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, 1997
Commission File No 0-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Name of Small Business Issuer 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) 588-9463
(Issuer's telephone number, including area code)
________________________________
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 Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the Issuer 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 Issuer'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, 1997
Issuer's revenues for its most recent fiscal year: $5,714,132
Aggregate market value of the voting stock held by
non-affiliates of the Issuer based upon the closing
bid price of such stock: $6,372,535
Number of shares of Common Stock outstanding: 4,231,431
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.
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.
In 1996, the Company owned 50 acres of planted vineyards--39
acres producing and 11 acres in development. After the acquistion
of Tualatin Vineyards, Inc., in 1997 the Company owned 122 acres
of producing vineyard, 30 acres in development and 41 additional
plantable acres. After the long term lease of O'Connor Vineyards,
the Company controlled 170 producing acres, 38 acres in
development and 61 plantable acres.
In April 1997 the Company acquired the net assets of Tualatin
Vineyards, Inc. (TVI) adding 83 acres of producing vineyard, 60
more plantable acres and an additional 20,000 cases of wine making
capacity. The purchase price paid by the Company to the Tualatin
Valley shareholders in exchange for their shares was $1,824,000
plus Tualatin Vineyards current assets minus their current and
long term liabilities as reflected in their balance sheet dated
April 15, 1997. The Company paid 35 percent of the purchase price
in the form of cash with the balance paid through the issuance of
shares of the Company's common stock at an agreed price per share.
The final purchase price was $1,988,601 paid to the Tualatin
Vineyard, Inc. shareholders.
The Company also leased O'Connor Vineyards on a ten-year
contract adding an additional 48 producing acres. All of these
highly regarded vineyards are within the Willamette Valley
Appellation.
Products
Under its Willamette Valley Vineyards label, the Company
currently produces and sells the following types of wine in 750 ml
bottles:: Pinot Noir , the Company's flagship and its largest
selling varietal in 1997; Chardonnay, Pinot Gris, White Riesling,
Dry Riesling, Gewurztraminer and Oregon Blossom (blush blend). As
a convenience to our restaurant customers the Company produces
some of our products in larger sized packages.
Under its WVV label, the Company currently produces and sells
small quantities of the following types of wine in 750 ml bottles:
Merlot, Cabernet Sauvignon, Edelweiss, and Oregon's Nog -- a
seasonal holiday product.
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 once again began to rise.
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 1997, there were 120 commercial wineries licensed in
Oregon and over 7,800 acres of wine grape vineyards, 6,300 acres
of which are currently producing. Total production of Oregon
wines in 1997 is estimated by the Company to be approximately
760,000 cases. Oregon's entire 1997 production would have an
estimated retail value of approximately $76 million, assuming a
retail price of $100 per case, and a wholesale value of
approximately one-half of the retail value, or $38 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 $3,500
per acre in Oregon. In the Burgundy region of France, virtually
no new vineyard land is available for planting.
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 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, most
Oregon phylloxera infestations have expanded very slowly and done
only minimal damage. Nevertheless, phylloxera does constitute 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, 1997, the Company has not detected
any phylloxera at its Turner site. In 1997, the Company purchased
Tualatin Vineyards which has phylloxera at its site. The Company
did plant 19 acres of self rooted vines which are susceptible to
phylloxera. Since the change in management in the third quarter,
all future planting have been and will be on phylloxera resistant
root stock. The Company takes all necessary precautions to
prevent the spread of phylloxera to its Turner site.
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. Their wines, under the Argyle label,
have 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. 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 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's.
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 US 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 brand positioning that support high bottle
prices for its high quality wines; (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.
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,
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 for the Winery to passing
motorists, thus enhancing recognition of the Company's products in
retail outlets and restaurants. The Company's Hospitality Center
has further increased the Company's direct sales and enhanced
public recognition of its wines.
Vineyard
The Property. The Company's estate vineyard at the Turner
site currently has 50 acres planted and 39 acres producing 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.
In April of 1997, the Company purchased Tualatin Vineyards,
Inc. which added 83 acres of additional producing vineyards and
some 60 acres of bare land for future plantings. In 1997, the
Company planted 19 acres at the Tualatin site and is preparing to
plant another 41 acres in 1998. The majority of the new plantings
will be Pinot Noir which is the Company's flagship varietal. All
of the new planting will be available to harvest in the next three
to five years.
Also in 1997, the Company entered into a 10 year lease with
O'Connor Vineyards (48 acres) located near Salem to manage and
obtain the supply of grapes from O'Connor Vineyards. In 1997 the
Company received only a portion of the grapes produced at O'Connor
due to the phase out of certain preexisting grape sales
contracts.
The Company now controls of 243 acres (indluding 41acres
which will be planted in 1998) of vineyard land. At full
production, these vineyards should enable the Company to grow
approximately 38 % of the grapes needed to meet the Winery's
ultimate production capacity of 298,000 gallons (124,000 cases).
Grape Supply. In 1997, the Company's 39 acres of producing
estate vineyard yielded approximately 181 tons of grapes for the
Winery's ninth crush. Tualatin Vineyards produced 234 tons of
grapes in 1997. O'Connor Vineyards produced 127 tons of which
about 80% were sold to other wineries because of previous
commitments. An additional 1,112 tons of grapes were purchased
from other growers in 1997. However, the Company sold about 228
tons of the grapes harvested from its vineyards or purchased from
contracted vineyards in 1997. The Company realized it could
optimize inventory levels and improve wine quality by processing
fewer tons than were initially thought necessary because of overly
optimistic sales projections, e.g. Chardonnay. The Company
expects to produce 202,000 gallons in 1998 (85,011 cases) from its
1997 crush. In 1998, the Company also anticipates selling excess
bulk wine to meet revised sales projections The Winery's 1997
total wine production was 218,238 gallons (91,793 cases) from its
1996 crush. The Vineyard cannot and will not provide the sole
supply of grapes for the Winery's near-term production
requirements. The Company has also entered into grape purchase
contracts with certain directors of the Company. See "CERTAIN
TRANSACTIONS."
The Company fulfills its remaining grape needs by purchasing
grapes from other nearby vineyards at competitive prices. The
Company believes high quality grapes will be available for
purchase in sufficient quantity to meet the Company's requirements
except in the Pinot Noir varietal, where there is increasing
demand. The grapes grown on the Company's vineyards establish 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 vineyards may be labeled as "Estate Bottled" wines.
These wines traditionally sell at a premium over non-estate
bottled wines.
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 some
of the famous viticultural regions of France. Western Oregon's
latitude (42 -46 North) and relationship to the eastern edge of a
major ocean is very similar to certain 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 Haut Brion vineyards in Bordeaux, France.
The Vineyard's soil type is Jory/Nekia, a dark reddish-brown
silky 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 one water
well which can sustain 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 and
production facilities, built at an initial cost of approximately
$1,500,000, was originally structurally capable of producing up to
75,000 cases of wine per year, depending on the type of wine
produced. 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 (250,000 gallons). 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. In
1997, the Winery produced 218,238 gallons (91,793 cases) of wine
from its 1996 crush. 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. This facility
has now been converted to barrel storage in order to accommodate
an additional 750 barrels for aging wines. This change increases
our barrel aging capacity a the Turner site. The production area
is equipped with a settling tank and sprinkler system for
disposing of waste water from the production process in compliance
with environmental regulations. The settling tank and sprinkler
system were installed at a total cost of approximately $20,000.
In 1997, the Company constructed a 20,000 square foot storage
building to store all of its bottled product at an approximate
cost of $729,000. In the past, the Company rented a storage
facility with an annual rental cost to the Company of $96,000.
With the purchase of Tualatin Vineyards, Inc., the Company
added 20,000 square feet of additional production capacity.
Although the Tualatin facility was constructed over twenty years
ago, it will add 20,000 gallons of wine production capacity to the
Company. However, the facility is not in use at this time because
the Executive Committee of the Company decided the production
capacity at Tualatin was not needed at this time to meet short
term production requirements.
Construction of Hospitality Facility. In May 1995, the
Company completed construction of a large tasting and hospitality
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 will enable 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
3,000 barrels of wine for aging.
Just outside the Hospitality Center, the Company has planned
a landscaped park setting 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
Center 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 will make the Winery an attractive
recreational and social destination for tourists and local
residents, thereby enhancing the Company's ability to sell its
wines.
