareholders Services, LLC has been appointed as the transfer agent
and registrar for Ravenswood's common stock.
Listing
Ravenswood has applied to list its common stock on the Nasdaq National Market
under the trading symbol "RVWD."
56
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, Ravenswood will have outstanding an aggregate
of 4,550,852 shares of common stock. Of these shares, the 1,000,000 shares sold
in this offering will be freely tradable without restrictions or further
registration under the Securities Act unless such shares are purchased by
"affiliates" of Ravenswood, as that term is defined under Rule 144 under the
Securities Act. The remaining 3,550,852 shares of common stock held by existing
shareholders will be "restricted securities" as that term is defined in Rule 144
under the Securities Act (the "Restricted Shares"). Restricted Shares may be
sold in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 or Rule 701 under the Securities Act.
Ravenswood has agreed not to offer, sell, contract to sell, or otherwise dispose
of any shares of common stock, or any options or warrants to purchase common
stock other than the shares or options issued under Ravenswood's 1999 Equity
Incentive Plan, Employee Stock Purchase Plan or upon conversion of outstanding
convertible debentures, for a period of 90 days after the date of this
prospectus, except with the prior written consent of W. R. Hambrecht & Company,
LLC.
The Restricted Shares will be available for sale in the public market as
follows:
* 866,248 Restricted Shares will be eligible for sale on the date of this
prospectus pursuant to rule 144(k);
* 1,810,620 Restricted Shares will be eligible for sale 90 days after the
date of this prospectus pursuant to Rule 144 and Rule 701 of the Securities
Act; and
* the remaining Restricted Shares will be eligible for sale from time to time
thereafter upon expiration of one-year holding periods and subject to the
requirements of Rule 144.
Upon completion of this offering, there will be 454,622 shares issuable upon
conversion of outstanding convertible debentures ("Debenture Shares"), all of
which are immediately convertible. Debenture Shares will be available for sale
in the public market as follows:
* 273,000 Debenture Shares will be eligible for sale on the date of this
prospectus pursuant to Rule 144(k);
* 12,250 Debenture Shares will be eligible for sale 90 days after the date of
this prospectus pursuant to Rule 144; and
* the remaining Debenture Shares will be eligible for sale from time to time
thereafter upon expiration of one-year holding periods and subject to the
requirements of Rule 144.
In general, beginning 90 days after the date of this prospectus, Restricted
Shares or Debenture Shares that are held for at least one year may be sold
pursuant to Rule 144, subject to certain volume limitations. Sales under Rule
144 are also subject to certain requirements relating to manner of sale, notice
and availability of current public information about Ravenswood. Additionally,
in general, a person who is not an affiliate of Ravenswood is entitled to sell
such shares under Rule 144(k) without regard to the limitations described above,
provided the person has held Restricted Shares or Debenture Shares for at least
two years. The foregoing is only a summary of Rule 144 and is not intended to be
a complete description of it.
57
Certain of the Restricted Shares held by Mr. Foster were issued in reliance upon
Rule 701 and may be sold beginning 90 days after the date of this prospectus
under Rule 144, without compliance with the one-year minimum holding period
requirement.
As of February 1, 1999, no options had been granted under the 1999 Equity
Incentive Plan. Ravenswood intends to grant options to purchase an aggregate of
279,500 shares of common stock on the effective date of this offering at the
initial public offering price. After the completion of this offering, Ravenswood
intends to file a registration statement under the Securities Act to register
the 500,000 shares of common stock reserved for issuance under the 1999 Equity
Incentive Plan and the 50,000 shares of common stock reserved for issuance under
the Employee Stock Purchase Plan. Upon registration, all of these shares will be
freely tradeable when issued.
Prior to this offering, there has been no public market for the common stock of
Ravenswood, and the effect, if any, that the sale or availability for sale of
shares of additional common stock will have on the trading price of the common
stock cannot be predicted. Nevertheless, sales of substantial amounts of such
shares in the public market, or the perception that such sales could occur,
could adversely affect the trading price of the common stock and could impair
Ravenswood's future ability to raise capital through an offering of its equity
securities.
58
PLAN OF DISTRIBUTION
Subject to the terms and conditions of an Underwriting Agreement, W.R. Hambrecht
& Company, LLC (the "Underwriter") has agreed to purchase from Ravenswood all of
the shares of common stock offered hereby. The Underwriting Agreement provides
that the obligations of the Underwriter are subject to certain conditions
precedent, including the absence of any material adverse change in Ravenswood's
business, and the receipt of certain certificates, opinions and letters from
Ravenswood and its counsel and independent auditors. Subject to those
conditions, the Underwriter is committed to purchase all shares of common stock
offered if any of such shares are purchased.
The Underwriter proposes to offer the shares of common stock directly to the
public at the offering price set forth on the cover page of this prospectus, as
such price is determined pursuant to the process described below, and to certain
dealers at such price less a concession not in excess of $ per share. Any
dealers or agents that participate in the distribution of the common stock may
be deemed to be underwriters within the meaning of the Securities Act, and any
discounts, commissions or concessions received by them and any provided pursuant
to the sale of the shares by them might be deemed to be underwriting discounts
and commissions under the Securities Act. After the public offering of the
shares, the offering price and other selling terms may be changed by the
Underwriter.
In determining the public offering price set forth on the cover page of this
prospectus, the Underwriter and certain dealers will solicit indications of
interest for the shares to be offered from prospective investors. Such
indications of interest will indicate the number of shares the potential
investor proposes to purchase and the price proposed to be paid for such shares.
No indication of interest will be accepted by the Underwriter, nor will any
funds with respect to any indication of interest be collected, prior to
effectiveness of the registration statement filed with the Securities and
Exchange Commission in connection with this offering. The Underwriter reserves
the right to accept or reject any indication of interest submitted by a
prospective investor either directly to the Underwriter or through a selected
dealer.
The price per share at which the common stock will be sold to the public (the
"Offer Price") will be determined by negotiation between the Underwriter and
Ravenswood by reference to a price per share (the "Clearing Price") that equals
the highest price set forth in valid indications of interest at which all of the
shares offered may be sold to potential investors. The Offer Price may be less
than the Clearing Price. Pursuant to the terms of a Master Selected Dealers
Agreement, the Underwriter has agreed to offer shares to dealers on behalf of
certain prospective investors from whom such dealers have solicited indications
of interest at or in excess of the Offer Price. Such dealers have agreed with
the Underwriter to reoffer any shares which they purchase from the Underwriter
solely to such prospective investors unless otherwise consented to by the
Underwriter. The Underwriter also intends to offer shares to prospective
investors from whom it solicits indications of interest directly. The
Underwriter may alter this plan of distribution as it, in its sole discretion,
deems necessary.
The proposed plan of distribution, particularly with respect to the
determination of the offering price and allocation of shares, may differ
materially from typical offerings of securities to the public and may result in
price and volume volatility in the market for Ravenswood's common stock after
the completion of this offering. Such price and volume volatility may adversely
affect the market price of Ravenswood's common stock.
Ravenswood has granted to the Underwriter an option, exercisable no later than
30 days after the date of this prospectus, to purchase up to an aggregate of
150,000 additional shares
59
of common stock at the Offer Price, less the underwriting discount, set forth on
the cover page of this prospectus. To the extent that the Underwriter exercises
this option, the Underwriter will have a firm commitment to purchase the
additional shares, and Ravenswood will be obligated, pursuant to the option, to
sell such additional shares to the Underwriter to the extent the option is
exercised. The Underwriter may exercise such option only to cover
over-allotments made in connection with the sale of shares offered.
