SCHEDULE 14A INFORMATION
Proxy Statement Pursuant To Section 14(a) Of The Securities
Exchange Act Of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e) (2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Willamette Valley Vineyards, Inc.
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i) (1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
(2) Aggregate number of securities to which transaction
applies:
(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials:
[ ] Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a) (2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule
and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
PROXY STATEMENT
for
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 28, 2000
INTRODUCTION
General
This Proxy Statement (the "Proxy Statement") is being furnished to the
shareholders of Willamette Valley Vineyards, Inc., an Oregon corporation
("the Company"), as part of the solicitation of proxies by the Company's
Board of Directors (the "Board of Directors") from holders of the
outstanding shares of the Company's Common Stock, no par value (the
"Common Stock"), for use at the Company's Annual Meeting of Shareholders
to be held on May 28th, 2000, at 1:00 PM at Willamette Valley Vineyards,
8800 Enchanted Way SE, Turner, Oregon 97392 and at any adjournments or
postponements thereof, (the "Annual Meeting"). At the Annual Meeting,
shareholders will be asked to (i) elect five members of the Board of
Directors, (ii) approve Amendment No. 2 to the Company's Articles of
Incorporation to authorize the issuance of up to ten million
(10,000,000) shares of preferred stock with such rights and preferences
as a majority of the outside directors of the Company shall approve
(iii) ratify the appointment by the Board of Directors of
PricewaterhouseCoopers LLP as independent auditors of the Company for
the year ending December 31, 2000, and (iv) transact such other
business as may properly come before the meeting or any adjournments
thereof. This Proxy Statement, together with the enclosed Proxy Ballot,
is first being mailed to the Company's shareholders on or about May 1,
2000 .
Solicitation, Voting and Revocability of Proxies
The Board of Directors has fixed the close of business on April 3rd,
2000 as the record date for the determination of the shareholders
entitled to notice of and to vote at the Annual Meeting. Accordingly,
only holders of record of shares of Common Stock at the close of
business on such date will be entitled to vote at the Annual Meeting,
with each such share entitling its owner to one vote on all matters
properly presented at the Annual Meeting. On the record date, there
were 3,237 beneficial holders of the 4,250,555 shares of Common Stock
then outstanding. The presence, in person or by proxy, of a majority of
the total number of outstanding shares of Common Stock entitled to vote
at the Annual Meeting is necessary to constitute a quorum at the Annual
Meeting.
If the enclosed form of proxy is properly executed and returned in time
to be voted at the Annual Meeting, the shares represented thereby will
be voted in accordance with the instructions marked thereon. Executed
but unmarked proxies will be voted FOR the election of the nominees for
election to the Board of Directors and FOR the approval of Amendment No.
2 to the Company's Articles of Incorporation to authorize the issuance
of up to ten million (10,000,000 ) shares of preferred stock with such
rights and preferences as a majority of the outside directors of the
Company shall approve and FOR the ratification of the appointment of
PricewaterhouseCoopers LLP as the Company's independent auditors for the
year ending December 31, 2000. The Board of Directors does not know of
any matters other than those described in the Notice of Annual Meeting
that are to come before the Annual Meeting. If any other matters are
properly brought before the Annual Meeting, the persons named in the
proxy will vote the shares represented by such proxy upon such matters
as determined by a majority of the Board of Directors.
The presence of a shareholder at the Annual Meeting will not
automatically revoke such shareholder's proxy. A shareholder may,
however, revoke a proxy at any time prior to its exercise by filing a
written notice of revocation with, or by delivering a duly executed
proxy bearing a later date to: Board Secretary, Willamette Valley
Vineyards, Inc., 8800 Enchanted Way S.E., Turner, Oregon 97392, or by
attending the Annual Meeting and voting in person. However, a
shareholder who attends the meeting need not revoke a previously
executed proxy and vote in person unless the shareholder wishes to do
so. All valid, unrevoked proxies will be voted at the Annual Meeting.
