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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission File No 0-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Name of Small Business Registrant in Its Charter)
OREGON 93-0981021
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8800 Enchanted Way, S.E.
Turner, OR 97392
(Address of principal executive offices,
including zip code)
(503) 231-7616
(Registrant's telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act: Common Stock
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past
12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form
10-KSB or any amendment to this Form 10-KSB [X].
As of December 31, 1996
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Registrant's revenues for its most recent fiscal year: $ 4,235,020
Aggregate market value of the voting stock held by
non-affiliates of the Registrant based upon the closing
price on February 28, 1997, as reported on NASDAQ: $8,880,231
Number of shares of Common Stock outstanding: 3,785,356
Transitional Small Business Disclosure Format: YES [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for its 1997 Annual Meeting are
incorporated by reference into Part III of this Report.
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WILLAMETTE VALLEY VINEYARDS, INC.
FORM 10-KSB INDEX
PART I
Page
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Item 1. Description of Business 3
Item 2 Description of Property 10
Item 3. Legal Proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 10
Item 6. Management's Discussion and Analysis or Plan of Operation 11
Item 7. Financial Statements 16
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 16
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial Owners and
Management 16
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits and Reports on Form 8-K 17
Signatures 20
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Willamette Valley Vineyards, Inc. (the "Company") was formed in May 1988
to produce and sell premium, super premium and ultra premium varietal wines
(i.e., wine which sells at retail prices of $3 to $7, $7 to $14 and over $14
per bottle, respectively). The Company's wines are made from grapes grown at
its vineyard (the "Vineyard") and from grapes purchased from other nearby
vineyards. The grapes are crushed, fermented and made into wine at the
Company's winery (the "Winery") and the wines are sold principally under the
Company's Willamette Valley Vineyards label. The Company's Vineyard and
Winery are located on 75 acres of Company-owned land adjacent to Interstate
5, approximately two miles south of Salem, Oregon.
Products
Under its Willamette Valley Vineyards label, the Company produces and
sells the following types of wine in 750ml bottles: Pinot Noir, Chardonnay,
Pinot Gris, White Riesling, Dry Riesling, Gewurztraminer and Oregon Blossom
(blush blend). Under the WVV' label, the Company sells the following
varieties in 750ml bottles: Merlot, Cabernet Sauvignon, Edelweiss, Oregon's
Nog and White Nog. The Company produces and sells the following types of wine
in 1.5 liter bottles: White Riesling, Pinot Noir and Chardonnnay. The
Company also produces White Riesling, Dry Riesling, Pinot Noir, Oregon
Blossom and Chardonnay premium wines in 12-liter, bag-in-the-box packaging
for restaurants (on-premise). Under its 'Oregon Trail' label, the Company
currently produces and sells only Pinot Noir and Chardonnay in 750 ml bottles.
Market Overview
Wine Consumption Trends. Wine consumption in the United States declined
from 1987 to 1994 due to increased consumer health concerns and a growing
awareness of alcohol abuse. That decline was led by sharp reductions in the
low-cost, non-varietal ("jug") wine and wine cooler segments of the market
which, prior to 1987, were two of the fastest growing market segments.
Beginning in 1994, per capita wine consumption began to increase, and
continued to do so through 1996. Nevertheless, the Company believes that
consumption of jug wines and wine coolers will continue to decline over the
next few years, it estimates that premium, super premium and ultra premium
wine consumption will experience a moderate increase over the same period.
Consumers have restricted their drinking of alcoholic beverages and view
premium, super premium and ultra premium wines as a beverage of moderation.
The Company believes this change in consumer preference from low quality,
inexpensive wines to premium, super premium and ultra premium wines reflects,
in part, a growing emphasis on health and nutrition as a principal element of
the contemporary lifestyle as well as an increased awareness of the risks
associated with alcohol abuse.
The Oregon Wine Industry. Oregon is a relatively new wine producing
region in comparison to California and France. In 1966, there were only two
commercial wineries licensed in Oregon. By contrast, in 1996, there were 113
commercial wineries licensed in Oregon and over 7,500 acres of wine grape
vineyards, 5,800 acres of which are currently producing. Total production of
Oregon wines in 1996 is estimated by the Company to be approximately 975,000
cases. Oregon's entire 1996 production would have an estimated retail value
of approximately $97.5 million, assuming a retail price of $100 per case,
and a wholesale value of approximately one-half of the retail value, or
$48.75 million.
Because of climate, soil and other growing conditions, the Willamette
Valley in Western Oregon is ideally suited to the growing of superior quality
Pinot Noir, Chardonnay, Pinot Gris and White Riesling wine grapes. Some of
Oregon's Pinot Noir and Chardonnay wines have developed outstanding
reputations winning numerous national and international awards.
Oregon wine producers enjoy certain cost advantages over their California
and French competitors due to lower costs for grapes, vineyard land and
winery sites. For example, the average cost of unplanted vineyard land in
Napa County, California is approximately $40,000 per acre as compared to
approximately $4,000 per acre in Oregon. In the Burgundy region of France,
virtually no new vineyard land is available for planting.
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Oregon does have certain disadvantages, however. As a new wine
producing region, Oregon's wines are relatively little-known to consumers
worldwide and the total wine production of Oregon wineries is small relative
to California and French competitors. Greater worldwide label recognition
and larger production levels give Oregon's competitors certain financial,
marketing, distribution and unit cost advantages. Furthermore, Oregon's
Willamette Valley has an unpredictable rainfall pattern in early Autumn. If
significantly above average rains were to occur during critical growing
periods or just prior to the Autumn grape harvest, the quality of harvested
grapes could materially diminish thereby affecting that year's wine quality.
Finally, phylloxera, an aphid-like insect that feeds on the roots of
grapevines, has been found in at least 14 commercial vineyards in Oregon.
Contrary to the California experience, the Company believes most Oregon
phylloxera infestations have expanded very slowly and done only minimal
damage. Nevertheless, phylloxera constitutes a significant risk to Oregon
vineyards. Prior to the discovery of phylloxera in Oregon, all vine plantings
in the Company's Vineyard were with non-resistant rootstock. Beginning with
the Company's plantings in May 1992, only phylloxera-resistant rootstock was
planted. As of December 31, 1996, the Company has not detected any
phylloxera in any of its vineyards. Of the Company's 50 acres of planted
vineyard, 25 acres have been planted with phylloxera-resistant rootstocks.
Several significant developments in the Oregon wine industry have taken
place over the past ten years. Robert J. Drouhin, a well-known producer of
French wines, purchased vineyard land near Dundee, Oregon on which he has
planted a vineyard and constructed a winery. Napa Valley's Girard and Stag's
Leap Wineries have formed a partnership and purchased vineyard land in the
Willamette Valley where they have planted a vineyard and begun harvesting
Pinot Noir grapes. Brian Croser (a noted Australian winemaker), in
partnership with Cal Knudsen (an original investor in Erath Vineyards) and
the French Champagne firm, Taittinger, established the Dundee Wine Company.
Sold under the Argyle' label, Dundee has received recognition for sparkling
wines, Dry Riesling, Chardonnay and Pinot Noir. In 1992, a vineyard
consisting of over 200 acres of Pinot Noir grapes was planted by a California
vineyard investor across Interstate 5 and within sight of the Company's
Winery.
The largest development in the Oregon wine industry is King Estate
Winery, which is located 22 miles southwest of Eugene. The facility was
completed in 1994 and is approximately 100,000 square feet in size surrounded
by a 180 acre vineyard. The Company estimated King Estate's wine production
in 1996 to be 250,000 gallons. King Estate is focused on serving the
national market. The Company views King Estate as a welcome addition to the
Oregon wine industry and believes they could have the same positive effect on
wine exports as St. Michelle Winery has had on the Washington wine industry.
The most recent high-profile move in Oregon was the Benziger family's
purchase of 65 acres, including 32 producing acres of vineyard, near Scholls.
The Benziger family created the huge Glen Ellen wine brand in California,
before selling it off to Brown-Forman about three years ago. The Company
believes that further investments by other experienced wine producers will
continue, ultimately benefiting the Company and the Oregon wine industry as a
whole by bringing increased international recognition to the quality of
Oregon wines.
As a result of these factors, the Company believes that long-term
prospects for growth in the Oregon wine industry are excellent. The Company
further believes that over the next 20 years the Oregon wine industry will
grow at a faster rate than the overall domestic wine industry, and that much
of this growth will favor producers of premium, super premium and ultra
premium wines such as the Company.
Company Strategy
The Company, as one of the largest wineries in Oregon, believes its
success is dependent upon its ability to: (1) grow and purchase high quality
vinifera wine grapes; (2) vinify the grapes into premium, super premium and
ultra premium wine; and (3) achieve significant brand recognition for its
wines, first in Oregon and then nationally and internationally. The
Company's goal is to continue as one of Oregon's largest wineries, gaining a
reputation for producing some of Oregon's finest, most sought after wines.
Based upon several highly regarded surveys of the U.S. wine industry the
Company believes that successful wineries exhibit the following four key
attributes: (i) focus on production of high-quality premium, super premium
and ultra premium varietal wines; (ii) achieve annual production levels
between 100,000 and 200,000 cases; (iii); build brand recognition by
emphasizing restaurant sales; and (iv) develop strong marketing advantages
(such as a highly visible winery location and successful self-distribution).
The Company has designed its strategy to address each of these attributes.
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To successfully execute this strategy, the Company grows and purchases
selected, high-quality varietal wine grapes which can be vinified into
premium, super premium and ultra premium wine. To produce superior quality
wine, the Company has assembled a team of well-known, accomplished winemaking
professionals, and has constructed and equipped a 22,934 square foot
state-of-the-art Winery and a 12,500 square foot outdoor production area for
the crushing, pressing and fermentation of wine grapes.
The Company's marketing strategy is to sell its premium bulk-packaged
wines to restaurants and its premium, super premium and ultra premium cork
finished wine through a combination of (i) direct sales at the Winery, (ii)
self-distribution to local and regional restaurants and retail outlets, and
(iii) sales through independent distributors and wine brokers who market the
Company's wine in specific targeted areas where self-distribution is not
economically feasible. Most of the Company's wines are sold under its
Willamette Valley Vineyards label.
