-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, S/HXtY+zA7RGeDc2Jnt9G0lE2hv91YOgp7/+v7npk5mh2NcgpNiJQ+Y1RgD2Wc4w XuNXcH1NZz5PJd7A7GzYaw== 0000950005-99-000267.txt : 19990319 0000950005-99-000267.hdr.sgml : 19990319 ACCESSION NUMBER: 0000950005-99-000267 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19990318 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RAVENSWOOD WINERY INC CENTRAL INDEX KEY: 0000937015 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] STATE OF INCORPORATION: CA FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-71729 FILM NUMBER: 99567627 BUSINESS ADDRESS: STREET 1: 18701 GEHRICKE RD CITY: SONOMA STATE: CA ZIP: 95476 MAIL ADDRESS: STREET 1: 18701 GEHRICKE RD CITY: SONOMA STATE: CA ZIP: 95476 SB-2/A 1 FORM SB-2/A As filed with the Securities and Exchange Commission on March 18, 1999 Registration No. 333-71729 ================================================================================ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- Amendment No. 1 to FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- RAVENSWOOD WINERY, INC. (Exact name of registrant as specified in its charter) California 94-3026706 ------------------------- ------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 2080 ------------------------- (Primary Standard Industrial Classification Code) --------------- 18701 Gehricke Road Sonoma, California 95476 (707) 938-1960 (Address, including zip code and telephone number, including area code of registrant's principal executive offices) --------------- Justin M. Faggioli Executive Vice President and Secretary 18701 Gehricke Road Sonoma, California 95476 (707) 938-1960 (Name, address, including zip code and telephone number, including area code of agent for service) --------------- Copies to: Bruce Maximov, Esq. Mark P. Tanoury, Esq. Maria L. Pizzoli, Esq. Vincent P. Pangrazio, Esq. David E. Stoll, Esq. Nicole C. Deiger, Esq. Farella Braun & Martel LLP Cooley Godward LLP 235 Montgomery Street 3000 Sand Hill Road San Francisco, California 94104 Building 3, Suite 230 Menlo Park, California 94025 Approximate date of commencement of proposed sale to public: As soon as practicable after the registration statement becomes effective. If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box: [ ] --------------- 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(3) - ------------------------------------------------------------------------------------------------------------------------ Common Stock, no par value per share 1,150,000 shares $13.50 $15,525,000 $4,315.95 ======================================================================================================================== (1) Includes up to 150,000 shares of Common Stock that the Underwriters have the option to purchase to cover over-allotments, if any. See "Underwriting." (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(a) of the Securities Act, as amended. (3) Previously paid.
--------------- 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, March 18, 1999 1,000,000 shares of common stock $____________ per share [Ravenswood Logo] R A V E N S W O O D W I N E R Y Ravenswood Winery, Inc. We produce, market and sell 18701 Gehricke Road premium California wines Sonoma, California 95476 exclusively under the (707) 938-1960 Ravenswood brand name. The Offering Per Share Total This is our initial public --------- ----- offering and no public Public Price ................. $ $ market currently exists for Underwriting discounts and our shares. We expect that commissions ............... $ $ the price will be between Proceeds to Ravenswood ....... $ $ $10.50 and $13.50 per share. That price may not reflect the market price of our shares after the offering. Proposed Trading Symbol: The Nasdaq National Market -- RVWD ------------ This offering involves a high degree of risk. You should purchase shares only if you can afford a complete loss. See "Risk Factors" beginning on page 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. We have entered into a firm commitment underwriting agreement with W.R. Hambrecht & Company, LLC for the sale of the shares in this offering. We have granted the underwriter a 30-day option to purchase up to an additional 150,000 shares of common stock to cover over-allotments. The underwriter expects to deliver the shares to purchasers on ______________, 1999. WR HAMBRECHT + CO ______________, 1999 [Three bottles picture] You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. ------------ TABLE OF CONTENTS Page ---- PROSPECTUS SUMMARY ........................................................ 1 THE OFFERING .............................................................. 3 SUMMARY FINANCIAL DATA .................................................... 4 RISK FACTORS .............................................................. 5 FORWARD-LOOKING STATEMENTS ................................................ 12 RAVENSWOOD ................................................................ 13 USE OF PROCEEDS ........................................................... 13 DIVIDEND POLICY ........................................................... 13 CAPITALIZATION ............................................................ 14 DILUTION .................................................................. 15 SELECTED FINANCIAL DATA ................................................... 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ..................................... 17 BUSINESS .................................................................. 26 MANAGEMENT ................................................................ 45 CERTAIN TRANSACTIONS ...................................................... 52 PRINCIPAL SHAREHOLDERS .................................................... 54 DESCRIPTION OF CAPITAL STOCK .............................................. 56 SHARES ELIGIBLE FOR FUTURE SALE ........................................... 59 PLAN OF DISTRIBUTION ...................................................... 61 LEGAL MATTERS ............................................................. 63 EXPERTS ................................................................... 63 ENGAGEMENT OF NEW AUDITORS ................................................ 63 ADDITIONAL INFORMATION .................................................... 63 INDEX TO FINANCIAL STATEMENTS ............................................. F-1 ------------ "Ravenswood," the Ravenswood logo and the slogan "No Wimpy Wines" are federally registered trademarks of Ravenswood Winery, Inc. All other trademarks or tradenames referred to in this prospectus are the property of their respective owners. PROSPECTUS SUMMARY Our Business: We produce, market and sell premium California wines exclusively under the Ravenswood brand name. The majority of the wines we produce and sell are red wines, including Merlot, Cabernet Sauvignon and, particularly, Zinfandel. Our approach focuses on using old-world French winemaking techniques to produce premium wines of exceptional quality and on building awareness and loyalty for the Ravenswood brand. Our Strategy: We seek to achieve a competitive advantage by producing wines that enhance our reputation for high quality and further establish our brand identity. To this end, we have adopted the following strategies: o Focus on Product Offerings that Give the Consumer Demonstrable Value o Strategically Manage Our Brand o Produce High-Quality Products that Emphasize the Winemaking Process o Maintain Broad, Efficient Distribution Channels o Selectively Invest in Vineyards and Production Facilities o Retain and Further Develop Our Professional Management Team Executing our strategy involves numerous risks and costs, including in particular those discussed under "Risk Factors." Our Market: Gomberg, Fredrickson and Associates, a consulting firm that collects and publishes information about the wine industry, estimates that shipments of California premium wines within the United States have grown from approximately $866 million in 1987 to $3.6 billion in 1997. We believe this growth can be attributed, among other things, to an increasingly discriminating customer base that is willing to pay for higher quality wines. By focusing our product portfolio on red wines, which have accounted for the majority of the growth in the market for premium wines in the United States in recent years, we believe we are well positioned to benefit from the favorable trend in the demand for California premium wines. 1 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: o the value-priced Vintners Blend Series, with a suggested retail price of approximately $9.75 to $11.25 per 750 ml bottle; o the intermediate-priced County Series, with a suggested retail price of approximately $12 to $18.50 per 750 ml bottle; and o the higher-priced Vineyard Designate Series, with a suggested retail price of approximately $18 to $31.50 per 750 ml bottle. We rely almost exclusively upon grapes supplied by third parties, and we use leased storage and crush facilities for a substantial portion of our wine production. We also purchase bulk wine of superior quality from third parties to incorporate into some of our products. We believe that this approach has enabled us to sustain the growth necessary to capitalize on favorable trends in the demand for California premium wines, while minimizing our investment of capital in the acquisition and development of land and capital equipment until our production levels warranted further investment. Our Brand: We have made significant investments in the development of the Ravenswood brand name, packaging and trademarks, and expect to continue to do so in the future. We believe that the distinctive Ravenswood name, our unique logo, and our trademarked slogan, "No Wimpy Wines," convey a recognizable and high-quality image that has contributed to our success. Our Distribution: We do not have an in-house sales staff. We have developed a broad network of brokers and distributors throughout the United States and in more than 15 export markets. We sell our products directly in California, using five warehouses throughout the state and seven brokers. Elsewhere, we use a network of over 75 distributors. We also sell our wines directly through mail order in the United States, where permitted by law, as well as through the tasting room in our Gehricke Road Facility in Sonoma, California. 2 THE OFFERING Type of security ........................... Common stock Shares to be offered ....................... 1,000,000 shares Common stock to be outstanding after the offering .................................. 4,550,852 shares Use of proceeds ............................ For wine inventory, for expansion of production facilities, for general corporate purposes and for retirement of indebtedness Proposed Nasdaq National Market symbol ..... RVWD The common stock to be outstanding after the offering as shown above is based on shares outstanding on December 31, 1998, excluding: (a) 500,000 shares of common stock reserved for issuance under our 1999 Equity Incentive Plan; (b) 50,000 shares of common stock reserved for issuance under our Employee Stock Purchase Plan; (c) up to 454,622 shares of common stock issuable upon conversion of outstanding convertible debentures; and (d) 150,000 shares of common stock issuable upon the exercise of the underwriter's over-allotment option. 3 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: Deferred Compensation Expense ........... 72 166 207 93 2,206 -- -- Other Operating Expenses ................ 1,890 3,131 2,642 3,262 4,034 1,852 2,340 -------- -------- -------- -------- -------- -------- -------- Operating Income ......................... 970 1,972 2,488 2,972 2,253 2,881 4,176 Other Income (Expense) ................... 55 (192) (297) (437) (474) (114) (147) -------- -------- -------- -------- -------- -------- -------- Income Before Income Taxes ............... 1,025 1,780 2,190 2,535 1,779 2,767 4,029 Provision for Income Taxes ............... 433 763 921 1,067 1,592 1,133 1,744 -------- -------- -------- -------- -------- -------- -------- Net Income ............................... $ 592 $ 1,017 $ 1,269 $ 1,468 $ 187 $ 1,634 $ 2,285 ======== ======== ======== ======== ======== ======== ======== Basic Earnings per Share ................. $ 0.16 $ 0.28 $ 0.35 $ 0.40 $ 0.05 $ 0.47 $ 0.66 ======== ======== ======== ======== ======== ======== ======== Weighted Average Number of Common Shares Outstanding ............... 3,636 3,636 3,636 3,636 3,492 3,505 3,479 Diluted Earnings per Share ............... $ 0.16 $ 0.27 $ 0.33 $ 0.39 $ 0.05 $ 0.44 $ 0.61 ======== ======== ======== ======== ======== ======== ======== Weighted Average Number of Common Shares and Equivalents Outstanding ............................. 3,636 3,884 3,939 3,939 3,795 3,808 3,847
June 30, December 31, 1998 ------------------------------------------------------- --------------------- 1994 1995 1996 1997 1998 Actual As Adjusted ------- ------- ------- ------- ------- ------- ----------- (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 5,532 5,532 Long-Term Liabilities ........................ 79 2,723 2,662 2,622 2,910 5,345 5,345 Total Shareholders' Equity ................... 2,028 3,210 4,698 6,259 8,374 12,347 23,577 Fiscal Year Ended June 30, ---------------- Six Months Ended 1997 1998 December 31, 1998 ---- ---- ----------------- (Unaudited) (Unaudited) Other Data: Cases Sold ............................ 131,175 191,655 130,493 Average Price Per Case ................ $ 91.58 $ 87.37 $ 92.03
Earnings per share and outstanding share amounts are computed on the basis described in notes 1 and 15 to our financial statements. As adjusted balance sheet data reflects the sale of the 1,000,000 shares of common stock in this offering at an assumed initial public offering price of $12.00 per share after deducting underwriting fees and commissions and estimated offering expenses payable by us, and the receipt and application of the estimated net proceeds from this offering. 4 RISK FACTORS Our profits depend largely on sales of our red wines Over the past decade, the demand for the types of premium wine which have constituted the majority of our production and sales--red wines and, particularly, Zinfandel--has increased considerably. We cannot assure you, however, that consumer demand for red wines in general, or Zinfandel in particular, 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 rely on annual contracts, many of which are not in writing, with over 60 independent growers to purchase substantially all of the grapes used in our wine production. We cannot assure you that we will be able to contract for the purchase of grapes at acceptable prices from these or other suppliers in the future. The terms of many of our purchase agreements also constrain our ability to discontinue purchasing grapes in circumstances where we might want to do so. Those agreements provide that, while either party may terminate the agreement at any time, both parties must continue to abide by its terms for three years following termination. We are dependent on bulk wine suppliers for the production of several of our wines, particularly our Vintners Blend Series. We do not have contracts with bulk wine suppliers or agreements that would protect us from fluctuations in the price or availability of bulk wine. The availability and price of bulk wine significantly affect the quality and production levels of our products that contain bulk wine. The price, quality and available quantity of bulk wine have fluctuated in the past. It is possible that we will not be able to purchase bulk wine of acceptable quality at acceptable prices and quantities in the future, which could increase the cost or reduce the amount of wine we produce for sale. This could cause reductions in our sales and profits. See "Business--Grape and Bulk Wine Supply." We may not be able to acquire enough quality grapes for our wines A shortage in the supply of quality grapes may result from the occurence of any number of the factors which determine the quality and quantity of grape supply, such as weather conditions, pruning methods, the existence of diseases and pests, and the number of vines producing grapes, as well as the level of consumer demand for wine. Any shortage could cause an increase in the price of some or all of the grape varieties required for our wine production and/or a reduction in the amount of wine we are able to produce, which could harm our business and reduce our sales and profits. Due to the effects of El Nino, the grape supply available to us for the 1998 harvest was lower than for the 1997 harvest, which we believe was an unusually large harvest. Although we expect to compensate in part for this shortfall by purchasing bulk wine, the inventory of 5 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." 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, which could result in a significant increase in the supply of premium wine grapes. Although an 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, which would increase competition in our distribution channels. 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. Most of the vineyards that supply our grapes are primarily planted to rootstocks believed to be resistant to Phylloxera, a pest that feeds on susceptible grape rootstocks. However, we cannot be certain that these vineyards, or vineyards from which we obtain grapes in the future, will not become susceptible to current or new strains of Phylloxera, plant insects or diseases. Any resulting reduction in grape supply could reduce our sales and profits. The loss of Mr. Foster, Mr. Peterson or other key employees would damage our reputation and business We believe that our success largely depends on the continued employment of a number of our key employees, including W. Reed Foster, our chairman and chief executive officer, and Joel E. Peterson, our president and winemaker. Any inability or unwillingness of Mr. Foster, Mr. Peterson or other key management team members to continue in their present capacities could harm our business and our reputation. See "Management." We depend on third parties to sell our wine In the 1998 fiscal year, approximately 75% of our gross sales were made through brokers. A change in our relationship with any of our brokers could harm our business and reduce our sales. Our most successful broker was responsible for 21% of our gross sales in the 1998 fiscal year, and our ten most successful brokers were responsible for 69% of our gross sales in the 1998 fiscal year. Our sales outside of California largely depend on the use of distributors. Our ten largest distributors accounted for approximately 23% of our gross sales for the 1998 fiscal year, and we expect that sales to our ten largest distributors will continue to represent a substantial 6 portion of our sales in the future. The laws and regulations of several states prohibit distributor changes except under limited circumstances. As a result, it may be difficult for us to replace distributors that do not perform adequately, which may reduce our sales and profits. 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 wine sales, operating expenses and net income fluctuate seasonally We experience seasonal and quarterly fluctuations in sales, operating expenses and net income. Generally, the second and third quarters of our fiscal year have lower sales volumes than the first and fourth quarters. We have managed, and will continue to manage, our business to achieve long-term objectives. In doing so, we may make decisions that we believe will enhance our long-term profitability, even if these decisions may reduce quarterly earnings. These decisions include: (a) when to release our wines for sale; (b) how to position our wines competitively; and (c) which grape and bulk wine sources to use to produce our wines. In addition, fluctuations in our distributors' inventory levels may affect our sales volume. These and other factors relating to seasonality and business decisions may cause fluctuations in the market price of our common stock. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Ever-increasing competition with other wineries and producers of other beverages 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: o Brand recognition o Product quality o Access to distribution channels o Price 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 7 of the producers of these beverages also have significantly greater financial, technical, marketing and public relations resources than we do. Our sales may be harmed to the extent any alternative beverages are introduced that compete with wine. We may not be able to compete successfully against these wine or alternative beverage producers. 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 utilize several third-party facilities, of which there is a limited supply, for the production activities associated with our wines. Our inability in the future to use these or alternative facilities, at reasonable prices or at all, could increase the cost or reduce the amount of our production, which could reduce our sales and our profits. We do not have long-term agreements with any of these facilities. The activities conducted at outside facilities include: (a) crushing; (b) fermentation; (c) storage; (d) blending; and (e) bottling. Our reliance on these third parties varies according to the type of production activity. As production increases, we must increasingly rely upon these third- party production facilities. Reliance on third parties will also vary with annual harvest volumes. See "Business--Wine Production Facilities." Our facilities expansion plans may not be successful We are currently building a new facility, which we are calling the Quarry Facility, in order to increase our production capacity. Our failure to complete the Quarry Facility, or otherwise expand our production capabilities, would limit our production capacity, would require greater use of third-party production facilities, and could reduce our sales and/or profits. Upon its completion, we expect to use both the Quarry Facility and our current Gehricke Road Facility for a majority of our operations. We will need to make significant capital investments for the construction and completion of the Quarry Facility. Although we believe that we will have access to sufficient capital to complete the facility, we may need additional financing. 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." 8 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 similar to those we use, which could weaken our intellectual property rights. If our competitors infringe our trademark rights, we may have to litigate in order to protect our 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, activist groups have used advertising and other methods to inform the public about the societal harms associated with the consumption of alcoholic beverages. These groups have also sought, and continue to seek, legislation to reduce the availability of alcoholic beverages, to increase the penalties associated with the misuse of alcoholic beverages, or to increase the costs associated with the production of alcoholic beverages. Over time, these efforts could cause a reduction in the consumption of alcoholic beverages generally, which could harm our business and reduce our sales and profits. Contamination of our wines would harm our business Because our products are designed for human consumption, our business is subject to 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 recall would significantly damage our reputation for product quality, which we believe is one of our principal competitive assets, and could seriously harm our business and sales. Although we maintain insurance to protect against these risks, we may not be able to maintain insurance on acceptable terms and this insurance may not be adequate to cover any resulting liability. Increased regulatory costs or taxes would harm our financial performance The wine industry is regulated extensively by the Federal Bureau of Alcohol, Tobacco and Firearms, various foreign agencies, and state and local liquor authorities. These regulations and laws dictate such matters as: o Excise taxes o Licensing requirements o Trade and pricing practices o Permitted distribution channels o Permitted and required labeling o Advertising o Relationships with distributors and retailers 9 Recent and future zoning ordinances, environmental restrictions and other legal requirements may limit our plans to expand our production capacity, as well as any future development of new vineyards and wineries. In addition, federal legislation has been proposed that could significantly increase excise taxes on wine. This proposed legislation, or other new regulations, requirements or taxes could harm our business and operating results. Future legal or regulatory challenges to the wine industry could also harm our business and impact our operating results. Our existing shareholders will retain significant control over Ravenswood after this offering Following this offering and assuming that all debentures held by our directors and executive officers and their respective affiliates have been converted, our directors and executive officers and their respective affiliates will beneficially own 2,225,641 shares of common stock, or approximately 48.5% of our outstanding common stock. Of these shares, 2,131,151 shares, plus an additional 19,530 shares not held of record by Ravenswood's affiliates, have been placed in a voting trust. The trustees of this voting trust are Messrs. Foster, Peterson, Faggioli, and Wisner, all of whom serve as directors of Ravenswood. As a result, Messrs. Foster, Peterson, Faggioli and Wisner have significant influence in the election of directors and the approval of corporate actions that must be submitted for a vote of shareholders. The interests of these affiliates may conflict with the interests of other shareholders, and the actions they take or approve may be contrary to those desired by the other shareholders. This concentration of ownership may also have the effect of delaying, preventing or deterring an acquisition of Ravenswood by a third party. Natural disasters could destroy our facilities or our inventory The Gehricke Road Facility, the Quarry Facility and all of the third-party facilities we use to produce and store our wine are located in areas that are subject to earthquake activity. If we lost all or a portion of our wine prior to its sale or distribution as a result of earthquake activity, we would lose our investment in, and anticipated profits and cash flows from, that wine. Such a loss would seriously harm our business and reduce our sales and profits. In addition, we must store our wine in a limited number of locations for a period of time prior to its sale or distribution. Any intervening catastrophies, such as a fire, that result in the destruction of all or a portion of our wine would result in a loss of our investment in, and anticipated profits and cash flows from, that wine. Such a loss would seriously harm our business and reduce our sales and profits. The fact that the offering is relatively small in size and is being managed by a single underwriter could limit the market price, liquidity or trading volume of our stock We are offering only 1,000,000 shares and these shares are being sold by a single underwriter, W.R. Hambrecht & Company, LLC. These factors may prevent us from obtaining as much research coverage from market analysts after the offering as we might obtain for an offering of greater size or for one managed by multiple underwriters. The reduced level of such coverage may limit the market price, liquidity or trading volume of our common stock. Ravenswood's 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 10 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 these 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 those 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: o 866,248 restricted shares will be eligible for sale on the date of this prospectus under Rule 144(k); o 1,810,620 restricted shares will be eligible for sale 90 days after the date of this prospectus under Rule 144 and Rule 701 of the Securities Act; and o the remainder of the restricted shares will be eligible for sale from time to time upon expiration of one-year holding periods and subject to the requirements of Rule 144. Upon completion of this offering, there will be 454,622 shares issuable upon conversion of outstanding convertible debentures, all of which are immediately convertible. Shares issuable upon conversion of the convertible debentures will be available for sale in the public market as follows: o 273,000 shares will be eligible for sale on the date of this prospectus under Rule 144(k); o 12,250 shares will be eligible for sale 90 days after the date of this prospectus under Rule 144; and o the remainder of these shares will be eligible for sale from time to time upon expiration of one-year holding periods and subject to the requirements of Rule 144. 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 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 11 systems for any potential Year 2000 problems that might arise as a result of these requirements, and do not believe our 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 this third-party equipment or software fails to properly process dates for the year 2000 and beyond, we could 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." FORWARD-LOOKING STATEMENTS This prospectus contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 which involve risks and uncertainties. These forward-looking statements are usually accompanied by words such as "believes," "anticipates," "plans," "expects" and similar expressions. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under "Risk Factors" and elsewhere in this prospectus. Investing in our common stock is risky. You should carefully consider the preceding risks before making an investment decision. These risks are not the only ones that we face. Additional risks that generally apply to publicly traded companies and companies in our industry, that we have not yet identified or that we think are immaterial may also impair our business operations. Our business, operating results and financial condition could be adversely affected by any of the preceding risks. The trading price of our common stock could decline due to any of these risks, and you could lose all or part of your investment. You should also refer to the other information set forth in this prospectus, including our financial statements and the related notes. 12 RAVENSWOOD We originally formed Ravenswood as a partnership in 1976 and reorganized as a limited partnership in 1979. We were incorporated in the State of California in 1986. We maintain our principal executive offices at 18701 Gehricke Road, Sonoma, California 95476. Our telephone number is (707) 938-1960 and our Web site is located at www.ravenswood-wine.com. Information contained on our Web site does not constitute a part of this prospectus. USE OF PROCEEDS We estimate that we will receive net proceeds of $11,230,000 from the sale of the 1,000,000 shares of common stock in this offering, assuming an initial public offering price of $12.00 per share and after deducting estimated underwriting discounts and offering expenses. While we cannot predict with certainty how the net proceeds of this offering will be used, we currently intend to use them approximately as follows: Amount Percent ------ ------- For wine inventory ................................... $ 6,000,000 53% For expansion of production facilities ............... $ 4,000,000 36% For general corporate purposes and retirement of indebtedness ....................................... $ 1,230,000 11% ----------- --- Total ................................................ $11,230,000 100% As of December 31, 1998, borrowings of an aggregate of approximately $1,529,887 were outstanding under our two lines of credit and we expect that approximately the same amounts will be outstanding under the lines of credit on the closing date of this offering. As of December 31, 1998, the lines of credit had the following maturities, balances, interest rates and uses: Maturity Balance Interest Rate Use - -------- ------- ------------- --- June 1, 2001 ......... $950,000 8.3% For working capital December 1, 2024 ..... $579,887 7.1% To fund the construction of the Quarry Facility The cost, timing and amount of funds required cannot be precisely determined at this time and will be based on numerous factors. Our board of directors has broad discretion in determining how the proceeds of this offering will be applied. We intend to invest the net proceeds in short-term, investment grade interest-bearing obligations until they are used. DIVIDEND POLICY We have never paid cash dividends on our common stock and do not anticipate paying 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. 13 CAPITALIZATION The following table sets forth our capitalization as of December 31, 1998, (a) on an actual basis and (b) on an as adjusted basis after giving effect to the sale of the 1,000,000 shares of common stock in this offering at an assumed public offering price of $12.00 per share and the receipt of the estimated net proceeds from this offering. This table only presents summary information. In reading it, you should refer to our financial statements and related notes, which are included elsewhere in this prospectus.
