UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission File No 0-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Name of Small Business Issuer in Its Charter)
OREGON 93-0981021
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8800 Enchanted Way, S.E.
Turner, OR 97392
(Address of principal executive offices,
including zip code)
(503) 588-9463
(Issuer's telephone number, including area code)
_______________________________________
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of the Issuer's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB [X].
As of December 31, 2003
Issuer's revenues for its most recent fiscal year: $7,356,646
Aggregate market value of the voting stock held by
non-affiliates of the Issuer based upon the closing
bid price of such stock: $9,496,493
Number of shares of Common Stock outstanding: 4,479,478
Transitional Small Business Disclosure Format: YES [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
The purpose of this Amendment No. 2 on Form 10-KSB/A to the Annual Report on
Form 10-KSB of Willamette Valley Vineyards, Inc. (the "Company") for the fiscal
year ended December 31, 2003 is to restate our financial statements for the
years ended December 31, 2003, 2002 and 2001, for the quarters ended March 31,
June 30, September 30 and December 31, 2003, 2002 and 2001, and related
disclosures.
Generally, no attempt has been made in this Amendment No. 2 to modify or update
other disclosures presented in the original report on Form 10-KSB except as
required to reflect the effects of the restatement. This Form 10-KSB/A
generally does not reflect events occurring after the filing of the Form 10-KSB
or modify or update those disclosures affected by subsequent events. Information
not affected by the restatement is unchanged and reflects the disclosures made
at the time of the original filing of the Form 10-KSB on April 15, 2004.
Accordingly, this Form 10-KSB/A should be read in conjunction with our filings
made with the Securities and Exchange Commission subsequent to the filing of
the original Form 10-KSB, including any amendments to those filings.
In February and March 2004, the Alcohol and Tobacco Tax and Trade Bureau of the
U.S. Treasury Department audited the Company's excise tax for 2003, 2002 and
2001. This audit resulted in additional excise taxes owing for those periods
due principally to the Company's incorrect application of the federal small
winery tax credit. The Company originally recorded a liability as of December
31, 2003 and a related expense in the year then ended of the estimated excise
taxes owing of $80,000. The Company has restated its financial statements for
the years ended December 31, 2003, 2002, and 2001 and the quarterly periods
within each of those years, to reflect the correct excise tax for each of the
annual periods of $25,135, $38,615 and $16,250, respectively, and to record the
estimated interest and penalties of $7,418, $3,911 and $893, respectively, with
respect to the related estimated excise tax liability.
In addition, the Company previously capitalized certain label and package
design costs totaling $71,528 and was amortizing them over a 5 year period
through 2004. Amortization expense of $14,400 was included in selling, general
and administrative expenses in 2003, 2002 and 2001. It has been determined
that such costs should be expensed as incurred. Accordingly, the Company has
restated its financial statements for the years ended December 31, 2003, 2002
and 2001 and for each of the quarters in the years then ended to adjust for the
previously capitalized costs and related amortization.
In addition, the Company has restated its financial statements for the years
ended December 31, 2002 and 2001 and for each of the quarters therein, and for
the quarters ended March 31, June 30 and September 30, 2003, to reflect the
reclassification of amortization of deferred gain arising from a sales-
leaseback transaction from other income to an offset of the related lease
expense included in selling, general and administrative expenses. The Company
has also restated the three and six month periods ended June 30, 2003 and the
nine month period ended September 30, 2003 to reflect the reclassification of
an expense from other expense to cost of goods sold. The Company has also
included additional disclosure related to providing living accommodations in a
manufactured home on the Company's premises for the president and his family as
additional compensation for security and lock-up services the president
provides.
Our Chief Executive Officer and Chief Financial Officer have also reissued
their certifications required by Sections 302 and 906 of the Sarbanes-Oxley
Act.
Additional detail regarding the restatement is included in Notes 10, 13 and
Note 14 of the Notes to Financial Statements included in Part II-Item 7 and in
Management's Discussion and Analysis or Plan of Operation in Part II-Item 6 of
this Amendment No. 2 on Form 10-KSB/A.
ITEM 1. DESCRIPTION OF BUSINESS.
Introduction
Willamette Valley Vineyards, Inc. (the "Company") was formed in May 1988 to
produce and sell premium, super premium and ultra premium varietal wines (i.e.,
wine which sells at retail prices of $7 to $14, $14 to $20 and over $20 per 750
ml 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 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 additional
plantable acres and an additional 20,000 cases of winemaking capacity. The
purchase price paid by the Company to the Tualatin Vineyards' shareholders in
exchange for their shares was $1,824,000 plus Tualatin Vineyards' current
assets minus TVI's current and long-term liabilities as reflected in its
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. In 1999, the Company purchased 33 acres
of vineyard land adjoining Tualatin Estate for future plantings and used lot
line adjustments to create three separate land parcels at Tualatin Estate.
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 growing 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 $725,000 and the last parcel, which contains the
Tualatin Estate winery plus 115 acres, is priced at $1,605,000.
The Company also leases Belle Provenance Vineyards, formerly known as O'Connor
Vineyards, on a ten-year contract adding an additional 59 producing acres. All
of these 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 2002, from $15 to $60 per bottle;
Chardonnay, from $14 to $25 per bottle; Pinot gris, $14 per bottle; Riesling
and Oregon Blossom (blush blend), $9 per bottle, all bottle prices included
herein are the suggested retail prices. The Company's mission for this brand
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, and Edelweiss, $9 per bottle, under
a "Made in Oregon Cellars" label, all bottle prices are suggested retail
prices.
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; Late Harvest Gewurztraminer, $20 per bottle; and Pinot blanc,
$14 per bottle, all bottle prices are suggested retail prices. The Company's
mission for this brand 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, $30 per bottle; Syrah, $35 per
bottle; Cabernet Sauvignon, $35 per bottle; Cabernet Franc, $35 per bottle; The
Griffin (a Bordeaux blend), $70 per bottle; Pinot gris, $18 per bottle;
Viognier, $25 per bottle; and Pinot noir, $25 per bottle, all bottle prices are
suggested retail prices. This brand's mission is to be the highest quality
producer of Bordeaux and Rhone varietals in Oregon.
Market Overview
Wine Consumption Trends: Wine consumption in the United States declined from
1987 to 1994 due to increased consumer health concerns and a growing awareness
of alcohol abuse. That decline was led by sharp reductions in the low-cost
non-varietal ("jug") wine and wine cooler segments of the market, which, prior
to 1987, were two of the fastest growing market segments. Beginning in 1994,
per capita wine consumption began to rise. The Company estimates that premium;
super premium and ultra premium wine consumption will experience a moderate
increase over the next few years. Consumers have restricted their drinking of
alcoholic beverages and view premium, super premium and ultra premium wines as
a beverage of moderation. The Company believes this change in consumer
preference from low quality, inexpensive wines to premium, super premium and
ultra premium wines reflects, in part, a growing emphasis on health and
nutrition as a principal element of the contemporary lifestyle as well as an
increased awareness of the risks associated with alcohol abuse.
The Oregon Wine Industry.
Oregon is a relatively new wine-producing region in comparison to California
and France. In 1966, there were only two commercial wineries licensed in
Oregon. By contrast, in 2003, there were over 200 commercial wineries licensed
in Oregon and over 13,400 acres of wine grape vineyards, 10,700 acres of which
are currently producing. Total production of Oregon wines in 2003 is estimated
to be approximately 1,379,162 cases. Oregon's entire 2003 production would
have an estimated retail value of approximately $206.9 million, assuming a
retail price of $150 per case, and a FOB value of approximately one-half of the
retail value, or $103.5 million.
Because of climate, soil and other growing conditions, the Willamette Valley in
western Oregon is ideally suited to growing superior quality Pinot noir,
Chardonnay, Pinot gris and Riesling wine grapes. Some of Oregon's Pinot noir,
Pinot gris and Chardonnay wines have developed outstanding reputations, winning
numerous national and international awards.
Oregon wine producers enjoy certain cost advantages over their California and
French competitors due to lower costs for grapes, vineyard land and winery
sites. For example, the average cost of unplanted vineyard land in Napa
County, California is approximately $40,000 per acre as compared to
approximately $6,000 per acre in Oregon. In the Burgundy region of France,
virtually no new vineyard land is available for planting.
Oregon does have certain disadvantages, however. As a new wine-producing
region, Oregon's wines are relatively little known to consumers worldwide and
the total wine production of Oregon wineries is small relative to California
and French competitors. Greater worldwide label recognition and larger
production levels give Oregon's competitors certain financial, marketing,
distribution and unit cost advantages.
Furthermore, Oregon's Willamette Valley has an unpredictable rainfall pattern
in early autumn. If significantly above-average rains occur just prior to the
autumn grape harvest, the quality of harvested grapes is often materially
diminished, thereby affecting that year's wine quality.
Finally, phylloxera, an aphid-like insect that feeds on the roots of grapevines,
has been found in several commercial vineyards in Oregon. Contrary to the
California experience, most Oregon phylloxera infestations have expanded very
slowly and done only minimal damage. Nevertheless, phylloxera does constitute
a significant risk to Oregon vineyards. Prior to the discovery of phylloxera
in Oregon, all vine plantings in the Company's Vineyard were with non-resistant
rootstock. As of December 31, 2003, the Company has not detected any
phylloxera at its Turner site. Beginning with the Company's plantings in May
1992, only phylloxera-resistant rootstock was planted until 1997, when the
previous management planted non-resistant rootstock on approximately 10 acres
at the Tualatin Vineyard. In 1997, the Company purchased Tualatin Vineyards,
which has phylloxera at its site. Since the third quarter of 1997, all
plantings have been and all future planting will be on phylloxera resistant
rootstock. The Company takes all necessary precautions to prevent the spread
of phylloxera to its Turner site. Also phylloxera is active at the Belle
Provenance Vineyard for which the Company has a 10-year lease. Any planting,
training, and care of new plants at the Belle Provenance vineyard will not be
at the expense of the Company, because under the terms of the lease, it would
be the responsibility of the landowner.
In 1994, the largest development in the Oregon wine industry, King Estate
Winery, was completed. The facility, which is located 22 miles southwest of
Eugene, is approximately 100,000 square feet in size surrounded by a 180-acre
vineyard. King Estate is focused on serving the national market. The Company
views King Estate as a welcome addition to the Oregon wine industry and
believes they could have the same positive effect on wine exports as St.
Michelle Winery has had on the Washington wine industry. The most recent high-
profile move in Oregon was the Benziger family's purchase of 65 acres,
including 32 producing acres of vineyard, near Scholls. The Benziger family
created the Glen Ellen wine brand in California, before selling it to Grand
Metropolitan. Well-known California winemaker Tony Soter is making Oregon
Pinot noir under the Etude label. The Company believes that further
investments by other experienced wine producers will continue, ultimately
benefiting the Company and the Oregon wine industry as a whole by bringing
increased national and international recognition to the quality of Oregon
wines.
As a result of these factors, subject to the risks and uncertainties identified
above, the Company believes that long-term prospects for growth in the Oregon
wine industry are excellent. The Company believes that over the next 20 years
the Oregon wine industry will grow at a faster rate than the overall domestic
wine industry, and that much of this growth will favor producers of premium,
super premium and ultra premium wines such as the Company's.
Company Strategy
The Company, 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; (3) achieve significant brand recognition for its wines, first in Oregon
and then nationally and internationally; and (4) effectively distribute and
sell its products nationally. 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.
The Company believes the location of its Winery next to Interstate 5, Oregon's
major north-south freeway, significantly increases direct sales to consumers
and facilitates self-distribution of the Company's products. The Company
believes this location provides high visibility for the Winery to passing
motorists, thus enhancing recognition of the Company's products in retail
outlets and restaurants. The Company's Hospitality Center has further
increased the Company's direct sales and enhanced public recognition of its
wines.
Vineyard
The Property. The Company's estate vineyard at the Turner site currently has
50 acres planted and 40 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 vines in 1993. In 1996, the Company planted its
remaining 11 acres in Chardonnay 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.
Beginning in 1997, The Company embarked on a major effort to improve the
quality of its flagship varietal by planting new Pinot noir clones that
originated directly from the cool climate growing region of Burgundy rather
than the previous source, Napa California where winemakers believe the variety
adopted to the warmer climate over the many years it was grown there.
These new French clones are called "Dijon clones" after the University in
Burgundy who assisted in their selection and shipment to a US government
authorized quarantine site, and then seven years later to Oregon winegrowers.
The most desirable of these new clones are numbered 113, 114, 115, 667 and
777. In addition to certain flavor advantages, these clones ripen up to two
weeks earlier, allowing growers to pick before heavy autumn rains. Heavy rains
can dilute concentrated fruit flavors and promote bunch rot and spoilage.
These new Pinot noir clones were planted at the Tualatin Estate on disease
resistant rootstock and the 667 and 777 clones have been grafted onto 8 acres
of self rooted, non disease resistant vines at the Company's Estate Vineyard
near Turner.
New clones of Chardonnay preceded Pinot noir into Oregon also arranged by the
University of Dijon, which were planted at the Company's Estate Vineyard on
disease resistant rootstock.
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 approximately 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 one to two years.
Also in 1997, the Company entered into a 10-year lease with O'Connor Vineyards,
now known as Belle Provenance, (59 acres) located near Salem to manage and
obtain the supply of grapes from Belle Provenance Vineyards.
In 1999, the Company purchased 33 acres of vineyard land adjoining Tualatin
Estate for future plantings and used lot line adjustments 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 2003, the Company's 40 acres of producing estate vineyard
yielded approximately 119 tons of grapes for the Winery's thirteenth crush.
Tualatin Vineyards produced 503 tons of grapes in 2003. Belle Provenance
Vineyards produced 102 tons of grapes in 2003. In 2003, the Company purchased
an additional 193 tons of grapes from other growers. The Winery's 2003 total
wine production was 219,227 gallons (92,208 cases) from its 2001 and 2002
crushes. The Company expects to produce 141,713 gallons in 2004 (59,605 cases)
from its 2002 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 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 2003, the Winery produced 219,227 gallons (92,208 cases) from its
2001 and 2002 crushes. 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 of its bottled product at an approximate cost of $750,000. Previously, the
Company rented a storage facility with an annual rental cost to the Company of
$96,000.
With the purchase of Tualatin Vineyards, Inc., the Company added 20,000 square
feet of additional production capacity. Although the Tualatin facility was
constructed over twenty years ago, it 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
anticipated future production 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 enable 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 utilizes this space to host numerous events,
most notably the annual fundraiser for the Marion-Polk Food Share, "Chefs' Nite
Out."
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 $2,777,779 at December 31, 2003 and
$3,003,720 at December 31, 2002. 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 $2,140,159 on December 31, 2003. 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 $637,620
on December 31, 2003
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 current 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
2001 1859 2001 85,554
2002 1091 2002 110,063
2003 917 2003 92,208
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.