The Company believes the location of its Winery next to Interstate 5,
Oregon's major north-south freeway, significantly increases direct sales to
consumers and facilitates self-distribution of the Company's products. The
Company believes this location provides high visibility of the Winery to
passing motorists, thus enhancing recognition of the Company's products in
retail outlets and restaurants. The addition of the Company's Hospitality
Center, in 1995, has further increased the Company's direct sales and
enhanced public recognition of its wines.
The Company markets its premium bulk-packaged wines to restaurants for
sale as the restaurants' "house wine." The Company believes consumers are
most often exposed to new wines at restaurants. If satisfied with the
Company's premium "wine by the glass" served in restaurants, the Company
believes these consumers are likely to develop brand loyalty and purchase the
Company's cork-finished wines at retail outlets for consumption at home and
on other occasions.
Vineyard
The Property. The Company's Vineyard currently has 50 planted acres and
39 producing acres which includes 17 acres of Pinot Noir and 8 acres of White
Riesling grape vines planted in 1985. The Company planted 8 acres of Pinot
Gris vines in May 1992 and 6 acres of Chardonnay (Espiguette clone) vines in
1993. In 1996, the Company planted its remaining 11 acres in Chardonnay
(Dijon clones) and Pinot Gris. Grapevines do not bear commercial quantities
until the third growing season and do not become fully productive until the
fifth to eighth growing season. Vineyards generally remain productive for 30
to 100 years, depending on weather conditions, disease and other factors.
The Vineyard uses an elaborate trellis design known as the Geneva Double
Curtain. The Company has incurred the additional expense of constructing
this trellis because it doubles the number of canes upon which grape clusters
grow and spreads these canes for additional solar exposure and air
circulation. Research and practical applications of this trellis design
indicate that it will increase production and improve grape quality over
traditional designs.
Over the long-term, management believes the Company should acquire and
plant at least 200 additional acres of vineyard land. At full production,
this new vineyard, in combination with the existing 50 acre Vineyard, should
enable the Company to grow approximately 50% of the grapes needed to meet the
Winery's ultimate production capacity of 250,000 gallons (104,000 cases).
Grape Supply. Grapes grown in the Vineyard will assure the Company a
constant, though small supply of high quality grapes. This supply of grapes
establishes a foundation of quality upon which the purchase of additional
grapes is built. In addition, wine produced from grapes grown in the
Company's own Vineyard may be labeled as "Estate Bottled" wines. These wines
traditionally sell at a premium over non-estate bottled wines.
In 1996, the Company's 39 acres of producing vineyard yielded
approximately 120 tons of grapes for the Winery's eighth crush. An
additional 1,170 tons of grapes were purchased in 1996. The Company estimates
that its 1996 vintage will consist of approximately 210,000 gallons (88,328
cases). The Winery's total wine production in 1996 was 150,206 gallons
(63,178 cases). The Company plans to purchase an additional 20,000 gallons
of wine in 1997 to help meet demand for its products. The Vineyard can not
and will not provide the sole supply of grapes for the Winery's near-term
production requirements.
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The Company fulfills its remaining grape needs by purchasing grapes from
other nearby vineyards at competitive prices. While the Company believes
high quality grapes will be available for purchase in sufficient quantity to
meet the Company's requirements, the Company does not have binding sale
commitments from grape growers in sufficient quantity to supply the Winery
with an adequate amount of grapes to meet its projected production needs for
1997. Accordingly, no assurance can be given that sufficient quantities of
high quality grapes will be available to the Company at reasonable prices.
To help ensure that the Company will have an adequate supply of high
quality grapes in the future, the Company is in the process of negotiating
several binding long-term supply contracts with established grape growers.
The Company expects to sign several of these contracts in the near future.
In addition, assuming the Company completes its planned acquisition of
Tualatin Vineyards, management expects that an additional 50 to 100 tons of
grapes not committed to production of wine for sale under Tualatin's label
will become available to the Company annually from Tualatin's vineyard as
well as an additional 70 acres of plantable vineyard land.
Viticultural Conditions. Oregon's Willamette Valley is recognized as a
premier location for growing certain varieties of high quality wine grapes,
particularly Pinot Noir, Chardonnay, White Riesling and Pinot Gris. The
Company believes that the Vineyard's growing conditions including its soil,
elevation, slope, rainfall, evening marine breezes and solar orientation are
among the most ideal conditions in the United States for growing certain
varieties of high-quality wine grapes. The Vineyard's grape growing
conditions compare favorably to those found in the famous viticultural
regions of France. Western Oregon's latitude (42DEG. -46DEG. North) and
relationship to the eastern edge of a major ocean is very similar to the
centuries-old wine grape growing regions of France. These conditions are
unduplicated anywhere else in the world except the great wine grape regions
of Northern Europe. The Company's property is located at the same latitude
as the famous Chateau Lafite vineyards in Bordeaux, France.
The Vineyard's soil type is Jory/Nekia, a dark reddish-brown silty clay
loam over basalt bedrock noted for being well drained, acidic, of adequate
depth, retentive of appropriate levels of moisture and particularly suited to
growing high quality wine grapes.
The Vineyard's elevation ranges from 533 feet to 700 feet above sea level
with slopes from 2 percent to 30 percent (predominately 12-20 percent). The
Vineyard's slope is oriented to the south, southwest and west. Average
annual precipitation at the Vineyard is 41.3 inches, average annual air
temperature is 52 to 54 degrees Fahrenheit, and the length of each year's
frost-free season averages from 190 to 210 days. These conditions compare
favorably with conditions found throughout the Willamette Valley viticultural
region and other domestic and foreign viticultural regions which produce high
quality wine grapes.
In the Willamette Valley, permanent vineyard irrigation is not required.
The average annual rainfall provides sufficient moisture to avoid the need to
irrigate the Vineyard. However, if the need should arise, the Company's
property contains two water wells which can sustain a combined output of 35.5
gallons per minute. This is sufficient volume to meet the needs of the
Winery and to provide auxiliary water to the Vineyard for new plantings and
unusual drought conditions.
Winery
Wine Production Facility. The Company's Winery, built at an initial cost
of approximately $1,000,000, is structurally capable of producing up to
250,000 gallons (104,000 cases) of wine per year, depending on the type of
wine produced. In 1996, the Winery produced 150,206 gallons (63,178 cases) of
wine. The Winery is 12,784 square feet in size and contains areas for the
processing, fermenting, aging and bottling of wine, as well as an underground
wine cellar, a tasting room, a retail sales room and administrative offices.
A 12,500 square foot outside production area was added for the crushing,
pressing and fermentation of wine grapes. In 1993, a 4,000 square foot
insulated storage facility with a capacity of 30,000 cases of wine was
constructed at a cost of approximately $70,000. In 1996 the Company invested
an additional $750,000 to increase its capacity from 75,000 cases to its
present capacity of 104,000 cases. It added one large press, six stainless
steel fermenters, and handling equipment to increase its capacity to the new
level. It also expanded the size of its crush pad to meet the needs of the
additional tons of grapes crushed.
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Construction of Hospitality Facility. In May 1995, the Company completed
construction of a large tasting and cellaring facility of 19,470 square feet
(the "Hospitality Center"). The first floor of the Hospitality Center
includes retail sales space and a "great room" designed to accommodate
approximately 400 persons for gatherings, meetings, weddings and large wine
tastings. An observation tower and decking around the Hospitality Center
enables visitors to enjoy the view of the Willamette Valley and the Company's
Vineyard. The Hospitality Center has been joined with the present Winery by
an underground cellar tunnel. The facility includes a basement cellar of
10,150 square feet (including the 2,460 square foot underground cellar
tunnel) to expand storage of the Company's wine in a proper environment. The
cellar provides the Winery with ample space for storing up to 3000 barrels of
wine for aging.
Just outside the Hospitality Center, the Company has landscaped a park
consisting of one acre of terraced lawn for outdoor events and five wooded
acres for picnics and social gatherings. The area between the Winery and the
hospitality facility forms a 20,000 square foot quadrangle. As designed, the
quadrangle can be covered by a removable fabric top making it an all-weather
outdoor facility to promote sale of the Company's wines through outdoor
festivals and social events.
The Company believes the addition of the Hospitality Center, and the park
and quadrangle make the Winery an attractive recreational and social
destination for tourists and local residents, thereby enhancing the Company's
ability to sell its wines.
Mortgage on Property. The Company's Vineyard, Winery and Hospitality
Center are subject to a mortgage with a principal balance of $3,170,000 at
December 31, 1996, which is an increase of $1,095,637 over the principal
balance of $2,074,363 at December 31, 1995. The mortgage is payable in
annual installments of approximately $375,000 through 2005. The increase in
the mortgage was used principally for the following purposes: (i) $650,000
to complete a 20,000 square foot storage facility in May 1997, and (ii)
$500,000 to expand the production facility by adding fermentation tanks and
barrels to meet the increased production in that year and future years.
Wine Production. The Company operates on the principle that winemaking
is a natural but highly technical process requiring the attention and
dedication of the winemaking staff. The Company's Winery is equipped with
the latest technical innovations and uses modern laboratory equipment and
computers to monitor the progress of each wine through all stages of the
winemaking process.
Beginning with the Company's first vintage in 1989, the Company's annual
grape harvest and wine production are as follows:
Tons of
Grapes Case
Vintage Year Crushed Gallons Equivalents
- ------------ ------- ------- -----------
1989 203 31,400 13,200
1990 206 31,900 13,400
1991 340 52,600 22,100
1992 565 90,622 38,237
1993 633 97,514 41,145
1994 590 96,097 40,411
1995 885 127,671 53,693
1996 1290 150,206 63,178
Since sales of the Company's wine have been increasing at a rate of
about 30% in each of the last three years, it has become necessary to
purchase bulk wine and increase the 1996 harvest and crush to insure that the
Company will have sufficient inventory to meet future sales needs.
