DEF 14A
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wvv2000proxy.txt
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant To Section 14(a) Of The Securities
Exchange Act Of 1934
Filed by the Registrant [x]
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Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e) (2))
[x] Definitive Proxy Statement
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[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Willamette Valley Vineyards, Inc.
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PROXY STATEMENT
for
ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 27th , 2001
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 27th, 2001, 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) ratify the appointment by the
Board of Directors of PricewaterhouseCoopers LLP as independent auditors of the
Company for the year ending December 31, 2001, (iii) consider and vote upon an
amendment to increase the number of shares that may be issued under the
Company's stock incentive plan, 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 (Appendix A), is first
being mailed to the Company's shareholders on or about May 7, 2001.
Solicitation, Voting and Revocability of Proxies
The Board of Directors has fixed the close of business on March 28, 2001 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 3,162 beneficial holders of the 4,254,481 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 Proxy Ballot 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 ratification of the appointment of PricewaterhouseCoopers
LLP as the Company's independent auditors for the year ending December 31, 2001
and FOR the amendment to the Company's stock incentive plan. The Board of
Directors does not know of any matters other than those described above 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, un-
revoked proxies will be voted at the Annual Meeting.
ELECTION OF DIRECTORS (PROPOSAL NO. 1)
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. Directors are elected by a plurality of votes; therefore, the five
persons receiving the most votes, even if less than a majority of the votes
cast, will be elected directors. Abstentions or failure to vote will have no
effect on the election of directors, assuming the existence of a quorum.
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 March 28, 2001 and position with the Company.
Name Position(s) with the Company Age
James W. Bernau *** Chairperson of the Board,
President and Director 47
James L. Ellis * *** Secretary and Director 56
Betty M. O'Brien* Director 57
Delna L. Jones** **** Director 60
Stan G. Turel * ** *** ****Director 53
_______________________________
*Member of the Compensation Committee
**Member of the Audit Committee
***Member of the Executive Committee
****Member of the Affiliated Transaction Committee
All directors hold office until the next annual meeting of Shareholders or until
their successors have been elected and qualified. Executive officers are
appointed by the Board of Directors and serve at the pleasure of the Board of
Directors.
Set forth below is additional information as to each director and executive
officer of the Company.
James W. Bernau. Mr. Bernau has been President and Chairperson of the Board of
Directors of the Company since its inception in May 1988. Willamette Valley
Vineyards was originally established as a sole proprietorship by Oregon
winegrower Jim Bernau in 1983, and he co-founded the Company in 1988 with Salem
grape grower, Donald Voorhies. From 1981 to September 1989, Mr. Bernau was
Director of the Oregon Chapter of the National Federation of Independent
Businesses ("NFIB"), an association of 15,000 independent businesses in Oregon.
James L. Ellis. Mr. Ellis has served as a Director since July 1991 and
Secretary since June 1997. Mr. Ellis has served as the Company's Director of
Human Resources from January 1993. From 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 is a writer and public relations consultant. Ms. O'Brien was employed
by Willamette University as its Director of News and Publications from 1988 to
2000. 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
and as a director. Ms. O'Brien also serves on several community boards.
Delna L. Jones. Ms. Jones has served as a Director since November 1994. Ms.
Jones is semi-retired. Ms. Jones was elected in 1998 and served as a County
Commissioner for Washington County, Oregon from 1998 to 2000. Ms. Jones has
served as project director for the CAPITAL Center, an education and business
consortium from 1990 to 1998. From 1985 to 1990, Ms. Jones served as Director
of Economic Development with US West Communications. Beginning in 1982, she
was elected six times to the Oregon House as the State Representative for
District 6. During her tenure, she served as the Assistant Majority Leader;
she also chaired the Revenue and School Finance committee, and served on the
Legislative Rules and Reorganization committee and the Business and Consumer
Affairs committee. In addition, Ms. Jones presently serves on many community
and business boards and advisory panels.
Stan G. Turel. Mr. Turel has served as a Director since November of 1994. Mr.
Turel is part owner and the CEO of Columbia Turel, Inc., (formerly Columbia
Bookkeeping, Inc.) a position he has held since 1974. Columbia Turel, Inc.
has sixteen offices in Oregon and Washington, servicing 4,000 small business
and 26,000 tax clients annually. Mr. Turel is a licensed tax consultant, a
member of the National Association of Public Accountants, a private pilot,
and a former delegate to the White House Conference on Small Business. In
addition, Mr. Turel serves his community on a number of advisory boards and
panels.
Board of Directors Committees. The Board of Directors acts as a nominating
committee for selecting nominees for election as directors.
The Board of Directors also has appointed a Compensation Committee that
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, 2000, the
Compensation Committee held four meetings. The members of the Compensation
Committee currently are Betty M. O'Brien, Chair, Stan Turel, and Jim Ellis.
In 1994, the Board of Directors created an Affiliated Transactions Committee
that reviews transactions that may involve a conflict of interest between the
Company and its current and/or former affiliates. Current members of the
Affiliated Transaction Committee are Delna Jones and Stan Turel. The committee
held no meetings in 2000.
In 1997 the Board appointed an Executive Committee, whose members are James
Bernau, James Ellis, and Stan Turel. The Executive Committee, which reviews
operational issues, met four times during 2000.
Report of the Audit Committee. The Board of Directors has appointed a
standing Audit Committee, which met once in the calendar year ended
December 31, 2000. The members of the Audit Committee are Delna L. Jones
and Stan G. Turel. The Company believes that each of the members is
"independent" as defined in applicable SEC and Nasdaq rules.
In accordance with applicable SEC and Nasdaq rules, the Audit Committee
reports that it has (i) reviewed and discussed the audited financial
statements for the fiscal year ended December 31, 2000 with management,
(ii) discussed with the Company's independent auditors the matters required
to be discussed by applicable accounting and auditing standards, (iii)
received the written disclosures and the letter from the Company's independent
auditors required by applicable accounting standards and discussed with such
auditors their independence and (iv) based on such review and discussions,
recommended to the Board o Directors that the financial statements be included
in the Annual Report or Form 10-kSB for the fiscal year ended December 31,
2000, which was filed previously with the SEC.
Delna L. Jones Stan G. Turel
MANAGEMENT / EXECUTIVE OFFICERS
Name Position Age
James W. Bernau President, Director
and Chairperson of the Board of Directors 47
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, 1998, 1999, and
2000.
Annual Compensation
Name and Principal Position Year Salary ($) Bonus
James W. Bernau 1998 84,865 10,000
President and Chairperson of 1999 91,512 -0-
the Board of Directors 2000 93,000 -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 amended agreement, Mr. Bernau is paid
an annual salary of $90,000 with annual increases tied to increases in
the consumer price index. Pursuant to the terms of the employment
agreement, the Company must use its best efforts to provide Mr. Bernau
with housing on the Company's property. Mr. Bernau and his family
currently live in a Company-owned house on the Company's property free
of rent and must continue to reside there for the duration of his
employment in order to provide additional security and lock-up services
for late evening events at the winery and vineyard. The employment
agreement provides that Mr. Bernau's employment may be terminated only
for cause, which is defined as non-performance of his duties or
conviction of a crime.
Stock Options
In order to reward performance and retain high-quality employees, the
Company often grants stock options to its employees. The Company does
not ordinarily directly issue shares of stock to its employees. Options
are typically issued at a per share exercise price equal to the closing
price as reported by NASDAQ at the time the option is granted. The
options vest to the employee over time. Three months following
termination of the employee's employment with the Company, any and all
unexercised options terminate.
Option Exercises and Holdings
The following table provides information, with respect to the named
executive officer, concerning exercised options during the last fiscal
year and unexercised options held as of December 31, 2000.
Options exercised in the last fiscal year
Name Number Value
of shares realized (1)
James W. Bernau -0- -0-
Number of Securities Underlying Unexercised Options at FY-End
Exercisable Unexercisable
James W. Bernau 75,000 -0-
1,500 -0-
4,000 -0-
Value of Unexercised In-the-Money Options at FY-End (2)
Exercisable Unexercisable
James W. Bernau -0- -0-
_________________________________
(1) The value realized is based on the difference between the market price at
the time of exercise of the options and the applicable exercise price.
(2) Options are "in the money" at the fiscal year-end if the fair market
value of the underlying securities on such date exceeds the exercise price of
the option. The amounts set forth represent the difference between the fair
market value of the securities underlying the options on December 31, 2000
($1.4688 per share based on the NASDAQ closing price for the Company's Common
Stock on the NASDAQ Small Cap Market on that date), and the exercise price of
the option, multiplied by the applicable number of options.
Director Compensation
The members of the Company's Board of Directors do not receive cash
compensation for their service on the Board, but are reimbursed for
out-of-pocket and travel expenses incurred in attending Board meetings.