The Underwriting Agreement provides that Ravenswood will indemnify the
Underwriter against certain liabilities, including liabilities under the
Securities Act, or contribute to payments that the Underwriter may be required
to make.
Ravenswood has agreed not to offer, sell, contract to sell, or otherwise dispose
of any shares of common stock, or any options or warrants to purchase common
stock other than the shares of common stock or options to acquire common stock
issued under Ravenswood's 1999 Equity Incentive Plan, Employee Stock Purchase
Plan or upon the conversion of outstanding convertible debentures, for a period
of 90 days after the date of this prospectus, except with the prior written
consent of the Underwriter.
Prior to the offering, there has been no public market for Ravenswood's common
stock. The initial public offering price for the common stock will be determined
by the process described herein and does not necessarily bear any direct
relationship to Ravenswood's assets, current earnings or book value or to any
other established criteria of value, although these factors were considered in
establishing the initial public offering price range. Among other factors
considered in determining the initial public offering price range were market
conditions, the industry in which Ravenswood operates, an assessment of
Ravenswood's management, its operating results, its capital structure, the
business potential of Ravenswood, the demand for similar securities of
comparable companies and other factors deemed relevant.
Certain persons participating in this offering may engage in transactions that
stabilize, maintain or otherwise affect the price of Ravenswood's common stock,
including over-allotment, stabilizing and short-covering transactions in such
securities, and the imposition of a penalty bid, in connection with the
offering.
W.R. Hambrecht & Company, LLC is an investment banking firm formed as a limited
liability company in February 1998. The manager of W.R. Hambrecht & Company,
LLC, William R. Hambrecht, has 40 years of experience in the securities
industry. Persons affiliated and associated with W.R. Hambrecht & Company, LLC
beneficially own an aggregate of approximately 23,265 shares of Ravenswood's
common stock, including shares issuable upon the conversion of convertible
debentures.
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for Ravenswood by
Farella Braun & Martel LLP of San Francisco, California. Certain legal matters
in connection with the offering will be passed upon for the Underwriter by
Cooley Godward LLP of Menlo Park, California.
60
EXPERTS
The financial statements of Ravenswood as of June 30, 1998 and 1997, and for
each of the two fiscal years ended June 30, 1997 and June 30, 1998, included in
the Registration Statement of which this prospectus is a part, have been
included herein in reliance on the report of Odenberg, Ullakko, Muranishi & Co.
LLP, independent accountants, given on the authority of that firm as an expert
in accounting and auditing.
ENGAGEMENT OF NEW AUDITORS
Effective July 1, 1998, Odenberg, Ullakko, Muranishi & Co. LLP were engaged as
Ravenswood's independent accountants. Prior to that date, Field Accountancy
Corporation was Ravenswood's independent accountant, but did not conduct an
audit of, or issue an opinion concerning, Ravenswood's financial statements. The
decision to change accountants was approved by Ravenswood's board of directors.
Prior to July 1, 1998, Ravenswood did not consult with Odenberg, Ullakko,
Muranishi & Co. LLP on items which involved Ravenswood's accounting principles
or the form of audit opinion to be issued on Ravenswood's financial statements.
ADDITIONAL INFORMATION
Ravenswood has filed with the Securities and Exchange Commission (the
"Commission"), a registration statement on Form SB-2 under the Securities Act
with respect to the shares offered hereby. This prospectus does not contain all
of the information set forth in the registration statement and the exhibits and
schedules thereto. For further information with respect to Ravenswood and the
shares offered hereby, reference is made to the registration statement, and the
exhibits and schedules filed as part thereof through the Electronic Data
Gathering, Analysis and Retrieval system. Statements contained in this
prospectus as to the content of any contract or other document referred to are
not necessarily complete, and, in each instance, if such contract or document is
filed as an exhibit, reference is made to the copy of such contract or document
filed as an exhibit to the registration statement. Each statement is qualified
in all respects by such reference to such exhibit. A copy of the registration
statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048, and copies of all or any part of the
registration statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. The public may obtain information on the
operation of the Commission's public reference facilities by calling 1 (800)
SEC-0330. The Commission maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The address of the Commission's Web site is
www.sec.gov.
Ravenswood intends to furnish its shareholders with annual reports containing
audited financial statements and with quarterly reports for each of the first
three quarters of each fiscal year containing summary financial information.
61
INDEX TO FINANCIAL STATEMENTS
Report of Odenberg, Ullakko, Muranishi & Co. LLP,
Independent Accountants .................................................. F-2
Balance Sheets ......................................................... F-3
Statements of Income ................................................... F-4
Statements of Shareholders' Equity ....................................... F-5
Statements of Cash Flows ................................................ F-6
Notes to Financial Statements .......................................... F-7
F-1
September 15, 1998,
except for Note 16, which is as of
February 1, 1999
To the Board of Directors and
Shareholders of
Ravenswood Winery, Inc.
REPORT OF INDEPENDENT ACCOUNTANTS
In our opinion, the accompanying balance sheet and the related statements of
income, shareholders' equity and cash flows present fairly, in all material
respects, the financial position of Ravenswood Winery, Inc. at June 30, 1998 and
1997, and the results of its operations and its cash flows for the fiscal years
then ended in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
ODENBERG, ULLAKKO, MURANISHI & CO. LLP
San Francisco, California
F-2
RAVENSWOOD WINERY, INC.
BALANCE SHEET
June 30, December 31,
----------------------------- -----------------------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
----------- ----------- ----------- -----------
(unaudited) (unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................... $ 102,272 $ 211,961 $ 3,171,374 $ 165,852
Accounts receivable, less allowance for doubtful
accounts of $10,000 at June 30, 1998 and
December 31, 1998 and $31,213 at June 30, 1997
and December 31, 1997 ...................................... 1,906,498 1,568,491 2,654,480 1,849,911
Refundable income taxes ..................................... 73,849 33,886 240,882 160,808
Inventories ................................................ 10,427,359 7,158,002 12,931,338 10,290,223
Prepaid expenses ............................................ 38,569 47,771 85,517 70,939
Deferred tax assets ......................................... 270,822 192,954 29,940 209,687
----------- ----------- ----------- -----------
Total current assets ..................................... 12,819,369 9,213,065 19,113,531 12,747,420
----------- ----------- ----------- -----------
Property, plant and equipment, less
accumulated depreciation ................................... 2,973,814 2,646,814 3,869,953 2,773,311
Notes receivable from shareholder ........................... 28,312 26,442 87,747 27,377
Other assets ................................................ 155,615 154,429 153,034 158,407
----------- ----------- ----------- -----------
3,157,741 2,827,685 4,110,734 2,959,095
----------- ----------- ----------- -----------
$15,977,110 $12,040,750 $23,224,265 $15,706,515
=========== =========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt ........................... $ 194,464 $ 154,890 $ 86,133 $ 163,011
Current portion of capital lease
obligations ................................................ 189,975 153,102 112,707 160,179
Short-term borrowings ....................................... 1,350,000 698,199 1,529,887 825,000
Accounts payable ............................................ 2,330,967 1,725,988 3,760,686 3,580,116
Accrued commissions ......................................... 246,483 148,628 375,252 263,526
Accrued liabilities ......................................... 381,013 278,577 247,460 252,509
----------- ----------- ----------- -----------
Total current liabilities ................................ 4,692,902 3,159,384 6,112,125 5,244,341
Long-term liabilities:
Long-term debt, net ......................................... 1,795,665 1,514,577 1,787,858 1,730,832
Notes payable to shareholders, net .......................... 50,000 50,000 50,000 50,000
Capital lease obligations, net .............................. 199,719 192,697 375,226 201,604
Convertible debentures ...................................... 865,000 865,000 2,552,500 865,000
----------- ----------- ----------- -----------
Total liabilities ........................................ 7,603,286 5,781,658 10,877,709 8,091,777
----------- ----------- ----------- -----------
Shareholders' equity:
Preferred stock, no par value; one million shares
authorized, none issued .................................... -- -- -- --
Common stock, no par value; 20
million shares authorized .................................. 804,146 737,804 2,491,646 732,804
Retained earnings ........................................... 7,569,678 5,521,288 9,854,910 6,881,934
----------- ----------- ----------- -----------
Total shareholders' equity ............................... 8,373,824 6,259,092 12,346,556 7,614,738
----------- ----------- ----------- -----------
Commitments (See Notes 11, 13 and 16)
$15,977,110 $12,040,750 $23,224,265 $15,706,515
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
F-3
RAVENSWOOD WINERY, INC.