Sales and Distribution
Marketing Strategy. The Company markets and sells its wines through a
combination of direct sales at the Winery, sales directly and indirectly
through its shareholders, self-distribution to local restaurants and retail
outlets in Oregon, directly through mailing lists, and through distributors and
wine brokers who sell in specific targeted areas outside of the state of
Oregon. As the Company has increased production volumes and achieved greater
brand recognition, sales to other domestic markets have increased both in terms
of absolute dollars and as a percentage of total Company sales.
Direct Sales. The Company's Winery is located adjacent to the state's major
north-south freeway (Interstate 5), approximately 2 miles south of the state's
third largest metropolitan area (Salem), and 50 miles in either direction from
the state's first and second largest metropolitan areas (Portland and Eugene,
respectively). The Company believes the Winery's unique location along
Interstate 5 has resulted in a greater amount of wines sold at the Winery as
compared to the Oregon industry standard. Direct sales from the Winery are an
important distribution channel and an effective means of product promotion. To
increase brand awareness, the Company offers educational Winery tours and
product presentations by trained personnel.
The Company holds four major festivals and events at the Winery each year. In
addition, open houses are held at the Winery during major holiday weekends such
as Memorial Day, Independence Day, Labor Day and Thanksgiving, where barrel
tastings and cellar tours are given. Numerous private parties, wedding
receptions, political and other events are also held at the Winery. Finally,
the Company participates in many wine and food festivals throughout Oregon.
Each of these events results in direct sales of the Company's wines and
promotion of its label to event attendees.
Direct sales are profitable because the Company is able to sell its wine
directly to consumers at retail prices rather than to distributors or retailers
at wholesale prices. Sales made directly to consumers at retail prices result
in an increased profit margin equal to the difference between retail prices and
distributor or wholesale prices, as the case may be. For 2003, direct sales
make up approximately 22% of the Company's revenue.
Self-Distribution. The Company has established a self-distribution system to
sell its wines to restaurant and retail accounts located in Oregon. Eighteen
sales representatives who take wine orders and make deliveries on a commission-
only basis, currently carry out the self-distribution program. Company
provided trucks and delivery drivers support several of these sales
representatives. The Company believes this program of self-representation and
delivery has allowed its relatively new wines to gain a strong presence in the
Oregon market with over 1,200 restaurant and retail accounts established as of
December 31, 2003. The Company further believes that the location of its
Winery along Interstate 5 facilitates self-distribution throughout the entire
Willamette Valley, where approximately 70% of Oregon's population resides.
The Company has expended significant resources to establish its self-
distribution system. The system initially focused on distribution in the
Willamette Valley, but then expanded to the Oregon coast, and then into
southern Oregon. For 2003, approximately 46% of the Company's net revenues
were attributable to self-distribution.
Distributors and Wine Brokers. The Company uses both independent distributors
and wine brokers primarily to market the Company's wines in specific targeted
areas where self-distribution is not feasible. Only those distributors and
wine brokers who have demonstrated knowledge of and a proven ability to market
premium, super premium, and ultra premium wines are utilized.
Shareholders. As a public company, the Company has a unique marketing
opportunity available to only a few of its competitors. The Company has
approximately 3,091 shareholders of record, which represents approximately
5,000 wine consumers since family members hold many shares jointly. The
Company's shareholders, as a group, purchase a significant portion of the
Company's cork-finished wines directly from the Winery.
Tourists. Oregon wineries are experiencing an increase in on-site visits by
consumers. In California, visiting wineries is a very popular leisure time
activity. Napa Valley is one of California's largest tourist attractions with
over 3.4 million visitors in 2001. Wineries in Washington are also
experiencing strong interest from tourists. Chateau Ste. Michelle, located
near Woodinville, Washington, attracts approximately 200,000 visitors per year.
The Winery is located less than one mile from The Enchanted Forest, a
gingerbread village/forest theme park that, in 2002, was Oregon's twentieth
most visited tourist attraction. The Enchanted Forest, which operates from
March 15 to September 30 each year, attracts approximately 130,000 paying
visitors per year. Adjacent to the Enchanted Forest is the Thrillville
Amusement Park and the Forest Glen Recreational Vehicle Park, which contains
approximately 110 overnight recreational vehicle sites. Many of the visitors
to the Enchanted Forest and RV Park visit the Winery. More importantly, the
Company believes its convenient location, adjacent to Interstate 5, enables the
Winery to attract a significant number of visitors.
Competition
The wine industry is highly competitive. In a broad sense, wines may be
considered to compete with all alcoholic and nonalcoholic beverages. Within
the wine industry, the Company believes that its principal competitors include
wineries in Oregon, California and Washington, which, like the Company, produce
premium, super premium, and ultra premium wines. Wine production in the United
States is dominated by large California wineries that have significantly
greater financial, production, distribution and marketing resources than the
Company. Currently, no Oregon winery dominates the Oregon wine market.
Several Oregon wineries, however, are older and better established and have
greater label recognition than the Company.
The Company believes that the principal competitive factors in the premium,
super premium, and ultra premium segment of the wine industry are product
quality, price, label recognition, and product supply. The Company believes it
competes favorably with respect to each of these factors. The Company has
received Excellent to Recommended reviews in tastings of its wines and believes
its prices are competitive with other Oregon wineries. Larger scale production
is necessary to satisfy retailers' and restaurants' demand and the Company
believes that its current level of production is adequate to meet that demand
for the foreseeable future. Furthermore, the Company believes that its
ultimate forecasted production level of 298,000 gallons (124,000 cases) per
year will give it significant competitive advantages over most Oregon wineries
in areas such as marketing, distribution arrangements, grape purchasing, and
access to financing. The current production level of most Oregon wineries is
generally much smaller than the projected production level of the Company's
Winery. With respect to label recognition, the Company believes that its
unique structure as a consumer-owned company will give it a significant
advantage in gaining market share in Oregon as well as penetrating other wine
markets.
Governmental Regulation of the Wine Industry
The production and sale of wine is subject to extensive regulation by the
Federal Bureau of Alcohol, Tobacco and Firearms and the Oregon Liquor Control
Commission. The Company is licensed by and meets the bonding requirements of
each of these governmental agencies. Sale of the Company's wine is subject to
federal alcohol tax; payable at the time wine is removed from the bonded area
of the Winery for shipment to customers or for sale in its tasting room. The
current federal alcohol tax rate is $1.07 per gallon; however, wineries that
produce not more than 250,000 gallons during the calendar year are allowed a
graduated tax credit of up to $0.90 per gallon on the first 100,000 gallons of
wine (other than sparkling wines) removed from the bonded area during that
year. The Company also pays the state of Oregon an excise tax of $0.67 per
gallon on all wine sold in Oregon. In addition, all states in which the
Company's wines are sold impose varying excise taxes on the sale of alcoholic
beverages. As an agricultural processor, the Company is also regulated by the
Oregon Department of Agriculture and, as a producer of wastewater, by the
Oregon Department of Environmental Quality. The Company has secured all
necessary permits to operate its business. The Company estimates that its
costs of compliance with federal and state environmental laws is $3,000 per
year.
Prompted by growing government budget shortfalls and public reaction against
alcohol abuse, Congress and many state legislatures are considering various
proposals to impose additional excise taxes on the production and sale of
alcoholic beverages, including table wines. Some of the excise tax rates being
considered are substantial. The ultimate effects of such legislation, if
passed, cannot be assessed accurately since the proposals are still in the
discussion stage. Any increase in the taxes imposed on table wines can be
expected to have a potentially adverse impact on overall sales of such products.
However, the impact may not be proportionate to that experienced by producers
of other alcoholic beverages and may not be the same in every state. Recently,
there have been national efforts to reduce the legal blood alcohol level to .08
to combat driving under the influence. The Company believes that if such
legislation is passed, it may discourage wine consumption in restaurants.
Although the .08 rule is in effect in Oregon, the Company's principal sales
territory, it has not yet affected local restaurant sales although it is
possible that it will on a national level.
Employees
As of December 31, 2003 the Company had 49 full-time employees and 31 part-time
employees. In addition, the Company hires additional employees for seasonal
work as required. The Company's employees are not represented by any
collective bargaining unit. The Company continues to believe it maintains
positive relations with its employees.
Additional Information
The Company files quarterly and annual reports with the Securities and Exchange
Commission. The public may read and copy any material that the Company files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington D.C. 20549. The public may also obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330. As the
Company is an electronic filer, filings may be obtained via the SEC website at
(www.sec.gov.). Also visit the Company's website (www.wvv.com) for links to
stock position and pricing.
ITEM 2. DESCRIPTION OF PROPERTY.
See "DESCRIPTION OF BUSINESS -- Winery" and "-- Vineyard".
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending to which the Company is a party
or to which any of its property is subject, and the Company's management does
not know of any such action being contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during the
Company's Fourth Quarter ended December 31, 2003.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's Common Stock is traded on the NASDAQ Small Cap Market under the
symbol "WVVI." As of December 31, 2003, there were 3,091 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
3/31/03 6/30/03 9/30/03 12/31/03
High $1.74 $1.53 $2.05 $2.30
Low $1.26 $1.08 $1.18 $1.64
Quarter Ended
3/31/02 6/30/02 9/30/02 12/31/02
High $1.94 $1.84 $1.60 $1.77
Low $1.51 $1.10 $1.18 $1.00
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.
The Company intends to use its earnings to grow the distribution of its brands,
improve quality and reduce debt. The Management does not intend to use
earnings to pay dividends and if it chooses to recommend to the Board it
approve such an action, management would first seek approval of it lender
providing the credit facility.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Forward Looking Statement
This Management's discussion and Analysis of Financial Condition and Results of
Operation and other sections of this Form 10KSB contain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Words such as "expects", "anticipates", "intends", "plans",
"believes", "seeks", "estimates", and variations of such words and similar
expressions are intended to identify such forward-looking statements. Such
forward-looking statements include, for example, statements regarding general
market trends, predictions regarding growth and other future trends in the
Oregon wine industry, expected availability of adequate grape supplies,
expected positive impact of the Company's Hospitality Center on direct sales
effort, expected positive impacts on future operating results from
restructuring efforts, expected increases in future sales, expected
improvements in gross margin. These forward-looking statements involve risks
and uncertainties that are based on current expectations, estimates and
projections about the Company's business, and beliefs and assumptions made by
management. Actual outcomes and results may differ materially from what is
expressed or forecasted in such forward-looking statements due to numerous
factors, including, but not limited to: availability of financing for growth,
availability of adequate supply of high quality grapes, successful performance
of internal operations, impact of competition, changes in wine broker or
distributor relations or performance, impact of possible adverse weather
conditions, impact of reduction in grape quality or supply due to disease,
impact of governmental regulatory decisions, and other risks detailed below as
well as those discussed elsewhere in this Form 10KSB and from time to time in
the Company's Securities and Exchange Commission filing and reports. In
addition, such statements could be affected by general industry and market
conditions and growth rates, and general domestic economic conditions.
The Management's Discussion and Analysis or Plan of Operation presented below
reflects the effects of the restatement of our financial statements for the
years ended December 31, 2003, 2002 and 2001, as further discussed below and in
Note 13 to the financial statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management's Discussion and Analysis of Financial Condition and Results of
Operations discusses Willamette Valley Vineyards' consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles. As such, management is required to make certain
estimates, judgments and assumptions that are believed to be reasonable based
upon the information available. On an on-going basis, management evaluates its
estimates and judgments, including those related to product returns, bad
debts, inventories, investments, income taxes, financing operations, and
contingencies and litigation. Management bases its estimates and judgments on
historical experience and on various other factors that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
The Company's principal sources of revenue are derived from sales and
distribution of wine. Revenue is recognized from wine sales at the time of
shipment and passage of title. Our payment arrangements with customers provide
primarily 30 day terms and, to a limited extent, 60, 90 or 120 day terms.
Shipping and handling costs are included in general and administrative
expenses.
The Company values inventories at the lower of actual cost to produce the
inventory or market value. We regularly review inventory quantities on hand
and adjust our production requirements for the next twelve months based on
estimated forecasts of product demand. A significant decrease in demand could
result in an increase in the amount of excess inventory quantities on hand. In
the future, if our inventory cost is determined to be greater than the net
realizable value of the inventory upon sale, we would be required to recognize
such excess costs in our cost of goods sold at the time of such determination.
Therefore, although we make every effort to ensure the accuracy of our
forecasts of future product demand, any significant unanticipated changes in
demand could have a significant impact on the ultimate selling price and,
therefore, the carrying value of our inventory and our reported operating
results.
We capitalize internal vineyard development costs subsequent to the developing
vineyard land becoming fully productive. These costs consist primarily of the
costs of the vines and expenditures related to labor and materials to prepare
the land and construct vine trellises. Amortization of such costs as annual
crop costs is done on a straight-line basis for the estimated economic useful
life of the vineyard, which is estimated to be 30 years. The Company regularly
evaluates the recoverability of capitalized costs. Amortization of vineyard
development costs are included in capitalized crop costs that in turn are
included in inventory costs and ultimately become a component of cost of goods
sold.
The Company pays depletion allowances to the Company's distributors based on
their sales to their customers. The Company sets these allowances on a
monthly basis, and the Company's distributors bill them back on a monthly
basis. All depletion expenses associated with a given month are expensed in
that month as a reduction of revenues. The Company also pays a sample allowance
to the Company's distributors in the form of a 1.5% discount applied to
invoices for product sold to the Company's distributors. The expenses for
samples are expensed at the time of sale in the selling, general and
administrative expense. The Company's distributors use the allowance to sample
product to prospective customers.
Amounts paid by customers to the Company for shipping and handling expenses are
included in the net revenue. Expenses incurred for shipping and handling
charges are included in selling, general and administrative expense. The
Company's gross margins may not be comparable to other companies in the same
industry as other companies may include shipping and handling expenses as a
cost of goods sold.
In connection with its ongoing transition to a national network of affiliated
distributors, the Company has entered into an agreement with fourteen
affiliated distributors under which the Company's products are distributed in
certain states. As part of that agreement, the distributors paid the company
$1,500,000 for a base amount of bottled wine to be retained by the Company,
which was not recorded as a sale. The Company recorded a Distributor
Obligation liability to recognize the future obligation of the Company to
deliver the wine to the distributors, and recorded the wine as an asset at
cost. The Company will hold the base amount of $1,500,000 of wine until 2006,
when the balance will be depleted on a straight-line basis until 2010. Also as
part of that agreement, the Company has agreed to pay the distributors
incentive compensation if certain sales goals are met over the next five
years. The incentive compensation will be paid only in the event of a
transaction in excess of $12 million in value in which either the Company sells
all or substantially all of its assets or a merger, sale of stock, or other
similar transaction occurs, the result of which is that the Company's current
shareholders do not own at least a majority of the outstanding shares of
capital stock of the surviving entity. Assuming the $12 million threshold is
met and the distributors meet certain sales goals, the distributors will be
entitled to incentive compensation equal to 20% of the total proceeds from the
sale or transaction and up to 17.5% of the difference between the transaction
value and approximately $8.5 million.