The Company's long-term strategy is to produce premium bulk-packaged
wines for sale to restaurants in 1.5 liter bottles and 12-liter containers
and premium, super premium and ultra premium cork-finished wines in 750 ml
bottles for sale primarily to wine specialty stores, restaurants and
supermarkets, as well as directly to consumers through the Winery. The
premium bulk-packaged wines will be produced primarily to increase the
overall production of the Winery, thereby reducing the Winery's fixed cost
per gallon of wine produced. Sale of premium bulk-packaged wines will also
build label
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recognition since these wines will be primarily sold to restaurants and
served as restaurants' "house wine" (i.e., wine-by-the glass). The Company
believes wine consumers will positively associate the Company's bulk-packaged
house wines served in restaurants with the Company's cork-finished wines sold
in retail outlets thus enhancing sales of the latter. The Company
anticipates the retail price of its bulk-packaged wines will be $2.50 to
$5.00 per five-ounce glass.
Sales and Distribution
Marketing Strategy. The Company markets its wines through a combination
of direct sales at the Winery, sales directly and indirectly through its
shareholders, self-distribution to local restaurants and retail outlets in
Oregon, directly through mailing lists, and through distributors and wine
brokers who sell in specific targeted areas out of the state of Oregon. As
the Company increases production volumes and achieves greater brand
recognition, sales to other domestic and foreign markets have increased both
in terms of absolute dollars and as a percentage of total Company sales.
Direct Sales. The Company's Winery is located adjacent to the state's
major freeway (Interstate 5), approximately 2 miles south of the state's
third largest metropolitan area (Salem), and 50 miles in either direction
from the state's first and second largest metropolitan areas (Portland and
Eugene, respectively). The Company believes the Winery's unique location
along Interstate 5 has resulted in a greater amount of wines sold at the
Winery as compared to the industry standard for other Oregon wineries.
Direct sales from the Winery are an important distribution channel and an
effective means of product promotion. To increase brand awareness, the
Company offers educational Winery tours and product presentations by trained
personnel.
The Company holds eight major festivals and events at the Winery each
year. In addition, open houses are held at the Winery during major holiday
weekends such as Memorial Day, Independence Day, Labor Day and Thanksgiving,
where barrel tastings and cellar tours are given. Numerous private parties,
wedding receptions, political and other events are also held at the Winery.
Finally, the Company participates in many wine and food festivals throughout
Oregon. Each of these events results in direct sales of the Company's wines
and promotion of its label to event attendees.
Direct sales are profitable because the Company is able to sell its wine
at retail prices rather than to distributors at distributor prices or
retailers at wholesale prices. Sales made directly to consumers at retail
prices result in an increased profit margin of the difference between retail
prices and distributor or wholesale prices, as the case may be.
Self-Distribution. The Company has established a self-distribution
program to sell its wines to restaurant and retail accounts located primarily
in the Willamette Valley. The self-distribution program currently consists
of 18 sales representatives who market the Company's wine exclusively, take
wine orders and make deliveries on a commission-only basis. The Company
believes this program of self-representation and delivery has allowed its
relatively new wines to gain a strong presence in the Oregon market with over
1,000 restaurant and retail accounts established as of December 31, 1996.
The Company further believes that the location of its Winery along Interstate
5 facilitates self-distribution throughout the entire Willamette Valley where
approximately 70% of Oregon's population resides.
The Company has expended significant resources to establish its
self-distribution program. The program initially focused on distribution in
the Willamette Valley, but then expanded to the Oregon coast, and then into
southern and central Oregon. For 1996, approximately 41% of the Company's
total sales were attributable to self-distribution, up from 38% in 1995.
Distributors and Wine Brokers. The Company uses both independent
distributors and wine brokers primarily to market the Company's wines in
specific targeted areas where self-distribution is not feasible. Only those
distributors and wine brokers who have demonstrated a knowledge of and a
proven ability to market premium, super premium, and ultra premium wines are
utilized. The Company does not rely solely upon any distributor or wine
broker in a particular geographic area, but rather tries to develop and
maintain relationships with restaurants and retail outlets directly through
Winery personnel and the Company's shareholders.
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Shareholders. As a consumer-owned company, the Company has a unique
marketing opportunity not available to its competitors. The Company has
approximately 4,500 beneficial shareholders comprised of approximately 6,000
wine consumers since many shares are held jointly by family members. The
Company believes its shareholders, as a group, purchase a significant portion
of the Company's cork-finished wines directly from the Winery.
The Company encourages its shareholders to consume the Winery's products
and promote them to their friends and business associates. The Company's
shareholders have been very active throughout the Winery's operations,
providing valuable assistance at little or no cost. Throughout the year,
shareholders have helped with cellaring duties. Over 300 shareholders have
qualified with the Oregon Liquor Control Commission as licensed wine servers
and have poured wine at various Winery events. The Winery's tasting
facilities are often staffed with volunteer shareholders. With their own
personalized Company business cards, shareholders have made numerous contacts
with restaurants and retail outlets interested in selling the Company's
wines. The Company views its shareholders as an army of volunteer marketers
promoting the Company's products to their friends and acquaintances in both
social and business settings. On an ongoing basis, shareholders provide
valuable leads and feedback to the Company's management and staff.
Tourists. Oregon wineries are experiencing an increase in on-site visits
by consumers. In California, visiting wineries is a very popular leisure
activity. Napa Valley is California's second-largest tourist attraction with
over 2.5 million visitors in 1987. Wineries in Washington are also
experiencing strong interest from tourists. Chateau Ste. Michelle, located
near Woodinville, Washington, attracts approximately 200,000 visitors per
year.
The Winery is located less than one mile from The Enchanted Forest, a
gingerbread village/forest theme park which, in 1985, was Oregon's eleventh
most visited tourist attraction (fifth among those charging admission). The
Enchanted Forest, which operates from March 15 to September 30 each year,
attracts approximately 200,000 paying visitors per year. Adjacent to the
Enchanted Forest is the Thrillville Amusement Park and the Forest Glen
Recreational Vehicle Park which contains approximately 110 overnight vehicle
sites. The Company believes that some of the visitors to the Enchanted
Forest and RV Park also visit the Winery. More important, the Company
believes its convenient location, adjacent to Interstate 5, will enable the
Winery to attract a significant number of visitors.
Competition
The wine industry is highly competitive. In a broad sense, wines may be
considered to compete with all alcoholic and nonalcoholic beverages. Within
the wine industry, the Company believes that its principal competitors
include wineries in Oregon, California and Washington, which, like the
Company, produce premium, super premium, and ultra premium wines. Wine
production in the United States is dominated by large California wineries
which have significantly greater financial, production, distribution and
marketing resources than the Company. Currently, no Oregon winery dominates
the Oregon wine market. Several Oregon wineries, however, are older and
better established and have greater label recognition than the Company.
The Company believes that the principal competitive factors in the
premium, super premium, and ultra premium segment of the wine industry are
product quality and price, label recognition, and product supply. The
Company believes it competes favorably with respect to each of these factors.
The Company has received good reviews in tastings of its wines and believes
its prices are competitive with other Oregon wineries. Large production is
necessary to satisfy retailers' and restaurants' demand and the Company
believes that its current level of production is adequate to meet that
demand. Furthermore, the Company believes that its ultimate forecasted
production level of 250,000 gallons (104,000 cases) per year will give it
significant competitive advantages over most Oregon wineries in areas such as
marketing, distribution arrangements, grape purchasing, and access to
financing. The current production level of most Oregon wineries is generally
much smaller than the projected production level of the Company's Winery.
With respect to label recognition, the Company believes that its unique
structure as a consumer-owned company will give it a significant advantage in
gaining market share in Oregon as well as penetrating other wine markets.
-9-
<PAGE>
Governmental Regulation of the Wine Industry
The production and sale of the Company's wine is subject to extensive
regulation by the Federal Bureau of Alcohol, Tobacco and Firearms and the
Oregon Liquor Control Commission. The Company is licensed by and meets the
bonding requirements of each of these governmental agencies. Sale of the
Company's wine is subject to federal alcohol tax, payable at the time wine is
removed from the bonded area of the Winery for shipment to customers or for
sale in its tasting room. The current federal alcohol tax rate is $1.07 per
gallon; however, wineries that produce not more than 250,000 gallons during
the calendar year are allowed a graduated tax credit of up to $0.90 per
gallon on the first 100,000 gallons of wine (other than sparkling wines)
removed from the bonded area during that year. The Company also pays the
state of Oregon an excise tax of $0.67 per gallon on all wine sold in Oregon.
In addition, all states in which the Company's wines are sold impose varying
excise taxes on the sale of alcoholic beverages. As an agricultural
processor, the Company is also regulated by the Oregon Department of
Agriculture and, as a producer of waste water, it is regulated by the Oregon
Department of Environment Quality. The Company has secured all necessary
permits to operate its business.
Prompted by growing government budget shortfalls and public reaction
against alcohol abuse, Congress and many state legislatures are considering
various proposals to impose additional excise taxes on the production and
sale of alcoholic beverages, including table wines. Some of the excise tax
rates being considered are substantial. The ultimate effects of such
legislation, if passed, cannot be assessed accurately since the proposals are
still in the discussion stage. Any increase in the taxes imposed on table
wines can be expected to have a potentially adverse impact on overall sales
of such products. However, the impact may not be proportionate to that
experienced by producers of other alcoholic beverages and may not be the same
in every state. Therefore, it is possible that the overall competitive
climate resulting from such legislative developments could result in growth
opportunities for premium, super premium, and ultra premium table wines if a
heavier tax is imposed on lower end wines and other alcoholic beverages.
Employees
As of December 31, 1996 the Company had 25 full-time employees and 6
part-time employees. In addition the Company hires additional employees for
seasonable work as required. The Company's employees are not represented by
any collective bargaining unit. The Company believes its relations with its
employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
See "DESCRIPTION OF BUSINESS -- Winery" and "-- Vineyard".
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company is a
party or to which any of its property is subject, and the Company's
management does not know of any such action being contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded in the over-the-counter market and
is quoted on the NASDAQ system under the symbol "WVVI." The table below sets
forth for the quarters indicated the high and low sales prices for the
Company's common stock as reported on the NASDAQ system. The Company's
common stock began public trading on September 13, 1994. The market
quotations represent prices between dealers, do not include retail markup,
markdown, or commissions and may not represent actual transactions.