ELECTION OF DIRECTORS
At the Annual Meeting, five directors will be elected, each for a one-
year term. Unless otherwise specified on the proxy, it is the intention
of the persons named in the proxy to vote the shares represented by each
properly executed proxy for the election as directors the persons named
below as nominees. The Board of Directors believes that the nominees
will stand for election and will serve if elected as directors.
However, if any of the persons nominated by the Board of Directors fails
to stand for election or is unable to accept election, the proxies will
be voted for the election of such other person as the Board of Directors
may recommend. There is no cumulative voting for election of directors.
Information regarding Nominees. The following table sets for the names
of the Board of Directors nominees for election as a director, and each
such person's age at April 17, 2000 and position with the Company.
Name Position(s) with the Company Age
James W. Bernau *** Chairperson of the Board, President/CEO
and Director 46
James L. Ellis *** Vice-President/Secretary and Director 55
Betty M. O'Brien* Director 56
Delna L. Jones** **** Director 59
Stan G. Turel * ** *** **** Director 52
__________________
*Member of the Compensation Committee
**Member of the Audit Committee
***Executive Committee
****Affiliated Transaction Committee
All directors hold office until the next annual meeting of Shareholders
or until their successors have been elected and qualified. Executive
officers are appointed by the Board of Directors and serve at the
pleasure of the Board of Directors. Set forth below is additional
information as to each director and executive officer of the Company.
James W. Bernau. Mr. Bernau has been President and Chairperson of the
Board of Directors of the Company since its inception in May 1988. Mr.
Bernau began to develop the vineyard in 1983, and co-founded the Company
in 1988 with Salem winegrape 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. Mr. Ellis was appointed
Vice President/Corporate in January of 1998. 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 Communications 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 presently serves as a Washington County, Oregon, County
Commissioner; she was elected to this position in 1998. From 1985 to
1990, Ms. Jones served as Director of Economic Development with US West
Communications. From 1990 to 1998 she served as project director for the
CAPITAL Center, an education and business consortium. 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.
During 1999, the Board of Directors held thirteen meetings. All
incumbent directors attended more than 75% of the aggregate of the total
number of meetings held by the Board of Directors and the total number
of meetings held by all committees of the Board on which he or she
served during 1998. See "Management-Executive Compensation" for certain
information regarding compensation for Directors.
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, and Stan G. Turel. In 1994, the
Board of Directors created an Affiliated Transactions Committee that
reviewed transactions deemed to involve a potential conflict of interest
between the Company and its former affiliates. Current members of the
Affiliated Transaction Committee are Delna L. Jones and Stan G. Turel.
The Committee held no meetings in 1999. In 1997 the Board appointed an
Executive Committee, members are: James W. Bernau, James L. Ellis, and
Stan G. Turel. The Executive Committee may exercise the authority of the
Board between Board meetings, except to the extent that the Board has
delegated authority to another Committee or to other persons, and except
as limited by Oregon law. The Executive Committee met four times during
1999.
The Board of Directors unanimously recommend that shareholders vote FOR
the election of its nominees for Director. If a quorum is present, the
Company's bylaws provide that directors are elected by a plurality of
the votes cast by the shares entitled to vote. Abstention and broker
non-votes are counted for purposes of determining whether a quorum
exists at the Annual Meeting, but are not counted and have no effect on
the determination of whether a plurality exists with respect to a given
nominee.
MANAGEMENT / EXECUTIVE OFFICERS
Name Position Age
James W. Bernau President, Director and Chairperson
of the Board of Directors 46
Information concerning the principle occupation of Mr. Bernau is set
forth under "Election of Directors".
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, and 1998, and 1999.
Name and Principle Position Year Annual Compensation
Salary ($) Bonus
James W. Bernau
President, Director and Chairperson of
the Board of Directors 1997 $19,385 $ -0-
1998 $84,865 $10,000
1999 $91,512 $ -0-
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 present 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 will
live in the house free of rent and must continue to reside there for the
duration of his employment in order to provide additional security and
lock-up services for late evening events at the Winery and Vineyard. The
employment agreement provides that Mr. Bernau's employment may be
terminated only for cause which is defined as non-performance of his
duties or conviction of a crime.
