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, 1999
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, 1999
Issuer's revenues for its most recent fiscal year: $5,914,208
Aggregate market value of the voting stock held by
non-affiliates of the Issuer based upon the closing
bid price of such stock: $8,506,862
Number of shares of Common Stock outstanding: 4,253.431
Transitional Small Business Disclosure Format: YES [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
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).
Willamette Valley Vineyards was originally established as a sole
proprietorship by Oregon winegrower Jim Bernau in 1983. 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.
The Company owns 50 acres of planted vineyards--42 acres producing
Acres and 8 acres in development, which includes a grafting of 8
acres to Pinot Noir in 1999. In April 1997, the Company acquired
100 percent of the outstanding stock 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.
In December 1999, the Company sold one parcel of three parcels
offered for sale at its Tualatin Estate Vineyard. The Company
entered into an agreement with the new owners to lease back the
land for farming the grapes for use in the Company's Estate
bottling program. The final purchase price paid was $1,500,000 for
the 80 acre parcel. The lease is for twenty years with three 5
year renewals at the Company's option. The Company continues to
offer the two remaining properties and equipment on the same type
of sale/leaseback arrangement. One parcel contains 75 acres priced
at $808,700 and the last parcel, which contains the Tualatin
Estate winery plus 115 acres, is priced at $1,825,000.
The Company also leases O'Connor Vineyards on a ten-year contract
adding an additional 54 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 1999; Chardonnay, Pinot Gris, Riesling, Dry Riesling,
Gewurztraminer and Oregon Blossom (blush blend). As a convenience
to our restaurant customers, the Company produces some of its
products in larger sized packages.
The Company currently produces and sells small quantities of
Oregon's Nog(a seasonal holiday product) and Edelweiss under a
"Made in Oregon Cellars" label.
In November 1998, the Company released a new label under the
Griffin Creek brand name. This represents a joint effort between
the Company and Quail Run Vineyards to develop a new brand of
wines from the Southern Oregon growing region. Currently, the
Company has several varieties under this label; Merlot, Syrah,
Pinot Gris, Chardonnay, Viognier, and Pinot Noir.
Market Overview
Wine Consumption Trends: Wine consumption in the United States
declined from 1987 to 1994 due to increased consumer health
concerns and a growing awareness of alcohol abuse. That decline
was led by sharp reductions in the low-cost non-varietal ("jug")
wine and wine cooler segments of the market, which, prior to 1987,
were two of the fastest growing market segments. Beginning in
1994, per capita wine consumption began to rise. The Company
estimates that premium, super premium and ultra premium wine
consumption will experience a moderate increase over the next few
years. 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 1999, there were 136 commercial wineries licensed in
Oregon and over 9,800 acres of wine grape vineyards, 7,400 acres
of which are currently producing. Total production of Oregon
wines in 1999 is estimated by the Company to be approximately
735,000 cases. Oregon's entire 1999 production would have an
estimated retail value of approximately $74 million, assuming a
retail price of $100 per case, and a FOB value of approximately
one-half of the retail value, or $37 million.
Because of climate, soil and other growing conditions, the
Willamette Valley in western Oregon is ideally suited to growing
superior quality Pinot Noir, Chardonnay, Pinot Gris and 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 $6,000
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 several 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. As of December 31, 1999, the
Company has not detected any phylloxera at its Turner site.
Beginning with the Company's plantings in May 1992, only
phylloxera-resistant rootstock was planted until 1997, when the
previous management planted non-resistant rootstock on
approximately 10 acres at the Tualatin Vineyard. In 1997, the
Company purchased Tualatin Vineyards, which has phylloxera at its
site. Since the Third Quarter of 1997, all plantings have been
and all future planting will be on phylloxera resistant rootstock.
The Company takes all necessary precautions to prevent the spread
of phylloxera to its Turner site. Also phylloxera is active at
the O'Connor Vineyard for which the Company has a 10 year lease.
Any care and training of new plants at the O'Connor will not be at
the expense of the Company.
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.
In 1994, the largest development in the Oregon wine industry is
King Estate Winery was completed. The facility, which is located
22 miles southwest of Eugene, 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, and
establish 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 supports high bottle
prices for its high quality wines; (iii) build brand recognition
by emphasizing restaurant sales; and (iv) development of the
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 has assembled a
team of 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 and selling 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 37 acres producing which
includes 17 acres of Pinot Noir and 8 acres of Riesling grape
vines planted in 1985, which were grafted to Pinot Noir in 1999.
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.
The purchase of Tualatin Valley Vineyards,Inc. in April 1997
(including the subsequent sale-leaseback of a portion of the
property in December 1999) 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
planted another 41 acres in 1998, the majority being Pinot Noir,
which is the Company's flagship varietal. All of the new planting
will be available to harvest in the next two to four years.
Also in 1997, the Company entered into a 10 year lease with
O'Connor Vineyards (54 acres) located near Salem to manage and
obtain the supply of grapes from O'Connor Vineyards.
The Company now controls 247 acres (including 41 acres planted in
1998) of vineyard land. At full production, these vineyards
should enable the Company to grow approximately 30% of the grapes
needed to meet the Winery's ultimate production capacity of
298,000 gallons (124,000 cases).
Grape Supply. In 1999, the Company's 37 acres of producing estate
vineyard yielded approximately 100 tons of grapes for the Winery's
eleventh crush. Tualatin Vineyards produced 201 tons of grapes in
1999. O'Connor Vineyards produced 114 tons of which about 16%
were sold to other wineries because of previous commitments. In
1999, the Company purchased an additional 969 tons of grapes from
other growers. The Company expects to produce 205,420 gallons in
2000 (86,402 cases) from its 1999 crush. The Winery's 1999 total
wine production was 192,739 gallons (81,068 cases) from its 1998
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 or their respective affiliates 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, 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,
were originally 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 1999, the
Winery produced 192,739 gallons (81,068 cases) of wine from its
1998 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 1998 in order to
accommodate an additional 750 barrels for aging wines. This
change increases the Company's barrel aging capacity at the Turner
site. The production area is equipped with a settling tank and
sprinkler system for disposing of wastewater 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 $750,000. Previously, 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 cases of wine production capacity to the Company
which the Company felt at the time of purchase was needed.
However due to lower sales forecasts of higher priced wines, the
facility is not needed at this time. The Company decided to move
current production to its Turner site to meet short-term
production requirements. The capacity at Tualatin is still
available to the Company to meet any future production expansion
needs.
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
enables visitors to enjoy the view of the Willamette Valley and
the Company's Vineyard. The Hospitality Center is 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 1,600 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 with a principal balance of $3,584,123 at
December 31, 1999 and $4,237,387 at December 31,1998. The
mortgages are payable in annual aggregate installments including
interest of approximately $350,000 through 2012. After 2012, the
Company's annual aggregate mortgage payment including interest
will be approximately $75,000 until the year 2014. The mortgage
on the Turner site had a principal balance of $2,801,984 on
December 31, 1999. The mortgage on the Tualatin Valley property,
issued in April 1997 to fund the acquisition of the property and
development of its vineyard, had a principal balance of $782,139
on December 31, 1999, after the Company made an additional payment
of approximately $471,000 in December, 1999. The additional
payment was made as a result of the Company selling a parcel of
the Tualatin Valley property under a sale-leaseback agreement.
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 Cases
Crush Year Crushed Year Produced
1989 203
1990 206 1990 13,200
1991 340 1991 13,400
1992 565 1992 22,100
1993 633 1993 38,237
1994 590 1994 41,145
1995 885 1995 40,411
1996 1290 1996 53,693
1997 1426 1997 91,793
1998 1109 1998 77,064
1999 1383 1999 81,068
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 sold in 1998.