-10-
<PAGE>
Quarter Ended High Low
------------- ---- ---
December 31, 1996 $3.50 $2.50
September 30, 1996 $3.50 $2.00
June 30, 1996 $3.62 $2.75
March 31, 1996 $3.75 $2.75
December 31, 1995 $4.00 $2.62
September 30, 1995 $4.62 $2.38
June 30, 1995 $4.62 $3.00
March 31, 1995 $5.00 $3.25
As of December 31, 1996, there were 3,770 holders of record of the Common
Stock. The Company believes that there are significantly more beneficial
holders of the Common Stock as many of the shares of Common Stock are held in
"street" name.
The Company has not paid any dividends on the Common Stock, and it is not
anticipated that any dividends will be paid by the Company in the foreseeable
future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operation and other sections of this Form 10-KSB contain
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements involve
risks and uncertainties that are based on current expectations, estimates and
projections about the Company's business, and beliefs and assumptions made by
management. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates" and variations of such words and similar
expressions are intended to identify such forward-looking statements.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements due to numerous
factors, including, but not limited to: availability of financing for growth,
availability of adequate supply of high quality grapes, successful
performance of internal operations, impact of competition, changes in wine
broker or distributor relations or performance, impact of possible adverse
weather conditions, impact of reduction in grape quality or supply due to
disease, impact of governmental regulatory decisions, successful completion
of the proposed acquisition of Tualatin Vineyards and assimilation of
Tualatin's business with that of the Company (see "Subsequent Event--Proposed
Acquisition of Tualatin Vineyards, Inc.), and other risks detailed below as
well as those discussed elsewhere in this Form 10-KSB and from time to time
in the Company's Securities and Exchange Commission filings and reports. In
addition, such statements could be affected by general industry and market
conditions and growth rates, and general domestic economic conditions.
Results of Operations
Seasonal and Quarterly Results. The Company has historically experienced
and expects to continue experiencing seasonal fluctuations in its revenues
and net income. In the past the Company has reported a net loss or modest
net income during its first quarter and expects this trend to continue in
future first quarters, including the first quarter of 1997. Sales volume
tends to increase during summer and fall periods when many on-site and
off-site festivals are held in advance of holiday periods which usually last
two months.
-11-
<PAGE>
The following table sets forth certain information regarding the
Company's revenues from winery operations for each of the last eight fiscal
quarters:
<TABLE>
<CAPTION>
Fiscal 1996 Quarter Ended(1) Fiscal 1995 Quarter Ended
---------------------------- -------------------------
(in thousands) (in thousands)
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
---- ---- ---- ----- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Tasting room and retail sales $151 $213 $251 $367 $117 $176 $214 $433
On-site and off-site festivals 76 116 128 154 77 94 187 170
In-state sales 307 403 415 640 217 286 320 571
Out-of-state sales 169 239 358 347 199 163 230 184
---- ---- ---- ----- ---- ---- ---- -----
Total winery revenues 703 971 1152 1,508 610 719 951 1,358
---- ---- ---- ----- ---- ---- ---- -----
---- ---- ---- ----- ---- ---- ---- -----
</TABLE>
Period to Period Comparisons
Revenue. The following table sets forth, for the periods indicated,
select revenue data from winery operations:
Year Ended December 31(1)
----------------------------
(in thousands)
1996 1995 1994
---- ---- ----
Tasting room and retail sales..................... $ 982 $ 940 $ 867
On-site and off-site festivals.................... 474 528 445
In-state sales.................................... 1,765 1,394 1,266
Out-of-state sales................................ 1,113 776 291
------ ----- ------
Revenues from winery operations................... $4,334 $3,638 $2,869
------ ------ ------
------ ------ ------
(1) Revenue for 1996 is reflected before payment of excise taxes of $99,219
1996 Compared to 1995. Tasting room sales for the year ended December
31, 1996 increased 4% to $981,804 from $940,327 for the same period in 1995,
principally as a result of an increase in rental income from the Hospitality
Center. This rental income comes primarily through weddings, business
meetings and educational conferences held at the Winery's Hospitality Center.
This increase in rental days results in increased foot traffic in the tasting
room. Many rental visitors who are introduced to the Winery and tasting room
facility later return to purchase wine and participate in Winery events.
On-site and off-site festival sales for the year ended December 31, 1996
decreased 10% to $474,405 from $528,158 for the same period in 1995, due
principally to the Company's decision to eliminate its retail booth at the
Oregon State Fair. The Company decided to eliminate this event along with
several smaller off-site events because the events proved to not be
profitable. The Company has been able to replace these lost revenues with
increased sales in other divisions with lower operating costs, and believes
the net result has contributed to improved Company-wide profitability.
Wholesale sales in the state of Oregon for the year ended December 31,
1996, through the Company's independent sales force, increased 27% to
$1,765,340 from $1,393,429 for the same period in 1995. The increase in
sales is primarily attributable to a focus on new wine accounts, better
point-of-sale information, improved sales management and targeting sales of
higher margin wines. In large, due to the Company being one of the largest
producers of wine in Oregon, the Company has secured
-12-
<PAGE>
significant additional and better positioned shelf space in several chain
stores over this time last year. One major discount chain placed the
Company's products in several new locations in 1996 which resulted in
approximately $90,000 additional sales in that chain.
Out-of-state sales for the year ended December 31, 1996 increased 43% to
$1,112,690 from $775,808 for the same period in 1995. The Company now sells
wine in 28 states as compared to 22 states in 1995. In the third quarter of
1996, the Company obtained a license to distribute its product in Connecticut
for the first time. Revenue in the state of Connecticut for 1996 was
$186,000.
Pinot Noir, which now constitutes about one-third of the Company's
production, is among the fastest growing wine varietals. According to
InfoScan reports, Pinot Noir dollar sales in U.S. retail stores (those with
scanners) grew 28% over the 52-week period ending January 5, 1997. In
comparison, Chardonnay sales (the number one varietal wine) grew 17% in the
same time period. New consumers are coming into this wine category.
Positive press regarding the healthful use of wine continues to help
stimulate demand. The Company expects demand for its wines to remain strong
for the foreseeable future.
For the first time in 1996, the Company has restated its income
statement to subtract its excise taxes from the gross revenue to equal a net
revenue. Since the Company only collects the excise tax for payment to the
Bureau of Alcohol, Tobacco, and Firearms, and Oregon Liquor Control Board,
these taxes should not be considered as a legitimate expense for the Company.
The total excise taxes collected in 1996 was $99,219 as compared to $87,599
in 1995. The 1995 and 1994 excise taxes were included in the "selling,
general, and administrative expenses" in the Company's audits for those
years.
As a percentage of net revenue after removing the excise taxes, gross
profit for all winery operations was 56% for fiscal year 1996 as compared to
52% for 1995. In the first half of 1996, the Company increased its prices in
all sales venues. This resulted in an increase in the gross margin percentage
over the same period in 1995. Also, in 1996, the Company sold 2,000 cases
more Chardonnay and Pinot Noir than it did in 1995. The margins on these two
wines are significant higher than the margins of the Company's remaining
wines.
Selling, General, and Administrative ("S,G&A") expenses for the year
ended December 31, 1996 increased 7.9% to $1,951,120 compared to $1,807,430
for the same period in 1995. As a percentage of revenue from winery
operations, the S,G&A expenses were 46.1% in 1996 as compared to 49.7% in
1995. It is important to point out that the excise taxes paid in 1995 are
included in the Company's S,G&A expenses, whereas in 1996 the excise taxes
are netted against the Company's revenue. In April 1996, the Company
initiated a strong cost control policy designed to decrease S,G&A as a
percentage of overall revenue. Each month each department manager meets with
the Company's Controller to go over the previous month's expenses. All of the
monthly expenditures are explained to the manager along with a comparison of
the manager's operating budget.
During the year of 1996, increased sales revenues over 1995 resulted in
increased commissions paid to our independent sales force. Commissions are
paid to the sales force on a specified percentage of revenue there is no
adverse affect on the net income ratio. The commissions paid in 1996 amounted
to $504,125 as compared to $401,449 in 1995.
In the Retail operations, the Company added an additional person to help
with the growing room rentals it experienced in 1996. Other expenses such as
supplies, advertising, and services increased proportionately to the increase
in the number of days the Hospitality Center was rented. In 1996, it was the
first full year of depreciation of the new Hospitality Center. The
depreciation expense for the Retail operation increased from $34,379 in 1995
to $90,522 in 1996.
Other income for the year ended December 31, 1996 was $28,241 as compared
to $2,408 for the year ended December 31, 1995. Interest income increased
from $18,648 in fiscal year 1995 to $25,145 in fiscal year 1996. Interest
expense increased from $128,168 in fiscal year 1995 to $214,380 in fiscal
year 1996. The increase in the interest expense was the result of the
Company taking on more long term debt to finance expansion of the new storage
and production facility to be completed in the second quarter of 1997.
The provision for income taxes and the Company's effective tax rate were
$98,685 and 36.7% in fiscal year 1996 with $29,768 or 82% of pre-tax income
recorded for fiscal year 1995.
-13-
<PAGE>
As a result of the above factors, net income increased to $170,430 in
fiscal 1996 from $6,324 for the fiscal year of 1995. Earnings per share were
$.05, $.002 and $.04 in fiscal year 1996, 1995 and 1994, respectively.
1995 compared to 1994. Tasting room sales for the year ended December
31, 1995, increased 9% to $940,327 from $866,654 in 1994. The increase was
attributed to a strong fourth quarter, in which the Company increased its
retail marketing effort during the holiday season. Increased recognition
from awards received from different competitions throughout the country has
brought the Winery name recognition in the state and across the country.
Specifically, the Company received the prestigious silver medal from the
American Wine Competition in New York for its 1992 OVB (Our Very Best)
Whitaker Cabernet Sauvignon which drew wines throughout the world. The Wine
Enthusiast Publication named Willamette Valley Vineyards as one of "America's
Great Pinot Noir Producers" in its March 1996, article on "Focus on American
Pinot Noir". With the opening of a new Hospitality Center, the Company has
experienced an increase in retail sales due to a new expanded Tasting Room
allowing for more product displays and more personalized customer service.
On-site and off-site festival sales for the year ended December 31, 1995
increased 19% to $528,158 from $445,176 for the same period in 1994. The
overall increase is due to an increased emphasis on festivals. Additionally,
the Company's new Hospitality Center is a highly-visible landmark near a
major freeway which generates greater interest in the winery and its
festivals.