December 31, 1998 ------------------------- As Actual Adjusted ------- -------- (in thousands) Long-Term Debt--including current portion ...................................................... $ 5,544 $ 5,544 ------- ------- Shareholders' Equity: Preferred Stock, no par value; 1,000,000 shares authorized and none outstanding (actual and as adjusted) ....................................................... -- -- Common Stock, no par value; 20,000,000 shares authorized and 3,550,852 outstanding (actual); 20,000,000 authorized and 4,550,852 outstanding (as adjusted) .................................................................. 4,627 15,857 Retained Earnings ........................................................................... 7,720 7,720 ------- ------- Total Shareholders' Equity .................................................................. 12,347 23,577 ======= ======= Total Capitalization ........................................................................... $17,891 $29,121 ======= =======
Authorized and outstanding share information reflects board and shareholder approval in February 1999 of the authorization of 1,000,000 shares of preferred stock and an increase in the number of authorized shares of common stock from 1,000,000 to 20,000,000. The common stock outstanding as shown above is based on shares outstanding as of December 31, 1998 and excludes: (a) 500,000 shares of common stock reserved for issuance under our 1999 Equity Incentive Plan; (b) 50,000 shares of common stock reserved for issuance under our Employee Stock Purchase Plan; (c) up to 454,622 shares of common stock issuable upon conversion of outstanding convertible debentures; and (d) 150,000 shares of common stock issuable upon the exercise of the underwriter's over-allotment option. 14 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 in this offering at an assumed initial public offering price of $12.00 per share, after deducting the estimated fees payable to the underwriter and offering expenses payable by us, our as adjusted net tangible book value at December 31, 1998 would have been approximately $23.4 million, or $5.15 per share. This represents an immediate dilution of $6.85 per share to new investors purchasing shares in this offering. The following table illustrates this per share dilution: 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 in this offering, assuming an initial public offering price of $12.00 per share:
Average Price Paid Shares Purchased Total Consideration Per Share ----------------------- ------------------------- ------------ Number Percent Amount Percent ----------- --------- ------------- --------- Existing shareholders ........ 3,550,852 78.0 % $ 4,626,400 27.8% $ 1.30 New public investors ......... 1,000,000 22.0 % $12,000,000 72.2 12.00 --------- ------- ------------ ----- Total ..................... 4,550,852 100.00% $16,626,400 100%
This information is based on shares outstanding on December 31, 1998, and excludes: (a) 500,000 shares of common stock reserved for issuance under our 1999 Equity Incentive Plan; (b) 50,000 shares of common stock reserved for issuance under our Employee Stock Purchase Plan; (c) up to 454,622 shares of common stock issuable upon conversion of outstanding convertible debentures; and (d) 150,000 shares of common stock issuable upon the exercise of the underwriter's over-allotment option. 15 SELECTED FINANCIAL DATA The following table sets forth our selected financial data as of and for each of the fiscal years in the five-year period ended June 30, 1998, as of December 31, 1998 and for the six-month periods ended December 31, 1997 and 1998. The statements of operations data for each of the fiscal years in the two-year period ended June 30, 1998 and the balance sheet data as of June 30, 1997 and 1998 have been derived from our financial statements, audited by Odenberg, Ullakko, Muranishi & Co. LLP, independent auditors, which are included elsewhere in this prospectus. The statements of operations data for each of the fiscal years in the three-year period ended June 30, 1996 and the balance sheet data as of June 30, 1994, 1995 and 1996 have been derived from our unaudited financial statements, which are not included in this prospectus. The statements of operations data for the six-month periods ended December 31, 1997 and 1998 and the balance sheet data as of December 31, 1998 have been derived from our unaudited financial statements that include, in the opinion of our management, all normal and recurring adjustments that our management considers necessary for a fair statement of the quarterly results. The operating results for the six months ended December 31, 1998 are not necessarily indicative of results that may be expected for the year ending June 30, 1999. Earnings per share and outstanding share amounts were computed on the basis described in notes 1 and 15 to our financial statements. 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: Deferred Compensation Expense .................. 72 166 207 93 2,206 -- -- Other Operating Expenses ....................... 1,890 3,131 2,642 3,262 4,034 1,852 2,340 -------- -------- -------- -------- -------- -------- -------- Operating Income ................................ 970 1,972 2,488 2,972 2,253 2,881 4,176 Other Income (Expense) .......................... 55 (192) (297) (437) (474) (114) (147) -------- -------- -------- -------- -------- -------- -------- Income Before Income Taxes ...................... 1,025 1,780 2,190 2,535 1,779 2,767 4,029 Provision for Income Taxes ...................... 433 763 921 1,067 1,592 1,133 1,744 -------- -------- -------- -------- -------- -------- -------- Net Income ...................................... $ 592 $ 1,017 $ 1,269 $ 1,468 $ 187 $ 1,634 $ 2,285 ======== ======== ======== ======== ======== ======== ======== Basic Earnings per Share ........................ $ 0.16 $ 0.28 $ 0.35 $ 0.40 $ 0.05 $ 0.47 $ 0.66 ======== ======== ======== ======== ======== ======== ======== Weighted Average Number of Common Shares Outstanding .................................... 3,636 3,636 3,636 3,636 3,492 3,505 3,479 Diluted Earnings per Share ...................... $ 0.16 $ 0.27 $ 0.33 $ 0.39 $ 0.05 $ 0.44 $ 0.61 ======== ======== ======== ======== ======== ======== ======== Weighted Average Number of Common Shares and Equivalents Outstanding .................... 3,636 3,884 3,939 3,939 3,795 3,808 3,847
June 30, ------------------------------------------------------- 1994 1995 1996 1997 1998 December 31, 1998 ------- ------- ------- ------- ------- ------------------ (Unaudited) (Audited) (Unaudited) Balance Sheet Data: Cash & Cash Equivalents ...................... $ 103 $ 542 $ 766 $ 212 $ 102 $ 3,171 Inventories .................................. 2,787 3,979 5,144 7,158 10,427 12,931 Property, Plant and Equipment, Net ........... 84 2,075 2,445 2,647 2,974 3,870 Total Assets ................................. 4,051 8,685 10,591 12,040 15,977 23,224 Current Liabilities .......................... 1,944 2,752 3,231 3,159 4,693 5,532 Long-Term Liabilities ........................ 79 2,723 2,662 2,622 2,910 5,345 Total Shareholders' Equity ................... 2,028 3,210 4,698 6,259 8,374 12,347
16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this prospectus. Except for historical information, the discussion in this prospectus contains 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. Overview Ravenswood produces, markets and sells premium California wines exclusively under the Ravenswood brand name. The vast majority of wines produced and sold by Ravenswood are red wines, including Merlot, Cabernet Sauvignon and, particularly, Zinfandel. To a lesser extent, Ravenswood produces white wines, including Chardonnay, French Colombard and 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 wine products. For the fiscal year ended June 30, 1998, Ravenswood realized gross sales of $17.0 million from the sale of 191,655 cases and Ravenswood branded merchandise. The mix of products sold in any given period affects Ravenswood's gross profit as a percentage of net sales, or gross margin. In particular, as sales of the value-priced Vintners Blend Series have increased as a percentage of gross sales, Ravenswood's gross margin has decreased. The gross margin for the Vintners Blend Series is traditionally more variable than Ravenswood's higher-priced product series because a significant portion of the wine used in these products is purchased in the bulk market rather than produced by Ravenswood from grapes acquired from its traditional grape suppliers. Ravenswood has no bulk wine purchase contracts, and the price, quality and available quantity of bulk wine have fluctuated in the past and Ravenswood expects that they will continue to fluctuate in the future. The timing for release of Ravenswood's products, particularly its County Series and Vineyard Designate Series, also significantly affects Ravenswood's sales in specific periods. Ravenswood traditionally releases new vintages of its Vineyard Designate Series in the fourth fiscal quarter or the first fiscal quarter of the subsequent fiscal year. In addition, the release dates of some of Ravenswood's County Series wines fluctuate between the third and fourth fiscal quarters of each fiscal year. The timing of these release dates is based upon the winemakers' determination as to the optimal flavor characteristics of these wines. Release dates have fluctuated in the past and can be expected to continue to fluctuate from year to year, which may make comparison of results on a period-to-period basis less meaningful. 17 The nature of the winemaking process, including the need for wine to be aged before it is released, requires Ravenswood to incur significant expenses in producing products which may not generate revenues until up to two years later. Any factors that may prevent or delay the sale of Ravenswood's wines at the prices anticipated at the time of their production could adversely affect its liquidity and reduce its profits. The pricing for grapes obtained from Ravenswood's suppliers is determined annually by reference to benchmark price quotations or through negotiation. As a result, the cost of grapes used in Ravenswood's wine production has fluctuated and is expected to continue to fluctuate. Ravenswood has traditionally attempted to moderate and stabilize price increases from year to year. Consequently, gross margins realized by Ravenswood have fluctuated in the past and are expected to continue to fluctuate with the price of grapes used in production. Ravenswood does not have an in-house sales staff. It markets and sells its wine both to "on-premise" restaurants and "off-premise" retailers, such as liquor stores, specialty wine stores, supermarkets and discounters. Ravenswood sells its products directly in California, utilizing five warehouses throughout the state and a network of seven brokers. Ravenswood realizes significantly greater gross margins in areas, such as California, where it relies on direct sales facilitated through brokers without the use of distributors. Sales within California, 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. 18 Results of Operations The following table sets forth items from Ravenswood's statement of income, expressed as a percentage of net sales, for the periods indicated:
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: Deferred Compensation Expense ...... 0.8 13.9 -- -- Other Operating Expenses ......... 28.3 25.3 22.1 20.2 ----- ----- ----- ----- Operating Income .................. 25.8 14.2 34.3 36.1 Other Expense, net .................. 3.8 3.0 1.3 1.3 ----- ----- ----- ----- Income Before Income Taxes ......... 22.0 11.2 33.0 34.8 Provision for Income Taxes ......... 9.3 10.0 13.5 15.1 ----- ----- ----- ----- Net Income ........................ 12.7% 1.2% 19.5% 19.7% ===== ===== ===== =====
Six Months Ended December 31, 1998 and 1997 Sales Net sales consist of gross sales of Ravenswood's wines and merchandise, less excise taxes, discounts, returns and allowances. Net sales of Ravenswood's products increased to $11.6 million in the six months ended December 31, 1998, from $8.4 million in the six months ended December 31, 1997. This increase is primarily attributable to an increase in the volume of wines produced and sold by Ravenswood. In the six months ended December 31, 1998, case sales of Ravenswood's products increased to 130,493 cases, from 91,681 cases in the six months ended December 31, 1997, while the average price per case decreased by approximately 2.7%. This decrease in average price per case is primarily attributable to the increase in sales of Ravenswood's value-priced Vintners Blend Series as a percentage of gross sales and, to a lesser extent, to the respective release dates of Vineyard Designate Series Zinfandel products in each of these periods. The percentages of gross sales attributable to Ravenswood's Vintners Blend Series, County Series and Vineyard Designate Series were approximately 48%, 26% and 24%, respectively, in the six months ended December 31, 1998, as compared to 43%, 31% and 24%, respectively, in the corresponding period in 1997. Sales of Ravenswood branded merchandise accounted for approximately 2% of gross sales in each of these periods. Ravenswood expects that the percentage of gross sales attributable to sales of its Vintners Blend Series and, to a lesser extent, its County Series, will increase relative to sales of Ravenswood's Vineyard Designate Series as Ravenswood continues to expand its production and product offerings within these segments. 19 Cost of Goods Sold Cost of goods sold includes the costs of: o Grapes o Bulk wine o Packaging materials o Labor used in wine production o Bottling expenses o Overhead allocated to production costs from winery facilities and equipment These costs are capitalized as inventory and depleted as costs of goods sold are recognized. Cost of goods sold increased to $5.1 million, or 43.7% of net sales, in the six-month period ended December 31, 1998, from $3.7 million, or 43.6% of net sales, in the corresponding period in 1997. The increase in the amount of cost of goods sold over these respective periods is primarily due to increases in the total volume of wine sold. Gross Profit Ravenswood's gross profit increased to $6.5 million in the six months ended December 31, 1998, from $4.7 million in the corresponding period in 1997, but decreased as a percentage of net sales to 56.3% from 56.4% in these respective periods. The increase in the amount of gross profit is primarily attributable to increases in sales volumes across all product lines, particularly the Vintners Blend Series. Operating Expenses Deferred Compensation Expense: No deferred compensation expenses were recognized in the six months ended December 31, 1997 and December 31, 1998. Other Operating Expenses: Other operating expenses consist of sales and marketing overhead, commissions paid to independent brokers, advertising and merchandising expenses, salaries and facilities expenses unrelated to wine production, insurance and professional services expenses. Other operating expenses increased to $2.3 million in the six months ended December 31, 1998, from $1.9 million in the corresponding period in 1997. As a percentage of net sales, other operating expenses decreased to 20.2% of net sales in the six months ended December 31, 1998, from 22.1% of net sales in the six months ended December 31, 1997. The increase in other operating expenses is primarily attributable to increases in brokerage commissions related to Ravenswood's increased sales volumes, particularly in California. The decrease in other operating expenses as a percentage of net sales is primarily attributable to increased sales volumes without corresponding increases in administrative staff or other overhead expenses. Ravenswood expects other operating expenses to increase as it continues to increase production and becomes a public company. Other Expense, Net Other expense consists of non-operating income and expense items, which primarily consist of interest on outstanding indebtedness. These items have tended to fluctuate from year to year. Other expense amounted to $113,588 and $146,955 in the six months ended December 31, 1997 and 1998, respectively. Ravenswood expects that these expenses will increase as it is required to pay interest on $1,687,500 worth of convertible debentures issued in the second quarter of the 1999 fiscal year. Ravenswood expects that this expense may be offset in part by interest earned on that portion of the proceeds of this offering that is retained as working capital. Interest payments on the debentures commenced in January 1999 and will continue to be paid on a quarterly basis until the debentures are converted or redeemed, or until they mature. 20 Provision for Income Taxes The provision for income taxes reflects the estimated annualized effective tax rate of 43.3% at December 31, 1998, and 40.9% at December 31, 1997. Ravenswood does not expect a material change in its effective tax rate in the near future. Fiscal Years Ended June 30, 1998 and 1997 Sales Net sales of Ravenswood's products increased to $15.9 million in the 1998 fiscal year, from $11.5 million in the 1997 fiscal year. This increase is primarily attributable to an increase in the volume of wines produced and sold by Ravenswood. In the 1998 fiscal year, case sales increased to 191,655 cases from 131,175 cases in the 1997 fiscal year, while the average price per case decreased from $91.58 to $87.37 in these respective periods. The decrease in average price per case is primarily attributable to the increase in sales of the value-priced Vintners Blend Series as a percentage of gross sales and, to a lesser extent, the timing of release dates for 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 Deferred Compensation Expense: Deferred compensation expense consists of non-cash expenses recognized by Ravenswood in connection with a deferred compensation agreement with W. Reed Foster, Ravenswood's chairman and chief executive officer. Deferred compensation expense increased to $2.2 million in the 1998 fiscal year from $93,292 in the 1997 fiscal year, and increased as a percentage of net sales to 13.9% in the 1998 fiscal year from 0.8% in the 1997 fiscal year. The increase in deferred compensation expense is attributable to an increase in the common stock per share value recognized by Ravenswood 21 at June 30, 1998. The deferred compensation arrangement was terminated as of July 1, 1998 and Ravenswood will not incur any additional deferred compensation expense from this arrangement. Other Operating Expenses: Other operating expenses increased to $4.0 million in the 1998 fiscal year, from $3.3 million in the 1997 fiscal year, but decreased as a percentage of net sales to 25.3% in the 1998 fiscal year from 28.3% in the 1997 fiscal year. The increase in the amount of other operating expenses is primarily attributable to increases in brokerage commissions related to Ravenswood's increased sales volumes and, to a lesser extent, increased expenditures on advertising and promotional efforts. The decrease in other operating expenses as a percentage of net sales is primarily attributable to increased sales volumes without corresponding increases in administrative staff or other overhead expenses. Other Expense, Net Other expense amounted to $474,340 and $437,258, or 3.0% and 3.8% of net sales, in the 1998 and 1997 fiscal years, respectively. Provision for Income Taxes The provision for income taxes reflects the estimated annualized effective tax rate of 89.5% in the 1998 fiscal year and 42.1% in the 1997 fiscal year. The increase in the effective tax rate for fiscal 1998 was a result of recognizing a portion of deferred compensation expense in the amount of $2.1 million in the 1998 fiscal year as a permanent difference for tax purposes. Selected Quarterly Results of Operations 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: Deferred Compensation Expense ............. -- -- -- 2,206 -- -- Other Operating Expenses .................. 880 972 914 1,269 1,215 1,125 ------- ------- ------- ------- ------- ------- Operating Income (Loss) .................... 1,642 1,239 875 (1,503) 2,219 1,957 Other (Income) Expense ..................... 34 79 100 260 73 74 ------- ------- ------- ------- ------- ------- Income (Loss) Before Income Taxes .......... 1,607 1,160 775 (1,763) 2,146 1,884 Provision for Income Taxes ................. 658 475 315 144 929 815 ------- ------- ------- ------- ------- ------- Net Income (Loss) .......................... $ 949 $ 685 $ 460 $(1,907) $ 1,217 $ 1,068 ======= ======= ======= ======= ======= =======
22 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. These decisions include: (a) when to release its wines for sale; (b) how to position its wines competitively; and (c) which grape and bulk wine sources to use to produce its wines. In addition, the release dates of Ravenswood's Vineyard Designate Series and County Series have resulted in fluctuations in Ravenswood's results on a quarter-to-quarter basis. Ravenswood's sales volume may also change depending upon its distributors' inventory levels. The results of operations for any quarter are not necessarily indicative of the results of any future period. The market price of Ravenswood's common stock may fluctuate significantly in response to these quarter-to-quarter variations. Results of operations for the quarter ended June 30, 1998 were materially affected by expenses recognized in connection with a deferred compensation arrangement with W. Reed Foster, Ravenswood's chairman and chief executive officer. This arrangement was terminated as of July 1, 1998. No additional deferred compensation expenses relating to this arrangement have been or will be incurred in subsequent periods. Liquidity and Capital Resources Ravenswood has funded its capital requirements primarily with cash flows from operations, a mix of short-term and long-term borrowings, and the sale of its securities. Cash and cash equivalents totaled $3.2 million at December 31, 1998, as compared to $102,272 at June 30, 1998. The increase in cash and cash equivalents is primarily due to the receipt of the net proceeds from Ravenswood's sale of securities completed in December 1998. Net cash provided by operations was $655,773 in the six months ended December 31, 1998, as compared to $124,197 in the six months ended December 31, 1997. For the 1998 fiscal year, net cash used for operations was $357,171, as compared to net cash provided by operations of $265,809 in the 1997 fiscal year. The principal use of cash from operations in each of these respective periods was the acquisition of additional inventory through increased production, while the principal source of cash in each period was net income. Net cash used for investing activities totaled $891,336 in the six months ended December 31, 1998, as compared to $243,229 in the six months ended December 31, 1997. Net cash used for investing activities was $490,621 for the 1998 fiscal year, as compared to $312,386 in the 1997 fiscal year. The increases were primarily a result of costs associated with the Quarry Facility. Ravenswood expects that net cash used for investing activities will increase in the future as additional investments in plant and equipment are made in completing the Quarry Facility. Net cash provided by financing activities was $3.3 million in the six months ended December 31, 1998, as compared to $72,923 in the six months ended December 31, 1997. Net cash provided by financing activities totaled $738,103 in the 1998 fiscal year, as compared to $507,595 used for financing activities in the 1997 fiscal year. The principal sources of cash provided by financing activities in each of these respective periods were short- and long-term borrowings under two lines of credit with Pacific Coast Farm Credit Services and long-term borrowings, including additional obligations to Pacific Coast. In addition, in the six months ended December 31, 1998, a principal source of cash was Ravenswood's sale of securities completed in December 1998. The principal use of cash from financing activities in each of 23 these respective periods was for repayment obligations under Ravenswood's various short- and long-term borrowing arrangements. In addition, Ravenswood used $278,255 in cash for the repurchase of outstanding shares of common stock from one of its former officers in the 1998 fiscal year. The majority of Ravenswood's grape purchases occur in the second fiscal quarter, when the fruit is harvested. Most grape purchase contracts specify the timing of payment for these purchases. Ravenswood typically makes several payments to each grower in the quarters following each harvest. The actual dates vary depending upon the terms of the individual contract. Based upon its grape purchase contracts for the 1998 harvest, these payments will be made in the following manner: 42%, 19% and 21% in the second, third and fourth quarters of fiscal 1999, respectively, and 18% in the first quarter of fiscal 2000. As a result of harvest costs and the timing of grape and bulk purchase payments, Ravenswood's inventory and related cash requirements generally peak during the second or third fiscal quarters. Cash requirements also fluctuate depending upon the level and timing of capital spending and tax payments. Ravenswood leases barrels and other equipment used in the production of its wines. Ravenswood estimates that aggregate lease payments for barrels and other equipment will be $222,844 for the 1999 fiscal year. Ravenswood anticipates that it will enter into additional leasing arrangements as it increases its production. In December 1994, Ravenswood completed a sale of $865,000 of convertible debentures due December 31, 2004. Each $10,000 debenture is convertible into 3,500 shares of common stock at any time prior to December 31, 1999 upon request of the holder. If the debentures are not converted, Ravenswood may redeem them at face value at any time during the period from January 1, 2000 until the maturity date. Ravenswood pays interest quarterly on the debentures based on a floating index tied to prime bank rates for a five-year period. The interest rate is adjusted every 18 months, except that in no period may the interest rate adjustment exceed 2%, or the maximum interest rate exceed 11%. In December 1998, Ravenswood completed a sale of $1.7 million of convertible debentures due December 31, 2008 and $1.7 million of common stock. Each $10,000 debenture is convertible into 900 shares of common stock at any time prior to December 31, 2003, upon request of the holder. If the debentures are not converted, Ravenswood may redeem them at face value at any time during the period from January 1, 2004 until the maturity date. Ravenswood pays interest quarterly on the debentures in an amount equal to the prime interest rate quoted by Bank of America NT&SA plus 1%. The interest rate is adjusted every 18 months, except that in no period may the interest rate adjustment exceed 2%, or the maximum interest rate exceed 11%. Ravenswood has two lines of credit with Pacific Coast Farm Credit Association, pursuant to which Ravenswood may borrow up to a total of $2.8 million. As of December 31, 1998, Ravenswood had $1.5 million outstanding under these lines of credit. In addition, Ravenswood expects to receive an additional $4.6 million construction loan from Pacific Coast Farm Credit Association for the purpose of financing the construction of the Quarry Facility. The loan will be secured by the Quarry Facility and its lease. Since 1989, Ravenswood has periodically borrowed funds for short-term working capital from its executive officers. As of December 31, 1998, Ravenswood had outstanding promissory notes in the principal amount of $50,250 payable to Mr. Foster, its chairman and chief executive officer, and additional promissory notes in the principal amount of $46,143 payable to Mr. Peterson, its president and winemaker. 24 Ravenswood anticipates that its capital expenditures will increase substantially in the 1999 fiscal year as it undertakes to complete the Quarry Facility. The full extent of Ravenswood's future capital requirements and the adequacy of its available funds will depend on many factors, not all of which can be accurately predicted. Although no assurance can be given, Ravenswood believes that anticipated cash flow from operations, borrowings under its existing credit agreements, its proposed additional line of credit, and proceeds from this offering and other recent financing activities will be sufficient to fund its capital requirements, including its planned expansion, for at least the next 12 months. In the event that additional capital is required, Ravenswood may seek to raise that capital through public or private equity or debt financings. Future capital funding transactions may result in dilution to purchasers in this offering. There can be no assurance that additional capital will be available on favorable terms, if at all. Risks associated with potential Year 2000 problems Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field and cannot reliably distinguish dates beginning on January 1, 2000 from dates prior to the year 2000. Many companies' software and computer systems may need to be upgraded or replaced in order to process correctly dates beginning in 2000 and to comply with the Year 2000 requirements. Ravenswood is reviewing its information systems for any potential Year 2000 problems that might arise as a result of these requirements, and does not believe its systems will be affected by the upcoming change in century. However, Ravenswood utilizes third-party equipment and software that may not be Year 2000 compliant. If this third-party equipment or software fails to process dates for the year 2000 and thereafter properly, Ravenswood could incur unanticipated expenses to remedy any problems, which could harm its business. In addition, Ravenswood relies on various service providers, including banks, and on grape and bulk wine suppliers, third-party production facilities and distributors. The software and computer systems of any of these entities could have Year 2000 problems. A disruption in the supply of services or products Ravenswood receives from any of these entities due to Year 2000 problems could harm its business. 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: o the value-priced Vintners Blend Series, with a suggested retail price of approximately $9.75 to $11.25 per 750 ml bottle; o the intermediate-priced County Series, with a suggested retail price of approximately $12 to $18.50 per 750 ml bottle; and o the higher-priced Vineyard Designate Series, with a suggested retail price of approximately $18 to $31.50 per 750 ml bottle. The actual price of any particular wine may be either higher or lower than suggested retail, depending upon the type of retail outlet and location where it is sold. All of these products are within the super-premium and ultra-premium categories of the premium wine market generally recognized by the wine industry. "Premium" wines typically retail for more than $3.00 per 750 ml equivalent unit. The premium category is often divided into three major segments: (a) "popular premium" wines, which retail for between $3.00 and $7.00 per 750 ml equivalent unit; (b) "super-premium" wines, which retail for between $7.00 and $14.00 per 750 ml equivalent unit; and (c) "ultra-premium" wines, which retail for $14.00 or more per 750 ml equivalent unit. These categories were originally created by Gomberg, Fredrickson and Associates and are now commonly used in the wine industry. Ravenswood believes that the scope of its product offerings, coupled with its emphasis on red wines, has positioned it well within the fast-growing premium red wine market. Since its inception, Ravenswood has continued to expand its product portfolio by including new labels in its County Series and its Vineyard Designate Series and by developing and steadily increasing the production of its Vintners Blend Series. For its 1996 vintage, Ravenswood marketed and sold 37 different wines within its three product series. Ravenswood's approach focuses on using old-world French winemaking techniques to produce premium wines of exceptional quality and on building awareness and loyalty for the Ravenswood brand. Ravenswood has traditionally concentrated investment in developing its brand name, building inventory and expanding distribution channels, rather than developing vineyard holdings and production facilities. Although Ravenswood currently owns and manages 14 acres of planted vineyards, over 95% of its grapes are supplied by third parties. A majority of these grapes are crushed and fermented at facilities owned by third parties, in accordance with Ravenswood's prescribed winemaking practices. Ravenswood also purchases bulk wine of superior quality, which is incorporated into its products, particularly its Vintners Blend Series. A substantial portion of Ravenswood's wines is stored at facilities leased for this purpose by Ravenswood. Ravenswood believes this strategy has enabled it to sustain the growth necessary to capitalize on favorable trends in the demand for California premium wines, while minimizing the need to invest large amounts of capital in the acquisition and development of land and capital equipment until its production levels warranted further investment. 26 Ravenswood was founded in 1976 by Messrs. Foster and Peterson when Mr. Peterson harvested and crushed Zinfandel grapes from two Sonoma County vineyards. In 1979, Ravenswood released its first wines, consisting of 327 cases of the 1976 vintage Zinfandel. Since its founding, and particularly since 1991, Ravenswood's production and sales levels have increased substantially, to approximately 191,655 cases sold and $17.0 million in gross sales for the 1998 fiscal year. From the 1994 fiscal year to the 1998 fiscal year, the compound annual growth rate of Ravenswood's gross sales was approximately 28%. Ravenswood has occupied the Gehricke Road Facility in Sonoma, California since 1991. This facility includes a tasting room, which Ravenswood uses to promote consumer demand and generate direct retail sales, as well as a wine production facility, a barrel storage warehouse and executive offices. Recognizing its anticipated growth and the potential scarcity of future winemaking capacity in the Napa and Sonoma counties of California, Ravenswood is building a new winery facility in Sonoma County, which is referred to as the Quarry Facility. Ravenswood believes that the Quarry Facility will reduce its reliance on leased storage space and custom crush production facilities and improve its ability to control the quality of its wines and operate efficiently. Varietal Wines In the United States, wines are classified as "non-varietal" or "varietal." Non-varietal wines contain less than 75% of a single grape variety. While there are non-varietal blends sold within the premium category, non-varietal wines are often sold as "generic" or "jug" wines and include wines named after European regions, such as Burgundy and Chablis, as well as wines simply labeled "red" or "white." Generic or jug wines are packaged primarily in large-size containers, which usually are offered in three-, four- and five-liter sizes and often retail for less than $3.00 per 750 ml equivalent unit. As prescribed by United States Federal Bureau of Alcohol, Tobacco, and Firearms regulation, varietal wines must contain at least 75% of the single grape variety for which they are named. Wine production outside the United States relies on a significant number of grape varieties, and most of the better known wines are not varietally designated. The majority of high-quality wine produced in the United States is varietal and, particularly in California, is comprised of a limited number of grape varieties with distinct characteristics. Federal regulations also require that wines be identified by the region from which the grapes were sourced. These regions are called appellations. Ravenswood offers varietal wines in appellations ranging in size from California to areas like the Sonoma Valley. The predominant varietal wines produced in California include the following: Cabernet Sauvignon: The Cabernet Sauvignon varietal, which is the most famous grape of France's Bordeaux region, is a hybrid of Cabernet Franc, a red grape, and Sauvignon Blanc, a white grape. It produces red wines that are highly aromatic, with significant depth and intensity of flavor. Cabernet Sauvignon has traditionally been blended with other select grape varieties, but in the United States, and particularly California, it is not unusual to have wines that contain 90% to 100% of this varietal. The most highly regarded Cabernet Sauvignon wines are generally stored in French or American oak barrels for 18 to 30 months prior to bottling in order to impart a 27 distinctive flavor, while softening the effect of the natural grape skin astringent, or tannin, that is highly concentrated in the Cabernet Sauvignon grape. Chardonnay: The Chardonnay grape is a versatile varietal that grows well in a variety of locations throughout the world, including California. The Chardonnay grape produces white wines that winemakers can relatively easily manipulate in order to produce distinctive flavors. Chardonnay is often highly regarded for the significant impact oak aging can have on enhancing the fruit and spice flavors of the grape. Chardonnay is the most plentiful white grape in California and is planted in virtually all of its wine growing regions, producing wines that range from jug to ultra-premium quality. Merlot: Like Cabernet Sauvignon, Merlot's prominence originated in the Bordeaux region of France, where it is mainly blended with other varietals according to local winemaking traditions. It is the predominant grape of the Pomerol appellation in Bordeaux, and Chateau Petrus, the most famous wine of that appellation, is nearly 100% Merlot. Wide-scale production of Merlot in California has developed over the last 15 to 20 years. Due to its popularity, Merlot is being widely planted in California and Chile, even though it is considered difficult to grow because of its uneven crop production. Merlot is typically considered softer and more supple tasting than Cabernet Sauvignon. Zinfandel: Zinfandel arrived in California in the mid-1800s from a horticultural collection in New York. The origins of Zinfandel are unknown, although it is closely related to the ancient Plavic Mali varietal from Croatia. Zinfandel is well suited to the California climate and is widely planted throughout the state. Much of the Zinfandel grown in California is used in the production of white Zinfandel, a blush-colored slightly sweet wine that is served chilled. Traditional Zinfandel, a red wine, can range from short-lived wines with light berry flavors and mild tannins to robust, intensely flavored wines with strong tannins that are vinted to improve with age. California has a number of old Zinfandel vineyards that range from 50 to 100 years old. Many of these vineyards are farmed without irrigation, are planted relatively densely, and are frequently planted in prime grape-growing locations. These vines produce smaller, more uniform crops of superior quality and are highly sought after by wineries such as Ravenswood. While these varietal grapes are widely produced and the wines produced from them are generally considered the most popular with consumers, other varietals, including Sauvignon Blanc, Gew -urztraminer, Pinot Noir, Sangiovese, Petite Sirah, Syrah, and Grenache, are also produced in significant quantities throughout the world, including California. In addition, wines blended from varietal grapes that do not consist of 75% or more of one varietal are commonly produced worldwide. California has experienced a growing trend toward producing more ultra-premium non-varietal wines. Perhaps the most well known of these are the "Meritage," which rhymes 28 with "heritage," wines that use varietal grapes commonly associated with Bordeaux. These Meritage wines are both white and red. The whites are usually a combination of Sauvignon Blanc and Semillion, while the reds are some combination of Cabernet Sauvignon, Cabernet Franc, Merlot, Petite Verdot and Malbec. There has also been a trend in California to produce Rhone-style blends. These blends include grapes such as Rousanne and Marsanne for white wines, and Syrah, Grenache, Mourvedre and Cinsault for red wines. The Premium Wine Market Industry analysts estimate that in 1997, shipments of popular-premium, super-premium and ultra-premium wines accounted for 66%, 27% and 7%, respectively, of premium wine cases shipped in the United States and 46%, 35% and 19%, respectively, of premium wine revenues, as indicated in the chart below. Ravenswood's products fall exclusively into the super-premium and ultra-premium segments of the premium wine category. The United States Premium Wine Shipments by Segment: 1997* [GRAPHIC OMITTED] (Two pie charts showing percentages of cases and revenues by popular, super and ultra) * Source: Gomberg, Fredrickson and Associates (1998) During the last ten years, consumer preferences for wine in the United States have shifted significantly away from generic jug wines toward premium wines sold in 750 ml bottles. Industry analysts estimate that United States shipments of California premium wines have grown from approximately $866 million in 1987 to approximately $3.6 billion in 1997. Ravenswood believes this growth in the premium wine category can be attributed to, among other things, an increasingly discriminating customer base that appreciates higher quality wines and is willing to pay for them. As a result of changing consumer preferences, as well as several studies suggesting various health benefits from the moderate consumption of red wine, the vast majority of the recent growth in the wine industry has been in the sales of red wine. Industry analysts estimate that sales of nine-liter cases of red wine grew 158% from 1991 to 1997, from 22.1 million cases to 57.2 million cases, as indicated in the following chart. This amounts to approximately 67% of the growth in the premium wine industry during this period. 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 (1998) Within the red wine category, Cabernet Sauvignon has historically dominated sales relative to other varietals. In recent years, however, other varietals, including Merlot and, more recently, Zinfandel, have fueled much of the growth in sales of red wines. The following table sets forth estimated shipments for 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% - ------------ * Source: Gomberg, Fredrickson and Associates (1998)
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 Demonstrable Value: in the last decade, the most prominent growth in the past six years has been in the demand for red wines. Red wines accounted for approximately 91% of Ravenswood's gross sales in the 1998 fiscal year. As a result, Ravenswood believes it has been and continues to be well positioned to take advantage of the growing consumer preference for premium red wine. In particular, Ravenswood believes its emphasis on the 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 that enhance its reputation for expertise, demonstrable value and high quality. Ravenswood believes this approach will further promote the favorable image of its products. Strategically Manage Consumer research indicates that the majority 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, and by strictly adhering to Ravenswood's traditional winemaking techniques. Ravenswood believes that its old-world French winemaking techniques impart a distinctive style to its wines, which is evident even when blended with purchased bulk wine. Many of Ravenswood's grapes are purchased from dry-farmed vineyards that yield low crops with concentrated fruit flavors. In addition, younger vineyards from which Ravenswood acquires grapes are regularly thinned at the request of Ravenswood to ensure the premium quality of the grapes they produce. Ravenswood often pays a premium for grapes that are grown according to these specifications. Ravenswood intends to continue to emphasize the high-quality results of its winemaking process as it promotes its existing products and develops additional product offerings. Maintain Broad, Efficient Ravenswood has developed a broad network of Distribution Channels: brokers and distributors throughout the United States and in more than 15 export markets. Ravenswood sells its products directly in California, using five warehouses throughout the state and a network of seven brokers. Elsewhere throughout the United States and internationally, Ravenswood uses a network of over 75 distributors. Ravenswood has concentrated on the establishment of relationships with smaller, regionally-based brokers and distributors for which Ravenswood is a 31 prominent brand. Ravenswood believes these arrangements create incentives for 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. For example, for the 1998 harvest, Ravenswood crushed at the Gehricke Road Facility approximately one-third of the total grapes crushed, and relied on third-party facilities for the remainder of its crush requirements for that harvest. While Ravenswood believes that it will continue to focus primarily on the development of the Ravenswood brand, it is building the Quarry Facility to accommodate the increase in its wine production and to reduce its reliance upon the limited capacity available at third-party production facilities. Upon completion of the Quarry Facility, Ravenswood expects to utilize fully both the Quarry Facility and the Gehricke Road Facility for its wine production. Ravenswood believes the addition of the Quarry Facility will present several benefits, including: (a) consolidation of operations so as to improve coordination of management and staff; (b) substantial cost savings; and (c) closer control of Ravenswood's winemaking techniques to ensure continued high-quality standards. Retain and Further Develop Ravenswood believes its professional 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. Ravenswood Products Ravenswood has traditionally focused on the production of wines within the super-premium and ultra-premium categories of the premium wine market. Ravenswood's wines target specific varietals, appellations and prices within these categories. Vintners Blend Series: Ravenswood's Vintners Blend Series consists of wines produced from grapes of specific varietals but sourced from a variety of appellations in California. In producing its Vintners Blend Series, Ravenswood uses grapes obtained from independent growers in premium grape-growing regions in Northern California and bulk wine derived from grapes grown in various California appellations. Ravenswood 32 currently produces Vintners Blend Series wines in Zinfandel, Merlot and Chardonnay varietals. Its Vintners Blend Series provides lower margins than Ravenswood's other products; however, the flexibility provided by using grapes and bulk wine of varying appellations enables Ravenswood to produce its Vintners Blend Series on a larger scale than its other products. As a result, Ravenswood is able to generate greater sales. In the 1998 fiscal year, sales of the Vintners Blend Series totaled $9.5 million, or 56% of Ravenswood's gross sales. County Series: Ravenswood's County Series consists of specific varietal wines primarily vinted by Ravenswood and blended from grapes acquired from various independent growers within the specific appellations of Napa County, Sonoma County, Amador County and Lodi County. Ravenswood believes that its County Series provides consumers with a reasonably priced ultra-premium varietal wine derived solely from grapes of highly regarded appellations of the California premium wine industry. For its 1996 vintage, Ravenswood offered twelve different wines within its County Series. In the 1998 fiscal year, sales of the County Series totaled $4.5 million, or 27% of Ravenswood's gross sales. Vineyard Designate Series: Ravenswood's Vineyard Designate Series consists of ultra-premium varietal and Meritage wines derived from grapes supplied by specific vineyards within Napa and Sonoma counties. Ravenswood believes that Vineyard Designate Series wines represent the unique characteristics of each designated vineyard and its respective grape varietal. Ravenswood also believes that its Vineyard Designate Series' emphasis on old-world French winemaking techniques sets a standard for high quality that enhances the perceived value of the products in each of its product series. For its 1996 vintage, Ravenswood offered 22 different wines within its Vineyard Designate Series. The number of products offered within the Vineyard Designate Series varies from year to year. This variation results from two factors: the number of vineyards available for designation and the winemakers' discretion as to whether harvested grapes merit Vineyard Designate Series status. In the 1998 fiscal year, sales of the Vineyard Designate Series totaled $2.7 million, or 16% of Ravenswood's gross sales. 33 The table below summarizes the number of wines offered in each product series, by varietal, for the Ravenswood 1996 vintage: Vintners Vineyard Blend County Designate Total ----- ------ --------- ----- Zinfandel ................................ 1 4 10 15 Merlot ................................... 1 2 4 7 Cabernet Sauvignon, Cabernet Franc and Bordeaux varietal blends ............ -- 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, as Ravenswood expects production of other red varietal wines to increase more rapidly. While Ravenswood will continue to attempt to expand its sales and name recognition selectively, Ravenswood believes that its current mix of products is well suited to the growing demand for red wines, and it intends to continue to devote a majority of its production to its existing red wines. Ravenswood believes that by focusing on its unique winemaking process and emphasizing red wine, it has achieved a reputation for high quality and distinctive flavors within the market for red wines, particularly with respect to its Zinfandel and its Vineyard Designate Series. Ravenswood intends to maintain its position as a prominent supplier in the product categories in which it has already established itself. It also plans to explore additional opportunities to produce alternative varietal or blended products in those areas where its focus can enable Ravenswood to establish a similar reputation for excellence and build favorable awareness for the Ravenswood brand. Ravenswood's Red Winemaking Process In producing its premium wine products, Ravenswood employs traditional old-world French winemaking techniques modified to embrace important aspects of modern winemaking. Ravenswood defines traditional old-world French winemaking as an approach that embraces natural processes and in which human and mechanical intervention is minimized. To that end, Ravenswood takes such steps as allowing wild yeasts to assist in fermentation and manually mixing its fermenting wines when feasible. 