OVERVIEW
RESULTS OF OPERATIONS
The Company's net income in the first three Quarters of 2003 is primarily a
result of increased margins from the sale of wines that have lower production
costs. Since Management reduced production volumes due to higher inventories,
per unit costs are increasing, reducing gross margins and net income per case
in the final quarter of 2003. Production costs were reduced in 2003 and are
expected to decline over the next several years due to new lower cost winegrape
contracts. Per unit costs will not decline until bottled inventory is reduced
and wine production returns to current sales levels.
Annual operating performance was affected significantly by Fourth Quarter
events. A large portion of the higher expenses was the result of planned
investment by the Company. Management took advantage of the stronger net
profits and recent federal business tax incentives by making substantial
repairs to the winery buildings and equipment, adding delivery vehicles to its
Wholesale Department, a warehouse office, new network servers, group software,
accounting software upgrades permitting wholesale sales orders to be entered
contemporaneously with remote handheld devices, a new Retail Point of Sale
system and new computers for the Retail Key Customer Service Representatives
for recording sales and customer information.
Management chose the Fourth Quarter to expand the sales and delivery
infrastructure of its Oregon Wholesale Department named Bacchus Fine Wines.
The Company is increasing its representation of brands other than its own
through its Oregon sales force. The Company expects to increase its
inventories of these wines, which will place additional demands on the use of
cash. The Company is protecting the loyalty and focus of its sales force by
limiting representation of only Oregon brands the Company owns and out-of-state
brands which fill other product needs of retail licensees the Company does not
produce. The Company is engaging in this strategy to provide more value to its
retail licensees, improve sales management and representation and increase
profits.
Although the Bacchus Fine Wines department experienced record growth of 42% in
the Fourth Quarter, net results declined from the same period in the prior year
due to this expansion. This department finished the year contributing the most
increase in net operating results as compared to other departments. Bacchus
gross margins were expected to decline and are expected to continue to decline
as sales of wines purchased from other suppliers and resold to retail accounts
at lower margins increase.
During the first part of 2003, many of the lower cost 2001 Willamette Valley
Vineyards vintage wines were sold and replaced later in the year by new higher
cost vintages reducing gross margins, particularly in the Retail Department.
Combined with unplanned and substantially higher expenses, Retail posted its
weakest financial performance in the Fourth Quarter in some time. Management
has identified the causes of the higher sample use, higher sales commissions
and inventory losses and has taken corrective action. Prior to the Fourth
Quarter, Retail outperformed the prior year.
Out-of-state sales to distributors grew in the Fourth Quarter by 30%. This
sales growth more than offset the higher cost of goods. The CEO continued in
2003 the extensive travel schedule making sales presentations to distributor
staffs and their retail customers. The Company increased its role in the
industry's Oregon Pinot Camp and conducted a national sales contest for
selected distributor sales staffs that resulted in a trip to Oregon. Among the
winners was top performer Premier Beverage of Florida increasing sales 93%
earning nine places on the trip.
During 2003 Company officials discovered a significant loss of wine inventory
in the control of a now former sales representative of approximately $100,000
at wholesale prices. This inventory was WVV wines and was not a result of the
new distribution enterprise, Bacchus Fine Wines. The Company filed an insurance
claim, which was accepted, paid and is recorded under Other Income.
Management has strengthened inventory controls in the wake of this significant
loss of wine inventory. Sales representative handling of inventory is
physically inspected at random and all samples reviewed by the General Sales
Manager. Tasting Room daily sales and sampling are reconciled against daily
deliveries from the warehouse. Management is implementing a system where all
inventory movements in and out of the warehouse are to be recorded in the
Company's accounting system contemporaneously with the movement.
Management is planning to reduce wine inventories and its accompanying credit
line requirements by reducing the 2004 and 2005 crush volumes from historic
highs and focus its production operations by reducing the number of products to
those that most contribute to the reputation of its core brand and product,
Willamette Valley Vineyards vintage Pinot noir and the Company's earnings and
sales growth.
Wine Quality
The Company's wine ratings are among the highest given to Oregon produced
wines. By focusing on expanding vineyard plantings at Tualatin Estate over
the last several years, the Company has greatly enhanced control over producing
high quality fruit in that unique microclimate.
Plantings of the new French Pinot noir clones (113, 114, 115, 667 & 777) on
selected resistant rootstock have accelerated ripening and improved flavor
attributes. The Company now has 55 acres of young, closely spaced Pinot noir
vines, including these new clones on computer controlled drip irrigation at the
Forest Grove vineyard, and 8 acres of 667 & 777 clones on self-rooted, grafted
vines at the Turner vineyard. The management believes this investment will
begin to be realized as these vines mature and their fruit find there way into
the market through the distribution of Willamette Valley Vineyards Pinot noir.
The Tualatin Estate Pinot noir is made from a small, designated block of 25-
year-old Pommard clone vines and a designated block in the new French clone
planting.
As noted below, the following publications review wines according to the
testing procedures described.
WINE SPECTATOR
The Wine Spectator is one of the most popular magazines for wine connoisseurs.
It is a monthly magazine with thorough reports on wineries, restaurants and
travel, along with a highly reputable wine rating system. The wine writers are
among the most experienced and knowledgeable and their goals are to cover every
aspect of wine, from buying to tasting, with descriptions of different
varietals and wine-growing regions.
Their wine rating system is as follows:
95-100: Classic
90-94: Outstanding
85-89: Very good
80-84: Good
70-79: Average
Below 70: Below Average
WINE ENTHUSIAST
As the fastest growing wine publication in the world today, Wine Enthusiast's
mission is to promote the wine "lifestyle" and to educate its readers on how to
buy, taste, and appreciate wine. It is also a catalog, which sells anything
related to wine, from cellars to cork screws. They provide and in-depth wine
descriptions and a reputable rating scale. Within their rating system, they
note their "Best Buys", which incorporates both price and taste, to ensure the
best value. Both wine novices and experience connoisseurs enjoy and respect
this monthly publication.
Rating system:
96-100: Classic, Highest Recommendation
90-95: Superb, Highly Recommended
85-89: Very good, Recommended
There are over 100,000 paid subscriptions to Wine Enthusiast today.
BEVERAGE TESTING INSTITUTE
This is a journal strictly for wine ratings. They have a very technical rating
system and numerous tasters are involved in one score. First they start with a
4-point scale:
1) <80: Not recommended (self-explanatory)
2) 80-84: Recommended (sound, commercial)
3) 85-89: Highly recommended (very good)
4) 90+: Potentially outstanding
All wines given a 4 are reviewed again and rated on the following scale:
88-89: Very good, but not outstanding
90-92: Excellent, a wine of distinction
93-95: Outstanding, short of world class
96-100: World-class, unparalleled
The ratings are designed to depict the general quality of the wines,
considering color, ageability, and intensity. All tastings are blind and the
reviews are published bimonthly.
THE VINE
The Vine is the world's leading independent wine magazine. Written out of
London, England, author Clive Coates was a wine executive for 20 years before
becoming an author and winning awards including Wine Writer of the Year. He has
written for nearly all major wine publications and wine books, which are
considered "classics". The Vine concentrates on fine wines only and is written
from personal tasting experience. Coates focuses on many aspects of wine, such
as when to buy and consume, and tasting comparisons. He rates wines from 1 to
20, 20 being a perfect score:
14 - Average
15 - Good
16 - Very Good
17.5 - A fine one
18 and up - Grande Annee
Please note the following list of some of the Company's wines that are
currently in distribution:
Willamette Valley Vineyards
Red Wines
1998 Signature Cuvee Pinot Noir 93 points, Top 100 - Wine Enthusiast
1999 Signature Cuvee Pinot Noir 91 points, Cellar Selection - Wine
Enthusiast
1998 Estate Vineyard Pinot Noir 89 points - Wine Spectator
1999 Estate Vineyard Pinot Noir 92 points - Beverage Tasting
Institute
Top 10 out of 76 rated Oregon Pinots
- The Vine
1998 O'Connor Vineyard Pinot Noir 91 points - Wine Enthusiast
1998 Freedom Hill Vineyard Pinot Noir 91 points - Wine Enthusiast
2000 Freedom Hill Vineyard Pinot Noir 89 points - Wine Spectator
1998 Karina Vineyard Pinot Noir 90 points - Wine Spectator
1999 Karina Vineyard Pinot Noir 90 points - Wine Enthusiast
1998 Hoodview Vineyard Pinot Noir 90 points - Wine Spectator
Top 3 out of 83 rated Oregon Pinots
- The Vine
1999 Hoodview Vineyard Pinot Noir 90 points - Wine Spectator
1999 Founders' Reserve Pinot Noir 90 points - Wine Spectator
2000 Pinot Noir Top 25 under $25 - Bon Appetit
2001 Whole Cluster Pinot Noir 87 points & Best Buy - Wine
Enthusiast
White Wines
1998 Estate Vineyard Chardonnay 90 points - Wine Spectator
2000 Chardonnay 88 points/Best Buy - Wine Enthusiast
2000 Founders' Reserve Pinot Gris 88 points - Wine Enthusiast
2001 Pinot Gris 87 points - Wine Spectator
2002 Pinot Gris 89 points/Best Buy - Wine Enthusiast
2002 Gewurztraminer 88 points/Best Buy - Wine Enthusiast
2002 Riesling 88 points - Wine Enthusiast
2002 Founders' Reserve Sauvignon Blanc 90 points - Wine Enthusiast
Tualatin Estate Vineyards
Red Wines
1999 Pinot Noir 88 points - Wine Enthusiast
Top 10 out of 76 rated Oregon Pinots
- The Vine
White Wines
1999 Late Harvest Gewurztraminer 91 points - Wine Spectator
2000 Late Harvest Gewurztraminer 88 points - Wine Spectator
1999 Pinot Blanc 88 points, Best Buy - Wine
Enthusiast
1998 Chardonnay 87 points - Wine Spectator
Griffin Creek
Red Wines
1996 Merlot 91 points - Wine Spectator
1997 Merlot 91 points - Beverage Tasting
Institute
1998 Merlot 89 points - Wine Spectator
1999 Merlot 90 points - Wine Spectator
1999 Cabernet Sauvignon 89 points - Wine Spectator
1999 Cabernet Franc 88 points - Wine Enthusiast
2000 Syrah 90 points - Wine Spectator
1999 Pinot Noir 88 points - Wine Spectator
Sales
Finished wine revenues increased 20% in 2003 from the previous year. Unit
sales increased 22% from the previous year. Case sales from the Winery
increased from 73,854 in 2002 to 90,294 in 2003 for product manufactured by the
Company. The Company also experienced an increase of 163% in unit sales for
products other than its own through Bacchus Fine Wines, from 1,066 in 2002 to
5,233 in 2003. The Company's distributors experienced a collective increase of
15% in sales of Company products to their retail customers in 2003. This
helped the distributors sell through the substantial volume of wines they
acquired in 2001, reducing the amount of wines held in their inventory to be
sold in 2004.
Wine Inventory
The Company has a substantial inventory of '99, '00, '01 and '02 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 137,399 cases in 2003 from 133,369 the
previous year due to the building of inventory items not released until later
years, and the purchasing of other brand's product for resale by Bacchus Fine
Wines. 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 2004. 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, excluding excise taxes, from Winery operations for each of the last
eight fiscal quarters:
Fiscal 2003 Quarter Ended Fiscal 2002 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 $296 $351 $446 $485 $340 $383 $411 $432
On-site and off-site
festivals 43 22 21 22 46 33 46 19
In-state sales 591 756 915 1,292 564 613 668 935
Bulk/Grape sales 155 9 70 26 - 28 - 2
Out-of-state
sales 447 481 535 679 344 355 439 523
Total winery
revenues 1,532 1,619 1,987 2,504 1,294 1,412 1,564 1,911
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)
2003 2002 2001
(Restated) (Restated) (Restated)
Tasting room and retail sales $1,578 $1,566 $1,409
On-site and off-site festivals 108 144 206
In-state sales 3,554 2,780 2,802
Bulk /Grape Sales 260 30 353
Out-of-state sales 2,142 1,661 2,461
Revenues from winery operations $7,642 $6,181 $7,231
Less Excise Taxes 285 230 216
Net Revenue $7,357 $5,951 $7,015
Restatement of Financial Information
As further discussed in Note 13 to the financial statements, in February and
March 2004, the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Treasury
Department audited the Company's excise tax for 2003, 2002 and 2001. This
audit resulted in additional excise taxes owing for those periods due
principally to the Company's incorrect application of the federal small winery
tax credit. The Company originally recorded a liability as of December 31,
2003 and a related expense in the year then ended of the estimated excise taxes
owing of $80,000. The Company has restated its financial statements for the
years ended December 31, 2003, 2002, and 2001 and the quarterly periods within
each of those years, to reflect the correct excise tax for each of the annual
periods of $25,135, $38,615 and $16,250, respectively, and to record the
estimated interest and penalties of $7,418, $3,911 and $893, respectively, with
respect to the related estimated excise tax liability.
In addition, the Company previously capitalized certain label and package
design costs totaling $71,528 and was amortizing them over a 5 year period
through 2004. Amortization expense of $14,400 was included in selling, general
and administrative expenses in 2003, 2002 and 2001. It has been determined
that such costs should be expensed as incurred. Accordingly, the Company has
restated its financial statements for the years ended December 31, 2003, 2002
and 2001 and for each of the quarters in the years then ended to adjust for the
previously capitalized costs and related amortization.
The effect of these restatements is to increase net income for the year ended
December 31, 2003 by $35,508 ($.01 per share) and to decrease net income for
the years ended December 31, 2002 and 2001 by $17,729 ($- per share) and $1,840
($- per share), respectively.
In addition, the Company has restated its financial statements for the years
ended December 31, 2002 and 2001 to reflect the reclassification of
amortization of deferred gain arising from a sales-leaseback transaction of
$24,984 from other income to an offset of the related lease expense. The
Company has also restated the three and six month periods ended June 30, 2003
and the nine month period ended September 30, 2003 to reflect the
reclassification of an expense of $29,423 from other expense to cost of goods
sold. There was no change to previously reported net income as a result of
these reclassifications.
The following sets forth the effects of the aforementioned restatements to the
Company's Balance Sheet at December 31, 2003 and 2002, and its Statements of
Operations for the years ended December 31, 2003, 2002 and 2001. There was no
change to previously reported net cash provided by (used for) operating
activities, net cash used in investing activities, or net cash (used in)
provided by financing activities.