STATEMENT OF INCOME
Fiscal year ended June 30, Six months ended December 31,
--------------------------------- ---------------------------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
------------ ------------ ------------ ------------
(unaudited) (unaudited)
Gross sales .......................................... $ 17,016,866 $ 12,246,716 $ 12,194,996 $ 8,855,184
Less excise taxes ................................. 552,499 330,133 275,795 196,998
Less discounts, returns and allowances ............ 573,762 393,881 336,684 273,403
------------ ------------ ------------ ------------
Net sales ............................................ 15,890,605 11,522,702 11,582,517 8,384,783
Cost of goods sold ................................... 7,397,362 5,196,152 5,066,471 3,652,357
------------ ------------ ------------ ------------
Gross profit ......................................... 8,493,243 6,326,550 6,516,046 4,732,426
Operating expenses ................................... 4,105,089 3,354,595 2,340,009 1,851,859
------------ ------------ ------------ ------------
Operating income ..................................... 4,388,154 2,971,955 4,176,037 2,880,567
------------ ------------ ------------ ------------
Other income (expense):
Interest expense .................................. (523,551) (392,600) (225,669) (164,388)
Impairment loss on vineyard ....................... -- (136,144) -- --
Other, net ........................................ 49,211 91,486 78,713 50,800
------------ ------------ ------------ ------------
(474,340) (437,258) (146,956) (113,588)
------------ ------------ ------------ ------------
Income before income taxes ........................... 3,913,814 2,534,697 4,029,081 2,766,979
Provision for income taxes ........................... 1,592,169 1,066,503 1,743,849 1,133,078
------------ ------------ ------------ ------------
Net income ........................................... $ 2,321,645 $ 1,468,194 $ 2,285,232 $ 1,633,901
============ ============ ============ ============
Basic earnings per share ............................. $ 0.67 $ 0.40 $ 0.66 $ 0.47
============ ============ ============ ============
Weighted average number of
common shares outstanding ........................... 3,491,981 3,636,356 3,478,954 3,505,106
============ ============ ============ ============
Diluted earnings per share ........................... $ 0.63 $ 0.39 $ 0.61 $ 0.44
============ ============ ============ ============
Weighted average number of common shares
and equivalents outstanding ......................... 3,794,732 3,939,107 3,847,331 3,807,857
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
F-4
RAVENSWOOD WINERY, INC.
STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock
------------------------------- Retained
Shares Amount Earnings Total
------------ ------------ ------------ ------------
(as restated)
Balance at June 30, 1996 ................................... 3,149,998 $ 644,512 $ 4,053,094 $ 4,697,606
Compensation related to deferred compensation plan ...... 93,292 93,292
Net income .............................................. 1,468,194 1,468,194
------------ ------------ ------------ ------------
Balance at June 30, 1997 ................................... 3,149,998 737,804 5,521,288 6,259,092
Repurchase of common shares from former officer ......... (157,500) (5,000) (273,255) (278,255)
Compensation related to deferred compensation plan ...... 71,342 71,342
Net income .............................................. 2,321,645 2,321,645
------------ ------------ ------------ ------------
Balance at June 30, 1998 ................................... 2,992,498 804,146 7,569,678 8,373,824
Shares issued related to deferred compensation plan ..... 345,731
Shares issued ........................................... 212,623 1,687,500 1,687,500
Net income .............................................. 2,285,232 2,285,232
------------ ------------ ------------ ------------
Balance at December 31, 1998 (unaudited) ................... 3,550,852 $ 2,491,646 $ 9,854,910 $ 12,346,556
============ ============ ============ ============
<FN>
See accompanying notes to financial statements.
</FN>
F-5
RAVENSWOOD WINERY, INC.
STATEMENT OF CASH FLOWS
Six months ended
Fiscal year ended June 30, December 31,
----------------------------- -----------------------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Operations:
Net income ................................................... $ 2,321,645 $ 1,468,194 $ 2,285,232 $ 1,633,901
Items not requiring the current use of cash:
Depreciation and amortization .............................. 168,784 225,026 170,668 119,314
Deferred income taxes ...................................... (77,868) (56,608)
Deferred compensation ...................................... 71,342 93,292
Impairment loss on vineyard ................................ 136,144
Changes in other operating items:
Accounts receivable ....................................... (338,007) (12,721) (747,982) (281,420)
Refundable income taxes ................................... (39,963) 22,006 73,849 (126,922)
Inventories ............................................... (3,269,357) (2,014,283) (2,503,980) (3,132,222)
Prepaid expenses .......................................... 9,202 (29,734) (46,947) (23,168)
Other assets .............................................. (8,220) 15,586 (6,560)
Accounts payable .......................................... 604,979 475,547 1,429,719 1,854,128
Accrued liabilities ....................................... 200,292 (56,640) (4,786) 87,146
----------- ----------- ----------- -----------
Cash provided by (used for) operations .................. (357,171) 265,809 655,773 124,197
----------- ----------- ----------- -----------
Investments:
Additions to plant and equipment ............................. (490,621) (312,386) (831,901) (243,229)
Shareholder receivables ...................................... (59,435)
Cash used for investing activities ...................... (490,621) (312,386) (891,336) (243,229)
----------- ----------- ----------- -----------
Financing:
Short-term borrowings, net ................................... 651,801 (351,801) 150,000 126,801
Proceeds from long-term debt 410,642 278,225
Repayments of long-term debt ................................. (46,085) (155,794) (220,335) (53,878)
Proceeds from convertible debentures and common
shares issued .............................................. 3,375,000
Repurchase of common shares from former officer .............. (278,255) (278,225)
----------- ----------- ----------- -----------
Cash provided by (used for) financing activities ........ 738,103 (507,595) 3,304,665 72,923
----------- ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents .............. (109,689) (554,172) 3,069,102 (46,109)
Cash and cash equivalents at beginning of period .............. 211,961 766,133 102,272 211,961
----------- ----------- ----------- -----------
Cash and cash equivalents at end of period .................... $ 102,272 $ 211,961 $ 3,171,374 $ 165,852
=========== =========== =========== ===========
Cash paid during the period for:
Interest ..................................................... $ 484,670 $ 378,162 $ 209,497 $ 139,617
=========== =========== =========== ===========
Income taxes ................................................. $ 1,660,344 $ 1,125,404 $ 1,670,000 $ 1,260,000
=========== =========== =========== ===========
<FN>
See accompanying notes to financial statements.