Under the Company's Stock Incentive Plan adopted by the shareholders in 1992
and further amended by the shareholders in 1996, beginning in 1997 an option
to purchase 1,500 shares of Common Stock is granted to each Director for
service on the Board during the year. The number of options granted on an
annual basis was increased to 4,000 per year when the 50-share grant per
Director's meeting was discontinued for the year 2000 and beyond.
Section 16(a) Beneficial Ownership Reporting Compliance
None
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 2000 and 1999, the Company purchased grapes from Elton Vineyards
for $74,585 and $62,068 respectively. Betty M. O'Brien, a Director of the
Company, is a principal owner of Elton Vineyards.
On June 1, 1992, the Company granted Mr. Bernau a warrant to purchase
15,000 shares of the Company's Common Stock as consideration for his
personal guarantee of the Real Estate Loan and the Line of Credit from
Farm Credit Services pursuant to which the Company borrowed $1.2 million.
The warrant is exercisable anytime through June 1, 2012, at an exercise
price of $3.42 per share.
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, 2000, the outstanding balance of the loan was $56,869
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 December
31, 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.
Percent of Number of
Shares Beneficially Owned Shares Outstanding Stock
James W. Bernau President/CEO, Chair of the Board
2545 Cloverdale Road 1,038,350.5 (1) 24.4%
Turner, OR 97392
James L. Ellis Secretary, Director
7850 S.E. King Road 36,523 (2) **
Milwaukie, OR 97222
Delna L. Jones Director
PO Box 5969 8,700 (3) **
Aloha, OR 97006
Betty M. O'Brien Director
22500 Ingram Lane NW 13,950 (4) **
Salem, OR 97304
Stan G. Turel Director
1390Stark Street 131,885 (5) 3.1%
Portland, OR 97233
Donald Voorhies Estate
400 Madrona SE, Apt 334 212,518 5.0%
Salem, OR 97302
All Directors, executive 1,441,927 33.9%
officers and persons owning
5% or more as a group (6 persons)
______________________________
** Less than one percent.
(1) Includes 15,000 shares issuable upon the exercise of an outstanding warrant
and 80,500 shares issuable upon exercise of options.
(2) Includes 29,928.5 shares issuable upon the exercise of options.
(3) Includes 6,100 shares issuable upon the exercise of options.
(4) Includes 8,500 shares issuable upon the exercise of options.
(5) Includes 8,500 shares issuable upon the exercise of options.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS (PROPOSAL NO. 2)
The Board of Directors has appointed PricewaterhouseCoopers LLP to act as
independent auditors for the Company for the year ending December 31, 2001,
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, 2000.
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, 2001. 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.
Assuming the existence of a quorum, the appointment of PriceWaterhouseCoopers
LLP will be ratified if approved by the holders of a majority of the shares
present in person or by proxy. Abstentions and the failure to vote will have
the effect of a "No" vote.
AMENDMENT TO 1992 STOCK INCENTIVE PLAN (PROPOSAL NO. 3)
The Company's stockholders are being asked to approve an amendment to the
Company's 1992 Stock Incentive Plan (the "Plan") to increase the number of
shares reserved for issuance thereunder to 900,000 shares. The Plan was
originally adopted in June 1992 and amended in 1996 and 1998. It provides
for granting stock options to acquire shares of the Company's common stock
as well as issuing shares of such stock directly, to officers, employees and
consultants of the Company or its subsidiaries.
Following are summaries of the principal provisions and the principal federal
income tax consequences of the Plan. Capitalized terms used in this summary
that are not defined herein have the meanings ascribed to them in the Plan.
The following description of the Plan is not complete. Shareholders are able
to review the entire text of the Plan, available by request from the Company.
OPERATION OF THE PLAN
DURATION OF THE PLAN. Unless sooner terminated in accordance with its terms,
the Plan expires on May 31, 2002.
PLAN ADMINISTRATION. The Plan is generally administered by the Board of
Directors or a committee of th Board (the "Committee), consisting of three
or more directors. The current members of the Committee are Ms. O'Brien and
Messrs. Turel and Ellis.
SHARES AVAILABLE FOR ISSUANCE. The Option Plan currently authorizes the
issuance of 600,000 shares of Common Stock. Assuming shareholder approval
of the proposed 300,000 share increase in the number of shares of Common
Stock that may be issued, delivered or made subject to awards or Options
under the Plan, a total of 900,000 shares of Common Stock would be issuable
under the Plan.
Whenever any Option terminates or is cancelled for any reason without having
been exercised or whenever the shares of Common Stock subject to an award or
Option are resold to the Company or forfeited, or any shares of Common Stock
are delivered to pay the exercise price of an Option, those shares will then
become available for grants of Options or awards under the Plan.
PLAN PARTICIPANTS. The Committee may select any officer, employee or
consultant to receive awards or Options under the Plan. Currently there are
approximately 100 individuals eligible to participate in the Plan.
AWARDS AVAILABLE UNDER THE PLAN. Grants under the Plan may take the form of
Options to purchase shares of Common Stock as well as the issuance of the
Shares themselves directly to Plan participants. The Committee, to the extent
authorized and consistent with the provisions of the Plan, determines the
provisions of awards and Options under the Plan, vesting and exercise
schedules, the price at which Options may be exercised or shares issued and
the manner of exercise.
TERMS OF EXERCISE. Each Option will be exercisable, in whole or in part,
prior to its cancellation or termination, by written notice to the Company.
With respect to the exercise of any Option, the Plan requires that notice be
accompanied by payment in full of the purchase price in cash, or if
acceptable to the Committee, in the form of a check, promissory note,
delivery of shares of Common Stock, or a combination thereof.
TRANSFERABILITY AND TERMINATION. Options are not transferable except by
devise or by the laws of descent and distribution. In general, Option
agreements provide for termination upon the earlier of (i) the date fixed
by the Committee, when the Option is granted or (ii) in the event of
termination of employment other than for cause, up to 90 days after the
holder's termination of employment to the extent the Option was then
exercisable, unless determined otherwise by the Committee.
OPTIONS. Options meeting the requirements of Section 422 of the Code
("Incentive Stock Options") and those that do not so qualify ("Non-
Qualified Options") are both available for grant under the Plan. The term
of each Option will be determined by the Committee at the time of grant.
In the event of death or termination due to disability, the Plan permits
the exercise of Options, to the extent then exercisable, for up to one year
thereafter. In the event of termination for cause, any and all vested Options
remain exercisable for a period of three months thereafter, at which time the
Option is canceled. In general, the Options have a term of ten years, unless
extended.
RESTRICTED STOCK. The Committee may issue shares of Common Stock directly to
Plan participants. Such shares may be subject to risk of forfeiture based
upon certain conditions determined by the Committee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES. The following is a brief summary of
the principal federal income tax consequences of Options or awards under the
Plan based upon current federal income tax laws. The Plan is not qualified
under Section 401(a) of the Code. The summary is not intended to be
comprehensive and, among other things, does not describe state, local or
foreign tax consequences.
STOCK OPTIONS. Generally, an Optionee will not recognize taxable income at the
time of grant of a Non-Qualified Option. Upon exercise of the Option, the
difference between the fair market value of the shares on the date of exercise
and the exercise price will be taxable as ordinary income to the Optionee. If
that amount is included in income or the Company satisfies applicable
reporting requirements, the Company will receive a commensurate tax deduction
at the time of exercise, subject to the deduction limitation under Section
162(m) of the Code (which is discussed below). The basis in the shares
acquired upon exercise of a Non-Qualified Option will equal the fair market
value of the Shares at the time of exercise. The holding period of the shares
for capital gain purposes will begin on the date of exercise. In the event of
a sale of the shares received upon the exercise of a Non-Qualified Option, any
appreciation or depreciation after the exercise date generally will constitute
short-term or long-term capital gain or loss, depending on whether the shares
have been held for at least twelve months after the date of exercise.
An Optionee will generally not recognize taxable income at the time of grant or
exercise of an Incentive Stock Option, and the Company will not be entitled to
a tax deduction with respect to that grant or exercise. However, upon exercise,
the difference between the fair market value of the shares and the exercise
price is an item of tax preference subject to the possible application of the
alternative minimum tax. Generally, if an Optionee holds shares acquired upon
the exercise of an Incentive Stock Option for at least one year after the date
of exercise and for at least two years after the date of grant, then upon
disposition of the shares by the Optionee, the difference, if any, between
the sales price of the shares and the exercise price will be treated as long-
term capital gain or loss to the Optionee. Upon a sale or other disposition of
shares acquired upon the exercise of an Incentive Stock Option within one year
after the transfer of the shares to the Optionee or within two years after the
date of grant (a "disqualifying disposition"), the excess of (a) the lesser of
(x) the fair market value of the shares at the time of exercise of the Option
and (y) the amount realized on the disqualifying disposition of the shares over
(b) the exercise price of the shares, should constitute ordinary income to the
Optionee and the Company should be entitled to a deduction in the amount of
that income, subject to the deduction limitation under Section 162(m) of the
Code. The excess, if any, of the amount realized on a disqualifying disposition
over the fair market value of the shares at the time of the exercise generally
will constitute short-term or long-term capital gain, depending on whether the
shares have been held for at least twelve months after the date of exercise. If
an Option is exercised through the use of shares previously owned by the
Optionee, the exercise generally will not be considered a taxable disposition of
the previously-owned shares and thus no gain or loss will be recognized with
respect to the shares upon exercise. However, if an Incentive Stock Option
is exercised through the use of previously-owned shares that were acquired
upon the exercise of an Incentive Stock Option, and the holding period
requirement for those shares is not satisfied at the time they are used to
exercise the Option, that use will constitute a disqualifying disposition of
the previously-owned shares resulting in the recognition of ordinary income
in the amount described above with respect to disqualifying dispositions.