Mortgages on Properties. The Company's winery facilities are
subject to two mortgages. The estate vineyards at Turner has a
principal balance of $3,062,779 at December 31, 1997. In 1997,
the Company entered into a second separate mortgage to fund the
Tualatin acquisition and development of its vineyards. This
separate mortgage, secured by Tualatin assets, has a principal
balance of $982,164 at December 31, 1997. The Company's total
mortgages have a balance of $4,044,943 at December 31, 1997, as
compared to the principal balance of $3,170,000 at December 31,
1996. These mortgages are payable in annual aggregate
installments of approximately $480,000 through 2012. After 2012,
the Company's annual aggregate mortgage payment will be $96,000
until the year 2014.
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 Production Case
Crush Year Crushed Year Gallons Produced Equivalents
1989 203
1990 206 1990 31,383 13,200
1991 340 1991 31,900 13,400
1992 565 1992 52,600 22,100
1993 633 1993 90,908 38,237
1994 590 1994 97,822 41,145
1995 885 1995 96,077 40,411
1996 1290 1996 127,655 53,693
1997 1426 1997 199,353 83,850
The quantity of grapes crushed in 1997 does not include 228
tons of grapes that were purchased and resold on the open market
because the Company had contracted for more grapes than were
needed. The Company was unable to sell 270 tons of grapes before
crush, this tonnage converts to 44,000 gallons of bulk wine which
the Company plans to sell in 1998.
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 outside 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 north-south 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 Oregon
industry standard. 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 directly to consumers at retail prices rather than
to distributors or retailers at wholesale prices. Sales made
directly to consumers at retail prices result in an increased
profit margin equal to the difference between retail prices and
distributor or wholesale prices, as the case may be.
Self-Distribution. The Company has established a self-
distribution system to sell its wines to restaurant and retail
accounts located primarily in Oregon. 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, 1997. 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 system. The system initially focused on
distribution in the Willamette Valley, but then expanded to the
Oregon coast, and then into southern and central Oregon. For
1997, approximately 38% of the Company's total sales were
attributable to self-distribution.
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.
Shareholders. As a consumer-owned company, the Company has a
unique marketing opportunity available to only a few of its
competitors. The Company has approximately 3,619 shareholders of
record as of December 31, 1997, comprised of approximately 5,000
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 time 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 do visit the Winery.
More importantly, 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 298,000 gallons (124,000
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.
Governmental Regulation of the Wine Industry
The production and sale of 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 will be 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. Recently there have been national efforts to reduce the
blood alcohol level to .08 to combat driving under the influence.
The company believes that is such legislation is passed, it may
discourage wine consumption in restaurants. Although the .08 rule
is operative in Oregon, the company's principal sales territory,
it has not yet affected local restaurant sales although it is
possible that it will on a national level..
Employees
As of December 31, 1997 the Company had 31 full-time
employees and 6 part-time employees. In addition, the Company
hires additional employees for seasonal 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
Not applicable.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq Stock
Market under the symbol "WVVI." As of December 31, 1997, there
were 3,619 holders of record of the Common Stock.
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 Stock Market. The Company's Common Stock
began public trading on September 13, 1994.
Quarter Ended
3/31/97 6/30/97 9/30/97 12/31/97
High $3.63 $3.50 $3.25 $2.25
Low $2.25 $2.00 $1.75 $1.19
3/31/96 6/30/96 9/30/96 12/31/96
High $3.75 $3.62 $3.50 $3.50
Low $2.75 $2.75 $2.00 $2.50
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.
Forward Looking Statement
This Management's discussion and Analysis of Financial
Condition and Results of Operation and other sections of this Form
10K 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 assimilation of
Tualatin Vineyard Inc.'s business with that of the Comp[any and
other risks detailed below as well as those discussed elsewhere in
this Form 0K and from time to time in the Company's Securities and
Exchange Commission filing and reports. In addition, such
statements could be affected general industry and market
conditions and growth rates, and general domestic economic
conditions.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company embarked on an aggressive growth plan in 1997 aimed at
solving several major issues. First, sales demand exceeded supply
of certain varieties, requiring allocation and shortening the
time for bottle aging to speed release into the market. Second,
sales and production growth made the Company highly dependent upon
outside sources of grapes which were fetching higher market prices
and becoming more difficult to secure. Third, growers were
linking the sales of high demand grapes like Pinot Noir with low
demand grapes, requiring the Company to purchase grapes it didn't
need. Fourth, management's sales projections indicated the
Company needed more winemaking capacity than was available at its
Turner site and significantly more wine storage.
The Company has experienced over the last several years high
demand for some of its products as a result of positive reviews by
national wine writers and critics. For example, Wine Enthusiast
Magazine names Willamette Valley Vineyards as "one of America's
great Pinot Noir producers"; noted wine critic, Robert Parker
stated, "Willamette Valley Vineyards' Whole Berry Fermented Pinot
Noir may be the world's most delicious and accessible Pinot. It
has been a knock-out in some vintages." With the Company's 1996
Pinot Gris variety, noted Wine Spectator writer Matt Kramer stated
"In short it's a winner." As a consequence, the Company has
experienced shortages in the marketplace, which in the short term,
is beneficial to brand positioning but, over the long term, can
threaten placement in critical high profile accounts. The Company
has resorted to allocating the wines, this has not been entirely
effective in resolving the problem.
Facing these conditions, the Board of Directors adopted a 1997
Budget which called for dramatically higher production levels,
construction of a wine storage facility, and authorized the
purchase of Tualatin Vineyards and Winery and the leasing, on a
long term basis, of O'Connor Vineyards.
For the first nine months of 1997, the Company failed to achieve
its sales projections. In addition, the Company incurred expenses
greater than the Board authorized budget. The combination of
these two factors, despite record sales growth, produced record
losses for the first three quarters. The Board of Directors
formed an Executive Committee at its April 28th meeting to work
closely with the General Manager to address operational management
issues. Following the resignation of the Company's General
Manager in the third quarter, the Executive Committee assumed
management responsibilities for the winery until Company Founder &
President/CEO, Jim Bernau returned to operate the Company on a
full-time basis beginning in mid-September of 1997. The Executive
Committee consists of the President and Chair of the Board Jim
Bernau, Director Jim Ellis and Director Stan Turel.
The Executive Committee of the Board of Directors determined the
Company's performance was adversely affected by the following:
Sales Projections - The 1997 sales projections for the
Willamette Valley Vineyard Brands were established solely on a
percentage increase from the prior year dollar sales without
surveying distributors, sales agents and representatives for
projected case depletion by variety. The projections did not
provide detail for the Executive Committee to determine in what
products or markets the Company was not meeting projections. This
is the first time in the Company's history it has not met its
sales projections. Additionally, the actual sales of the newly
acquired Tualatin Brand were only a small fraction of its
projected sales. The Company has returned to a strict policy of
developing detailed sales projections in which each sales manager,
agent and representative is directly responsible for his or her
projections. Sales against projections are measured by product
each month in each market by wholesalers, agents and sales
representatives.
Budgets and Spending - Since the 1997 Budget was based upon the
flawed sales projections, expenditures were not adequately covered
by the resulting sales. In addition, actual spending exceeded the
Board authorized budget. The acquisition of Tualatin Vineyards
magnified this problem, since Tualatin was losing money at the
time it was purchased by the Company. Adequate measures were not
taken to eliminate these losses or adjust spending downward to
match the lower than expected sales. In 1997, the acquisition of
Tualatin Vineyards adversely affected the Company's net income by
$14,000. Since the capacity at the Tualatin facility was not
immediately needed, the Executive Committee shifted wine
production of Tualatin wine to its Turner facility and mothballed
the Tualatin facilities, mitigating further Tualatin related
losses. The Company did, however, reopen the Tualatin tasting
room to generate additional retail sales and interest in the
Tualatin brand. The Company has returned to its policy of limiting
spending to monthly budgets and has instituted a "real time"
Purchase Order system, where managers can input proposed expenses,
measure them against the funds available in the budget and seek
approval from the CEO for spending above pre-determined limits.
The Executive Committee developed an expenditure reduction plan
that resulted in General and Administrative expenses to be lower
in the 4th Quarter of 1997 than in the same quarter of the
previous year. The expenses that were dramatically over budget
were targeted for strict controls included legal, travel,
printing, advertising, outside contractors and memberships.
Competitive bidding processes have been instituted for all major
purchases, services and supplies.
Personnel - The labor costs experienced in the first nine months
of 1997 exceeded the Budget. In addition, staff reductions were
not made when sales projections were not achieved. The Executive
Committee reorganized the workforce and eliminated, through
attrition or termination, 19 full and part-time positions
(principally mid-level managers) and 2 consultants. An in-state
sales manager position and an additional staff accountant were
added. These personnel actions resulted in considerable savings
to the Company. The personnel requisition and compensation
process requiring Human Resource Director and CEO approval has
been reinstituted to prevent hirings or compensation increases at
department levels that are outside the budget.