</FN>
F-6
RAVENSWOOD WINERY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1--Organization, operations and summary of significant accounting policies:
Organization
Ravenswood Winery, Inc. (the "Company") was founded in 1976, became a California
Limited Partnership in 1979, and was subsequently incorporated in the State of
California on December 23, 1986. The Company produces, markets, and sells
California wines exclusively under the Ravenswood brand name.
Concentration of risk
The Company obtains its grapes from over sixty independent grape growers and
bulk wine suppliers located in Sonoma, Napa and other North Coast Counties.
These sources account for 95% or more of its annual wine production. The Company
relies upon certain varietals, notably Zinfandel, which accounted for
approximately 63% of the total dollar sales for the fiscal year ended June 30,
1998. In addition, the Company relies on the winemaking capacity of other
companies and is limited to one-year contractual obligations with all custom
crush facilities.
The Company performs ongoing credit evaluations of its distributors and
customers and generally does not require collateral. The Company maintains
reserves for potential credit losses and such losses have been within
management's expectations.
The Company places its cash and temporary cash investments with financial
institutions. At June 30, 1998 and periodically throughout the fiscal year, such
investments were in excess of FDIC insurance limits.
A summary of significant accounting policies follows:
Revenue recognition
Sales are recorded when merchandise is shipped.
Inventories
Inventories are stated at the lower of cost or market (on the first-in,
first-out basis), and include finished goods, raw materials, packaging materials
and product merchandise. Finished goods include costs of raw materials (grapes
and bulk wine), packaging, labor used in wine production, bottling, warehousing
and overhead on winery facilities and equipment.
Costs associated with growing crops are recorded as inventory and are recognized
as inventory costs in the fiscal year in which the related crop is harvested.
In accordance with general practice in the wine industry, wine inventories are
included in current assets although a portion of such inventories may be aged
for periods longer than one year.
Property, plant and equipment
Property, plant and equipment are carried at cost. The cost of repairs and
maintenance is expensed as incurred; major replacements and improvements are
capitalized. Costs incurred in developing vineyards, including interest costs,
are capitalized until the vineyards become commercially productive. When assets
are retired or disposed of, the cost and accumulated depreciation are removed
from the accounts, and any resulting gains or losses are included in
F-7
income in the year of disposition. Depreciation is computed using both the
straight-line and accelerated methods over the estimated useful lives of the
assets. Leased equipment under capitalized leases are generally amortized over
the terms of the leases or their estimated useful lives, whichever is shorter.
Impairment of long-lived assets is measured on the basis of anticipated
undiscounted cash flows for each asset. Based upon the Company's analysis, a
$136,144 impairment loss relating to the vineyards was reported for the fiscal
year ended June 30, 1997. The impairment loss is included in other income and
expenses in the accompanying statement of income.
Cash and cash equivalents
The Company considers all short-term interest-bearing investments with original
maturities of less than three months to be cash equivalents.
Income taxes
Deferred income taxes are computed using the liability method. Under the
liability method, taxes are recorded based on the future tax effects of the
difference between the tax and financial reporting bases of the Company's assets
and liabilities.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results when ultimately realized could differ from those estimates.
Fair value of financial instruments
The carrying amount of accounts receivable, prepaid expenses, notes receivable
from shareholders, accounts payable, accrued liabilities, short-term borrowings,
long-term debt, capital lease obligations and convertible debentures is a
reasonable estimate of the fair value of these financial instruments.
Earnings per share
Basic earnings per share represents income available to common shareholders
divided by the weighted average number of common shares outstanding during the
measurement period, after giving retroactive effect to: (1) shares issued under
a deferred compensation arrangement in July 1998 (see Notes 11 and 16); (2) the
63-to-1 stock split approved in February 1999 (see Note 16); and (3) common
stock issued in December 1998 (using the "treasury stock method") at prices
below the assumed initial public offering price (see Note 16).
Diluted earnings per share represents the income available to common
shareholders divided by: (1) the weighted average number of common shares
outstanding during the measurement period, after giving retroactive effect to
(a) shares issued under a deferred compensation
F-8
arrangement in July 1998, (b) the stock split approved in February 1999, and (c)
common stock issued in December 1998 (using the "treasury stock method") at
prices below the assumed initial public offering price; and (2) the potentially
dilutive common shares issuable for convertible debt that was outstanding during
the measurement period.
Unaudited interim financial statements
The unaudited interim financial statements for the six month periods ended
December 31, 1998 and 1997 include, in the opinion of management, all
adjustments, consisting of normal recurring accruals, considered necessary for a
fair presentation of such financial information. Operating results for the
six-month period ended December 31, 1998 are not necessarily indicative of the
results that may be expected for the year ending June 30, 1999.
Reclassification of financial statement presentation
Certain reclassifications have been made to the fiscal 1997 financial statements
to conform to the fiscal 1998 financial statement presentation.
NOTE 2--Inventories: Inventories are summarized as follows:
June 30,
------------------------------
1 9 9 8 1 9 9 7
-------------- -------------
Bulk wine ..................... $ 7,898,937 $ 5,341,378
Bottled wine .................. 2,285,862 1,636,409
Crop costs ..................... 37,691 44,675
Supplies ..................... 72,902 41,161
Tasting room merchandise ...... 131,967 94,379
------------- ------------
$ 10,427,359 $ 7,158,002
============= ============
Certain of the foregoing assets are pledged as security for certain indebtedness
(See Notes 5 and 6).
NOTE 3--Property, plant and equipment:
Property, plant and equipment is summarized as follows:
June 30,
----------------------------
1 9 9 8 1 9 9 7
------------ -------------
Land ................................... $ 245,135 $ 245,135
Vineyards .............................. 56,264 56,264
Vineyards under development ............ 235,879 123,075
Building and improvements .............. 1,716,781 1,637,635
Leasehold improvements ................. 94,828 39,011
Machinery and equipment ................ 706,164 584,052
Barrels and equipment held under
capital leases ........................ 870,468 611,657
Tanks .................................. 145,688 68,874
Office equipment ....................... 110,678 99,193
Transportation equipment ............... 12,409 13,309
------------ ------------
4,194,294 3,478,205
Less--accumulated depreciation ......... 1,220,480 831,391
------------ ------------
$ 2,973,814 $ 2,646,814
============ ============
Included in property, plant and equipment are barrels and equipment leased under
capital leases with cost and accumulated depreciation totaling $870,468 and
$472,185, respectively, at June 30, 1998; and $611,657 and $249,125,
respectively, at June 30, 1997.
F-9
NOTE 4--Notes receivable from shareholder:
The notes receivable from shareholder at June 30, 1998 and 1997 consist of two
unsecured notes bearing annual interest at 8.5% and due January 2004 and April
2004.
NOTE 5--Short-term borrowing arrangements:
At June 30, 1998, the Company has a $2 million revolving line of credit with
Pacific Coast Farm Credit Services, ACA ("Association") that expires on June 1,
2001. The loan agreement provides that the principal advances under the facility
cannot exceed certain percentages of eligible accounts receivable and wine
inventories as defined in the agreement. The borrowings bear annual interest at
a variable rate established by the Association (8.86% and 9.57% at June 30, 1998
and 1997, respectively). The borrowings are secured by the Company's accounts
receivable, wine inventories and equipment. Borrowings under the line of credit
at June 30, 1998 and 1997 were $1,350,000 and $698,199, respectively.