Sales and Distribution
Marketing Strategy. The Company markets and sells 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 has increased production volumes and
achieved greater brand recognition, sales to other domestic
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 four 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. For 1999,
direct sales make up approximately 25% of the Company's revenue.
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 is currently carried out by 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, 1999. 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 Oregon. For 1999,
approximately 41% of the Company's net revenues 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.
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 3,500 shareholders of
record, which represents 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.
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 recreational 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, enables 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, 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 Environmental
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
legal blood alcohol level to .08 to combat driving under the
influence. The Company believes that if such legislation is
passed, it may discourage wine consumption in restaurants.
Although the .08 rule is in effect 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, 1999 the Company had 40 full-time employees and
15 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
There were no matters submitted to a vote of security holders
during the Company's Fourth Quarter ended December 31, 1999.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the NASDAQ Small Cap
Market under the symbol "WVVI." As of December 31, 1999, there
were 3,523 stockholders of record of the Common Stock.
The table below sets forth for the quarters indicated the high and
low bids for the Company's Common Stock as reported on the NASDAQ
Small Cap Market. The Company's Common Stock began trading
publicly on September 13, 1994.
Quarter Ended
3/31/99 6/30/99 9/30/99 12/31/99
High $2.13 $2.13 $2.25 $2.50
Low $1.50 $1.57 $1.63 $2.00
Quarter Ended
3/31/98 6/30/98 9/30/98 12/31/98
High $1.94 $3.63 $2.88 $2.25
Low $1.38 $1.56 $1.75 $1.50
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward Looking Statement
This Management's discussion and Analysis of Financial Condition
and Results of Operation and other sections of this Form 10KSB
contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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. Such forward-looking statements include, for example,
statements regarding general market trends, predictions regarding
growth and other future trends in the Oregon wine industry,
expected availability of adequate grape supplies, expected
positive impact of the Company's Hospitality Center on direct
sales effort, expected positive impacts on future operating
results from restructuring efforts, expected increases in future
sales, expected improvements in gross margin. 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. 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, and
other risks detailed below as well as those discussed elsewhere in
this Form 10KSB and from time to time in the Company's Securities
and Exchange Commission filing and reports. In addition, such
statements could be affected by general industry and market
conditions and growth rates, and general domestic economic
conditions.
OVERVIEW
RESULTS OF OPERATION
The Company continues to implement its five year plan developed
following the return in September, 1997, of the Company's Founder,
Jim Bernau, as operator of the business. Management is
implementing its plan to reduce its bank debt and payables, and
improve its cash position.
Wine Quality
The Company's wine ratings are the highest in its history. In the
June 30, 1999 issue, The Wine Spectator magazine gave the
Willamette Valley Vineyards 1997 Late Harvest Viognier a "93"
with senior editor Harvey Steiman calling it a "stunner". The
Tualatin Estate 1997 Late Harvest Gewurztraminer received a "90"
from the Wine Spectator's June 30, 1999, issue. Also, the Griffin
Creek 1996 Merlot received a "91" from the Wine Spectator's May
31, 1999, issue. The Magazine rated the Merlot the top scoring
red from Oregon in 1999.
The Willamette Valley Vineyard 1996 Founders' Reserve Chardonnay
won the "Best of the Best" award at the Northwest Wine Summit
held at Timberline Lodge in May 1999, and the 1996 Estate
Chardonnay was rated a "90" by Wine Enthusiast magazine in the
February 1999 issue. The 1998 Tualatin Estate Semi-Sparkling
Muscat received a Double Gold at the San Francisco International
Wine Competition in July, 1999, and gold medals at the Los Angeles
County Fair in June, 1999, and Grand Harvest Awards in January
1999, sponsored by Vineyard & Winery magazine. The editor of the
Wine Spectator wrote a feature story in the February 1999, issue
about our Semi-Sparkling Muscat and how Joe Dobbes, our winemaker,
pioneered the style. The 1998 Muscat received a score of "89"
from the Wine Spectator.
The Griffin Creek 1997 Pinot Noir won the Gold medal for its
variety at the 1999 Dallas Morning News Competition in Texas and
was named one of the best of the vintage at Atwaters' (a premier
Oregon restaurant), Annual Pinot Noir Dinner in Portland, Oregon.
The Beverage Testing Institute, which provides ratings to
Epicurious, the website for Gourmet and Bon Appetite magazines
gave our new release, the 1997 Griffin Creek Merlot a "91" rating
in July 1999. Whereas the Company was previously known for its
great values and "Best Buys", it is now receiving recognition
for most expensive wines. the most significant review was the
annual review in 1998 of Oregon Pinot Noirs by Clive Coats, Master
of Wine and Publisher of the "The Vine" where he rated the
Company first release of its 1996 Signature Cuvee as the leading
Pinot Noir of the 1996 Oregon vintage.
Sales
Revenues on the sale of finished wine were up 3% in 1999 from the
previous year. Unit sales were down 6% due to price increases,
discontinuing higher velocity lower priced, lower margin wines and
the introduction of new brands and products at higher prices and
margins. Expenses were higher due to the costs related to making
these changes. Management expects to incur additional brand and
new product introduction costs in the year 2000 with the prospect
of achieving higher average margins on sales over time.
The price increases, which went into effect September of 1998
resulted in a substantial purchases of product by the Company's
distributors before the price increases went into effect in the
third Quarter of 1998. These higher prices were eventually
reflected into the trade, at the retailer level beginning in April
of this year. For our vintage line, particularly Pinot Noir,
Pinot Gris, and Chardonnay, out-of-state sales to the retail
customer slowed significantly following the price increases.
Sales incentive programs to encourage distributor sales
representatives to present the Company's products have resulted in
higher sales in the Fourth Quarter of 1999 with some short term
sacrifice in gross margin.
The Griffin Creek brand, the Company's new and most expensive
wines, are selling at a rate of 147% ahead of plan and have been
placed on allocation to distributors and accounts. The production
of these wines is growing. Since 1997, the Griffin Creek label
has produced 1,460 cases from its 1996 vintage, 3,457 cases from
its 1997 vintage, and 8,790 cases from its 1998 vintage.
The new estate grown brand, Tualatin Estate, is also experiencing
higher than budgeted sales for its Gewurztraminer, Pinot Blanc,
and Semi-Sparkling Muscat. The Tualatin Estate Chardonnay label
won the Oregon State Fair Label Design Award in August 1999, and
has been recently released. The 1997 Tualatin Estate Pinot Noir
was poured at this year's International Pinot Noir Celebration
where Decanter magazine wrote, "Tualatin, one of Oregon's oldest
vineyards, has returned to top form with its 1997 bottling".
This wine is now limited to Tasting Room sales. The re-
introduction of the vineyard's Pinot Noir to the general market
will be with the 1998 vintage scheduled for May 2000 release.
The Company is experiencing higher costs for winegrapes, vineyard
and production labor. Higher grape costs are a result of the
lower 1998 harvest yield and higher prices required by growers due
to increased demand for winegrapes. Higher vineyard costs are
resulting from an unfavorable vineyard lease which the Company
entered into in early 1997 and additional effort expended in the
vineyard to improve winegrape quality. Higher production costs
are resulting from additional qualified staffing to make high
quality wines and improvements in packaging to project the quality
changes in the wine. Management expects these costs to hold down
increases in gross margin until sales volume of the higher quality
and margin wines increase significantly.
Competitive pressure is also affecting gross margins. One large
Oregon winery has dropped the price of their Pinot Gris
significantly due to the volume they produced causing the Company
to lose some sales of its Pinot Gris and respond by reducing
margins. One large Washington producer has increased their
Riesling sales activities in Oregon with a significantly lower
priced product, causing the Company to respond by reducing margins
on its Riesling.