Stock Options
In order to reward performance and retain high-quality employees, the
Company often grants stock options to its employees. The Company does
not ordinarily grant shares of stock to its employees. Options are
typically issued at a per share exercise price equal to the closing
price as reported 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. Based on an assumed appreciation of 5% and 10% in the price
of the company's stock price, the projected value of all options held by
Mr. Bernau over the term of the option is $59,500 and $168,046
respectively.
Option Exercises and Holdings
The following table provides information, with respect to Mr. Bernau,
concerning exercised options during the last fiscal year and unexercised
options held as of December 31, 1999.
Options Exercised
in the last fiscal year
Number Value
Name of shares Realized(1)
James W. Bernau -0- -0 -
Number of Securities
Underlying Unexercised
Options at FY-End
Exercisable Unexercisable
James W. Bernau 15,000(3) -0-
75,000 (1.65) -0-
1,500 (1.81) -0-
Value of Unexercised
Name In-the-Money Options
at FY-End(2)
Exercisable Unexercisable
James W. Bernau $26,435 -0-
______________________________
(1) The value realized is based on the difference between the market
price at the time of exercise of the options and the applicable exercise
price.
(2) Options are "in the money" at the fiscal year-end if the fair market
value of the underlying securities on such date exceeds the exercise
price of the option. The amounts set forth represent the difference
between the fair market value of the securities underlying the options
on December 31, 1999 ($1.94 per share based on the NASDAQ closing price
for the Company's Common Stock on that date), and the exercise price of
the option ($1.65 per share), multiplied by the applicable number of
options.
(3) Represents a 15,000 share warrant exercisable at $3.42 per share
issued to Mr. Bernau in 1992. See "Certain Transactions".
Director Compensation
The members of the Company's Board of Directors do not receive cash
compensation for their service on the Board, but are reimbursed for out-
of-pocket and travel expenses incurred in attending Board meetings.
Under the Company's Stock Incentive Plan adopted by the shareholders in
1992 and further amended by the shareholders in 1996, beginning in 1997
an option to purchase 1,500 shares of Common Stock was granted to each
Director for service on the Board during the year. In addition, each
director receives 50 shares of Common Stock for each Board or committee
meeting attended.
Section 16 Reports
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"1934 Act") requires the Company's directors and officers, and persons
who own more than 10% of a registered class of the Company's equity
securities, to file initial reports of ownership and reports of changes
in ownership with the Securities and Exchange Commission. Such persons
also are required to furnish the Company with copies of all Section
16(a) reports they file. Based on reports filed by such persons, the
Company believes that all filing requirements applicable to its
directors, officers and persons who own more than 10% of the Company's
Common Stock have been complied with for 1999.
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 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.
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 April 17th,
2000 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 941,354 (1) 22.1%
Turner, OR 97392
James L. Ellis Secretary, Director
7850 S.E. King Road 41,380 (2) **
Milwaukie, OR 97222
Delna L. Jones, Director
PO Box 5969 4,900 (3) **
Aloha, OR 97006
Betty M. O'Brien, Director
22500 Ingram Lane NW 10,800 (4) **
Salem, OR 97304
Stan G. Turel, Director
13909 S.E. Stark Street 127,885 (5) 3%
Portland, OR 97233
All Directors and executive 1,126,469 26.5%
officers as a group and persons owning
5% or more as a group (5 persons)
_________________________
** Less than one percent.
(1) Includes 15,000 shares issuable upon the exercise of an outstanding
warrant and 78,000 shares issuable upon the exercise of options
(2) Includes 36,280 shares issuable upon the exercise of options.
(3) Includes 3,800 shares issuable upon the exercise of options.
(4) Includes 7,000 shares issuable upon the exercise of options.
(5) Includes 6,000 shares issuable upon the exercise of options
(6) Includes 3,000 shares issuable upon the exercise of options
APPROVAL OF AMENDMENT NO. 2 TO THE COMPANY'S ARTICLES OF INCORPORATION
From time to time, the Board of Directors considers whether the Company
should raise additional capital through the issuance of debt or shares
of its capital stock. Currently, the Company is authorized to issue
only shares of common stock.