Pricing - Pricing has not kept up with contracted grape prices
and production cost increases reducing gross margins. The Company
has now phased out a lower price tier Willamette Valley Vineyard
Branded "Lot 27 and Lot 28" Pinot Noir and Chardonnay and
replaced it with a higher quality and higher priced "Vintage
Series" in grocery stores. The promotional pricing in which the
Company engaged to reduce its excess inventories is now being
phased out. Promotional sales were limited to markets that would
minimize potential harm to the positioning of the Company's brand.
A high end "Vineyard Designated" series is now being produced to
match the quality and cost of grapes from prestige vineyards.
Interest Expense - Higher than necessary inventories have
required additional borrowings against the Company's line of
credit. As management works to optimize inventory levels, these
related interest costs will decline relative to sales. The
inventory build in 1997 was based upon what the Company has now
determined to be unrealistic sales projections with some varieties
like Chardonnay where 19,478 case equivalents were crushed when in
the same year only 10,537 cases of Chardonnay were sold.. In
addition, the method used to calculate production needs was
flawed which overstated necessary inventory levels. Production
and Depletion forecasting has now been corrected and the Company
believes it will eliminate surplus inventories by the end of 1999.
The Tualatin purchase was financed with borrowed funds, increasing
interest expense. This cost (as well as related depreciation)
will not be offset until the Company can generate net revenue from
its currently mothballed Tualatin production facilities. Custom
crushing and leasing the facility are being explored until such
time as the Company needs the capacity for its own use. The
additional plantings at Tualatin are financed entirely with
borrowed funds and the interest costs will not be directly offset
until the new plantings become fully productive in 5 years.
Additional interest cost is being incurred due to how the Company
obtains its grapes. When grapes are purchased from other growers,
they are paid in installments after crush and into the following
year. However, growing grapes instead of purchasing them requires
cash to cover ongoing agricultural expenses. The Company is now
responsible for farming expenses at the Tualatin and O'Connor
sites. Additionally, the O'Connor Vineyard lease requires annual
cash lease payment at the beginning of the year before the grapes
are harvested. In general, the Company's costs of growing its own
grapes is less than purchasing on the open market. This benefit,
however, will not be realized until the wine made from those
grapes is sold.
The change in warehousing has increased interest expense as well.
The Company previously stored most of its case goods off-site and
paid by the month for storage and handling. The new warehouse was
constructed with borrowed funds and is being used for storage,
eliminating these outside storage charges. Since the new
warehouse has excess capacity, management is actively seeking
contract wine storage opportunities. The cost of renting outside
storage on an annual basis was costing the Company $96,000. The
Company believes that it will realize savings in operating its own
storage facility.
The Winery posted net profits of $182,385 for the 4th quarter of
1997 after the year-end adjustments or 4 cents per share compared
with net profits of $35,808 or 1 cent per share for the fourth
quarter of 1996. The year-end adjustments were (1) the allowance
for doubtful accounts receivable was adjusted to $30,000 from
$10,000 in 1996, (2) the Company wrote off $9,500 of marketing
expenses, incurred in 1996, associated with its distributor in the
United Kingdom, (3) the Company wrote off approximately $14,000 in
receivables from its former affiliated companies, (4) $7,000 in
vaious year-end adjustments.. A portion of the revenue resulted
from the sale of certain varieties of grapes for which the company
had contracted early in 1997, but did not need at crush time in
the fall. The fourth quarter increase reverses the disappointing
performance of the Company in the first, second and third quarters
of 1997 where losses totaled $113,523.
Although the Company experienced a dramatic turnaround and enjoyed
a strong fourth quarter, profits per share fell due to overall
1997 performance and the dilution resulting from new shares issued
to Tualatin shareholders in partial payment for the purchase of
Tualatin Vineyards and Winery.
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 1998. Sales volumes
increase progressively beginning in the second quarter through the
fourth quarter because of consumer buying habits.
The following table sets forth certain information regarding
the Company's revenues from Winery operations for each of the last
eight fiscal quarters:
Fiscal 1997 Quarter Ended
(in thousands)
Fiscal 1996 Quarter Ended
(in thousands)
3/31 6/30 9/30 12/31
3/31 6/30 9/30 12/31
Tasting room and retail sales $140 $212 $244 $151
$151 $213 $251 $367
On-site and off-site festivals 86 92 145 177
76 116 128 154
In-state sales 317 462 552 827
307 403 415 640
In-state sales 38 19 408
Out-of-state sales 298 510 400 727
169 239 358 347
Total winery revenues 841 1,314 1,360 2,411
703 971 1,152 1,508
Period to Period Comparisons
Revenue. The following table sets forth, for the periods
indicated, select revenue data from Company operations:
Year Ended December 31
(in thousands)
1997 1996 1995
Tasting room and retail sales $ 868 $ 982 $ 940
On-site and off-site festivals 500 474 528
In-state sales 2,158 1,765 1,394
Bulk /Grape Sales 465
Out-of-state sales 1,935 1,113 776
Revenues from winery operations $5,926 $4,334 $3,638
Less Excise Taxes 212 99 0
Net Revenue $5,714 $4,235 $3,638
1997 Compared to 1996. Tasting room sales for the year ended
December 31, 1997 decreased 12% to $868,531 from $981,804 for the
same period in 1996. The Company has seen a drop in the average
tasting room "ring" which means that the customer is purchasing
the wine elsewhere as witnessed by increased sales in the in-state
sales category. In the last part of 1997, management has begun to
track the buying habits of the customers who visit the tasting
room. In the past several years, the Company did not track
customers buying habits which means the tasting room did not focus
on a targeted group of customers to increase its sales. In the
past year, the Company has allowed the Wholesale Division to sell
wine that in previous years has been exclusively sold in the
tasting room. In 1998, the Company will return to the practice of
selling certain exclusive wines in the tasting room at higher
profit margins. The Company experienced an increase in revenue
during 1997 in Hospitality rental income over the same period in
1996. The total of rental income and related wine sales was
$187,257 in 1997 as compared to $159,741 in 1996. This rental
income comes primarily through weddings, business meetings and
educational conferences held at the Winery's Hospitality Center.
On-site and off-site festival sales for the year ended
December 31, 1997 increased 5% to $500,199 from $474,405 for the
same period in 1996. One off-site event, "The Bite of Salem", had
an increase in revenue of $11,500 over last year's event, but it
had a sponsor's fee of $8,000 which made the event unprofitable.
The Company has reinstituted a strict policy of requiring a
cost/benefit analysis for each event before the decision is made
to participate in the event. The Company plans to reduce its
overhead in the Retail Department by only participating in events
that return to the Company a positive cash flow.
Wholesale sales in the state of Oregon for the year ended
December 31, 1997, through the Company's independent sales force,
increased 22% to $2,157,896 from $1,765,340 for the same period
in 1996. PriceCostco, a large retailer, placed the Company's
products in several new locations in 1997 which resulted in
$277,000 additional sales to that chain. The Company has seen a
significant increase in the sales of its White Riesling product
line which nearly doubled in sales in 1997, resulting in an
increase of approximately $235,000 in sales over 1996, most of
which was sold to the above mentioned chain store. During the last
part of 1997, the Company added an in-state sales manager whose
main focus was to increase in-state sales. This increased focus
by the Company resulted in record breaking sales in the fourth
quarter of 1997.
The Company contracted in early 1997 for more grapes than
what was needed to meet the revised sales forecasts in the next
few years. The Company sold some of its own grapes and some of
its contracted grapes for $465,030 and generated a small profit in
doing so. Because of certain multi-year contracts, the Company
intends to sell additional grapes in 1998 without incurring a
loss.
Out-of-state sales for the year ended December 31, 1997,
increased 74% to $1,934,877 from $1,112,690 for the same period in
1996. The Company now sells wine in 39 states as compared to 28
states in 1996. The Pinot Noir variety led the way in increased
sales in 1997. The vintage and whole berry Pinot Noir product
lines sold 6,097 more cases in 1997 resulting in a $439,000
increase in sales.
Pinot Noir, which now constitutes about one-third of the
Company's production, is among the fastest growing wine varietals.
New consumers are coming into the wine category. Positive press,
regarding the healthful use of wine, continues to stimulate
demand. The Company expects demand for its wines to continue to
increase. However, the Company notes that new formidable entries
into the Oregon wine industry from out of state will increase
competition and put additional pressure on Pinot Noir grape
supplies. In addition, the industry in Oregon, Washington, and
California has experienced crush volumes in 1997 higher than
annual consumption rate increases, thus potentially putting
pressure on prices and margins.