Wine Inventory
The winery's inventory of high margin wines has never been
greater. Successful distribution of these wines will result in
higher total revenues and margins. For Example:
Cases Revenue @ FOB
@1998 @1999 @1998 @1999
Willamette Valley Vineyards
Founders Pinot Noir 4,292 5,890 $ 755,392 $ 1,036,640
Vineyard Designate
Pinot Noir 3,311 5,929 794,640 1,660,120
Signature Pinot Noir 1,678 1,995 570,520 718,200
Chardonnay Vintage
Series 6,928 8,154 616,592 725,706
Pinot Noir Vintage
Series 16,094 20,930 1,625,494 2,365,090
Pinot Gris 4,710 6,929 386,220 637,468
Griffin Creek Label
Merlot 498 335 62,748 42,210
Syrah 0 201 0 22,713
Pinot Noir 148 2,472 16,724 279,336
Pinot Gris 845 708 84,500 82,128
Tualatin Estate Label 7,393 8,700 650,584 765,600
Total 45,897 62,243 5,563,414 8,335,211
Debt Reduction
In order to reduce depreciation and interest charges and increase
cash available, in the third quarter of 1999 the Company embarked
on a plan to sell its Tualatin Estate assets and lease back on a
long term basis what the Company needed. This necessitated
purchasing adjoining property to permit the division of the land
into three marketable parcels. These parcels are called Mt. Hood
Estate (78 acres) with 63 acres of new vines, Meadow View Estate
(75 acres) with 23 acres of mature vineyard, and the Winery Estate
(115 acres) with 54 acres of mature vineyard and the winery
related buildings. The total aggregate asking price for these
parcels is $4.2 million.
The purchase of 33 adjoining acres was completed by July 1999, and
financed, in part, by thinning timber out of the remote wooded
areas of the property. As a result of this property addition, the
plantable acreage at Tualatin Estate has increased to 37 acres.
Eighty (80) acres of mature vines were acquired at the time of
purchase in April 1997. An additional 63 acres were planted in
1997 through 1999. There is now a total of 180 acres of vines and
plantable acreage at Tualatin Estate.
The Company has completed the sale of one of the parcels for $1.5
million. Management is actively advertising the winery's
availability in the Wine Spectator and Wine Enthusiast magazines
and fielding questions from callers and visitors. The plan for the
Winery Estate is selling the property and lease back the vineyards
and the winery buildings the Company needs to operate the winery
as a joint venture when the Company needs additional capacity or
failing to sell the property, hold it for future use if needed. In
any event, the wine grapes from the property are needed for the
Company production needs. By leasing back the vineyards on a long
term basis, the Company has the benefit of controlling winegrape
quality and growing costs.
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 2000. 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 1999 Quarter Ended Fiscal 1998 Quarter Ended
(in thousands) (in thousands)
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
Tasting room and
retail sales $150 $227 $294 $302 $155 $224 $274 $284
On-site and off-site
festivals 114 86 135 168 118 108 132 207
In-state sales 416 497 627 872 426 575 530 747
Bulk/Grape sales 17 13 7 32 235 88 0 131
Out-of-state
sales 458 451 631 629 437 500 811 376
Total winery
revenues 1,155 1,274 1,694 2,003 1,371 1,495 1,747 1,745
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)
1999 1998 1997
Tasting room and retail sales $ 973 $ 937 $ 868
On-site and off-site festivals 503 565 500
In-state sales 2,412 2,278 2,158
Bulk /Grape Sales 69 454 465
Out-of-state sales 2,169 2,124 1,935
Revenues from winery operations $6,126 $6,358 $5,926
Less Excise Taxes 212 226 212
Net Revenue $5,914 $6,132 $5,714
1999 Compared to 1998.
Tasting room sales for the year ended December 31, 1999 increased
4% to $973,028 from $936,585 for the same period in 1998. In 1996
and early 1997 the previous management allowed the Wholesale
Division to sell wine that in previous years has been exclusively
sold in the tasting room. In 1998, the Company returned to the
practice of selling certain exclusive wines in the tasting room at
higher profit margins. The tasting room had additional higher
value products added in 1998. Specifically, a Founders' Pinot
Noir, a Merlot from Griffin Creek and a Founder Reserve Cabernet
were available to the customers at higher average prices. In 1999,
the tasting room added a Syrah and Viognier from Griffin Creek
along with a Signature Cuvee Pinot Noir from the Winemaker and
several Vineyard Designate Pinot Noirs, all retail at over $35
per bottle. The Company has made an effort to build its brand by
the offering these higher quality wines in the tasting room. The
Company experienced an increase in revenue during 1999 in
Hospitality rental income of $227,452(included in the tasting room
and retail sales category) over $209,856 in the same period in
1998.
On-site and off-site festival sales and telephone sales for the
year ended December 31, 1999 decreased 11% to $502,960 from
$564,828 for the same period in 1998. The Company had a decrease
in its sales by phone solicitation from $252,000 in 1998 to
$183,000 in 1999. The Company eliminated several on and off-site
festivals by analyzing each event to determine if the event was
going to return a certain profit percentage. The Company
eliminated all on-site and off-site events which were not
profitable.
Wholesale sales in the state of Oregon for the year ended December
31, 1999, through the Company's independent sales force, increased
6% to $2,412,266 from $2,277,676 for the same period in 1998.
This increase is not as significant as in previous years due to
the 1998 price increases, but the Company still maintains a strong
presence in its own home state. Costco, a large retailer, remains
the largest in-state customer of the Company. The sales to Costco
were $639,000 in 1999, up from $463,000 in 1998. The Company's
first sales to Costco were a two-pack White Riesling. Since then,
the Company has expanded it products to include higher-priced
higher-profit Founders Reserve Chardonnay, Barrel Select Pinot
Noir and Griffin Creek Merlot. Beginning July 1, 1998, the Company
increased the price of its wine by an average of 8% in state. The
Company's average sales price increased due to its successful
introduction of its higher-priced, higher-margin Griffin Creek
product line. However, this was offset by a decrease in the number
of cases sold in Oregon. For the year 1999, the total number of
cases sold was 30,440 as compared to 32,412 in 1998. The decrease
was related to the elimination of the Company's lower-priced,
lower-margin "Oregon Trail and Lot 27/28" Pinot Noir and
Chardonnay from its product line. Both of these products were
replaced by the Company's Vintage series in the grocery stores and
restaurants throughout Oregon.
The Company contracted in early 1997 for more grapes than 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 in 1997 and $454,281 in 1998. It sold
approximately $22,000 of grapes under contract in 1999.
Out-of-state sales for the year ended December 31, 1999, increased
2% to $2,168,897 from $2,124,826 for the same period in 1998. The
The Pinot Noir variety led sales in 1999. The total cases sold
decreased from 26,921 cases in 1998 to 22,637 cases in 1999. The
Vintage and Whole Cluster Pinot Noir products decreased in case
sales 14% in 1999 over 1998 yet the revenue only decreased 3%
between the two years. Pinot Noir, which now constitutes about
one-third of the Company's production,is among the fastest growing
wine varietals. 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 1999, vintage Chardonnay sales to distributors decreased from
2,813 cases in 1998 to 2,112 cases in 1999. A large part of the
decrease was due to favorable pricing offered to distributors to
reduce the Company's excess inventory in 1998.
The total excise taxes collected in 1999 were $211,824 as compared
to $225,842 in 1998. Before 1996, excise taxes were included in
the "selling, general, and administrative expenses". Sales data in
the discussion above is quoted before the exclusion of excise
taxes.
Gross Margin
As a percentage of net revenue (i.e., gross sales less related
excise taxes), gross margin for all winery operations was 54% for
fiscal year 1999 as compared to 50% for 1998. The sales of bulk
juice and grapes at harvest at a slim margin reduced the gross
margin in 1998. After adjusting for these sales, the gross margin
would be 54% in 1999 as compared to 54% in 1998. Even though the
average sales price increased in 1999 as compared to 1998, the
gross margin remained the same for both periods. The Company has
seen significant rises in the cost of grapes, packaging and labor
cost in the past several years.