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. Grape Acquisition Substantially all of the grapes utilized in the production of Ravenswood's wines are purchased from independent growers. Ravenswood plays an active role, however, in the management of the grapes that it purchases by monitoring the development of the crop and working directly with vineyard owners to determine optimal plans for nurturing and 34 harvesting grapes. Ravenswood also purchases bulk wine, which is wine vinted by third parties, to incorporate into some of its products. Most of the bulk wine purchased by Ravenswood is incorporated into its Vintners Blend Series. To a limited extent, Ravenswood may incorporate bulk wine that it believes to be of exceptional quality into its County Series. Fermentation After the grapes are harvested, they are immediately crushed and pumped into fermenting tanks. Using wild natural yeasts found on the grapes, a combination of the grapes, juice, seeds and stems is left to ferment for a period ranging from one to four weeks, during which time the sugar in the grapes is converted to alcohol. During fermentation, the grape skins are mixed with the fermenting juice through a process known as "punching down," which provides maximum contact between the skins and the juice. Ravenswood's fermentation procedures, by product series, are described below: Vineyard Designate Series: Ravenswood's Vineyard Designate Series is fermented in open-top redwood fermentation tanks of approximately five- to eight-ton capacity that permit punching down to be done by hand and optimize the distribution of heat throughout the fermentation process. All of the Vineyard Designate Series is currently crushed and fermented at the Gehricke Road Facility. County Series: Ravenswood's County Series is fermented in a mix of open-top redwood and stainless steel fermentation tanks ranging in size from six to 20 tons. A majority of the County Series is currently crushed and fermented at the Gehricke Road Facility. Vintners Blend Series: The portion of Ravenswood's Vintners Blend Series vinted by Ravenswood is fermented exclusively in 20- to 60-ton stainless steel fermenting tanks. Ravenswood currently utilizes independent crush and fermentation facilities for the production of this portion of the Vintners Blend Series. Most of Ravenswood's wines are allowed to go through malolactic fermentation, a secondary fermentation which adds complexity and flavor to the wines. Aging When the fermentation process is completed, the wine is gently pressed to separate the juice from the grape skins and stems. It is then stored for aging. Ravenswood's aging procedures, by product series, are described below: Vineyard Designate Series: All of Ravenswood's Vineyard Designate Series is stored in 60-gallon French oak barrels of various ages. Approximately 30-60% of the Vineyard Designate Series is stored in new barrels. Ravenswood believes that storage in new French oak barrels provides superior flavor characteristics in comparison 35 to other storage alternatives. The Vineyard Designate Series is aged in barrels for up to two years. County Series: Substantially all of Ravenswood's County Series is stored in 60-gallon French oak barrels and approximately 25-30% of the County Series is stored in new barrels. The County Series is typically aged in barrels for approximately 18 months. Vintners Blend Series: Approximately 30% of Ravenswood's Vintners Blend Series is stored in French oak barrels, but Ravenswood does not typically store wines in this series in new barrels. The remaining wine used to produce the Vintners Blend Series is stored in stainless steel tanks or purchased as bulk wine from third parties. The portion of the Vintners Blend Series that is vinted by Ravenswood and stored in barrels is typically aged for approximately one year. Blending And Bottling After aging is completed, Ravenswood's wines are blended prior to bottling and sale. Ravenswood's blending procedures, by product series, are described below: Vineyard Designate Series: The Vineyard Designate Series is produced by blending the wine vinted from a particular vineyard based on proportions of that wine stored in new and older barrels. The decision as to what percentage of wine stored in new and older barrels is included in a particular Vineyard Designate Series product is determined by Ravenswood's winemaker. County Series: The County Series is blended by mixing wines vinted from particular appellations based on proportions of wine from particular vineyards and stored in barrels of various ages. To a very limited extent, Ravenswood may incorporate some bulk wine that it believes to be of exceptional quality into its County Series. Vintners Blend Series: The Vintners Blend Series is blended using a proportion of French oak barreled wine, wine stored in stainless steel tanks and bulk wine acquired from independent wineries. After bottling, Ravenswood's winemakers release the wines for distribution at times they deem appropriate. Although Ravenswood currently uses a variety of production facilities to complete the production of its annual wine volume, it prescribes the processes used at these facilities in order to maintain consistency in the flavor and quality of its products. Ravenswood believes this approach has enabled it to establish a reputation for value at each price segment within the premium wine market in which Ravenswood currently competes. As Ravenswood expands production of its existing wines and adds new wines to its product portfolio, it intends to continue to use these same practices to ensure the quality of its wines and to enhance awareness of the Ravenswood brand name. 36 Marketing A primary focus of Ravenswood's marketing is associating the Ravenswood brand name with high quality and distinctive flavor within the super-premium and ultra-premium segments of the premium wine market. Ravenswood believes it has developed a favorable reputation and strong brand awareness among wine consumers and resellers for its red wines, in particular its Zinfandel, Merlot, Cabernet Sauvignon and proprietary blends. Ravenswood has invested, and expects to continue to invest significantly, in the development of its brand name, packaging and trademarks. Ravenswood believes that the distinctive Ravenswood name, which is derived from a character in the opera Lucia di Lammermoor by Gaetano Donizetti, and its distinctive logo, created by Berkeley poster artist and printer David Lance Goines, convey a recognizable and high-quality image that has contributed to its success. In addition, Ravenswood has invested substantially in promoting its trademarked slogan "No Wimpy Wines," which it believes accurately and humorously conveys its core marketing philosophy: to demystify wine and make it intellectually accessible to a broad range of consumers. At the same time, Ravenswood believes this slogan, which Ravenswood has idiosyncratically translated into over a dozen languages in its promotional materials, portrays the robust, full-bodied nature of its products, particularly its red wines. The focus of Ravenswood's marketing strategy is to attract core wine consumers. Consumer research indicates that the vast majority of the wine consumed in the United States is consumed by a small percentage of the adult population. While Ravenswood believes its promotional messages are appealing to a wide audience of consumers, it also believes a marketing effort focused upon core wine consumers is more effective than campaigns aimed at broadening the population of wine consumers in general. As a result, Ravenswood has not traditionally relied on broad-based advertising in the promotion of its wine and instead has relied on targeted marketing strategies aimed at the core population of wine consumers. As part of its targeted marketing strategy, Ravenswood has traditionally relied on its management's personal involvement in the marketing of its wines. Mr. Foster, Ravenswood's chief executive officer, and Mr. Peterson, its president and winemaker, as well as other employees, spend considerable time each year leading tours at the Gehricke Road Facility as well as traveling on behalf of Ravenswood throughout the country to meet with consumers, distributors, wholesalers, restaurateurs and wine writers. Although Ravenswood expects to expand its marketing efforts in the future, it anticipates that its executive management will continue to personally promote its products and brand name. A key element of Ravenswood's marketing is its tasting room located at its Gehricke Road Facility. The tasting room, which is open seven days a week, offers tastings of Ravenswood's product line, Ravenswood logo merchandise and a daily tour of the winery operations. The tasting room also offers barbecues on summer weekends, which encourage visitors to linger over lunch. Ravenswood believes that this welcoming, relaxed atmosphere is an integral part of its casual and approachable style and assists in the development of a favorable image for the Ravenswood brand. Consumer research also indicates that a majority of core wine consumers rate brand name familiarity as a very important attribute in selecting a wine for purchase. Ravenswood intends to continue to invest in the promotion of its brand name, logo and slogan in the future to increase the familiarity and favorable impression of the Ravenswood brand. This 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. 37 Sales and Distribution Ravenswood's wines are purchased by consumers at: o "on-premise" restaurants o "off-premise" retailers such as specialty wine stores, supermarkets, discounters and liquor stores o Ravenswood's tasting room Consumers can purchase Ravenswood's wines at on- and off-premise accounts in all 50 states and in over 15 foreign countries located in North America, Europe and Asia. Ravenswood's sales and distributions strategy varies by geographic location. Within the United States, Ravenswood utilizes distributors in every state except California. Brokers are used to assist the sales effort in California and 29 other states. Ravenswood uses both brokers and distributors in most of the foreign countries in which Ravenswood's wines are sold. Brokers act as an independent sales force and receive commissions as compensation for their sales. Brokers do not take title to the wines they sell. Distributors purchase wine from Ravenswood and sell the wine to their own retail accounts, such as restaurants, grocery stores and wine shops. Ravenswood primarily uses smaller, well-positioned brokers and distributors for whom Ravenswood is a key brand. Although Ravenswood has very few long-term agreements for the distribution of its products, Ravenswood believes that its relationships with its existing brokers and distributors are excellent. Ravenswood's executive management also takes an active role in assisting brokers and distributors with sales within California and within major geographic markets outside California. In the 1998 fiscal year, approximately 75% of Ravenswood's gross sales were made using brokers. In the 1998 fiscal year, its most successful broker was responsible for 21% of its gross sales, and its ten most successful brokers were responsible for 69% of its gross sales. Within California, Ravenswood currently uses seven brokers and five warehouses located throughout the state. For the 1998 fiscal year, excluding sales through its tasting room, approximately 39% of Ravenswood's gross sales resulted from sales to retail accounts in California. In this same period, 11% of gross sales were purchases by consumers 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 allocated its available production among its brokers and distributors. Ravenswood believes that the breadth of its distributor network, which participated in approximately 49% of Ravenswood's gross sales for the 1998 fiscal year, ensures that the elimination of any one specific distribution relationship will not adversely affect out-of-state sales. Beginning in 1991, Ravenswood began selling wines and some merchandise directly to consumers through the tasting room at its Gehricke Road Facility. Ravenswood's gross sales from its tasting room have grown substantially since 1992. Although Ravenswood sells some 38 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. Currently only three acres of these vineyards are producing grapes. The remaining eleven acres were infested with Phylloxera. They were recently replanted with Phylloxera-resistant vines and will resume production over the next three years. Ravenswood is dependent upon independent grape growers and bulk wine suppliers for substantially all of its annual wine production. Ravenswood obtains its grapes for wine production from more than 60 suppliers located in Sonoma and Napa counties, and other Northern California premium grape-growing counties. Ravenswood is not dependent upon any one supplier for a significant portion of its total required grape supply in any given harvest season. Ravenswood's largest supplier typically accounts for no more than 8% of the total grapes crushed for Ravenswood's annual wine production, and the top three suppliers together generally account for no more than 20% of the total grapes crushed. Ravenswood believes there are sufficient alternative supplies of high-quality grapes to ensure continuing production of high-quality wines in the event that it cannot obtain grapes from any particular supplier. In working with its growers, Ravenswood relies on both personal and contractual relationships. Ravenswood has entered into grape purchase agreements with the growers of a majority of the grapes used in its annual production. The business terms of these purchase agreements vary; however, the majority of Ravenswood's purchase agreements require that, while either party may terminate the agreement at any time, both parties must abide by its terms for three years following termination. The majority of these contracts provide for pricing formulas tied to the Final Grape Crush Report published annually by the California Department of Food and Agriculture. Ravenswood also purchases grapes from some of its growers in amounts and at prices that are negotiated from year to year. These year-to-year arrangements are often not in writing. Ravenswood traditionally has relied on, and continues to seek to establish, relationships with growers that have a long-term perspective, whose vineyards have the potential for developing distinctive wines, and for whom Ravenswood is an important customer. Ravenswood relies on several specific grape suppliers for its Vineyard Designate Series in order to produce wines from those specific vineyards. For the 1996 vintage, Ravenswood produced 22 separate wines within the Vineyard Designate Series. The vast majority of growers supplying grapes for Ravenswood's Vineyard Designate Series have entered into grape supply agreements with Ravenswood. Ravenswood believes that the pricing arrangements with these growers and the prestige and notoriety related to the production of a wine within the Vineyard Designate Series have led to stable and long-term relationships with those suppliers. Ravenswood is also dependent on bulk wine suppliers for the production of several of its wines, particularly its Vintners Blend Series. Ravenswood does not have contracts with bulk wine suppliers or agreements that would protect it from fluctuations in the price or availability of bulk wine. The availability and price of bulk wine significantly affect the quality and production level of Ravenswood's products that contain bulk wine. The price, 39 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 Nino, the grape supply available to Ravenswood for the 1998 harvest was lower than for the 1997 harvest, which Ravenswood believes was an unusually large harvest. Although Ravenswood expects to compensate in part for this shortfall by the purchase of bulk wine, the inventory of Ravenswood's 1998 vintage may be less than that of the 1997 vintage. As a result, the growth of Ravenswood's sales may be limited in fiscal years 2000 and 2001, when most of its 1998 vintage will be released for sale. Ravenswood believes it has maintained good relationships with its grape suppliers in the past, and it expects no material adverse change in these relationships in the foreseeable future. Nevertheless, shortages in the supply of wine grapes could result in an increase in the price of some or all grape varieties and a corresponding increase in the cost to Ravenswood of its wine production as well as a potential shortfall in Ravenswood's inventory. An increase in the cost of producing Ravenswood's wines or a shortfall in inventory could reduce the amount of wine Ravenswood produces for sale, and could result in reductions in its sales and profits. The recent increase in demand for premium wine has resulted in the planting of additional vineyards both domestically and internationally and the replanting of existing vineyards to greater densities. Many industry sources expect a significant increase in the supply of premium wine grapes in the next few years. Although this increase in supply may cause a decrease in the prices Ravenswood pays independent growers for their grapes, an oversupply of grapes may significantly increase the amount of premium wine produced. An increase in the supply of premium wine may reduce the price of premium wines, including those Ravenswood produces, which could harm its business and reduce its sales. Oversupply may also increase the amount of premium wine available to its distributors and retail outlets, which could increase competition in its distribution channels. Wine Production Facilities Ravenswood currently uses the Gehricke Road Facility, which it owns, two leased barrel-storage warehouses and three production facilities operated by third parties to crush, ferment, store and bottle its annual wine production. Ravenswood also leases production equipment, including French oak barrels, under various capital leases. Typically, Ravenswood's agreements with third-party production partners have one-year terms. Ravenswood believes these arrangements are acceptable because of the excellent relationships maintained with such producers. Ravenswood believes access to third-party production facilities may be limited in the future due to several factors, including: o Growth in demand for these facilities o Anti-development sentiments in Napa and Sonoma counties o Unavailability of sites for additional facilities o Significant growth in the wine industry 40 If Ravenswood were not able to secure the use of these facilities, and could not undertake increased production activities through its own facilities, its production, sales and profits could be limited. Due to the increase in Ravenswood's production over the past several years and its increasing dependence on third-party production facilities, Ravenswood has undertaken to increase its own production capacity. Its Gehricke Road Facility is currently operating at full capacity. Ravenswood is in the process of building the Quarry Facility as an additional production facility on a leased, approximately 30-acre location in the Sonoma Valley approximately nine miles southwest of the Gehricke Road Facility. Portions of the Quarry Facility are located immediately adjacent to a working quarry. The winery and quarry operations will be physically separated and will not share any improvements with the exception of an access road. Ravenswood's management does not believe that the quarry will negatively affect its operations in any material way. Preliminary site work began on the Quarry Facility during the fall of 1998, and construction commenced in February 1999. Prior to the commencement of construction, the site was undeveloped. Ravenswood anticipates that the facility will be operational by late summer or early autumn of 1999. Ravenswood estimates that construction costs for the facility will total approximately $7 million, and additional equipment purchases and capital leases will total approximately $2 million. Ravenswood has developed a master plan for the Quarry Facility, which includes a 45,000 square-foot building with facilities capable of crushing 2,700 tons of grapes and storing 11,000 barrels of wine. Ravenswood initially plans to bottle a maximum of 250,000 cases of wine annually at the Quarry Facility, which is the maximum amount allowed under its current use permit. Ravenswood anticipates that it will expand the facility in the future to increase its production and believes that it will be able to increase its permitted capacity. The Quarry Facility will also support warehouse and administrative office activities. Ravenswood believes that it will require additional production personnel in connection with this expansion. Any hiring will take place when the new facility is operational. Upon completion of the Quarry Facility, Ravenswood believes that it will use both its Gehricke Road Facility and the Quarry Facility to full capacity. Ravenswood believes that the construction of the Quarry Facility will result in immediate and substantial savings because in-house production will cost less than paying outside vendors for custom crushing, fermentation, storage and bottling. Ravenswood anticipates that consolidating its facilities will improve the management and coordination of production staff and facilities. In addition, Ravenswood believes this consolidation will allow it to reduce its future reliance upon production facilities owned by independent third parties. Ravenswood believes the increased control over the production process provided by the completion of the Quarry Facility will enhance its ability to apply its traditional winemaking processes on a consistent basis. Use of the Quarry Facility will also assist Ravenswood in maintaining the label terminology "Produced and Bottled by Ravenswood Winery, Sonoma, CA." Production of wine at non-Ravenswood locations sometimes requires different labeling. Ravenswood believes that it will have access to adequate capital to complete the Quarry Facility. Ravenswood's failure to complete the facility, or otherwise expand its production capabilities, could limit its production and therefore its sales and profits. 41 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 Ravenswood believes it is competitive in each of these areas, there can be no assurance that it will be able to compete effectively in the future. The wine industry has experienced significant consolidation in recent years. Despite numerous brand labels, industry analysts estimate that seven wineries accounted for approximately 53% of the total California premium wine shipments in 1997, by volume. Large volume competitors, such as Beringer Estates, Gallo, Kendall Jackson and Robert Mondavi, which compete directly with Ravenswood in the premium wine market, have significantly greater capital resources, more sophisticated promotional practices, and substantially larger and more developed distribution networks than Ravenswood. As a result, Ravenswood may not be able to compete successfully against these producers of premium wines. As a result of its distribution strategy, Ravenswood believes that it has been able to compete effectively, particularly with respect to its higher-end products, with much larger-scale wine producers that rely on larger distributors or internal sales forces. In recent years, an increasing number of smaller wineries have adopted an approach to winemaking similar to Ravenswood's, which emphasizes production processes and brand awareness over investment in land and production capacity. Ravenswood believes that these competitors, such as Cline Cellars, Kenwood, Rabbit Ridge, Ridge Vineyards and Rosenblum Cellars, appeal to many of the same consumers as those targeted by Ravenswood. Ravenswood believes that, while brand awareness is an important component to core wine consumers, most wine consumers are loyal to more than one brand of premium wine. As a result, Ravenswood must constantly promote its wines to its existing customer base. The increase in the number of Ravenswood's competitors may prevent it from successfully establishing its brand name or obtaining sufficient marketing focus from its independent brokers and distributors, which could harm its business and reduce its sales and profits. Government Regulation The wine industry is subject to extensive regulation by the Federal Bureau of Alcohol, Tobacco and Firearms, various foreign agencies, and state and local liquor authorities. These regulations and laws dictate matters such as: o Excise taxes o Licensing requirements 42 o Trade and pricing practices o Permitted distribution channels o Permitted and required labeling o Advertising o 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. It also regulates some elements of wine production. The State of California regulates Ravenswood's activities through the Alcoholic Beverage Control. Ravenswood holds a permit with the ABC to produce and sell alcoholic beverages. The State of California also regulates the sales and distribution of Ravenswood's products in the state. In addition, Ravenswood is subject to regulation by each state in which its products are sold, and many of those states restrict the shipment of alcoholic beverages by Ravenswood directly to consumers. The laws and regulations of several states also prohibit changes of distributors except under limited circumstances, making it difficult to terminate a distributor without reasonable cause, as defined by applicable statutes. Ravenswood periodically uses various chemical herbicides, fungicides and pesticides on the vineyards it cultivates, some of which contain hazardous or toxic substances. The use and storage of these chemicals are, to varying degrees, subject to federal and state regulation. The expansion of the Gehricke Road Facility and Quarry Facility, and the development of new vineyards and winery facilities, may be limited by zoning ordinances, environmental restrictions and other legal requirements. In addition, new regulations or requirements or increases in excise taxes, income taxes, property and sales taxes and international tariffs could materially adversely affect the financial results of Ravenswood. Ravenswood can provide no assurance that there will not be future legal or regulatory challenges to the industry, which could have a material adverse effect on Ravenswood's business, financial condition and results of operations. Properties Ravenswood currently operates one owned and two leased locations in Sonoma. The Gehricke Road Facility, which Ravenswood owns, is comprised of two buildings totaling approximately 12,600 square feet. This facility houses the majority of Ravenswood's production equipment, its administrative offices, a small laboratory, a retail tasting room, and a warehouse space for barrel and tank storage. The Gehricke Road Facility is situated on approximately 25 acres, 14 of which are Zinfandel and Merlot vineyards. Ravenswood's two additional production and operation facilities, which it leases, are used primarily for barrel storage and aging of wines. These facilities comprise a total of approximately 29,900 square feet. The lease for one of the properties provides for monthly payments of $3,960 for 9,900 square feet, subject to annual adjustment, and expires on September 30, 2000. The lease for the other facility provides for monthly payments of $8,200 for 20,000 square feet, subject to annual adjustment, and expires on September 30, 1999, with a two-year renewal option. Ravenswood also leases a 1,000 square-foot office in San Francisco for administrative and sales purposes. The lease for the office provides for monthly payments of $1,217, subject to annual adjustment, and expires on February 28, 2000. 43 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. Current monthly payments are $1,723, and will increase to $3,445 on August 1, 1999, subject to annual adjustment. In addition, the lease provides Ravenswood with a right of first refusal to purchase a portion of the property and an option to extend the lease upon its expiration, under certain circumstances. 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 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. 44 MANAGEMENT Executive Officers and Directors Ravenswood's executive officers and directors and their ages as of February 1, 1999 are as follows: Name Age Position - ---- --- -------- W. Reed Foster ............... 67 Chairman, chief executive officer and director Joel E. Peterson ............. 51 President, winemaker and director Justin M. Faggioli ........... 47 Executive vice president, secretary and director Callie S. Konno .............. 45 Chief financial officer, treasurer and director James F. Wisner .............. 65 Director Robert E. McGill, III ........ 67 Director W. Reed Foster co-founded Ravenswood in 1976. He has served as chairman, chief executive officer and a director since Ravenswood's incorporation in 1986. From 1970 until joining Ravenswood, Mr. Foster operated a commercial real estate firm in San Francisco. He also co-founded the San Francisco Vintner's Club, serving as its president for six years, and served as an officer of Draper & Esquin, a retail wine shop, for 15 years. He received a B.A. in philosophy from Williams College and an M.B.A. from the Harvard Graduate School of Business Administration. Joel E. Peterson co-founded Ravenswood in 1976. He has served as president, winemaker and a director since Ravenswood's incorporation in 1986. Mr. Peterson's duties as winemaker involve managing and directing the winemaking process and staff, and sourcing grape and bulk wine supplies. From 1973 until joining Ravenswood, Mr. Peterson was a wine writer and a consultant in the art of traditional winemaking as practiced in Bordeaux and Burgundy. Mr. Peterson holds a B.S. in Microbiology and Biochemistry from Oregon State University and a Medical Technology degree from the University of California, San Francisco. Mr. Peterson was actively involved in immunology research at Mt. Zion Hospital until 1977. Justin M. Faggioli has served as executive vice president of Ravenswood since January 1995, and as secretary and a director since October 1996. Prior to joining Ravenswood, from May 1991 until January 1995, Mr. Faggioli operated a 2,600-acre ranch in Sonoma County owned by his wife's family and helped develop a 175-acre vineyard on that property. Mr. Faggioli holds B.S. and M.S. degrees in Earth Sciences from Stanford University and an M.B.A. from the Harvard Graduate School of Business Administration. Callie S. Konno has served as Ravenswood's chief financial officer since 1996 and has served as a director since February 1999. From 1993 until her appointment as chief financial officer, Ms. Konno served as secretary of Ravenswood and was responsible for various accounting and administrative duties. She holds an A.B. in History and International Relations from Occidental College and an M.L.I.S. in Library and Information Studies from the University of California, Berkeley. In addition, Ms. Konno has passed the Certified Public Accountants examination. James F. Wisner has served as a director since Ravenswood's incorporation in 1986. Mr. Wisner has practiced law as a sole practitioner since 1992. From 1972 until 1992, Mr. Wisner was a partner in the law firm of Bancroft, Avery & McAllister in San Francisco, California. He holds an A.B. in American History from Yale University, a J.D. from Stanford University and an M.B.A. from Golden Gate University. 45 Robert E. McGill, III has served as a director of Ravenswood since February 1999. Mr. McGill currently serves as a director of Connecticut Surety Corporation, an insurance company, and Chemfab Corporation, a specialty materials manufacturing company. In addition, he currently serves as a trustee of Travelers Mutual & Variable Annuity Funds, an investment company. From 1975 to 1995, Mr. McGill served in various senior management positions, including, most recently, as executive vice president, finance and administration, and, from 1983 to 1995 as a director, of The Dexter Corporation, a specialty materials and chemical manufacturing company. Mr. McGill received a B.A. in Economics from Williams College and an M.B.A. from the Harvard Graduate School of Business Administration. Each director holds office until the next annual meeting of shareholders or until the director's successor is duly elected and qualified. Officers are elected by the board of directors at each annual meeting and serve at the pleasure of the board of directors. Audit Committee The board of directors has established an audit committee consisting of Ms. Konno and Messrs. Wisner and McGill. The audit committee reviews with Ravenswood's independent auditors the scope and timing of their audit services and any other services that they are asked to perform, the auditor's report on Ravenswood's financial statements following completion of their audit, and Ravenswood's policies and procedures with respect to internal accounting and financial controls. In addition, the audit committee makes annual recommendations to the board of directors for the appointment of independent auditors for the ensuing year. Compensation Committee The board of directors has established a compensation committee consisting of Messrs. Wisner and McGill. Ravenswood expects that the compensation committee will make recommendations to the board of directors regarding executive compensation. Director Compensation Directors receive no cash compensation for serving as directors of Ravenswood. Ravenswood intends to grant stock options under its 1999 Equity Incentive Plan to purchase 5,000 shares of common stock to each of Messrs. Wisner and McGill on the effective date of this offering at the initial public offering price. These options will vest annually over five years from the date of grant. 46 Executive Compensation The following table sets forth information for the fiscal year ended June 30, 1998, regarding the compensation earned by the chief executive officer and each of Ravenswood's three most highly compensated executive officers other than the chief executive officer whose salary plus bonus exceeded $100,000 for the fiscal year ended June 30, 1998. No stock options were granted to or exercised by any of the named executive officers in the fiscal year ended June 30, 1998. Ravenswood has not entered into employment agreements with any of its officers. Ravenswood has purchased key-man life insurance policies with respect to Messrs. Peterson and Foster, in the amounts of $7 million and $2 million, respectively. Summary Compensation Table
Annual Compensation -------------------------------------------------------- 401(k) Matching Name and Principal Position Salary($) Bonus($) Contributions($) - --------------------------- -------- -------- ---------------- 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
In accordance with the rules of the Securities and Exchange Commission, the compensation described in the above table does not include perquisites and other personal benefits received by the named executive officers which do not exceed the lesser of $50,000 or 10% of the total salary and bonus reported for the named executive officer. 1999 Equity Incentive Plan Ravenswood's 1999 Equity Incentive Plan was adopted by Ravenswood's board of directors and approved by its shareholders in February 1999. There are 500,000 shares of common stock reserved for issuance under the plan and no options have been granted under the plan as of February 1, 1999. Ravenswood intends to grant stock options to purchase an aggregate of 279,500 shares of common stock on the effective date of this offering, including the following grants to its named executive officers: Number of Shares Name Granted as Options ---- ------------------ W. Reed Foster ........... 50,000 Joel E. Peterson ......... 50,000 Justin M. Faggioli ....... 37,500 Callie S. Konno .......... 37,500 The remaining 104,500 shares will be granted as follows: o Options to purchase 5,000 shares of common stock will be granted to each of Messrs. Wisner and McGill, as described under "Director Compensation" o Options to purchase the remaining 94,500 shares of common stock will be granted to individuals who are employees of, or independent contractors or consultants to, Ravenswood 47 All of these options will vest annually over five years from the date of grant. The exercise prices will be equal to the initial public offering price, except in the case of Messrs. Foster and Peterson, whose stock option exercise prices will be equal to 110% of the initial public offering price. No awards may be granted under the plan after February 2009, but the vesting and effectiveness of awards previously granted may extend beyond that date. The plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code, non-statutory stock options, restricted stock awards and other stock-based awards. All officers, employees, directors, independent contractors and consultants to Ravenswood are eligible to receive awards under the plan. Under present law, however, 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 Internal Revenue Code may not be granted at an exercise price less than the fair market value of the common stock on the date of grant, or less than 110% of the fair market value in the case of 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: o Cash, o Delivery to Ravenswood of a promissory note o Surrender to Ravenswood of shares of common stock, or, in connection with a "cashless exercise" through a broker o Delivery of an irrevocable notice of exercise o Any combination of the permitted forms of payment Options will expire on a date determined by the board of directors, provided that the expiration date for 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 only by the optionee during the optionee's lifetime, except as permitted by the board of directors. The board of directors may grant restricted shares, which are shares of common stock that are subject to transfer restrictions determined by the board of directors and subject to substantial risk of forfeiture unless and until specific conditions established by the board at the time of grant are met. These conditions may be based upon continuing employment or achievement of pre-established performance goals, or both, as determined by the board of directors. The plan also authorizes the board of directors to award or offer bonuses of shares of common stock, either restricted or non-restricted, as current or deferred compensation, in lieu of all or any portion of the cash compensation to which the employee is entitled. The board of directors administers the plan. The board also has the authority to adopt, amend and repeal the administrative rules, guidelines and practices relating to the plan and to interpret its provisions; provided, however, that no amendment, suspension or termination 48 of the plan may alter or impair an interest granted to a beneficiary under the plan without the beneficiary's written consent. The board may delegate its authority under the plan to a committee of the board. In the event of a merger, liquidation or other acquisition event as described in the plan, the board of directors is authorized to provide for outstanding options or other stock-based awards to be assumed or replaced by the acquiror and to take other actions, including accelerating the vesting schedule of awards. Stock options granted under the plan are intended to be "performance-based compensation" that are not subject to the deduction limitation of Section 162(m) of the Internal Revenue Code. Under generally accepted accounting principles, as currently applied, Ravenswood will not incur accounting charges with respect to stock options granted or exercised under the plan. Ravenswood will, however, incur accounting charges for the fair market value of stock options granted to non-employee directors, consultants or independent contractors, as well as restricted stock grants or stock bonus awards, as of the date of each grant or award. Stock options will also affect the amount of diluted earnings per share, in accordance with Financial Accounting Standard 128. Under Financial Accounting Standard 123, Ravenswood will provide footnote disclosure in its financial statements of the assumed value of all options granted under the plan and the actual value of restricted stock and stock bonus awards granted under the plan. Employee Stock Purchase Plan Ravenswood's Employee Stock Purchase Plan was adopted by Ravenswood's board of directors and approved by its shareholders in February 1999. Ravenswood has reserved 50,000 shares of common stock for issuance under the Employee Stock Purchase Plan. The plan, which is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code, provides that all employees of Ravenswood, including directors of Ravenswood who are employees whose customary employment is more than 20 hours per week for more than five months in any calendar year, are eligible to participate in the plan. Employees who would immediately after the grant own 5% or more of the total combined voting power or value of the stock of Ravenswood are not eligible to participate. As of February 1, 1999, approximately 31 employees would have been eligible to participate in the plan. The plan may be amended solely by the board of directors, except with respect to an increase in the number of shares reserved for issuance under the plan, which would require shareholder approval. On the first day of the offering period, Ravenswood will grant to each eligible employee who has elected to participate in the plan an option to purchase shares of common stock. The employee may authorize an amount ranging from 1% to 10% of his or her base pay to be deducted by Ravenswood during the offering period. On the last day of the offering period, the employee is deemed to have exercised the option, at the option exercise price, to the extent of accumulated payroll deductions. Under the terms of the plan, the option price may be set at an amount as low as 85% of the average market price per share of the common stock on either the first day or the last day of the offering period, whichever is lower. An employee may not purchase more than 500 shares in any one offering period. The board of directors may, in its discretion, choose an offering period of any length not exceeding 27 months. An employee who is not a participant in the plan on the last day of the offering period is not entitled to exercise any option, and the employee's accumulated payroll deductions will be 49 refunded. An employee's rights under the plan terminate upon voluntary withdrawal from the plan at any time, or when the employee ceases employment for any reason, except that upon termination of employment because of death, the employee's beneficiary has the right to elect to exercise the option to purchase the shares that the accumulated payroll deductions in the participant's account would purchase at the date of death. Because participation in the plan is voluntary, Ravenswood cannot now determine the number of shares of common stock to be purchased by any particular executive officer, by all current executive officers as a group, or by non-executives as a group. All shares of common stock purchased by an employee will be held by Ravenswood or by an agent of Ravenswood and will be registered in the name of the plan. Ravenswood or its agent will abstain from voting any shares held under the plan. An employee's interest in the amount of cash and/or shares held on his or her behalf will be fully vested and non-forfeitable at all times. An employee may have any shares of common stock held on his or her behalf under the plan distributed to that employee, as provided under the plan. 401(k) Savings Plan In April 1995 Ravenswood instituted a defined contribution retirement plan, intended to qualify under Sections 401(a) and 401(k) of the Internal Revenue Code. All full-time employees of Ravenswood are eligible to participate in the retirement plan on the first day of the semi-annual period following one year of employment. The retirement plan provides that each participant may contribute from 1% to 15% of compensation, subject to statutory limitations. Under the retirement plan, Ravenswood may also make discretionary contributions based on a percentage of a participant's contributions as determined by Ravenswood or additional amounts as Ravenswood may deem appropriate. In connection with the adoption of the retirement plan, the board of directors approved a matching contribution of 66% of the first 6% of employee contributions. Ravenswood's contributions under the retirement plan totaled $53,089 for the 1998 fiscal year. Limitation of Liability and Indemnification Matters Ravenswood's bylaws provide that Ravenswood will indemnify its directors and executive officers and may indemnify its other officers, employees and other agents to the fullest extent permitted by California law. Ravenswood is also empowered under its bylaws to enter into indemnification contracts with its directors and officers and to purchase insurance on behalf of any person it is required or permitted to indemnify. Under this provision, Ravenswood has entered into indemnity agreements with each of its directors and executive officers. Ravenswood has obtained officer and director liability insurance 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: o Breach of the director's duty of loyalty to Ravenswood o Acts or omissions involving intentional misconduct or bad faith 50 o Knowing violations of law o Any transaction from which the director derived an improper personal benefit o Improper transactions between the director and Ravenswood o Improper distributions to shareholders and loans to directors and officers This provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws. There is no pending litigation or proceeding involving a director or officer of Ravenswood as to which indemnification is being sought, nor is Ravenswood aware of any pending or threatened litigation that may result in claims for indemnification by any director or officer. 51 CERTAIN TRANSACTIONS On August 25, 1992, Ravenswood entered into a deferred compensation agreement with Mr. Foster, its chairman and chief executive officer, entitling him to receive upon termination of his employment the value of 345,731 shares of common stock, payable in shares or cash at Ravenswood's discretion. Effective July 1, 1998, Ravenswood and Mr. Foster mutually terminated this arrangement upon Ravenswood's issuing to Mr. Foster the 345,731 shares of common stock, and agreeing to lend him up to $335,000 to pay taxes related to his receipt of these shares. The loan, which was partially funded in December 1998, with the balance to be drawn in April 1999, is due on December 21, 2008, with interest payable annually at 5.3% per annum. The loan is unsecured. See notes 11 and 16 of the notes to financial statements. From August until December 1998, the following officers and directors of Ravenswood participated in a private placement of an aggregate of $1.7 million of convertible debentures and $1.7 million of common stock by Ravenswood: Name Security Amount Purchased ---- -------- ---------------- W. Reed Foster .......... Convertible Debentures $ 62,500 Common Stock $ 62,500 Justin M. Faggioli ...... Convertible Debentures $134,283 Common Stock $187,500 Robert E. McGill, III ... Convertible Debentures $ 62,500 Common Stock $ 62,500 Each $10,000 convertible debenture is convertible into 900 shares of common stock. The per share price of the common stock sold in the private placement was $7.94 per share. The purchase price of the securities sold to these officers and directors in the private placement was determined based on Ravenswood's board of directors' good faith determination of the fair market value of the securities, and was equivalent to the price paid for the securities by unrelated third parties in the transaction. In connection with the proposed expansion of the Quarry Facility, Ravenswood has entered into an agreement to lease approximately 30 acres of land in Sonoma County, California from Sandra D. Donnell and Bruce B. Donnell, the wife and brother-in-law, respectively, of Mr. Faggioli, Ravenswood's executive vice president. The lease, which is dated as of January 1, 1999, provides for monthly payments and expires on December 31, 2032. Payments under the lease from Ravenswood to Ms. Donnell and Mr. Donnell totaled $20,672 for calendar 1998, and are expected to total $29,255 for calendar 1999, and approximately $41,344 for calendar 2000, subject to annual adjustments. Mr. Faggioli, Ms. Donnell and Mr. Donnell, together, are 15% partners in Sangiacomo-El Novillero Vineyards. This partnership leases land from Ms. Donnell and Mr. Donnell and sells a portion of its grapes to Ravenswood. Grape payments by Ravenswood to the partnership totaled $88,872 in calendar 1997 and $147,490 in calendar 1998. Ravenswood has periodically borrowed funds for short-term working capital from some of its executive officers. As of December 31, 1998, Ravenswood had outstanding promissory notes in the principal amount of $50,250 payable to Mr. Foster, and promissory notes in the principal amount of $46,143 payable to Mr. Peterson, Ravenswood's president and winemaker. With the exception of two notes in the principal amount of $25,000 payable to each of Mr. Foster and Mr. Peterson, respectively, which are due in June 30, 2004, each of the notes is payable upon demand by the holder. The notes bear interest at rates ranging from 10% to 11% per annum. 52 Mr. Peterson has two outstanding promissory notes payable to Ravenswood for an aggregate principle amount of $22,000. The notes bear interest at 8.5% per annum and are due in January 2004 and April 2004. Mr. Peterson's wife, Madeleine Deininger, serves as a broker for Ravenswood in the New England states. Under this arrangement, Ms. Deininger received sales commissions totaling $154,575 in calendar 1997 and $214,018 in calendar 1998. Ravenswood believes these transactions were in its best interest. As a matter of policy, the transactions were, and all future transactions between Ravenswood and any of its officers, directors or principal shareholders will be, approved by a majority of the disinterested members of the board of directors, will be on terms no less favorable to Ravenswood than could be obtained from unaffiliated third parties and will be to serve bona fide business purposes of Ravenswood. 53 PRINCIPAL SHAREHOLDERS The following tables set forth information regarding beneficial ownership of Ravenswood's common stock as of December 31, 1998, and as adjusted to reflect the sale of the 1,000,000 shares of common stock in this offering, for: (a) each person who is known by Ravenswood to beneficially own more than 5% of the outstanding shares of common stock; (b) each director of Ravenswood; (c) each named executive officer; and (d) all directors and executive officers of Ravenswood as a group. The address of each of the directors and executive officers of Ravenswood is c/o Ravenswood Winery, Inc., 18701 Gehricke Road, Sonoma, California 95476. The percentages of shares outstanding prior to the offering are based on 3,550,852 shares outstanding as of December 31, 1998. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares voting and investment power with his or her spouse, with respect to all shares of capital stock listed as owned by such person. Shares issuable upon conversion of debentures that are currently convertible or become convertible within sixty days of December 31, 1998 are considered outstanding for the purpose of calculating the percentage of outstanding shares of Ravenswood held by the individual, but not for the purpose of calculating the percentage of outstanding shares of Ravenswood held by any other individual. The total number of shares shown as beneficially owned by each of Messrs. Foster, Peterson Faggioli and Wisner includes 2,150,681 shares of common stock held in a voting trust, as to which Messrs. Foster, Peterson, Faggioli and Wisner exercise voting control as trustees. 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.