The Company reclassified its income statement to subtract
excise taxes from its gross revenue to equal a net revenue. Since
the Company only collects the excise tax on behalf of 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 1997
were $212,402 as compared to $99,219 in 1996. Before 1996, excise
taxes were included in the "selling, general, and administrative
expenses".
As a percentage of net revenue after removing the excise
taxes, gross margin for all winery operations was 51% for fiscal
year 1997 as compared to 56% for 1996. The sales of bulk juice and
grapes at harvest at a slim margin reduced the gross margin in
1997. After adjusting for these sales, the gross margin would be
54% as compared to 56% in 1996. The sales of existing Tualatin
product at lower margins reduced the margin in 1997, as well as,
promotional pricing of certain Willamette Valley products to
reduce inventory.
Selling, general, and administrative expenses for the year
ended December 31, 1997, increased 25% to $2,434,867 compared to
$1,951,120 for the same period in 1996. As a percentage of revenue
from winery operations, the selling, general, and administrative
expenses were 43% in 1997 as compared to 46% in 1996.
During the year of 1997, increased sales revenues over 1996
resulted in increased commissions paid to our independent sales
force. Commissions are paid to the sales force on a specified
percentage of revenue resulting in no adverse affect on the
income. The commissions paid in 1997 amounted to $642,709 as
compared to $521,832 in 1996. The Company has experienced
increased expenses relating to samples, travel, point-of-sale
expenses, and shipping charges for the development of new markets
and the expansion of sales outside of the state. The out-of-state
sales representatives are allowed a set percentage of revenue for
wine samples and point of sale material. Thus, as the gross
revenues increase, the actual dollar expenditures for wine
samples and point-of-sale material increases, as well.
Other income for the year ended December 31, 1997 was $19,471
as compared to $28,241 for the year ended December 31, 1996.
Interest income increased to $31,296 in fiscal year 1997 from
$25,145 in fiscal year 1996. Interest expense increased to
$396,118 in fiscal year 1997 from $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 the purchase of Tualatin
Vineyards, Inc., plant additional land at Tualatin, and fund
increases in inventory.
The provision for income taxes and the Company's effective
tax rate were $52,288 and 44% in fiscal year 1997 with $98,685 or
37% of pre-tax income recorded for fiscal year 1996.
As a result of the above factors, net income decreased 60%
to $67,862 in fiscal 1997 from $170,430 for the fiscal year of
1996. Earnings per share were $.02, $.05 and $.002 in fiscal
years 1997, 1996 and 1995, respectively.
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. The most significant increase in revenue
during 1996 was in the Hospitality rental income over the same
period in 1995. The total of rental income was $159,741 in 1996 as
compared to $80,857 in 1995. This rental income comes primarily
through weddings, business meeting 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 introduced to our winery and tasting room facility
return later to purchase wine at the tasting room.
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. The major reason for a decrease in revenue
was the elimination of a 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. The net result has contributed to improved
Company-wide profit.
Wholesales 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 the
focus on new wine accounts, better point-of-sale information,
improved sales management and targeting sales of higher margin
wines. Because the Company is one of the largest producers of
wine in Oregon, the Company has secured significant additional and
better positioned shelf space in several chain stores over this
time the previous year. PriceCostco placed the Company's products
in several new locations in 1996 which resulted in $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 sales in American retail
stores have grown 47% over the past 52 weeks. In comparison,
Chardonnay sales (the number one varietal wine) grew about 19% in
the same time period. New consumers are coming into the wine
category. Positive press regarding the healthful use of wine
continues to 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 gross revenue
to arrive at 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 were $99,219 as compared to $87,599
in 1995. The 1995 excise taxes were included in "selling, general,
and administrative expenses" in the 1995 Company audit.
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 margin on
these two wines are significantly higher than the margins of the
remaining wines.
Selling, general, and administrative expenses for the year
ended December 31, 1996 increased 8% to $1,951,120 compared to
$1,807,430 for the same period in 1995. As a percentage of revenue
from winery operations, the selling, general, and administrative
expenses were 46% in 1996 as compared to 50% in 1995. The excise
taxes paid in 1995 are included in the Company's selling, general,
and administrative cost, whereas, in 1996, the excise taxes are
netted against the Company's revenue. The Company has initiated a
strong cost control policy whereas 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. After which the department manager is required
to develop a plan to control the expense accounts that exceed his
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 resulting in no adverse affect on the net
income. The commissions paid in 1996 amounted to $504,125 as
compared to $401,449.
In the Retail operations, the Company added an additional
person to help with the growing room rentals it experienced in
1996. Other expenses like 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.
The provision for income taxes and the Company's effective
tax rate were $98,685 and 37% in fiscal year 1996 with $29,768 or
82% of pre-tax income recorded for fiscal year 1995.
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 and $.002 in fiscal year 1996 and
1995, respectively.
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 decreased to $13,541 at
December 31, 1997 from $794,885 at December 31, 1996. This change
was principally attributable to spending nearly $650,000 of funds
borrowed in 1996 from Farm Credit Services to construct a storage
facility on site.
Inventories increased 47% as of December 31, 1997, to
$4,171,027 from the December 31, 1996 level of $2,843,053. The
increase is the result of significant increases in production to
meet the projections used by previous management.
Property, plant and equipment, net, increased 26% as of
December 31, 1997, to $6,859,835 from $5,421,016 as of
December 31, 1996. The increase was attributable to the
construction of a 20,000 square foot storage facility plus the
addition of the production facility purchased from Tualatin
Vineyards.
Long term debt increased to $4,044,943 as of December 31,
1997, from $3,170,000 as of December 31, 1996. The increase in
debt was the result of cash borrowings for the purchase and
vineyard expansion of Tualatin Vineyards,
The Company has a line of credit from Farm Credit Services
with a limit of $2,000,000. As of December 31, 1997 the
outstanding balance of the line was $1,517,297 as compared to
$479,625 in 1996. These funds were used to meet operational
expenditures primarily to fund the increase in the inventory.
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.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Directors,' nominees for election as a director, and each such
person's age at June 30, 1998 and position with the Company.
Name Position(s) with the Company Age
James W. Bernau *** Chairperson of the Board, President
and Director 44
James L. Ellis *** Secretary and Director 53
Betty M. O'Brien* Director 55
Daniel S. Smith Director 58
Delna L. Jones** **** Director 58
Stan G. Turel * ** *** **** Director 50
William H. Malkmus * Director 63
___________________
*Member of the Compensation Committee
**Member of the Audit Committee
***Executive Committee
****Affiliated Transaction Committee
All directors hold office until the next annual meeting of
Shareholders or until their successors have been elected and
qualified. Executive officers are appointed by the Board of
Directors and serve at the pleasure of the Board of Directors.
Set forth below is additional information as to each director and
executive officer of the Company.
James W. Bernau. Mr. Bernau has been President and Chairperson of
the Board of Directors of the Company since its inception in May
1988. Mr. Bernau began to develop the vineyard in 1983, and co-
founded the Company in 1988 with Salem grape grower, Donald
Voorhies. From 1981 to September 1989, Mr. Bernau was Director of
the Oregon Chapter of the National Federation of Independent
Businesses ("NFIB"), an association of 15,000 independent
businesses in Oregon. After founding and serving as President and
Chairman of several regional brewing companies (See "Certain
Relationships and Related Transactions") between 1992 and 1997,
Mr. Bernau elected in September of 1997 to turn his full time
attention and effort to the Company.
James L. Ellis. Mr. Ellis has served as a Director since July
1991 and Secretary since June 1997. Mr. Ellis has served as the
Company's Director of Human Resources from January 1993. From 1993
to 1997 he also served the Director of Human Resources for
several regional brewing companies (see "Certain Relationships and
Related Transactions) founded by Mr. Bernau. Mr. Ellis returned
full time to the Company in September of 1997. From 1990 to 1992,
Mr. Ellis was a partner in Kenneth L. Fisher, Ph.D. & Associates,
a management consulting firm. From 1980 to 1990, Mr. Ellis was
Vice President and General Manager of R.A. Kevane & Associates, a
Pacific Northwest personnel consulting firm. From 1962 to 1979,
Mr. Ellis was a member of and administrator for the Christian
Brothers of California, owner of Mont La Salle Vineyards and
producer of Christian Brothers wines and brandy.
Betty M. O'Brien. Ms. O'Brien has served as a Director since July
1991. Ms. O'Brien has been employed by Willamette University as
its Director of News and Publications since 1988. Ms. O'Brien is
a partner in Elton Vineyards, a commercial vineyard located in
Eola Hills in Yamhill County, Oregon. She is a member of the
Oregon Winegrowers Association having previously served as its
President and Treasurer as well as a director.