RESTRICTED STOCK. A direct grant of shares subject to vesting restrictions to
a Plan participant generally does not constitute a taxable event for a grantee
or the Company. However, the grantee will be subject to tax, at ordinary income
rates, when any restrictions on ownership of the shares lapse. If the Company
satisfies applicable reporting requirements, the Company will be entitled to a
commensurate deduction at that time, subject to the deduction limitation under
Section 162(m) of the Code. A grantee may elect to recognize taxable ordinary
income at the time restricted shares are awarded in an amount equal to the fair
market value of the shares at the time of grant, determined without regard to
any forfeiture restrictions. If such an election is made and if the Company
satisfies applicable reporting requirements, the Company will be entitled to
a deduction at that time in the same amount, subject to the deduction
limitation under Section 162(m) of the Code. Future appreciation of the shares
will be taxed at the capital gains rate when the shares are sold. However, if,
after making such election, the shares are forfeited, the grantee will be unable
to claim a deduction.
SECTION 280G OF THE CODE. Under certain circumstances, the accelerated vesting
or exercise of Options or the accelerated lapse of restrictions with respect to
other awards in connection with a change of control of the Company might be
deemed an "excess parachute payment" for purposes of the golden parachute tax
provisions of Section 280G of the Code. To the extent it is so considered, the
grantee may be subject to a 20% excise tax, and the Company may be denied a tax
deduction.
BOARD RECOMMENDATION
The Board unanimously recommends a vote FOR the amendment to the Plan thereby
increasing the number of shares reserved for issuance under the Plan. Assuming a
quorum is present at the meeting, the amendment will be approved if the holders
of a majority of the shares of Common Stock present in person or by proxy vote
in favor of the amendment. Abstentions and failure to vote will have the effect
of a "no" vote.
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 2002 annual meeting of shareholders must be
received by the Company not later than January 4, 2002, 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 2001
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, 2000 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.
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 $7 to $14, $14 to $20
and over $20 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 146 acres of vineyard land. Fifty acres of planted
vineyards-42 acres producing and 8 acres in development, which includes
a grafting of 8 acres to Pinot Noir in 1999 at the Turner site. 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 winemaking capacity.
The purchase price paid by the Company to the Tualatin Valley shareholders
in exchange for their shares was $1,824,000 plus Tualatin Vineyards'
current assets minus their current and long-term liabilities as reflected
in their balance sheet dated April 15, 1997. The Company paid 35 percent
of the purchase price in the form of cash with the balance paid through
the issuance of shares of the Company's common stock at an agreed price
per share. The final purchase price was $1,988,601 paid to the Tualatin
Vineyard, Inc. shareholders.
In December 1999, the Company sold one parcel of three parcels offered for
sale at its Tualatin Estate Vineyard. The Company entered into an agreement
with the new owners to lease back the land for farming the grapes for use
in the Company's Estate bottling program. The final purchase price paid
was $1,500,000 for the 80-acre parcel. The lease is for twenty years with
three 5-year renewals at the Company's option. The Company continues to
offer the two remaining properties and equipment on the same type of sale/
leaseback arrangement. One parcel contains 75 acres priced at $808,700 and
the last parcel, which contains the Tualatin Estate winery plus 115 acres,
is priced at $1,825,000.
The Company also leases O'Connor Vineyards on a ten-year contract adding
an additional 54 producing acres. All of these highly regarded vineyards
are within the Willamette Valley Appellation.
Products
Under its Willamette Valley Vineyards label, the Company currently
produces and sells the following types of wine in 750 ml bottles: Pinot
Noir, the brand's flagship and its largest selling varietal in 2000,
from $15 to $60 per bottle; Chardonnay, from $14 to $25 per bottle; Pinot
Gris, $14 per bottle; Riesling, Gewurztraminer and Oregon Blossom (blush
blend), $9 per bottle. As a convenience to our restaurant customers, the
Company produces some of its products in larger sized packages. This
brand's mission is to become the premier producer of Pinot noir from the
Pacific Northwest.
The Company currently produces and sells small quantities of Oregon's Nog
(a seasonal holiday product), $10 per bottle, under a "Made in Oregon
Cellars" label.
Under its Tualatin Estate Vineyards label, the Company currently produces
and sells the following types of wine in 750 ml bottles: Pinot Noir, the
brand's flagship, $28 per bottle; Chardonnay, $14 per bottle; Semi-Sparkling
Muscat, $15 per bottle; Gewurztraminer, $9 per bottle; and Pinot Blanc,
$14 per bottle. This brand's mission is to be among the highest quality
estate producers of Burgundy and Alsatian varietals in Oregon.
In November 1998, the Company released a new label under the Griffin Creek
brand name, which the company owns. 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, the brand's flagship, $35 per bottle;
Syrah, $35 per bottle; Cabernet Sauvignon, $40 per bottle; Pinot Gris,
$18 per bottle; Chardonnay, $30 per bottle; Viognier, $30 per bottle;
and Pinot Noir, $27 per bottle. This brand's mission is to be the highest
quality producer of Bordeaux and Rhone varietals in Oregon.
Vineyard
The Property. The Company's estate vineyard at the Turner site currently
has 50 acres planted and 42 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 Vineyards, Inc. in April 1997 (including the
subsequent sale-leaseback of a portion of the property in December 1999)
added 83 acres of additional producing vineyards and some 60 acres of
bare land for future plantings. In 1997, the Company planted 19 acres at
the Tualatin site and planted another 41 acres in 1998, the majority being
Pinot Noir, which is the Company's flagship varietal. All of the new
planting will be available to harvest in the next two to four years.
Also in 1997, the Company entered into a 10-year lease with O'Connor
Vineyards (54 acres) located near Salem to manage and obtain the supply of
grapes from O'Connor Vineyards.
In 1999, the Company purchased 33 acres of vineyard land adjoining
Tualatin Estate for future plantings and use the lot line adjustment to
create three separate land parcels at Tualatin Estate.
The Company now controls 280 acres of vineyard land. At full production,
these vineyards should enable the Company to grow approximately 50% of
the grapes needed to meet the Winery's ultimate production capacity of
298,000 gallons (124,000 cases).
Grape Supply. In 2000, the Company's 42 acres of producing estate vineyard
yielded approximately 109 tons of grapes for the Winery's twelfth crush.
Tualatin Vineyards produced 173 tons of grapes in 2000. O'Connor Vineyards
produced 129 tons of which about 7% were sold to other wineries because of
previous commitments. In 2000, the Company purchased an additional 822
tons of grapes from other growers. The Winery's 2000 total wine production
was 214,206 gallons (90,097 cases) from its 1999 crush, and 21,015 gallons
(8,839 cases) from its 2000 crush. The Company expects to produce an
additional 175,588 gallons in 2001 (73,854 cases) from its 2000 crush. The
Vineyard cannot and will not provide the sole supply of grapes for the
Winery's near-term production requirements. The Company has also entered
into grape purchase contracts with certain directors or their respective
affiliates of the Company. See "CERTAIN TRANSACTIONS."
The Company fulfills its remaining grape needs by purchasing grapes from
other nearby vineyards at competitive prices. The Company believes high
quality grapes will be available for purchase in sufficient quantity to meet
the Company's requirements except in the Pinot Noir varietal, where there
is increasing demand. The grapes grown on the Company's vineyards establish
a foundation of quality upon which the purchase of additional grapes is built.
In addition, wine produced from grapes grown in the Company's own vineyards
may be labeled as "Estate Bottled" wines. These wines traditionally sell at
a premium over non-estate bottled wines.
Viticultural Conditions. Oregon's Willamette Valley is recognized as a
premier location for growing certain varieties of high quality wine grapes,
particularly Pinot Noir, Chardonnay, Riesling and Pinot Gris. The Company
believes that the Vineyard's growing conditions, including its soil,
elevation, slope, rainfall, evening marine breezes and solar orientation
are among the most ideal conditions in the United States for growing certain
varieties of high-quality wine grapes. The Vineyard's grape growing
conditions compare favorably to those found in some of the famous
Viticultural regions of France. Western Oregon's latitude (42o-46o North)
and relationship to the eastern edge of a major ocean is very similar to
certain centuries-old wine grape growing regions of France. These
conditions are unduplicated anywhere else in the world except the great
wine grape regions of Northern Europe. The Company's property is located
at the same latitude as the famous Haut Brion vineyards in Bordeaux, France.