Selling, general, and administrative expenses for the year ended
December 31, 1999, increased to $2,901,594 compared to $2,694,488
for the same period in 1998. As a percentage of revenue from
winery operations, the selling, general, and administrative
expenses were 49% in 1999 as compared to 44% in 1998. The selling,
general, and administrative expenses increased 6% in 1999 against
expenses recorded in 1998.
The largest part of the increase in expenses in 1999 over 1998 was
the addition of several key managers in 1999. West Coast and East
Coast Sales Managers were hired to bring about a change in the
Company's sales management team. Beginning in 1999, the Company
changed its sales force from shareholder-commissioned sales
agents, who relied solely on selling lower margin product, to a
professional sales manager force dividing up the country. As the
Company has moved its image to the higher-priced, higher-margin
products like Griffin Creek label plus its own vineyard designate
series, the Company felt it also needed to change its sales force.
Along with these additions, the Company hired a retail manager to
boost sales in the retail department.
The Company also incurred some additional expenses in 1999 which
did not occur in 1998. Bad debt allowance increased by $24,000 as
the Accounts Receivable balance has increased over the past few
years. With the sales of one parcel of Tualatin Estate, the
Company wrote-off $22,584 which had been capitalized when the
Company purchased Tualatin Vineyards, Inc. in 1997. The Company
also incurred $16,800 in legal and other expenses evaluating a
proposal of merger with a Napa Valley winery.
Other income for the year ended December 31, 1999 was $85,963
as compared to $10,013 for the year ended December 31, 1998. This
increase was from the sale of timber on its Tualatin Estate land
in 1999. Interest income decreased to $7,807 in fiscal year 1999
from $22,967 in fiscal year 1998. Interest expense decreased to
$483,723 in fiscal year 1999 from $493,901 in fiscal year 1998.
The provision for income taxes and the Company's effective tax
rate were $(22,880) and (20)% in fiscal year 1999 with $(27,581)
or (28)% of pre-tax income recorded for fiscal year 1998.
As a result of the above factors, net income/(loss) decreased to
$(92,232) in fiscal 1999 from $(71,980) for the fiscal year of
1998. Earnings per share were $(.02),$(.02),and $.02, in fiscal
years 1999, 1998, and 1997, respectively.
1998 Compared to 1997.
Tasting room sales for the year ended December 31, 1998 increased
8% to $936,585 from $868,531 for the same period in 1997. The
Company 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 1996 and early 1997 the previous management allowed the
Wholesale Division to sell wine that in previous years has been
exclusively sold in the tasting room. In 1998, the Company
returned to the practice of selling certain exclusive wines in the
tasting room at higher profit margins. The tasting room had
additional higher value products added in 1998. Specifically, a
Founders' Pinot Noir, a Merlot from Griffin Creek and a Founder
Reserve Cabernet were available to the customers at higher average
prices. In 1998, the Company contracted its hospitality and
catering services to an outside company. This allowed the Company
to reduce one full time position and offer a more complete set of
services. The Company experienced an increase in revenue during
1998 in Hospitality rental income (included in the tasting room
and retail sales category) over the same period in 1997. The
total of rental income and related wine sales was $209,856 in 1998
as compared to $187,257 in 1997. This rental income came
primarily through weddings, business meetings and educational
conferences held at the Winery's Hospitality Center.
On-site and off-site festival sales and telephone sales for the
year ended December 31, 1998 increased 13% to $564,828 from
$500,124 for the same period in 1997. The most significant change
in operations for this group was that the Company paid commissions
to several employees to solicit sales by phone. The Company
increased its sales by phone solicitation in 1998 to $252,000 in
1998 from $132,000 in 1997. The Company eliminated several on and
off site festivals by analyzing each event to determine if the
event was going to return a certain profit percentage.
Wholesale sales in the state of Oregon for the year ended December
31, 1998, through the Company's independent sales force, increased
6% to $2,277,676 from $2,157,896 for the same period in 1997.
This increase is not as significant as in previous years due to
the 1998 price increases but the company still maintains a strong
presence in its own home state. Costco, a large retailer, remains
the largest in-state customer of the Company. The sales to Costco
were $463,000 in 1998, up from $409,000 in 1997. During the last
part of 1997, the Company added an in-state sales manager whose
main focus was to increase in-state sales. Beginning July 1,
1998, the Company increased the price of its wine by an average
of 8% in state. In July and August of 1998, sales decreased 7%
and 8% respectively over 1997. In the Fourth Quarter of 1998, the
sales were down by 10%. Part of the decrease in sales in the
Fourth Quarter was due to the Company's decision to reduce
production of its lower priced Holiday wine. Its sales for this
product decreased from nearly 4,000 cases in 1997 to 2,100 cases
in 1998.
The Company contracted in early 1997 for more grapes than were
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 in 1997 and $454,281 in 1998.
Out-of-state sales for the year ended December 31, 1998, increased
10% to $2,124,826 from $1,934,877 for the same period in 1997.
The Pinot Noir variety led sales in 1998. The Vintage and Whole
Cluster Pinot Noir products increased in case sales 10% in 1998
over 1997. Pinot Noir, which now constitutes about one-third of
the Company's production, is among the fastest growing wine
varietals. Positive press, regarding the healthful use of wine,
continues to stimulate demand. 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.
For the first half of 1998 out-of-state sales increased 16% over
1997. A large part of the increase was due to favorable pricing
offered to distributors to reduce the Company's excess inventory.
The May 15, 1998 issue of the Wine Spectator magazine rated the
1996 Willamette Valley Vineyards Chardonnay as a leading "top
pick\best buy" in the world class category. The article also
quoted Harvey Steiman, editor at large, "Willamette Valley
Vineyards, Oregon's second largest winery, is on its way to
becoming that state's most reliable producer of widely available
wine...The best is yet to come." Based on this endorsement, the
Company spent a considerable amount of funds in advertising to
project the Company's Chardonnay image as a best value in its
class. The funds were spent to project the Company's brand as a
leading brand of Oregon wineries. In the months of May through
September, the Company sold 5,722 cases of Vintage Chardonnay as
compared to 1,516 cases in the prior year.
Effective September 1st 1998, the Company raised its price to all
out-of-state distributors which caused the distributors to make
large purchases in August to beat the price increase. The out-
of-state revenue in August 1998 exceeded August 1997 by $262,000.
The price increase was followed by declining out-of-state
revenues in the fourth quarter of 1998.
The total excise taxes collected in 1998 were $225,842 as compared
to $212,402 in 1997. Sales data in the discussion above is quoted
before the exclusion of excise
taxes.
Gross Margin
As a percentage of net revenue (i.e., gross sales less related
excise taxes), gross margin for all winery operations was 50% for
fiscal year 1998 as compared to 51% for 1997. The sales of bulk
juice and grapes at harvest at a slim margin reduced the gross
margin in 1997 and 1998. After adjusting for these sales, the
gross margin would be 54% in 1998 as compared to 54% in 1997. The
sales of existing Tualatin product at lower margins reduced the
margin in 1997 and 1998, as well as did promotional pricing of
certain Willamette Valley products to reduce inventory in late
1997 and the first half of 1998.
Selling, general, and administrative expenses for the year ended
December 31, 1998, increased to $2,694,488 compared to $2,434,867
for the same period in 1997. As a percentage of revenue from
winery operations, the selling, general, and administrative
expenses were 44% in 1998 as compared to 43% in 1997. The
management took significant steps to control expenses in this
category in 1998.