The loan contains various covenants which include, among other things, a
requirement to maintain a minimum working capital of $3.25 million, a ratio of
liabilities to tangible net worth of not greater than 1.5 to 1, and a current
ratio of at least 1.75 to 1, and provides for restrictions on the payment of
dividends and distributions to shareholders.
F-10
NOTE 6--Long-term debt:
Long-term debt is summarized as follows:
June 30,
------------------------
1998 1997
---------- ----------
Note payable to Pacific Coast Farm Credit
Services, ACA ("Association") with annual
interest at a variable rate established by
the Association (7.65% at June 30, 1998),
payable in quarterly interest installments
until December 1, 1999 and commencing March
1, 2000 in quarterly principal and interest
installments of $34,795 through December 1,
2024, secured by property and equipment
(see Note 3) ........................................ $1,552,500
Note payable to an individual with annual
interest at 11%, payable in monthly
interest installments until January 1,
2000, thereafter payable in monthly
principal and interest installments (as
defined in the agreement) through October
1, 2009, secured by property and equipment
(see Note 3) ........................................ $1,450,000
Note payable to the Association with annual
interest at a variable rate established by
the Association (8.86% at June 30, 1998),
payable in quarterly principal and interest
installments of $17,390 through June 1,
2002, secured by property and equipment
(see Note 3) ........................................ 227,265
Revolving equity line of credit note payable
($835,000 commitment) to the Association
with annual interest at a variable rate
established by the Association (7.65% at
June 30, 1998), payable in quarterly
interest only installments until December
1, 1999 and commencing March 1, 2000 in
equal quarterly principal and interest
installments through December 1, 2024,
secured by property and equipment (see Note
3) .................................................. 29,887
Note payable to bank with annual interest at
10%, payable in monthly principal and
interest installments of $1,600 through
November 11, 2000, secured by computer
equipment (see Note 3) .............................. 39,304 53,513
Other unsecured notes payable with annual
interest ranging from 10% to 11%, payable
in monthly principal and interest
installments as defined to January 31, 1999
through June 2001 ................................... 26,030 40,816
---------- ----------
1,874,986 1,544,329
Less--current portion ................................ 79,321 29,752
---------- ----------
$1,795,665 $1,514,577
========== ==========
Scheduled annual maturities of long-term debt are as follows: $79,321 - fiscal
1999; $124,281 - fiscal 2000; $90,443 - fiscal 2001; $84,161 - fiscal 2002;
$27,420 - fiscal 2003 and $1,469,360 thereafter.
F-11
NOTE 7--Notes payable to shareholders:
Notes payable to shareholders are summarized as follows:
June 30,
-------------------
1 9 9 8 1 9 9 7
-------- --------
Notes payable to Joel Peterson, unsecured, with annual interest ranging
from 10% to 11%, due on demand and on June 30, 2004 ................... $ 46,143 $ 56,138
Notes payable to W. Reed Foster, unsecured, with annual interest ranging
from 10% to 11%, due on demand and on June 30, 2004 ................... 119,000 119,000
-------- --------
165,143 175,138
Less--current portion .................................................. 115,143 125,138
-------- --------
$ 50,000 $ 50,000
======== ========
NOTE 8--Capital lease obligations:
The Company leases barrels and other equipment that are accounted for as capital
leases. Minimum future lease payments under the capital leases are as follows:
Fiscal year
-----------
1999 ......................................... $ 222,844
2000 ......................................... 155,852
2001 ......................................... 59,935
2002 ......................................... 14,736
2003 ......................................... 1,994
----------
Net minimum lease payments ................. 455,361
Less--amount representing interest ........... 65,667
----------
Present value of net minimum lease payments ... 389,694
Less--current portion ....................... 189,975
----------
$ 199,719
==========
The net book value of leased barrels and equipment included in property, plant
and equipment at June 30, 1998 is $398,283.
NOTE 9--Convertible debentures:
At June 30, 1998 and 1997, the Company had $865,000 of convertible debentures
outstanding. The terms of the convertible debentures provide for current
interest payments to be made based on a floating index tied to prime bank rates
for a five-year period (9.5% at June 30, 1998). The initial rate and minimum
interest rate was set at 8% per annum, with a ceiling rate of 11%.
Conversion rights allow debenture holders to convert debt into 302,750 (as
restated for 63-to-1 stock split) shares of common stock at the option of the
debenture holders for a five-year period ending December 31, 1999. The
conversion price is stated at $2.857 per share. After the five-year conversion
period, the Company may redeem any convertible debt not converted to stock at
any time until the debenture's maturity on December 31, 2004.
F-12
NOTE 10--Income taxes:
The provision for income taxes is as follows:
Fiscal year ended June 30,
--------------------------------
1 9 9 8 1 9 9 7
----------- -----------
Current tax expense:
Federal ........................... $ 1,306,069 $ 868,184
State and local ................... 363,968 254,927
----------- -----------
1,670,037 1,123,111
----------- -----------
Deferred tax benefit:
Federal ........................... (71,875) (48,771)
State and local ................... (5,993) (7,837)
----------- -----------
(77,868) (56,608)
----------- -----------
$ 1,592,169 $ 1,066,503
=========== ===========
Deferred income taxes are provided for the temporary differences between the
financial reporting and tax bases of the Company's assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized.
Deferred tax assets and liabilities are comprised of the following:
June 30,
--------------------------
1 9 9 8 1 9 9 7
--------- ---------
Deferred tax assets:
Deferred compensation ...................... $ 240,882 $ 212,670
State taxes ................................ 37,074
--------- ---------
277,956 212,670
--------- ---------
Deferred tax liabilities:
Depreciation and amortization .............. (7,134)
Inventory costing .......................... (19,716)
--------- ---------
(7,134) (19,716)
--------- ---------
Net deferred tax asset ....................... $ 270,822 $ 192,954
========= =========
A reconciliation of income tax computed at the federal statutory corporate tax
rate to the provision for income taxes follows:
Fiscal year ended June 30,
------------------------------------------------------------
1 9 9 8 1 9 9 7
------------------------- -------------------------
Amount % Amount %
---------- ----- ---------- -----
Income taxes at federal statutory rate .............................. $1,330,697 34.0 % $ 861,797 34.0 %
Increase in income taxes resulting from:
State and local income taxes net of federal benefit ................. 228,567 5.84 155,630 6.14
Permanent differences ............................................... 32,905 .86 49,076 1.94
---------- ----- ---------- -----
$1,592,169 40.70% $1,066,503 42.08%
========== ===== ========== =====
NOTE 11--Deferred compensation agreement:
On August 25, 1992, the Company entered into a deferred compensation agreement
with its chairman and chief executive officer, W. Reed Foster. The agreement
established an account
F-13
with 5,487.8 units. Each unit was the equivalent value of one share of common
stock and contained an equivalent right to cash and common stock dividends and
all stock splits and other benefits paid to the shareholders of the Company. At
June 30, 1998, the estimated fair value of the units was $111.00 per unit, which
is included in common stock in the accompanying balance sheet. Compensation
expense relating to this agreement is $71,342 and $93,292, respectively, for the
fiscal years ended June 30, 1998 and 1997 and is included in operating expenses
in the accompanying statement of income.