Wholesale sales in the state of Oregon for the year ended December 31,
1995 increased 10% to $1,393,429 from $1,266,417 for the same period in 1994.
The increase was principally attributable to new accounts, better
point-of-sales information, improved sales management, and targeted sales of
higher priced wines. The Winery has initiated a new program in which to
better educate our independent sales representatives on our new wines and
better sales methods. One element of the new program is to do a "ride along"
by the Sales Manager with each sales representatives In 1996, the Winery
will be selling our wines in two new major chain outlets in the Oregon --
Safeway and Price-Costco.
Out of-state sales for the year ended December 31, 1995 increased 166% to
$775,808 from $291,052 for the same period in 1994. The dramatic increase is
due to an emphasis in developing domestic and international markets. The
Company entered new geographic markets during 1995, including European
countries such as Spain and England. The Company is now licensed to sell
product in 22 states. The Company made two large sales of wine to its
English broker both in the third and fourth quarters of 1995 totaling
approximately $102,000. The awards received in U.S. wine competitions have
made a name for the Company's products and the growing popularity of Oregon
wines has allowed the Winery to develop long-term agreements with brokers and
distributors outside the state of Oregon. The noted wine critic, Robert
Parker, Jr., has been quoted in the Wine Advocate as saying "Willamette
Valley Vineyards has quickly risen, to the top echelon of producers in
Oregon".
Beginning July 1, 1994, the Company discontinued its management services
to affiliated companies. The management services income to the Company
amounted to $252,891 for the first half of 1994. Beginning July 1, 1994, the
Company began purchasing certain management services from Willamette Valley
Inc., Microbreweries Across America ("WVI"), a company affiliated with the
Company through common ownership. In December 1995, the Company greatly
reduced these services by added administrative staff transferred from WVI.
The Company paid WVI $216,899 for management services in 1995.
In 1995, the Company's gross profit as a percentage of revenue for its
winery operation remained nearly the same at 55%, as compared to 56% for
1994. The small decrease in gross margin was a result of an increase in the
cost of purchasing grapes. Along with this there were no major increases in
sales price in 1995. Effective February 1, and May 1, 1996, the Company will
initiate sales price increases to the wholesale and retail departments in
order to restore the gross profit margins experienced in 1994.
Selling, general and administrative expenses for the year ending December
31, 1995 increased 26% to $1,807,430 compared to $1,439,532 for the same
period in 1994. In May 1996, the new Hospitality Center was opened which lead
to a significant increase in the depreciation expense and resulted in
increased personnel costs to staff the retail department. This resulted in
an increase of $40,600 in depreciation and approximately $40,000 in personnel
and other expenses related to the new building. During 1995 the significant
increases in sales in-state and out-of-state contributed to increased selling
-14-
<PAGE>
expenses over 1994. The estimated amount of additional commission paid to
sales agents in-state and out-of-state increased in 1995 by $61,000 over 1994.
In past years the Company has produced less than 100,000 gallons of wine
annually which is the maximum amount a winery can produce to qualify as a
small winery in the state of Oregon and receive the benefit of reduced excise
taxes. In 1995, the Company exceeded 100,000 gallons in wine production. By
losing its favorable tax status, the Company paid approximately $25,000 in
additional excise taxes over excise taxes paid in 1994.
Other income for the year ended December 31, 1995 was $2,408 as compared
to $15,059 for the year ending December 31, 1994. Other income consists
primarily of interest income and interest expense. Interest expense
increased for the year 1995 to $128,169 from $26,938 due to an increase of
long-term debt.
The provision for income taxes and the Company's effective tax rate was
$29,768 or 82% of pre-tax income for fiscal year 1995 as compared to $45,095
or 21% of pre-tax income in 1994.
As a result of the above factors, net income decreased to $6,324 in 1995
from $170,109 in 1994. Earnings per share were $.002, $.04, and $.03 in the
fiscal years 1995, 1994, and 1993.
Liquidity and Capital Resources
The Company was organized on May 2, 1988, and sold its first wine in late
April 1990. Prior to April 1990, the Company's working capital and Vineyard
development and Winery construction costs were principally funded by cash
contributed by James Bernau and Donald Voorhies, the Company's co-founders,
and by $1,301,354 in net proceeds received from the Company's first public
stock offering, which began in September 1988 and was completed in June 1989
with the sale of 882,352 shares at a price of $1.70 per share pursuant to
Federal Regulation A.
Since April 1990, the Company has operated on revenues from the sale of
its wine and related products and the net proceeds from three additional
stock offerings. The Company's second public stock offering began in July
1990 and was completed in July 1991 with the sale of 731,234 shares at prices
of $2.65 and $2.72 per share exclusively to Oregon residents, resulting in
net proceeds to the Company of $1,647,233.
In 1992, the Company conducted two stock offerings pursuant to Federal
Regulation A. The Company commenced an offering on July 18, 1992 which was
completed on September 30, 1992, with the sale of 428,216 shares of common
stock at a price of $3.42 per share and net proceeds to the Company of
$1,290,364. On October 2, 1992, as a result of the oversubscription of the
first offering in 1992, the Company commenced another offering of Common
Stock which was completed on October 31, 1992 with the sale of 258,309 shares
at a price of $3.42 per share, resulting in net proceeds to the Company of
$775,726.
Cash and cash equivalents increased to $794,885 at December 31, 1996 from
$599,895 at December 31, 1995. This change was principally attributable to
cash borrowings for expansion of the new storage and production facility,
expected to be completed in the second quarter of 1997.
Inventories increased 50% as of December 31, 1996, to $2,843,053 from the
December 31, 1995 level of $1,890,048. The increase is the result of
significant increases in production to meet the expected demand.
Property, plant and equipment, net, increased 12% as of December 31,
1996, to $5,421,016 from $4,849,746 as of December 31, 1995. The increase
was attributable to the expansion of the production facility to its present
capacity of 250,000 gallons (104,000 cases).
Debt increased to $3,170,000 as of December 31, 1996, from $2,074,363 as
of December 31, 1995. The increase in debt was the result cash borrowings
for expansion of the production facility.
-15-
<PAGE>
The Company has a line of credit from Farm Credit Services with an
upward limit of $1,000,000. As of December 31, 1996 the balance of the line
was $479,625 as compared to $161,300 in 1995. These funds are used to meet
operational expenditures primarily to fund the increase in inventory.
Subsequent Event--Proposed Acquisition of Tualatin Vineyards, Inc.
On January 23, 1997, the Company entered into a Letter of Intent with
Tualatin Vineyards, Inc. ("TVI") to acquire 100 percent of the outstanding
stock of TVI. The purchase price to be paid by the Company to the TVI
shareholders in exchange for their shares is equal to $1,824,000, plus TVI's
current assets, minus TVI's current and long-term liabilities as reflected in
its balance sheet dated as of the closing date of the transaction. The
Company will pay 35 percent of the purchase price in cash with the balance
paid through the issuance of unregistered shares of the Company's Common
Stock at an exchange rate based on an agreed upon price for the Company's
Common Stock of $3.16 per share. The transaction is subject to the
negotiation and execution of a definitive purchase agreement between the
parties and is conditioned upon the completion of due diligence satisfactory
to the Company, receipt of approval from regulatory bodies to the transfer of
all necessary licenses, and the Company's completion of a loan agreement with
Farm Credit Services on terms and conditions acceptable to the Company, the
proceeds of which will be used by the Company to pay the cash portion of the
purchase price to TVI shareholders. The parties anticipate that closing of
the transaction will occur early in the second quarter of 1997.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item are presented at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
The information required by Item 9 is incorporated by reference to the
Proxy Statement under the caption "Management."
ITEM 10. EXECUTIVE COMPENSATION
The information required by Item 10 is incorporated by reference to the
Proxy Statement under the caption "Executive Compensation."
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 11 is incorporated by reference to the
Proxy Statement under the caption "Principal Shareholders."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 12 is incorporated by reference to the
Proxy Statement under the caption "Certain Transactions."
-16-
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation of Willamette Valley Vineyards,
Inc. (incorporated by reference from the Company's Regulation
A Offering Statement on Form 1-A (File No. 24S-2996))
(b) Bylaws of Willamette Valley Vineyards, Inc.(incorporated by
reference from the Company's Regulation A Offering Statement
on Form 1-A (File No. 24S-2996))
(10) Material Contracts
(a) Employment Agreement between Willamette Valley Vineyards,
Inc. and James W. Bernau dated August 3, 1988 (incorporated
by reference from the Company's Regulation A Offering
Statement on Form 1-A (File No. 24S-2996))
(b) Indemnity Agreement between Willamette Valley Vineyards,
Inc. and James W. Bernau dated May 2, 1988 (incorporated by
reference from the Company's Regulation A Offering Statement
on Form 1-A (File No. 24S-2996))
(c) Indemnity Agreement between Willamette Valley Vineyards,
Inc. and Donald E. Voorhies dated May 2, 1988 (incorporated
by reference from the Company's Regulation A Offering
Statement on Form 1-A (File No. 24S-2996))
(d) Revolving Note and Loan Agreement dated May 28, 1992 by and
between Northwest Farm Credit Services, Willamette Valley
Vineyards, Inc. and James W. and Cathy Bernau (incorporated
by reference from the Company's Regulation A Offering
Statement on Form 1-A (File No. 24S-2996))
(e) Distribution Agreement between Willamette Valley Vineyards,
Inc. and Willamette Valley Brewing Company dated January 7,
1993 (incorporated by reference from Willamette Valley
Brewing Company's Regulation A Offering Statement filed on
Form 1-A (File No. 24S-3003)).
(f) Letter of Intent dated January 16, 1997, between the Company
and Tualatin Vineyards, Inc. and Press Release dated
January 23, 1997 announcing execution of the Letter of
Intent (incorporated by reference from the Company's
Form 8-K filed on January 23, 1997).
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter covered by
this Annual Report.