Daniel S. Smith. Mr. Smith has served as a Director since July
1991. Since 1973, Mr. Smith has been an owner in and the manager
of Danco Company, a commercial refrigeration business. Mr. Smith
owns 65-acres of commercial vineyards near Eugene, Oregon.
Delna L. Jones. Ms. Jones has served as a Director since November
1994. Since 1990, Ms. Jones has served as project director for
the CAPITAL Center, an education and business consortium. From
1985 to 1990, Ms. Jones served as Director of Economic Development
with US West Communications. Beginning in 1982, she was elected
six times to the Oregon House as the State Representative for
District 6. During her tenure, she served as the Assistant
Majority Leader; she also chaired the Revenue and School Finance
committee, and served on the Legislative Rules and Reorganization
committee and the Business and Consumer Affairs committee. In
addition, Ms. Jones presently serves on many community and
business boards and advisory panels.
Stan G. Turel. Mr. Turel has served as a Director since November
of 1994. Mr. Turel is part owner and the CEO of Columbia Turel,
Inc., (formerly Columbia Bookkeeping, Inc.) a position he has held
since 1974. Columbia Turel, Inc. has sixteen offices in Oregon
and Washington, servicing 4,000 small business and 26,000 tax
clients annually. Mr. Turel is a licensed tax consultant, a
member of the National Association of Public Accountants, a
private pilot, and a former delegate to the White House Conference
on Small Business. In addition, Mr. Turel serves his community on
a number of advisory boards and panels.
William H. Malkmus. Mr. Malkmus has served as a Director since
April of 1997. Mr. Malkmus spent over 20 years as an investment
banker in San Francisco. For six years, following his banking
career and until his retirement in 1995, Mr. Malkmus was the Chief
Financial Officer of Vivea Inc., a healthcare service company
listed on the New York Stock Exchange. In 1973, Mr. Malkmus co-
founded Tualatin Vineyards, one of Oregon's original wineries, and
was President/Treasurer until Tualatin merged with Willamette
Valley Vineyards, Inc. in 1997.
Board of Directors Committees. The Board of Directors acts as a
nominating committee for selecting nominees for election as
directors. The Board of Directors has appointed a standing Audit
Committee which, during the year ended December 31, 1997,
conducted one meeting. The newly elected members of the Audit
Committee are Delna L. Jones and Stan G. Turel. The Audit
Committee reviews the scope of the independent annual audit, the
independent public accountants' letter to the Board of Directors
concerning the effectiveness of the Company's internal financial
and accounting controls and the Board of Directors' response to
that letter, if deemed necessary. The Board of Directors also has
appointed a Compensation Committee which reviews executive
compensation and makes recommendations to the full Board regarding
changes in compensation, and also administers the Company's 1992
Stock Incentive Plan. During the fiscal year ended December 31,
1997, the Compensation Committee held one meeting. The members
of the Compensation Committee currently are Betty M. O'Brien,
Chair, Stan Turel, and William Malkmus. In 1994, the Board of
Directors created an Affiliated Transactions Committee that
reviewed transactions deemed to involve a conflict of interest
between the Company and its former affiliates, current members
of the Affiliated Transaction Committee are Delna Jones and Stan
Turel. The Committee held no meetings in 1997. In 1997 the
Board appointed an Executive Committee, members are: James
Bernau, James Ellis, and Stan Turel. The Executive Committee met
ten times during 1997.
During 1997 the Company's Board of Directors held nine meetings.
All incumbent directors attended more than 75% of the aggregate of
the total number of meetings held by the Board of Directors and
the total number of meetings held by all committees of the Board
on which he or she served during 1997. See "Management -
Executive Compensation" for certain information regarding
compensation of Directors.
ITEM 10. EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information
concerning compensation paid or accrued by the Company, to or on
behalf of the Company's Chief Executive Officer, James W. Bernau
(the "named executive officer") for the years ending December 31,
1995, 1996, and 1997.
Name and Principle Position Year Annual Compensation
Salary ($) Bonus
James W. Bernau 1995 $ 3,040 -
President and Chairperson of 1996 6,500 -
the Board of Directors 1997 19,385 -
As discussed under "Election of Directors", Mr. Bernau previously
served as President of certain affiliates of the Company. Each
of these companies paid a pro rata portion of Mr. Bernau's monthly
salary based on the amount of time that Mr. Bernau devoted to the
respective company's business in that month. However, Mr. Bernau
has now turned his full time attention and effort to the Company's
business. In addition to his salary, Mr. Bernau may receive an
annual bonus from the Company based on the Company's performance
and Mr. Bernau's contribution to the Company as determined solely
by the company's Board of Directors.
Bernau Employment Agreement
The Company and Mr. Bernau are parties to an employment agreement
dated August 3, 1988 and amended in February, 1997 and again
amended in January of 1998. Under the amended agreement, Mr.
Bernau is paid an annual salary of $75,000 with annual increases
tied to increases in the consumer price index. Pursuant to the
terms of the employment agreement, the Company must use its best
efforts to provide Mr. Bernau with housing on the Company's
property. Mr. Bernau and his family will live in the house free
of rent and must continue to reside there for the duration of his
employment in order to provide additional security and lock-up
services for late evening events at the Winery and Vineyard. The
employment agreement provides that Mr. Bernau's employment may be
terminated only for cause which is defined as non-performance of
his duties or conviction of a crime.
Stock Options
In order to reward performance and retain high-quality employees,
the Company often grants stock options to its employees. The
Company does not ordinarily grant shares of stock to its
employees. Options are typically issued at a per share exercise
price equal to the closing price as reported by NASDAQ at the time
the option is granted. The options vest to the employee over time.
Three months following termination of the employee's employment
with the Company, any and all unexercised options return to the
Company. No stock options were granted to the named executive
officer during the year ended December 31, 1997 under the
Company's 1992 Stock Incentive Plan.
Option Exercises and Holdings
The following table provides information, with respect to the
named executive officer, concerning exercised options during the
last fiscal year and unexercised options held as of December 31,
1997.
Options Exercised
in the last fiscal year
Number Value
Name of shares Realized(1)
James W. Bernau -0- -0 -
Number of Securities
Underlying Unexercised
Options at FY-End
Name Exercisable Unexercisable
James W. Bernau 15,000(3) -0-
Value of Unexercised
In-the-Money Options
at FY-End(2)
Name Exercisable Unexercisable
James W. Bernau -0- -0-
______________________________
(1) The value realized is based on the difference between the
market price at the time of exercise of the options and the
applicable exercise price.
(2) Options are "in the money" at the fiscal year-end if the fair
market value of the underlying securities on such date exceeds the
exercise price of the option. The amounts set forth represent the
difference between the fair market value of the securities
underlying the options on December 31, 1997 ($2.75 per share based
on the NASDAQ closing price for the Company's Common Stock on that
date), and the exercise price of the option ($3.42 per share),
multiplied by the applicable number of options.
(3) Represents a 15,000 share warrant exercisable at $3.42 per
share issued to Mr. Bernau in 1992. See "Certain Transactions".
Director Compensation
The members of the Company's Board of Directors do not receive
cash compensation for their service on the Board, but are
reimbursed for out-of-pocket and travel expenses incurred in
attending Board meetings. Under the Company's Stock Incentive Plan
adopted by the shareholders in 1992 and further amended by the
shareholders in 1996, beginning in 1997 an option to purchase
1,500 shares of Common Stock is granted to each Director for
service on the Board during the year. In addition, each director
receives 50 shares of Common Stock for each Board or committee
meeting attended.
Section 16 Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "1934 Act") requires the Company's directors and officers,
and persons who own more than 10% of a registered class of the
Company's equity securities, to file initial reports of ownership
and reports of changes in ownership with the Securities and
Exchange Commission. Such persons also are required to furnish
the Company with copies of all Section 16(a) reports they file.
The Company believes that all filing requirements applicable to
its directors, officers and persons who own more than 10% of the
Company's Common Stock have been complied with for 1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information with
respect to beneficial ownership of the Company's Common Stock as
of December 31, 1997, by (i) each person who beneficially owns
more than 5% of the Company's Common Stock (ii) each Director of
the Company (iii) each of the Company's named executive officers,
and (iv) all directors and executive officers as a group.