The Vineyard's soil type is Jory/Nekia, a dark reddish-brown silky clay
loam over basalt bedrock noted for being well drained, acidic, of adequate
depth, retentive of appropriate levels of moisture and particularly suited
to growing high quality wine grapes.
The Vineyard's elevation ranges from 533 feet to 700 feet above sea level
with slopes from 2 percent to 30 percent (predominately 12-20 percent).
The Vineyard's slope is oriented to the south, southwest and west. Average
annual precipitation at the Vineyard is 41.3 inches; average annual air
temperature is 52 to 54 degrees Fahrenheit, and the length of each year's
frost-free season averages from 190 to 210 days. These conditions compare
favorably with conditions found throughout the Willamette Valley
viticultural region and other domestic and foreign viticultural regions,
which produce high quality wine grapes.
In the Willamette Valley, permanent vineyard irrigation is not required.
The average annual rainfall provides sufficient moisture to avoid the need
to irrigate the Vineyard. However, if the need should arise, the Company's
property contains one water well which can sustain sufficient volume to
meet the needs of the Winery and to provide auxiliary water to the
Vineyard for new plantings and unusual drought conditions.
Winery
Wine Production Facility. The Company's Winery and production facilities,
built at an initial cost of approximately $1,500,000, were originally
capable of producing up to 75,000 cases of wine per year, depending on the
type of wine produced. In 1996 the Company invested an additional $750,000
to increase its capacity from 75,000 cases to its present capacity of
104,000 cases (250,000 gallons). It added one large press, six stainless
steel fermenters, and handling equipment to increase its capacity to the
new level. It also expanded the size of its crush pad to meet the needs of
the additional tons of grapes crushed. In 2000, the Winery produced 214,206
gallons (90,097 cases) of wine from its 1999 crush, and 21,015 gallons
(8,839 cases) from its 2000 crush. The Winery is 12,784 square feet in size
and contains areas for the processing, fermenting, aging and bottling of wine,
as well as an underground wine cellar, a tasting room, a retail sales room
and administrative offices. A 12,500 square foot outside production area was
added for the crushing, pressing and fermentation of wine grapes. In 1993,
a 4,000 square foot insulated storage facility with a capacity of 30,000
cases of wine was constructed at a cost of approximately $70,000. This
facility was converted to barrel storage in 1998 in order to accommodate an
additional 750 barrels for aging wines. This change increases the Company's
barrel aging capacity at the Turner site. The production area is equipped
with a settling tank and sprinkler system for disposing of wastewater from
the production process in compliance with environmental regulations. The
settling tank and sprinkler system were installed at a total cost of
approximately $20,000.
In 1997, the Company constructed a 20,000 square foot storage building to
store all if its bottled product at an approximate cost of $750,000.
Previously, the Company rented a storage facility with an annual rental
cost to the Company of $96,000.
With the purchase of Tualatin Vineyards, Inc., the Company added 20,000
square feet of additional production capacity. Although the Tualatin
facility was constructed over twenty years ago, it adds 20,000 cases of
wine production capacity to the Company, which the Company felt at the
time of purchase was needed. To date, production and sales volumes have
not expanded enough to necessitate the utilization of the Tualatin
facilities. The Company decided to move current production to its Turner
site to meet short-term production requirements. The capacity at Tualatin
is available to the Company to meet any future production expansion needs.
Construction of Hospitality Facility. In May 1995, the Company completed
construction of a large tasting and hospitality facility of 19,470 square
feet (the "Hospitality Center"). The first floor of the Hospitality Center
includes retail sales space and a "great room" designed to accommodate
approximately 400 persons for gatherings, meetings, weddings and large
wine tastings. An observation tower and decking around the Hospitality
Center enables visitors to enjoy the view of the Willamette Valley and the
Company's Vineyard. The Hospitality Center is joined with the present
Winery by an underground cellar tunnel. The facility includes a basement
cellar of 10,150 square feet (including the 2,460 square foot underground
cellar tunnel) to expand storage of the Company's wine in a proper environment.
The cellar provides the Winery with ample space for storing up to 1,600
barrels of wine for aging.
Just outside the Hospitality Center, the Company has planned a landscaped park
setting consisting of one acre of terraced lawn for outdoor events and five
wooded acres for picnics and social gatherings. The area between the Winery
and the Hospitality Center forms a 20,000 square foot quadrangle. As designed,
a removable fabric top making it an all-weather outdoor facility to promote
sale of the Company's wines through outdoor festivals and social events can
cover the quadrangle.
The Company believes the addition of the Hospitality Center and the park and
quadrangle has made the Winery an attractive recreational and social destination
for tourists and local residents, thereby enhancing the Company's ability to
sell its wines.
Mortgages on Properties. The Company's winery facilities are subject to two
mortgages with a principal balance of $3,228,752 at December 31, 2000 and
$3,584,123 at December 31, 1999. The mortgages are payable in annual aggregate
installments including interest of approximately $350,000 through 2012.
After 2012, the Company's annual aggregate mortgage payment including interest
will be approximately $75,000 until the year 2014. The mortgage on the
Turner site had a principal balance of $2,510,484 on December 31, 2000. The
mortgage on the Tualatin Valley property, issued in April 1997 to fund the
acquisition of the property and development of its vineyard, had a principal
balance of $718,268 on December 31, 2000, after the Company made an additional
payment of approximately $471,000 in December 1999. The additional payment was
made as a result of the Company selling a parcel of the Tualatin Valley
property under a sale-leaseback agreement.
Wine Production. The Company operates on the principle that winemaking is a
natural but highly technical process requiring the attention and dedication of
the winemaking staff. The Company's Winery is equipped with the latest
technical innovations and uses modern laboratory equipment and computers to
monitor the progress of each wine through all stages of the winemaking process.
Beginning with the Company's first vintage in 1989, the Company's annual grape
harvest and wine production are as follows:
Tons of
Grapes Production Cases
Crush Year Crushed Year Produced
1989 203
1990 206 1990 13,200
1991 340 1991 13,400
1992 565 1992 22,100
1993 633 1993 38,237
1994 590 1994 41,145
1995 885 1995 40,411
1996 1290 1996 53,693
1997 1426 1997 91,793
1998 1109 1998 77,064
1999 1383 1999 81,068
2000 1223 2000 98,936
The quantity of grapes crushed in 1997 does not include 228 tons of grapes
that were purchased and resold on the open market because the Company had
contracted for more grapes than were needed. The Company was unable to sell
270 tons of grapes before crush; this tonnage converts to 44,000 gallons of
bulk wine that the Company sold in 1998.
Company Strategy
The Company, as one of the largest wineries in Oregon, believes its success
is dependent upon its ability to: (1) grow and purchase high quality vinifera
wine grapes; (2) vinify the grapes into premium, super premium and ultra
premium wine; and (3) achieve significant brand recognition for its wines,
first in Oregon and then nationally and internationally. The Company's goal
is to continue as one of Oregon's largest wineries, and establish a
reputation for producing some of Oregon's finest, most sought after wines.
Based upon several highly regarded surveys of the US wine industry, the
Company believes that successful wineries exhibit the following four key
attributes: (i) focus on production of high-quality premium, super premium
and ultra premium varietal wines; (ii) achieve brand positioning that
supports high bottle prices for its high quality wines; (iii) build brand
recognition by emphasizing restaurant sales; and (iv) development of the
strong marketing advantages (such as a highly visible winery location and
successful self-distribution).
The Company has designed its strategy to address each of these attributes.
To successfully execute this strategy, the Company has assembled a team of
accomplished winemaking professionals, and has constructed and equipped a
22,934 square foot state-of-the-art Winery and a 12,500 square foot outdoor
production area for the crushing, pressing and fermentation of wine grapes.
The Company's marketing and selling strategy is to sell its premium, super
premium and ultra premium cork finished wine through a combination of (i)
direct sales at the Winery, (ii) self-distribution to local and regional
restaurants and retail outlets, and (iii) sales through independent
distributors and wine brokers who market the Company's wine in specific
targeted areas where self-distribution is not economically feasible. Most
of the Company's wines are sold under its Willamette Valley Vineyards label.
The Company believes the location of its Winery next to Interstate 5, Oregon's
major north-south freeway, significantly increases direct sales to consumers
and facilitates self-distribution of the Company's products. The Company
believes this location provides high visibility for the Winery to passing
motorists, thus enhancing recognition of the Company's products in retail
outlets and restaurants. The Company's Hospitality Center has further
increased the Company's direct sales and enhanced public recognition of
its wines.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the NASDAQ Small Cap Market under
the symbol "WVVI." As of December 31, 2000, there were 3,173 stockholders
of record of the Common Stock.
The table below sets forth for the quarters indicated the high and low bids
for the Company's Common Stock as reported on the NASDAQ Small Cap Market.