The largest part of the increase in expenses in 1998 over 1997 was
a reserve for the doubtful collection of a $81,000 sale made to
the Company's United Kingdom agent in 1997. The agent was
involuntarily placed in "administration" in September 1998, a
British form of bankruptcy, and has been permitted to emerge from
"administration" and continue in business by a vote of the
creditors including the Company.
Other income for the year ended December 31, 1998 was $10,013 as
compared to $19,471 for the year ended December 31, 1997.
Interest income increased to $22,967 in fiscal year 1998 from
$31,296 in fiscal year 1997. Interest expense increased to
$493,901 in fiscal year 1998 from $396,118 in fiscal year 1997.
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. in 1997, plant additional land at Tualatin in 1997
and 1998, and fund increases in inventory.
The provision for income taxes and the Company's effective tax
rate were $(27,581) and (28)% in fiscal year 1998 with $52,288 or
44% of pre-tax income recorded for fiscal year 1997.
As a result of the above factors, net income/(loss) decreased to
$(71,980) in fiscal 1998 from $67,862 for the fiscal year of 1997.
Earnings per share were $(.02), and $.02 in fiscal years 1998 and
1997, respectively.
Liquidity and Capital Resources
Willamette Valley Vineyards was originally established as a sole
proprietorship by Oregon winegrower Jim Bernau in 1983. 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.
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. The Company
commenced an offering on July 18, 1992 which was completed on
September 30, 1992, with the sale of 428,216 shares of Common
Stock at a price of $3.42 per share and net proceeds to the
Company of $1,290,364. On October 2, 1992, as a result of the
oversubscription of the first offering in 1992, the Company
commenced another offering of Common Stock which was completed on
October 31, 1992 with the sale of 258,309 shares at a price of
$3.42 per share, resulting in net proceeds to the Company of
$775,726.
Cash and cash equivalents increased to $219,041 at December 31,
1999 from $149,401 at December 31, 1998.
Inventories increased 33% as of December 31, 1999, to $6,142,697
from the December 31, 1998 level of $4,601,808. The Company has
seen a significant increase in its higher cost wines as its ramps
up to improve the quality of its wine and thus the price of its
wine as shown below:
In Cases units
12/31/98 12/31/99
Willamette Valley Vineyards
Founders Pinot Noir 4,292 5,890
Vineyard Designate Pinot Noir 3,311 5,929
Signature Pinot Noir 1,678 1,995
Griffin Creek Label
Merlot 498 335
Syrah 201
Pinot Noir 148 2,472
Pinot Gris 845 708
Tualatin Estate Label 7,393 8,700
Total 18,165 26,230
Property, plant, and equipment, net, decreased 6% as of
December 31, 1999,to $6,402,023 from $6,790,985 as of December 31,
1998.
Long term debt decreased to $3,796,509 as of December 31, 1999,
from $4,292,948 as of December 31, 1998. This decrease was due to
retiring $471,000 of debt when the Company sold one parcel of
Tualatin Estate.
The Company has a line of credit from Farm Credit Services with a
limit of $2,500,000. As of December 31, 1999 the outstanding
balance of the line was $1,685,584 as compared to $1,652,667 in
1998. These funds were used to meet operational expenditures
primarily to fund the increase in the inventory. The Company
received a new line of credit of $2,500,000 in May of 1999 up
$500,000 from the old line of credit. Farm Credit Services has
established credit line targets based upon the Company's cash flow
plan and will increase the interest rate on the credit line if
those targets were not met in August and December of 1999. The
Company did not meet its August target but did meet its December
target. Because of this Farm Credit Services also increased their
lending rate .5% above their base rate for 1999. The Company was
not in compliance with 2 of 5 debt covenants, but obtain a waiver
letter from Farm Credit Services at December 31, 1999.
YEAR 2000 COMPLIANCE
The Company began to develop its strategy in the first part of
1998 to make itself business ready for the year 2000. Its first
step was to make all levels of the Company aware of the basic
problems that the Company can expect as the year 2000 approaches.
Each month the Company holds an all staff meeting. The Company
began to set aside time in each meeting to discuss the problem in
detail. The Company has made educational awareness and education
a priority in 1999. The Company's small staff makes it easy to
communicate with its employees and develop strategy plans.
.
The Company feels, due to the nature of the winemaking business,
most of the critical needs have been fulfilled. The Company tested
all temperature control systems for its stainless steel tanks and
found no problems on January 1, 2000. As of this date, all
computer software and hardware is fully operational and the
Company sees no need to expend any additional financial resources
to upgrade any of its systems. All vendors and suppliers have met
their deadlines and the Company has not witnessed any interruption
of productions. All customers have responded in a positive matter
thus alleviating any need to change our current distribution
method.
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, 2000 and position with the Company.
Name Position(s) with the Company Age
James W. Bernau *** Chairperson of the Board,
President and Director 46
James L. Ellis *** Secretary and Director 55
Betty M. O'Brien* Director 57
Delna L. Jones** **** Director 60
Stan G. Turel * ** *** **** Director 52
William H. Malkmus * Director 65
_______________________________
*Member of the Compensation Committee
**Member of the Audit Committee
***Member of the Executive Committee
****Member of the 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. Willamette Valley Vineyards was originally established as a
sole proprietorship by Oregon winegrower Jim Bernau in 1983, and
he 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.
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.
Delna L. Jones. Ms. Jones has served as a Director since November
1994. Ms Jones was elected in 1998 and now serves as a County
Commissioner for Washington county, Oregon. Ms. Jones has served
as project director for the CAPITAL Center, an education and
business consortium from 1990 to 1998. 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
August 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, 1999,
conducted one meeting. The 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, 1999,
the Compensation Committee held four meetings. 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 1999. In 1997 the Board
appointed an Executive Committee, members are: James Bernau, James
Ellis, and Stan Turel. The Executive Committee met four times
during 1999.
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,
1997, 1998, and 1999.
Name and Principle Position Year Annual Compensation
Salary ($) Bonus
James W. Bernau
President and Chairperson of 1997 19,385 -
the Board of Directors 1998 84,865 10,000
1999 91,512
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 $90,000 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 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 directly issue 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
terminate. Stock options were granted to Mr Bernau during the year
ended December 31, 1999 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,
1999.
Options Number of Value of
Exercised Securities Unexercised
in the last Underlying In-the-Money
fiscal year Unexercised Options
Number Value Options at FY-End at FY-End(2)
Name of shares Realized(1) Exer- Unexer- - Exer- Unexer-
cisable cisable cisable cisable
James W. Bernau -0- -0 - 37,500 37,500($1.65) 13,125 13,125
0 1,500($1.81) 0 285
_____
(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, 1999 ($2.00 per share based
on the NASDAQ closing price for the Company's Common Stock on the
NASDAQ Small Cap Market on that date), and the exercise price of
the option ($3.42 per share), multiplied by the applicable number
of options.
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(a) Beneficial Ownership Reporting Compliance
None
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, 1999, 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 1,034,350.5 (1) 24.3%
Turner, OR 97392
James L. Ellis Secretary, Director
7850 S.E. King Road 32,523 (2) **
Milwaukie, OR 97222
Delna L. Jones Director
PO Box 5969 4,700 (3) **
Aloha, OR 97006
Betty M. O'Brien Director
22500 Ingram Lane NW 9,950 (4) **
Salem, OR 97304
Stan G. Turel Director
13909 S.E. Stark Street 127,885 (6) 3.1%
Portland, OR 97233
William H. Malkmus Director
415 Manzanita Way 173,328 4.1%
Woodside, CA 94062
Donald Voorhies
78356 Golden Reed Dr 212,518 5.0%
Palm Desert, CA 92211
All Directors, executive 1,595,257 37.5%
officers and persons owning
5% or more as a group (7 persons)
______________________________
** Less than one percent.
(1) Includes 15,000 shares issuable upon the exercise of an
outstanding warrant and 76,500 shares issuable upon exercise of
options.