Shares Beneficially Owned
Number of Percent of
Shares Outstanding Stock
James W. Bernau President/CEO, Chair of the Board
2545 Cloverdale Road 1,121,967.5(1) 26.5%
Turner, OR 97392
James L. Ellis Secretary, Director
7850 S.E. King Road 10,214 **
Milwaukie, OR 97222
Delna L. Jones Director
PO Box 5969 200 **
Aloha, OR 97006
Betty M. O'Brien Director
22500 Ingram Lane NW 3,900 **
Salem, OR 97304
Daniel S. Smith Director
26978 Briggs Hill Road 28,734 **
Eugene, OR 97405
Stan G. Turel Director
13909 S.E. Stark Street 17,629 **
Portland, OR 97233
William H. Malkmus Director
415 Manzanita Way 171,178 4.0
Woodside, CA 94062
Donald Voorhies
1715 Wickshire Court S.E. 261,617 6.2
Salem, OR 97302
All Directors and executive 1,353,822.5
officers as a group (7 persons)
_________________________
** Less than one percent.
(1) Includes 15,000 shares issuable upon the exercise of an
outstanding warrant.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1997 and 1996, the Company purchased grapes from Elton
Vineyards for $95,594and $88,364, respectively. Betty M. O'Brien,
a Director of the Company, is a principle owner of Elton
Vineyards. Also during 1997 and 1996, the Company purchased
grapes from Sweet Cheeks Vineyards owned by Director, Daniel S.
Smith, for $128,460 and $50,292.
On June 1, 1992, the Company granted Mr. Bernau a warrant to
purchase 15,000 shares of the Company's Common Stock as
consideration for his personal guarantee of the Real Estate Loan
and the Line of Credit from Farm Credit Services pursuant to which
the Company borrowed $1.2 million. The warrant is exercisable
anytime through June 1, 2012, at an exercise price of $3.42 per
share.
Each of the following companies--Nor'Wester Brewing, Willamette
Valley Inc,-Microbreweries across America (WVIMAA), Aviator Ales,
Mile High Brewing, Bayhawk Ales and North Country Brewing was
affiliated with the Company in that James W. Bernau, the Company's
founder, President and Chairperson of the Board of Directors, was
also President and Chairperson of the Board of Directors of each
such affiliated company. Mr. Bernau was also a significant
shareholder in Nor'Wester and WVIMAA.
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-fees basis. Beginning in July 1994, such services were
performed primarily by WVI employees. The Company 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 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 provided 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 aggregate payable balance of $7,221 is
netted against other receivables in the accompanying balance
sheet. During 1997, charges to the Company aggregated $164,716;
amounts charged by the Company aggregated $92,600. The charges to
the Company were composed of reimbursements for combined purchases
of health insurance and telephone services which were paid through
the former affiliates. In the fall of 1997, the Company ceased
all transactions with these affiliated companies due to the fact
that these affiliated companies ceased doing business or were no
longer providing services. At December 31, 1997, the Company has
no receivables or payables from the former affiliates. In 1997,
the Company wrote off $14,000 of receivables from the former
affiliates. The Company will continue its efforts to collect
these receivables.
On December 3, 1992, James W. Bernau borrowed $100,000 from the
Company. The loan is secured by Mr. Bernau's stock in the
Company, and is payable, together with interest at a rate of 7.35%
per annum, on March 14, 2009. At December 31, 1996, the
outstanding balance of the loan was $148,448.
The Company believes that the transactions set forth above were
made on terms no less favorable to the Company than could have
been obtained from unaffiliated third parties. All future
transactions between the Company and its officers, directors, and
principal shareholders will be approved by a disinterested
majority of the members of the Affiliated Transactions Committee
of the Company's Board of Directors, and will be on terms no less
favorable to the Company than could be obtained from unaffiliated
third parties.
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) Shareholders Agreement among Willamette Valley
Vineyards, Inc. and its founders, James
Bernau and Donald Voorhies, dated May 2, 1988
(incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(h) 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])
(i) Founders' Escrow Agreement among Willamette
Valley Vineyards, Inc., James W. Bernau,
Donald Voorhies and First Interstate Bank of
Oregon, N.A. dated September 20, 1988
(incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(j) Amendment to Founders' Escrow Agreement dated
September 20, 1988 (incorporated by reference
from the Company's Regulation A Offering
Statement on Form 1-A [File No. 24S-2996])
(k) Stock Escrow Agreement among Willamette Valley
Vineyards, Inc., Betty M. O'Brien and Charter
Investment Group, Inc. dated July 7, 1992
(incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(l) Stock Escrow Agreement among Willamette Valley
Vineyards, Inc., Daniel S. Smith and Piper
Jaffray & Hopwood, Inc. dated July 7, 1992
(incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(m) Acquisition of Tualatin Vineyards, Inc. dated
April 15, 1997. (File No.
(b) Reports on Form 8-K
Not applicable.
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 , 1998. By: ___________________
James W. Bernau, Chairperson of
the
Board, President
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
___________________ Chairperson of the Board, March ,
1998
James W. Bernau President
(Principal Executive Officer)
_________________ Controller March ,
1998
John E. Moore (Principal Accounting Officer)
______________ Director and Vice-President March ,
1998
James L. Ellis and Secretary
________________ Director March ,
1998
Betty M. O'Brien
_________________ Director March ,
1998
Daniel S. Smith
_____________ Director March ,
1998
Stan G. Turel
_________________ Director March ,
1998
William H. Malkmus
_________________ Director March ,
1998
Delna Jones
Willamette Valley
Vineyards, Inc.
Report and Financial Statements
December 31, 1997, 1996 and 1995
Willamette Valley Vineyards, Inc.
Index to Financial Statements
Report of Independent Accountants F-1-2
Balance Sheet F-3-4
Statement of Operations F-5
Statement of Shareholders= Equity F-6
Statement of Cash Flows F-7-8
Notes to Financial Statements F-9-26
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, 1997 and 1996, and the
results of its operations and its cash flows for each of
the three years in the period ended December 31, 1997, 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.
PRICE WATERHOUSE LLP
Portland, Oregon
March 10, 1998
Willamette Valley Vineyards, Inc.
Balance Sheet
December 31, 1997 and 1996
1997 1996
Assets
Current assets
Cash and cash equivalents $ 13,541 $ 794,885
Accounts receivable, net (Note 3) 820,526 288,905
Income taxes receivable (Note 12) 24,436 -
Other receivables 3,122 12,388
Inventories (Note 4) 4,171,027 2,843,053
Prepaid expenses and other
current assets 75,171 94,790
Deferred income taxes (Note 11) 94,813 111,438
Total current assets 5,202,636 4,145,459
Vineyard development costs, net
(Notes 1 and 2) 1,506,906 386,605
Property and equipment, net
(Notes 2 and 5) 6,859,835 5,421,016
Investments (Note 6) 105,040 115,218
Note receivable (Note 12) 148,448 138,511
Debt issuance costs 122,870 56,896
$ 13,945,735 $ 10,263,705
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit (Note 7) $ 1,517,297 $ 479,626
Current portion of long-term
debt (Note 8) 124,192 97,819
Accounts payable 363,419 117,428
Accrued commissions and payroll costs 225,297 122,745
Other accrued liabilities - 51,511
Income taxes payable - 29,148
Grape payables (Note 12) 501,238 551,014
Total current liabilities 2,731,443 1,449,291
Long-term debt (Note 8) 3,920,751 3,072,181
Deferred income taxes (Note 11) 188,275 114,028
Total liabilities 6,840,469 4,635,500
Commitments and contingencies (Note 13)
Shareholders' equity (Note 9):
Common stock, no par value - 10,000,000 shares authorized,
4,231,431 and 3,785,356 shares issued and outstanding at
December 31, 1997 and 1996 6,779,067 5,369,868
Retained earnings 326,199 258,337
Total shareholders' equity 7,105,266 5,628,205
$13,945,735 $10,263,705
Willamette Valley Vineyards, Inc.
Statement of Operations
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Net revenues:
Winery operations 5,714,132 $ 4,235,020 $ 3,637,721
Cost of goods sold:
Winery operations 2,813,764 1,853,791 1,687,086
Gross margin 2,900,368 2,381,229 1,950,635
Selling, general and
administrative expenses 2,434,867 1,951,120 1,807,430
Income from operations 465,501 430,109 143,205
Other income (expenses):
Interest income 31,296 25,145 18,648
Interest expense (Note 1)(396,118) (214,380) (128,169)
Other income 19,471 28,241 2,408
(345,351) (160,994) (107,113)
Income before income taxes 120,150 269,115 36,092
Income taxes (Note 10) 52,288 98,685 29,768
Net income $ 67,862 $ 170,430 $ 6,324
Basic net income per
common share (Note 1) $ .02 $ .05 $ -
Diluted net income per
common share (Note 1)$ .02 $ .04 $ -
Willamette Valley Vineyards, Inc.