The Company's Common Stock began trading publicly on September 13, 1994.
Quarter Ended
3/31/00 6/30/00 9/30/00 12/31/00
High $2.25 $2.00 $2.28 $2.06
Low $1.50 $1.50 $1.50 $1.47
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
The Company has not paid any dividends on the Common Stock, and it is not
anticipated that the Company will pay any dividends 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, 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
ffected by general industry and market conditions and growth rates, and
general domestic economic conditions.
OVERVIEW
RESULTS OF OPERATIONS
The Management is continuing the transition to higher quality, higher margin
wines. A careful selection and recruitment of top Oregon winegrowers has
lead to quality improvements in purchased grapes and in the offering of Single
Vineyard Designated bottlings. The recent plantings of new Pinot Noir clones
at Tualatin Estate, Willamette Valley Vineyards, and O'Connor Vineyards are
nearing maturity. Improvements in production staffing and barrels, and
discontinuing high volume, lower priced product lines have sharpened winemaking
focus on the Company's flagship wines. A higher level of professionalism in
the sales staff has improved the Company's ability to present and sell high
quality, high margin wines.
In fiscal year 2000, the Retail, Self-Distribution, and FOB Departments showed
increases in net contribution, after direct departmental expenses, of 25%, 13%,
and 44%, respectively, from the previous year. These increases resulted from
careful management of selling activities. Profits were depressed by higher
general and administrative expenses, particularly accounting expenses,
professional fees, and bulk wines sales, resulting in significant losses on
those sales. Although sales are increasing, they have not reached the level
to warrant a restart of the Tualatin Winery facility or equipment.
Wine Quality
The Company's wine ratings are among the highest given to Oregon produced wines.
In the January 2000 issue, "The Wine Enthusiast" magazine rated the Willamette
Valley Vineyard Signature Cuvee Pinot Noir among the top 100 wines in the world
with a score of "93".
The annual review of Oregon Pinot Noirs by Clive Coates, Master of Wine and
Publisher of the "The Vine" rated the Willamette Valley Vineyards Hoodview
Single Vineyard Designate as the leading Pinot Noir of the 1998 Oregon vintage.
Both the "Wine Spectator" and "Wine Enthusiast" gave this wine a score of "90".
Sales
Finished wine revenues increased 12% in 2000 from the previous year. Unit
sales increased 22% from the previous year. Case depletions from the
Winery increased from 71,886 in 1999 to 88,045 in 2000. The significant
increase in case depletions is due to Management's efforts to reduce low
demand white wine inventories resulting from long-term grape contracts.
The Company's distributors experienced a collective increase of 18% in
depletions of Company products to their retail customers in 2000. Sales
expenses decreased due to continued efforts to improve efficiencies.
Management expects to continue to reduce costs incurred in the year 2001
with the prospect of achieving higher average margins on sales over time.
Long-term grape contracts caused the Company to pay high prices for lower
demand white wines. These contracts expired at the end of 2000. As these
wines were sold in bulk or as finished case goods, they reduced average
margins.
Wine Inventory
The Company has built a substantial inventory of '98, '99 and '00 vintage
super premium, and ultra premium wines like Vintage Pinot Noir, Single
Vineyard Designated Pinot Noirs, and Griffin Creek Bordeaux and Rhone
varietals. Total finished wine inventory increased to 93,821 cases by year-
end 2000 from 79,371 the previous year. There are many factors that will
affect the Company's successful marketing of these wines, 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 the Company and other sources will put downward pressure on
prices, as well as other factors, many of which Management cannot control.
In addition, factors that affect the Company's ability to operate profitably
and implement the sales and marketing strategy may affect the successful
marketing of these wines. Management believes if these factors are
successfully addressed, the Company can profitably market these wines.
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 during its first quarter and expects this
trend to continue in future first quarters, including the first quarter of
2001. 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 2000 Quarter Ended Fiscal 1999 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 $146 $255 $253 $284 $150 $227 $294 $302
On-site and off-site festivals 133 77 91 149 114 86 135 168
In-state sales 418 715 755 1,011 416 497 627 872
Bulk/Grape sales 6 0 113 144 17 13 7 32
Out-of-state sales 572 636 483 714 458 451 631 629
Total winery revenues 1,275 1,683 1,695 2,302 1,155 1,274 1,694 2,003
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)
2000 1999 1998
Tasting room and retail sales $938 $973 $937
On-site and off-site festivals 450 503 565
In-state sales 2,899 2,412 2,278
Bulk /Grape Sales 263 69 454
Out-of-state sales 2,405 2,169 2,124
Revenues from winery operations $6,955 $6,126 $6,358
Less Excise Taxes 238 212 226
Net Revenue $6,717 $5,914 $6,132
2000 Compared to 1999
Tasting room sales for the year ended December 31, 2000 decreased 3.6% to
$938,303 from $973,028 for the same period in 1999. By offering higher
quality wines in the tasting room and discontinuing events with low net
returns, the net contribution, after direct departmental expenses, from
the Retail Department increased by $70,024 in 2000. The Company experienced
a decrease in revenue during 2000 in Hospitality rental income of $160,826
(included in the tasting room and retail sales category) over $227,452 in
the same period in 1999.
On-site and off-site festival sales and telephone sales for the year ended
December 31, 2000 decreased 11% to $449,558 from $502,960 for the same
period 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 that were not profitable. Despite greater competition from new
event establishments, and a reduction in retail revenues, the net
contribution from the Retail Department improved by 25%.
Wholesale sales in the state of Oregon for the year ended December 31,
2000, through the Company's independent sales force, increased 20% to
$2,898,870 from $2,412,266 for the same period in 1999. Oregon's retail
wine environment is dominated by large chain retailers. For example,
one large retailer, remains the largest in-state customer of the Company.
The sales to this retailer were $979,755 in 2000, up from $639,000 in 1999.
The net contribution, after direct expenses, from the In-state Self
Distribution Department increased by $71,360, an increase of 13%.
Out-of-state sales for the year ended December 31, 2000, increased 11% to
$2,404,863 from $2,168,897 for the same period in 1999. The Pinot Noir
variety led sales in 2000. Higher sales and lower related expenses
produced an increase in the net contribution of $232,172 from the FOB
Department, an increase of 44% from the prior year.
The Company contracted in early 1997 on a long-term basis for more grapes
than needed to meet the revised sales forecasts in the following few years.
The Company sold some of its own grapes and some of its contracted grapes
for $465,030 in 1997, $454,281 in 1998 and $22,000 in 1999. It sold $18,526
of grapes under contract in 2000. These long-term grape contracts expired
at the end of 2000. What the Company couldn't sell as grapes was produced
as bulk wine. The losses the Company suffered from bulk wine sales totaled
$104,888 in 2000. The only remaining winegrape production that exceeds
sales plans is Chardonnay from the leased O'Connor Vineyard and the
purchased Tualatin Vineyard. The significance of this imbalance between
fruit and sales forecasts is now reduced to approximately 3,000 cases of
Chardonnay, annually.
The total excise taxes collected in 2000 were $238,072 as compared to
$211,824 in 1999. Sales data in the discussion above is quoted before
the exclusion of excise taxes.
As a percentage of net revenue (i.e., gross sales less related excise taxes),
gross margin for all winery operations was 47% for fiscal year 2000 as
compared to 54% for 1999. The sales of bulk wine at a loss and grapes at
harvest at a slim margin reduced the gross margin in 2000. After
adjusting for these sales, the gross margin would be 55% in 2000 compared
to 54% in 1999. Even though the sales price increased in 2000 for many
varieties, the average sales price decreased due to the sale of low demand
inventory to institutional buyers at significant reductions from frontline
pricing. The Company has seen significant increases 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,
2000, decreased to $2,775,782 compared to $2,901,594 for the same period in
1999. As a percentage of revenue from winery operations, the selling,
general, and administrative expenses were 41% in 2000 as compared to 49%
in 1999. The selling, general, and administrative expenses decreased 4.3%
in 2000 against expenses recorded in 1999. The largest part of the
decrease in expenses in 2000 over 1999 was improved management of sales
expenses. The retirement of our Controller of 8 years lead to temporary
increases in accounting costs of $90,000 as the new Controller transitioned
and instituted new accounting systems.
Other income for the year ended December 31, 2000 was $169,305 as compared
to $85,963 for the year ended December 31, 1999. This increase was due in
part to the settlement of litigation regarding cork failures, and to rebates
received from Farm Credit Services. Interest income decreased to $3,894 in
fiscal year 2000 from $7,807 in fiscal year 1999. Interest expense increased
to $547,216 in fiscal year 2000 from $483,723 in fiscal year 1999.
The provision (benefit) for income taxes and the Company's effective tax rate
were $19,595 and 57% of pre-tax income in fiscal year 2000 with $(22,880) or
(20)% of pre-tax loss recorded for fiscal year 1999.