-17-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
---------------------------------
(Registrant)
Date: March 23, 1997. By: /s/ James W. Bernau
-----------------------------------------
James W. Bernau, Chairperson of the Board,
President and Secretary
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
- --------- ----- ----
/s/ James W. Bernau Chairperson of the Board, March 23, 1997
- ----------------------------------President, and Secretary
James W. Bernau (Principal Executive Officer)
/s/ Kevin R. Chambers Vice-President, March 25, 1997
- ----------------------------------General Manager
Kevin R. Chambers
/s/ John E. Moore Controller March 27, 1997
- ----------------------------------(Principal Accounting Officer)
John E. Moore
/s/ Donald Voorhies Director March 25, 1997
- ----------------------------------
Donald Voorhies
/s/ James L. Ellis Director March 22, 1997
- ----------------------------------
James L. Ellis
/s/ Betty M. O'Brien Director March 22, 1997
- ----------------------------------
Betty M. O'Brien
/s/ Daniel S. Smith Director March 22, 1997
- ----------------------------------
Daniel S. Smith
/s/ Stan G. Turel Director March 22, 1997
- ----------------------------------
Stan G. Turel
/s/ Delna Jones Director March 25, 1997
- ----------------------------------
Delna Jones
-19-
<PAGE>
Willamette Valley
Vineyards, Inc.
Report and Financial Statements
December 31, 1996 and 1995
<PAGE>
<TABLE>
<CAPTION>
Willamette Valley Vineyards, Inc.
Index to Financial Statements
- -------------------------------------------------------------------------------
<S> <C>
Report of Independent Accountants ................................... F-1
Balance Sheet ....................................................... F-2
Statement of Operations ............................................. F-3
Statement of Shareholders= Equity ................................... F-4
Statement of Cash Flows ............................................. F-5
Notes to Financial Statements ....................................... F-6
</TABLE>
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of
Willamette Valley Vineyards, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of shareholders' equity and of cash flows present fairly, in all
material respects, the financial position of Willamette Valley Vineyards,
Inc. at December 31, 1996 and 1995, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 1996,
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.
Willamette Valley Vineyards, Inc. is a member of a group of affiliated
companies and, as disclosed in the financial statements, has extensive
transactions and relationships with members of the group. Because of these
relationships, it is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
PRICE WATERHOUSE LLP
Portland, Oregon
March 7, 1997
F-1
<PAGE>
Willamette Valley Vineyards, Inc.
Balance Sheet
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
December 31,
1996 1995
---- ----
Assets
Current assets:
Cash and cash equivalents $ 794,885 $ 599,895
Accounts receivable (Note 2) 288,905 132,072
Other receivables 12,388 18,727
Inventories (Note 3) 2,843,053 1,890,048
Prepaid expenses and other current assets 94,790 64,211
Deferred income taxes (Note 10) 111,438 93,872
-------------- -------------
Total current assets 4,145,459 2,798,825
Vineyard development costs, net 386,605 372,676
Property and equipment, net (Note 4) 5,421,016 4,849,747
Investments (Note 5) 115,218 153,893
Note receivable (Note 11) 138,511 129,002
Debt issuance costs 56,896 36,416
------------ --------------
$ 10,263,705 $ 8,340,559
-------------- -------------
-------------- -------------
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit (Note 6) $ 479,626 $ 161,300
Current portion of long-term debt (Note 7) 97,819 66,493
Accounts payable 117,428 135,969
Accrued commissions and payroll costs 122,745 94,816
Other accrued liabilities 51,511 14,756
Income taxes payable 29,148 -
Grape payables (Note 11) 551,014 344,642
-------------- -------------
Total current liabilities 1,449,291 817,976
Long-term debt (Note 7) 3,072,181 2,007,870
Deferred income taxes (Note 10) 114,028 56,938
-------------- -------------
Total liabilities 4,635,500 2,882,784
-------------- -------------
Commitments
Shareholders' equity (Note 8):
Common stock, no par value -
10,000,000 shares authorized,
3,785,356 shares issued and outstanding 5,369,868 5,369,868
Retained earnings 258,337 87,907
-------------- -------------
Total shareholders' equity 5,628,205 5,457,775
-------------- -------------
$ 10,263,705 $ 8,340,559
-------------- -------------
-------------- -------------
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-2
<PAGE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
Willamette Valley Vineyards, Inc.
Statement of Operations
- ----------------------------------------------------------------------------------
Year ended December 31,
1996 1995 1994
------------ ------------ -------------
<S> <C> <C> <C>
Revenues:
Winery operations ............ $ 4,235,020 $ 3,637,721 $ 2,869,299
Management services
(Note 11).................. - - 252,891
------------- ------------- -------------
4,235,020 3,637,721 3,122,190
------------- ------------- -------------
Cost of goods sold:
Winery operations ............ 1,853,791 1,687,086 1,251,102
Management services
(Note 11)................. - - 231,411
------------- ------------- -------------
1,853,791 1,687,086 1,482,513
------------- ------------- -------------
Gross margin............... 2,381,229 1,950,635 1,639,677
Selling, general and administrative
expenses........................ 1,951,120 1,807,430 1,439,532
------------- ------------- --------------
Income from operations............ 430,109 143,205 200,145
------------- ------------- --------------
Other income (expense):
Interest income .............. 25,145 18,648 39,132
Interest expense (Note 1)..... (214,380) (128,169) (26,938)
Other income.................. 28,241 2,408 2,865
------------- ------------- ---------------
(160,994) (107,113) 15,059
------------- ------------- ---------------
Income before income taxes........ 269,115 36,092 215,204
Income taxes (Note 10)............ 98,685 29,768 45,095
------------- ------------- ---------------
Net income........................ $ 170,430 $ 6,324 $ 170,109
------------- ------------- ---------------
------------- ------------- ---------------
Net income per common share
(Note 1)...................... $ 0.05 $ .00 $ .04
------------- ------------- ---------------
------------- ------------- ---------------
Weighted average number of common
shares outstanding (Note 1)..... 3,785,356 3,785,356 3,784,756
------------- ------------- ---------------
------------- ------------- ---------------
</TABLE>
The accompanying notes are an integral part of this
statement.
F-4
<PAGE>
<TABLE>
<CAPTION>
Willamette Valley Vineyards, Inc.
Statement of Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------
Common stock Retained
earnings
--------------- --------- ------------ --------
<S> <C> <C> <C> <C>
Balances at December 31, 1993........................... 3,784,456 $ 5,366,790 $ (88,526) $5,278,264
Stock options exercised (Note 9)....................... 900 3,078 3,078
Net income ............................................. 170,109 170,109
--------- ------------ ----------- ----------
Balances at December 31, 1994 .......................... 3,785,356 5,369,868 81,583 5,451,451
Net income.............................................. - 6,324 6,324
------------ ------------ ----------- ---------
Balances at December 31, 1995........................... 3,785,356 5,369,868 87,907 5,457,775
Stock options exercised (Note 9)........................ - - - -
Net income ............................................. - - 170,430 170,430
------------ ------------ ----------- ---------
Balances at December 31, 1996.......................... 3,785,356 $ 5,369,868 $ 258,337 $5,628,205
----------- ------------ --------- ----------
----------- ------------ --------- ----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
<TABLE>
<CAPTION>
Willamette Valley Vineyards, Inc.
Statement of Cash Flows
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------
Year ended December 31,
1996 1995 1994
---- ---- ----
Cash flows from operating activities:
Net income ...................................................... $ 170,430 $ 6,324 $ 170,109
Reconciliation of net income to net cash
(used for) provided by operating activities:
Depreciation and amortization........................... 377,855 302,971 233,468
Deferred income taxes................................... 39,524 (32,427) (4,507)
Changes in assets and liabilities:
Accounts receivable................................ (156,833) 4,276 (9,429)
Other receivables.................................. 6,339 (6,219) 112,835
Inventories........................................ (953,005) (356,423) (60,288)
Prepaid expenses and
other current assets............................. (30,579) (18,148) (204)
Notes receivable................................... (9,509) 2,127 -
Accounts payable................................... (18,541) (628) 7,381
Accrued liabilities................................ 64,684 (1,783) (81,909)
Income taxes payable............................... 29,148 (49,602) 49,602
Grape payables..................................... 206,372 133,243 (601)
---------- ---------- ----------------
Net cash (used for) provided by
operating activities............................................. (274,115) (16,289) 486,457
----------- ----------- ----------------
Cash flows from investing activities:
Additions to property and equipment.......................... (931,110) (1,067,024) (934,284)
Vineyard development expenditures............................ (31,943) (31,755) (85,190)
Cash received (paid) for stock
and time deposits........................................ 38,675 (38,017) (26,077)
----------- ----------- ---------------
Net cash used for investing activities........................... (924,378) (1,136,796) (1,045,551)
----------- ----------- ---------------
Cash flows from financing activities:
Debt issuance costs.......................................... (20,477) (21,068) -
Net increase in line of credit balance....................... 318,326 161,300 -
Issuance of long-term debt................................... 1,162,127 1,185,561 -
Repayments of long-term debt................................. (66,493) (21,613) (21,613)
------------- ------------- ------------
Net cash provided by (used for)
financing activities........................................... 1,393,483 1,304,180 (21,613)
------------- ------------- -------------
Net increase (decrease) in cash and
cash equivalents............................................... 194,990 151,095 (580,707)
Cash and cash equivalents:
Beginning of year............................................ 599,895 448,800 1,029,507
------------- ------------ -------------
End of year.................................................. $ 794,885 $ 599,895 $ 448,800
------------- ------------ -------------
------------- ------------ -------------
</TABLE>
The accompanying notes are an integral part of this
statement.
F-6
<PAGE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
1. Summary of Operations, Basis of Presentation and Significant Accounting
Policies
Organization and operations
Willamette Valley Vineyards, Inc. (the Company) owns and operates a
vineyard and winery located in the state of Oregon, and produces and
distributes premium and super premium wines, primarily pinot noir,
chardonnay, and white riesling. The majority of the Company's wine is
sold to grocery stores and restaurants in the state of Oregon through the
Company's sales force. Out-of-state sales represent approximately 26% of
sales. The Company also sells its wine from the hospitality room at its
winery.
Basis of presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles which require management to make
certain estimates and assumptions. These estimates and assumptions affect
the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities as of the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include short-term investments with an original
maturity of less than ninety days.
Revenue recognition
The Company recognized revenue upon the delivery of its products to its
customers. Sales are recorded as trade accounts receivable and no
collateral is required.