Percentage of Shares Outstanding ----------------------------- Number of Shares Beneficially Prior to After Name Owned Offering Offering - ---- ----- -------- -------- W. Reed Foster(1) ................................................. 2,164,181 60.9% 47.5% Joel E. Peterson(2) ............................................... 2,150,681 60.6% 47.3% Justin M. Faggioli(3) ............................................. 2,186,391 61.4% 47.9% James F. Wisner(4) ................................................ 2,150,681 60.6% 47.3% Callie S. Konno ................................................... 59,850 1.7% 1.3% Robert E. McGill, III(5) .......................................... 25,750 * * All directors and executive officers as a group (6 persons)(6) ........................................ 2,225,641 62.1% 48.5% - ------------------ * Less than 1%. (1) Includes 5,625 shares of common stock issuable upon conversion of outstanding convertible debentures. Does not include 151,200 shares held by an irrevocable trust established for the benefit of Mr. Foster's children. (2) Does not include 151,200 shares held by an irrevocable trust established for the benefit of Mr. Peterson's children. (3) Includes 12,085 shares of common stock issuable upon conversion of outstanding convertible debentures, 4,789 shares of which are held by Mr. Faggioli's spouse. (4) Includes 31,500 shares held by Mr. Wisner's spouse. (5) Includes 17,875 shares of common stock issuable upon conversion of outstanding convertible debentures. Also includes 13,500 shares held in a family trust established for the benefit of Mr. McGill. (6) Includes 35,585 shares of common stock issuable upon conversion of outstanding convertible debentures.
54 Excluding the shares of common stock beneficially owned by Messrs. Foster, Peterson, Faggioli and Wisner solely as a result of their status as trustees of the voting trust, Messrs. Foster, Peterson, Faggioli and Wisner's beneficial ownership disclosure would appear as follows: Percentage of Shares Outstanding ----------------------- Number of Shares Prior to After Name Beneficially Owned Offering Offering - ---- -------------------- ---------- ---------- W. Reed Foster (1) ........... 431,681 12.1% 9.5% Joel E. Peterson (2) ......... 1,404,270 39.6% 30.9% Justin M. Faggioli (3) ....... 127,060 3.6% 2.8% James F. Wisner (4) .......... 157,500 4.4% 3.5% 55 DESCRIPTION OF CAPITAL STOCK Upon the closing of this offering, the authorized capital stock of Ravenswood will consist of 20,000,000 shares of common stock, no par value, and 1,000,000 shares of preferred stock, no par value. As of December 31, 1998, there were outstanding 3,550,852 shares of common stock held by approximately 60 shareholders of record and no shares of preferred stock. Of the 20,000,000 shares of common stock authorized: 500,000 are reserved for issuance under the 1999 Equity Incentive Plan, 50,000 are reserved for issuance under the Employee Stock Purchase Plan, 454,622 are reserved for issuance upon the conversion of outstanding debentures, and 1,000,000 are being sold in this offering. Common Stock The holders of common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the shareholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, the holders of common stock are entitled to receive dividends as may be declared by the board of directors out of legally available funds. In the event of a liquidation, dissolution or winding up of Ravenswood, holders of the common stock are entitled to share ratably in all assets remaining after payment of liabilities and the liquidation preferences of any outstanding shares of preferred stock. Holders of common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are, and all shares of common stock to be outstanding upon the closing of this offering will be, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to the rights of holders of shares of any series of preferred stock which Ravenswood may designate and issue in the future. Voting Trust A portion of Ravenswood's outstanding common stock, totaling 2,150,681 shares and representing approximately 60.6% of the outstanding common stock prior to the offering and approximately 47.3% after the offering, is held in a voting trust, for which Messrs. Foster, Peterson, Faggioli and Wisner serve as trustees. A total of 2,131,151 shares in the voting trust are held of record by affiliates of Ravenswood. The remaining 19,530 shares are held by two non-affiliated shareholders, William R. Hambrecht and John D. Nichols. The address of each of the trustees is: c/o Ravenswood Winery, 18701 Gehricke Road, Sonoma, California 95476. The trustees have the exclusive right to vote all of the shares held by the voting trust on all matters presented to the shareholders for a vote, as follows: o As long as Mr. Peterson is a trustee of the voting trust, all decisions except decisions to amend or terminate the voting trust require the approval of Mr. Peterson and one other trustee; however, decisions to amend or terminate the voting trust require the approval of Mr. Peterson and two other trustees o If Mr. Peterson is no longer a trustee of the voting trust, all decisions require the approval of three trustees; however, decisions to amend or terminate the voting trust require the approval of the three remaining trustees and Mr. Peterson's successor trustee who shall be appointed by the three remaining trustees Shares may be released from the voting trust upon transfer of shares for estate-planning purposes, in connection with the sale of shares, or upon the approval of the trustees. The voting trust expires on May 27, 2008. 56 Preferred Stock Ravenswood's articles give the the board of directors the authority, without further action by the shareholders, to issue up to 1,000,000 shares of preferred stock in one or more series. The articles also allow the board of directors to fix the designations, powers, preferences, privileges and rights of the preferred stock, and the qualifications, limitations or restrictions on the preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights of the common stock. The board of directors, without shareholder approval, may issue preferred stock with voting, conversion or other rights that could adversely affect the voting power and other rights of the holders of common stock. Preferred stock could be issued quickly with terms which could delay or prevent a change in control of Ravenswood or make removal of management more difficult. Additionally, the issuance of preferred stock may have the effect of decreasing the market price of the common stock and may adversely affect the voting and other rights of the holders of common stock. Upon the closing of this offering, there will be no shares of preferred stock outstanding, and Ravenswood currently has no plans to issue any of its preferred stock. Debentures Ravenswood has outstanding $865,000 of convertible debentures due December 31, 2004. Each $10,000 debenture is convertible into 3,500 shares of common stock at any time prior to December 31, 1999 upon request of the holder. If the debentures are not converted, Ravenswood may redeem them at face value at any time from January 1, 2000 until the maturity date. Ravenswood pays interest quarterly on the debentures based on a floating index tied to prime bank rates for a five-year period. The interest rate is adjusted every 18 months, except that in no period may the interest rate adjustment exceed 2% or the maximum interest rate exceed 11%. Ravenswood has outstanding $1.7 million of convertible debentures due December 31, 2008. Each $10,000 debenture is convertible into 900 shares of common stock at any time prior to December 31, 2003 upon request of the holder. If the debentures are not converted, Ravenswood may redeem them at face value at any time from January 1, 2004 until the maturity date. Ravenswood pays interest quarterly on the debentures in an amount equal to the prime interest rate quoted by Bank of America NT&SA plus 1%. The interest rate is adjusted every 18 months, except that in no period may the interest rate adjustment exceed 2% or the maximum interest rate exceed 11%. Registration Rights Upon conversion of debentures due December 31, 2004, shareholders holding an aggregate of 302,750 shares of common stock will have 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 these 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. 57 Antitakeover Effects of Ravenswood's Articles and Bylaws Ravenswood's articles and bylaws require that, effective upon the closing of this offering, any action required or permitted to be taken by Ravenswood's shareholders must be effected at a duly called annual or special meeting of the shareholders, and may not be effected by a consent in writing. In addition, the bylaws require advance notice of shareholder proposals and nominations for board elections. Ravenswood's articles also specify that the authorized number of directors within the range specified in Ravenswood's bylaws may be changed only by resolution of the board of directors. Ravenswood's bylaws may be amended by its board of directors or its shareholders; however, its shareholders may amend the bylaws only by the affirmative vote of at least two-thirds of the outstanding voting securities. These provisions may have the effect of deterring hostile takeovers or delaying changes in the control or management of Ravenswood. Ravenswood's articles and its bylaws provide that Ravenswood will indemnify its officers and directors as permitted by California law against losses that they may incur in investigations and legal proceedings resulting from their service to Ravenswood, which may include service in connection with takeover defense measures. These provisions may have the effect of preventing changes in Ravenswood's management. In addition, once Ravenswood is qualified for listing on the Nasdaq National Market and has at least 800 holders of its equity securities, its charter documents will eliminate cumulative voting, which may make it more difficult for a third party to gain control of Ravenswood's board of directors. Transfer Agent and Registrar ChaseMellon Shareholders Services, LLC has been appointed as the transfer agent and registrar for Ravenswood's common stock. Listing Ravenswood has applied to list its common stock on the Nasdaq National Market under the trading symbol "RVWD." 58 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 the shares are purchased by "affiliates" of Ravenswood, as that term is defined under Rule 144 under the Securities Act. The remaining 3,550,852 shares of common stock held by existing shareholders will be "restricted securities" as that term is defined in Rule 144 under the Securities Act. Restricted shares may be sold in the public market only if registered or if they qualify for an exemption from registration under Rule 144 or Rule 701 under the Securities Act. The restricted shares will be available for sale in the public market as follows: o 866,248 restricted shares will be eligible for sale on the date of this prospectus under Rule 144(k); o 1,810,620 restricted shares will be eligible for sale 90 days after the date of this prospectus under Rule 144 and Rule 701 of the Securities Act; and o the remaining restricted shares will be eligible for sale from time to time upon expiration of one-year holding periods and subject to the requirements of Rule 144. Upon completion of this offering, there will be 454,622 shares issuable upon conversion of outstanding convertible debentures, all of which are immediately convertible. Debenture shares will be available for sale in the public market as follows: o 273,000 debenture shares will be eligible for sale on the date of this prospectus under Rule 144(k); o 12,250 debenture shares will be eligible for sale 90 days after the date of this prospectus under Rule 144; and o the remaining debenture shares will be eligible for sale from time to time upon expiration of one-year holding periods and subject to the requirements of Rule 144. In general, beginning 90 days after the date of this prospectus, restricted shares or debenture shares that are held for at least one year may be sold under Rule 144, subject to certain volume limitations. Sales under Rule 144 are also subject to requirements relating to manner of sale, notice and availability of current public information about Ravenswood. Additionally, a shareholder who is not an affiliate of Ravenswood is entitled to sell shares under Rule 144(k) without regard to the limitations described above, provided the shareholder has held the restricted shares or debenture shares for at least two years. This discussion is only a summary of Rule 144 and is not intended to be a complete description of it. The 345,731 shares issued to Mr. Foster in termination of his deferred compensation arrangement were issued in reliance upon Rule 701. These shares may be sold beginning 90 days after the date of this prospectus under Rule 144, without compliance with the one-year minimum holding period requirement. 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 59 Securities Act to register the 500,000 shares of common stock reserved for issuance under the 1999 Equity Incentive Plan and the 50,000 shares of common stock reserved for issuance under the Employee Stock Purchase Plan. Upon registration, all of these shares will be freely tradeable when issued. Prior to this offering, there has been no public market for the common stock of Ravenswood, and the effect, if any, that the sale or availability for sale of shares of additional common stock will have on the trading price of the common stock cannot be predicted. Nevertheless, sales of substantial amounts of shares in the public market, or the perception that these sales could occur, could adversely affect the trading price of the common stock and could impair Ravenswood's future ability to raise capital through an offering of its equity securities. 60 PLAN OF DISTRIBUTION Subject to the terms and conditions of an underwriting agreement, W.R. Hambrecht & Company, LLC, as underwriter, has agreed to purchase from Ravenswood all of the shares of common stock offered. The underwriting agreement provides that the obligations of the underwriter are subject to conditions, including the absence of any material adverse change in Ravenswood's business, and the receipt of certificates, opinions and letters from Ravenswood and its counsel and independent auditors. Subject to those conditions, the underwriter is committed to purchase all shares of common stock offered if any of the shares are purchased. The underwriter proposes to offer the shares of common stock directly to the public at the offering price set forth on the cover page of this prospectus, as this price is determined by the process described below, and to certain dealers at this price less a concession not in excess of $[___________] per share. Any dealers or agents that participate in the distribution of the common stock may be deemed to be underwriters within the meaning of the Securities Act, and any discounts, commissions or concessions received by them and any provided by the sale of the shares by them might be deemed to be underwriting discounts and commissions under the Securities Act. After the initial public offering of the shares has been completed, the offering price and other selling terms may be changed by the underwriter. In determining the offering price set forth on the cover page of this prospectus, the underwriter and participating dealers will solicit indications of interest for the shares to be offered from prospective investors. These 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 these indications 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, or offering price, will be determined by negotiation between the underwriter and Ravenswood. In conducting these negotiations, the underwriter and Ravenswood will rely, in part, on a price per share, or 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 offering price may be less than the clearing price based on other factors in the negotiations between the underwriter and Ravenswood. Under 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 the dealers have solicited indications of interest at or in excess of the offering price. These dealers have agreed with the underwriter to reoffer any shares which they purchase from the underwriter solely to these prospective investors unless otherwise consented to by the underwriter. The underwriter also intends to offer shares to prospective investors from whom it directly solicits indications of interest at or in excess of the offering price. W.R. Hambrecht & Company, LLC is serving as the sole underwriter of this offering. The lack of additional underwriters and the small aggregate size of this offering relative to other initial public offerings may result in less financial analyst research coverage of Ravenswood 61 after this offering as compared to other public companies. A lack of sufficient analyst research, as well as the relatively few shares of Ravenswood available for trading after this offering, may result in price and volume volatility in the market for Ravenswood's common stock after completion of this offering. Price and volume volatility may adversely affect the market price of Ravenwood's common stock. Ravenswood has granted to the underwriter an option, exercisable no later than 30 days after the date of this prospectus, to purchase up to an aggregate of 150,000 additional shares of common stock at the offering price, less the underwriting discount, set forth on the cover page of this prospectus. To the extent that the underwriter exercises this option, the underwriter will have a firm commitment to purchase the additional shares, and Ravenswood will be obligated, pursuant to the option, to sell such additional shares to the underwriter to the extent the option is exercised. The underwriter may exercise the option only to cover over-allotments made in connection with the sale of shares offered. The underwriting agreement provides that Ravenswood will indemnify the underwriter against 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 convertibles debentures, for a period of 90 days after the date of this prospectus, except with the prior written consent of the underwriter. Prior to the offering, there has been no public market for Ravenswood's common stock. The initial public offering price for the common stock will be determined by the process described above and does not necessarily bear any direct relationship to Ravenswood's assets, current earnings or book value or to any other established criteria of value, although these factors were considered in establishing the initial public offering price range. Among other factors considered in determining the initial public offering price range: o Market conditions o The industry in which Ravenswood operates o An assessment of Ravenswood's management o Its operating results o Its capital structure o The business potential of Ravenswood o The demand for similar securities of comparable companies o Other factors deemed relevant Certain persons participating in this offering may engage in transactions that stabilize, maintain or otherwise affect the price of Ravenswood's common stock, including over-allotment, stabilizing and short-covering transactions in 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. In addition to this offering, W.R. Hambrecht & Company, LLC has engaged in the business of public and private equity investing and financial advisory services since its inception. The manager of W.R. Hambrecht & Company, LLC, William R. Hambrecht, has 40 years of experience in the securities industry. Persons affiliated and associated with W.R. Hambrecht & Company, LLC beneficially own an 62 aggregate of approximately 23,265 shares of Ravenswood's common stock, including shares issuable upon the conversion of convertible subordinated debentures. LEGAL MATTERS The validity of the shares issued in connection with this offering will be passed upon for Ravenswood by Farella Braun & Martel LLP of San Francisco, California. Certain legal matters in connection with the offering will be passed upon for the underwriter by Cooley Godward LLP of Menlo Park, California. EXPERTS The financial statements of Ravenswood as of June 30, 1998 and 1997, and for each of the two fiscal years ended June 30, 1997 and June 30, 1998, included in the registration statement of which this prospectus is a part, have been included here in reliance on the report of Odenberg, Ullakko, Muranishi & Co. LLP, independent accountants, given on the authority of that firm as an expert in accounting and auditing. ENGAGEMENT OF NEW AUDITORS Effective July 1, 1998, Odenberg, Ullakko, Muranishi & Co. LLP were engaged as Ravenswood's independent accountants. Prior to that date, Field Accountancy Corporation was Ravenswood's independent accountant, but did not conduct an audit of, or issue an opinion concerning, Ravenswood's financial statements. During its engagement as independent accountant for Ravenswood, there were no disagreements with Field Accountancy Corporation on any matter of accounting principles or practices, or financial statement disclosure. Field Accountancy Corporation did not resign nor was it dismissed. In anticipation of this offering, Odenberg, Ullakko, Muranishi & Co. LLP assumed the role of independent accountants and Field Accountancy Corporation continued in its role as preparer of Ravenswood's corporate tax returns. The decision to engage Odenberg, Ullakko, Muranishi & Co. LLP was approved by Ravenswood's board of directors. Prior to July 1, 1998, Ravenswood did not consult with Odenberg, Ullakko, Muranishi & Co. LLP on items which involved Ravenswood's accounting principles or the form of audit opinion to be issued on Ravenswood's financial statements. ADDITIONAL INFORMATION Ravenswood has filed with the Securities and Exchange Commission, a registration statement on Form SB-2 under the Securities Act with respect to the shares to be sold in this offering. This prospectus does not contain all of the information set forth in the registration statement and its exhibits and schedules. For further information with respect to Ravenswood and the shares to be sold in this offering, reference is made to the registration statement and its exhibits and schedules filed through the EDGAR system. Statements contained in this prospectus as to the content of any contract or other document referred to are not necessarily complete, and, in each instance, if a contract or document is filed as an exhibit, reference is made to the copy of the contract or document filed as an exhibit to the registration statement. Each statement is qualified in all respects by reference to the exhibit. 63 A copy of the registration statement and its exhibits and schedules may be inspected without charge at the public reference facilities maintained by the commission in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the commission's regional offices located at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or any part of the registration statement may be obtained from those offices upon the payment of the fees prescribed by the commission. The public may obtain information on the operation of the commission's public reference facilities by calling 1 (800) SEC-0330. The commission maintains a Web site that contains reports, proxy and information statements and other information regarding registrants that file electronically with the commission. The address of the commission's Web site is www.sec.gov. Ravenswood intends to furnish its shareholders with annual reports containing audited financial statements and with quarterly reports for each of the first three quarters of each fiscal year containing summary financial information. 64 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 $ 86,103 $ 163,011 Current portion of capital lease obligations ........................................ 189,975 153,102 112,707 160,179 Short-term borrowings ............................... 1,350,000 698,199 950,000 825,000 Accounts payable .................................... 2,330,967 1,725,988 3,760,686 3,580,116 Accrued commissions ................................. 246,483 148,628 375,252 263,526 Accrued liabilities ................................. 381,013 278,577 247,460 252,509 ----------- ----------- ----------- ----------- Total current liabilities ........................ 4,692,902 3,159,384 5,532,208 5,244,341 Long-term liabilities: Long-term debt, net ................................. 1,795,665 1,514,577 2,367,775 1,730,832 Notes payable to shareholders, net .................. 50,000 50,000 50,000 50,000 Capital lease obligations, net ...................... 199,719 192,697 375,226 201,604 Convertible debentures .............................. 865,000 865,000 2,552,500 865,000 ----------- ----------- ----------- ----------- Total liabilities ................................ 7,603,286 5,781,658 10,877,709 8,091,777 ----------- ----------- ----------- ----------- Shareholders' equity: Preferred stock, no par value; one million shares authorized, none issued ............................................. -- -- -- -- Common stock, no par value; 20 million shares authorize ........................... 2,938,900 737,804 4,626,400 732,804 Retained earnings ................................... 5,434,924 5,521,288 7,720,156 6,881,934 ----------- ----------- ----------- ----------- Total shareholders' equity ....................... 8,373,824 6,259,092 12,346,556 7,614,738 ----------- ----------- ----------- ----------- Commitments (See notes 11, 13 and 16) $15,977,110 $12,040,750 $23,224,265 $15,706,515 =========== =========== =========== =========== See accompanying notes to financial statements.
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: Deferred Compensation Expense .................................... 2,206,096 93,292 -- -- Other Operating Expenses .................... 4,033,747 3,261,303 2,340,009 1,851,859 ------------ ------------ ------------ ------------ Operating income ............................... 2,253,400 2,971,955 4,176,037 2,880,567 ------------ ------------ ------------ ------------ Other income (expense): Interest expense ............................ (523,551) (392,600) (225,669) (164,388) Impairment loss on vineyard ................. -- (136,144) -- -- Other, net .................................. 49,211 91,486 78,713 50,800 ------------ ------------ ------------ ------------ (474,340) (437,258) (146,956) (113,588) ------------ ------------ ------------ ------------ Income before income taxes ..................... 1,779,060 2,534,697 4,029,081 2,766,979 Provision for income taxes ..................... 1,592,169 1,066,503 1,743,849 1,133,078 ------------ ------------ ------------ ------------ Net income ..................................... $ 186,891 $ 1,468,194 $ 2,285,232 $ 1,633,901 ============ ============ ============ ============ Basic earnings per share ....................... $ 0.05 $ 0.40 $ 0.66 $ 0.47 ============ ============ ============ ============ Weighted average number of common shares outstanding ..................... 3,491,981 3,636,356 3,478,954 3,505,106 ============ ============ ============ ============ Diluted earnings per share ..................... $ 0.05 $ 0.39 $ 0.61 $ 0.44 ============ ============ ============ ============ Weighted average number of common shares and equivalents outstanding ................................... 3,794,732 3,939,107 3,847,331 3,807,857 ============ ============ ============ ============ See accompanying notes to financial statements.
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 .............................. 2,206,096 2,206,096 Net income ...................................... 186,891 186,891 ------------ ------------ ------------ ------------ Balance at June 30, 1998 ........................... 2,992,498 2,938,900 5,434,924 8,373,824 Shares issued related to deferred compensation plan .............................. 345,731 Shares issued ................................... 212,623 1,687,500 1,687,500 Net income ...................................... 2,285,232 2,285,232 ------------ ------------ ------------ ------------ Balance at December 31, 1998 (unaudited) ........... 3,550,852 $ 4,626,400 $ 7,720,156 $ 12,346,556 ============ ============ ============ ============ See accompanying notes to financial statements.
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 ............................................ $ 186,891 $ 1,468,194 $ 2,285,232 $ 1,633,901 Items not requiring the current use of cash: Depreciation and amortization ....................... 168,784 225,026 170,668 119,314 Deferred income taxes ............................... (77,868) (56,608) Deferred compensation ............................... 2,206,096 93,292 Impairment loss on vineyard ......................... 136,144 Changes in other operating items: Accounts receivable ................................ (338,007) (12,721) (747,982) (281,420) Refundable income taxes ............................ (39,963) 22,006 73,849 (126,922) Inventories ........................................ (3,269,357) (2,014,283) (2,503,980) (3,132,222) Prepaid expenses ................................... 9,202 (29,734) (46,947) (23,168) Other assets ....................................... (8,220) 15,586 (6,560) Accounts payable ................................... 604,979 475,547 1,429,719 1,854,128 Accrued liabilities ................................ 200,292 (56,640) (4,786) 87,146 ----------- ----------- ----------- ----------- Cash provided by (used for) operations ...................................... (357,171) 265,809 655,773 124,197 ----------- ----------- ----------- ----------- Investments: Additions to plant and equipment ...................... (490,621) (312,386) (831,901) (243,229) Shareholder receivables ............................... (59,435) ----------- ----------- ----------- ----------- Cash used for investing activities ............... (490,621) (312,386) (891,336) (243,229) ----------- ----------- ----------- ----------- Financing: Short-term borrowings, net ............................ 651,801 (351,801) (400,000) 126,801 Proceeds from long-term debt .......................... 410,642 550,000 278,225 Repayments of long-term debt .......................... (46,085) (155,794) (220,335) (53,878) Proceeds from convertible debentures and common shares issued ............................ 3,375,000 Repurchase of common shares from former officer ...................................... (278,255) (278,225) ----------- ----------- ----------- ----------- Cash provided by (used for) financing activities ............................ 738,103 (507,595) 3,304,665 72,923 ----------- ----------- ----------- ----------- Increase (decrease) in cash and cash equivalents ........................................... (109,689) (554,172) 3,069,102 (46,109) Cash and cash equivalents at beginning of period ................................................ 211,961 766,133 102,272 211,961 ----------- ----------- ----------- ----------- Cash and cash equivalents at end of period ............................................. $ 102,272 $ 211,961 $ 3,171,374 $ 165,852 =========== =========== =========== =========== Cash paid during the period for: Interest .............................................. $ 484,670 $ 378,162 $ 209,497 $ 139,617 =========== =========== =========== =========== Income taxes .......................................... $ 1,660,344 $ 1,125,404 $ 1,670,000 $ 1,260,000 =========== =========== =========== =========== See accompanying notes to financial statements.