To secure such capital, the Company could issue additional shares of its
common stock. It could also issue shares of preferred stock. It also
could issue additional debt, which may or may not be convertible into
shares of stock.
While the Board would be willing to consider any transaction structure
that accomplishes the Company's goals and is also fair to the
shareholders, the Company's options are constrained by the fact that the
Company does not have any authorized shares of preferred stock. This
constraint may be important because the Board believes new investors may
require preferred stock in exchange for an investment in the Company.
As suggested by its name, preferred stock carries with it certain rights
and preferences relative to the common stock. For example, preferred
stock often carries with it a liquidation preference. That is if the
Company is liquidated, the holders of preferred stock are entitled to be
paid a stated amount (usually the amount they paid for their shares of
preferred stock) before proceeds may be distributed to the holders of
common stock. Similarly, preferred stock often carries a dividend
preference that requires payment of a dividend at a stated rate (e.g.,
8% per annum) before dividends may be paid to common shareholders.
Other rights may include the right to require the Company to redeem the
preferred stock at a certain price and by a certain date as well as the
right to elect one or more directors. Preferred stock is often
convertible into shares of common stock at a stated conversion price,
which is typically the price paid by the preferred shareholder (thus,
the shares of preferred stock start out being convertible on a one-to-
one basis into common stock) but which may be adjusted downward (and
thus the shares of preferred stock become convertible into more shares
of common stock) under certain events, including the subsequent issuance
of stock by the Company at prices less than the conversion price.
At this time, the Board does not know what rights and preferences may be
required for preferred stock in order to be able to secure additional
capital for the Company. In order to be able to accommodate the
Company's potential need to issue preferred stock while not being able
to specify the exact rights and preferences at this time, the Board is
recommending to the shareholders that they approve an amendment to the
Company's Articles of Incorporation. This amendment would allow the
Company to issue up to ten million (10,000,000) shares of preferred
stock in one or more series with such rights and preferences as a
majority of the outside directors shall determine. By giving the
outside directors the authority to establish the rights and preferences
of the preferred stock, the Company can negotiate the best terms it can
from an investor. By requiring the outside directors, i.e., those
directors not employed by the Company as officers, to approve the rights
and preferences, the shareholders are protected from the insiders
negotiating terms and conditions that are not fair to the common
shareholders.
The Board believes it is in the best interests of the Company and its
shareholders to have the flexibility in the Company's capital structure
to enable the Company to raise additional funds in an efficient and
equitable manner. The Board believes that authorizing the preferred
stock as outlined above gives the Company the flexibility it needs to be
able to raise additional funds when it needs to and on terms that are
acceptable to the investors and shareholders. For these reasons, the
Board of Directors unanimously recommends a vote FOR the proposal to
approve the amendment. A copy of the proposed amendment is attached to
this Proxy Statement as Attachment A.
Unless otherwise indicated, properly executed proxies will be voted in
favor of the approval of the amendment. The amendment will be approved,
assuming the existence of a quorum, if a majority of the shares of
common stock entitled to vote at the meeting vote in favor. Abstentions
and non-votes have the effect of a vote against the proposal.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed PricewaterhouseCoopers LLP to act
as independent auditors for the Company for the year ending December 31,
2000, subject to ratification of such appointment by the Company's
shareholders. PricewaterhouseCoopers, LLP was the Company's independent
auditor for the fiscal year which ended December 31, 1999.
Unless otherwise indicated, properly executed proxies will be voted in
favor of ratifying the appointment of PricewaterhouseCoopers LLP to
audit the books and accounts of the Company for the fiscal year ending
December 31, 2000. No determination has been made as to what action the
Board of Directors would take if the shareholders do not ratify the
appointment.
A representative of PricewaterhouseCoopers LLP has been invited to
attend the Annual Meeting at his own expense and will be given an
opportunity to make a statement if he desires to do so and will be
available to respond to appropriate questions.
The Board of Directors unanimously recommends a vote FOR this proposal.