Statement of Shareholders' Equity
Years Ended December 31, 1997, 1996 and 1995
Retained
Common stock earnings
Shares Dollars (deficit) Total
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
Net income - - 170,430 170,430
Balances at
December 31, 1996 3,785,356 5,369,868 258,337 5,628,205
Stock issuance for
purchase of Tualatin
Valley Vineyard 444,825 1,406,699 - 1,406,699
Stock issuance
for compensation 1,250 2,500 - 2,500
Net income - - 67,862 67,862
Balances at
December 31, 1997 4,231,431 6,779,067 326,199 7,105,266
Willamette Valley Vineyards, Inc.
Statement of Cash Flows
Years Ended December 31, 1997, 1996 and 1995
1997 1996 1995
Cash flows from
operating activities
Net income $ 67,862 $ 170,430 $ 6,324
Reconciliation of net
income to net cash (used for)
provided by operating activities
Depreciation and
amortization 533,444 377,855 302,971
Deferred income taxes 90,872 39,524 (32,427)
Bad debt expense 44,384 27,382 7,890
Loss on disposition
of assets 895 - -
Changes in assets and liabilities
Accounts receivable (519,198) (184,215) (3,614)
Other receivables 9,266 6,339 (6,219)
Inventories (953,956) (953,005) (356,423)
Prepaid expenses and
other current assets 19,775 (30,579) (18,148)
Notes receivable (9,937) (9,509) 2,127
Accounts payable 90,133 (18,541) (628)
Accrued liabilities 45,741 64,684 (1,783)
Income taxes receivable (24,436) - -
Income taxes payable (29,148) 29,148 (49,602)
Grape payables (49,776) 206,372 133,243
Net cash (used for)
operating activities (684,079) (274,115) (16,289)
Cash flows from investing activities
Additions to property
and equipment (1,101,354) (931,110) (1,067,024)
Vineyard development
expenditures (165,794) (31,943) (31,755)
Cash received (paid)
for investments 10,178 38,675 (38,017)
Payments to acquire
Tualatin Valley Vineyards(684,624) - -
Proceeds from sale of
property and equipment 6,000 - -
Net cash used for
investing activities (1,935,594) (924,378) (1,136,796)
Cash flows from financing activities
Debt issuance costs (74,285) (20,477) (21,068)
Net increase in line
of credit balance 1,037,671 318,326 161,300
Issuance of long-term debt 982,164 1,162,127 1,185,561
Repayments of long-term debt (107,221) (66,493) (21,613)
Net cash provided by
financing activities 1,838,329 1,393,483 1,304,180
Net (decrease) increase in
cash and cash equivalents (781,344) 194,990 151,095
Cash and cash equivalents
Beginning of year 794,885 599,895 448,800
End of year $ 13,541 $ 794,885 $ 599,895
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1997, 1996 and 1995
1. Summary of Operations, Basis of Presentation and
Significant Accounting Policies
Organization and operations
Willamette Valley Vineyards, Inc. (the Company) owns and
operates vineyards and a 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 and foreign sales represented
approximately 33% of revenues. 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 and 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
After 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 $116,193 and $74,700 at December 31, 1997 and 1996,
respectively.
1. Summary of Operations, Basis of Presentation 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 adopted the
statement in 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 stand-alone federal and
state income tax returns.
Basic and diluted net income per share
The Company adopted Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share," in 1997.
SFAS 128 requires disclosure of basic and diluted earnings per
share. All prior years have been restated to reflect the
adoption of SFAS 128. Basic earnings per share are computed
based on the weighted average number of common shares
outstanding each year. Escrowed shares have been included in
the weighted average number of common shares outstanding for
1995. Diluted earnings per common share take into account all
dilutive equity instruments.
1997
Weighted
average
shares Earnings
Income outstanding per share
Basic $67,862 4,103,669 $ .02
Options 638
Warrants
_______ __________ _________
Diluted $67,862 4,104,307 $ .02
1996
Weighted
average
shares Earnings
Income outstanding per share
Basic $170,430 3,785,356 $ .05
Options 20,532
Warrants
_______ __________ _________
Diluted $170,430 3,805,888 $ .04
1995
Weighted
average
shares Earnings
Income outstanding per share
Basic $ 6,324 3,785,356 $ -
Options 4,938
Warrants 3,600
______ __________ _________
Diluted $ 6,324 3,793,894 $ -
1. Summary of Operations, Basis of Presentation and
Significant Accounting Policies (Continued)
Basic and diluted net income per share (continued)
Options to purchase 161,500, 92,000 and 5,000 shares of common
stock were outstanding at December 31, 1997, 1996 and 1995,
respectively, but were not included in the computation of
diluted earnings per share because the options' exercise price
was greater than the average market price of the common
shares. In addition, the warrant outstanding since 1992 (see
Note 9) was not included in the computation of diluted
earnings per share in 1997 or 1996 because the exercise price
of $3.42 was greater than the average market price of the
common shares during those two years.
Statement of cash flows
Supplemental disclosure of cash flow information:
1997 1996 1995
Interest paid $ 321,000 $ 197,000 $ 166,000
Income taxes paid 15,000 28,000 112,000
Supplemental schedule of noncash investing
and financing activities
Assets transferred from
related companies 19,279 48,189
Issuance of common stock
awards to employees 2,500
Acquisition of Tualatin Valley, Inc.:
Common stock issued in connection with acquisition
Issued to stockholders
of TVI 1,292,591
Fee to Acquisitions
Northwest, Inc. 114,108
Tangible assets acquired, net of cash paid
Fixed assets 143,376
Vineyard development 996,000
Other assets acquired, net of cash acquired
Accounts receivable 56,807
Inventory 371,518
Prepaids 156
Liabilities assumed
Accounts payable 269,966
Accrued liabilities 5,300
During the year ended December 31, 1995, the Company
capitalized approximately $38,000 of interest related to the
construction of its hospitality center.
Fair market value of financial instruments
The fair market values of the Company's recorded financial
instruments 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.
2. Acquisition
On April 15, 1997, Willamette Valley Vineyards, Inc. (WVV)
acquired the assets of Tualatin Vineyards, Inc. (TVI), a
winery located in Oregon, for a purchase price of $1,824,000,
plus TVI's net current assets of $164,601 as of the closing
date. The acquisition was accounted for using the purchase
method of accounting, and the results of operations include
the revenues and expenses generated with the TVI assets from
the acquisition date through December 31, 1997. WVV paid 35
percent of the purchase price in cash and the balance was paid
through the issuance of WVV common stock.
The following unaudited pro forma information represents
the results of operations of the Company as if the acquisition
had occurred as of January 1, 1996, after giving effect to
increased interest expense for debt issued related to the
acquisition, depreciation based on current costs, and the
effect of the (benefit from) provision for income taxes.
1997 1996
(unaudited) (unaudited)
Net revenues 5,874,733 4,944,635
Gross margin 2,972,077 2,645,337
Net income (53,395) 38,488
3. Accounts Receivable
Oregon law prohibits the sale of wine in Oregon 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 $185,200 and $80,000 at December 31, 1997 and
1996, respectively, from a European customer to which extended
credit terms have been granted. At December 31, 1997 and
1996, the Company's accounts receivable balance is net of an
allowance for doubtful accounts of $30,000 and $10,000,
respectively.
4. Inventories
Inventories consist of:
1997 1996
Winemaking and packaging materials $ 189,062 $ 87,321
Work-in-process (costs relating
to unprocessed 1,725,910 1,559,612
and/or unbottled wine products)
Finished goods (bottled wine and
related products) 2,256,055 1,196,120
$ 4,171,027 $ 2,843,053
5. Property and Equipment
1997 1996
Land and improvements $ 1,031,115 $ 563,077
Winery building and hospitality
center 4,506,344 3,718,733
Equipment 3,263,633 2,576,748
Construction in progress ______ -_ 27,913
8,801,092 6,886,471
Less accumulated depreciation (1,941,257) (1,465,455)
$ 6,859,835 $ 5,421,016
Construction in progress related to the addition of a new
storage tasting and cellaring facility at the Company's winery
which was completed in the Fall of 1997.
6. Investments
Investments consist of:
1997 1996
Oregon Liquor Control Commissions and Bureau
of Alcohol, Tobacco and Firearms $ 88,066 $ 85,163
Farm Credit Securities 15,000 30,055
Other 1,974 ______-
$ 105,040 $ 115,218
The Oregon Liquor Control Commission and the Bureau of
Alcohol, Tobacco and Firearms investments require restricted
short-term investments to cover future excise tax payments.