December 31, 2003
As Reported Adjustments Restated
Current assets $ 8,648,453 $ 2,241 $ 8,650,694
------------ ------------ ------------
Other assets $ 215,148 $ (13,928) $ 201,220
------------ ------------ ------------
Total assets $ 15,942,839 $ (11,687) $ 15,931,152
============ ============ ============
Current liabilities $ 3,261,959 $ 12,222 $ 3,274,181
------------ ------------ ------------
Deferred income taxes $ 300,856 $ (5,571) $ 295,285
------------ ------------ ------------
Total liabilities $ 8,264,661 $ 6,651 $ 8,271,312
Shareholders' equity 7,678,178 (18,338) 7,659,840
------------ ------------ ------------
Total liabilities and
Shareholders' equity $ 15,942,839 $ (11,687) $ 15,931,152
============ ============ ============
December 31, 2002
As Reported Adjustments Restated
Other assets $ 238,647 $ (28,328) $ 210,319
------------ ------------ ------------
Total assets $ 16,547,253 $ (28,328) $ 16,518,925
============ ============ ============
Current liabilities $ 3,777,154 $ 36,849 $ 3,814,003
------------ ------------ ------------
Deferred income taxes $ 287,127 $ (11,331) $ 275,796
------------ ------------ ------------
Total liabilities $ 9,019,722 $ 25,518 $ 9,045,240
Shareholders' equity 7,527,531 (53,846) 7,473,685
------------ ------------ ------------
Total liabilities and
shareholders' equity $ 16,547,253 $ (28,328) $ 16,518,925
============ ============ ============
For the year ended December 31, 2003
As Reported Adjustments Restated
Net revenues $ 7,301,781 $ 54,865 $ 7,356,646
Cost of sales 3,827,526 - 3,827,526
------------ ------------ ------------
Gross margin 3,474,255 54,865 3,529,120
Selling general and administrative
expenses 3,018,164 (10,354) 3,007,810
------------ ------------ ------------
Net operating income 456,091 65,219 521,310
Other income
(expense), net (213,606) (3,372) (216,978)
------------ ------------ ------------
Income before
income taxes 242,485 61,847 304,332
Income tax 104,265 26,339 130,604
------------ ------------ ------------
Net income $ 138,220 $ 35,508 $ 173,728
For the year ended December 31, 2002
As Reported Adjustments Restated
Net revenues $ 5,989,456 $ (38,615) $ 5,950,841
Cost of sales 2,754,824 - 2,754,824
------------ ------------ ------------
Gross margin 3,234,632 (38,615) 3,196,017
Selling general and administrative
expenses 2,685,023 (37,251) 2,647,772
------------ ------------ ------------
Net operating income 549,609 (1,364) 548,245
Other income
(expense), net (322,297) (26,762) (349,059)
------------ ------------ ------------
Income before
income taxes 227,312 (28,126) 199,186
Income tax 90,837 (10,397) 80,440
------------ ------------ ------------
Net income $ 136,475 $ (17,729) $ 118,746
For the year ended December 31, 2001
As Reported Adjustments Restated
Net revenues $ 7,030,791 $ (16,250) $ 7,014,541
Cost of sales 3,560,853 - 3,560,853
------------ ------------ ------------
Gross margin 3,469,938 (16,250) 3,453,688
Selling general and administrative
expenses 2,978,799 (38,897) 2,939,902
------------ ------------ ------------
Net operating income 491,139 22,647 513,786
Other income
(expense), net (378,279) (25,390) (403,669)
------------ ------------ ------------
Income before
income taxes 112,860 (2,743) 110,117
Income tax 54,015 (903) 53,112
------------ ------------ ------------
Net income $ 58,845 $ (1,840) $ 57,005
2003 Compared to 2002.
Tasting room sales for the year ended December 31, 2003 increased 1% to
$1,577,622 from $1,566,349 for the same period in 2002. This was primarily due
to telephone and mail order sales for the year ended December 31, 2003
increasing 12% to $444,714 from $398,360 for the same period in 2002. The
focus on telephone, mail order and retail sales will continue with the goal of
expanding the customer base and continuing the trend of increasing revenue
generation by the retail department. The Company experienced a decrease in
revenue during 2003 in on-site and off-site festivals revenue of $107,666 over
$143,887 in the same period in 2002. This decrease is due primarily to the
continuing focus away from on-site and off-site events, and towards telephone,
mail order and retail sales.
In prior periods, direct sales from the winery to independent distributors in
the state of Oregon were included in out-of-state sales category. Beginning in
the quarter ended June 30, 2003, these sales are accounted for in the in-state
sales category. For the year ended December 31, 2003, these sales increased
124% to $367,857 from $164,317 over the same period of 2002. The higher sales
are a result of increased sales focus on these distributors by the new Bacchus
management.
Wholesale sales in the state of Oregon for the year ended December 31, 2003,
through the Company's independent sales force and through direct sales from the
winery, increased 28% to $3,554,499 from $2,779,735 for the same period in 2002.
Large chain retailers dominate Oregon's retail wine environment. For example,
one large retailer remains the largest in-state customer of the Company. The
sales to this retailer were $339,022 in 2003, down from $343,876 in 2002.
Out-of-state sales for the year ended December 31, 2003, increased 29% to
$2,141,989 from $1,661,184 for the same period in 2002. Depletions of wine
through the Company's distributors to their customers increased in 2003 by 15%,
to 27,042 units, from 23,602 units in 2002. After adjusting for deeply
discounted, non-continuing Chardonnay sales in 2003, these depletions increased
11% to 26,244 from 23,602. The Pinot noir variety led sales in 2003.
The Company pays alcohol excise taxes based on product sales to both the Oregon
Liquor Control Commission and to the U.S. Department of the Treasury, Alcohol
and Tobacco Tax and Trade Bureau. The Company is liable for the taxes upon the
removal of product from the Company's warehouse on a per gallon basis. The
Company also pays taxes on the grape harvest on a per ton basis to the Oregon
Liquor Control Commission for the Oregon Wine Board. The total excise taxes
incurred in 2003 was $284,743, as compared to $229,940 in 2002. 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 48% for fiscal year 2003 as compared
to 54% for 2002. The sales of bulk wine, and revenue from custom crush
services, as well as increased Bacchus sales of distributed products at slim
margins, reduced the gross margin in 2003. The cost of sales increased in 2003
for many varieties, though the average sales price did not change. The Company
had significant decreases in the cost of production as a result of the highly
successful 2001 crush. As the Company sold through products from this vintage,
and moved into products from subsequent vintages, the cost of goods resulted in
decreased margins. The Company has taken several steps to emulate the low cost
of the 2001 vintage products including purchasing fewer grapes, and purchasing
the fruit from lower cost growers for its lower priced wines. Also, the
Company plans to provide custom crush services to help offset the fixed costs
of production by increasing the tonnage of grapes crushed without increasing
the Company's inventory.
Beginning in 2002, The Company continued to focus on the maintenance of lower
production costs by scaling back its harvest volumes to 917 tons in 2003, from
1091 and 1859 in 2002 and 2001 respectively. The Company also began soliciting
growers for custom crush work to maintain the costs of production. This
solicitation resulted in custom crush revenue of $181,475, and processing costs
totaled $156,020. In 2003, the Company's bulk wine sales totaled $68,620, and
bulk wine costs totaled $54,648. The only remaining wine grape production that
exceeds sales plans is Chardonnay from the leased Belle Provenance Vineyard and
the purchased Tualatin Vineyard. The significance of this imbalance between
fruit and sales forecasts is now reduced to approximately 1,500 cases of
Chardonnay, annually because the Company removed approximately 6.5 acres of
Chardonnay from the Tualatin Estate Vineyard. This imbalance is expected to
continue until the end of the Belle Provenance Vineyard lease agreement, or
until the Company can allocate the resources to replant or graft-over the
remaining Tualatin grapes to Pinot noir. The excess inventory created by this
imbalance will be sold through normal channels with increased sales allowances
to speed distributor case sales. These sales allowances will cause small
decreases in gross profit margins until the Company can overcome the imbalance.
Amortization of vineyard development costs are included in capitalized crop
costs that in turn are included in inventory costs and ultimately become a
component of cost of goods sold. For the years ending December 31, 2003 and
2002 approximately $72,000 and $69,000 were amortized into inventory costs,
respectively.
Selling, general, and administrative expenses for the year ended December 31,
2003, increased approximately 14% to $3,007,810 compared to $2,647,772 for the
same period in 2002. As a percentage of revenue from winery operations, the
selling, general, and administrative expenses were 41% in 2003 as compared to
44% in 2002. The primary reasons for the increase in expenses in 2003 over 2002
were increased expenses related to in-state sales and the building of the
Bacchus sales force, and the focus on facilities repairs and maintenance in the
fourth quarter of 2003. The Company invested heavily in delivery vehicles and
drivers to support the in-state sales force, as well as increased the marketing
expenses provided for their accounts.
The Company's other income (expense) is summarized as follows:
Year Ended December 31
2003 2002
(restated)
__________ __________
Insurance settlement for
inventory loss $ 95,369 $ -
Miscellaneous rebates 1,511 122
Gain on Tualatin
bare land sale 3,004 -
Farm Credit interest
rebate 22,617 -
Refunded interest and penalties 5,572
__________ __________
Other income
(expense) $ 122,501 $ 5,694
Other income for the year ended December 31, 2003 was $122,501 as compared to
$5,694 for the year ended December 31, 2002. This increase is primarily due
to insurance proceeds received related to an inventory loss.
The Company discovered a significant loss of inventory in the control of a now
former independent sales representative with a wholesale value of approximately
$100,000, and an inventory cost of $29,423 that the Company expensed as cost of
sales. The Company filed an insurance claim and notified local law enforcement
officials. The insurance company paid $95,369 for claim and the Company
recorded it as other income in the third quarter of 2003.
Interest income increased to $5,070 in fiscal year 2003 from $4,469 in fiscal
year 2002. Interest expense decreased to $344,549 in fiscal year 2003 from
$359,222 in fiscal year 2002.
The provision for income taxes and the Company's effective tax rate were
$130,604 and 43% of pre-tax income in fiscal year 2003 with $80,440 or 40% of
pre-tax income recorded for fiscal year 2002.
As a result of the above factors, net income increased to $173,728 in fiscal
2003 from $118,746 for fiscal year of 2002. Earnings per share were $.04,
$.03, and $.01, in fiscal years 2003, 2002, and 2001, respectively.
2002 Compared to 2001.
Tasting room sales for the year ended December 31, 2002 increased 11% to
$1,566,349 from $1,408,955 for the same period in 2001. In 2000, telephone and
mail order sales were part of the on-site and off-site festivals category, in
2001 and 2002 they are accounted for in the tasting room and retail sales
category. The Company experienced a decrease in revenue during 2002 in
on-site and off-site festivals revenue of $143,887 over $206,187 in the same
period in 2001. This decrease is due primarily to the continuing focus away
from on-site and off-site events, and towards telephone, mail order and retail
sales. Telephone and mail order sales for the year ended December 31, 2002
increased 13% to $398,360 from $353,210 for the same period in 2001. The focus
on telephone, mail order and retail sales will continue with the goal of
expanding the customer base and continuing the trend of increasing revenue
generation by the retail department.
Wholesale sales in the state of Oregon for the year ended December 31, 2002,
through the Company's independent sales force and through direct sales from the
winery, decreased 1% to $2,779,735 from $2,801,754 for the same period in 2001.
Large chain retailers dominate Oregon's retail wine environment. For example,
one large retailer remains the largest in-state customer of the Company. The
sales to this retailer were $343,876 in 2002, down from $452,652 in 2001. This
sales decline was due to a change in the product mix sold in the retailer
starting in 2001, due to an unusual frost during the spring of 2000, the 2000
Riesling harvest was very small, which resulted in a shortage of Riesling to
sell at high volumes through this retailer. Once the Company lost the
placement in the retailer, the Company focused on the placement of other
varieties in an attempt to regain the higher sales volumes of the prior years.
This change has resulted in declining gross sales but improved margins, and the
Company plans to continue to focus on the retailer in order to improve sales.
Out-of-state sales for the year ended December 31, 2002, decreased 32% to
$1,660,784 from $2,460,555 for the same period in 2001. The Pinot noir
variety led sales in 2002.
The Company contracted in early 1997 on a long-term basis for more grapes than
needed to meet the Company's then current sales forecasts. The Company
subsequently reduced its sales forecasts but had already committed to acquiring
the grapes. The Company sold some of its own grapes and some of its contracted
grapes for $465,030 in 1997, $454,281 in 1998, $22,000 in 1999, $18,526 in
2000, and $13,628 in 2001. These long-term grape contracts expired at the end
of 2000. What the Company couldn't sell as grapes was produced as bulk wine.
In 2002, the Company's bulk wine sales totaled $30,026, and bulk wine costs
totaled $28,405. The only remaining wine grape 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 1,500 cases of Chardonnay, annually
because the Company removed approximately 6.5 acres of Chardonnay from the
Tualatin Estate Vineyard. This imbalance is expected to continue until the end
of the O'Connor Vineyard lease agreement, or until the Company can allocate the
resources to replant or graft-over the remaining Tualatin grapes to Pinot
noir. The excess inventory created by this imbalance will be sold through
normal channels with increased sales allowances to speed distributor case
sales. These sales allowances will cause small decreases in gross profit
margins until the Company can overcome the imbalance.
Amortization of vineyard development costs are included in capitalized crop
costs that in turn are included in inventory costs and ultimately become a
component of cost of goods sold. For the years ending December 31, 2002 and
2000 approximately $69,000 and $65,000 were amortized into inventory costs,
respectively.
Amounts paid by customers to the Company for shipping and handling expenses
are included in the net revenue. Expenses incurred for shipping and handling
charges are included in selling, general and administrative expense. The
Company's gross margins may not be comparable to other companies in the same
industry as other companies may include shipping and handling expenses as a
cost of goods sold.
The Company pays alcohol excise taxes based on product sales to both the Oregon
Liquor Control Commission and to the U.S. Department of the Treasury, Alcohol
and Tobacco Tax and Trade Bureau. The Company is liable for the taxes upon the
removal of product from the Company's warehouse on a per gallon basis. The
Company also pays taxes on the grape harvest on a per ton basis to the Oregon
Liquor Control Commission for the Oregon Wine Board. The total excise taxes
incurred in 2002 was $229,940, as compared to $216,328 in 2001. 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 2002 as compared
to 49% for 2001. The sales of bulk wine at a loss and grapes at harvest at a
slim margin reduced the gross margin in 2001. After adjusting for these sales,
the gross margin would be 54% in 2002 compared to 50% in 2001. The cost of
sales decreased in 2002 for many varieties, though the average sales price did
not change. The Company has seen significant decreases in the cost of
production as a result of the highly successful 2001 crush. As the Company
sells through products from this vintage, the cost of goods will result in
improved margins. The Company has taken several steps to emulate the low cost
of the 2001 vintage products including purchasing fewer grapes, and purchasing
the fruit from lower cost growers. Also, the Company plans to provide custom
crush services to help offset the fixed costs of production by increasing the
tonnage of grapes crushed without increasing the Company's inventory.