(2) Includes 25,928.5 shares issuable upon the exercise of
options.
(3) Includes 2,100 shares issuable upon the exercise of
options.
(4) Includes 4,500 shares issuable upon the exercise of
options.
(5) Includes 4.500 shares issuable upon the exercise of
options.
(6) Includes 2,100 shares issuable upon the exercise of
options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1999 and 1998, the Company purchased grapes from Elton
Vineyards for $62,068 and $77,097 respectively. Betty M. O'Brien,
a Director of the Company, is a principal owner of Elton
Vineyards.
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 1997, the Company had transactions with affiliated entities
Related to various shared administrative services. Charges to the
Company aggregated $164,716; amounts charged by the Company
aggregated
$92,601 for the year ended December 1997.
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, 1999, the
outstanding balance of the loan was $48,204 including accrued
interest.
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 30, 2000. 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 30, 2000
James W. Bernau President
(Principal Executive Officer)
_____________________ Controller March 30, 2000
John E. Moore (Principal Accounting Officer)
_____________________ Director and Vice-President March 30, 2000
James L. Ellis and Secretary
_____________________ Director March 30, 2000
Betty M. O'Brien
_____________________ Director March 30, 2000
Stan G. Turel
_____________________ Director March 30, 2000
William H. Malkmus
_____________________ Director March 30, 2000
Delna Jones
Willamette Valley
Vineyards, Inc.
Report and Financial Statements
For the Years Ended December 31, 1999, 1998 and 1997
Willamette Valley Vineyards, Inc.
Index to Financial Statements
Report of Independent Accountants F-1
Balance Sheet F-2
Statement of Operations F-3
Statement of Shareholders' Equity F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6
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,
1999 and 1998, and the results of its operations and its cash
flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally
accepted in the United States. 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 auditing standards generally
accepted in the United States, 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.
PricewaterhouseCoopers LLP
Portland, Oregon
March 8, 2000
Willamette Valley Vineyards, Inc.
Balance Sheet
December 31, 1999 and 1998
ASSETS 1999 1998
Current Assets:
Cash and cash equivalents $ 219,041 $ 149,401
Accounts receivable, net (Note 3) 429,495 371,537
Income taxes receivable (Note 11) - 24,436
Inventories (Note 4) 6,142,697 4,601,808
Prepaid expenses and
Other current assets 79,102 86,986
Deferred income taxes (Note 11) 100,798 101,457
--------- ---------
Total current assets 6,971,133 5,335,625
Vineyard development costs, net
(Note 1) 1,381,163 1,892,538
Property and equipment, net
(Note 1,2 and 5) 6,402,023 6,790,985
Investments (Note 6) 4,974 4,974
Note receivable (Note 12) 52,975 46,937
Debt issuance costs 72,107 119,244
Other assets 141,655 67,813
---------- ---------
$15,026,030 $14,258,116
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 7) $ 1,685,584 $ 1,652,667
Current portion of long-term debt
and capital lease obligations
(Note 8) 213,502 191,176
Accounts payable 960,479 315,185
Accrued commissions and payroll costs 126,375 213,210
Income taxes payable 42,429 -
Grape payables (Note 12) 827,843 581,294
------- -------
Total current liabilities 3,856,212 2,953,532
Long-term debt and capital lease
Obligations (Note 8) 3,583,007 4,101,772
Deferred gain (Note 2) 508,054 -
Deferred income taxes (Note 11) 100,798 167,337
--------- --------
8,048,071 7,222,641
========= =========
Commitments and contingencies (Note 13)
Shareholders' equity (Notes 9 and 10):
Common stock, no par value -
10,000,000 Shares authorized,
4,253,431 and 4,232,681 shares
issued and outstanding at
December 31, 1999 and 1998 6,815,972 6,781,256
Retained earnings 161,987 254,219
--------- ---------
Total shareholders' equity 6,977,959 7,035,475
--------- ---------
$15,026,030 $14,258,116
=========== ===========
Willamette Valley Vineyards, Inc.
Statement of Operations
For the Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Net revenues $5,914,208 $6,132,355 $5,714,132
Cost of goods sold 2,737,773 3,076,507 2,813,764
--------- --------- ---------
Gross margin 3,176,435 3,055,848 2,900,368
Selling, general and
Administrative expenses 2,901,594 2,694,488 2,434,867
--------- --------- ---------
Income from operations 274,841 361,360 465,501
--------- --------- ---------
Other income (expenses):
Interest income 7,807 22,967 31,296
Interest expense (Note 1) (483,723) (493,901) (396,118)
Other income 85,963 10,013 19,471
-------- -------- --------
(389,953) (460,921) (345,351)
-------- -------- ---------
Income (loss) before
income taxes (115,112) (99,561) 120,150
Income tax (benefit)
Provision (Note 11) (22,880) (27,581) 52,288
--------- ------- -------
Net income (loss) $ (92,232) $ (71,980) $ 67,862
Basic net income (loss) ========== ======== ========
Per common share (Note 1) $ (.02) $ (.02) $ .02
========== ======== ========
Diluted net income (loss)
Per common share (Note 1) $ (.02) $ (.02) $ .02
========== ======== ========
The accompanying notes are an integral part of these financial
statements.
Willamette Valley Vineyards, Inc.
Statement of Shareholders' Equity
For the Years Ended December 31, 1999, 1998 and 1997
Common stock Retained
Shares Dollars earnings Total
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
Stock issuance for
compensation 1,250 2,189 - 2,189
Net loss - - (71,980) (71,980)
--------- --------- -------- --------
Balances at
December 31, 1998 4,232,681 6,781,256 254,219 7,035,475
Stock issuance for
Compensation 20,750 34,716 - 34,716
Net loss - - (92,232) (92,232)
-------- -------- -------- ------
Balances at
December 31, 1999 4,253,431 $6,815,972 $161,987 $6,977,959
========= ========== ======== ==========
Willamette Valley Vineyards, Inc.
Statement of Cash Flows
Years Ended December 31, 1999, 1998 and 1997
1999 1998 1997
Cash flow from operating
Activities:
Net income (loss) $ (92,232) $ (71,980) $ 67,862
Reconciliation of net
income (loss) to net cash
(used for) provided by
operating activities: 729,770 657,536 533,444
Deferred income taxes (65,880) (27,581) 90,872
Bad debt expense 27,730 83,148 44,384
Stock issued for compensation 13,622 - -
Changes in assets and
Liabilities:
Accounts receivable (85,688) 365,841 (519,198)
Inventories (1,519,795) (428,593) (953,956)
Prepaid expenses and other
current assets 7,884 (8,693) 29,041
Notes receivable (6,038) 101,511 (9,937)
Other assets - (67,813) -
Accounts payable 645,294 (48,234) 90,133
Accrued commissions and
payroll costs (86,835) (12,087) 16,593
Income taxes receivable 24,436 - (24,436)
Income taxes payable 42,429 - -
Grapes payable 246,549 80,056 (49,776)
-------- ------- --------
Net cash (used for)
Operating activities (118,754) 623,111 (684,974)
========= ======= ========
Cash flows from investing
activities:
Additions to property and
equipment (484,249) (458,805) (1,101,354)
Vineyard development
expenditures (283,483) (445,507) (165,794)
Cash received upon sale of
investments - 100,066 10,178
Payments to acquire
Tualatin Valley Vineyards - - (684,624)
Proceeds form sale of
property and equipment 1,490,706 - 6,000
--------- ------- --------
Net cash used for
Investing activities 722,974 (804,246) (1,935,594)
--------- -------- ---------
Cash flows from
financing activities:
Debt issuance costs (71,058) (6,707) (74,285)
Net increase in line of
credit balance 32,917 135,370 1,037,671
Issuance of long-term debt 157,731 312,760 982,164
Repayments of long-term debt(654,170) (124,428) (107,221)
-------- ------- --------
Net cash provided by
financing activities (534,580) 316,995 1,838,329
-------- ------- ---------
Net (decrease) increase in cash and cash equivalents 69,640
135,860 (782,239)
Cash and cash equivalents:
Beginning of year 149,401 13,541 794,885
------- ------- -------
End of year $219,041 $149,401 $ 12,646
======== ======== ========
Willamette Valley Vineyards, Inc.