Farm Credit Securities investments are required as a condition
of the Northwest Farm Credit Service loan and line of credit
facility (see Note 7). These investments are classified as
held-to-maturity investments and are recorded at historical
cost.
7. Line of Credit Facility
The Company has a $2,000,000 credit facility with Northwest
Farm Credit Services. Borrowings under this facility bear
interest at 8.5%. At December 31, 1997 and 1996, $1,517,297
and $479,626 were outstanding under this facility,
respectively.
8. Long-Term Debt
Long-term debt consists of:
1997 1996
Northwest Farm Credit Services Loan $ 4,044,943 $3,170,000
Less current portion (124,192) (97,819)
$ 3,920,751 $ 3,072,181
The Company entered into an agreement with Northwest Farm
Credit Services (NWFCS) in 1997 containing two separate notes
bearing interest at a rate of 7.96%. These notes require
monthly payments ranging from $10,364 to $16,488 until the
notes are fully repaid in 2014. The loan agreements contain
covenants which require the Company to maintain certain
financial ratios and balances. At December 31, 1997, the
Company was not in compliance with these covenants. However,
the Company has obtained a letter dated March 24, 1998 waiving
the debt covenants until December 31, 1998.
Future minimum principal payments of long-term debt mature as
follows:
Year ending
December 31,
1998 $ 124,192
1999 180,978
2000 195,763
2001 211,754
2002 229,052
Thereafter 3,103,204
$ 4,044,943
9. 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.
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.
9. Shareholders' Equity (Continued)
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 7 and
8). 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, 1997, no warrants had been exercised.
10. 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. In 1996, the Board of Directors reserved an additional
150,000 shares. 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, 1997, 1996 and 1995, the following
transactions related to stock options occurred:
1997 1996 1995
Wtd.. Wtd.. Wtd
Avg Avg Avg
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at
beginning of year 246,500 $2.87 45,000 $3.72 84,100 $4.58
Granted 100,000 2.63 248,500 2.81 25,000 3.80
Exercised - - - - - -
Forfeited (173,500) 2.66 (47,000) 3.38 (64,100) 4.88
Outstanding at
end of year 173,000 $2.94 246,500 $2.87 45,000 $3.72
Weighted average fair value of options granted
during the year $ 1.47 $ 1.87 $ 2.35
Weighted average options outstanding and exercisable at December
31, 1997 are as follows:
Options outstanding
Options exercisable
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Exercise December 31, contractual exercise December 31, exercise
price 1997 life price 1997 price
$ 2.50 13,500 8.66 $ 2.50 1,350 2.50
2.75 72,500 6.95 2.75 9,500 2.75
3.00 72,000 5.16 3.00 10,760 3.00
3.62 10,000 2.56 3.62 4,000 3.62
4.50 5,000 2.08 4.50 2,000 4.50
$2.50-4.50 173,000 5.94 2.94 27,610 3.09
10. Stock Incentive Plan (Continued)
The Company adopted Statement of Financial Accounting
Standards No. 123 (SFAS 123) in 1996 and has elected to
account for its stock-based compensation under Accounting
Principles Board Opinion 25. As required by SFAS 123, the
Company has computed for pro forma disclosure purposes the
value of options granted during each of the three years ended
December 31, 1997 using the Black-Scholes option-pricing model
with the following weighted-average assumptions used for the
grants in 1997, 1996 and 1995:
1997 1996 1995
Risk-free interest rate 6.31 % 6.33 % 6.56 %
Expected dividend yield - - -
Expected lives 5 years 8.15 years 7.25 years
Expected volatility 57 % 57% 55%
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, 1997, 1996 and 1995,
the total value of the options granted was computed to be $146,700,
$371,034 and $58,825, respectively, which would be amortized on a
straight-line basis over the vesting period of the options.
Had compensation cost for the Company's stock option plans been
determined based on the fair value at the grant date for awards
consistent with the provisions of SFAS 123, the Company's net
earnings would have been reduced to the pro forma amounts indicated
as follows:
1997 1996 1995
Net income - as reported $ 67,862 $ 170,430 $ 6,324
Per share:
Basic 0.02 0.05 0.00
Diluted 0.02 0.04 0.00
Net income (loss) - pro forma
41,838 116,786 (1,794)
Per share:
Basic 0.01 0.03 0.00
Diluted 0.01 0.03 0.00
The effects of applying SFAS 123 for providing pro forma
disclosures for the three years ended December 31, 1997 are not
likely to be representative of the effects on reported net income
and earnings per share for future years, because options vest over
several years and additional awards generally are made each year.
11. Income Taxes
The provision for income taxes consists of:
1997 1996 1995
Current tax expense (benefit)
Federal $ - $ 47,197 $ (2,300)
State - 11,964 (359)
- 59,161 (2,659)
Deferred tax (expense):
Federal 46,530 35,032 26,545
State 5,758 4,492 5,882
52,288 39,524 32,427
Total $ 52,288 $ 98,685 $ 29,768
During the year ended December 31, 1996, the Company utilized
its net operating loss carryforwards of approximately $28,000
to reduce its taxable income.
The effective income tax rate differs from the federal
statutory rate as follows:
Year ended December 31
1997 1996 1995
Federal statutory rate 34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit 4.4 4.9 5.9
Utilization of fully reserve
net operating loss carryforwards - - -
Permanent differences 3.8 0.6 41.9
Benefit of federal rate bracket - (2.9) -
Other 1.3 0.1 0.7
43.5 % 36.7 % 82.5%
Deferred tax assets and (liabilities) consist of:
December 31,
1997 1996
Accounts receivable $ 11,508 $ 3,836
Inventory 34,538 103,522
Net operating loss carryforwards 37,888 -
Other 10,879 4,080
Gross deferred tax assets 94,813 111,438
Capital assets (188,275) (114,028)
Gross deferred tax liability (188,275) (114,028)
Net deferred tax (liability) asset $ (93,462) $ (2,590)
12. Related Parties
In 1996, the Company began contracting for management
services with Nor'Wester Brewing Company (Nor'Wester) and
Willamette Valley, Inc. (WVI), companies formerly controlled
by the Company's president, under a general services
agreement. Nor'Wester, WVI, and the Company each provided
various administrative services, including design and print
work, and stock offering services to the affiliated companies,
subsidiaries of WVI: Aviator Ales, Inc. (AAI); Mile High
Brewing Company (MHBC); Bayhawk Ales, Inc. (BAI); and North
Country Brewing Company, Inc. (NCBCI). 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. During 1997,
charges to the Company aggregated $164,716; amounts charged by
the Company aggregated $92,601. Prior to December 31, 1997,
all intercompany transactions ceased and as of December 31,
1997 all balances are zero.
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
noir, 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, the
Company purchased grapes for $33,347, pursuant to the terms of
the contract. The founding shareholder sold his vineyards in
November of 1995.
During 1997, 1996 and 1995, the Company purchased grapes
from other shareholders, at an aggregate price of $262,795,
$138,656 and $142,003, respectively. At December 31, 1997,
1996 and 1995, grape payables included $130,893, $92,706 and
$67,161, respectively, owed to these shareholders.
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 7.35%. 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.
13. Commitments and Contingencies
Litigation
From time to time, in the normal course of business, the
Company is a party to legal proceedings. The Company is also
a party, as defendant to one lawsuit arising out of its
primary business operations. Management, after review, and
consultation with counsel, believe that the Company has
meritorious defenses to the allegations and plans to defend
itself vigorously. Management believes that these matters
will not have a material adverse effect of the Company's
financial position or results of operations, but due to the
nature of the litigation, the ultimate outcome cannot
presently be determined.
Operating leases
The Company entered into a lease agreement for
approximately 45 acres of vineyards and related equipment in
1997. The Company is also committed to lease payments for
various office equipment. As of December 31, 1997, the
Company was obligated under various long-term operating leases
requiring future minimum lease payments as follows:
Year ending
December 31
1998 $ 90,519
1999 92,984
2000 92,702
2001 83,827
2002 83,827
Thereafter 335,308
Total minimum payments required $ 779,167
Total rental expense for all operating leases amounted to $94,827
in 1997.
Susceptibility of vineyards to disease
The Tualatin vineyard purchased during 1997 is known to be
infested with phylloxera, an aphid-like insect which can
destroy vines. Although management has begun planting with
phylloxera-resistant rootstock, a portion of the vines at the
Tualatin vineyard are susceptible to phylloxera. The Company
has not detected any phylloxera at its Turner vineyard.
1
2
- -
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