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder proposal intended for inclusion in the proxy statement
and form of proxy relating to the Company's 2001 annual meeting of
shareholders must be received by the Company not later than February 24,
2001, pursuant to the proxy soliciting regulations of the Securities and
Exchange Commission (the "SEC"). Nothing in this paragraph shall be
deemed to require the Company to include in its proxy statement and form
of proxy for such meeting any shareholder proposal which does not meet
the requirements of the SEC in effect at the time.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not
know of any other matters to be presented for action by the shareholders
at the 2000 Annual Meeting. If, however, any other matters not now
known are properly brought before the meeting, the persons named in the
accompanying proxy will vote such proxy in accordance with the
determination of a majority of the Board of Directors.
COST OF SOLICITATION
The cost of soliciting proxies will be borne by the Company. In
addition to use of the mails, proxies may be solicited personally or by
telephone by directors, officers and employees of the Company, who will
not be specially compensated for such activities.
ADDITIONAL INFORMATION
A copy of the Company's Annual Report to Shareholders for the fiscal
year ended December 31, 1999 accompanies this Proxy Statement. The
Company is required to file an Annual Report on Form 10-KSB with the
Securities and Exchange Commission. Shareholders may obtain, free of
charge, a copy of the Form 10-KSB by writing to James L. Ellis,
Secretary, Willamette Valley Vineyards, Inc., 8800 Enchanted Way S.E.,
Turner, Oregon 97392. Or they may access a copy through links provided
on the Company's web site: www.wvv.com.
By Order of the Board of Directors,
James W. Bernau
Chairperson of the Board
Turner, Oregon
April 2000
Attachment A
Proposed amendment No. 2 to the Company's
Articles of Incorporation
Article II of the Article of Incorporation, as amended, shall be amended
to read as follows:
A. Authorized Shares. The aggregate number of shares which the
Corporation shall have the authority to issue is 20,000,000, of
which 10,000,000 shall be designated Common Stock and
10,000,000 shall be designated Series A Preferred Stock.
B. Preferred Stock. The Board of Directors is authorized,
subject to limitations prescribed by the Oregon Business
Corporation Act, as amended from time to time (the Act"), and
by the provisions of this Article, and with the approval of a
majority of the outside directors, to provide for the issuance
of shares of Preferred Stock in series, to establish from time
to time the number of shares to be included in each series and
to determine the designations, relative rights, preferences and
limitations of the shares of each series. The authority of the
Board of Directors with respect to each series includes
determination of the following:
1. The number of shares in and the distinguishing
designation of that series;
2. Whether shares of that series shall have full, special,
conditional, limited or no voting rights, except to the
extent otherwise provided by the Act;
3. Whether shares of that series shall be convertible and
the terms and conditions of the conversion, including
provision for adjustment of the conversion rate in
circumstances determined by the Board of Directors;
4. Whether shares of that series shall be redeemable and
the terms and conditions of redemption, including the
date or dates upon or after which they shall be
redeemable and the amount per share payable in case of
redemption, which amount may vary under different
conditions or at different redemption dates;
5. The dividend rate, if any, on shares of that series, the
manner of calculating any dividends and the preferences
of any dividends;
6. The rights of shares of that series in the event of
voluntary or involuntary dissolution of the Corporation
and the rights of priority of that series relative to
the Common Stock and any other series of Preferred Stock
on the distribution of assets on dissolution; and
7. Any other rights, preferences and limitations of that
series that are permitted by law to vary.
Annual Report to Shareholders
DESCRIPTION OF BUSINESS
Willamette Valley Vineyards, Inc. (the "Company") was formed in May 1988
to produce and sell premium, super premium and ultra premium varietal
wines (i.e., wine which sells at retail prices of $3 to $7, $7 to $14
and over $14 per bottle, respectively). 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 producing acres and
8 acres in development, which includes a grafting to 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.
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 leased 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, 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.
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 of 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 three to five 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 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 of the Company or their
respective affiliates. See Proxy Statement: "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.