Under the terms of the agreement, upon termination of employment, the Company
had the option of paying the full amount of the account as follows: (1) in stock
within thirty days of termination of employment or (2) in equal cash
installments over a four-year period plus interest at prime rate (as defined in
the agreement). As of July 1, 1998, the deferred compensation agreement was
terminated and, the Company issued 345,731 (as restated for the 63-to-1 stock
split) shares of common stock to Mr. Foster. (see Note 16).
NOTE 12--Voting trust:
On August 25, 1992, the Board of Directors authorized the creation of a Voting
Trust for all of the common stock of the Company. On November 1, 1993, the
shareholders approved the terms and conditions contained in the Trust which
provides for four trustees, who currently are: Joel Peterson, W. Reed Foster,
Justin Faggioli and James Wisner. The original Voting Trust Agreement was
replaced by a Voting Trust Agreement which is dated May 27, 1998 and which
extends to May 26, 2008. As long as Mr. Peterson is a trustee of the Voting
Trust, all decisions except decisions to amend or terminate the Voting Trust
require the approval of Mr. Peterson and one other trustee; however, decisions
to amend or terminate the Voting Trust require the approval of Mr. Peterson and
two other trustees. If Mr. Peterson is no longer a trustee of the voting trust,
all decisions require the approval of three trustees; however, decisions to
amend or terminate the Voting Trust require the approval of the three remaining
trustees and Mr. Peterson's successor trustee (who shall be appointed by the
three remaining trustees). As of December 31, 1998, 2,150,681 (as restated for
63-to-1 stock split) shares of common stock were subject to the terms of the
Voting Trust (see Note 16).
NOTE 13--Commitments and contingencies:
The Company leases certain warehouse space under noncancellable operating leases
that expire on dates ranging from October 1999 to October 2008. Under the terms
of certain of the leases, rent is contingent on the amount of bulk wine and/or
case goods stored at any given time and is adjusted annually for increases in
building operating costs. Rental expense (including contingent rent) was
$468,616 for 1998 and $317,507 for 1997. Minimum future rental payments for each
of the next five fiscal years and thereafter are as follows: $224,432 - fiscal
1999; $145,764 - fiscal 2000; $73,796 - fiscal 2001; $61,252 - fiscal 2002;
$61,252 - fiscal 2003 and $106,176 thereafter.
The Company has contracted with various growers and certain wineries to supply
approximately 95% of its future grape and bulk wine requirements. While most of
these contracts call for prices to be determined by market conditions, several
long-term contracts provide for minimum grape or bulk wine purchase prices.
The Company has established a plan to achieve Year 2000 compliance in its
electronic information systems and does not believe this plan will materially
affect the Company's results of operations or financial position.
F-14
NOTE 14--401(k) savings plan:
The Company has a 401(k) savings plan that is available to eligible employees.
Employer contributions to the plan are at the discretion of the Board of
Directors and amounted to $53,089 in the 1998 fiscal year and $41,057 in the
1997 fiscal year.
NOTE 15--Earnings per share:
Basic earnings per share represents income available to common shareholders
divided by the weighted average number of common shares outstanding during the
measurement period, after giving retroactive effect to: (1) shares issued under
a deferred compensation arrangement in July 1998 (see Notes 11 and 16); (2) the
63-to-1 stock split approved in February 1999 (see Note 16); and (3) common
stock issued in December 1998 (using the "treasury stock method") at prices
below the assumed initial public offering price (see Note 16).
Diluted earnings per share represents the income available to common
shareholders divided by: (1) the weighted average number of common shares
outstanding during the measurement period, after giving retroactive effect to
(a) shares issued under a deferred compensation arrangement in July 1998, (b)
the 63-to-1 stock split approved in February 1999, and (c) common stock issued
in December 1998 (using the "treasury stock method") at prices below the assumed
initial public offering price; and (2) the potentially dilutive common shares
issuable for convertible debt that was outstanding during the measurement
period.
F-15
A summary of the basic and diluted earnings per share calculations is as
follows:
Fiscal year ended June 30, Six months ended December 31,
---------------------------- ----------------------------
1 9 9 8 1 9 9 7 1 9 9 8 1 9 9 7
---------- ---------- ---------- ----------
(unaudited) (unaudited)
BASIC
Average shares outstanding [A] ................................ 3,005,625 3,150,000 2,992,500 3,018,750
Shares issued under deferred
compensation arrangement [B] ................................. 345,731 345,731 345,731 345,731
Shares issued in December 1998 [C] ............................ 140,625 140,625 140,723 140,625
---------- ---------- ---------- ----------
Weighted average number of common shares outstanding .......... 3,491,981 3,636,356 3,478,954 3,505,106
========== ========== ========== ==========
Net income .................................................... $2,321,645 $1,468,194 $2,285,232 $1,633,901
========== ========== ========== ==========
Per share amount .............................................. $ 0.67 $ 0.40 $ 0.66 $ 0.47
========== ========== ========== ==========
DILUTED
Average shares outstanding [A] ................................ 3,005,625 3,150,000 2,992,500 3,018,750
Shares issued under deferred compensation arrangement [B] ..... 345,731 345,731 345,731 345,731
Shares issued in December 1998 [C] ............................ 140,625 140,625 140,723 140,625
Net effect of potentially dilutive common stock issuable for
convertible debentures ....................................... 302,751 302,751 368,377 302,751
---------- ---------- ---------- ----------
Weighted average number of common shares and
equivalents outstanding ...................................... 3,794,732 3,939,107 3,847,331 3,807,857
========== ========== ========== ==========
Net income ....................................................... $2,321,645 $1,468,194 $2,285,232 $1,633,901
Interest on convertible debt, net of tax benefit ................. 49,305 55,793 45,168 24,653
---------- ---------- ---------- ----------
Net income, after adding interest on debentures .................. $2,370,950 $1,523,987 $2,330,400 $1,658,554
========== ========== ========== ==========
Per share amount .............................................. $ 0.63 $ 0.39 $ 0.61 $ 0.44
========== ========== ========== ==========
<FN>
- ------------
[A] Reflects the retroactive effect of the 63-to-1 stock split approved in
February 1999.
[B] Reflects the retroactive effect of the shares issued under a deferred
compensation agreement in July 1998.
[C] Represents the retroactive effect using the "treasury stock method" for
common stock issued in December 1998 at prices below the assumed initial
public offering price.
</FN>
NOTE 16--Subsequent events:
As of July 1, 1998, the Company and its chairman and chief executive officer, W.
Reed Foster (see Note 11), agreed to terminate his deferred compensation
agreement. Under the terms of the agreement, the Company issued Mr. Foster
345,731 (as restated for 63-to-1 stock split) shares of common stock and agreed
to loan Mr. Foster up to $335,000 to pay taxes related to his receipt of these
shares. The loan, which was partially funded in December 1998, with the balance
to be funded in April 1999, is due on December 21, 2008 with interest payable
annually at 5.3% per annum. In connection with the termination of the deferred
compensation agreement, the Company amended the Voting Trust to include the
345,731 shares issued to Mr. Foster.