Selling, general, and administrative expenses for the year ended December
31, 2002, decreased approximately 10% to $2,647,772 compared to $2,939,902 for
the same period in 2001. During 2002 the Company disposed of approximately
6.5 acres of unproductive vines at the Tualatin Estate Vineyard and recorded an
expense of $35,465 included in selling, general and administrative expenses.
As a percentage of revenue from winery operations, the selling, general, and
administrative expenses were 44% in 2002 as compared to 42% in 2001. The
largest part of the decrease in expenses in 2002 over 2001 was decreased
expenses related to out-of-state sales and tight restrictions on all aspects of
spending due to the lack of a line of credit. Management reduced fixed sales
costs by eliminating the national sales manager position and his remote office,
decreasing compensation, office, travel and entertainment expenses. With the
CEO as the lead, the Company embarked on extensive distributor sales staff
training in the field, and retained, in selected markets, local, professional
wine brokers paid on case depletions made by the distributor to retail
accounts. The Company's ability to spend was hampered by the lack of an
external source of liquidity caused by the reduction in available borrowing
demanded by the Company's former operating lender, Northwest Farm Credit
Services. This restriction forced the Company to closely watch spending to
ensure maximum return, and delay some spending until alternate financing was
arranged.
The Company's other income (expense) is summarized as follows:
Year Ended December 31
2002 2001
(restated) (restated)
__________ __________
Miscellaneous rebates $ 122 $ 4,384
Refunded interest and penalties 5,572 -
Northwest Farm Credit Services
patronage rebate 29,171
__________ __________
Other income
(expense) $ 5,694 $ 33,555
Other income for the year ended December 31, 2002 was $5,694 as compared to
$33,555 for the year ended December 31, 2001. The Company filed an amended
tax return for the year ended December 31, 1999 and received a refund for
interest and penalties paid for the 1999 tax year totaling $5,572. In the year
ended December 31, 2001, the Company received a patronage rebate from Northwest
Farm Credit Services that was not received in 2002. Interest income decreased
to $4,469 in fiscal year 2002 from $4,811 in fiscal year 2001. Interest
expense decreased to $359,222 in fiscal year 2002 from $442,035 in fiscal year
2001.
The provision for income taxes and the Company's effective tax rate were
$80,440 and 40% of pre-tax income in fiscal year 2002 with $53,112 or 48% of
pre-tax income recorded for fiscal year 2001.
As a result of the above factors, net income increased to $118,746 in fiscal
2002 from $57,005 for fiscal year of 2001. Earnings per share were $.03, $.01,
and $.00, in fiscal years 2002, 2001, and 2000, respectively.
Liquidity and Capital Resources
Prior to April 1990 when it sold its first wine, 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 of common stock 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 public 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 decreased to $213,681 at December 31, 2003 from
$632,183 at December 31, 2002.
Inventories decreased 3% as of December 31, 2003, to $7,335,378 from the
December 31, 2002 level of $7,550,291. As the Company moved through the
significant 2001 vintage products, the inventory began to decline and come into
balance with sales. Combined with the reduction in production, inventories
have begun the decline towards current sales levels.
Property, plant, and equipment, net, decreased 7% as of December 31, 2003, to
$4,698,915 from $5,046,893 as of December 31, 2002.
The Company has a line of credit from GE Commercial Distribution Finance
Corporation, formerly known as Deutsche Financial Services Corporation, which
had provided for maximum borrowings of $2,700,000 for operations during the
year ended December 31, 2003. The agreement calls for an interest rate equal
to the Prime Rate plus eighty one hundredths of one percent (0.80%) per year.
The agreement also contains, among other things, certain restrictive financial
covenants with respect to total equity, debt-to-equity and debt coverage. At
December 31, 2003, the Company was in compliance with all debt covenants. The
borrowings are collateralized by the bulk and case goods inventory, and the
proceeds from the sales thereof, as well as a second lien against the Turner,
Oregon property. The agreement replaced the existing $1,500,000 line of
credit the Company had with Northwest Farm Credit Services. As of December 31,
2003 the outstanding balance of the GE Commercial Distribution Finance line was
$1,130,516 as compared to $2,050,170 as of December 31, 2002. The outstanding
balance of the GE Commercial Distribution Finance line as of December 31, 2003
is net of a $435,248 depository cash balance in a depository cash account
maintained by the Company in the name of GE Commercial Distribution Finance.
The Company's lender, GE Commercial Distribution Finance, announced to its
winery clients that it would be exiting the wine industry. It was noted that
GE Commercial Distribution Finance was unable to build a client base to justify
their costs of servicing the industry.
The Company's ability to fund operations requires utilization of amounts
available pursuant to a line of credit agreement as further discussed above.
There was $1,256,360 outstanding on the line of credit with GE Commercial
Distribution Finance Corporation as of September 30, 2004. The Company has been
notified by GE Commercial Distribution Finance Corporation that they do not
intend to renew the line of credit agreement when it expires on January 3, 2005
and that it was reducing the amount available under the existing line of credit
to $2,000,000. There can be no assurance that the Company will be successful in
obtaining replacement financing on favorable terms, or at all. The Company's
failure to obtain such financing or to obtain such financing on favorable terms
raises substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. The Company is in discussions with a replacement
lender to replace the line of credit facility in amounts that are similar to
the existing credit facility but has not obtained a non-cancelable commitment.
Management believes that it will be able to complete discussions and satisfy
all the required terms and conditions prior to January 3, 2005. In the event
that they are not able to finalize a new line of credit facility prior to
January 3, 2005, management believes that the existing lender will grant an
extension of time on the existing line of credit to enable the Company to
finalize a new line of credit facility. Management believes existing cash and
cash flow from operations, combined with the amounts that it expects to have
available under the new line of credit facility will be sufficient to satisfy
all debt service obligations and fund the Company's operating needs and capital
expenditures through 2005.
Long-term debt decreased to $2,943,399 as of December 31, 2003, from $3,182,349
as of December 31, 2002. The Company has a loan agreement with Farm Credit
Services that contains certain restrictive financial covenants, which require
the Company to maintain certain financial ratios and balances. At December 31,
2003, the Company was in compliance with all five debt covenants.
The Company's contractual obligations as of December 31, 2003 including long-
term debt, grape payables, commitments for future payments under non-cancelable
lease arrangements, and commitments for future payments under the Distributor
Obligation, are summarized below:
Payments Due by Period
__________________________________________________________
Total Less than 1-3 years 4-5 years After 5
1 year years
__________ __________ __________ __________ __________
Long-term debt and
capital lease
obligations $ 2,943,399 $ 250,291 $ 581,094 $ 652,684 $ 1,459,330
Grape Payables 669,714 260,158 200,000 150,000 59,556
Operating Leases 2,682,134 200,609 410,799 276,272 1,794,454
Distributor
Obligation 1,500,000 - 300,000 600,000 600,000
__________ __________ __________ __________ __________
Total Contractual
Obligations $ 7,795,247 $ 711,058 $ 1,491,893 $ 1,678,956 $ 3,913,340
========== ========== ========== ========== ==========
Amount of Commitment Expiration Per Period
__________________________________________________________
Total Less than 1-3 years 4-5 years After 5
1 year years
__________ __________ __________ __________ __________
Operating Line
of credit(A) $ 1,130,516 $ - $ 1,130,516 $ - $ -
__________ __________ __________ __________ __________
Total Commercial
Commitments $ 1,130,516 $ - $ 1,130,516 $ - $ -
========== ========== ========== ========== ==========
(A) As discussed in Note 1 to the financial statements the Company has been
notified by the lender that they do not intend to renew the line of credit
agreement when it expires on January 3, 2005.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements required by this item are presented at page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
Not applicable.
ITEM 8A. CONTROLS AND PROCEDURES.
a) We carried out an evaluation, under the supervision and with the
participation of the Chief Executive Officer, Chief Financial Officer and other
management personnel, of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities and
Exchange Act of 1934 as of December 31, 2003. Based on that evaluation, the
Chief Executive Officer and Chief Financial Officer initially concluded that
our disclosure controls and procedures as of December 31, 2003 were effective
to ensure that information required to be disclosed by the Company in the
reports it files or submits under the Securities and Exchange Act of 1934 is
recorded, processed, summarized, and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
As described in Part II, Item 6, Management's Discussion and Analysis or Plan
of Operation under Restatement of Financial Information and in Note 13 of the
Notes to Financial Statements included in Part II, Item 7, subsequent to the
issuance of the Company's financial statements for the year ended December 31,
2003, the Company's management determined it was necessary to restate the
Company's financial statements as of and for the years ended December 31,
2003, 2002, and 2001 and for each of the quarterly periods within each of those
years for the following: a) the Company's incorrect application of the
federal small winery tax credit, b) capitalization and subsequent amortization
of certain label and package design costs that should have been expensed in the
period incurred, c) revision in classification of the amortization of deferred
gain from a sales-leaseback from other income to selling, general and
administrative expenses, and d) revision in classification of an expense in
other expense to cost of goods sold.
In connection with restating the Company's financial statements as provided in
this report, the Chief Executive Officer, Chief Financial Officer and other
management personnel re-evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of the end of the period covered
by the report and as of the date of this report. Based on the foregoing, our
Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures were not effective at a reasonable
assurance level.
Management and the Company's independent registered public accounting firm,
PricewaterhouseCoopers LLP, identified and communicated to the Audit Committee
certain matters relating to the Company's internal controls and procedures
over its financial reporting for excise taxes during the periods under review
that are considered a material weakness (as defined in Public Company
Accounting Oversight Board Standard No. 2). In response thereto, the Company
has performed a review of its excise tax calculation and reporting procedures
and has put additional controls in place over the calculation and reporting of
excise taxes to ensure that they are accurately measured and reported in the
appropriate reporting period. We believe these changes to our disclosure
controls and procedures will be adequate to provide reasonable assurance that
the objectives of our disclosure controls and procedures will be met. The
Company has also implemented enhanced supervisory review procedures related to
the preparation of our financial statements, including the process used to
initially classify transactions, to ensure that amounts are appropriately
classified in accordance with generally accepted accounting principles and
classified consistently between reporting periods.
The Company does not expect that its disclosure controls and procedures will
prevent all error and all fraud. A control procedure, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance
that the objectives of the control procedure are met. Because of the inherent
limitations in all control procedures, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the Company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that breakdowns
can occur because of simple error or mistake. Additionally, controls can be
circumvented by the individual acts of some persons, by collusion of two or
more people, or by management override of the control. The Company considered
these limitations during the development of it disclosure controls and
procedures, and will continually reevaluate them to ensure they provide
reasonable assurance that such controls and procedures are effective.
b) There were no changes in the Company's internal control procedures over
financial reporting that occurred during the period ended December 31, 2003
that have materially affected, or are reasonably likely to materially affect,
our internal controls over financial reporting, except as noted above.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors, nominees for election as a director, and each such person's age at
March 30, 2004 and position with the Company.
Name Position(s) with the Company Age
James W. Bernau *** Chairperson of the Board,
President and Director 50
James L. Ellis * *** Secretary and Director 59
Terry Emmert** Director 59
Betty M. O'Brien* Director 60
Stan G. Turel * ** *** Director 57
_______________________________
*Member of the Compensation Committee
**Member of the Audit Committee
***Member of the Executive 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. Mr. Bernau has served as the President of the Oregon Winegrowers
Association, Treasurer of the association's Political Action Committee (PAC),
and Chair of the Promotions Committee of the Oregon Wine Advisory Board, the
State of Oregon's agency dedicated to the development of the industry. In
March 2004, Mr. Bernau received the industry's Founder's Award for his service.
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, and Vice President/Corporate since 1998.
From 1990 to 1992, Mr. Ellis was a partner in Kenneth L. Fisher, Ph.D. &
Associates, a management-consulting firm. From 1980 to 1990, Mr. Ellis was
Vice President and General Manager of R.A. Kevane & Associates, a Pacific
Northwest personnel-consulting firm. From 1962 to 1979, Mr. Ellis was a member
of and administrator for the Christian Brothers of California, owner of Mont
La Salle Vineyards and producer of Christian Brothers wines and brandy.
Terry W. Emmert. Mr. Emmert has served as a Director since October 2001. Mr.
Emmert is founder and President of Emmert Industrial Corporation. The company
was founded in 1968. Mr. Emmert has received many letters for recommendation
and awards in his industry. These include the Rigging Job of the Year from
Specialized Carriers & Rigging Association. The Emmert history is highlighted
with innovative solutions to monumental problems. Mr. Emmert currently serves
on the Boards of Directors for Christie School, Warehouse Project, Oregon
Business Committee for the Arts, and Elected Multnomah County Sheriff Advisory
Board, as well as chairing the Police Activity League fundraiser for 2002.
Betty M. O'Brien. Ms. O'Brien has served as a Director since July 1991. Ms.
O'Brien is the Executive Director of the Oregon Wine Board. 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.
Stan G. Turel. Mr. Turel has served as a Director since November of 1994. Mr.
Turel currently manages a multimillion-dollar real estate portfolio. Prior to
his current activities, Mr. Turel was part owner and the CEO of Columbia Turel,
Inc. (formerly Columbia Bookkeeping, Inc.) a position he assumed in 1974.
Prior to 2001, Columbia Turel, Inc. has fifteen offices in Oregon and
Washington, servicing 4,000 small business and 26,000 tax clients annually.
In 2001, Columbia Turel, Inc. sold its offices to Fiducial, one of Europe's
largest accounting firms. 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 has appointed a standing Audit Committee that, during the year ended
December 31, 2003, conducted one meeting. The elected members of the Audit
Committee are Terry Emmert and Stan Turel. Mr. Turel is designated by
the Board of Directors as the "audit committee financial expert" under SEC
rules. The Audit Committee reviews the scope of the independent annual audit,
the independent accountants' letter to the Board of Directors concerning the
effectiveness of the Company's internal financial and accounting controls and
the Board of Directors' response to that letter, if deemed necessary. The
Board of Directors also has appointed a Compensation Committee, which reviews
executive compensation and makes recommendations to the full Board regarding
changes in compensation, and also administers the Company's 1992 Stock
Incentive Plan. During the fiscal year ended December 31, 2003, the
Compensation Committee held three meetings. The members of the Compensation
Committee currently are Betty M. O'Brien, Chair, Stan Turel, and James Ellis.
In 1997 the Board appointed an Executive Committee, members are: James Bernau,
James Ellis, and Stan Turel. The Executive Committee held one meeting during
2003.
Code of Ethics. The Company adopted a code of ethics applicable to its chief
executive officer, controller and other finance leaders, which is a "code of
ethics" as defined by applicable rules of the Securities and Exchange
Commission. A copy of the code of ethics is attached as an exhibit to this
Annual Report on Form 10-KSB. Amendments to the code of ethics or any grant of
a waiver from a provision of the code of ethics requiring disclosure under
applicable SEC rules, if any, will be disclosed on our website at www.WVV.com.