Winery
Wine Production Facility. The Company's Winery is structurally
capable of producing up to 250,000 gallons (104,000 cases) of wine per
year, depending on the type of wine produced. With the addition of
Tualatin Vineyards, the Company added 50,000 gallons (20,000 cases) of
capacity. 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.
Beginning with the Company's first vintage in 1989, the Company's annual
grape harvest and wine production are as follows:
Tons of
Crush Grapes Production Case
Year Crushed Year Equivalents
_____ __________ ___________ ____________
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 approximately 270 tons of grapes before crush; this
tonnage convert to 44,000 gallons of bulk wine which the Company sold in
1998.
Company Strategy
As one of the largest wineries in Oregon, the Company believes its
success is dependent upon its ability to: (1) grow and purchase high
quality vinifera wine grapes; (2) vinify the grapes into premium, super
premium and ultra premium wine; and (3) achieve significant brand
recognition for its wines, first in Oregon and then nationally and
internationally. The Company's goal is to continue as one of Oregon's
largest wineries, gaining a reputation for producing some of Oregon's
finest, most sought after wines.
Based upon several highly regarded surveys of the US wine industry, the
Company believes that successful wineries exhibit the following four key
attributes: (i) focus on production of high-quality premium, super
premium and ultra premium varietal wines; (ii) achieve brand
positioning that supports high bottle prices for its high quality wines;
(iii) build brand recognition by emphasizing restaurant sales; and (iv)
develop strong marketing advantages (such as a highly visible winery
location and successful self-distribution).
The Company has designed its strategy to address each of these
attributes.
To successfully execute this strategy, the Company 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 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.
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 April 3, 1999 there were 3,237 holders
of record of the Common Stock.
The table below sets forth for the quarters indicated the high and low
sales prices for the Company's Common Stock as reported on the Nasdaq
Stock Market. The Company's Common Stock began public trading on
September 13, 1994.
Quarter Ended
3/31/99 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.
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,and 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 Operations
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 more 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's 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.
We believe sales incentive programs to encourage distributor sales
representatives to present the Company's products 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, is
selling at a rate of 147% ahead of plan and has 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 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
We currently have a substantial inventory of premium, super premium, and
ultra premium wines like Riesling, Vintage Pinot Noir, and Single
Vineyard Designated Pinot Noir. Of course, there are many factors that
will affect our successful marketing of this wine, including whether the
wines maintain their quality through the time they are sold and
consumed, whether consumers will continue to enjoy these varieties and
to be willing to pay higher prices for these wines, whether increased
supply of these types of wines from us and other sources will put
downward pressure on prices, whether consumer tastes will shift to
varieties not produced by the Company, as well as other factors, many of
which we cannot control. In addition, factors that affect our ability
to operate profitably and implement our sales and marketing strategy may
affect our ability to successfully market these wines. If we can
successfully address these factors and their affects, however, we
believe we can profitably market these wines. For example, the table
below shows the potential revenue from the sales of these wines if we
could have sold these wines in 1998 and 1999 at the then-prevailing
prices. While there can be no assurance that we would have been able to
sell these wines for the prices assumed in 1998 and 1999, that the
prices set forth in the table will be maintained in subsequent years of
that even if marketed at these prices, the wines will be profitable, we
believe the table below gives some indication of the value of these
wines.
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.
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. A large retailer, remains the largest in-state customer of
the Company. The sales to retailer were $639,000 in 1999, up from
$463,000 in 1998. The Company's first sales to this retailer 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 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 sale
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 price. 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 comes 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. A large retailer, remains the largest in-state
customer of the Company. The sales to this retailer 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, sales were down by 10% but the Company
expects sales to rebound in 1999. Part of the decrease in sales in
the Fourth Quarter was due to the Company's decision to reduce 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 Company
now sells wine in 39 states. 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. The Company expects demand for its wines
to continue to increase. However, the Company notes that new formidable
entries into the Oregon wine industry from out of state will increase
competition and put additional pressure on Pinot Noir grape supplies.
In addition, the Company believes the industry in Oregon, Washington,
and California will experience crush volumes in future years higher than
annual consumption rate increases, thus potentially putting pressure on
prices and margins.