In December 1998, the Company completed a sale of $1,687,500 of convertible
debentures due December 31, 2008 and $1,687,500 of common stock. Each $10,000
debenture is convertible into 900 (as restated for 63-to-1 stock split) shares
of common stock at any time prior to December 31, 2003 upon request of the
holder. If the debentures are not converted,
F-16
the Company may redeem them at face value at any time during the period from
January 1, 2004 until the maturity date. The Company pays interest quarterly on
the debentures in an amount equal to the prime interest rate quoted by Bank of
America NT & SA plus 1%. The interest rate is adjusted every 18 months, except
that in no period may the interest rate adjustment exceed 2% or the maximum
interest rate exceed 11%.
In January 1999, the Company entered into an agreement to lease approximately 30
acres of land in Sonoma County, California from Sandra D. Donnell and Bruce B.
Donnell, the wife and brother-in-law, respectively, of Justin M. Faggioli, the
Company's Executive Vice President. The Company is in the process of building a
new winery facility on the leased property to expand its production capacity.
The lease provides for monthly payments that are adjusted annually and has a
term ending December 31, 2032. The Company is in the process of negotiating bank
financing required for the construction of the new facility.
On February 1, 1999, the Board of Directors declared a 63-to-1 stock split of
the Company's common stock. All shares and per share data have been restated to
reflect the stock split. In addition, the Board of Directors has authorized one
million shares of preferred stock and increased the number of authorized shares
of common stock from one million to twenty million.
On February 1, 1999, the Company's Board of Directors adopted and the Company's
shareholders approved the 1999 Equity Incentive Plan to provide for the grant of
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), nonstatutory stock options,
restricted stock awards and other stock-based awards to the Company's officers,
employees, directors, independent contractors, consultants, vendors and
suppliers. There are 500,000 shares of common stock reserved for issuance under
the plan. No options have been granted under the plan to date, although the
Company intends to grant options to purchase an aggregate of 279,500 shares of
common stock in connection with its initial public offering. No awards may be
granted under the plan after January 2009, but the vesting of awards previously
granted may extend beyond that date.
On February 1, 1999, the Company's Board of Directors adopted and the Company's
shareholders approved the Employee Stock Purchase Plan with 50,000 shares of
common stock available for issuance thereunder. The plan, which is intended to
qualify as an employee stock purchase plan under Section 423 of the Code,
provides that all employees of the Company, including directors of the Company
who are employees, whose customary employment is more than 20 hours per week for
more than five months in any calendar year, are eligible to participate in the
plan. Employees who would immediately after the grant own 5% or more of the
total combined voting power or value of the stock of the Company or any
subsidiary are not eligible to participate. Eligible employees may elect to have
up to 10% of their earnings withheld and applied to the purchase of common stock
at a price equal to as low as 85% of the average market price per share (as
defined in the plan) of the common stock on either the first day or the last day
of the relevant offering period, whichever is lower. An employee may not
purchase more than 500 shares in any one offering period. No shares of common
stock have been issued pursuant to the purchase plan to date.
On February 1, 1999, the Company's board of directors approved a resolution to
conduct an initial public offering in early 1999.
F-17
[GRAPHIC OMITTED]
(Full-page Ravenswood slogan "No Wimpy Wines" with logo)
[GRAPHIC OMITTED]
(Full-page Ravenswood logo)
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Articles 5 and 6 of Ravenswood's Articles provide for the indemnification of the
officers and directors of the company to the fullest extent permissible under
California law. In addition, Article 6 of Ravenswood's Bylaws, as amended,
requires that Ravenswood indemnify, and, in certain instances, advance expenses
to, its agents with respect to certain costs, expenses, judgments, fines,
settlements and other amounts incurred in connection with any proceeding, to the
fullest extent permitted by California law. Persons covered by this
indemnification provision include current and former directors, officers,
employees and other agents of Ravenswood, as well as persons who serve at the
request of Ravenswood as directors, officers, employees or agents of another
enterprise.
Section 317(b) of the California Corporations Code (the "Corporations Code")
provides that a corporation may indemnify any person who was or is a party or is
threatened to be made a party to any "proceeding" (as defined in Section 317(a)
of the Corporations Code), other than an action by or in the right of the
corporation to procure a judgment in its favor, by reason of the fact that such
person is or was a director, officer, employee or other agent of the corporation
(collectively, an "Agent"), against expenses, judgments, fines, settlements and
other amounts actually and reasonably incurred in connection with such
proceeding if the Agent acted in good faith and in a manner the Agent reasonably
believed to be in the best interests of the corporation and, in the case of a
criminal proceeding, had no reasonable cause to believe the conduct was
unlawful.
Section 317(c) provides that a corporation shall have power to indemnify any
Agent who was or is a party or is threatened to be made a party to any
threatened, pending or completed action by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that such person is or was
an Agent, against expenses actually and reasonably incurred by the Agent in
connection with the defense or settlement of such action if the Agent acted in
good faith and in a manner such Agent believed to be in the best interests of
the corporation and its shareholders.
Section 317(c) further provides that no indemnification may be made thereunder
for any of the following: (i) in respect of any claim, issue or matter as to
which the Agent shall have been adjudged to be liable to the corporation, unless
and only to the extent that the court in which such proceeding is or was pending
shall determine that such Agent is fairly and reasonably entitled to
indemnification for expenses, (ii) of amounts paid in settling or otherwise
disposing of a pending action without court approval and (iii) of expenses
incurred in defending a pending action which is settled or otherwise disposed of
without court approval. Section 317(d) of the Corporations Code requires that an
Agent be indemnified against expenses actually and reasonably incurred to the
extent the Agent has been successful on the merits in the defense of proceedings
referred to in subdivisions (b) or (c) of Section 317.
Except as provided in Section 317(d), and pursuant to Section 317(e),
indemnification under Section 317 shall be made by the corporation only if
specifically authorized and upon a determination that indemnification is proper
in the circumstances because the Agent has met the applicable standard of
conduct set forth in Section 317(b) or (c), which determination is made by any
of the following: (i) a majority vote of a quorum consisting of directors who
are
II-1
not parties to the proceeding, (ii) if such a quorum of directors is not
obtainable, by independent legal counsel in a written opinion, (iii) approval of
the shareholders, provided that any shares owned by the Agent may not vote
thereon, or (iv) the court in which such proceeding is or was pending. Pursuant
to Section 317(f) of the Corporations Code, the corporation may advance expenses
incurred in defending any proceeding upon receipt of an undertaking by the Agent
to repay such amount if it is ultimately determined that the Agent is not
entitled to be indemnified.
Section 317(h) provides, with certain exceptions, that no indemnification shall
be made under Section 317 where it appears that it would be inconsistent with a
provision of the corporation's articles or, bylaws, a shareholder resolution or
an agreement which prohibits or otherwise limits indemnification, or where it
would be inconsistent with any condition expressly imposed by a court in
approving a settlement.
In addition, Article 6 of Ravenswood's Bylaws authorizes Ravenswood to purchase
and maintain insurance on behalf of any person indemnified by Ravenswood.
Ravenswood expects to obtain a directors and officers liability insurance policy
prior to the closing of this offering.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the various expenses to be incurred in connection
with the sale and distribution of the securities being registered hereby, other
than underwriting discounts and commissions. All amounts are estimated except
the Securities and Exchange Commission registration fee and the National
Association of Securities Dealers, Inc. filing fee.