Inventories
When a portion of the vineyard becomes commercially productive, the annual
crop and production costs relating to such portion are recognized as
work-in-progress inventories. Such costs are accumulated with related
direct and indirect harvest, wine processing and production costs, and
are transferred to finished goods inventories when the wine is produced,
bottled, and ready for sale. The cost of finished goods is recognized
as cost of sales when the wine product is sold. Inventories are stated
at the lower of cost or market using the average cost method by variety
and vintage to determine the first-in, first-out (FIFO) cost of
inventories. In accordance with general practices in the wine industry,
wine inventories are included in current assets in the accompanying balance
sheet, although a portion of such inventories may be aged for more than
one year.
Vineyard development costs
Vineyard development costs consist primarily of the costs of the vines and
expenditures related to labor and materials to prepare the land and
construct vine trellises. The costs are capitalized until the vineyard
becomes commercially productive, at which time annual amortization is
recognized using the straight-line method over the estimated economic
useful life of the vineyard, which is estimated to be 30 years.
Accumulated amortization of vineyard development costs aggregated
$74,700 and $56,686 at December 31, 1996 and 1995, respectively.
F-8
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
1. Summary of Operations, Basis of Presentations and Significant Accounting
Policies (Continued)
Property and equipment
Property and equipment are stated at cost or the historical cost basis
of the contributing shareholders, as applicable, and are depreciated on the
straight-line basis over their estimated useful lives as follows:
Land improvements 15 years
Winery building 30 years
Equipment 5-7 years
Expenditures for repairs and maintenance are charged to operating expense
as incurred. Expenditures for additions and betterments are capitalized.
When assets are sold or otherwise disposed of, the cost and related
accumulated depreciation are removed from the accounts, and any resulting
gain or loss is included in operations.
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
Company has adopted the statement in fiscal 1996; however, the adoption
does not have a significant impact on the Company's financial position or
results of operations.
Debt issuance costs
Debt issuance costs are amortized on a straight-line basis, which
approximates the effective interest method, over the life of the debt.
Income taxes
The Company accounts for income taxes using the asset and liability
approach prescribed by Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes." Under this approach, deferred
income taxes are calculated for the expected future tax consequences of
temporary differences between the book basis and tax basis of the
Company's assets and liabilities. The Company files a stand-alone
federal income tax return.
Net income per common share
Net income per common share is computed based on the weighted average number
of common shares outstanding, including common stock equivalents, for the
years reported. Escrowed shares have been included in the weighted
average number of common shares outstanding.
Statement of cash flows
During the years ended December 31, 1996, 1995, and 1994, the Company made
cash interest payments of
F-9
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
approximately $197,000, $166,000, and $73,000, respectively. Income tax
payments of approximately $28,000 and $112,000 were made in 1996 and 1995,
respectively; no income tax payments were made in 1994. During the years
ended December 31, 1995 and 1994, the Company has capitalized approximately
$38,000 and $45,000, respectively, of interest related to the construction
of its hospitality center. WVI, an affiliated company, transferred assets
valued at $48,189 to the Company during 1996. This non-cash transaction
has been excluded from the statement of cash flows.
F-10
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
1. Summary of Operations, Basis of Presentations and Significant Accounting
Policies (Continued)
Fair market value of financial instruments
The fair market values of the Company's recorded financial instruments
materially approximate their respective recorded balances, as the recorded
assets and liabilities are stated at amounts expected to be realized or
paid, or carry interest rates commensurate with current rates for
instruments with a similar duration and degree of risk.
Statement of Financial Accounting Standards No. 123
The Company has adopted Statement of Financial Accounting Standards No. 123
(SFAS 123), "Accounting for Stock-Based Compensation," in 1996. SFAS 123
was issued by the Financial Accounting Standards Board in October 1995, and
allows companies to choose whether to account for stock-based compensation
under the current intrinsic method as prescribed in Accounting Principles
Board Opinion Number 25 (APB 25) or use the fair value method prescribed
in SFAS 123. The Company continues to follow the provisions of APB 25.
The effect of SFAS 123 had the fair value method been chosen is disclosed
in Note 9.
2. Accounts Receivable
Oregon law prohibits the sale of wine on credit; therefore, the Company's
accounts receivable balances are the result of sales to out-of-state and
foreign distributors. Accounts receivable include an outstanding balance
of approximately $80,000 and $8,000 at December 31, 1996 and 1995,
respectively, from a European customer to which extended credit terms have
been granted. At Dcember 31, 1996 and 1995, the Company's accounts
receivable balance is net of an allowance for doubtful accounts of
approximately $10,000 and $5,000, respectively.
3. Inventories
Inventories consist of:
December 31,
1996 1995
----- -----
Winemaking and packaging materials............ $ 87,321 $ 71,725
Work-in-progress (costs relating to
unprocessed and/or unbottled
wine products).............................. 1,559,612 942,189
Finished goods (bottled wine and
related products)........................... 1,196,120 876,134
------------ ----------
$ 2,843,053 $ 1,890,048
------------ ----------
------------ ----------
F-11
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
4. Property and Equipment
December 31,
1996 1995
---- ----
Land and improvements................. $ 563,077 $ 562,217
Winery building and hospitality
center............................ 3,718,733 3,532,646
Equipment............................. 2,576,748 1,860,498
Construction in progress.............. 27,913 -
------------- ----------
6,886,471 5,955,361
Less accumulated depreciation (1,465,455) (1,105,614)
--------------- ------------
$ 5,421,016 $ 4,849,747
--------------- ------------
--------------- ------------
Construction in progress relates to the addition of a new storage, tasting
and cellaring facility at the Company's winery which is expected to be
completed by Fall 1997.
5. Investments
At December 31, 1996 and 1995, investments included $85,165 and $82,173,
respectively, in restricted short-term investments required by the Oregon
Liquor Control Commission and the Bureau of Alcohol, Firearms and Tobacco
to cover future excise tax payments. Investments at December 31, 1996 and
1995 also included $30,055 and $71,720 of restricted investments in Farm
Credit Securities which are required as a condition of the Northwest Farm
Credit Service loan and line of credit facility (see Note 6). These
investments are classified as held-to-maturity investments and are recorded
at historical cost.
6. Line of Credit Facility
The Company has a $1,000,000 credit facility with Northwest Farm Credit
Services. Borrowings under this facility bear interest at 8.55%. At
December 31, 1996 and 1995, $479,626 and $161,300 were outstanding
under this facility, respectively.
7. Long-Term Debt
Long-term debt consists of:
December 31,
1996 1995
------- -------
Northwest Farm Credit Services Loan........ $ 3,170,000 $ 2,074,363
Less current portion...................... (97,819) (66,493)
------------ -----------
F-12
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
$ 3,072,181 $ 2,007,870
--------------- ----------
--------------- ----------
F-13
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
7. Long-Term Debt (Continued)
The Company's loan with Northwest Farm Credit Services (NWFCS) was
refinanced in 1996 so that the principal balance was converted into
three separate notes bearing interest at rates ranging from 7.95% to 9.95%.
These notes require monthly payments ranging from $4,599 to $16,488 until
the notes are fully repaid in 2012. The loan agreements contain covenants
which require the Company to maintain certain financial ratios and
balances. At December 31, 1996, the Company was in compliance with these
covenants.
Future minimum principal payments of long-term debt mature as follows:
Year ending
December 31,
------------
1997.................................... $ 97,819
1998.................................... 115,446
1999.................................... 125,924
2000.................................... 137,270
2001.................................... 149,897
Thereafter.............................. 2,543,644
---------------
$ 3,170,000
---------------
---------------
8. Shareholders' Equity
The Company is authorized to issue 10,000,000 shares of its common stock.
Each share of common stock is entitled to one vote. At its discretion,
the Board of Directors may declare dividends on shares of common stock,
although the Board does not anticipate paying dividends in the foreseeable
future.
The two founding shareholders, one of whom is the Company's president and
chairman of the Board of Directors, have entered into a shareholders'
agreement. The terms of the agreement provide, among other things,
certain restrictions on the transfers or encumbrance of their shares
of common stock.
Pursuant to the terms of the agreement, the Company has the right of first
refusal to purchase all of the shares offered for sale by either
shareholder at a price to be mutually agreed upon between the Company
and the selling shareholder. Upon the death of either shareholder, the
Company, at its option, may purchase the shares from the surviving members
of the shareholder's family at a purchase price to be mutually agreed upon
or calculated based upon an outside appraisal of the Company's value.
F-14
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
8. Shareholders' Equity (Continued)
In addition, in connection with the Company's initial stock offering, the
founding shareholders agreed to place in escrow certain shares of common
stock. All of these shares have been released as of December 31, 1995.
On June 1, 1992, the Company granted its president a warrant to purchase
15,000 shares of common stock as consideration for his personal guarantee
of the real estate loans and the line of credit with Northwest Farm Credit
Services (see Notes 6 and 7). The warrant is exercisable through June 1,
2012 at an exercise price of $3.42 per share. As the warrant exercise
price equaled the stock price at the date of grant, no expense was
recorded as a result of this transaction. As of December 31, 1996,
no warrants had been exercised.
9. Stock Incentive Plan
In 1992, the Board of Directors adopted a stock incentive plan and
reserved 175,000 shares of common stock for issuance to employees,
consultants, and directors of the Company under the plan.
Administration of the plan, including determination of the number,
term, and type of options to be granted, lies with the Board of
Directors or a duly authorized committee of the Board of Directors.
At December 31, 1993, 1994, 1995, and 1996, the following transactions
related to stock options occurred:
Exercise Vesting Year-end
Issued price period Exercised Canceled balance
------ ------ ------- ---------- -------- ----------
1993 20,000 $ 3.42 10 years - - $ 20,000
1994 45,000 $ 5.50 10 years 900 -
20,000 $ 3.60 10 years - -
-------- ---------- -------- ---------
65,000 900 - $ 84,100
-------- ---------- -------- ---------
-------- ---------- -------- ---------
1995 5,000 $ 4.50 5 years - 65,000
10,000 $ 3.62 5 years - -
10,000 $ 3.62 10 years - -
-------- ---------- --------- ---------
25,000 - 65,000 $ 44,100
-------- ---------- --------- ---------
-------- ---------- --------- ---------
1996 42,000 $ 3.00 5 years - -
20,000 $ 3.00 7 years - -
25,000 $ 3.00 10 years - -
29,500 $ 2.75 5 years - -
92,000 $ 2.75 10 years - -
F-15
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -------------------------------------------------------------------------------
30,000 $ 2.50 10 years - -
--------- ------ ----- ---------
238,500 - - $ 282,600
--------- ------ ------ ---------
--------- ------ ------ ---------
In January of 1997, 40,000 of the 92,000 options issued during 1996 at an
exercise price of $2.75 were canceled.