Any person may request a copy of the code of ethics, at no cost, by writing
to us at the following address:
Willamette Valley Vineyards, Inc.
8800 Enchanted Way SE
Turner, OR 97392
Attention: Corporate Secretary
ITEM 10. EXECUTIVE COMPENSATION.
Summary of Cash and Certain Other Compensation
The following table provides certain summary information concerning
compensation paid or accrued by the Company, to or on behalf of the Company's
Chief Executive Officer, James W. Bernau (the "named executive officer") for
the years ending December 31, 2001, 2002, and 2003.
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
Name
Year Salary($) Bonus($) Other Annual Restricted Securities LTIP All
Compensation($) Stock Underlying Payouts($)Other
Compen-
sations
Award(s) Options/
($) SARs (#)
James W. Bernau
2001 95,357 - 6,693 - 82,000 - -
2002 97,027 - 6,934 - 112,000 - -
2003 120,318 - 6,953 - 112,000 - -
Bernau Employment Agreement
The Company and Mr. Bernau are parties to an employment agreement dated
August 3, 1988 and amended in February 1997 and again amended in January of
1998. Under the amended agreement, Mr. Bernau is paid an annual salary of
$90,000 with annual increases tied to increases in the consumer price index.
Pursuant to the terms of the employment agreement, the Company must use its
best efforts to provide Mr. Bernau with housing on the Company's property.
Mr. Bernau and his family live in the house free of rent and must continue to
reside there for the duration of his employment in order to provide additional
security and lock-up services for late evening events at the Winery and
Vineyard. The employment agreement provides that Mr. Bernau's employment may
be terminated only for cause, which is defined as non-performance of his duties
or conviction of a crime.
Stock Options
In order to reward performance and retain high-quality employees, the Company
often grants stock options to its employees. The Company does not ordinarily
directly issue shares of stock to its employees. Options are typically issued
at a per share exercise price equal to the closing price as reported by NASDAQ
at the time the option is granted. The options vest to the employee over time.
Three months following termination of the employee's employment with the
Company, any and all unexercised options terminate.
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, 2003.
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(1.65)
1,500(1.81)
1,500(1.50)
4,000(1.5625)
30,000(1.507)
Value of Unexercised
In-the-Money Options at FY-End(2)
Exercisable Unexercisable
James W. Bernau 35,250
465
930
2,230
18,390
(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, 2003 ($2.12 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. This option 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
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth certain information with respect to beneficial
ownership of the Company's Common Stock as of December 31, 2003, 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.
Number of Percent of
Shares Outstanding Shares
Beneficially Owned
James W. Bernau President/CEO, Chair of the Board
2545 Cloverdale Road 1,071,160.5 (1) 23.9%
Turner, OR 97392
James L. Ellis Secretary, Director
7850 S.E. King Road 52,743 (2) 1.2%
Milwaukie, OR 97222
Terry W. Emmert Director
11811 SE Highway 212 281,200 6.3%
Clackamas, OR 97015
Betty M. O'Brien Director
22500 Ingram Lane NW 13,950 (3) **
Salem, OR 97304
Stan G. Turel Director
604 SE 121 Street 131,885 (4) 2.9%
Vancouver, WA 98683
All Directors, executive 1,550,939 34.6%
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 112,000 shares issuable upon exercise of options.
(2) Includes 47,643 shares issuable upon the exercise of options.
(3) Includes 8,500 shares issuable upon the exercise of options.
(4) Includes 8,500 shares issuable upon the exercise of options.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 2003, 2002, 2001 and 2000, the Company purchased grapes from Elton
Vineyards for $122,780, $120,589, $108,672 and $74,585 respectively. Betty M.
O'Brien, a Director of the Company, is a principal owner of Elton Vineyards.
On November 26, 2002, Mr. Bernau was granted 30,000 employee stock options for
his personal guarantee of $1,000,000 of the Company's Line of Credit from GE
Commercial Distribution Finance. The options, which were issued pursuant to
the stock incentive plan and are, accounted for as non-compensatory employee
stock options. The options are exercisable anytime through November 26, 2012,
at an exercise price of $1.507 per share.
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,
2003, the outstanding balance of the loan was $61,134 including accrued
interest.
The Company believes that the transactions set forth above were made on terms
no less favorable to the Company than could have been obtained from
unaffiliated third parties. All future transactions between the Company and
its officers, directors, and principal shareholders will be approved by a
disinterested majority of the members of the Affiliated Transactions Committee
of the Company's Board of Directors, and will be on terms no less favorable to
the Company than could be obtained from unaffiliated third parties.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation of Willamette Valley Vineyards, Inc.
(incorporated by reference from the Company's Regulation A Offering Statement
on Form 1-A [File No. 24S-2996])
(b) Bylaws of Willamette Valley Vineyards, Inc.(incorporated by reference from
the Company's Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(10) Material Contracts
(a) Employment Agreement between Willamette Valley Vineyards, Inc. and James W.
Bernau dated August 3, 1988 (incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(b) Indemnity Agreement between Willamette Valley Vineyards, Inc. and James W.
Bernau dated May 2, 1988 (incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(c) Indemnity Agreement between Willamette Valley Vineyards, Inc. and Donald E.
Voorhies dated May 2, 1988 (incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(d) Shareholders Agreement among Willamette Valley Vineyards, Inc. and its
founders, James Bernau and Donald Voorhies, dated May 2, 1988 (incorporated by
reference from the Company's Regulation A Offering Statement on Form 1-A [File
No. 24S-2996])
(h) Revolving Note and Loan Agreement dated May 28, 1992 by and between
Northwest Farm Credit Services, Willamette Valley Vineyards, Inc. and James W.
and Cathy Bernau (incorporated by reference from the Company's Regulation A
Offering Statement on Form 1-A [File No. 24S-2996])
(i) Founders' Escrow Agreement among Willamette Valley Vineyards, Inc., James
W. Bernau, Donald Voorhies and First Interstate Bank of Oregon, N.A. dated
September 20, 1988 (incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A [File No. 24S-2996])
(j) Amendment to Founders' Escrow Agreement dated September 20, 1988
(incorporated by reference from the Company's Regulation A Offering Statement
on Form 1-A [File No. 24S-2996])
(k) Stock Escrow Agreement among Willamette Valley Vineyards, Inc., Betty M.
O'Brien and Charter Investment Group, Inc. dated July 7, 1992 (incorporated by
reference from the Company's Regulation A Offering Statement on Form 1-A [File
No. 24S-2996])
(l) Stock Escrow Agreement among Willamette Valley Vineyards, Inc., Daniel S.
Smith and Piper Jaffray & Hopwood, Inc. dated July 7, 1992 (incorporated by
reference from the Company's Regulation A Offering Statement on Form 1-A [File
No. 24S-2996])
(m) Acquisition of Tualatin Vineyards, Inc. dated April 15, 1997. (File No.
000-21522)
(n) Business Financing Agreement dated July 2, 2002 by and between GE
Commercial Distribution Finance and Willamette Valley Vineyards, Inc. (File No.
000-21522)
(o) Consent of PricewaterhouseCoopers LLP, Independent Registered Public
Accounting Firm
(b) Reports on Form 8-K
a. Form 8-K, filed October 7, 2004, Item 4.02 - Non-Reliance on Previously
Issued Financial Statements or a Related Audit Report or Interim Review
b. Form 8-K, filed November 26, 2004, Item 2.02 - Results of Operations
and Financial Condition
c. Form 8-K, filed December 2, 2004, Item 2.02 - Results of Operations and
Financial Condition and Item 3.01 - Notice of Delisting or Failure to Satisfy a
Continued Listing Rule or Standard: Transfer of Listing
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information contained under the caption entitled "Audit and Related Fees"
in the Proxy Statement is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
(Registrant)
Date: December 6, 2004 By:____/s/ James W. Bernau__________
James W. Bernau,
Chairperson of the Board,
President
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed below by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
Signature Title Date
__/s/________________ Chairperson of the Board, December 6, 2004
James W. Bernau President
(Principal Executive Officer)
__/s/________________ Controller December 6, 2004
Sean M. Cary (Principal Accounting Officer)
__/s/________________ Director and Vice-President December 6, 2004
James L. Ellis and Secretary
__/s/________________ Director December 6, 2004
Delna L. Jones
__/s/________________ Director December 6, 2004
Lisa M. Matich
__/s/________________ Director December 6, 2004
Betty M. O'Brien
__/s/________________ Director December 6, 2004
Stan G. Turel
EXHIBIT INDEX
Exhibit
23.1 Consent of Independent Registered Public Accounting Firm
31.1 Certification by James W. Bernau pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
31.2 Certification by Sean M. Cary pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 99.77D Code of Ethics for CEO and Finance Leaders
Willamette Valley
Vineyards, Inc.
Report and Financial Statements
For the Years Ended December 31, 2003, 2002 and 2001.
Willamette Valley Vineyards, Inc.
Index to Financial Statements
Report of Independent Registered Public Accounting Firm............... F-1
Financial Statements
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 Registered Public Accounting Firm
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.
(the "Company") at December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003, 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 the standards of the Public
Company Accounting Oversight Board(United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note 13 to the accompanying financial statements, the Company
has restated its financial statements for the years ended December 31, 2003,
2002 and 2001.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's line of credit expires on January 3, 2005
which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to this matter are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Portland, Oregon
March 24, 2004, except for the liquidity paragraph at Note 1 and Note 13, as to
which the date is December 1, 2004
F-1
Willamette Valley Vineyards, Inc.
Balance Sheets
December 31, 2003 and 2002
2003 2002
(Restated) (Restated)
ASSETS
Current assets:
Cash and cash equivalents $ 213,681 $ 632,183
Accounts receivable, net (Note 2) 796,836 519,861
Inventories (Note 3) 7,335,378 7,550,291
Prepaid expenses and other current assets 46,565 47,908
Income taxes receivable (Note 9) 83,911 -
Deferred income taxes (Note 9) 174,323 148,212
----------- -----------
Total current assets 8,650,694 8,898,455
Vineyard development costs, net 1,698,970 1,707,274
Inventory (Notes 3 and 12) 552,414 520,408
Property and equipment, net (Note 4) 4,698,915 5,046,893
Notes receivable from officer and
other (Note 10) 66,134 61,948
Debt issuance costs 62,805 73,628
Other assets 201,220 210,319
----------- -----------
$ 15,931,152 $ 16,518,925
___________ ___________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Line of credit (Note 5) $ 1,130,516 $ 2,050,171
Current portion of long-term debt and
capital lease obligations (Note 6) 250,291 237,838
Accounts payable 752,219 371,253
Accrued expenses 471,441 273,698
Income taxes payable - 10,985
Grape payables 669,714 870,058
----------- -----------
Total current liabilities 3,274,181 3,814,003
Long-term debt and capital lease
obligations (Note 6) 2,693,108 2,944,511
Distributor obligation (Note 12) 1,500,000 1,500,000
Deferred rent liability 108,995 86,203
Deferred gain (Note 11) 399,743 424,727
Deferred income taxes (Note 9) 295,285 275,796
----------- -----------
Total liabilities 8,271,312 9,045,240
----------- -----------
Commitments and contingencies (Note 11)
Shareholders' equity (Notes 7 and 8):
Common stock, no par value - 10,000,000
shares authorized, 4,479,478 and
4,469,444 shares issued and
outstanding at December 31, 2003
and 2002, respectively 7,167,589 7,155,162
Retained earnings 492,251 318,523
----------- -----------
Total shareholders' equity 7,659,840 7,473,685
----------- -----------
$ 15,931,152 $ 16,518,925
___________ ___________
The accompanying notes are an integral part of the financial statements.
F-2
Willamette Valley Vineyards, Inc.
Statements of Operations
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
(restated) (restated) (restated)
Net revenues $ 7,356,646 $ 5,950,841 $ 7,014,541
Cost of goods sold 3,827,526 2,754,824 3,560,853
------------ ------------ ------------
Gross margin 3,529,120 3,196,017 3,453,688
Selling, general and
administrative expenses 3,007,810 2,647,772 2,939,902
------------ ------------ ------------
Income from operations 521,310 548,245 513,786
------------ ------------ ------------
Other income (expenses):
Interest income 5,070 4,469 4,811
Interest expense (344,549) (359,222) (442,035)
Other income 122,501 5,694 33,555
------------ ------------ ------------
(216,978) (349,059) (403,669)
------------ ------------ ------------
Income before income taxes 304,332 199,186 110,117
Income tax provision (Note 9) 130,604 80,440 53,112
------------ ------------ ------------
Net income $ 173,728 $ 118,746 $ 57,005
____________ ____________ ____________
Basic net income
per common share $ 0.04 $ 0.03 $ 0.01
____________ ____________ ____________
Diluted net income
per common share $ 0.04 $ 0.03 $ 0.01
____________ ____________ ____________
The accompanying notes are an integral part of the financial statements.
F-3.
Willamette Valley Vineyards, Inc.
Statements of Shareholders' Equity
For the Years Ended December 31, 2003, 2002 and 2001
Common stock Retained
Shares Dollars earnings Total
(restated) (restated)
----------- ------------ ---------- -----------
Balances at December 31, 2000 4,254,481 $ 6,817,613 $ 142,772 $ 6,960,385
Stock issuance for compensation 2,500 3,985 - 3,985
Common stock issued and
options exercised 208,000 321,049 - 321,049
Net income (restated) - - 57,005 57,005
----------- ------------ ---------- -----------
Balances at December 31, 2001 4,464,981 7,142,647 199,777 7,342,424
Stock issuance for compensation 2,463 3,941 - 3,941
Common stock issued and
options exercised 2,000 8,574 - 8,574
Net income (restated) - - 118,746 118,746
----------- ------------ ---------- -----------
Balances at December 31, 2002 4,469,444 7,155,162 318,523 7,473,685
Stock issuance for compensation 10,034 12,427 - 12,427
Net income (restated) - - 173,728 173,728
----------- ------------ ---------- -----------
Balances at December 31, 2003 4,479,478 $ 7,167,589 $ 492,251 $ 7,659,840
___________ ____________ __________ ___________
The accompanying notes are an integral part of the financial statements.
F-4
Willamette Valley Vineyards, Inc.