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, --------------------------- December 31, 1 9 9 8 1 9 9 7 1 9 9 8 ----------- ----------- ----------- (Unaudited) Bulk wine ...................... $ 7,898,937 $ 5,341,378 $11,556,669 Bottled wine ................... 2,285,862 1,636,409 1,061,356 Crop costs ..................... 37,691 44,675 23,921 Supplies ....................... 72,902 41,161 131,542 Tasting room merchandise ....... 131,967 94,379 157,850 ----------- ----------- ----------- $10,427,359 $ 7,158,002 $12,931,338 =========== =========== =========== Certain of the foregoing assets are pledged as security for certain indebtedness. See notes 5 and 6. F-9 NOTE 3--Property, plant and equipment: Property, plant and equipment is summarized as follows: June 30, December 31, ----------------------- ---------- 1 9 9 8 1 9 9 7 1 9 9 8 ---------- ---------- ---------- (Unaudited) Land .................................... $ 245,135 $ 245,135 $ 245,135 Vineyards ............................... 56,264 56,264 56,264 Vineyards under development ............. 235,879 123,075 270,041 Building and improvements ............... 1,716,781 1,637,635 2,350,334 Leasehold improvements .................. 94,828 39,011 174,328 Machinery and equipment ................. 706,164 584,052 785,499 Barrels and equipment held under capital leases ................................. 870,468 611,657 1,077,616 Tanks ................................... 145,688 68,874 145,688 Office equipment ........................ 110,678 99,193 114,793 Transportation equipment ................ 12,409 13,309 40,145 ---------- ---------- ---------- 4,194,294 3,478,205 5,259,843 Less--accumulated depreciation .......... 1,220,480 831,391 1,389,890 ---------- ---------- ---------- $2,973,814 $2,646,814 $3,869,953 ========== ========== ========== Included in property, plant and equipment are barrels and equipment leased under capital leases with cost and accumulated depreciation totaling $870,468 and $472,185, respectively, at June 30, 1998; and $611,657 and $249,125, respectively, at June 30, 1997. NOTE 4--Notes receivable from shareholder: The notes receivable from shareholder at June 30, 1998 and 1997 consist of two unsecured notes bearing annual interest at 8.5% and due January 2004 and April 2004. NOTE 5--Short-term borrowing arrangements: At June 30, 1998, the Company has a $2 million revolving line of credit with Pacific Coast Farm Credit Services, ACA ("Association") that expires on June 1, 2001. The loan agreement provides that the principal advances under the facility cannot exceed certain percentages of eligible accounts receivable and wine inventories as defined in the agreement. The borrowings bear annual interest at a variable rate established by the Association (8.86% and 9.57% at June 30, 1998 and 1997, respectively). The borrowings are secured by the Company's accounts receivable, wine inventories and equipment. Borrowings under the line of credit at June 30, 1998 and 1997 were $1,350,000 and $698,199, respectively. The loan contains various covenants which include, among other things, a requirement to maintain a minimum working capital of $3.25 million, a ratio of liabilities to tangible net worth of not greater than 1.5 to 1, and a current ratio of at least 1.75 to 1, and provides for restrictions on the payment of dividends and distributions to shareholders. F-10 NOTE 6--Long-term debt: Long-term debt is summarized as follows: June 30, December 31, ----------------------- ---------- 1998 1997 1998 ----------- ----------- ---------- (Unaudited) Note payable to Pacific Coast Farm Credit Services, ACA ("Association") with annual interest at a variable rate established by the Association (7.65% at June 30, 1998), payable in quarterly interest installments until December 1, 1999 and commencing March 1, 2000 in quarterly principal and interest installments of $34,795 through December 1, 2024, secured by property and equipment (see note 3) .. $ 1,552,500 $1,552,500 Note payable to an individual with annual interest at 11%, payable in monthly interest installments until January 1, 2000, thereafter payable in monthly principal and interest installments (as defined in the agreement) through October 1, 2009, secured by property and equipment (see note 3) .............................. $ 1,450,000 Note payable to the Association with annual interest at a variable rate established by the Association (8.86% at June 30, 1998), payable in quarterly principal and interest installments of $17,390 through June 1, 2002, secured by property and equipment (see note 3) ............... 227,265 202,244 Revolving equity line of credit note payable ($835,000 commitment) to the Association with annual interest at a variable rate established by the Association (7.65% at June 30, 1998), payable in quarterly interest only installments until December 1, 1999 and commencing March 1, 2000 in equal quarterly principal and interest installments through December 1, 2024, secured by property and equipment (see note 3) .............................. 29,887 579,887 Note payable to bank with annual interest at 10%, payable in monthly principal and interest installments of $1,600 through November 11, 2000, secured by computer equipment (see note 3) .............................. 39,304 53,513 31,499 Other unsecured notes payable with annual interest ranging from 10% to 11%, payable in monthly principal and interest installments as defined to January 31, 1999 through June 2001 ... 26,030 40,816 41,355 ----------- ----------- ---------- 1,874,986 1,544,329 2,407,485 Less--current portion .................. 79,321 29,752 39,710 ----------- ----------- ---------- $ 1,795,665 $ 1,514,577 $2,367,775 =========== =========== ========== 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, --------------------------- December 31, 1 9 9 8 1 9 9 7 1 9 9 8 -------- -------- -------- (unaudited) Notes payable to Joel Peterson, unsecured, with annual interest ranging from 10% to 11%, due on demand and on June 30, 2004 ......................................................... $ 46,143 $ 56,138 $ 46,143 Notes payable to W. Reed Foster, unsecured, with annual interest ranging from 10% to 11%, due on demand and on June 30, 2004 ......................................................... 119,000 119,000 50,250 -------- -------- -------- 165,143 175,138 96,393 Less--current portion ..................................................... 115,143 125,138 46,393 -------- -------- -------- $ 50,000 $ 50,000 $ 50,000 ======== ======== ========
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 ....................... $ 604,880 34.0 % $ 861,797 34.0 % Increase in income taxes resulting from: State and local income taxes net of federal benefit ..................................................... 228,567 12.85 155,630 6.14 Permanent differences (including a portion of deferred compensation expense for fiscal 1998) ....................................................... 758,722 42.64 49,076 1.94 ---------- ----- ---------- ----- $1,592,169 89.49% $1,066,503 42.08% ========== ===== ========== =====
Deferred compensation expense ($2,134,754) is recorded as a permanent difference in fiscal 1998 since the Company has decided not to take a tax deduction for this expense on its federal or state tax returns. F-13 NOTE 11--Deferred compensation agreement: On August 25, 1992, the Company entered into a deferred compensation agreement with its chairman and chief executive officer, W. Reed Foster. The agreement established an account with 5,487.8 units. Each unit was the equivalent value of one share of common stock and contained an equivalent right to cash and common stock dividends and all stock splits and other benefits paid to the shareholders of the Company. At June 30, 1998, the estimated fair value of the units was $500 per unit, which is included in common stock in the accompanying balance sheet. Compensation expense relating to this agreement is $2,206,096 and $93,292, respectively, for the fiscal years ended June 30, 1998 and 1997 and is included in operating expenses in the accompanying statement of income. Under the terms of the agreement, upon termination of employment, the Company had the option of paying the full amount of the account as follows: (1) in stock within thirty days of termination of employment or (2) in equal cash installments over a four-year period plus interest at prime rate (as defined in the agreement). As of July 1, 1998, the deferred compensation agreement was terminated and, the Company issued 345,731 (as restated for the 63-to-1 stock split) shares of common stock to Mr. Foster. (see note 16). NOTE 12--Voting trust: On August 25, 1992, the Board of Directors authorized the creation of a voting trust for all of the common stock of the Company. On November 1, 1993, the shareholders approved the terms and conditions contained in the Trust which provides for four trustees, who currently are: Joel Peterson, W. Reed Foster, Justin Faggioli and James Wisner. The original voting trust agreement was replaced by a voting trust agreement which is dated May 27, 1998 and which extends to May 26, 2008. As long as Mr. Peterson is a trustee of the voting trust, all decisions except decisions to amend or terminate the voting trust require the approval of Mr. Peterson and one other trustee; however, decisions to amend or terminate the voting trust require the approval of Mr. Peterson and two other trustees. If Mr. Peterson is no longer a trustee of the voting trust, all decisions require the approval of three trustees; however, decisions to amend or terminate the voting trust require the approval of the three remaining trustees and Mr. Peterson's successor trustee (who shall be appointed by the three remaining trustees). As of December 31, 1998, 2,150,681 (as restated for 63-to-1 stock split) shares of common stock were subject to the terms of the voting trust (see note 16). NOTE 13--Commitments and contingencies: The Company leases certain warehouse space under noncancellable operating leases that expire on dates ranging from October 1999 to October 2008. Under the terms of certain of the leases, rent is contingent on the amount of bulk wine and/or case goods stored at any given time and is adjusted annually for increases in building operating costs. Rental expense (including contingent rent) was $468,616 for 1998 and $317,507 for 1997. Minimum future rental payments for each of the next five fiscal years and thereafter are as follows: $224,432 - fiscal 1999; $145,764 - fiscal 2000; $73,796 - fiscal 2001; $61,252 - fiscal 2002; $61,252 - fiscal 2003 and $106,176 thereafter. The Company has contracted with various growers and certain wineries to supply approximately 95% of its future grape and bulk wine requirements. While most of these contracts call for prices to be determined by market conditions, several long-term contracts provide for minimum grape or bulk wine purchase prices. F-14 The Company has established a plan to achieve Year 2000 compliance in its electronic information systems and does not believe this plan will materially affect the Company's results of operations or financial position. NOTE 14--401(k) savings plan: The Company has a 401(k) savings plan that is available to eligible employees. Employer contributions to the plan are at the discretion of the Board of Directors and amounted to $53,089 in the 1998 fiscal year and $41,057 in the 1997 fiscal year. NOTE 15--Earnings per share: Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the measurement period, after giving retroactive effect to: (1) shares issued under a deferred compensation arrangement in July 1998 (see notes 11 and 16); (2) the 63-to-1 stock split approved in February 1999 (see note 16); and (3) common stock issued in December 1998 (using the "treasury stock method") at prices below the assumed initial public offering price (see note 16). Diluted earnings per share represents the income available to common shareholders divided by: (1) the weighted average number of common shares outstanding during the measurement period, after giving retroactive effect to (a) shares issued under a deferred compensation arrangement in July 1998, (b) the 63-to-1 stock split approved in February 1999, and (c) common stock issued in December 1998 (using the "treasury stock method") at prices below the assumed initial public offering price; and (2) the potentially dilutive common shares issuable for convertible debt that was outstanding during the measurement period. F-15 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 .......................................... $ 186,891 $1,468,194 $2,285,232 $1,633,901 ========== ========== ========== ========== Per share amount .................................... $ 0.05 $ 0.40 $ 0.66 $ 0.47 ========== ========== ========== ========== DILUTED Average shares outstanding [A] ...................... 3,005,625 3,150,000 2,992,500 3,018,750 Shares issued under deferred compensation arrangement [B] ....................... 345,731 345,731 345,731 345,731 Shares issued in December 1998 [C] .................. 140,625 140,625 140,723 140,625 Net effect of potentially dilutive common stock issuable for convertible debentures ............................. 302,751 302,751 368,377 302,751 ---------- ---------- ---------- ---------- Weighted average number of common shares and equivalents outstanding ................. 3,794,732 3,939,107 3,847,331 3,807,857 ========== ========== ========== ========== Net income ............................................. $ 186,891 $1,468,194 $2,285,232 $1,633,901 Interest on convertible debt, net of tax benefit ............................................... 49,305 55,793 45,168 24,653 ---------- ---------- ---------- ---------- Net income, after adding interest on debentures ............................................ $ 236,196 $1,523,987 $2,330,400 $1,658,554 ========== ========== ========== ========== Per share amount .................................... $ 0.05 $ 0.39 $ 0.61 $ 0.44 ========== ========== ========== ========== - ---------------- [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.
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 [Ravenswood Logo] Until _______________, 1999, 25 days after the date of this prospectus, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. 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): In April 1998, Ravenswood issued two promissory notes to Pacific Coast Farm Credit Services in the aggregate amount of $2.8 million. The issuance of these notes was made in reliance upon Section 4(2) of the Securities Act. The issuance was made without general solicitation or advertising. Pacific Coast Farm Credit Services is a commercial lender and was given access to all of the information it requested regarding Ravenswood. As of July 1, 1998, Ravenswood issued 5,487.8 shares of common stock to W. Reed Foster, Ravenswood's chairman and chief executive officer, in connection with the termination of II-2 a deferred compensation agreement entered into in August 1992. The issuance of these shares was made in reliance upon Rule 701 of the Securities Act. The issuance was made pursuant to a written contract relating to the compensation of Mr. Foster. From August until December 1998, Ravenswood sold a total of 3,375 shares of common stock at a price of $500.00 per share and 168.75 convertible debentures at a price of $10,000 per debenture, for aggregate consideration of $3,375,000 in cash. The shares and debentures were sold to the following investors: William F. Aldinger, Bay Limited Partnership, Simon J. Blattner, James R. & Mical Atz Brenzel, Paul J. Crowley, Bruce B. Donnell, Sandra D. Donnell, Justin M. Faggioli & Sandra D. Donnell, W. Reed Foster, Dennis M. Malloy, Robert E. & Daphne D. McGill III, Nichols Family Foundation, Nichols Family Investment Ltd. Partnership, Odyssey Capital, LLC, Mary F. Orben, Peter S. & Lorelei L. Redding, Ronald G. Silva, Jean-Michel Valette, John R. Walter, Edith M. Wisner, and W.R. Hambrecht & Co. LLC. These sales were made in reliance upon Rule 506 of the Securities Act. These sales were made without general solicitation or advertising. Each purchaser was an accredited investor with access to all information necessary to evaluate the investment and represented to Ravenswood that the shares or debentures were being acquired for investment purposes only and not with a view to distribution of those shares or debentures. Appropriate legends were affixed to the stock certificates and convertible debentures issued in such transactions. 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 Speciman 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 Administration Services Agreement between Ravenswood Winery, Inc. and Harvest Wines Inc. 11.1 Statement of Computation of Earnings Per Share 23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP II-3 Exhibit Number Description of Document - ------ ----------------------- 23.2 Consent of Farella Braun & Martel LLP (included in Exhibit 5.1)* 25.1 Power of Attorney (see p. II-6) 27.1 Financial Data Schedule 99.1 Former Accountant's Letter 99.2 Master Selected Dealers Agreement - ------------ * To be filed by amendment Item 28. Undertakings. (a) The undersigned registrant undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. (b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered here, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (c) The undersigned registrant hereby undertakes that it will: (1) For purposes of determining any liability under the Securities Act, treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (2) For determining any liability under the Securities Act, treat each post-effective amendment that contains a form of prospectus as a new registration statement relating to the securities offered therein, and the offering of such securities at that time as the initial bona fide offering of those securities. II-4 SIGNATURES In accordance with the requirements of the Securities Act, the Registrant certifies that it has reasonable grounds to believe that it meets all of the requirements of filing on Form SB-2 and authorizes this amendment to be signed on its behalf by the undersigned, in the County of Sonoma, State of California, on March 16, 1999. RAVENSWOOD WINERY, INC. /s/ Callie S. Konno ------------------------------------- Callie S. Konno Chief Financial Officer, Treasurer and Director Pursuant to the requirements of the Securities Act, this amendment has been signed below by the following persons in the capacities indicated on March 16, 1999. Name Title ---- ----- /s/ W. Reed Foster* Chairman of the Board and Chief --------------------------- Executive Officer (Principal Executive W. Reed Foster Officer) /s/ Joel E. Peterson* President, Winemaker and Director --------------------------- Joel E. Peterson /s/ Justin M. Faggioli* Executive Vice President, Secretary and --------------------------- Director Justin M. Faggioli /s/ Callie S. Konno Chief Financial Officer, Treasurer and --------------------------- Director (Principal Financial and Callie S. Konno Accounting Officer) /s/ James F. Wisner* Director --------------------------- James F. Wisner /s/ Robert E. McGill, III* Director --------------------------- Robert E. McGill, III *By: /s/ Callie S. Konno --------------------------- Callie S. Konno Attorney-in-fact II-5 EXHIBIT INDEX Exhibit Number Description of Document - ------ ----------------------- 1.1 Form of Underwriting Agreement 10.11 Form of Convertible Subordinated Debenture dated as of December 1998 11.1 Statement of Computation of Earnings per Share 23.1 Consent of Odenberg, Ullakko, Muranishi & Co. LLP 27.1 Financial Data Schedule 99.1 Former Accountant's Letter 99.2 Master Selected Dealers Agreement EX-1.1 2 UNDERWRITING AGREEMENT 1,000,000 Shares(1) Common Stock UNDERWRITING AGREEMENT ____________, 1999 W.R. Hambrecht & Company, LLC 550 Fifteenth Street San Francisco, CA 94103 Ladies and Gentlemen: Ravenswood Winery, Inc., a California corporation (the "Company"), proposes to issue and sell up to an aggregate of 1,000,000 shares of its authorized but unissued common stock, no par value per share (the "Common Stock"), (said 1,000,000 shares of Common Stock being herein called, the "Underwritten Stock") to W.R. Hambrecht & Company, LLC (the "Underwriter") and to grant the Underwriter an option to purchase up to an aggregate of 150,000 additional shares of Common Stock (the "Option Stock" and collectively with the Underwritten Stock, the "Shares"). The Common Stock is more fully described in the Registration Statement and the Prospectus hereinafter mentioned. The Company hereby confirm the agreements made with respect to the purchase of the Shares by the Underwriter. 1. Registration Statement. The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form SB-2 (No. 333-71729), including the related preliminary prospectus, for the registration under the Securities Act of 1933, as amended (the "Act") of the Shares. Copies of such registration statement and of each amendment thereto, if any, including the related preliminary prospectus (meeting the requirements of Rule 430A of the rules and regulations of the Commission) heretofore filed by the Company with the Commission have been delivered to you. - -------- (1) Plus an option to purchase from the Company up to an aggregate of 150,000 additional shares to cover over-allotments. 1. The term "Registration Statement" as used in this agreement shall mean such registration statement, including all exhibits and financial statements, all information omitted therefrom in reliance upon Rule 430A and contained in the Prospectus referred to below, in the form in which it became effective, and any registration statement filed pursuant to Rule 462(b) of the rules and regulations of the Commission with respect to the Shares (herein called a Rule 462(b) registration statement), and, in the event of any amendment thereto after the effective date of such registration statement (herein called the Effective Date), shall also mean (from and after the effectiveness of such amendment) such registration statement as so amended (including any rule 462(b) registration statement). The term "Prospectus" as used in this Agreement shall mean the prospectus relating to the Shares first filed with the Commission pursuant to Rule 424(b) and Rule 430A (or if no such filing is required, as included in the Registration Statement) and, in the event of any supplement or amendment so such prospectus after the Effective Date, shall also mean (from and after the filing with the Commission of such supplement or the effectiveness of such amendment) such prospectus as so supplemented or amended. The term "Preliminary Prospectus" as used in this agreement shall mean each preliminary prospectus included in such registration statement prior to the time it becomes effective. The Registration Statement has been declared effective under the Securities Act, and no post-effective amendment to the Registration Statement has been filed as of the date of this agreement. The Company has caused to be delivered to you copies of each Preliminary Prospectus and has consented to the use of such copies for the purposes permitted by the Act. 2. Representations and Warranties of the Company. The Company hereby represents and warrants to the Underwriter as follows: (a) Neither the Commission nor any state securities commission has issued any order preventing or suspending the use of any Preliminary Prospectus or has instituted or threatened to institute any proceedings with respect to such an order. The Registration Statement and the Prospectus comply, and on the Closing Date (as hereinafter defined) and any later date on which the Option Stock is to be purchased, the Prospectus will comply, in all material respects, with the provisions of the Act and the rules and regulations of the Commission thereunder. On the Effective Date, the Registration Statement did not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein or necessary in order to make the statements therein not misleading, and on the Effective Date the Prospectus did not and, on the Closing Date and any later date on which the Option Stock is to be purchased, will not contain any untrue statement of a material fact and did not omit to state any material fact required to be stated therein, or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; 2. provided however, that none of the representations and warranties in this subparagraph (a) shall apply to statements in, or omissions from, the Registration Statement or the Prospectus made in reliance upon and in conformity with information herein or otherwise furnished in writing to the Company by or on behalf of the Underwriter expressly for use in the Registration Statement or Prospectus. (b) The Company (i) is a duly incorporated and validly existing corporation in good standing under the laws of its jurisdiction of incorporation, having full power and authority, corporate and other, to own or lease its properties and to conduct its business as described in the Registration Statement and the Prospectus; and (ii) is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions in which the character of the property owned or leased or the nature of the business transacted by it makes qualification necessary (except where the failure to be so qualified would not have a material adverse effect on the business, properties, financial condition or results of operations of the Company). The Company does not own any capital stock or other equity securities in any entity. (c) The Company has the duly authorized and validly outstanding capitalization set forth under the caption "Capitalization" in the Prospectus and will have the adjusted capitalization set forth therein on the Closing Date, based on the assumptions set forth therein. The securities of the Company conform to the descriptions thereof contained in the Prospectus. The form of certificates for the Shares conforms to the corporate law of the jurisdiction of the Company's incorporation. The outstanding shares of Common Stock (other than the Shares) have been duly authorized and validly issued by the Company and are fully paid and nonassessable. Except as created hereby or referred to in the Prospectus, there are no outstanding options, warrants, rights or other arrangements requiring the Company at any time to issue any capital stock. No holders of outstanding shares of capital stock of the Company are entitled as such to any preemptive or other rights to subscribe for any of the Shares, and neither the filing of the Registration Statement nor the offering or sale of the Shares as contemplated by this Agreement gives rise to any rights, other than those which have been waived or satisfied, for or relating to, the registration of any securities of the Company. The Shares are duly and validly authorized, duly and validly issued, fully paid and nonassesable and conform to the description thereof contained in the Prospectus. No further approval or authority of the stockholders or the Board of Directors of the Company will be required for the issuance and sale of the Shares as contemplated herein. (d) The Company has full legal right, power and authority to enter into this agreement and to consummate the transactions provided for herein. This agreement has been duly authorized, executed and delivered by the Company and, assuming it is a binding agreement of the Underwriter, constitutes a legal, valid and binding agreement of 3. the Company enforceable against the Company in accordance with its terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws of general application relating to or affecting the enforcement of creditors' rights and the application of equitable principles relating to the availability of remedies and except as rights to indemnity or contribution may be limited by federal or state securities laws and the public policy underlying such laws), and none of the Company's execution or delivery of this agreement, its performance hereunder, its consummation of the transactions contemplated herein, its application of the net proceeds of the offering in the manner set forth under the caption "Use of Proceeds" or the conduct of its business as described in the Prospectus, conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitutes or will constitute a default under, causes or will cause (or permits or will permit) the maturation or acceleration of any liability or obligation or the termination of any right under, or result in the creation or imposition of any lien, charge, or encumbrance upon, any property or assets of the Company pursuant to the terms of (i) the certificate of incorporation or bylaws of the Company, (ii) any indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note agreement or other agreement or instrument to which the Company is a party or by which it is or may be bound or to which its respective property is or may be subject or (iii) any statute, judgment, decree, order, rule or regulation applicable to the Company of any government, arbitrator, court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having jurisdiction over the Company, or its activities or properties. (e) The Common Stock is approved for quotation on The Nasdaq National Market and, prior to the Closing Date, (i) the Common Stock shall be listed and duly admitted to trading on The Nasdaq National Market and (ii) the Shares will be authorized for inclusion in The Nasdaq National Market. (f) The financial statements of the Company and the related notes and schedules thereto included in the Registration Statement and the Prospectus fairly present the financial position, results of operations, stockholders' equity and cash flows of the Company at the dates and for the periods specified therein. Such financial statements and the related notes and schedules thereto have been prepared in accordance with generally accepted accounting principles consistently applied throughout the periods involved (except as otherwise noted therein) and all adjustments necessary for a fair presentation of results for such periods have been made; provided, however, that the unaudited financial statements are subject to normal year-end audit adjustments (which are not expected to be material) and do not contain all footnotes required under generally accepted accounting principles. The summary and selected financial and statistical data included in the Registration Statement and the Prospectus present fairly the information shown thereon 4. and such data have been prepared on a basis consistent with the financial statements contained therein and in the books and records of the Company. (g) Odenberg, Ullakko, Muranishi & Co., who have certified the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the rules and regulations promulgated thereunder. (h) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurances that (a) transactions are executed in accordance with management's general or specific authorization; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (c) access to assets is permitted only in accordance with management's general or specific authorization; and (d) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (i) The Company has filed all necessary federal, state and local income, franchise and other material tax returns and has paid all taxes shown as due thereunder, and the Company has no tax deficiency that has been or, to its knowledge, which might be assessed against the Company which, if so assessed, would materially and adversely affect it business or properties. All tax liabilities accrued through the date hereof have been adequately provided for on the books of the Company. (j) The Company maintains insurance underwritten by insurers of recognized financial responsibility of the types and in amounts and with such deductibles as is prudent and customary for companies in the same or similar business, all of which insurance is in full force and effect. (k) Except as disclosed in the Prospectus, there is no action, suit, proceeding or investigation pending or threatened against the Company before or by any court, regulatory body or administrative agency or any other governmental agency or body, domestic or foreign, which (i) questions the validity of the capital stock of the Company or this agreement or of any action taken or to be taken by the Company pursuant to or in connection with this agreement, (ii) is required to be disclosed in the Registration Statement which is not so disclosed (and such proceedings, if any, as are summarized in the Registration Statement are accurately summarized in all material respects), or (iii) may have a material adverse affect upon the business operations, financial conditions or income of the Company. 5. (l) All executed agreements or copies of executed agreements filed or incorporated by reference as exhibits to the Registration Statement to which the Company is a party or by which it is or may be bound or to which its assets, properties or businesses are or may be subject have been duly and validly authorized, executed and delivered by the Company and constitute the legal, valid and binding agreements of the Company enforceable by and against it in accordance with their respective terms (except as such enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other similar laws relating to enforcement of creditors' rights generally, and general equitable principles relating to the availability of remedies, and except as rights to indemnity or contribution may be limited by federal or state securities laws and the public policy underlying such laws). The descriptions in the Registration Statement of contracts and other documents are accurate and fairly present the information required to be shown with respect thereto by the Act and the rules and regulations promulgated thereunder, and there are no contracts or other documents which are required by the Act or the rules and regulations promulgated thereunder to be described in the Registration Statement or filed as exhibits to the Registration Statement which are not described or filed as required and the exhibits which have been filed are complete and correct copies of the documents of which they purport to be copies. (m) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, and except as expressly contemplated therein, the Company has not incurred, other than in the ordinary course of its business, any material liabilities or obligations, direct or contingent, purchased any of its outstanding capital stock, paid or declared any dividends or other distributions on its capital stock or entered into any material transactions, and there has been no material change in capital stock or debt or any material adverse change in the business, properties, assets, net worth, condition (financial or other), or results of operations or prospects of the Company whether or not arising from transactions in the ordinary course of business. (n) The Company is not, nor with the giving of notice or lapse of time or both, will it be, in violation of or in default under, any term or provision of (i) its Articles of Incorporation or Bylaws, (ii) any indenture, mortgage, deed of trust, voting trust agreement, stockholders' agreement, note agreement or other agreement or instrument to which it is a party or by which it is or may be bound or to which any of its property is or may be subject, or any indebtedness, the effect of which breach or default singly or in the aggregate may have a material adverse effect on the Company's business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects, or (iii) any statute, judgment, decree, order, rule or regulation applicable to the Company or of any arbitrator, court, regulatory body, administrative agency or any other governmental agency or body, domestic or foreign, having jurisdiction over the Company or its activities or properties and the effect of which breach or default singly or in the aggregate 6. may have a may have a material adverse effect on the Company's business, management, properties, assets, rights, operations, condition (financial or otherwise) or prospects. (o) The Company has not incurred any liability for a fee, commission, or other compensation on account of the employment of a broker or finder in connection with the transactions contemplated by this agreement other than as contemplated hereby. (p) No labor disturbance by the employees of the Company exists or is imminent. (q) The Company owns, is licensed or otherwise possesses all rights to use, all patents, patent rights, inventions, know-how (including trade secrets and other unpatented and/or unpatentable proprietary or confidential information, systems or procedures), trademarks, service marks, trade names, copyrights and other intellectual property rights (collectively, the "Rights") necessary for the conduct of its business as described in the Prospectus. No claims have been asserted against the Company by any person with respect to the use of any such Rights or challenging or questioning the validity or effectiveness of any such Rights. The continued use of the Rights in connection with the Company's business and operations does not, to the Company's knowledge, infringe on the rights of any person. (r) The Company is conducting its business in compliance with all applicable laws, ordinances or governmental rules or regulations of the jurisdictions in which it is conducting business except where failure to be so in compliance would not materially and adversely affect the business or properties of the Company. Each approval, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body necessary in connection with the execution and delivery by the Company of this agreement and the consummation of the transactions herein contemplated (except such additional steps as may be required by the National Association of Securities Dealers, Inc. (the, "NASD") or may be necessary to maintain the effectiveness of the Registration Statement and to qualify or exempt the Shares for public offering by the Underwriter under state securities or Blue Sky laws) has been obtained or made and is in full force and effect. (s) There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities under the Registration Statement, that have not been waived with respect to the Registration Statement. 