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, 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 Company reclassified its income statement to subtract excise taxes
from its gross revenue to equal a net revenue since the Company only
collects the excise tax on behalf of the Bureau of Alcohol, Tobacco, and
Firearms, and Oregon Liquor Control Board. The total excise taxes
collected in 1998 were $225,842 as compared to $212,402 in 1997. 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 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,
promotional pricing of certain Willamette Valley products to reduce
inventory in late 1997 and the first half of 1998. The price increases
in July of 1998 for in state customers and September of 1998 for out-of-
state customers are expected to increase the gross margin next year.
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. Management has taken significant
steps to control expenses in this category in 1998. All key managers
are required to review their monthly expenses against budget and make
appropriate changes to bring their budgets into balance. The Company
employs an "open book" policy as to its accounting records and ensures
that key managers and employees understand and can adjust their spending
habits as needed.
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.
The Management continues to make a concerted effort to collect these
funds.
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., plant additional land at
Tualatin, 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), $.02, and $.05 in fiscal years 1998,
1997 and 1996, 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 pursuant to Federal Regulation A.
Since April 1990, the Company has operated on revenues from the sale of
its wine and related products and the net proceeds from three additional
stock offerings. The Company's second public stock offering began in
July 1990 and was completed in July 1991 with the sale of 731,234 shares
at prices of $2.65 and $2.72 per share exclusively to Oregon residents,
resulting in net proceeds to the Company of $1,647,233.
In 1992, the Company conducted two stock offerings. 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 0 201
Pinot Noir 148 2,472
Pinot 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 obtained 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.
FINANCIAL HIGHLIGHTS
(in thousands, except for per share amounts)
Year ended December 31
1999 1998 1997 1996 1995 1994 1993 1992
______________________________________________________
Revenue from winery operations
$5,914 $6,132 $5,714 $4,235 $3,638 $2,869 $2,264 $1,818
Net income (loss)
(92) (72) 68 170 6 170 116 19
Net income (loss) per share
(.02) (.02) .02 .05 .00 .04 .03 .01
Weighted average number of common shares outstanding
4,253 4,233 4,104 3,785 3,785 3,785 3,784 3,350
As of December 31
1999 1998 1997 1996 1995 1994 1993 1992
______________________________________________________
Selected balance sheet data:
Working capital
$3,115 $2,515 $2,471 $2,696 $1,981 $1,661 $2,333 $2,472
Total assets
15,026 14,391 13,946 10,264 8,340 6,881 6,677 6,076
Long-term debt
3,797 4,293 4,044 3,170 2,008 889 910 440
Shareholders' equity
6,978 7,035 7,105 5,628 5,458 5,451 5,278 5,180
(Graphs unavailable for transmission so the following is a replacement
narrative.)
WVV Assets & Equity Growth
In 1997 the growth in assets and equity resulted from the acquisition of
Tualatin Vineyards, Inc.
ASSETS EQUITY
(in millions)
06/30/88 0.2 0.2
04/30/90 2.1 1.7
12/31/90 3.0 2.6
12/31/91 3.3 2.9
12/31/92 6.1 5.2
12/31/93 6.7 5.3
12/31/94 6.9 5.5
12/31/95 8.3 5.5
12/31/96 10.3 5.6
12/31/97 13.9 7.1
12/31/98 14.3 7.0
12/31/99 15.0 7.0
WVV Gross Margin
Gross Margin is the net of net sales revenue less the
production cost of wine sold. After the elimination of
grape sales, the gross margin in 1999 remained approximately
the same compared to 1998. The 1999 and 1998 margins are a
result of prices not keeping pace with cost increases, the
sale of Tualatin wines at lower margins and promotional
pricing of certain wines to reduce excess inventory.
1990 41.21%
1991 46.37%
1992 52.07%
1993 55.66%
1994 56.40%
1995 52.48%
1996 56.22%
1997 54.19%
1998 53.69%
1999 53.74%
Distribution of Sales
This chart shows the distribution of sales between wholesale
and retail and individual elements contained in each
element.