Statements of Cash Flows
For the Years Ended December 31, 2003, 2002 and 2001
2003 2002 2001
(restated) (restated) (restated)
Cash flows from operating activities:
Net income $173,728 $118,746 $ 57,005
Reconciliation of net income
to net cash (used for) provided by
operating activities:
Depreciation and amortization 713,817 763,077 778,752
Gain on disposal of fixed assets (3,003) - (3,043)
Loss on disposal of vines - 35,465 -
Deferred income taxes (6,622) 80,761 41,806
Bad debt expense 6,198 8,303 19,260
Stock issued for compensation 12,427 3,941 -
Changes in assets and liabilities:
Accounts receivable (283,173) 218,514 (201,918)
Inventories 182,907 (579,909) (565,791)
Prepaid expenses and
other current assets 1,343 39,604 (41,558)
Note receivable (4,186) 15,430 (7,169)
Other assets 3,989 (47,163) (29,691)
Accounts payable 380,966 (631,248) 154,618
Accrued expenses 197,743 118,069 11,967
Income taxes receivable/payable (94,896) (321) 11,306
Grape payables (200,344) (266,429) 222,121
Deferred rent liability 22,792 25,811 28,758
Deferred gain (24,984) (24,984) (24,984)
------------ ------------ ------------
Net cash provided by (used for)
operating activities 1,078,702 (122,333) 451,439
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment (273,214) (77,087) (379,953)
Vineyard development expenditures (63,275) (114,443) (153,930)
Proceeds on sale of fixed assets 15,128 - -
------------ ------------ ------------
Net cash used for
investing activities (321,361) (191,530) (533,883)
------------ ------------ ------------
Cash flows from financing activities:
Debt issuance costs (17,237) (20,378) (22,000)
Net increase (decrease) in line of
credit balance (919,655) 697,671 (1,264,049)
Proceeds from distributor obligation - - 1,500,000
Proceeds from common stock issued
and stock options exercised - 8,574 321,049
Issuance of long-term debt - - 33,909
Repayments of long-term debt (238,951) (244,331) (234,831)
------------ ------------ ------------
Net cash (used for) provided by
financing activities (1,175,843) 441,536 334,078
------------ ------------ ------------
Net (decrease) increase in cash
and cash equivalents (418,502) 127,673 251,634
Cash and cash equivalents:
Beginning of year 632,183 504,510 252,876
------------ ------------ ------------
End of year $ 213,681 $ 632,183 $ 504,510
____________ ____________ ____________
The accompanying notes are an integral part of the financial statements.
F-5
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
1. Summary of Operations, Basis of Presentation and Significant
Accounting Policies
Organization and Operations
Willamette Valley Vineyards, Inc. (the "Company") owns and operates vineyards
and a winery located in the state of Oregon, and produces and distributes
premium and super premium wines, primarily Pinot noir, Pinot gris,
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. In 2003, 2002 and 2001 no one customer represented more than
10% of revenues. Out-of-state sales represented approximately 30%, 30% and
37% of revenues for 2003, 2002 and 2001. Foreign sales represent less than
1% of total sales. 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
accounting principles generally accepted in the United States of America,
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. The Company bases its estimates
on historical experience and on various assumptions that are believed to be
reasonable under the circumstances at the time. Actual results could differ
from those estimates under different assumptions or conditions.
Restatement of Financial Statements
As further described in Note 13 the financial statements for the years ended
December 31, 2003, 2002 and 2001 have been restated to correctly reflect
federal excise taxes owing as a result of an audit by the Alcohol and
Tobacco Tax and Trade Bureau of the U.S. Treasury Department, accounting
for label and package design costs, as well as for certain other
reclassifications.
Segment Reporting
The Company has a single operating segment consisting of the retail, instate
self-distribution and out of state sales departments. These departments have
similar economic characteristics, offer the same products to customers,
utilize the same production facilities and processes and have similar
customer types and distribution methods.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument for which it is practicable to estimate
that value:
Cash and Cash Equivalents, Accounts Receivables, Prepaid Expenses and Other
Current Assets, Accounts Payable, Accrued Expenses and Other Current
Liabilities
The carrying amounts of these items are a reasonable estimate of their fair
values.
Notes Receivable from Officer and Other
The carrying amounts of these items are a reasonable estimate of their fair
values.
Line of Credit
Borrowings under the line of credit arrangement have variable interest rates
that reflect currently available terms and conditions for similar debt. The
carrying amount of this debt is a reasonable estimate of its fair value.
Long-Term Debt
The fair value of the Company's long-term debt, including the current portion
thereof, is estimated based on the present value method using AA rates
provided by Farm Credit Services for the Northwest Farm Credit Services debt
and estimated current rates for similar borrowing arrangements
F-6.
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
for all other long term debt. The carrying value and estimated fair value of
long term debt, including current portion is as follows:
2003 2002
Carrying Fair Carrying Fair
Value Value Value Value
__________ __________ __________ __________
Northwest Farm
Credit Services $ 2,777,780 $ 2,903,215 $ 3,003,720 $ 3,153,000
Real Property Loan 108,968 121,874 112,215 126,000
Other 56,651 62,000 66,414 73,000
Other Comprehensive Income
The nature of the Company's business and related transactions do not give
rise to other comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid short-term investments with
an original maturity of less than 90 days.
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 generally included in
current assets in the accompanying balance sheet, although a portion of such
inventories may be aged for more than one year (Notes 3 and 12).
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 $467,727 and $396,147 at December 31,
2003 and 2002, respectively.
Amortization of vineyard development costs are included in capitalized crop
costs that in turn are included in inventory costs and ultimately become a
component of cost of goods sold. For the years ending December 31, 2003,
2002 and 2001 approximately $72,000, $69,000 and $65,000 were amortized into
inventory costs, respectively.
During the year ended December 31, 2002, the Company disposed of
approximately 6.5 acres of vines. These vines were determined to be of a
variety, chardonnay, not in sufficient demand to support the cost of high
quality, low yield, farming that resulted from declining production from
these vines due to an infestation of phylloxera, an aphid-like insect
(Note 11). As a result of this disposal, the Company recorded a loss on
vineyard development costs in the amount of $35,465.
F-7
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
This loss is included in selling, general and administrative expenses in the
statement of operations. The Company intends to replant this land with
French clones of Pinot noir (clone # 777) on phylloxera resistant rootstock.
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. The Company reviews the carrying value of
investments for impairment whenever events or changes in circumstances
indicate the carrying amounts may not be recoverable.
Debt Issuance Costs
Debt issuance costs are amortized on the straight-line basis, which
approximates the effective interest method, over the life of the debt.
Amortization of debt issuance costs was approximately $28,000, $12,000 and
$7,000 in 2003, 2002 and 2001, respectively.
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.
Deferred Rent Liability
The Company leases land under a sale-leaseback agreement. 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,
2003, 2002
F-8
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
and 2001, rent costs recognized in excess of amounts paid totaled $22,109,
$26,057 and $28,758, respectively.
Revenue Recognition
The Company recognizes revenue when the product is shipped and title passes
to the customer. The Company's standard terms are 'FOB' shipping point, with
no customer acceptance provisions. The cost of price promotions and rebates
are treated as reductions of revenues. No products are sold on consignment.
Credit sales are recorded as trade accounts receivable and no collateral is
required. Revenue from items sold through the Company's retail locations is
recognized at the time of sale.
Other Income
Other income was income of $122,501 for the year ended December 31, 2003
compared to income of $5,694 and $33,555 for the year ended December 31, 2002
and 2001 respectively. This increase in 2003 is primarily due to insurance
proceeds received related to an inventory loss. The Company discovered a
significant loss of inventory in the control of a now former independent
sales representative with a wholesale value of approximately $100,000. The
Company filed an insurance claim and notified local law enforcement officials.
The insurance company paid $95,369 for the claim, which the Company recorded
as other income in the third quarter of 2003.
Cost of Goods Sold
Costs of goods sold include costs associated with grape growing, external
grape costs, packaging materials, winemaking and production costs, vineyard
and production administrative support and overhead costs, purchasing and
receiving costs and warehousing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of
nonmanufacturing administrative and overhead costs, advertising and other
marketing promotions. Advertising costs are expensed as incurred or the
first time the advertising takes place.
The Company provides an allowance to distributors for providing sample of
products to potential customers. These costs, which are included in selling,
general and administrative expenses totaled approximately $48,000, $33,000
and $52,000 in 2003, 2002 and 2001, respectively.
Shipping and Handling Costs
Amounts paid by customers to the Company for shipping and handling costs are
included in the net revenue. Costs incurred for shipping and handling charges
are included in selling, general and administrative expense. Such costs
totaled approximately $190,000, $145,000 and $131,000 in 2003, 2002 and 2001,
respectively. The Company's gross margins may not be comparable to other
companies in the same industry as other companies may include shipping and
handling costs as a cost of goods sold.
Excise Taxes
The Company pays alcohol excise taxes based on product sales to both the
Oregon Liquor Control Commission and to the U.S. Department of the Treasury,
Alcohol and Tobacco Tax and Trade Bureau. The Company is liable for the
taxes upon the removal of product from the Company's warehouse on a per
gallon basis. The federal tax rate is affected by a small winery tax credit
provision which declines based upon the number of gallons of wine production
in a year rather than the quantity sold. The Company also pays taxes on the
grape harvest on a per ton basis to the Oregon
F-9
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
Liquor Control Commission for the Oregon Wine Advisory. Excise taxes incurred
approximated $285,000 in 2003, $230,000 in 2002 and $216,000 in 2001.
Stock Based Compensation
The Company accounts for the employee and director stock options in accordance
with provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees. Pro forma disclosures as required
under Statement of Financial Accounting Standards ("SFAS") No. 123,
Accounting for Stock Based Compensation, and as amended by SFAS No. 148,
Accounting for Stock Based Compensation - Transition and Disclosure, are
presented below (Note 8).
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 No. 123, the Company's net earnings would have been
reduced to the pro forma amounts indicated as follows for the year ended
December 31 (Note 8 for certain assumptions with respect to this computation):
2003 2002 2001
(restated) (restated) (restated)
Net income, as reported $ 173,728 $ 118,746 $ 57,005
Add: Stock-based compensation expense
inlcuded in reported net income,
net of tax 7,463 2,365 2,391
Deduct: Total stock-based employee
compensation expense under fair value
based method for all awards,
net of tax (31,213) (25,892) (70,060)
------------ ------------ ------------
Pro Forma net income (loss) $ 149,978 $ 95,219 $ (10,664)
____________ ____________ ____________
Earnings per share:
Basic - as reported $ 0.04 $ 0.03 $ 0.01
Basic - pro forma 0.03 0.02 -
Diluted - as reported 0.04 0.03 0.01
Diluted - pro forma 0.03 0.02 -
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 are computed
using the weighted average number of shares of common stock and potentially
dilutive securities assumed to be outstanding during the year. Potentially
dilutive shares from stock options and other common stock equivalents are
excluded from the computation when their effect is antidilutive.
Options to purchase 288,600 shares of common stock were outstanding at
December 31, 2003 and diluted weighted-average shares outstanding at December
31, 2003 include the effect of 5,298 stock options. Options to purchase
421,670 shares of common stock were outstanding at December 31, 2002 and
diluted weighted-average shares outstanding at December 31, 2002 include the
effect of 2,745 stock options. Options to purchase 475,170 shares of common
stock were outstanding at December 31, 2001 and diluted weighted-average
shares outstanding at December 31, 2001 include the effect of 47,903 stock
options. In addition, the warrant outstanding since 1992 was not included in
the computation of diluted earnings per share in 2003, 2002 or 2001 because
the exercise price of $3.42 was greater than the average market price of the
common shares during all three years.
F-10
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
2003
Weighted
average Earnings
shares per
Income outstanding share
(restated) (restated)
Basic $173,728 4,477,043 0.04
Options - 5,298 -
-------- --------- ------
Diluted $173,728 4,482,341 $0.04
======== ========= ======
2002
Weighted
average Earnings
shares per
Income outstanding share
(restated) (restated)
Basic $118,746 4,468,783 0.03
Options - 2,745 -
--------- --------- ------
Diluted $118,746 4,471,528 $0.03
========= ========= ======
2001
Weighted
average Earnings
shares per
Income outstanding share
(restated) (restated)
Basic $ 57,005 4,345,941 0.01
Options - 47,903 -
--------- --------- ------
Diluted $ 57,005 4,393,844 $0.01
========= ========= ======
Statement of cash flows
Supplemental disclosure of cash flow information:
2003 2002 2001
Interest paid $ 341,000 $ 357,000 $ 442,000
Income tax refund received 33,378 - -
Supplemental schedule of noncash
investing and financing activities:
Capital leases 14,413 18,479 16,740
Issuance of common stock(Note 7) 12,427 3,941 3,985
Notes receivables issued in sale
of fixed assets - - 13,340
Liquidity
The Company's ability to fund operations requires utilization of amounts
available pursuant to a line of credit agreement as further discussed in Note 5.
There was $1,256,360 outstanding on the line of credit with GE Commercial
Distribution Finance Corporation as of September 30, 2004 (unaudited). The
Company has been notified by GE Commercial Distribution Finance Corporation
that they do not intend to renew the line of credit agreement when it expires
on January 3, 2005. There can be no assurance that the Company will be
successful in obtaining replacement financing on favorable terms, or at all.
The Company's failure to obtain such financing or to obtain such financing on
favorable terms raises substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty. The Company is in
discussions with a replacement lender to replace the line of credit facility in
amounts that are similar to the existing credit facility but has not obtained a
non-cancelable commitment. Management believes that it will be able to
complete discussions and satisfy all the required terms and conditions prior to
January 3, 2005. In the event that they are not able to finalize a new line of
credit facility prior to January 3, 2005, management believes that the existing
lender will grant an extension of time on the existing line of credit to enable
the Company to finalize a new line of credit facility. Management believes
existing cash and cash flow from operations, combined with the amounts that it
expects to have available under the new line of credit facility will be
sufficient to satisfy all debt service obligations and fund the Company's
operating needs and capital expenditures through 2005.
Reclassifications
Certain reclassifications have been made to the 2002 and 2001 financial
statements to conform to the financial statement presentation for the year
ended December 31, 2003. 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,
F-11
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
2003 and 2002, the Company's accounts receivable balance is net of an
allowance for doubtful accounts of $41,885.
Changes in the allowance for doubtful accounts is as follows:
Balance at Charged to Charged to Write-offs Balance at
Beginning costs and other net of end of
Of period expenses accounts recoveries period
__________ __________ __________ __________ __________
Fiscal year ended December 31, 2001:
Allowance for
Doubtful accounts $ 41,660 $ 19,260 $ - $ (19,035) $ 41,885
========== ========== ========== ========== ==========
Fiscal year ended December 31, 2002:
Allowance for
Doubtful accounts $ 41,885 $ 8,303 $ - $ (8,303) $ 41,885
========== ========== ========== ========== ==========
Fiscal year ended December 31, 2003:
Allowance for
Doubtful accounts $ 41,885 $ 6,198 $ - $ (6,198) $ 41,885
========== ========== ========== ========== ==========
3. Inventories
Inventories consist of:
2003 2002
Winemaking and packaging materials $ 80,886 $ 96,123
Work-in-process (costs relating to unprocessed
and/or unbottled wine products) 1,982,469 2,773,750
Finished goods (bottled wine
and related products) 5,824,437 5,200,826
----------- -----------
7,887,792 8,070,699
Less: amounts designated for
distributor (Note 12) (552,414) (520,408)
----------- -----------
Current inventories $ 7,335,378 $ 7,550,291
___________ ___________
4. Property and Equipment
2003 2002
Land and improvements $ 976,838 $ 984,954
Winery building and hospitality center 4,577,467 4,567,076
Equipment 4,933,329 4,670,506
----------- -----------
10,487,634 10,222,536
Less accumulated depreciation (5,788,719) (5,175,643)
----------- -----------
$ 4,698,915 $ 5,046,893
___________ ___________
F-12
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
The Company has capital lease arrangements for certain winery equipment and
vehicles. Future minimum capital lease payments as of December 31, 2003 are:
2004 $ 13,002
2005 5,463
---------
Total minimum lease payments 18,465
Less interest portion (1,138)
---------
Capital lease obligation (Note 6) 17,327
Less portion due within one year (Note 6) (12,029)
---------
$ 5,298
_________
The cost of the Company's leased equipment and related accumulated
depreciation aggregated $72,733 and $48,131, respectively, at December 31,
2003 and $72,733 and $36,772, respectively, at December 31, 2002.