7. (t) Neither the Company nor any of its officers, directors or affiliates (within the meaning of the rules and regulations promulgated under the Act) has taken or may take, directly or indirectly, any action designed to cause or result in, or which has constituted or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock of the Company, to facilitate the sale or resale of the Shares or otherwise. (u) The Company is not, and after giving effect to the issuance and sale of the Shares by the Company will not be an "investment company" within the meaning of such term under the Investment Company Act of 1940, as amended, and the rules and regulations of the Commission promulgated thereunder. (v) The Company has good and marketable title to all properties and assets described in the Prospectus as owned by it, free and clear of all liens, encumbrances, security interests, claims, restrictions, equities, claims and defects, except such as are described in the Registration Statement and Prospectus, or such as are not materially significant or materially important in relation to the business of the Company when taken in the aggregate. The Company has valid and enforceable leases for the properties described in the Prospectus as leased by it, free and clear of all liens, encumbrances, security interests, claims, restrictions, equities, claims and defects except are not material and do not interfere with the use made by the Company thereof. The Company owns or leases all such properties as are necessary to its operations as now conducted, and as proposed to be conducted as set forth in the Registration Statement and the Prospectus and the properties and business of the Company conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. (w) The Company holds all franchises, licenses, permits, approvals, certificates and other authorizations from federal, state and other governmental or regulatory authorities necessary to the ownership, leasing and operation of its properties or required for the present conduct of its business, and such franchises, licenses, permits, approvals, certificates and other governmental authorizations are in full force and effect and the Company is in compliance therewith in all material respects except where the failure so to obtain, maintain or comply with would not have a materially adverse effect on the Company's business, financial condition or results of operations. (x) The Company is in compliance in all material respects with all presently applicable provisions of the Employee Retirement Income Security Act of 1974, as amended, including the regulations and published interpretations thereunder (herein called ERISA); no "reportable event" (as defined in ERISA) has occurred with respect to any "pension plan" (as defined in ERISA) for which the Company would have any 8. liability; the Company has not incurred and does not expect to incur liability under (i) Title IV of ERISA with respect to termination of, or withdrawal from, any "pension plan" or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986, as amended, including the regulations and published interpretations thereunder (the "Code"); and each "Pension Plan" for which the Company would have liability that is intended to be qualified under Section 401(a) of the Code is so qualified in all material respects and nothing has occurred, whether by action or by failure to act, which would cause the loss of such qualification. (y) No relationship, direct or indirect, exists between or among the Company, on the one hand, and the directors, officers, stockholders, customers or suppliers of the Company, on the other hand, which is required to be described in the Prospectus that is not so described. (z) Neither the Company, nor any director, officer, agent, employee or other person associated with or acting on behalf of the Company, has used any corporate funds for any unlawful contribution, gift, entertainment or other unlawful expense relating to political activity; made any direct or indirect unlawful payment to any foreign or domestic government official or employee from corporate funds; violated or is in violation of any provisions of the Foreign Corrupt Practices Act of 1972; or made any bribe, rebate, payoff, influence, payment, kickback or other unlawful payment. (aa) The business, operations and facilities of the Company have been and are being conducted or operated in compliance with all applicable laws, ordinances, rules, regulations, licenses, permits, approvals, plans, authorizations or requirements relating to occupational safety and health, pollution, protection of health or the environment (including, without limitation, those relating to emissions, discharges, release or threatened releases of pollutants, contaminants or hazardous or toxic substances, materials or wastes into ambient air, surface water, groundwater or land, or relating to the manufacture, processing, distribution, use treatment, storage, disposal, transport or handling of chemical substances, pollutants, contaminants or hazardous or toxic substances, materials or wastes, whether solid, gaseous or liquid in nature) or otherwise relating to remediating real property in which the Company has or has had any interest, whether owned or leased, of any governmental department, commission, board, bureau, agency or instrumentality of the United States, any state or political subdivision thereof and all applicable judicial or administrative agency or regulatory decrees, awards, judgments and orders relating thereto, except for such failures to so comply as would not, individually or in the aggregate, have a material adverse effect on the Company's business, and the Company has not received any notice from a governmental instrumentality or any third party alleging any violation thereof or liability thereunder 9. (including, without limitation, liability for costs of investigating or remediating sites containing hazardous substances or damage to natural resources). (bb) Neither the Company nor any officer or employee of the Company is a party to any contract or commitment that restricts in any material respect the ability of the Company or such individual to engage in the Company's business as described in the Registration Statement and the Prospectus. 3. Purchase of the Stock by the Underwriter. (a) On the basis of the representations and warranties and subject to the terms and conditions herein set forth, the Company shall issue and sell the Underwritten Stock to the Underwriter, and the Underwriter agrees to purchase from the Company the Underwritten Stock. The price at which such shares of Underwritten Stock shall be $__________ per share (the "Purchase Price"). (b) On the basis of the representations, warranties and covenants herein contained, and subject to the terms and conditions herein set forth, the Company grants an option to the Underwriter to purchase, the Option Stock at the Purchase Price. Said option may be exercised only to cover over-allotments in the sale of the Underwritten Stock by the Underwriter and may be exercised in whole or in part at any time (but not more than once) on or before the thirtieth day after the date of this agreement upon written or telegraphic notice by the Underwriter to the Company setting forth the aggregate number of shares of Option Stock as to which the Underwriter is exercising the option. Delivery of the certificates for the shares of Option Stock, and payment therefor shall be made as provided in Section 5 hereof. 4. Offering by the Underwriter. (a) The terms of the initial public offering by the Underwriter of the Shares to be purchased by them shall be as set forth in the Prospectus. The Underwriter may from time to time change the public offering price after the closing of the initial public offering and increase or decrease the concessions and discounts to dealers as they may determine. (b) The information set forth in the last paragraph on the front cover page and under the caption "Plan of Distribution" in the Registration Statement, any Preliminary Prospectus and the Prospectus relating to the Shares filed by the Company (insofar as such information relates to the Underwriter or related persons) constitutes the only information furnished by the Underwriter to the Company for inclusion in the Registration Statement, and Preliminary Prospectus, and the Prospectus and the 10. Underwriter represents and warrants to the Company that the statements made therein (insofar as they relate to the Underwriter or related persons) are correct and do not omit any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. 5. Delivery of and Payment for the Shares. (a) Delivery of certificates for the shares of the Underwritten Stock and the Option Stock (if the option granted by Section 4(b) hereof shall have been exercised not later than 7:00 A.M., San Francisco time, on the date two business days preceding the Closing Date), and payment therefor, shall be made at the office of Farella, Braun & Martel, LLP, on the third business day after the date of this agreement, or at such time on such other day, not later than seven full business days after such third business day, as shall be agreed upon in writing by the Company and the Underwriter. The date and hour of such delivery and payment are herein called the Closing Date. (b) If the option granted by Section 4(b) hereof shall be exercised after 7:00 A.M., San Francisco time, on the date two business days preceding the Closing Date, delivery of certificates for the shares of Option Stock, and payment therefor shall be made at the office of Farella, Braun & Martel, LLP at 7:00 A.M., San Francisco time, on the third business day after the exercise of such Option. (c) Payment for the Shares purchased from the Company shall be made to the Company or its order by wire transfer or one or more certified or official bank check or checks in same day funds. Such payment shall be made upon delivery of certificates for the Shares to the Underwriter against receipt therefor signed by the Underwriter. Certificates for the Shares to be delivered to the Underwriter shall be registered in the name or names and shall be in such denominations as the Underwriter may request at least one business day before the Closing Date, in the case of Underwritten Stock, and at least one business day prior to the purchase thereof, in the case of Option Stock. Such certificates will be made available to the Underwriter for inspection, checking and packaging of BHC Securities, Inc. on the business day prior to the Closing Date or, in the case of Option Stock, by 12:00 P.M., San Francisco time on the business day preceding the date of purchase. 6. Covenants of the Company. The Company covenants and agrees as follows: (a) The Company will (i) prepare and timely file with the Commission under 424(b) a Prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A and (ii) not file with 11. the Commission any amendment to the Registration Statement or supplement to the Prospectus (A) of which the Underwriter shall not previously have been advised and furnished with a copy a reasonable period of time prior to the proposed filing and as to which filing the Underwriter shall not have given their consent or (B) which is not in compliance with the Act or the rules and regulations of the Commission thereunder. (b) As soon as the Company is advised or obtains knowledge thereof, the Company will advise the Underwriter (i) of any request made by the Commission for amendment of the Registration Statement, for supplement to the Prospectus or for additional information, (ii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, or the institution or threat of any action, investigation or proceeding for that purpose, or (iii) the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction, or the receipt by it of notice of the initiation or threatening of any proceeding for that purpose. The Company will use its best efforts to prevent the issuance of any such order and, if issued, to obtain the lifting or withdrawal thereof as soon as possible. (c) The Company will (i) on or before the Closing Date, deliver to the Underwriter a signed copy of the Registration Statement as originally filed and of each amendment thereto filed prior to the time the Registration Statement becomes effective and, promptly upon the filing thereof, a signed copy of each post-effective amendment, if any to the Registration Statement (together with, in each case, all exhibits thereto unless previously delivered to the Underwriter), (ii) as promptly as possible deliver to the Underwriter, at such office as the Underwriter may designate, as many copies of the Prospectus as the Underwriter may reasonably request, and (iii) thereafter from time to time during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, likewise send to the Underwriters as many additional copies of the Prospectus and as many copies of any supplement to the Prospectus and of any amended prospectus, filed by the Company with the Commission, as the Underwriter may reasonably request for the purposes contemplated by the Act. (d) If at any time during the period in which a prospectus is required by law to be delivered by the Underwriter or dealer any event relating to or affecting the Company, or of which the Company shall be advised by in writing by the Underwriter, shall occur as a result of which it is necessary, in the opinion of counsel for the Company or of counsel for the Underwriter, to supplement or amend the Prospectus in order to make the Prospectus not misleading in the light of the circumstances existing at the time it is delivered to a purchaser of the Shares, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus so that the Prospectus as so supplemented or amended will not contain any untrue statement of a 12. material fact or omit to state any material fact necessary in order to make the statements therein, in the light of the circumstances existing at the time such Prospectus is delivered to such purchaser, not misleading. If, after the initial public offering of the Shares by the Underwriter and during such period, the Underwriter shall propose to vary the terms of the offering thereof by reason of changes in general market conditions or otherwise, the Underwriter will advise the Company in writing of the proposed variation, and, if in the opinion either of counsel for the Company or of counsel for the Underwriter such proposed variation requires that the Prospectus be supplemented or amended, the Company will forthwith prepare and file with the Commission a supplement to the Prospectus or an amended prospectus setting forth such variation. The Company authorizes the Underwriter and all dealers to whom any of the Shares may be sold by the Underwriter to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Shares in accordance with the applicable provisions of the Act and the applicable rules and regulations thereunder for such period. (e) Prior to the filing thereof with the Commission, the Company will submit to the Underwriter, for its information, a copy of any post-effective amendment to the Registration Statement and any supplement to the Prospectus or any amended prospectus proposed to be filed. (f) The Company will cooperate, when and as requested by the Underwriter, in the qualification of the Shares for offer and sale under the securities or blue sky laws of such jurisdictions as the Underwriter may designate and, during the period in which a prospectus is required by law to be delivered by the Underwriter or a dealer, in keeping such qualifications in good standing under said securities or blue sky laws; provided, however, that the Company shall not be required to qualify as a foreign corporation or file any general consent to service of process in any jurisdiction in which it is not so qualified. The Company will from time to time, prepare and file such statements, reports, and other documents as are or may be required to continue such qualifications in effect for so long a period as the Underwriter may reasonably request for distribution of the Shares. (g) The Company agrees to pay all costs and expenses incident to the performance of the obligations of the Company under this agreement, including, without limitation, all costs and expenses incident to (i) the preparation, printing and filing with the Commission and the NASD of the Registration Statement, any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the Underwriter of copies of any Preliminary Prospectus and of the several documents required by paragraph (c) of this Section 6 to be so furnished, (iii) the printing of this agreement and related documents delivered to the Underwriter, (iv) the preparation, printing and filing of all supplements and amendments to the prospectus referred to in paragraph (d) of this Section 6, (v) the furnishing to you of 13. the reports and information referred to in paragraph (j) of this Section 6, and (vi) the printing and issuance of stock certificates, including the transfer agent's fees. (h) The Company agrees to reimburse you for blue sky fees and related disbursements (including counsel fees and disbursements and cost of printing memoranda for the Underwriter) paid by or for the account of the Underwriter or their counsel in qualifying the Shares under state securities or blue sky laws and in the review of the offering by the NASD. (i) As soon as practicable, but in any event not later than 45 days after the end of the first fiscal quarter first occurring after the first anniversary of the Effective Date, the Company will make generally available to its security holders, in the manner specified in Rule 158(b) of the rules and regulations promulgated under the Act, and to the Underwriter, an earnings statement which will be in the detail required by, and will otherwise comply with, the provisions of Section 11(a) of the Act and Rule 158(a) of the rules and regulations promulgated thereunder. (j) During a period of five years after the date hereof, the Company will furnish to the Underwriter copies of all periodic and special reports furnished to stockholders of the Company and of all information, documents and reports filed with the Commission. (k) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (l) The Company will not, directly or indirectly, without the prior written consent of the Underwriter, issue, offer, sell, grant any option to purchase or otherwise dispose (or announce any issuance, offer, sale, grant of any option to purchase or other disposition) of any shares of Common Stock or any securities convertible into, or exchangeable or exercisable for, shares of Common Stock for a period of 90 days after the date hereof, except pursuant to this agreement and except for issuances pursuant to the exercise of stock options outstanding on or granted subsequent to the date hereof, pursuant to a stock option or other employee benefit plan in existence on the date hereof and except as contemplated by the Prospectus. (m) The Company will cause the Shares to be duly included for quotation on the Nasdaq National Market prior to the Closing Date. (n) Neither the Company nor any of its officers or directors, nor affiliates of any of them (within the meaning of the rules and regulations) will take, 14. directly or indirectly, any action designed to, or which might in the future reasonably be expected to cause or result in, stabilization or manipulation of the price of any securities of the Company. (o) The Company will apply the net proceeds of the offering received by it in the manner set forth under the caption "Use of Proceeds" in the Prospectus. (p) The Company will timely file all such reports, forms or other documents as may be required from time to time, under the Act, the rules and regulations promulgated thereunder, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations promulgated thereunder, and all such reports, forms and documents filed will comply as to form and substance with the applicable requirements under the Act, the rules and regulations promulgated thereunder, the Exchange Act and the rules and regulations promulgated thereunder. (q) The Company is familiar with the Investment Company Act of 1940, as amended, and has in the past conducted its affairs, and will in the future conduct its affairs, in such a manner to ensure that the Company was not and will not be an "investment company" or a "company" controlled by an "investment company" within the meaning of the Investment Company Act of 1940, as amended, and the rules and regulations thereunder. 7. Conditions of the Underwriter's Obligations. The obligations of the Underwriter under this agreement are subject to the performance by the Company on and as of the Closing Date of its covenants and agreements hereunder, and the following additional conditions: (a) The Registration Statement shall have become effective, and no stop order suspending the effectiveness of the Registration Statement shall have been issued, and no proceedings for that purpose shall have been instituted or threatened or, to the knowledge of the Company or the Underwriter, shall be contemplated by the Commission. (b) The Underwriter shall be satisfied that (i) as of the Effective Date, the statements made in the Registration Statement and the Prospectus were true and correct and neither the Registration Statement nor the Prospectus omitted to state a fact required to be stated therein or is necessary to make the statements therein not misleading, (ii) since the Effective Date, no event has occurred which should have been set forth in a supplement or amendment to the Prospectus which has not been set forth in an effective supplement or amendment, (iii) since the respective dates as of which information is given in the Registration Statement in the form in which it originally 15. became effective and the Prospectus contained therein, there has not been any material adverse change or any development involving a prospective material adverse change in or affecting the business, properties, financial condition or results of operations of the Company, whether or not arising from transactions in the ordinary course of business, and since such dates, except in the ordinary course of business, the Company has not entered into any material transaction not referred to in the Registration Statement in the form in which it originally became effective and the Prospectus contained therein, (iv) the Company does not have any material contingent obligations which are not disclosed in the Registration Statement and the Prospectus, (v) there are not pending or known threatened legal proceedings to which the Company is a party or of which property of the Company is subject which are material and which are not disclosed in the Registration Statement and the Prospectus, (vi) there are not any franchises, contracts, leases or other documents which are required to be filed as exhibits to the Registration Statement which have not been filed as required, and (vii) the representations and warranties of the Company herein are true and correct in all material respects as of the Closing Date or any later date on which Option Stock is to be purchased, as the case may be. (c) On or prior to the Closing Date, the legality and sufficiency of the sale of the Shares hereunder and the validity and form of the certificates representing the Shares, all corporate proceedings and other legal matters incident to the foregoing, and the form of the Registration Statement and of the Prospectus (except as to the financial statements contained therein), shall have been approved at or prior to the Closing Date by Cooley Godward LLP, counsel for the Underwriter. The Underwriter shall have received from counsel to the Underwriter, such opinion or opinions with respect to the issuance and sale of the Shares, the Registration Statement and the Prospectus and such other related matters as the Underwriter reasonably may request and such counsel shall have received such documents and other information as they request to enable them to pass upon such matters. (d) On the Closing Date, and if Option Stock is purchased at any date after the Closing Date, on such later date, the Underwriter shall have received an opinion addressed to the Underwriter, dated the Closing Date or, if related to the later sale of Option Stock, such later date, of Farella Braun & Martel LLP, counsel to the Company ("Company Counsel"), to the effect set forth below: (i) The Company is a duly incorporated and validly existing corporation in good standing under the laws of its jurisdiction of incorporation with full power and authority (corporate and other) to own or lease its properties and to conduct its business as described in the Registration Statement, and is duly qualified to do business as a foreign corporation and is in good standing in each jurisdiction in which the ownership or leasing of property or the conduct of its 16. business requires such qualification (except for those jurisdictions in which the failure so to qualify would not have a material adverse effect on the Company); (ii) Upon the closing of the sale of the Underwritten Stock, the authorized capital stock of the Company consists of 1,000,000 shares of Preferred Stock, no par value, of which there are no outstanding shares, and 20,000,000 shares of Common Stock, no par value, of which there are outstanding ________ shares (including the Underwritten Stock and any shares of Option Stock issued on the date hereof). The securities of the Company conform in all material respects to the description thereof contained in the Prospectus. Proper corporate proceedings have been validly taken to authorize the Company's authorized capital stock and all outstanding shares of such capital stock (including the Underwritten Stock and the shares of Option Stock issued, if any) have been duly authorized and validly issued by the Company, are fully paid and nonassessable and have been issued in compliance with all federal and state securities laws. Any Option Stock purchased after the Closing Date, when issued and delivered to and paid for by the Underwriter as provided in the Underwriting Agreement, will have been duly and validly issued and be fully paid and nonassesable. No preemptive rights, rights of first refusal or other rights exist with respect to the Shares, or the issue and sale thereof, pursuant to the Company's Articles of Incorporation or Bylaws and, there are no contractual preemptive rights that have not been waived, right of first refusal or rights of co-sale which exist with respect to the Shares. (iii) To the best of such counsel's knowledge, there are no rights of any holders of the Company's securities, not effectively satisfied or waived, to require registration under the Act of any of the Company's securities or other securities of the Company in connection with the filing of the Registration Statement or with the offer or sale of the Shares; (iv) The Company has full legal right, power, and authority to enter into the Underwriting Agreement and to consummate the transactions provided for therein. The Underwriting Agreement has been duly authorized, executed and delivered by the Company and constitutes the legal, valid and binding agreement of the Company, enforceable in accordance with its terms, except as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to or affecting creditors' rights generally or by general principles of equity relating to the availability of remedies and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws. 17. (v) None of the Company's execution or delivery of the Underwriting Agreement, its performance thereof, its consummation of the transactions contemplated therein or its application of the net proceeds of the offering in the manner set forth under the caption "Use of Proceeds," conflicts or will conflict with or results or will result in any breach or violation of any of the terms or provisions of, or constitute a default under, or result in the creation or imposition of any lien, charge or encumbrance upon, any property or assets of the Company pursuant to the terms of the Articles of Incorporation or Bylaws of the Company; the terms of any indenture, mortgage, deed of trust, voting trust agreement, stockholder's agreement, note agreement or other agreement or instrument known to such counsel after reasonable investigation to which the Company is a party or by which it is or may be bound or to which its properties may be subject; any statute, rule or regulation of any regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having jurisdiction over the Company or any of its activities or properties; or any judgment, decree or order, known to such counsel after reasonable investigation, of any government, arbitrator, court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, having such jurisdiction; (vi) No consent, approval, authorization or order of any court, regulatory body or administrative agency or other governmental agency or body, domestic or foreign, has been or is required for the consummation of the transactions contemplated in the Underwriting Agreement, except such as have been obtained under the Act or may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriter; (vii) To the best of such counsel's knowledge, the conduct of the business of the Company is not in violation of any federal, state or local statute, administrative regulation or other law, which violation is likely to have a material adverse effect on the Company; and the Company has obtained all licenses, permits, franchises, certificates and other authorizations from state, federal and other regulatory authorities as are necessary or required for the ownership, leasing and operation of its properties and the conduct of its business as presently conducted and as contemplated in the Prospectus; (viii) The Registration Statement is effective under the Act; any required filing of the Prospectus pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and no stop order suspending the effectiveness of the Registration Statement or any amendment thereto has been issued, and no proceedings for that purpose have been instituted 18. or are pending or, to the best knowledge of such counsel, are threatened or contemplated by the Commission; (ix) The Registration Statement and the Prospectus (except for the financial statements, schedules and other financial data included therein, as to which such counsel need not express any opinion), complied as to form in all material respects with the requirements of the Act and the rules and regulations of the Commission thereunder; (x) The descriptions contained and summarized in the Registration Statement and the Prospectus of franchises, contracts, leases, documents, or any threatened legal or governmental actions, suits or proceedings, are accurate and fairly represent in all material respects the information required to be shown by the Act and the rules and regulations of the Commission thereunder. To the best knowledge of such counsel, there are no franchises, contracts, leases, documents, or any threatened legal or governmental actions, suits or proceedings, which are required by the Act and the rules and regulations of the Commission thereunder to be described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement which are not described or filed as required; (xi) The statements (1) in the Prospectus under the captions "Risk Factors - ___________, ___________, __________ and ___________," "Business ___________, __________ and ___________," "Management - ___________, __________ and ___________," "Certain Transactions," "Description of Capital Stock" and "Shares Eligible for Future Sale" and (2) in the Registration Statement in Items 24 and 26 in each case insofar as such statements constitute summaries of the legal matters, documents or proceedings referred to therein, fairly present the information required under the Act and the rules and regulations promulgated thereunder (the "Act and Rules") with respect to such legal matters, documents and proceedings and fairly summarize the matters referred to therein to the extent required by the Act and Rules; (xii) Good and marketable title to the Shares sold under the Underwriting Agreement, free and clear of all liens, encumbrances, equities, security interests and claims, has been transferred to the Underwriter, assuming for the purpose of this opinion that the Underwriter purchased the same in good faith without notice of any liens, encumbrances, equities, security interests or adverse claims; 19. (xiii) The Shares have been duly authorized for inclusion in The Nasdaq National Market upon official notice of issuance; In addition, such counsel shall state that in the course of the preparation of the Registration Statement and the Prospectus, such counsel has participated in conferences with officers and representatives of the Company and with the Company's independent public accountants, at which conferences such counsel made inquiries of such officers, representatives and accountants and discussed the contents of the Registration Statement and the Prospectus and (without taking any further action to verify independently the statements made in the Registration Statement and the Prospectus and, except as stated in the foregoing opinion, without assuming responsibility for the accuracy, completeness or fairness of such statements) nothing has come to such counsel's attention that causes such counsel to believe that either the Registration Statement as of the date it is declared effective and as of the Closing Date or the Prospectus as of the date thereof and as of the Closing Date contained or contains any untrue statement of a material fact or omitted or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading (it being understood that such counsel need not express any opinion with respect to the financial statements, schedules and other financial data included in the Registration Statement or the Prospectus). In rendering any such opinion, such counsel may rely, as to matters of fact, to the extent such counsel deems proper, on certificates of responsible officers of the Company and public officials. References to the Registration Statement and the Prospectus in this paragraph (d) shall include any amendment or supplement thereto at the date of such opinion. (e) The Underwriter shall have received from Odenberg, Ullakko, Muranishi & Co., a letter or letters, addressed to the Underwriters and dated the Closing Date and any later date on which Option Stock is purchased, confirming that they are independent public accountants with respect to the Company within the meaning of the Act and the applicable published rules and regulations thereunder and based upon the procedures described in their letter delivered to the Underwriter concurrently with the execution of this Agreement (the "Original Letter"), but carried out to a date not more than three business days prior to the Closing Date or such later date on which Option Stock is purchased (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the Closing Date or such later date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter signed the date of the Original Letter or to reflect the availability of more recent financial statements, data or information. The letters shall not disclose any change, or any development involving a prospective change, in or 20. affecting the business or properties of the Company, which in the Underwriter's sole judgment, makes it impractical or inadvisable to proceed with the public offering of the Shares or the purchase of the Option Stock as contemplated by the Prospectus. (f) The Underwriter shall have received from Odenberg, Ullakko, Muranishi & Co., a letter stating that their review of the Company's internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's financial statements as at June 30, 1998, did not disclose any weakness in internal controls that they considered to be material weaknesses. (g) On the Closing Date, and on any later date on which Option Stock is purchased, the Underwriter shall have received a certificate, dated the Closing Date or such later date, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company stating that the respective signers of said certificate have carefully examined the Registration Statement in the form in which it originally became effective and the Prospectus contained therein and any amendments or supplements thereto and this Agreement, and that the statements included in clauses (i) through (ix) of paragraph (b) of this Section 7 are true and correct. (h) The Underwriter shall have been furnished evidence in usual written or telegraphic form from the appropriate authorities of the several jurisdictions, or other evidence satisfactory to the Underwriter, of the qualification referred to in paragraph (f) of Section 6 hereof. (i) Prior to the Closing Date, the Shares shall have been duly authorized for inclusion on the Nasdaq National Market upon official notice of issuance. In case any of the conditions specified in this Section 8 shall not be fulfilled, this agreement may be terminated by the Underwriter by giving notice to the Company. Any such termination shall be without liability of the Company to the Underwriter and without liability of the Underwriter to the Company; provided, however, that (i) in the event of such termination, the Company agree to indemnify and hold harmless the Underwriter from all costs or expenses incident to the performance of the obligations of the Company under this agreement, including all costs and expenses referred to in paragraphs (g) and (h) of Section 6 hereof, and (ii) if this agreement is terminated by the Underwriter because of any refusal, inability or failure on the part of the Company to perform any agreement herein, to fulfill any of the conditions herein, or to comply with any provision hereof other than by reason of a default by the Underwriter, the Company will reimburse the Underwriter severally upon demand for all out-of-pocket expenses (including reasonable fees and disbursements of counsel) that shall have been incurred by them in connection with the transactions contemplated hereby. 21. 8. Conditions of the Obligations of the Company. (a) The obligations of the Company to deliver the Shares shall be subject to the conditions that (i) the Registration Statement shall have become effective and (ii) no stop order suspending the effectiveness thereof shall be in effect and no proceedings therefor shall be pending or threatened by the Commission. (b) In case either of the conditions specified in paragraph (a) of this Section 10 shall not be fulfilled, this agreement may be terminated by the Company by giving notice to the Underwriter. Any such termination shall be without liability of the Company to the Underwriter and without liability of the Underwriter to the Company; provided however, that in the event of any such termination the Company agrees to indemnify and hold harmless the Company from all costs or expenses incident to the performance of the obligations of the Company under this agreement, including all costs and expenses referred to in paragraphs (g) and (h) of Section 6 hereof. 9. Indemnification and Contribution. (a) Subject to the provisions of paragraph (d) of this Section 9, the Company agrees to indemnify and hold harmless the Underwriter (and any person participating in the distribution who is deemed to be an underwriter (as defined in Section 2(11) of the Act) and each person (including each member or officer thereof), if any, who controls the Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, damages or liabilities, joint or several (and actions in respect thereof), to which the Underwriter or such persons may become subject, under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, and the Company agree to reimburse the Underwriter and such persons for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages, or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement (including the Prospectus as part thereof and any Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus as amended or as supplemented if the Company shall have filed with the 22. Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstance under which they were made, not misleading; provided, however, that (i) the indemnity agreement of the Company contained in this paragraph (a) shall not apply to any such loss, claim, damage, liability or action if such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing to the Company by the Underwriter expressly for use in any Preliminary Prospectus or the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto, and (ii) that the indemnity agreement contained in this paragraph (a) with respect to any Preliminary Prospectus shall not inure to the benefit of the Underwriter (or such persons) if the person asserting any such loss, claim, damage, liability or action purchased Shares which are the subject thereof to the extent that any such loss, claim, damage, liability or action (A) results from the fact that such Underwriter failed to send or give a copy of the Prospectus (as amended or supplemented) to such person at or prior to the confirmation of the sale of such Shares to such person in any case where such delivery is required by the Act and (B) arises out of or is based upon an untrue statement or omission of a material fact contained in such Preliminary Prospectus that was corrected in the Prospectus (as amended and supplemented), unless such failure resulted from non-compliance by the Company with paragraph (c) of Section 6 hereof. The indemnity agreements of the Company contained in this paragraph (a) and the representations and warranties of the Company contained in Section 2 hereof shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery and payment for the Shares. The indemnity agreement in this paragraph (a) shall be in addition to any liability which the Company may have at common law or otherwise. (b) The Underwriter agrees to indemnify and hold harmless the Company, each of its directors, each of its officers who has signed the Registration Statement, each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, claims, damages or liabilities, joint or several, to which such indemnified parties or any of them may become subject, under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise and to reimburse each of them for any legal or other expenses (including, except as otherwise hereinafter provided, reasonable fees and disbursements of counsel) incurred by the respective indemnified parties in connection with defending against any such losses, claims, damages or liabilities or in connection with any investigation or inquiry of, or other proceeding which may be brought against, the respective indemnified parties, in each case arising out of or are based upon (i) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement (including the Prospectus as part thereof and any 23. Rule 462(b) registration statement) or any post-effective amendment thereto (including any Rule 462(b) registration statement) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (ii) any untrue statement or alleged untrue statement of any material fact contained in any Preliminary Prospectus or the Prospectus as amended or as supplemented if the Company shall have filed with the Commission any amendment thereof or supplement thereto) or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstance under which they were made, not misleading, in each case to the extent, but only to the extent, that such statement or omission was made in reliance upon and in conformity with information furnished as herein stated or otherwise furnished in writing by the Underwriter to the Company expressly for use in the Registration Statement or the Prospectus or any such amendment thereof or supplement thereto, and will reimburse, as incurred, all legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person in connection with investigating or defending any such loss, claim, damage, liability or action. The indemnity agreement of the Underwriter contained in this paragraph (b) shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any indemnified party and shall survive the delivery and payment for the Shares. The indemnity agreement contained in this subsection (b) shall be in addition to any liability which the Underwriter may have at common law or otherwise. (c) Each party indemnified under the provisions of paragraph (a) or (b) of this Section 9 agrees that, upon the service of a summons or other initial legal process upon it in any action or suit instituted against it or upon its receipt of written notification of the commencement of any investigation or inquiry of, or proceeding against it, in respect of which indemnity may be sought on account of any indemnity agreement contained in such paragraphs, such indemnified party will promptly notify any party or parties from whom indemnification may be sought hereunder of the commencement thereof in writing. No indemnification provided for in such paragraphs shall be available to any party who shall fail so to give such notice if the party to whom such notice was not given was unaware of the action, suit, investigation, inquiry or proceeding to which such notice would have related and was prejudiced by the failure to give the notice, but the omission so to notify such indemnifying party or parties of any such service or notification shall not relieve such indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of such indemnity agreement. Any indemnifying party or parties against which a claim is to be made will be entitled, at its own expense, to participate in the defense of such action, suit, investigation or inquiry of, an indemnified party. Any indemnifying party shall be entitled, if it so elects within a reasonable time after receipt of notice from the indemnified party or parties of an action, suit, investigation or inquiry to which indemnity 24. may be sought, to assume the entire defense thereof (alone or in conjunction with any other indemnifying party or parties), at its own expense, in which case such defense shall be conducted by counsel reasonably satisfactory to the indemnified party or parties; provided however, that (i) if the indemnified party or parties has reasonably concluded that there may be a conflict between the positions of the indemnifying party or parties and of the indemnified party or parties in conducting the defense of such action, suit, investigation, inquiry or proceeding or that there may be legal defenses available to such indemnified party or parties different from or in addition to those available to the indemnifying party or parties, then counsel for the indemnified party or parties shall be entitled to conduct such defense to the extent reasonably determined by such counsel to be necessary to protect the interests of the indemnified party or parties and (ii) in any event, the indemnified party or parties shall be entitled to have counsel chosen by such indemnified party or parties participate in, but not conduct, the defense. Upon receipt of notice from the indemnifying party to such indemnified party of its election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 9 for any legal or other expenses (other than the reasonable costs of investigation) subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party has employed such counsel in connection with the assumption of different or additional legal defenses in accordance with the proviso to the immediately preceding sentence, or (ii) the indemnifying party has authorized in writing the employment of counsel for the indemnified party at the expense of the indemnifying party. If no such notice to assume the defense of such action has been given within a reasonable time of the indemnified party's or parties' notice to such indemnifying party or parties, the indemnifying party or parties shall be responsible for any legal or other expenses incurred by the indemnified party or parties in connection with the defense of the action, suit, investigation, inquiry or proceeding. (d) If the indemnification provided for in this Section 9 is unavailable or insufficient to hold harmless an indemnified party under paragraph (a) or (b) above in respect of any losses, claims, damages, expenses or liabilities (or actions in respect thereof) referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions in respect thereof) referred to in paragraphs (a) and (b) above (i) in such proportion as is appropriate to reflect the relative benefits received by each of the contributing parties from the offering of the Shares or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) above but also the relative fault of each of the contributing parties, on the one hand, and the party to be indemnified, on the other hand in connection with the statements or omissions that resulted in such losses, claims, 25. damages or liabilities, as well as any other relevant equitable considerations. The relative benefits received by the Company, on the one hand, and the Underwriter, on the other, shall be deemed to be in the same proportion as the total net proceeds from the offering of the Shares (before deducting expenses) and the total underwriting discount received by the Underwriter, in each case as set forth in the table on the cover page of the Prospectus, bear to the aggregate public offering price of the Shares. Relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company or by the Underwriter, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such untrue statement or omission. The parties agree that it would not be just and equitable if contributions pursuant to this paragraph (d) were to be determined by pro rata allocation or by any other method of allocation which does not take into account the equitable consideration referred to above. The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions in respect thereof) referred to above in this paragraph (d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this paragraph (d), the Underwriter shall not be required to contribute any amount in excess of the underwriting discount applicable to the Shares purchased by the Underwriter hereunder. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Each party entitled to contribution agrees that upon the service of a summons or other initial legal process upon it in any action instituted against it in respect to which a claim for contribution may be made against another party or parties under this paragraph (d), it will promptly notify such party or parties from whom contribution may be sought, but the omission so to notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any other obligation it may have hereunder or otherwise (except as specifically provided in paragraph (c) of this Section 10). The contribution agreement set forth above shall be in addition to any liabilities which any indemnifying party may have at common law or otherwise. (e) The Company will not, without the prior written consent of the Underwriter, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action, suit or proceeding in respect of which indemnification may be sought hereunder (whether or not the Underwriter or any person who controls such Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act is a party to such claim, action, suit or proceeding) unless such settlement, 26. compromise or consent includes an unconditional release of such Underwriter and each such controlling person from all liability arising out of such claim, action, suit or proceeding. 10. Reimbursement of Certain Expenses. In addition to their other obligations under Section 9 of this agreement, the Company hereby agrees to reimburse on quarterly basis the Underwriter for all reasonable legal and other expenses incurred in connection with investigating or defending any claim, action, investigation, inquiry or other proceeding arising out of or based upon any statement or omission, or any alleged statement or omission, described in paragraph (a) of Section 9 of this agreement, notwithstanding the absence of a judicial determination as to the propriety and enforceability of the obligations under this Section 10 and the possibility that such payments might later be held to be improper; provided, however, that (i) to the extent that any such payment is ultimately held to be improper, the Underwriter shall promptly refund it and (ii) the Underwriter shall provide to the Company, upon request, reasonable assurances of their ability to effect any refund, when and if due. 11. Representations, etc. to Survive Delivery. The respective representations, warranties, agreements, covenants, indemnities and statements of, and on behalf of, the Company and its officers, and the Underwriter, respectively, set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of the Underwriter, and will survive delivery of and payment for the Shares. Any successors to the Underwriter shall be entitled to the indemnity, contribution and reimbursement agreements contained in this agreement. 12. Termination. (a) This agreement (except for the provisions of Section 9 hereof) may be terminated by the Underwriter by notice to the Company prior to the Closing Date if: (i) the Company shall have sustained a loss by strike, fire, flood, accident or other calamity of such a character as to interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss was insured; (ii) trading in the Common Stock shall have been suspended or trading in securities generally on the New York Stock Exchange, the American Stock Exchange or the Nasdaq National Market shall have been suspended or limitations on such trading shall have been imposed or limitations on prices shall have been established on any such exchange or market system; (iii) the engagement in hostilities or an escalation of major hostilities by the United States or the declaration of war or a national emergency by the United States on or after the date hereof shall have occurred; (iv) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions shall have occurred if the effect of such outbreak, calamity, crisis or change in economic or political 27. conditions in the financial markets of the United States would, in the Underwriter's reasonable judgment, make the offering or delivery of the Shares impracticable; (v) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of, or commencement of any proceeding or investigation by, any court, legislative body, agency or other governmental authority shall have occurred which in the Underwriter's reasonable opinion materially and adversely affects or will materially or adversely affect the business or operations of the Company; (vi) a banking moratorium shall have been declared by New York or United States authorities; (vii) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs shall have occurred which in the Underwriter's reasonable judgment has a material adverse effect on the securities markets in the United States. (b) If this agreement is terminated pursuant to this Section 12, there shall be no liability of the Company to the Underwriter and no liability of the Underwriter to the Company; provided, however, that in the event of any such termination, the Company agrees to indemnify and hold harmless the Underwriter from all costs or expenses incident to the performance of the obligations of the Company under this agreement, including all costs and expenses referred to in paragraphs (g) and (h) of Section 6. Notwithstanding any termination of this agreement, the provisions of Section 9 hereof shall survive and remain in full force and effect. 13. Notices. All communications hereunder shall be in writing and if sent to the Underwriter shall be mailed or delivered or telegraphed and confirmed by letter or telecopied and confirmed by letter to W.R. Hambrecht & Company, LLC at 550 Fifteenth Street, San Francisco, California 94103 or, if sent to the Company, shall be mailed or delivered or telegraphed and confirmed to the Company at 18701 Gehricke Road, Sonoma, California, 95476, Attention: Chief Executive Officer. 14. Successors. This agreement shall incur to the benefit of and be binding upon the Company and the Underwriter and, with respect to the provisions of Section 9 hereof, the several parties (in addition to the Company and the Underwriter) indemnified under the provisions of said Section 9, and their respective personal representatives successors and assigns. Nothing in this agreement is intended or shall be construed to give any other person any legal or equitable right, remedy or claim under or in respect of this agreement, or any provisions herein contained. The term "successors and assigns" as herein used shall not include any purchaser, as such purchaser, of any of the Shares from the Underwriter. 15. Counterparts. This agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, and all of which together shall be deemed to be one and the same instrument. 28. If the foregoing correctly sets forth our understanding, please indicate the Placement Agent's acceptance thereof in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, RAVENSWOOD WINERY, INC. By: ------------------------------ W. Reed Foster Chief Executive Officer Accepted as of the date first above written: W.R. HAMBRECHT & COMPANY, LLC By: --------------------------------- Title: ------------------------------- 29. EX-10.11 3 CONVERTIBLE SUBORDINATED DEBENTURE CONVERTIBLE SUBORDINATED DEBENTURE THE SECURITIES REPRESENTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAWS. SUCH SECURITIES AND ANY SECURITIES ISSUED HEREUNDER OR WITH RESPECT HERETO MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT AND APPLICABLE LAWS OR AN OPINION OF COUNSEL SATISFACTORY TO BORROWER THAT SUCH REGISTRATION IS NOT REQUIRED. FOR VALUE RECEIVED, Ravenswood Winery, Inc., a California corporation ("Borrower"), hereby promises to pay __________________________________ ("Holder"), or order, the "Principal" sum of __________________________ ($_______________________). Such payment shall be made no later that 5 p.m., Pacific time on December 31, 2008 ("Maturity"). Conversion of this Debenture, as provided in Article 3 hereto, shall constitute payment in full of all Principal. Borrower shall also pay interest upon the Principal outstanding from time to time in an amount equal to the index rate given to prime commercial customers by the Bank of America NT&SA, San Francisco, California (the "Prime Rate") plus one percent (1%) per annum (the "Interest Rate"), subject to adjustment as provided in this paragraph, from the date hereof until this Debenture is converted or all Principal is paid, whichever first occurs. Interest shall be payable quarterly in arrears, commencing with the first payment on January 15, 1999. The Interest Rate shall be subject to adjustment 18 months from the date hereof, and every eighteen months thereafter, to one percent (1%) over the Prime Rate (each, an "Interest Rate Adjustment"); provided, however, that no individual Interest Rate Adjustment shall exceed 2%, and provided further that the maximum Interest Rate shall be 11%. Notwithstanding any other provision of this Debenture, the Interest Rate shall not exceed the 1 maximum rate permitted under applicable law. Both principal and interest shall be payable in lawful money of the United States of America at the address which Holder has provided to Borrower in writing. The securities represented hereby have not been registered under the Securities Act of 1933 (the "Act") or any other federal or state securities laws, and may not be resold, transferred, pledged, hypothecated or otherwise assigned until the restrictions in Article 7 have been satisfied. ARTICLE ONE SUBORDINATION 1.1 Senior Indebtedness. As used in this Debenture, the term "Senior Indebtedness" shall mean the principal amount of all indebtedness of the Borrower, regardless of whether incurred on, before or after the date of this Debenture, including: (i) Borrower's indebtedness to Pacific Coast Farm Credit Association, ACA, in the form of a line of credit, pursuant to which Borrower may borrow up to a maximum of $2,000,000; (ii) Borrower's indebtedness to Pacific Coast Farm Credit Association, ACA, in the form of a loan secured by Borrower's property located at Gehricke Road, in the maximum amount of $2,665,755; (iii) proposed indebtedness to be secured by Borrower's leasehold interest in the proposed Quarry Facility, which is expected to total up to $5,000,000; (iv) money borrowed from any bank and evidenced by notes, bonds, debentures or other written obligations, if such notes, bonds, debentures or other written obligations are interest-bearing securities only and are not convertible or issued in connection with the issue of warrants or options, whether separate or attached, or some other rights to receive 2 stock or participate in the earnings of Borrower in any form, including dividend distributions; and (v) any renewals or extensions of any indebtedness described in (i), (ii) or (iii) above. Borrower reserves the right to increase the number of its sources of bank credit, as well as to increase the maximum loan amounts. Use of available funds for payments on Senior Indebtedness shall not constitute a default under payments due to the Holder. Any such payments not made to Holder shall cumulate at the Interest Rate until paid. 1.2 Subordination. Borrower covenants and agrees and Holder, by acceptance hereof, covenants, expressly for the benefit of the present and future holders of Senior Indebtedness, that the payment of the principal and interest on this Debenture is expressly subordinated in right of payment to the payment in full of principal and interest and any fees, charges or penalties of Senior Indebtedness. Upon any terminating liquidation of assets of Borrower upon the occurrence of any dissolution, winding up, or liquidation, whether or not in bankruptcy, insolvency or receivership proceedings, Borrower shall not pay thereafter and Holder shall not be entitled to receive thereafter, any amount in respect of the principal and interest of the Debenture unless and until the Senior Indebtedness shall have been paid, whether in cash, property or securities, by Borrower or by a trustee in bankruptcy, a receiver or liquidating trustee, or other person making such payment or distribution, whether directly to the holders of Senior Indebtedness, or to their representative or representatives, ratably according to the aggregate amounts remaining unpaid on Senior Indebtedness held or represented by each of them. 3 1.3 Rights Against Borrower and Others. It is understood that the provisions of this Article One captioned "Subordination" are, and are intended to be, solely for the purpose of defining the relative rights of Holder, on the one hand, and the holders of the Senior Indebtedness of Borrower, on the other hand. Nothing contained in this Article One or elsewhere in this Debenture shall or is intended to impair, as among Borrower, its creditors other than holders of Senior Indebtedness, and Holder, the unconditional and absolute obligation of Borrower to pay Holder the principal and interest on the Debenture as and when the same shall become due and payable in accordance with the terms hereof, or affect the relative rights of Holder and the creditors of the Borrower, other than a holder of such Senior Indebtedness; nor shall anything herein prevent Holder from exercising all remedies otherwise permitted by applicable law upon default under this Debenture, subject to the rights, if any, of a holder of Senior Indebtedness in respect to cash, property or securities of Borrower received upon the exercise of any such remedy. Upon any payment or distribution of assets of Borrower referred to in this Article One, Holder shall be entitled to rely upon any order or decree made by any court of competent jurisdiction in which any dissolution, winding up, liquidation or reorganization proceedings are pending, or upon a certificate of a liquidating trustee or agent or other person making any distribution to Holder, for the purpose of ascertaining the persons entitled to participate in such distribution, the holders of Senior Indebtedness and other indebtedness of the Borrower, the amounts thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article One. 4 ARTICLE TWO PREPAYMENT The principal and interest due pursuant to this Debenture may be prepaid, in whole or in part, at any time after expiration of the conversion right herein and prior to maturity, at the option of Borrower. Each prepayment shall include the principal amount to be prepaid plus all interest due to the prepayment date. In the case of partial prepayment, the amount and other details thereof shall be noted on this Debenture. ARTICLE THREE CONVERSION AND PURCHASE RIGHTS 3.1 Conversion Right. Holder shall have the right, from and after the date of this Debenture until any time at or prior to 5 o'clock p.m. Pacific time on December 31, 2003, to convert all, and not a portion, of this Debenture into fully paid and nonassessable shares of the Capital Stock of Borrower. If conversion is not requested at or before this time, the conversion right shall terminate and be of no further force or effect. Subject to the terms of Article Two, the indebtedness represented by this Debenture has been paid or otherwise discharged, the rights set forth in this Debenture shall not survive such payment or discharge, including but not limited to, the right to convert into shares of Capital Stock of Borrower. "Capital Stock" shall mean the common voting stock of Borrower. Upon the surrender of this Debenture, accompanied by the Holder's written request for conversion, which request shall be irrevocable, Borrower shall pay within 30 days all interest accrued hereon to the date of conversion and issue and deliver to Holder certificates, evidencing such shares of stock as hereinafter set forth. 5 Subject to readjustment as provided in Section 3.2 hereof, the Conversion Price (hereinafter, the "Conversion Price") and number of shares issuable upon conversion shall be determined as follows: Each $10,000 Debenture may be converted to 14.286 shares of Capital Stock for a price of $700 per share. 3.2 Adjustment of Conversion Terms. The Conversion Price and the number and kind of shares to be issued to Holder upon conversion pursuant to Section 3.1 shall be adjusted to reflect the effect of any consolidation, merger, sale of assets, reclassification of shares, share issuance or any other change in the status of the Capital Stock or the rights or privileges of holders of the Capital Stock (herein called a "Change" in the Capital Stock) which occurs prior to conversion. Such adjustment to the shares of Capital Stock to be issued upon a conversion to reflect a Change shall be calculated as if the Debenture had been converted and the Capital Stock into which the Debenture is convertible was issued and outstanding immediately prior to the Change and then, was adjusted, like all other shares of Capital Stock then outstanding, to reflect the Change. Accordingly, if the Debenture is then converted after a Change, the number of shares issued in the conversion shall reflect the Change. After conversion, the shares issued in the conversion shall be treated like all other similar shares outstanding when any subsequent changes occur. 3.3 Cash Distributions. No adjustment as a result of cash dividends or interest on Capital Stock into which this Debenture can be converted will be made to the Conversion Price at which the number of shares into which this Debenture can be converted. 6 3.4 No Fractional Shares. Fractional shares of Capital Stock shall not be issued in connection with any conversion hereunder. If after conversion and taking into account any Change, there shall result any fractional share, Borrower shall pay out such fractional share to Holder in cash. The value of such fractional share shall be determined based upon: (i) the last reported sales price of a share of Capital Stock on the last trading day prior to the conversion date on the principal national securities exchange on which the shares of Capital Stock are listed or admitted to trading; (ii) if the shares of Capital Stock are not so listed or admitted to trading, the average of the highest bid and lowest asked prices on the last trading day prior to the conversion date on the Nasdaq Stock Market; or (iii) if no such independent quotations exist, as determined in good faith by Borrower's board of directors. 3.5 Authorized Shares. Borrower covenants that during the period the conversion right exists, Borrower shall reserve sufficient shares of its authorized and unissued Capital Stock to provide for the issuance of Capital Stock upon the conversion of this Debenture. Borrower agrees that the issuance of this Debenture shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Capital Stock upon the conversion of this Debenture. 3.6 Method of Conversion. This Debenture may be converted by Holder in whole, only, by the surrender of this Debenture at the principal office of Borrower as provided in Section 3.1 hereto. 7 ARTICLE FOUR REPRESENTATIONS AND WARRANTIES Borrower represents and warrants that: 4.1 Existence and Rights. As of the date hereof, Borrower is a corporation duly organized and existing under the laws of the State of California without limit as to the duration of its existence, and is authorized and in good standing to do business in the State of California. Borrower has corporate powers and adequate authority, rights and franchises to own its property and to carry on its business as now conducted, and is duly qualified and in good standing in each state in which the character of the properties owned by it herein or the conduct of its business makes such qualification necessary, and Borrower has the corporate power and adequate authority to issue this Debenture and the underlying shares of Capital Stock. 4.2 Debenture Authorized. The execution and delivery of this Debenture and the performance by Borrower of its obligations hereunder are not in contravention of or in conflict with any law or regulation or any term or provision of Borrower's Articles of Incorporation or Bylaws, and are duly authorized and do not require the consent or approval of any governmental body or other regulatory authority; and this Debenture is the valid, binding and legally enforceable obligation of Borrower in accordance with its terms. 4.3 No Conflict. The execution, delivery and performance of this Debenture do not contravene or conflict with any agreement, indenture or undertaking to which Borrower is 8 a party or by which it or any of its property may be bound or affected, and do not cause any lien, charge or other encumbrance to be created or imposed upon any such property by reason thereof. 4.4 Shares Outstanding. As of the date hereof, Borrower's authorized Capital Stock consists of 1,000,000 shares, of which 56,362.8 shares are outstanding. As of the date of this Debenture, other than 4,805.56 and 2,410.729 shares of Capital Stock reserved for issuance upon the conversion of those certain Subordinated Convertible Debentures issued by Borrower in December of 1994 and December 31, 1998, respectively, there are no other shares of Capital Stock reserved for issuance or subject to any agreement, right, option or warrant with respect to the sale or issuance thereof by Borrower. ARTICLE FIVE RECORDS AND REPORTS Borrower shall maintain a standard and modern system of accounting, applied on a consistent basis. Within a reasonable period of time after the termination of Borrower's fiscal year, Borrower shall prepare annual financial statements pursuant to Generally Accepted Accounting Principles, based on Borrower's books and records. These annual financial statements shall be audited by an independent accountant. So long as Holder holds this Debenture, or Capital Stock issued upon conversion of this Debenture, Holder shall have access to Borrower's books and records, as provided under California law. 9 ARTICLE SIX EVENTS OF DEFAULT Except as provided in Article One, the failure to pay an installment of principal or interest hereon when due, and continued failure to pay after a period of ten business days has lapsed from the date of delivery of written notice therefor from Holder to Borrower shall constitute a default hereunder. ARTICLE SEVEN TRANSFERS 7.1 Investment Representation. Holder hereby represents and warrants that it has acquired this Debenture for the purpose of investment and with no present intent to sell or to distribute the same. Should it exercise the conversion privilege contained herein, any Capital Stock of Borrower so acquired will be acquired with the same investment intent. 7.2 Right of First Offer. Prior to the expiration of the conversion right, Holder shall not be entitled to transfer this Debenture or any interest in it without first offering to transfer the entire Debenture to Borrower for a price and upon terms chosen by Holder, all as provided in this Section 7.2. Any attempted transfer that does not comply with this section shall be void and of no force or effect. Without any other remedies, Borrower shall be entitled to an injunction requiring Holder to comply with the provisions of this section. The only exception to the restriction on transfer in this section is for transfers at death and certain lifetime transfers to family members, as described in Section 7.3 hereto. 10 If Holder wishes to transfer this Debenture in a transaction other than as described in Section 7.3 hereto, Holder shall, in writing, first offer this Debenture to Borrower, stating the price and terms upon which Holder offers to transfer the Debenture to Borrower. Borrower shall have fifteen (15) business days in which to accept the offer and a total of thirty (30) business days in which to close the transfer. Borrower shall also have the right to designate a third person or persons to accept the offer; however, once the offer is accepted, Borrower and all such designated third persons shall be jointly and severally liable with respect to the performance of the obligations hereunder. If Borrower does not accept Holder's offer, or designate a third party or parties to accept Holder's offer within the fifteen business day period, Holder shall be free to transfer the Debenture for a price and upon terms which are no more favorable to the transferee than those offered to Borrower. The transfer shall include Holder's entire interest in the Debenture. If a transfer is not contracted for within one calendar year from the date that Holder is free to offer the transfer to others, and closed within a total of fourteen (14) calendar months from that date, then any transfer shall require a new offer to Borrower by Holder. 7.3 Permissible Transfers. Not withstanding the right of first offer of Borrower provided in Section 7.2 above, Holder shall have the right: (i) to transfer the entire Debenture by will to any third party or (ii) to otherwise transfer the entire Debenture to a member or members (holding jointly) of Holder's immediate family, including Holder's children, parents, spouse, spouses parents ("Immediate Family") or to a trust solely for the benefit of members of Holder's Immediate Family. To transfer the Debenture under this Section 11 7.3, Holder must transfer the entire Debenture. A transferee or a group of transferees under this Section 7.3 shall not be entitled to transfer this Debenture pursuant to this Section 7.3. As a condition precedent to a transfer under this Section 7.3, each transferee shall agree to and sign a copy of these transfer restrictions. When a transfer results in joint ownership of this Debenture and the conversion right has not expired, the transferees shall designate one member of their group to represent them, in writing, to Borrower. Borrower shall be entitled to rely upon any agreement or representation of such representative. If the transferees do not designate a representative within thirty (30) days after a request by Borrower, Borrower shall have the right to designate one of the transferees as the representative of the transferees upon whom Borrower can rely. Subject to the sole discretion of Borrower, Borrower may modify this exception to the transfer restrictions provided in this Section 7.3 in order to meet what Borrower considers to be appropriate estate planning goals of Holder. 7.4 Restriction on Transfer. In addition to the restrictions on transfer provided in Sections 7.2 and 7.3 hereto, this Debenture may not be transferred or assigned in whole or in part without compliance with federal and state securities laws by the transferor and the transferee or transferees (including the delivery of investment representation letters and legal opinions reasonably satisfactory to Borrower, if such are requested Borrower). 7.5 Legend. Any certificate representing Securities shall be stamped with a suitable endorsement to the effect that said Securities are subject to the terms and conditions of this Article 7 and stating that said terms and conditions are fully set forth in this Article, a copy of which is on file and available for the inspection at the main office of Borrower. 12 ARTICLE EIGHT MISCELLANEOUS 8.1 Failure or Indulgence Not Waiver. No failure or delay on the part of Holder hereof in the exercise of any power, right or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such power, right or privilege preclude other or further exercise thereof or of any other right, power or privilege. All rights and remedies existing hereunder are cumulative to, and not exclusive of, any rights or remedies otherwise available. 8.2 Rights of Shareholders. Subject to Section 3.1 of this Debenture, Holder shall not be entitled to vote or receive dividends or be deemed the holder of Capital Stock or any other securities of Borrower that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon Holder, as such, any of the rights of a shareholder of Borrower or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action (whether upon any recapitalization, issuance of stock, reclassification of stock, change of par value, or change of stock to no par value, consolidation, merger, conveyance, or otherwise) or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until this Debenture shall have been converted as provided herein. 8.3 Notices. Any notice herein required or permitted to be given shall be in writing and may be personally serviced or sent by United States mail and shall be deemed to have been given when deposited in the United States mail registered, with postage prepaid and 13 properly addressed. For the purposes hereof, the address of Holder and the address of Borrower shall be as follows: Borrower Holder -------- ------ Ravenswood Winery, Inc. 18701 Gehricke Road Sonoma, CA 95476 Both Holder and Borrower may change the address for service by service of written notice to the other as herein provided. Notice by telephone or facsimile is also permitted. 8.4 Amendment Provision. This Debenture may only be amended by a written agreement executed by both Borrower and Holder. 8.5 Cost of Collection. If default is made in the payment of this Debenture, Borrower shall pay Holder hereof costs of collection, including, reasonable attorneys, fees, should Holder prevail. 8.6 Replacement of Debenture. On receipt of evidence reasonably satisfactory to Borrower of the loss, theft, destruction or mutilation of this Warrant and, in the case of loss, theft or destruction, on delivery of an indemnity agreement reasonably satisfactory in form and substance to Borrower or, in the case of mutilation, on surrender and cancellation of this Debenture, Borrower at its expense shall execute and deliver, in lieu of this Debenture, a new debenture of like tenor and amount. 8.7 Governing Law. This Debenture has been executed by Borrower in, and shall be governed by the laws of the State of California. 14 8.8 Successors and Assigns. Subject to terms and provisions of this Debenture limiting the right of assignment, this Debenture and all the respective rights, interests and obligations hereunder shall be binding upon, inure to the benefit of and be enforceable by the parties hereto and their respective heirs, devisees, executors, administrators, personal or legal representatives, successors (in interest, or in title, or in both) and assigns, whether or not any such person shall have become a party to this Debenture and have agreed in writing to join and be bound by the terms and conditions hereof. 8.9 Severability. If any term, covenant or condition of this Debenture or its application to any person or circumstances shall be held to be invalid or unenforceable, the remainder of this Debenture and the application of such term or provision to other persons or circumstances shall not be affected, and each term hereof shall be valid and enforceable to the fullest extent permitted by law. 8.10 Headings. The headings used herein are for purposes of convenience only and shall not be used in construing the provisions hereof or in determining any of the rights or obligations of the parties to the Debenture. 8.11 Further Assurances. The parties hereby agree to execute such other documents and perform such other acts as may be necessary or desirable to carry out the purposes of this Debenture. IN WITNESS HEREOF Borrower has caused this Debenture to be signed in its name by its duly authorized officers. 15 Dated: December 31, 1998 Ravenswood Winery, Inc. By: -------------------------------- W. Reed Foster, Chairman and Chief Executive Officer Attest: -------------------------------- Justin M. Faggioli, Executive Vice President and Secretary 16 EX-11.1 4 STATEMENT OF COMPUTATION OF EARNINGS PER SHARE Exhibit 11.1 RAVENSWOOD WINERY, INC. COMPUTATION OF EARNINGS PER SHARE AND COMMON SHARE EQUIVALENT
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 $ 186,891 $1,468,194 $2,285,232 $1,633,901 ========== ========== ========== ========== Per share amount $ .05 $ .40 $ .66 $ .47 ========== ========== ========== ========== DILUTED Average shares outstanding [A] 3,005,625 3,150,000 2,992,500 3,018,750 Shares issued under deferred compensation arrangement [B] 345,731 345,731 345,731 345,731 Shares issued in December 1998 [C] 140,625 140,625 140,723 140,625 Net effect of potentially dilutive common stock issuable for convertible debentures 302,751 302,751 368,377 302,751 ---------- ---------- ---------- ---------- Weighted average number of common shares and equivalents outstanding 3,794,732 3,939,107 3,847,331 3,807,857 ========== ========== ========== ========== Net income $ 186,891 $1,468,194 $2,285,232 $1,633,901 Interest on convertible debt, net of tax benefit 49,305 55,793 45,168 24,653 ---------- ---------- ---------- ---------- Net income, after adding interest on debentures $ 236,196 $1,523,987 $2,330,400 $1,658,554 ========== ========== ========== ========== Per share amount $ .05 $ .39 $ .61 $ .44 ========== ========== ========== ========== [A] Reflects the retroactive effect of the 63-to-1 stock split approved in February 1999. [B] Reflects the retroactive effect of the shares issued under a deferred compensation arrangement in early fiscal 1999. [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.
RAVENSWOOD WINERY, INC. COMPUTATION OF EARNINGS PER SHARE AND COMMON SHARE EQUIVALENT
Fiscal year ended June 30, ---------------------------------------------- 1 9 9 6 1 9 9 5 1 9 9 4 ---------- ---------- ---------- BASIC Average shares outstanding [A] 3,150,000 3,150,000 3,150,000 Shares issued under deferred compensation arrangement [B] 345,731 345,731 345,731 Shares issued in December 1998 [C] 140,625 140,625 140,625 ---------- ---------- ---------- Average shares outstanding 3,636,356 3,636,356 3,636,356 ========== ========== ========== Net income $1,268,832 $1,016,745 $ 591,962 ========== ========== ========== Per share amount $ 0.349 $ 0.280 $ 0.163 ========== ========== ========== DILUTED Average shares outstanding [A] 3,150,000 3,150,000 3,150,000 Shares issued under deferred compensation arrangement [B] 345,731 345,731 345,731 Shares issued in December 1998 [C] 140,625 140,625 140,625 Net effect of potentially dilutive common stock issuable for convertible debentures 302,751 247,920 ---------- ---------- ---------- Total 3,939,107 3,884,276 3,636,356 ========== ========== ========== Net income $1,268,832 $1,016,745 $ 591,962 Interest on convertible debt, net of tax benefit 41,520 33,906 ---------- ---------- ---------- Net income, after deducting interest on debentures $1,310,352 $1,050,651 $ 591,962 ========== ========== ========== Per share amount $ 0.333 $ 0.270 $ 0.163 ========== ========== ========== [A] Reflects the retroactive effect of the 63 to 1 stock split occurring in early 1999. [B] Reflects the retroactive effect of the shares issued under a deferred compensation arrangement in early fiscal 1999. [C] Represents the retroactive effect using the "treasury stock method" for common stock issued in December 1998 at prices below the planned initial public offering price.