As a result of the above factors, net income/(loss) increased to $15,062 in
fiscal 2000 from $(92,232) for fiscal year of 1999. Earnings/(loss) per
share were $.00, $(.02), and $(.02), in fiscal years 2000, 1999, and 1998,
respectively.
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 that 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. As the
Oregon wine retail market is dominated by large chain retailers, one large
retailer, remains the largest in-state customer of the Company. The sales
to this retailer were $639,000 in 1999, up from $463,000 in 1998. 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.
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 that 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.
Liquidity and Capital Resources
Willamette Valley Vineyards was originally established as a sole proprietorship
by Oregon winegrower Jim Bernau in 1983. The Company was organized on May 2,
1988, and sold its first wine in late April 1990. Prior to April 1990, the
Company's working capital and Vineyard development and Winery construction
costs were principally funded by cash contributed by James Bernau and Donald
Voorhies, the Company's co-founders, and by $1,301,354 in net proceeds
received from the Company's first public stock offering, which began in
September 1988 and was completed in June 1989 with the sale of 882,352 shares
at a price of $1.70 per share.
Since April 1990, the Company has operated on revenues from the sale of its
wine and related products and the net proceeds from three additional stock
offerings. The Company's second public stock offering began in July 1990
and was completed in July 1991 with the sale of 731,234 shares at prices of
$2.65 and $2.72 per share exclusively to Oregon residents, resulting in net
proceeds to the Company of $1,647,233.
In 1992, the Company conducted two stock offerings. The Company commenced
an offering on July 18, 1992 that 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 over-subscription 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 $252,876 at December 31, 2000 from
$219,041 at December 31, 1999.
Inventories increased 13% as of December 31, 2000, to $6,921,014 from the
December 31, 1999 level of $6,142,697. As the Company ramps up to improve
the quality of its wine, the Company has seen a significant increase in its
higher cost wines as shown below:
In Cases units
Willamette Valley Vineyards 12/31/99 12/31/00
Vineyard Designate Pinot Noir 5,929 8,178
Signature Pinot Noir 1,995 2,731
Griffin Creek Label
Merlot 335 1,852
Syrah 201 542
Pinot Gris 708 1,991
Tualatin Estate Label 8,700 9,155
Total 17,868 24,449
Property, plant, and equipment, net, decreased 6% as of December 31, 2000,
to $5,989,169 from $6,402,023 as of December 31, 1999.
Long-term debt decreased to $3,627,602 as of December 31, 2000, from
$3,796,509 as of December 31, 1999.
The Company has a line of credit from Farm Credit Services with a limit
of $2,750,000. As of December 31, 2000 the outstanding balance of the
line was $2,616,549 as compared to $1,685,584 in 1999. 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 $2,750,000 in
May of 2000 up $250,000 from the old line of credit. Farm Credit Services
established credit line targets based upon the Company's sale/lease back
plan for a Tualatin Estate parcel and would increase the interest rate on
the credit line if those targets were not met in September and December of
2000. The Company did not meet its September target or its December target
and Farm Credit Services increased their lending rate .5% above their base
rate for 2000. The Company was not in compliance with 3 of 5 debt covenants,
but obtained a waiver letter from Farm Credit Services at December 31, 2000.
The line of credit expired on May 1, 2001. Northwest Farm Credit Services
extended the line of credit on May1, 2001, to August 1, 2001. In light of
the Company's current projected earnings and cash flow, cash generated from
operations will not be sufficient to pay back the entire bank debt of
$2,700,000, on a current basis. Management plans to continue to market some
pieces of real estate, the sale of which would generate significant cash to
repay the debt. Additionally, management plans to obtain financing from
another financial institution. If the Company is unable to sell real estate
and/or refinance the debt with another financial institution, the Company may
be unable to continue its normal operations, except to the extent permitted by
Northwest Farm Credit Services.
FINANCIAL HIGHLIGHTS
(in thousands, except for per share amounts)
Year ended December 31,
2000 1999 1998 1997 1996 1995 1994 1993 1992
Revenue from
winery operations
$6,717 $5,914 $6,132 $5,714 $4,235 $3,638 $2,869 $2,264 $1,818
Net Income
(loss)
15 (92) (72) 68 170 6 170 116 19
Net Income
(loss)
per share
0.00 (0.02) (0.02) 0.02 0.05 0.00 0.04 0.03 0.01
Weighted average
number of common
shares outstanding
4,254 4,253 4,233 4,106 3,785 3,785 3,785 3,784 3,350
As of
December 31,
2000 1999 1998 1997 1996 1995 1994 1993 1992
Selected balance
sheet data:
Working capital
$3,159 $3,115 $2,515 $2,471 $2,696 $1,981 $1,661 $2,333 $2,472
Total assets
15,798 15,026 14,391 13,946 10,264 8,340 6,881 6,677 6,076
Long-term debt
3,628 3,797 4,293 4,044 3,170 2,008 889 910 440
Shareholders' equity
6,995 6,978 7,035 7,105 5,628 5,458 5,451 5,278 5,180
Willamette Valley
Vineyards, Inc.
Report and Financial Statements
For the Years Ended December 31, 2000, 1999 and 1998
Willamette Valley Vineyards, Inc.
Index to Financial Statements
Report of Independent Accountants F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5
Notes to Financial Statements F-6
Report of Independent Accountants
To the Board of Directors and Shareholders of
Willamette Valley Vineyards, Inc.
In our opinion, the accompanying balance sheets 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,
2000 and 1999, and the results of its operations and its cash
flows for each of the three years in the period ended December
31, 2000, in conformity with accounting principles generally
accepted in the United States of America. 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 of America, which require that we
plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material mis-
statement. 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 our opinion.
The accompanying 2000 financial statements have been prepared
assuming that the Company will continue as a going concern. As
more fully discussed in Note 13 to the financial statements, the
Company has not renewed its operating line of credit with the
bank, which expires May 1, 2001. Management's plans in regard
to these matters are also described in Note 13. These matters
raise substantial doubt about the Company's ability to continue
as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this
uncertainty.
PricewaterhouseCoopers LLP
Portland, Oregon
March 8, 2001
Willamette Valley Vineyards, Inc.
Balance Sheet
December 31, 2000 and 1999
ASSETS 2000 1999
Current Assets:
Cash and cash equivalents $ 252,876 $ 219,041
Accounts receivable, net (Note 2) 564,020 429,495
Inventories (Note 3) 6,921,014 6,142,697
Prepaid expenses and
Other current assets 45,954 79,102
Deferred income taxes (Note 10) 118,951 89,598
--------- ---------
Total current assets 7,902,815 6,959,933
Vineyard development costs, net
(Note 1) 1,608,365 1,396,317
Property and equipment, net
(Note 1 and 4) 5,989,169 6,402,023
Investments (Note 5) 4,974 4,974
Note receivable (Note 11) 56,869 52,975
Debt issuance costs 50,061 56,953
Other assets 185,619 141,655
---------- ---------
$15,797,872 $15,014,830
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 6) $ 2,616,549 $ 1,685,584
Current portion of long-term debt and
capital lease obligations (Note 7) 220,921 213,502
Accounts payable 847,883 960,479
Accrued commissions and payroll costs 143,662 126,375
Income taxes payable - 42,429
Grape payables 914,366 827,843
------- -------
Total current liabilities 4,743,381 3,856,212
Long-term debt and capital lease
Obligations (Note 7) 3,406,681 3,583,007
Deferred rent liability 31,634 -
Deferred gain (Note 12) 474,695 508,054
Deferred income taxes (Note 10) 146,819 89,598
--------- --------
8,803,210 8,036,871
========= =========
Commitments and contingencies (Notes 12 and 13)
Shareholders' equity (Notes 8 and 9):
Common stock, no par value -
10,000,000 Shares authorized,
4,254,481 and 4,253,431 shares
issued and outstanding at
December 31, 2000 and 1999 6,817,613 6,815,972
Retained earnings 177,049 161,987
--------- ---------
Total shareholders' equity 6,994,662 6,977,959
--------- ---------
$15,797,872 $15,014,830
=========== ===========
Willamette Valley Vineyards, Inc.
Statement of Operations
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Net revenues $6,716,857 $5,914,208 $6,132,355
Cost of goods sold 3,532,401 2,737,773 3,076,507
--------- --------- ---------
Gross margin 3,184,456 3,176,435 3,055,848
Selling, general and
Administrative expenses 2,775,782 2,901,594 2,694,488
--------- --------- ---------
Income from operations 408,674 274,841 361,360
--------- --------- ---------
Other income (expenses):
Interest income 3,894 7,807 22,967
Interest expense (547,216) (483,723) (493,901)
Other income 169,305 85,963 10,013
-------- -------- --------
(374,017) (389,953) (460,921)
-------- -------- ---------
Income (loss) before
income taxes 34,657 (115,112) (99,561)
Income tax (benefit)
Provision (Note 10) 19,595 (22,880) (27,581)
--------- ------- -------
Net income (loss) $ 15,062 $ (92,232) $ (71,980)
Basic net income (loss) ========== ======== ========
Per common share $ - $ (.02) $ (.02)
========== ======== ========
Diluted net income (loss)
Per common share $ - $ (.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, 2000, 1999 and 1998
Common stock Retained
Shares Dollars earnings Total
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
Stock issuance for
Compensation 1,050 1,641 - 1,641
Net loss - - 15,062 15,062
-------- -------- -------- -------
Balances at
December 31, 2000 4,254,481 $6,817,613 $177,049 $6,994,662
========= ========== ======== ==========
Willamette Valley Vineyards, Inc.