F-16
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -----------------------------------------------------------------------------
9. Notes to Financial Statements
The Company has elected to account for its stock-based compensation under
Accounting Principles Board Opinion 25; however, as required by SFAS 123,
the Company has computed for pro forma disclosure purposes the value of
options granted during 1996 and 1995 using the Black-Scholes option
pricing model. The weighted average assumptions used for stock option
grants for 1996 and 1995 were a risk-free interest rate of 6.33% and 6.56%,
respectively, an expected dividend yield of 0% and 0%, respectively, an
expected life of 8.15 years and 7.25 years, respectively, and an expected
volatility of 57% and 55%, respectively. The weighted average fair value
of stock options granted in 1996 and 1995 was $1.87 and $2.35,
respectively.
If the Company recorded compensation expense for options granted under the
plan in accordance with SFAS 123, the effect would have resulted in
pro-forma net income of $116,786 ($0.03 per share) and a pro-forma net loss
of $1,794 ($0.00 per share) for the years ended December 31, 1996 and 1995,
respectively. The effects of applying SFAS 123 to pro-forma disclosure for
1996 and 1995 are not likely to be representative of the effects on reported
net income and earnings per share for future years since options vest over
several years and additional awards are made each year.
Options were assumed to be exercised upon vesting for purposes of this
valuation. Adjustments are made for options forfeited prior to vesting.
For the years ended December 31, 1996 and 1995, the total value of the
options granted was computed to be $371,034 and $58,825, respectively,
which would be amortized on a straight-line basis over the vesting period
of the options.
The effects of applying SFAS 123 for providing pro forma disclosure for
1996 and 1995 are not likely to be representative of the effects on
reported net income and earnings per share for future years since options
vest over several years and additional awards are made each year.
10. Income Taxes
The provision for income taxes consists of:
Year ended December 31,
1996 1995 1994
---- ----- -----
Current tax expense:
Federal............. $ 47,197 $ (2,300) $ 39,422
State............... 11,964 (359) 10,180
------------ ------------- -----------
59,161 (2,659) 49,602
------------ ------------- -----------
Deferred tax (benefit):
Federal............. 35,032 26,545 (3,587)
State............... 4,492 5,882 (920)
------------ ------------- ------------
39,524 32,427 (4,507)
------------ ------------- ------------
Total $ 98,685 $ 29,768 $ 45,095
------------ ------------- ------------
------------ ------------- ------------
F-17
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -----------------------------------------------------------------------------
F-18
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -----------------------------------------------------------------------------
10. Income Taxes (Continued)
During the years ended December 31, 1996 and 1995, the Company utilized net
operating loss carryforwards of approximately $28,000 and $50,000,
respectively, to reduce its taxable income.
The effective income tax rate differs from the federal statutory rate as
follows:
Year ended December 31,
1996 1995 1994
-------- ------- -----
Federal statutory rate................... 34.0 % 34.0 % 30.0%
State taxes, net of federal benefit...... 4.9 5.9 4.0
Utilization of fully reserved
net operating loss carryforwards....... - - (8.8)
Permanent differences.................... 0.6 41.9 -
Benefit of federal rate bracket.......... (2.9) - -
Other 0.1 - (4.2)
--------- ------- ------
36.7% 81.8% 21.0%
--------- ------- -------
--------- ------- -------
Deferred tax assets and (liabilities) consist of:
December 31,
1996 1995
------ ------
Accounts receivable......................... $ 3,836 $ 1,918
Inventory................................... 103,522 76,692
Net operating loss carryforwards............ - 15,262
Other....................................... 4,080 -
-------- -------
Gross deferred tax assets................. 111,438 93,872
-------- -------
Capital assets............................. (114,028) (56,938)
--------- --------
Gross deferred tax liability............. (114,028) (56,938)
--------- --------
Net deferred tax (liability) asset......... $ (2,590) $ 36,934
--------- --------
--------- --------
11. Related Parties
Nature of related parties
The Company's president partially owns and controls Nor'Wester Brewing
Company, Inc. (Nor'Wester), a microbrewery in Oregon; and Willamette
Valley, Inc. Microbreweries Across
F-19
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -----------------------------------------------------------------------------
America (WVI), a company organized to establish
microbreweries throughout the United States. Additionally, the Company's
president is the president of each of the following subsidiaries of WVI:
Aviator Ales,
F-20
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -----------------------------------------------------------------------------
11. Related Parties (Continued)
Inc. (AAI); Mile High Brewing Company (MHBC); Bayhawk Ales, Inc. (BAI);
and North Country Brewing Company, Inc. (NCBCI); development stage
companies located in Washington, Colorado, California, and New York,
respectively. As a result of certain arrangements between the Company
and its affiliates, as well as the Company president's positions with
and/or ownership interests in each of these companies, inherent
conflicts of interest exist with respect to the pricing of services,
the sharing of resources and the allocation of the Company president's
time.
Related Party Transactions
During 1993 and through June 1994, the Company provided management
services to Nor'Wester and WVI. The management services consisted of
secretarial, accounting, marketing, administrative, stock transfer,
and warehousing services which were provided on a cost-plus-fee basis.
The revenue and costs of providing these services are shown separately
as management services in the accompanying statement of operations.
Beginning in July 1994, such services were performed primarily by WVI
employees. WVV provided services to the affiliated companies on a
limited basis. For the years ended December 31, 1995 and 1994,
charges to the Company for such management services aggregated
approximately $230,000 and $58,000, respectively, and are included
in selling, general and administrative expenses in the accompanying
statement of operations. In addition, the Company has entered into
a beer sale and distribution contract with Nor'Wester. No sales
were made under the terms of this contract in 1996 or 1995.
In 1996, the Company began contracting for these services with Nor'Wester
under a general services agreement. Nor'Wester, WVI, and the Company each
provide various administrative and stock offering services to the
affiliated companies. During 1996, total amounts charged to the Company
by Nor'Wester and WVI aggregated $47,025; amounts charged by the Company to
the various affiliated companies aggregated $86,450. As a result of these
and other transactions, the Company had an aggregate payable balance of
$7,221 which is netted against other receivables in the accompanying
balance sheet.
The Company and one of its two founding shareholders have entered into
a grape purchase contract. Under the terms of such contract, the
founding shareholder agreed to sell, and the Company agreed to buy,
the entire production of pinot moir, chardonnay, and white riesling
wine grapes from the founding shareholder's separately owned vineyard
to supplement grapes provided by the Company's vineyard. The contract
commenced with the Fall 1989 vineyard harvest and continued through
the 1995 harvest. The contract stipulated certain standards of quality.
The purchase price of the grapes equaled the average price paid for each
variety of grapes in the Willamette Valley market region each season, as
set forth by certain market surveys. The terms of the contract also
provided for a bonus payable to the founding shareholder if, and only if,
the finished bottle price of wine produced from the purchased grapes
exceeded the Oregon average bottle price as measured by certain market
surveys. In 1995 and 1994, the Company purchased grapes for $33,347
and $29,234, respectively, pursuant to the terms of the contract. The
founding shareholder sold his vineyards in November of 1995. No grapes
were purchased from him in 1996.
During 1996, 1995, and 1994, the Company purchased grapes from other
shareholders, at an aggregate price of $138,656, $142,003, and $134,139,
respectively. At December 31, 1996 and 1995, grape payables included
$92,706 and $67,161 owed to these shareholders, respectively.
F-21
<PAGE>
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
- -----------------------------------------------------------------------------
11. Related Parties (Continued)
On December 3, 1992, the Company issued a loan to its president in the
amount of $100,000. The loan was due on December 3, 1993, bearing interest
at 7.5%. On March 14, 1994, the loan was extended to March 14, 2009.
The loan is secured by the common stock of the Company held by its
president. This note, including the related interest receivable, is
classified as a long-term note receivable in the accompanying balance
sheet.
12. Subsequent Events
On January 23, 1997, Willamette Valley Vineyards, Inc. announced that it
had entered into a letter of intent pursuant to which Willamette Valley
Vineyards will acquire 100 percent of the outstanding stock of Tualatin
Vineyards, Inc., for a purchase price of $1,824,000, plus Tualatin
Vineyards' net current assets as of the closing date. Willamette Valley
Vineyards will pay 35 percent of the purchase price in cash and the
balance will be paid through the issuance of common stock in Willamette
Valley Vineyards. The transaction is subject to the negotiation and
execution of a definitive agreement and is conditioned upon the
satisfactory completion of due diligence, receipt of approval from
regulatory bodies to the transfer of all necessary licenses, and
Willamette Valley Vineyards' completion of financing arrangements on
term and conditions acceptable to the company. The parties anticipate
that the closing will occur during the first quarter of 1997. There can
be no assurance that the transaction will be completed.
F-22
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<PAGE>
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<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 794,885
<SECURITIES> 0
<RECEIVABLES> 288,905
<ALLOWANCES> 0
<INVENTORY> 2,843,053
<CURRENT-ASSETS> 4,145,454
<PP&E> 6,886,471
<DEPRECIATION> (1,465,455)
<TOTAL-ASSETS> 10,263,705
<CURRENT-LIABILITIES> 1,449,291
<BONDS> 0
0
0
<COMMON> 5,369,868
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,263,705
<SALES> 4,235,020
<TOTAL-REVENUES> 4,235,020
<CGS> 1,853,791
<TOTAL-COSTS> 1,853,791
<OTHER-EXPENSES> 1,951,120
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 214,380
<INCOME-PRETAX> 269,115
<INCOME-TAX> 98,685
<INCOME-CONTINUING> 170,430
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 170,430
<EPS-PRIMARY> .05
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