EX-23.1 5 CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the use in the Prospectus constituting part of this Registration Statement on Form SB-2 of our report dated September 15, 1998, except as to certain subsequent events described in Note 16, which is as of February 1, 1999, relating to the financial statements of Ravenswood Winery, Inc., which appears in such Prospectus. We also consent to the references to us under the headings "Experts" and "Selected Financial Data" in such Prospectus. However, it should be noted that Odenberg, Ullakko, Muranishi & Co. LLP has not prepared or certified such "Selected Financial Data." ODENBERG, ULLAKKO, MURANISHI & CO. LLP San Francisco, California March 16, 1999 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 12-MOS 6-MOS JUN-30-1998 JUN-30-1999 JUL-01-1997 JUL-01-1998 JUN-30-1998 DEC-31-1998 102,272 3,171,374 0 0 1,916,498 2,664,480 10,000 10,000 10,427,359 12,931,338 12,819,369 19,113,531 4,194,294 5,259,843 1,220,480 1,389,890 15,977,110 23,224,265 4,692,902 6,112,125 7,603,286 10,877,709 0 0 0 0 2,938,900 4,626,400 5,434,924 7,720,156 15,977,110 23,224,265 15,890,605 11,582,517 17,016,866 12,194,996 7,397,362 5,066,471 6,239,843 2,340,009 0 0 (6,722) 1,212 523,551 225,669 1,779,060 4,029,081 1,592,169 1,743,849 186,891 2,285,232 0 0 0 0 0 0 186,891 2,285,232 0.05 0.66 0.05 0.61
EX-99.1 7 LETTER FROM FIELD ACCOUNTANCY CORPORATION 11 EMBARCADERO WEST SUITE 215 FIELD OAKLAND, CA 94607 ACCOUNTANCY CORPORATION PHONE 510-874-1485 FAX 510-874-1490 United States Securities & Exchange Comm. 450 5th Street, N.W. Washington, D.C. 20549 March 15, 1999 Re: Ravenswood Winery, Inc. To Whom It May Concern: I was engaged by Ravenswood Winery, Inc. to review their financial statements from June 30, 1994 to June 30, 1997. I agree with the financial statements included in the Company's registration statement on form SB-2 (registration no. 333-71729) for the years ended June 30, 1994 through June 30, 1996. Sincerely, /s/ Kaar A. Field Field Accountancy Corporation by Kaar A. Field, President EX-99.2 8 MASTER SELECTED DEALERS AGREEMENT W.R. HAMBRECHT & COMPANY, LLC 550 15th Street, Floor 2 San Francisco, California 94103 ________ ___, 1998 MASTER SELECTED DEALERS AGREEMENT --------------------------------- Ladies and Gentlemen: In connection with public offerings of securities underwritten by W.R. Hambrecht & Company, LLC ("WRH"), or by a group of Underwriters represented by WRH (together with WRH, the "Representatives"), you and other securities dealers (collectively, the "Dealers") may be offered from time to time the opportunity to purchase a portion of such securities, as principals, at a discount from the public offering price representing a selling concession or reallowance granted as consideration for services rendered in the distribution of such securities. The Appendix hereto sets forth the general terms, conditions and representations applicable to any such purchase where WRH is responsible for reservations of securities for sale to Dealers unless WRH expressly informs you that such terms, conditions and representations shall not be applicable to any such purchase. Acceptance of any reservation of any such securities by you, as a Dealer, shall constitute acceptance of, and agreement to, such terms, conditions and representations, together with, and subject to, any additional or supplementary terms, conditions and representations communicated to you in connection with any specific offering. As used herein and the Appendix hereto, the term "Agreement" shall mean this Agreement, including the Appendix attached hereto and incorporated herein by reference, and, after receipt by you of written notice thereof, any amendment or supplement hereto, plus any additional or supplementary terms, conditions and representations communicated to you by the Representatives in connection with any offering of securities. This Agreement shall constitute a binding agreement between you and WRH, individually, or as Representative of the several Underwriters of such securities. This Agreement supersedes any prior understanding you have with WRH with respect to the subject matter hereof. If the foregoing, including the general terms, conditions and representations of the Appendix incorporated herein by reference is acceptable to you, please sign and return the enclosed copy of this Agreement. Very truly yours, W.R. Hambrecht & Company, LLC By -------------------------------- ----------------------------------- Name ----------------------------------- Title The foregoing Agreement is hereby acknowledged and accepted as of _____________ ___, 1998 - ---------------------------------- By: ----------------------------- Name: Title: Address: - ---------------------------------- - ---------------------------------- E-Mail Address: - ---------------------------------- -2- APPENDIX General Terms, Conditions and Representations Applicable in Underwritten Public Offerings of Securities Managed by W.R. Hambrecht & Company, LLC 1. Offering to Dealers. In connection with public offerings ("Offerings") of securities ("Securities") underwritten by underwriters ("Underwriters") represented by W.R. Hambrecht & Company, LLC ("WRH") alone or in conjunction with other firms (together with WRH, the "Representatives"), the Underwriters may severally offer to one or more securities dealers ("Dealers") the right to purchase from the Underwriters a portion of the Securities, subject to the receipt and acceptance thereof by the Underwriters and subject to the terms, conditions and representations set forth (a) herein, (b) in the effective registration statement relating to the offering of the Securities and (c) in any letter, electronic message, facsimile message and/or telegram sent by the Representatives to Dealers in connection with an offer to Dealers expressly informing such Dealers that such terms, conditions and representations shall be applicable. Any such offer to Dealers will be extended only on behalf of such Underwriters as may lawfully sell the Securities in said Dealer's state. Following the filing of a registration statement with respect to Securities to be offered, the Underwriters will accept by electronic transmission or orally, on behalf of specific brokerage accounts for which Dealer acts as broker ("Accounts") indications of interests ("Indications") to purchase the Securities. Such Indications shall set forth the number of Securities which such Account proposes to purchase and the price per Security that such Account proposes to pay in purchasing such Securities. No Indication shall be submitted on behalf of any Account that has not executed or electronically consented to the terms and conditions of an Electronic OpenIPO Participation Agreement substantially in the form of Exhibit A. The Representatives shall have the right, in their sole discretion, to accept or reject any Indication for any reason. The Representatives shall determine, in their sole discretion, the point in time following the declaration of effectiveness of the registration statement with respect to the Securities to be offered at which no additional Indications shall be accepted (the "Auction Close"). Following the Auction Close, the Representatives shall determine the initial public offering price of the Securities to the public (the "Public Offering Price") and the Accounts which bid for which Indications have been accepted ("Successful Bidders"). Dealers to whom an offer to purchase is made by the Representatives pursuant to this Agreement will be notified by the Representatives by electronic message, telegram or facsimile message of the method and terms of the Offering, the time of the release of the Securities for sale to the public, the Public Offering Price, the identity of the Successful Bidders and terms of the acceptance of such Indications ("Accepted Terms"), the selling concession, the time at which books will be opened, the total amount, if any, of Securities reserved for purchase by such Dealer, and the period of such reservation (the "Transaction Notification"). Pursuant to Section 9 of this Agreement, such Transaction Notification shall be deemed a supplement of this Agreement and the terms of this Agreement shall apply to any offering for which a Transaction Notification is forwarded to Dealers by the Representatives. Acceptance of the terms hereof (as supplemented by any Transaction Notice) constitutes an obligation on the part of each Dealer to purchase, upon the terms and conditions hereof (as supplemented by any Transaction Notice), the amount of Securities reserved and accepted by such Dealer and to perform and observe all the terms and conditions hereof. 2. Offering by Dealers. Immediately upon receipt of the telegram, letter or transmission referred to in clause (c) of the first paragraph of Section 1 hereof, Dealers may reoffer the Securities purchased by them hereunder, subject to receipt and acceptance of the Securities by the Underwriters, and upon the other terms, conditions and representations set forth herein and in the effective registration statement relating to such Securities. Each Dealer hereby represents and agrees that such Dealer shall reoffer the Securities to Successful Bidders pursuant to the Accepted Terms and will not offer any of the Securities for sale to other prospective purchasers except as consented to in writing by the Representatives. Securities purchased hereunder or are to be offered to the public at the Public Offering Price. You agree that any Securities purchased from you in connection with your participation as a Dealer will be evidenced by an electronic or written confirmation setting forth the Accepted Terms and otherwise meeting the requirements of the applicable federal regulations, and be subject to the terms and conditions set forth in such confirmation and in the Prospectus. With the consent of the Representatives, Dealers and Underwriters may deal in Securities with each other at the Public Offering Price less an amount not exceeding the concession to Dealers. After the initial public offering, the Representatives are authorized to vary the Public Offering Price, concession and other selling terms of the Securities. 3. Payment and Delivery. The Securities offered to and accepted by Dealers are to be paid for at the Public Offering Price prior to 6 o'clock a.m., Pacific time, on the Closing Date, as defined in the agreement for the purchase of the Securities by the Underwriters (the "Underwriting Agreement"). Unless otherwise indicated, such payment is to be made at the Clearing Agent' offices, [ADDRESS], by certified or bank cashier's check payable in next day funds (or such other funds as the Representatives may advise), to the order of the Representatives against delivery of such Securities. Delivery of any Securities purchased by Dealers shall be made through the facilities of The Depository Trust Company if Dealers are members thereof, unless the Representatives otherwise notifies Dealers in its discretion. If a Dealer is not a member of The Depository Trust Company, such delivery shall be made through a correspondent who is such a member, and such Dealer will advise the Clearing Agent and the Representatives of the name of such bank or correspondent at least 48 hours prior to the Closing Date. 4. Termination of the Offering. With respect to any particular Offering, the terms and conditions of this Agreement shall terminate upon the earlier of notice to you from the Representatives of (a) termination of the Offering pursuant to the termination provisions of the underwriting agreement or any other agreement in connection with the distribution; (b) the completion of the distribution pursuant to such Offering; or (c) if not previously terminated, on the thirtieth (30th) day after the date upon which the Underwriters first commence accepting Offers as set forth in Section 1. Unless the Offering is terminated pursuant to clause (a) of this paragraph, promptly following such termination, there shall become payable to each Dealer the selling concession on all Securities purchased by such Dealer pursuant to the terms hereto and which have not been purchased or contracted for by the Underwriters in the open market or otherwise (except pursuant to the second paragraph of Section 5 hereof), during the term of such Offering for the account of one or more of the several Underwriters. 5. Obligations and Positions of Dealers. Dealer agrees in reoffering the Securities to comply with all applicable requirements of the federal securities laws and all applicable rules and regulations promulgated thereunder. If any Dealer fails to pay for the Securities offered to and accepted by such Dealer or fails to perform any of such Dealer's other obligations hereunder, the Representatives may, in the Representatives' discretion and without demand, notice or legal proceedings, and in addition to any and all remedies otherwise available to the Representatives and to the other several Underwriters, (a) terminate any right or interest on such Dealer's part, and (b) at any time and from time to time sell, without notice to such Dealer, any of the Securities then held for such Dealer's account at public or private sale (i) to other Dealers on terms substantially equivalent to those set forth herein, or (ii) if in the sole discretion of the Representatives circumstances so warrant, to such parties and at such price or prices and upon such terms and conditions as the Representatives may deem fair, and apply the net proceeds so realized, as determined by the Representatives, toward payment of any obligations in respect of which such Dealer is in default, and, notwithstanding any action taken under (a) or (b) above, or both, such Dealer shall remain liable to the Underwriters, severally, to the extent of the Dealers' respective interests, or at the Representatives' election, to the Representatives for the respective accounts of the several Underwriters to a like extent, for all loss and expense resulting from such Dealer's default. At any such sale or sales, any of the Underwriters may, for such Underwriter's own account or for the account of any other person, become the purchaser of any Securities so sold, free from any right or interest on any Dealer's part in such Securities. A default by one or more Dealers shall not release any other Dealer from any obligation hereunder. Dealers agree to advise the Representatives, upon request, as to the number of the Securities accepted by such Dealer in any particular Offering which then remain unsold; and Dealers further agree, upon request of the Representatives, to sell to the Representatives for the account of one or more of the Underwriters such number of such unsold Securities as the Representatives may specify (in order to enable the Representative to deliver the Securities sold by or for the account of one or more of the several Underwriters) at the Public Offering Price less an amount determined by the Representatives not in excess of the concession to Dealers. Dealers (a) are not authorized by any of the Underwriters to give any information or to make any representations in connection with the offering or sale of the Securities other than those contained in the prospectus relating to such Securities; (b) are not authorized to act as agent for any of the Underwriters when offering the Securities to the public or otherwise; (c) acknowledge and agree that the issuer is not authorized to give any information or to make any representations to Dealers in connection with the offering or sale of the Securities other than those contained in the effective registration statement relating to the Securities; and (d) agree not to give any information or make any representations in connection with the offering or sale of the Securities other than those contained in the prospectus relating to such Securities on behalf of the issuer or act as agent for the issuer when offering the Securities to the public or otherwise. Nothing contained herein shall constitute the Dealers as an association or partnership with the Underwriters, the Representatives, WRH or each other, or as an unincorporated business or other separate entity. The Representatives undertake in any offering of Securities to make available copies of prospectuses (i) electronically by reference to an address on the World Wide Web where such prospectuses shall be posted and available to be printed and (ii) by mail upon request by Dealers for the benefit of persons requesting printed prospectuses and as otherwise required by federal securities laws and regulations. Each Dealer undertakes to deliver such prospectuses to all persons to whom Securities are reoffered or as otherwise required by federal and applicable state securities laws and regulations in accordance with such laws and regulations. Each Dealer represents that it is familiar with Rule 15c2-8 under the Securities Exchange Act of 1934, as amended (the "1934 Act") relating to the distribution of preliminary and final prospectuses and agrees that such Dealer will comply therewith. Each Dealer hereby represents that it is (i) a member of the National Association of Securities Dealers ("NASD") in good standing (a "NASD Member"); (ii) a foreign bank, broker, dealer or institution ineligible for membership in the NASD (a "Foreign Bank") or (iii) a bank that is not a member of the NASD (a "Non-Member Bank"). Each Dealer that is an NASD Member agrees that in making sales of Securities, such Dealer will comply with all applicable rules of the NASD. Each Dealer that is a Foreign Bank or Non-Member Bank agrees to comply with Conduct Rules 2730, 2740 and 2750 of the NASD and to comply with the requirements of the NASD's Interpretation with Respect to Free-Riding and Withholding as if such Foreign Bank or Non-Member Bank were an NASD Member. Each Dealer that is a Foreign Bank agrees not to offer or sell any Securities in the United States of America except through the Representatives and in making sales of Securities agrees to comply with Conduct Rule 2420 of the NASD as it applies to brokers and dealers in foreign jurisdictions. Each Dealer that is a Non-Member Bank agrees to comply with NASD Conduct Rule 2420 as though it were a NASD Member and not to accept any portion of the management fee paid to the Representatives with respect to the offering of any Securities or, except with respect to "exempted securities" within the meaning of Section 3(a)(12) of the Securities Exchange Act of 1934, purchase any Securities at a discount from the Public Offering Price from any Underwriter or Dealer or otherwise accept any selling concession, discount or other allowance form any Underwriter or Dealer, which in such case is not permitted under the NASD's Rules of Fair Practice. Each Dealer represents that such Dealer will not effect any transaction in violation of the provisions of Regulation M under the 1934 Act, applicable to a particular Offering, and each Dealer agrees that it will not, until the completion of the distribution by it of the Securities in a particular Offering pursuant to this Agreement, bid for, purchase, sell or deal in, or attempt to induce others to purchase such Securities, except (i) as provided for in this Agreement, the Underwriting Agreement or as otherwise approved by the Representatives or (ii) in brokerage transactions not involving the solicitation of a customer's order. Each Dealer agrees that such Dealer will not confirm sales to any Account over which such Dealer has discretionary trading authority, or make allocations of the type discussed in Release No. 4150 under the Securities Act of 1933, as amended. Each Dealer agrees that such Dealer shall be solely responsible for determining the suitability of any Account submitting an indication of interest and that such Dealer will undertake such steps as are necessary to determine that each Offering is a suitable investment for each Account with respect to whom an indication of interest is submitted to WRH with respect to such Offering and that no sales of Securities with respect to any Offering shall be made to any Account for which an investment in such Securities is not suitable. 6. Blue Sky Matters. The Representatives will advise Dealers of the jurisdictions where counsel for the Underwriters has advised the Underwriters that the Securities have been qualified for public offering and sale, or are exempt from qualification under applicable Blue Sky or state securities laws. The Representatives shall, however, be under no responsibility whatsoever to any Dealer with respect to the right of such Dealer to sell the Securities in any jurisdiction. Each Dealer, including, without limitation, each Foreign Dealer acknowledges that no action will be taken by the Underwriters or the issuer to permit a public offering in any jurisdiction other than the United States where action would be required for such purpose. 7. Limitation of Liability. The Representatives shall have full authority to take such action as they deem advisable in respect of all matters pertaining to the offering or arising hereunder. Neither the Representatives nor any Underwriter shall be under any liability, except for their own want of good faith, for or in respect of the validity of, or title to, any of the Securities; the form of, or the statements contained in, or the validity of the prospectuses or any amendment or supplement thereto, any document incorporated by reference therein or any other instruments executed by or on behalf of the issuer or seller of the Securities or others; the form or validity of the Underwriting Agreement or this Agreement; the delivery of the Securities, the performance by the issuer or seller of the Securities or others of any agreement on its or their part; the qualifications of the Securities for sale or the legality of the Securities for investment under the laws of any jurisdiction; any act or ommission, or any matter in connection with any of the foregoing; provided, however, that nothing in this paragraph shall be deemed to relieve the Representatives or any Underwriter from any liability imposed by federal securities laws or liability related to obligations expressly assumed by the Underwriters in this Agreement. 8. Notices. All communications from Dealers should be addressed to W.R. Hambrecht & Company, LLC, 550 Fifteenth Street, San Francisco, CA, 94103, Attention: Mr. Robert Eu. Any notice from the Representatives to a Dealer shall be deemed to have been duly authorized by the Underwriters and to have been duly given if mailed or telegraphed to such Dealer at the address appearing in this Agreement or delivered electronically to the e-mail address appearing in this Agreement. 9. Amendment. This Agreement may not be amended without the written consent of both parties hereto; provided, however, that with respect to the information specified in the third paragraph of Section 1, this agreement may be supplemented by WRH by delivery to you of a Transaction Notice. Any such supplement or amendment to this Agreement shall be effective with respect to any Offering to which this Agreement applies after the date of such supplement or amendment. 10. Termination. This Agreement shall continue in full force and effect until terminated by either party by five business days' written notice to the other, provided that, if this Agreement has become effective with respect to any offering of Securities, this Agreement shall remain in full force and effect as to such offering and shall terminate as otherwise provided in Section 4. Notwithstanding any distribution and settlement of accounts, Dealers shall be liable for the proper proportion of any transfer tax or other liability which may be asserted against the Representatives or any of the Underwriters or Dealers based upon the claim that the Dealers, or any of them, constitute a partnership, an association, an unincorporated business or other separate entity. 11. Governing Law. This Agreement shall be governed by the laws of the State of California. OpenIPO Participation Agreement (With W. R. Hambrecht + Co. and your broker) The following OpenIPO Participation Agreement ("Agreement") by you with W. R. Hambrecht + Co., LLC ("WRHCo") and your broker _______________________("Broker") governs your participation in the system (the "OpenIPO System") for new offerings underwritten by WRHCo, or by a group of Underwriters represented by WRHCo (together with WRHCo, the "Underwriters") and available for purchase through Broker. Acceptance of the terms and conditions of this Agreement and the establishment of a brokerage account with Broker ("Account") is a condition precedent to your participation in the OpenIPO System. This Agreement is separate and distinct from any other account agreement you may have with Broker. A copy of this Agreement should be retained by you for your future reference. General Terms As consideration for WRHCo and Broker permitting you access to the OpenIPO System you agree to the terms and conditions contained in this Agreement as amended from time to time. This Agreement can be amended at any time by WRHCo or Broker upon notice delivered to you. "You" and "your" as used in this Agreement refers to each person listed as account holders on your current account agreement with Broker ("Account Agreement") or a designate of any such person. 1. Access to and Delivery of OpenIPO Information. Access to the OpenIPO System requires you to provide a mailing address ("Mailing Address") and an electronic mail address ("E-mail Address") to the extent such information is not provided in your Account Agreement. The Underwriters and Broker, as the case may be, are hereby authorized to deliver any and all communications including, without limitation, prospectuses, confirmations, notices and all other documents required in connection with securities offerings under the OpenIPO System ("OpenIPO Information") to your Mailing Address or E-Mail Address, at their discretion, by mail, electronic mail or other means as described herein. You hereby agree you will not, for any reason, alter any OpenIPO Information or URL Notice (as defined below) delivered to you electronically or otherwise. The Underwriters and Broker are authorized to deliver to you any OpenIPO Information by providing you with notice which directs you to an Internet world wide web address ("URL") where the OpenIPO Information is posted and may be read and printed. The provision of any such notice (a "URL Notice") shall be deemed effective delivery of the OpenIPO Information referenced in such URL Notice and the Underwriters and Broker shall be under no further obligation to deliver such OpenIPO Information except as specifically set forth herein. The Underwriters or Broker may, in their discretion, provide you with URL Notice by mail, electronic mail, notification set forth in this Agreement or notification by WRHCo or Broker upon submission of an OpenIPO Bid (as defined below). You hereby consent to delivery of OpenIPO information through URL Notice and acknowledge that such delivery shall constitute good and effective delivery to you of the OpenIPO Information referenced in the URL Notice whether or not you access or review the OpenIPO information referenced in the URL Notice. YOU ACKNOWLEDGE AND UNDERSTAND THAT THE PRELIMINARY AND FINAL PROSPECTUS WITH RESPECT TO EACH OFFERING SHALL BE AVAILABLE AT THE FOLLOWING WEBSITE: www.openipo.com AND THAT THIS NOTICE CONSTITUTES A "URL NOTICE." OpenIPO Information and URL Notice properly sent by WRHCo or Broker to the E-mail Address or Mailing Address provided by you shall be deemed delivered regardless of whether actually received or not, unless you have notified WRHCo and Broker in writing or by E-Mail of a different address not less than 10 days prior to delivery. To the extent permitted by applicable law, OpenIPO Information and URL Notices may also be provided to you orally. For purposes of this Agreement, OpenIPO Information and URL Notices sent by electronic mail shall be deemed delivered by Broker or the Underwriters upon transmission to your E-Mail Address. All notices sent by you to Broker or the Underwriters, including without limitation, OpenIPO Bids (as defined below) shall be deemed 1 received by Broker or the Underwriters only upon actual receipt by Broker or the Underwriters of such notice. If you so request, the Underwriters or Broker, as applicable, shall deliver a paper copy to you of any OpenIPO Information legally required to be provided to you. You may make your request to Broker or to WRHCo, as applicable. You agree that despite any such request and compliance with any such request by the Underwriters or Broker, electronic delivery of such OpenIPO Information or delivery by URL Notice shall constitute good and effective delivery of such OpenIPO Information and that the fact that a paper copy of such OpenIPO Information was requested or delivered shall not imply the contrary. 2. OpenIPO Bids. With respect to public offerings of securities ("Offerings") within the OpenIPO System, after a registration statement relating to such offering has been filed, you may be permitted to enter a conditional bid (an "OpenIPO Bid") with Broker constituting an indication of interest in purchasing the securities proposed to be sold in the Offering when and if issued. Such OpenIPO Bids shall be transmitted by Broker to WRHCo in accordance with the terms of a Master Selected Dealers' Agreement by and between the Broker and the Underwriters. With respect to each Offering within the OpenIPO System in which you place a OpenIPO Bid, you shall be informed by Broker or WRHCo, prior to the submission of your OpenIPO Bid to WRHCo, as to the first date after which Broker and WRHCo may refuse to accept any additional OpenIPO Bids (the "Auction Close"). The Auction Close may occur upon such indicated date or at any time thereafter, but in no event shall the Auction Close occur prior to the effective date of the registration statement relating to such Offering. Posting of a notice of an Offering through the OpenIPO System shall not constitute an offer to sell or the solicitation of an offer to buy securities. No OpenIPO Bid may be accepted and no part of the purchase price can be received until the registration statement relating to such Offering has become effective, and any OpenIPO Bid may be withdrawn, modified or revoked, without obligation or commitment of any kind, at any time prior to notice of its acceptance after effectiveness of such registration statement and the Auction Close. An OpenIPO Bid submitted to broker will involve no obligation or commitment of any kind. OpenIPO Bids shall include the number of securities which you propose to purchase and the price per security which you propose to pay for such securities. The price per share included in an OpenIPO Bid shall be in increments of at least 1/32 of a dollar. No OpenIPO Bid that alone, or that when cumulated with other OpenIPO Bids submitted and not canceled on behalf of your Account, would constitute a bid for 10% or more of the shares available in the Offering will be accepted. All OpenIPO Bids that alone, or that when cumulated with other OpenIPO Bids submitted and not canceled on behalf of your Account, constitute a bid for in excess of 1% of the shares available in the Offering (a "Large Quantity Bid") shall be subject to WRHCo's rules with respect to Large Quantity Bids as set forth below. Each OpenIPO Bid will be authorized by you and subject to the terms and conditions of this Agreement. Any OpenIPO Bid accepted by Broker and the Underwriters shall be accepted on the basis that an actual purchase is intended and that you shall be obligated, in every case, to pay for the securities bid for upon closing of the sale of the securities bid for on behalf of your Account. The execution of a firm commitment underwriting agreement by WRHCo will be a condition to your obligation to pay for any securities. If an OpenIPO Bid is submitted by you with respect to a particular Offering, and such OpenIPO Bid includes a price in excess of the "Clearing Price" (as defined below), Broker has agreed with WRHCo to attempt to accept such OpenIPO Bid and transact for the sale of all or a portion of the securities which you have offered to purchase as provided in such OpenIPO Bid at the "Offering Price" (as defined below) prior to sale of such securities to other parties, subject to adjustments consented to by the Underwriters. Without limiting their rights as set forth herein to alter the method of allocation and pricing and subject to their rights with respect to Large Quantity Bids (as set forth below), the Underwriters and Broker shall use reasonable efforts to accept in whole all OpenIPO Bids setting forth a price in excess of the Clearing Price (as defined below) and accept in part all OpenIPO Bids setting forth a price equal to the Clearing Price. Notwithstanding the foregoing, you hereby agree that the submission of an OpenIPO bid on behalf of your Account in no way entitles you to purchase the securities offered and that Broker and the Underwriters reserve the right and authority, in their discretion and without notice, to reject any OpenIPO Bid that 2 the Underwriters deem manipulative of the OpenIPO System, disruptive with respect to a particular Offering, disruptive to the securities market, unusual in size, type or credit risk or which the Underwriters otherwise deem necessary or beneficial to facilitate the orderly completion of the Offering. In addition the Underwriters reserve the right and authority to, in their own discretion and without notice, alter the proposed method of allocation and allocate securities on a different basis if they deem necessary to facilitate the orderly completion of the Offering. Broker may require that your Account contain available funds or cleared funds equal to or in excess of the aggregate purchase price reflected by your OpenIPO Bids. Broker reserves the right and authority to, in its sole discretion, reject any OpenIPO Bid received without requisite funds in your Account prior to the Auction close or, if not rejected, and additional funds are not submitted prior to settlement, to liquidate your Account. The "Clearing Price" with respect to any particular Offering shall be the price at which sufficient OpenIPO Bids have been submitted to WRHCo to sell all of the securities proposed to be sold in such Offering. You understand and acknowledge that the price at which the securities in any Offering are sold to the public (the "Offering Price") may be less than the Clearing Price. Any OpenIPO Bid submitted by you that includes a price in excess of the Offering Price may be accepted by Broker (at the Offering Price), in whole or in part, whether or not such OpenIPO Bid is in excess of the Clearing Price. 3. Modification and Cancellation of OpenIPO Bids. Any request to cancel or modify an OpenIPO Bid will only be effected if such request is received by Broker and transmitted to the Underwriters prior to time at which your OpenIPO Bid is accepted. 4. Applicable Rules and Regulations. Broker's processing of any OpenIPO Bid and all transactions on behalf of your Account with respect to the OpenIPO System shall be subject to Broker's rules and regulations and the rules and regulations of WRHCo as managing underwriter of the Offering, which are subject to change at any time without notice. The rules and procedures applicable to use of the OpenIPO System shall be made available to you at any time upon request to Broker and may be delivered to you in the same manner as any other OpenIPO Information (including by URL Notice). In addition, where applicable, the transactions in your Account with respect to the OpenIPO System shall be subject to the provisions of the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended, and to the rules and regulations of the Securities and Exchange Commission, the Board of Governors of the Federal Reserve System, the National Association of Securities Dealers and any other applicable self-regulatory organization ("Applicable Regulations"). Violation by you of Applicable Regulations, (including without limitation, restrictions on "Free-Riding" in violation of Regulation T of the Federal Reserve Board) may result in restrictions being placed on your ability to participate in Offerings through OpenIPO System. 5. Large Quantity Bids. Without limiting any of the foregoing, the Underwriters and the Broker shall have the right to accept any Large Quantity Bid in part and limit the allocation of securities with respect to any Large Quantity Bid to an amount less than the total number of shares requested pursuant to such Large Quantity Bid, if in the sole discretion of the Underwriters, such partial allocation of shares is necessary to facilitate a reasonable public distribution of the securities available in the Offering. 6. Transactions and Settlement. The purchase and sale of securities through the OpenIPO System are settled on "settlement date," which generally shall be the third business day after an OpenIPO Bid is accepted by Broker and or the Underwriters. If funds for settlement are not available in the Account and your OpenIPO bid is accepted, your payment via wire or personal check or money order must immediately be submitted to Broker. The payment must be sent to the Broker's clearing firm if the broker uses a clearing firm. If payment is not received, at Broker's discretion, your Account may be liquidated without prior notice. In the event your Account is liquidated, you will be liable for resulting losses and all associated costs incurred by Broker and/or the Underwriters. 7. Restrictions. For their protection, the Underwriters or Broker may at any time, at their discretion and without prior notice to you, place restrictions on your ability to participate in the OpenIPO System. 3 8. Agency. You understand that with respect to Offerings through the OpenIPO System, Broker is acting as a principal. Broker will purchase the shares from WRHCo and sell them to you. 9. Electronic Products and Services. All products and services currently offered or offered in the future by Broker or WRHCo which, through the use of electronic or interactive data communications, allow you (i) to communicate with Broker, the Underwriters or any authorized service provider with respect to the OpenIPO System, (ii) to obtain information with respect to an Offering through the OpenIPO System, or (iii) to buy securities in any Offering conducted within the OpenIPO System through Broker (each an "EPS") shall be utilized only in accordance with this Agreement. You hereby agree that you shall be the only authorized user of any EPS under this Agreement and that you shall be solely responsible for the telecommunications costs (including internet access fees) incurred directly by you in accessing any EPS. You shall be solely responsible for the confidentiality of any user name, password or other alpha-numeric code or other device required to participate in the OpenIPO System or otherwise access any EPS ("Passwords"). You understand that you shall be solely responsible for all OpenIPO Bids submitted on behalf of your account utilizing such Passwords. If you become aware of any unauthorized use of your Account with respect to transactions through the OpenIPO System, you shall immediately notify WRHCo and Broker in writing or via E-mail. Upon receipt of such notice, Broker and WRHCo shall take reasonable steps to stop any activity in your Account, but neither Broker, WRHCo, the Underwriters nor any of their respective managers, directors, officers, employees, agents, affiliates, representatives or subsidiaries can or will have any responsibility or liability to you or to any other person whose claim may arise through you for any claims with respect to the handling or mishandling of any transaction in the OpenIPO System resulting from the unauthorized use of your Account. If you notify Broker only, WRHCo is not responsible for any unauthorized use of your Account. WRHCo, furthermore, is not responsible for any acts of Broker relating to your Account. WRHCo or Broker may modify or discontinue any EPS without prior notice. NEITHER WRHCo, THE UNDERWRITERS, BROKER NOR THEIR RESPECTIVE AFFILIATES, MANAGERS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, REPRESENTATIVES OR SUBSIDIARIES SHALL BE LIABLE FOR ANY DAMAGES, WHETHER DIRECT OR INDIRECT, (INCLUDING, WITHOUT LIMITATION, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES) THAT RESULT FROM INCONVENIENCE, DELAY OR LOSS OF THE USE OF ANY EPS NOTWITHSTANDING THE FACT THAT BROKER OR WRHCo HAS BEEN ADVISED OF THE POSSIBILITY OF ANY SUCH DAMAGES. WRHCo DOES NOT MAKE ANY WARRANTY OR OTHER ASSURANCES AS TO THE OPERATION OR FUNCTIONALITY OF ITS WEB SITE, ACCESS TO WHICH MAY BE INTERRUPTED, RESTRICTED OR DELAYED FROM TIME TO TIME FOR A VARIETY OF REASONS WHICH ARE BEYOND ITS CONTROL. 10. Eligibility. You hereby acknowledge that WRHCo or Broker may notify you through electronic mail or otherwise of opportunities to participate in Offerings through the OpenIPO System. You understand that Offerings are considered to be high risk investments. You agree that such notices from WRHCo or Broker of opportunities to participate in Offerings through the OpenIPO system are not intended to be, and shall not be considered to be, recommendations by WRHCo or Broker that Offerings in general or any Offering in particular is a suitable investment for you. On the contrary, you acknowledge and agree that investing in Offerings is speculative and highly risky and therefore only appropriate for investors who desire to take and can bear such risks. You further represent and warrant that you have disclosed to Broker in your account application or otherwise if you are an employee of any securities exchange, or of any corporation in which any securities exchange owns a majority of the capital stock, or a member of any exchange, or of a member firm or any securities exchange or the National Association of Securities Dealers, Inc. ("NASD"), or of a bank, trust company, insurance company, or of any corporation, firm, or individual engaged in the business of dealing, either directly or as a broker or principal, in 4 securities, bills of exchange, acceptances or other forms of commercial paper, or if you are a member of the immediate family of any such person. You hereby agree to notify Broker in writing if you or a member of your immediate family become or becomes so affiliated and to furnish Broker such information that Broker requests to verify or confirm such representation. You represent, warrant and agree that you will not submit an OpenIPO Bid with respect to any Offering which is not a suitable investment for you based on your investment objectives, your other securities holdings and your financial situation and needs. You hereby certify, nevertheless, that you have furnished Broker with personal information about your investment objectives, your other securities holdings and your financial situation and needs, and that such information is now accurate and current, and will be accurate and current, as of the date of each OpenIPO Bid. You agree to promptly furnish Broker with any changes in such information. If applicable, you also represent, warrant and agree that you will not open an Account with Broker or submit an OpenIPO Bid for which you have not obtained approval from your compliance officer prior to opening such Account and submitting such OpenIPO Bid. You agree, furthermore, that Broker or WHRCo may reject your bid in its entirety or reduce the amount of shares for which you bid in either of their respective discretion based on the information you furnished to Broker. 11. Severability. If any provision of this Agreement is held to be invalid, void or unenforceable by reason of any law, rule, administrative order or judicial decision, that determination shall not affect the validity of the remaining provisions of this Agreement. 12. Waiver. Except as specifically permitted in this Agreement, no provision of this Agreement can be, nor be deemed to be, waived, altered, modified or amended unless agreed to in writing signed by an authorized officer of Broker and WRHCo, respectively. 13. Successors. You hereby agree that this Agreement and all the terms hereof shall be binding upon your heirs, executors, administrators, personal representatives and assigns. This Agreement shall inure to the benefit of Broker, WRHCo, the Underwriters and their respective successors, assigns and agents. 14. Captions. The caption of each provision hereof is for convenience only and shall not be deemed to modify or qualify any of the rights or obligations set forth or be used to construe or interpret any of the provisions hereunder. 15. Arbitration. A. The following general provisions apply to all arbitrations pursuant to the arbitration provisions of this section: (i) Arbitration is final and binding on the parties. (ii) The parties are waiving their right to seek remedies in court, including the right to jury trial. (iii) Pre arbitration discovery is generally more limited than and different from court proceedings. (iv) The arbitrators award is not required to include factual findings or legal reasoning and any party's right to appeal or to seek modification of rulings by the arbitrators is strictly limited. (v) The panel of arbitrators will typically include a minority of arbitrators who were or are affiliated with the securities industry. B. You agree that the following conditions apply to any and all controversies arising between You and Broker or WRHCo, and/or any of their respective managers, directors, officers, controlling persons, agents, employees, representatives or agents with respect to this Agreement or to any Offering: All controversies which may arise between You and/or Your agents, employees or representatives, and WRHCo and/or Broker, and/or WRHCo's or Broker's respective managers, directors, officers, controlling persons, employees, representatives or agents, concerning any transaction, the construction, performance or breach of this Agreement, or relating to any OpenIPO Bid or any Offering, whether such transaction or OpenIPO Bid was entered into prior, on or subsequent to the date hereof, shall be determined by arbitration held pursuant to the then current Code of Arbitration Procedure of the NASD. Arbitration must be commenced by service upon the other 5 party or parties of a written demand for arbitration or a written notice of intention to arbitrate. This agreement to arbitrate shall be specifically enforceable under prevailing law and procedures, the award rendered by the arbitrators shall be final, and judgment may be entered upon it in any court having jurisdiction over the parties. Counsel can advise you on how this provision may affect you. C. This agreement to arbitrate constitutes a waiver of the right to seek a judicial forum unless such a waiver would be void under the federal securities laws. D. No person shall bring a putative or certified class action to arbitration, nor seek to enforce any pre-dispute arbitration agreement against any person who has initiated in court a putative class action; or who is a member of a putative class who has not opted out of the class with respect to any claims encompassed by the putative class action until: (i) the class certification is denied; (ii) the class is decertified; or (iii) the customer is excluded from the class by the court. Such forbearance to enforce an agreement to arbitrate shall not constitute a waiver of any rights under this agreement except to the extent stated herein. The undersigned (referred to as "You" in this Agreement) acknowledges that the undersigned has read and understands this Agreement and that this Agreement contains a predispute arbitration clause at Section 15 on pages 5 and 6. The undersigned acknowledges receipt of a copy of this Agreement. - ------------------------------------- Name of Account - ------------------------------------- ----------------------------------- Signature Signature (if more than one) Date: Date: ------------------------------- ----------------------------- - ------------------------------------- ----------------------------------- Printed Name and Title (if any) Printed Name and Title (if any) Mailing Address: ----------------------------------------- Street Apt. No. ----------------------------------------- City State Zip E-mail Address: ----------------------------------------- 6 -----END PRIVACY-ENHANCED MESSAGE-----