SEC registration fee ............................................. $ 4,316
National Association of Securities Dealers, Inc. filing fee ...... 2,053
Blue Sky fees and expenses ....................................... 2,000
Nasdaq National Market filing fee ................................. 63,725
Accounting fees and expenses .................................... 25,000
Legal fees and expenses .......................................... 85,000
Printing and engraving expenses ................................. 60,000
Registrar and Transfer Agent's fees .............................. 5,000
Miscellaneous fees and expenses ................................. 42,906
---------
Total: ............................................................ $290,000
=========
Item 26. Recent Sales of Unregistered Securities.
Since January 1996, Ravenswood has sold and issued the following unregistered
securities (share numbers and dollar amounts do not reflect the 63-for-1 split
to be effected in connection with this offering):
As of July 1, 1998, Ravenswood issued 5,487.8 shares of common stock to W. Reed
Foster, Ravenswood's Chairman and Chief Executive Officer, in connection with
the termination of a deferred compensation agreement entered into in August
1992.
From August until December 1998, Ravenswood sold a total of 3,375 shares of
common stock to accredited investors at a price of $500.00 per share and 168.75
convertible debentures at a price of $10,000 per debenture, for aggregate
consideration of $3,375,000 in cash.
II-2
The shares of common stock and debentures issued in the above transactions were
offered and sold in reliance upon the exemptions from registration under Section
4(2) of the Securities Act, or Regulation D or Rule 701 promulgated under the
Securities Act. The recipients of the above-described securities represented
their intention to acquire the securities for investment only and not with a
view to distribution thereof. Appropriate legends were affixed to the stock
certificates and convertible debentures issued in such transactions. All
recipients had adequate access, through employment or other relationships, to
information about Ravenswood.
Item 27. Exhibits and Financial Statement Schedules.
a. Index to Exhibits
Exhibit
Number Description of Document
- -------- ---------------------------------------------------------------------
1.1 Form of Underwriting Agreement*
3.1 Amended and Restated Articles of Incorporation of Ravenswood Winery,
Inc.
3.2 Amended and Restated Bylaws of Ravenswood Winery, Inc.
4.1 Specimen Stock Certificate*
5.1 Opinion of Farella Braun & Martel LLP*
9.1 Voting Trust Agreement*
10.1 1999 Equity Incentive Plan for Ravenswood Winery, Inc.
10.2 Employee Stock Purchase Plan for Ravenswood Winery, Inc.
10.3 Form of Indemnification Agreement for Ravenswood Winery, Inc.
10.4 Revolving Line of Credit Promissory Note and Agreement with Pacific
Coast Farm Credit Services, ACA, dated as of April 1, 1998.
10.5 Revolving Equity Line of Credit Promissory Note and Loan Agreement
with Pacific Coast Farm Credit Services, ACA, dated as of April 8,
1998.
10.6 Notes payable from Ravenswood Winery, Inc. to W. Reed Foster
10.7 Notes payable from Ravenswood Winery, Inc. to Joel E. Peterson and
notes payable from Joel E. Peterson to Ravenswood Winery, Inc.
10.8 Quarry Winery Lease Agreement, dated as of January 1, 1999
10.9 Stock Agreement and Amendment of Voting Trust by and between
Ravenswood Winery, Inc. and W. Reed Foster effective as of July 1,
1998 and note payable from W. Reed Foster to Ravenswood Winery, Inc.
10.10 Form of Convertible Subordinated Debenture dated as of January 1995.
10.11 Form of Convertible Subordinated Debenture dated as of December
1998.*
10.12 Marketing, Sales Agency and Administrative Services Agreement between
Ravenswood Winery, Inc. and Harvest Wines, Inc.
11.1 Statement of Computation of Earnings Per Share
23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP
23.2 Consent of Farella Braun & Martel LLP (included in Exhibit 5.1)*
25.1 Power of Attorney (see p. II-5)
27.1 Financial Data Schedule
- -----------
* To be filed by amendment
II-3
Item 28. Undertakings.
(a) The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that it will:
(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time as the initial bona fide offering of
those securities.
II-4
SIGNATURES
In accordance with the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements of filing on Form SB-2 and authorizes this registration statement
to be signed on its behalf by the undersigned, in the County of Sonoma, State of
California, on February 3, 1999.
RAVENSWOOD WINERY, INC.
/s/ Callie S. Konno
-------------------------------------
Callie S. Konno
Chief Financial Officer, Treasurer
and Director
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, to sign any and all amendments (including post-effective
amendments, exhibits thereto, and other documents in connection therewith to
this Registration Statement and any subsequent registration statement filed by
the Registrant pursuant to Rule 462(b) of the Securities Act, which relates to
this Registration Statement) and to file the same with exhibits thereto and
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as such
person might or could do in person, hereby ratifying and confirming all that
each of said attorneys-in-fact and agents, or any of them, or their substitute
or substitutes may lawfully do or cause to be done by virtue hereof.
II-5
Pursuant to the requirements of the Securities Act, this Registration Statement
has been signed below by the following persons in the capacities and on the
dates indicated.
Name Title Date
---- ----- ----
/s/ W. Reed Foster Chairman of the Board and Chief February 3, 1999
- ----------------------------- Executive Officer (Principal
W. Reed Foster Executive Officer)
/s/ Joel E. Peterson President, Winemaker and Director February 3, 1999
- -----------------------------
Joel E. Peterson
/s/ Justin M. Faggioli Executive Vice President, Secretary and February 3, 1999
- ----------------------------- Director
Justin M. Faggioli
/s/ Callie S. Konno Chief Financial Officer, Treasurer and February 3, 1999
- ----------------------------- Director (Principal Financial and
Callie S. Konno Accounting Officer)
/s/ James F. Wisner Director February 3, 1999
- -----------------------------
James F. Wisner
/s/ Robert E. McGill, III Director February 3, 1999
- -----------------------------
Robert E. McGill, III
II-6
EXHIBIT INDEX
Exhibit
Number Description of Document
------ -----------------------
3.1 Amended and Restated Articles of Incorporation of Ravenswood Winery,
Inc.
3.2 Amended and Restated Bylaws of Ravenswood Winery, Inc.
10.1 1999 Equity Incentive Plan for Ravenswood Winery, Inc.
10.2 Employee Stock Purchase Plan for Ravenswood Winery, Inc.
10.3 Form of Indemnification Agreement for Ravenswood Winery, Inc.
10.4 Revolving Line of Credit Promissory Note and Agreement with Pacific
Coast Farm Credit Services, ACA, dated as of April 1, 1998.
10.5 Revolving Equity Line of Credit Promissory Note and Loan Agreement
with Pacific Coast Farm Credit Services, ACA, dated as of April 8,
1998.
10.6 Notes payable from Ravenswood Winery, Inc. to W. Reed Foster
10.7 Notes payable from Ravenswood Winery, Inc. to Joel E. Peterson and
notes payable from Joel E. Peterson to Ravenswood Winery, Inc.
10.8 Quarry Winery Lease Agreement dated as of January 1, 1999
10.9 Stock Agreement and Amendment of Voting Trust by and between
Ravenswood Winery, Inc. and W. Reed Foster, effective as of July 1,
1998 and note payable from W. Reed Foster to Ravenswood Winery, Inc.
10.10 Form of Convertible Subordinated Debenture dated as of January 1995.
10.12 Marketing, Sales Agency and Administration Services Agreement between
Ravenswood Winery, Inc. and Harvest Wines Inc.
11.1 Statement of Computation of Earnings Per Share
23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP
25.1 Power of Attorney (see p. II-6)
27.1 Financial Data Schedule