Statement of Cash Flows
Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
Cash flow from operating
Activities:
Net income (loss) $ 15,062 $ (92,232) $ (71,980)
Reconciliation of net
income (loss) to net cash
(used for) provided by
operating activities:
Depreciation and
amortization 719,046 729,770 657,536
Deferred income taxes 27,868 (65,880) (27,581)
Bad debt expense - 27,730 83,148
Stock issued for compensation 1,641 13,622 -
Changes in assets and
Liabilities:
Accounts receivable (134,525) (85,688) 365,841
Inventories (778,317) (1,519,795) (428,593)
Prepaid expenses and other
current assets 33,148 7,884 (8,693)
Notes receivable (3,894) (6,038) 101,511
Other assets (43,964) - (67,813)
Accounts payable (112,596) 645,294 (48,234)
Accrued commissions and
payroll costs 17,287 (86,835) (12,087)
Income taxes receivable - 24,436 -
Income taxes payable (42,429) 42,429 -
Grape payables 86,523 246,549 80,056
Deferred rent liability 31,634 - -
Deferred gain (33,359)
-------- ------- -------
Net cash (used for)
Operating activities (216,875) (118,754) 623,111
========= ======= =======
Cash flows from investing
activities:
Additions to property and
equipment (214,855) (484,249) (458,805)
Vineyard development
expenditures (267,233) (283,483) (445,507)
Cash received upon sale of
investments - - 100,066
Proceeds from sale of
property and equipment - 1,490,706 -
---------- --------- --------
Net cash provided by (used for)
Investing activities (482,088) 722,974 (804,246)
---------- -------- ---------
Cash flows from
financing activities:
Debt issuance costs - (71,058) (6,707)
Net increase in line of
credit balance 930,965 32,917 135,370
Issuance of long-term debt 3,034 157,731 312,760
Repayments of long-term debt(201,201) (654,170) (124,428)
--------- --------- ---------
Net cash provided by (used for)
financing activities 732,798 (534,580) 316,995
-------- --------- -------
Net increase in cash and cash
equivalents 33,835 69,640 135,860
Cash and cash equivalents:
Beginning of year 219,041 149,401 13,541
------- ------- -------
End of year $252,876 $219,041 $149,401
======== ======== ========
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 years 2000 and 1999, revenues derived from one customer
of $979,755 and $639,466, respectively, represented 15% and 11%
of the Company's revenues. The Company did not derive more than
10% of revenues from any one customer in 1998. Out-of-state and
foreign sales represented approximately 36%, 37%, and 35% of
revenues for 2000, 1999 and 1998. 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 90 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 first-in, first-out (FIFO) cost or market by variety.
In accordance with general practices in the wine industry, wine
inventories are included in current assets in the accompanying
balance sheet, although a portion of such inventories may be aged
for more than one year.
Vineyard development costs
Vineyard development costs consist primarily of the costs of the
vines and expenditures related to labor and materials to prepare
the land and construct vine trellises. The costs are capitalized
until the vineyard becomes commercially productive, at which time
annual amortization is recognized using the straight-line method
over the estimated economic useful life of the vineyard, which is
estimated to be 30 years. Accumulated amortization of vineyard
development costs aggregated $262,148 and $206,903 at December 31,
2000 and 1999, 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 whereby 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.
Other income
Other income in the year ended December 31, 2000 includes
approximately $65,000 related to the settlement of legal
proceedings in favor of the Company.
Basic and diluted net income per share
Basic earnings per share are computed based on the weighted
average number of common shares outstanding each year. Diluted
earnings per share is computed using the weighted average number
of shares of common stock and dilutive common equivalent shares
outstanding during the year. Common equivalent shares from stock
options and other common stock equivalents are excluded from the
computation when their effect is antidilutive. Options to
purchase 510,670 shares of common stock were outstanding at
December 31, 2000, but were not included in the computation of
diluted earnings per share because the exercise prices were
greater than the average market price of the common shares at
December 31, 2000. Options to purchase 474,000 and 402,000
shares of common stock were outstanding at December 31, 1999
and 1998, respectively, but were not included in the
computation of diluted earnings per share because the effect
would have been antidilutive due to the Company's losses in
those years. In addition, the warrant outstanding since 1992
(Note 8) was not included in the computation of diluted earnings
per share in 2000, 1999, or 1998 because the exercise price of
$3.42 was greater than the average market price of the common
shares during all three years.
2000
Weighted
average Earnings
shares per
Income outstanding share
Basic $ 15,062 4,254,481 -
Options - -
Warrants - -
-------- --------- ------
Diluted $ 15,062 4,254,481 $ -
======== ========= ======
1999
Weighted
average Earnings
shares per
Income outstanding share
Basic $(92,232) 4,253,431 (.02)
Options - -
Warrants - -
--------- --------- ------
Diluted $(92,232) 4,253,431 $(.02)
========= ========= ======
1998
Weighted
average Earnings
shares per
Income outstanding share
Basic $(71,980) 4,232,578 (.02)
Options - -
Warrants - -
--------- --------- ------
Diluted $(71,980) 4,232,578 $(.02)
========= ========= ======
Statement of cash flows
Supplemental disclosure of cash flow information:
2000 1999 1998
Interest paid $547,000 $492,000 $556,000
Income tax refund received 8,344 - -
Supplemental schedule of
noncash investing and
financing activities:
Capital lease 29,260 - 59,673
Issuance of common stock
awards (Note 8) 1,641 21,094 2,188
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.
Deferred rent liability
The Company leases land under a sale-leaseback agreement
(Note 12). The long-term operating lease has minimum lease
payments that escalate every year. For accounting purposes,
rent expense is recognized on the straight-line basis by
dividing the total minimum rents due during the lease by the
number of months in the lease. In the early years of a lease
with escalation clauses, this treatment results in rental
expense recognition in excess of rents paid, and the creation
of a long-term deferred rent liability. As the lease matures,
the deferred rent liability will decrease and the rental expense
recognized will be less than the rents actually paid. For the
period ended December 31, 2000, rent cost recognized in excess of
amounts paid totaled $31,634, which has been capitalized into
vineyard development costs and inventory.
Reclassifications
Certain reclassifications have been made to the 1998 and 1999
financial statements to conform with financial statement
presentation for the year ended December 31, 2000. These
reclassifications have no effect on previously reported results
of operations or shareholders' equity.
2. 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, 2000 and 1999, the Company's accounts receivable
balance is net of an allowance for doubtful accounts of $41,660
and $54,000, respectively.
3. Inventories
Inventories consist of:
2000 1999
Winemaking and Packaging Materials $ 273,189 $ 276,571
Work-in-process(costs relating to
unprocessed and/or unbottled wine
products) 2,415,006 2,463,709
Finished goods (bottled wine and
related products) 4,232,819 3,402,417
---------- ----------
$6,921,014 $6,142,967
========== ==========
4. Property and Equipment
2000 1999
Land and improvements $ 965,309 $ 938,990
Winery building and hospitality center 4,549,081 4,527,573
Equipment 4,285,585 4,089,297
---------- ----------
9,799,975 9,555,860
Less accumulated depreciation (3,810,806) (3,153,837)
----------- -----------
$5,989,169 $6,402,023
=========== ===========
During 1998 and 2000, the Company entered into capital lease
arrangements for certain winery equipment and vehicles.
Future minimum capital lease payments as of December 31, 2000
are:
2001 $ 22,684
2002 22,858
2003 16,558
2004 12,899
2005 6,107
-----------
Total minimum lease payments 81,106
Less interest portion (13,397)
-----------
Capital Lease Obligation (note 7) 67,709
Less portion due within one
year (Note 7) (16,701)
-----------
$ 51,008
===========
The cost of the Company's leased equipment and related
accumulated depreciation aggregated $88,933 and $19,320,
respectively, at December 31, 2000.
5. Investments
Investments consist of:
2000 1999
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 (Note 6). These investments are classified as held-to-
maturity investments and are recorded at historical cost.
6. Line of Credit Facility
The Company has a $2,750,000 credit facility with Northwest Farm
Credit Services. Borrowings under this facility bear interest at
11% and are collateralized by inventories and accounts receivable.
At December 31, 2000 and 1999, $2,616,549 and $1,685,584 were
outstanding under this facility, respectively. This line of
credit facility expires on May 1, 2001. In addition, Northwest
Farm Credit Services has informed the Company that they should
look for another lender (Note 13).