Notes to financial Statements
1. Summary of Operations, Basis of Presentation and Significant
Accounting Policies
Organization and operations
Willamette Valley Vineyards, Inc. (the Company) owns and operates
vineyards and a winery located in the State of Oregon, and
produces and distributes premium and super premium
wines, primarily pinot noir, chardonnay, and 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. During fiscal year 1999, revenues derived from one
customer of $639,466 represented 11% of the Company's revenues,
which is reportable under Statement of Financial Accounting
Standards 131 (SFAS 131) as an operating segment with revenues
greater than 10% of combined revenue. The Company did not have
such operating segments in 1998 or 1997. Out-of-state and foreign
sales represented approximately 37%, 35%, and 33% of revenues for
1999, 1998, and 1997. The Company also sells its wine from the
tasting 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 recognizes 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-process 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 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.
1. Summary of Operations, Basis of Presentation and Significant
Accounting Policies (Continued)
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 $206,903 and $176,067 at December
31, 1999 and 1998, respectively.
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.
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.
Summary of Operations, Basis of Presentation and Significant
Accounting Policies (Continued)
1999
Weighted
Average
Shares Earnings
Loss Outstanding per share
Basic $ (92,232) 4,253,431 $ (.02)
Options - - -
Warrants - - -
--------- -------- -------
Diluted $ (92,232) 4,253,431 $ (.02)
========= ========= =======
1998
Weighted
Average
Shares Earnings
Loss Outstanding per share
Basic $ (71,980) 4,232,578 $ (.02)
Options - - -
Warrants - - -
-------- --------- ------
Diluted $ (71,980) 4,232,578 $ (.02)
========= ========= =======
1997
Weighted
Average
Shares Earnings
Loss Outstanding per share
Basic $ 67,862 4,103,669 $ .02
Options - 638 -
Warrants - - -
-------- --------- ------
Diluted $ 67,862 4,104,307 $ .02
========= ========= ========
Basic and diluted net income per share
Options to purchase 474,000 shares of common stock were
outstanding at December 31, 1999, but were not included
in the computation of diluted earnings per share because the
effect would be anti-dilutive due to the Company's loss in 1999.
Options to purchase 402,000 and 173,000 shares of common stock
were outstanding at December 31, 1998 and 1997, respectively,
but were not included in the computation of diluted earnings
per share in 1998 or 1997 because the effect would have been
anti-dilutive due to the Company's loss in 1998, and because the
options' exercise prices were greater than the average market
price of the common shares at December 31, 1997. In addition,
the warrant outstanding since 1992 (see Note 9) was not included
in the computation of diluted earnings per share in 1999, 1998 or
1997 because the exercise price of $3.42 was greater than the
average market price of the common shares during all three years.
Statement of cash flows
Supplemental disclosure of cash flow information:
1999 1998 1997
Interest paid $492,000 $556,000 $321,000
Income taxes paid - 15,000
Supplemental schedule of
noncash investing and
financing activities:
Capital leases - 59,673 -
Assets transferred from
related companies - 19,279
Issurance of common stock
Awards (Note 9) 21,094 2,188 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 - - -
1. Summary of Operations, Basis of Presentation and
Significant Accounting Policies (Continued)
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.
Reclassifications
Certain reclassifications have been made to the
1997 and 1998 financial statements to conform with
financial statement presentation for the year ended
December 31, 1999. These reclassifications have no
effect on previously reported results of operations or
shareholders' equity.
2. Tualatin Valley Vineyard
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, 1997, 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
(unaudited)
Net revenues 5,874,733
Gross margin 2,972,077
Net loss (53,395)
In December 1999, under a sale-leaseback agreement,
the Company sold a portion of the vineyard property
with a net book value of approximately $1,000,000 for
approximately $1,500,000 cash. Annual payments under
the operating lease agreement are $115,000. The gain
of approximately $500,000 is being amortized over the
20 year term of the lease.
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. At December 31, 1998 accounts
receivable included an outstanding balance of
approximately $81,000 from a European customer to which
extended credit terms were granted. Due to a bankruptcy
filing, the entire receivable of $81,000 has been written
off in 1999. At December 31, 1999 and 1998, the Company's
accounts receivable balance is net of an allowance for
doubtful accounts of $54,000 and $111,000, respectively.
4. Inventories
Inventories consist of:
1999 1998
Winemaking and packaging materials $ 276,571 $ 211,550
Work-in-process (costs relating
to unprocessed and/or unbottled
wine products) 2,463,709 1,923,852
Finished goods (bottled wine and
Related products) 3,402,417 2,466,406
--------- ---------
$6,142,697 $4,601,808
========== ==========
5. Property and Equipment
1999 1998
Land and improvements $ 938,990 $1,041,326
Winery building and hospitality
center 4,527,573 4,539,821
Equipment 4,089,297 3,715,612
--------- ---------
9,555,860 9,296,759
Less accumulated depreciation (3,153,837) (2,505,774)
--------- -----------
$6,402,023 $6,790,985
========= ==========
During 1998, the Company entered into two capital lease
arrangements for certain winery equipment. The cost of the
leased equipment and related accumulated amortization aggregated
$59,673 and $11,522, respectively, at December 31, 1999. Minimum
lease payments in 2000 through 2002 approximate $13,000 per year.
Subsequent minimum lease payments aggregate approximately $8,000
per year through 2005.
6. Investments
Investments consist of:
1999 1998
Farm Credit Securities $ 3,000 $ 3,000
Other 1,974 1,974
------- ------
$ 4,974 $4,974
======= ======
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 $2,500,000 credit facility with Northwest
Farm Credit Services. Borrowings under this facility bear
interest at 9.2% and are collateralized by inventory and
accounts receivable. At December 31, 1999 and 1998,
$1,685,584 and $1,652,667 were outstanding under this facility,
respectively.
8. Long-Term Debt
Long-term debt consists of:
1999 1998
Northwest Farm Credit Services Loan $3,598,209 $4,237,134
Real property loan, 8.5% interest,
Monthly payments of $1,055 through
2019 121,249 -
Capital lease obligations 48,150 55,814
Vehicle financing 28,901 -
--------- ---------
3,796,509 4,292,948
Less current portion (213,502) (191,176)
--------- -------
$3,583,007 $4,101,772
========== ==========
8. Long-Term Debt (Continued)
The Company has an agreement with Northwest Farm Credit
Services (NWFCS) containing two separate notes bearing
interest at a rate of 7.85%, which are collateralized by
real estate and equipment. These notes require monthly
payments ranging from $7,687 to $30,102 until the notes
are fully repaid in 2014. The loan agreement contains
covenants which require the Company to maintain certain
financial ratios and balances. At December 31, 1999, the
Company was not in compliance with these covenants but has
obtained a waiver letter thereon.
The Company also entered into an agreement with a private
party in 1999 for a note bearing interest at a rate of 8.5%.
This note requires monthly payments of $1,055 until the note
is fully repaid in 2019.
Future minimum principal payments of long-term debt mature
as follows:
Year ending
December 31,
2000 $ 213,502
2001 213,847
2002 225,927
2003 238,204
Thereafter 2,905,029
---------
$3,796,509
=========
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.
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 of December 31, 1999
and 1998, no warrants had been exercised.