Wholesale Retail
Festival 6%
Offsite 2%
Tasting Room 12%
Hospitality 4%
Out of State 36%
In State 39%
Bulk 1%
Totals 76% 24%
WVV Sales Revenue
Revenue in 1999 was $5,914,000 as compared to $6,132,000 in 1998. Bulk
wine sales were down $385,000 in 1999. Wholesale sales in Oregon rose
6% in 1998 to $2,412,000. Out-of-state distribution sales of
$2,169,000 in 1999 remained nearly the same level as 1998 sales.
(in millions)
Retail Wholesale Juice
1990 0.3 .1 0
1991 0.6 .2 0
1992 0.8 1.0 0
1993 1.0 1.3 0
1994 1.3 1.6 0
1995 1.4 2.2 0
1996 1.4 2.9 0
1997 1.4 4.1 .4
1998 1.5 4.4 .4
1999 1.4 4.4 .1
WVV Out-of-State Sales
WVV has dramatically increased its out-of-state sales in the
past few years. We are now licensed in 39 states and
several foreign countries. Out-of-state wholesale sales
grew nearly the same rate as 1998 sales.
(in millions)
1991 0.1
1992 0.1
1993 0.2
1994 0.3
1995 0.8
1996 1.1
1997 1.9
1998 2.2
1999 2.2
Cases Bottled at WVV
Our barrel-aged wines average 10 months in the barrel before
they are bottled and another 6 to 8 months in our cellar
before they are released for sale. The reduction in cases
bottled reflects the balancing of production with the sale
of higher quality wines.
(in cases)
1990 5,743
1991 17,796
1992 27,336
1993 39,697
1994 40,208
1995 53,693
1996 63,178
1997 91,793
1998 77,064
1999 81,084
Wine Inventory at WVV at Cost
A winery's development requires inventory building and
aging. At year end 1999, we had 6.1 million dollars of wine
inventory at cost.
(in millions)
1990 0
1991 0
1992 1.1
1993 1.5
1994 1.5
1995 1.9
1996 2.8
1997 4.2
1998 4.6
1999 6.1
WVV Production Capacity
At Willamette Valley, our structural capacity increased from
104,000 cases to 121,250 cases in 1997. The Company
moved its case goods to a new storage facility which will
allow it to place an additional 750 oak barrels (17,250
cases)in the former storage area. In April of 1997, the
Company added 20,000 additional case capacity with the
purchase of Tualatin Vineyards.
(in cases)
Production Structural
1990 25,000 25,000
1991 40,000 40,000
1992 65,000 65,000
1993 70,000 70,000
1994 78,000 78,000
1995 80,000 80,000
1996 104,000 104,000
1997 121,250 138,000
1998 121,250 138,000
1999 121,250 138,000
(capacity in cases)
Stainless Steel Barrel
1990 20,000 5,000
1991 32,000 8,000
1992 50,000 15,000
1993 50,000 20,000
1994 50,000 28,000
1995 50,000 30,000
1996 64,000 40,000
1997 69,000 52,000
1998 69,000 52,000
1999 69,000 52,000
Tons Crushed at WVV
In 1999, the yield at harvest increased over 1998. The company
was in the later parts of grape contracts signed in early 1997.
(in tons)
1990 206
1991 340
1992 556
1993 633
1994 630 (1)
1995 885
1996 1,290
1997 1,426
1998 1,209
1999 1,384
(1) 590 tons crushed plus 40 tons equivalent as purchased
bulk wines.
Oregon Wine Production
Since 1986, Oregon wine production has grown from 592,908
gallons to 1,746,571 in 1999 - an average annual increase of
13.9%
(in millions)
1986 0.6
1987 0.7
1988 0.8
1989 0.9
1990 0.9
1991 1.0
1992 1.1
1993 1.2
1994 1.4
1995 1.5
1996 1.7
1997 1.9
1998 1.7
1999 1.7
___________________________________________________
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
(Reports per page)
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:
Depreciation and amort. 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 from 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
Issuance 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 deferred 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.