7. Long-Term Debt
Long-term debt consists of:
2000 1999
Northwest Farm Credit Service Loan $3,422,675 $3,598,209
Real property loan, 8.5% interest,
monthly payments of $1055 through 2019 117,938 121,249
Capital lease obligations 67,709 48,150
Vehicle financing 19,280 28,901
---------- ----------
3,627,602 3,796,509
Less current portion (220,921) (213,502)
----------- -----------
$3,406,681 $3,583,007
=========== ===========
The Company has an agreement with Northwest Farm Credit Services
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, 2000, the Company
was not in compliance with these covenants but has obtained a
waiver letter thereon (Note 13).
Future minimum principal payments of long-term debt mature as
follows:
Year Ending
December 31,
2001 $ 220,921
2002 233,693
2003 246,470
2004 257,878
2005 271,887
Thereafter 2,396,753
-----------
$ 3,627,602
===========
8. Shareholders' Equity
The Company is authorized to issue 10,000,000 shares of its
common stock. Each share of common stock is entitled to one
vote. At its discretion, the Board of Directors may declare
dividends on shares of common stock, although the Board does
not anticipate paying dividends in the foreseeable future.
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 (Notes 6 and 7).
The warrant is exercisable through June 1, 2012 at an exercise
price of $3.42 per share. As of December 31, 2000 and 1999,
no warrants had been exercised.
In each of the years ended December 31, 2000 and 1999, the
Company granted 1,050 shares and 12,500 shares of stock valued
at $1,641 and $21,094, 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.
9. Stock Incentive Plan
In 1992, the Board of Directors adopted a stock incentive plan
and reserved 175,000 shares of common stock for issuance to
employees, consultants, and directors of the Company under the
plan. 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, 2000, 1999 and 1998, the following transactions
related to stock options occurred:
2000 .
Weighted
average.
exercise
Shares price
Outstanding at beginning of year 474,000 $1.75
Granted 135,900 1.62
Exercised - -
Forfeited (99,230) 1.75
-------- -----
Outstanding at end of year 510,670 1.72
======== =====
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
======= =====
Weighted average options outstanding and exercisable at
December 31, 2000 are as follows:
Options outstanding
Weighted
Number average Weighted
Outstanding at remaining average
Exercise December 31, contractual exercise
Price 2000 life price
$ 1.50 115,710 6.04 $1.50
1.56 74,500 9.41 1.56
1.65 75,000 7.00 1.65
1.69 57,000 9.50 1.69
1.75 105,000 8.25 1.75
1.81 35,500 8.71 1.81
1.88 25,000 8.71 1.88
2.75 7,200 6.50 2.75
3.00 9,260 6.08 3.00
3.62 4,000 5.56 3.62
4.50 2,000 4.08 4.50
------------ ------- ----- ------
$1.50 -$4.50 510,670 7.67 $1.72
============ ======= ===== ======
Options exercisable
Number Weighted
Exercisable at average
Exercise December 31, exercise
Price 2000 price
$ 1.50 115,710 $1.50
1.56 29,500 1.56
1.65 75,000 1.65
1.69 12,000 1.69
1.75 84,400 1.75
1.81 20,500 1.81
1.88 5,000 1.88
2.75 4,600 2.75
3.00 7,831 3.00
3.62 4,000 3.62
4.50 2,000 4.50
------------ ------- -----
$1.50 -$4.50 360,541 $1.71
============ ======= ======
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, 2000 using
the Black-Scholes option-pricing model with the following
weighted-average assumptions used for the grants in 2000,
1999 and 1998:
2000 1999 1998
Risk-free interest rate 6.12% 5.56% 5.54%
Expected dividend yield - - -
Expected lives 8 years 8 years 8 years
Expected volatility 70% 70% 70%
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, 2000, 1999
and 1998, the total value of the options granted was computed
to be $173,689, $173,815 and $192,540, respectively, which
would be amortized on a straight-line basis over the vesting
period of the options.
For the years ended December 31, 2000, 1999 and 1998, the
weighted average fair value of options granted was computed
to be $1.30, $1.44 and $0.85, 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:
2000 1999 1998
Net income (loss)-
As reported $ 15,062 (92,232) $ (71,980)
Per share:
Basic - (.02) (.02)
Diluted - (.02) (.02)
Net income (loss)-
Pro forma (112,570) (181,201) (175,860)
Per share:
Basic (.03) (.04) (.04)
Diluted (.03) (.04) (.04)
The effects of applying SFAS 123 for providing pro forma
disclosures for the three years ended December 31, 2000 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.
10. Income Taxes
The provision (benefit) for income taxes consists of:
2000 1999 1998
Current tax expense:
Federal $ (8,273) $ 43,000 -
State - - -
---------- --------- ---------
(8,273) 43,000 -
---------- --------- ---------
Deferred tax expense (benefit)
Federal 34,628 (68,319) $(24,291)
State 4,440 (8,761) (3,290)
---------- --------- ---------
39,068 (77,080) (27,581)
---------- --------- ---------
(Decrease) increase in
valuation allowance (11,200) 11,200 -
---------- --------- ---------
Total $ 19,595 (22,880) $(27,581)
========== ========= =========
The effective income tax rate differs from the federal statutory
rate as follows:
Year ended December 31,
2000 1999 1998
Federal statuatory rate 34.0% (34.0)% (34.0)%
State taxes, net of federal
Benefit 4.4 (4.4) (4.4)
Permanent differences 29.0 13.2 9.3
(Decrease) increase in
valuation allowance (32.3) 9.7 -
Other, primarily prioryear taxes 21.3 (4.4) 1.4
------ ------ -----
56.4% (19.9)% (27.7)%
====== ====== ======
Permanent differences consist primarily of nondeductible meals
and entertainment and life insurance premiums.
Deferred tax assets and (liabilities) consist of:
December 31,
2000 1999
Accounts receivable $15,981 20,714
Inventory 76,717 60,857
Other 26,253 19,227
------- -------
Net current deferred tax assets 118,951 100,798
------- -------
Depreciation (430,786) (440,071)
Net operating loss carryforwards 63,347 112,583
Deferred gain on sale-leaseback 182,093 194,890
Alternative minimum tax credit
Carryforward 38,527 43,000
------- -------
Net noncurrent deffered tax
Liability (146,819) (89,598)
-------- ---------
Net deferred tax asset (27,868) 11,200
Valuation allowance - (11,200)
-------- --------
Total $(27,868) -
======== ========
The Company's net operating loss carryforwards, which are
approximately $165,000, expire between 2015 and 2020.
11. Related Parties
During 2000, 1999 and 1998, the Company purchased grapes from
certain shareholders at an aggregate price of $73,958, $61,499
and $105,332, respectively. At December 31, 2000, 1999 and
1998, grape payables included $37,293, $26,586 and $52,667,
respectively, owed to these shareholders.
The Company has a loan to its president with a balance of
$56,869 at December 31, 2000. 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 collateralized by
the common stock of the Company held by its president. This
note, including the related interest receivable, is classified
as a long-term note receivable in the accompanying balance sheet.
12. 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. In December
1999, under a sale-leaseback agreement, the Company sold a
portion of the Tualatin Vineyards property with a net book
value of approximately $1,000,000 for approximately $1,500,000
cash and entered into a 20 year operating lease agreement.
The gain of approximately $500,000 is being amortized over the
20 year term of the lease.
As of December 31, 2000, future minimum lease payments are as
follows:
Year ending
December 31,
2001 $ 190,544
2002 193,485
2003 196,499
2004 202,289
2005 205,289
Thereafter 2,279,428
----------
Total $3,267,534
==========
The Company is also committed to lease payments for various
office equipment. Total rental expense for all operating
leases excluding the vineyards, amounted to $14,364, $27,372
and $30,647 in 2000, 1999, and 1998, respectively. In
addition, payments for the leased vineyards have been
included in inventory and vineyard developments costs and
aggregate approximately $196,308, $81,300, and $77,000,
respectively, for each of the years ended December 31, 2000,
1999, and 1998.
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.
13. Going Concern
The accompanying financial statements have been prepared
assuming the Company will continue as a going concern. As
discussed in Note 6, the line of credit facility with Northwest
Farm Credit Services expires May 1, 2001. In addition,
Northwest Farm Credit Services has informed the Company that
they should look for another lender. As discussed in Note 7,
the Company's loan agreements with Northwest Farm Credit
Services contain covenants that require the Company to
maintain certain financial ratios and balances. The Company
was not in compliance with certain of these covenants at
December 31, 2000 but had received waivers thereon. In light
of the Company's current projected earnings and cash flow,
cash generated from operations will not be sufficient to pay
back the bank debt on a current basis. Management plans to
continue to market some pieces of real estate, the sale of
which would generate significant cash to repay the debt.
Additionally, management plans to obtain financing from
another financial institution. If the Company is unable
to sell real estate and/or refinance the debt with another
institution, the Company may be unable to continue its normal
operations, except to the extent permitted by Northwest Farm
Credit Services.