In each of the years ended December 31, 1999 and 1998, the
Company granted 12,500 shares and 1,250 shares of stock valued
at $21,094 and $2,188, respectively, as compensation. The cost
of these grants were capitalized as inventory. The effects of
these non-cash transactions have been excluded from the cash
flow statements in both periods.
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 and 1998, the Board of Directors reserved an
additional 150,000 and 275,000 shares, respectively. In 1998,
the Board repriced options for 145,390 unvested shares with a
weighted average exercise price of $2.91 to the current market
price of $1.50 on the date of approval. 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, 1999, 1998 and 1997, the following transactions
related to stock options occurred:
1999 .
Weighted
average
exercise
Shares price
Outstanding at beginning of year 402,000 $1.73
Granted 120,500 1.83
Exercised - -
Forfeited (48,500) 1.75
------- ------
Outstanding at end of year 474,000 1.75
======= ======
1998 .
Weighted
average
exercise
Shares price
Outstanding at beginning of year 173,000 $2.94
Granted 229,000 1.71
Exercised - -
Forfeited - -
------- -----
Outstanding at end of year 402,000 1.73
======= =====
1997 .
Weighted
average.
exercise
Shares price
Outstanding at beginning of year 246,500 $2.87
Granted 100,000 2.63
Exercised - -
Forfeited (173,500) 2.66
-------- -----
Outstanding at end of year 173,000 2.94
======== =====
Weighted average options outstanding and exercisable at
December 31, 1999 are as follows:
Options outstanding
Weighted
Number average Weighted
Outstanding at remaining average
Exercise December 31, contractual exercise
Price 1999 life price
$ 1.50 155,890 6.34 $1.50
1.65 75,000 8.00 1.65
1.75 95,000 9.25 1.75
1.81 85,500 9.75 1.81
1.88 35,000 9.37 1.88
2.50 1,350 7.67 2.50
2.75 9,500 7.50 2.75
3.00 10,760 7.08 3.00
3.62 4,000 6.56 3.62
4.50 2,000 5.08 4.50
- - ------------ ------- ----- ------
$1.50 -$4.50 474,000 8.08 $1.75
============ ======= ===== ======
Options exercisable
Number Weighted
Exercisable at average
Exercise December 31, exercise
Price 1999 price
$ 1.50 155,890 $1.50
1.65 75,000 1.65
1.75 47,500 1.75
1.81 42,750 1.81
1.88 17,500 1.88
2.50 1,350 2.50
2.75 9,500 2.75
3.00 10,760 3.00
3.62 4,000 3.62
4.50 2,000 4.50
- - ------------ ------- -----
$1.50 -$4.50 366,000 $1.74
============ ======= ======
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, 1999 using the
Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants in 1999,
1998 and 1997:
1999 1998 1997
Risk-free interest rate 5.56% 5.54% 6.31%
Expected dividend yield - - -
Expected lives 8 years 8 years 8 years
Expected volatility 70% 70% 57%
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, 1999, 1998 and 1997, the total value of the
options granted was computed to be $173,815, $192,540 and
$146,700, respectively, which would be amortized on a
straight-line basis over the vesting period of the options.
For the years ended December 31, 1999, 1998 and 1997, the
weighted average fair value of options granted was computed
to be $1.44, $0.85 and $1.47, respectively.
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:
1999 1998 1997
Net income (loss)-
As reported $ (92,232) $ (71,980) $ 67,682
Per share:
Basic (.02) (.02) .02
Diluted (.02) (.02) .02
Net income (loss)-
Pro forma (181,201) (175,860) 41,838
Per share:
Basic (.04) (.04) .01
Diluted (.04) (.04) .01
The effects of applying SFAS 123 for providing pro forma
disclosures for the three years ended December 31, 1999
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:
1999 1998 1997
Current tax expense:
Federal $43,000
State
------
43,000
Deferred tax expense (benefit)
Federal (68,319) $(24,291) $46,530
State (8,761) (3,290) 5,758
------ ------- ------
(77,080) (27,581) 52,288
------ ------- -------
Increase in valuation allowance 11,200 - -
------ ------- -------
Total $(22,880) $(27,581) $52,288
======== ========= =======
The effective income tax rate differs from the federal
statutory rate as follows:
Year ended December 31,
1999 1998 1997
Federal statuatory rate (34.0)% (34.0)% 34.0%
State taxes, net of federal
Benefit (4.4) (4.4) 4.4
Permanent differences 13.2 9.3 3.8
Increase in valuation allowance 9.7 - -
Other, primarily effect of
Alternative minimum tax rates (4.4) 1.4 1.3
------ ------ -----
(19.9)% (27.7)% 43.5%
====== ====== ======
Permanent differences consist primarily of nondeductible
meals and entertainment and life insurance premiums.
11. Income Taxes (Continued)
Deferred tax assets and (liabilities) consist of:
December 31,
1999 1998
Accounts receivable $20,714 $42,580
Inventory 60,857 38,368
Other 19,227 20,509
------- -------
Net current deferred tax assets 100,798 101,457
------- -------
Depreciation (440,071) (300,083)
Net operating loss carryforwards 112,583 132,746
Deferred gain on sale-leaseback 194,890 -
Alternative minimum tax credit
Carryforward 43,000 -
------- -------
Net noncurrent deffered tax
Liability (89,598) (167,337)
-------- ---------
Net deferred tax asset 11,200 (65,880)
Valuation allowance (11,200) -
-------- --------
Total $ - $(65,880)
======== ========
The Company has recorded a valuation allowance to reflect
the estimated amount of deferred tax assets which may not
be realized due to the tax credit carryforwards. The Company's
net operating loss carryforwards expire between 2013 and 2019.
12. Related Parties
During 1999, 1998 and 1997, the Company purchased grapes
from other shareholders at an aggregate price of $61,499,
$105,332 and $262,795, respectively. At December 31, 1999,
1998 and 1997, grape payables included $26,586, $52,667 and
$130,893, respectively, owed to these shareholders.
On December 3, 1992, the Company issued a loan to its
president with a balance of $48,204 at December 31, 1999.
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.
During 1997, the Company had transactions with affiliated
entities related to various shared administrative services.
Charges to the Company aggregated $164,716; amounts charged
by the Company aggregated $92,601 for the year ended December
1997.
13. Commitments and Contingencies
Litigation
From time to time, in the normal course of business, the
Company is a party to legal proceedings. 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,
2000 $ 187,908
2001 190,544
2002 193,485
2003 196,499
2004 202,289
Thereafter 2,484,885
----------
Total $3,455,610
==========
Total rental expense for all operating leases excluding
the vineyards, amounted to $27,372, $30,647, and $17,827
in 1999, 1998, and 1997, respectively. In addition,
payments for the leased vineyards have been included in
inventory and aggregate approximately $81,300, $77,000,
and $60,000, respectively, for each of the years ended
December 31, 1999, 1998, and 1997.
Susceptibility of vineyards to disease
The Tualatin vineyard purchased during 1997 and the leased
vineyards are 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.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 219,041
<SECURITIES> 0
<RECEIVABLES> 483,495
<ALLOWANCES> (54,000)
<INVENTORY> 6,142,697
<CURRENT-ASSETS> 6,971,133
<PP&E> 9,555,860
<DEPRECIATION> (3,153,837)
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<CURRENT-LIABILITIES> 8,048,071
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0
0
<COMMON> 6,815,972
<OTHER-SE> 161,987
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<TOTAL-REVENUES> 5,914,208
<CGS> 2,737,773
<TOTAL-COSTS> 2,737,773
<OTHER-EXPENSES> 2,901,594
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 483,723
<INCOME-PRETAX> (115,112)
<INCOME-TAX> (22,880)
<INCOME-CONTINUING> (92,232)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (92,232)
<EPS-BASIC> (.02)
<EPS-DILUTED> (.02)
</TABLE>