5. Line of Credit Facility
In July 2002 the Company entered into a revolving line of credit agreement
with GE Commercial Distribution Finance Corporation ("GE") that now allows
borrowings of up to $2,000,000 against eligible accounts receivables and
inventories as defined in the agreement. The revolving line bears interest
at prime, plus 0.80%, and is payable monthly. The interest rate was 5.55% at
December 31, 2003. The Company's president has guaranteed up to $1,000,000
of this credit facility. At December 31, 2003, there were borrowings of
$1,565,764 on the revolving line of credit offset by $435,248 depository cash
balance discussed in greater detail in the paragraph below.
The weighted-average interest rate on the aforementioned borrowings for the
fiscal years ended December 31, are as follows:
2003 5.55%
2002 6.17%
2001 8.58%
The new line of credit agreement includes various covenants, which among
other things, requires the Company to maintain minimum amounts of tangible
net worth, debt-to-equity, debt service coverage as defined and limits the
level of acquisitions of property and equipment. As of December 31, 2003,
the Company was in compliance with these covenants.
The Company maintains a depository cash account that is in the name of GE.
For the year ended December 31, 2003, the line of credit balance was offset
by a depository cash balance of $435,248. GE Capital borrowings are
collateralized by the bulk and case goods inventory and the proceeds from the
sales thereof, as well as a second lien against the Turner, Oregon property.
F-13
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
6. Long-Term Debt
Long-term debt consists of:
2003 2002
Northwest Farm Credit Services Loan $ 2,777,780 $ 3,003,720
Real property loan, 8.5% interest,
monthly payments of $1,055 through 2019 108,968 112,215
Capital lease obligations 17,327 31,740
Vehicle financing 39,324 34,674
----------- -----------
2,943,399 3,182,349
Less current portion (250,291) (237,838)
----------- -----------
$ 2,693,108 $ 2,944,511
___________ ___________
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, 2003, the
Company was in compliance with these covenants. In the event of future
noncompliance with the Company's debt covenants, Northwest Farm Credit
Services ("FCS") would have the right to declare the Company in default, and
at FCS' option without notice or demand, the unpaid principal balance of the
loan, plus all accrued unpaid interest thereon and all other amounts due
shall immediately become due and payable.
Future minimum principal payments of long-term debt mature as follows for the
year ending December 31:
Year ending
December 31,
2004 $ 250,291
2005 282,742
2006 298,352
2007 316,366
2008 336,318
Thereafter 1,459,330
-----------
$ 2,943,399
___________
7. 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
F-14
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
Northwest Farm Credit Services (Notes 6 and 8). The warrant is exercisable
through June 1, 2012 at an exercise price of $3.42 per share. As of December
31, 2003, no warrants had been exercised.
During 2001 the Company sold 200,000 shares of common stock for approximately
$307,500.
In each of the years ended December 31, 2003, 2002 and 2001, the Company
granted 10,034, 2,463 and 2,500 shares of stock valued at $12,427, $3,941 and
$3,985, respectively, as compensation to employees. The cost of these grants
was capitalized as inventory. The effects of these noncash transactions have
been excluded from the cash flow statements in each period.
8. 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 and directors of the
Company under the plan. In 1996, 1998 and 2001, the Board of Directors
reserved an additional 150,000, 275,000 and 300,000 shares, respectively.
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. Options are generally
granted based on employee performance with vesting periods ranging from date
of grant to five years. The maximum term before expiration for all grants is
ten years. As of December 31, 2003, there are approximately 601,400 shares
available for future issuance under this plan.
At December 31, 2003, 2002 and 2001, the following transactions related to
stock options occurred:
2003 2002 2001
_______________ _________________ ________________
Weighted Weighted Weighted
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at
beginning of year 421,670 $ 1.71 475,170 $ 1.73 510,670 $ 1.72
Granted 20,000 1.46 30,000 1.51 5,500 1.65
Exercised - - (2,000) 1.56 (8,000) 1.56
Forfeited (153,070) 1.71 (81,500) 1.76 (33,000) 1.62
-------- -------- --------
Outstanding at
end of year 288,600 $ 1.69 421,670 $ 1.71 475,170 $ 1.73
________ ________ ________
F-15
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
Weighted-average options outstanding and exercisable at December 31, 2003 are
as follows:
Options outstanding Options exercisable
Weighted
Number average Weighted Number Weighted
outstanding at remaining average exercisable at average
Exercise December 31, contractual exercise December 31, exercise
price 2003 life price 2003 price
$ 1.46 20,000 9.00 $ 1.46 4,000 $ 1.46
1.50 47,186 4.39 1.50 47,186 1.50
1.51 30,000 8.90 1.51 30,000 1.51
1.56 36,000 6.59 1.56 36,000 1.56
1.60 3,000 9.29 1.60 2,700 1.60
1.65 75,000 7.00 1.65 75,000 1.65
1.69 8,000 9.50 1.69 8,000 1.69
1.70 2,500 9.96 1.70 1,000 1.70
1.75 41,500 8.25 1.75 41,500 1.75
1.81 4,500 8.71 1.81 4,500 1.81
2.75 2,000 6.50 2.75 2,000 2.75
3.00 9,914 6.08 3.00 9,914 3.00
3.62 6,000 5.56 3.62 6,000 3.62
4.50 3,000 4.08 4.50 3,000 4.50
------ --------- ------ ------ -------- ------
$ 1.46-$4.50 288,600 5.25 $ 1.69 270,800 $ 1.75
The Company adopted SFAS No. 123 in 1996 and has elected to account for its
stock-based compensation under Accounting Principles Board Opinion 25. As
required by SFAS No. 123, the Company has computed for pro forma disclosure
purposes (Note 1) the value of options granted during each of the three years
ended December 31, 2003 using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for the grants in 2003, 2002 and
2001:
2003 2002 2001
Risk-free interest rate 4.47 % 4.37 % 5.38 %
Expected lives 10 years 10 years 10 years
Expected volatility 52 % 53 % 55 %
Adjustments are made for options forfeited prior to vesting. For the years
ended December 31, 2003, 2002 and 2001, the total value of the options
granted was computed to be approximately $19,600, $27,300 and $6,445,
respectively, which would be amortized on the straight-line basis over the
vesting period of the options.
For the years ended December 31, 2003, 2002 and 2001, the weighted average
fair value of options granted was computed to be $0.98, $0.91 and $1.17,
respectively.
On November 26, 2002, the Company granted its President 30,000 options from
the Stock Incentive Plan for his personal guarantee of $1,000,000 of the line
of credit with GE Commercial Distribution Finance (Note 5). The options are
exercisable through November 27, 2012 at an exercise price of $1.51 per share.
As of December 31, 2003, no options had been exercised.
F-16
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
9. Income Taxes
The provision for income taxes consists of:
2003 2002 2001
(restated) (restated) (restated)
Current tax expense (benefit):
Federal $114,754 $ (2,918) $ 11,306
State 22,472 2,597 -
------------ ------------ ------------
137,226 (321) 11,306
------------ ------------ ------------
Deferred tax expense (benefit):
Federal (5,870) 71,570 37,054
State (752) 9,191 4,752
------------ ------------ ------------
(6,622) 80,761 41,806
------------ ------------ ------------
Total $130,604 $ 80,440 $ 53,112
____________ ____________ ____________
The effective income tax rate differs from the federal statutory rate as
follows:
Year ended December 31,
2003 2002 2001
(restated) (restated) (restated)
Federal statutory rate 34.0 % 34.0 % 34.0 %
State taxes, net of federal benefit 4.4 6.3 4.4
Permanent differences 3.9 4.0 8.3
Other, primarily prior year taxes 0.6 (3.9) 1.5
------------ ------------ ------------
42.9 % 40.4 % 48.2 %
____________ ____________ ____________
Permanent differences consist primarily of nondeductible meals and
entertainment and life insurance premiums.
Deferred tax assets and (liabilities) at December 31 consist of:
2003 2002
(restated) (restated)
Accounts receivable $ 16,067 $ 16,067
Inventories 111,856 129,268
Charitable contributions 14,284 -
Excise tax accrual 30,688 -
Other 1,428 2,877
----------- -----------
Net current deferred tax asset 174,323 148,212
----------- -----------
Depreciation (448,855) (450,052)
Deferred gain on sale-leaseback 153,341 162,925
Other 229 11,331
----------- -----------
Net noncurrent deferred tax liability (295,285) (275,796)
----------- -----------
Net deferred tax liability $ (120,962) $ (127,584)
___________ ___________
F-17
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
10. Related Parties
During 2003, 2002 and 2001, the Company purchased grapes from certain
shareholders for an aggregate price of $122,780, $120,589 and $108,672,
respectively. At December 31, 2003 and 2002, grape payables included $61,268
and $60,192, respectively, owed to these shareholders.
The Company has a loan to its president with a balance of $61,134 at December
31, 2003. 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. The Company's
loan to its president is collateralized by 75,000 shares of common stock.
The Company provides living accommodations in a manufactured home on the
Company's premises for the president and his family as additional compensation
for security and lock-up services the president provides. During the years
ended December 31, 2003, 2002 and 2001, the Company recorded $6,953, $6,934 and
$6,693, respectively, in expenses related to the housing provided for its
president.
11. 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 on the Company's financial position, results of
operations or cash flows, 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.
The amortization of the deferred gain totals approximately $25,000 per year
and is recorded as an offset to the related lease expense in selling, general
and administrative expenses.
As of December 31, 2003, future minimum lease payments are as follows:
Year ending
December 31,
2004 $ 200,609
2005 203,777
2006 207,023
2007 136,430
2008 139,841
Thereafter 1,794,453
-----------
Total $ 2,682,133
===========
The Company is also committed to lease payments for various office equipment.
Total rental expense for all operating leases excluding the vineyards,
amounted to $8,858, $12,316 and $9,891 in 2003, 2002 and 2001, respectively.
In addition, payments for the leased vineyards have been included in
inventory and vineyard developments costs and aggregate approximately
$196,804 and $204,713, respectively, for each of the years ended December 31,
2003 and 2002.
F-18
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
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 is susceptible to
phylloxera. The Company has not detected any phylloxera at its Turner
Vineyard.
It is not possible to estimate any range of loss that may be incurred due to
the phylloxera infestation of our vineyards. The phylloxera at Tualatin
Estate Vineyard is believed to have been introduced on the roots of the vines
first planted on the property in the southern most section Gewurztraminer in
1971. These vines, and all others infested, remain productive at low crop
levels. The removal of the Chardonnay block in 2002 was done principally
because of the high cost of farming high quality, low yield wine grapes and
the low price Oregon Chardonnay is receiving in the market.
12. Distributor Obligation
During 2001 the Company entered into a distribution agreement with a national
wine distributor group (the "distributor"), whereby the distributor paid the
Company $1,500,000 for a base amount of bottled wine with an approximate cost
of $552,000 and $520,000 at December 31, 2003 and 2002 respectively. The
Company believed the best way to incentivize national distributors to focus
on a relatively small national brand such as the Company's was to provide the
distributors a special financial incentive to focus on the brand. The Company
negotiated a way to incentivize its new distributor to provide a focus on the
Company's brand in a mutually beneficial way with the goal of greatly
increasing nationwide sales through the distribution agreement. The agreement
calls for the Company to warehouse this base amount of wine at the Turner
location, calculated using standard out of state pricing, with any draw-downs
by the distributor to be simultaneously replenished by another purchase. The
distribution agreement does not contain any restrictive covenants. The
distribution agreement appoints the distributors the exclusive distributor of
its wines identified by the agreement to retail licensees in the regions
serviced by the distributors as identified by the agreement. There are no
informal arrangements that impact the Company's obligations or the rights and
privileges of the distribution group. Sales to members of the distributor
group totaled approximately $812,702, $457,221 and $1,022,084 in 2003, 2002
and 2001, respectively.
F-19
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
The Company has recorded a Distributor Obligation liability, and a long-term
inventory asset based on the actual cost of goods held in the base amount of
wine at year end, to recognize the future obligation to deliver this amount
of wine to the distributor. The inventory held in the base amount of wine is
as follows:
Wine 2003 2002
Willamette Valley
Chardonnay 952 cs. 952 cs.
Estate Chardonnay 180 pks. 180 pks.
Pinot Gris 1,064 cs. 952 cs.
Pinot Noir 6,748 cs. 4,480 cs.
Pinot Noir-Whole Cluster - 1,400 cs.
Pinot Noir-Founders Reserve 1,008 pks. 1,008 pks.
Pinot Noir-Estate 1,016 pks. 504 pks.
Pinot Noir-Freedom Hill 180 pks. 180 pks.
Pinot Noir-Hoodview 180 pks. 180 pks.
Pinot Noir-Karina - 240 pks.
Pinot Noir-Signature Cuvee 516 pks. 336 pks.
Tualatin Estate
Chardonnay 224 cs. 224 cs.
Pinot Blanc - -
Pinot Noir 392 cs. 392 cs.
Griffin Creek
Merlot 748 pks. 448 pks.
Pinot Noir 350 pks. 700 pks.
Syrah 224 pks. 116 pks.
The distributor obligation will be settled by the delivery of inventory based
on a predetermined depletion schedule. The agreement calls for the base
amount of prepaid wine the Company holds for the distributor to remain at
$1,500,000 until 2006, when the balance is depleted to the following levels
in the following years:
2006 $ 1,200,000
2007 900,000
2008 600,000
2009 300,000
2010 -
The agreement can be cancelled with or without cause as defined in the
agreement upon 30 or 90 days notice, respectively. Upon termination of the
agreement the distributor obligation is to be repaid over the following 14
months.
Also as part of that agreement, the Company has agreed to pay the distributor
incentive compensation if certain sales goals are met over the next five
years and if a certain transaction occurs. The incentive compensation will
be paid only in the event of a transaction in excess of $12 million in value
in which either the Company, at its option, sells all or substantially all of
its assets or a merger, sale of stock, or other similar transaction occurs,
at the Company's option, the result of which is that the Company's current
shareholders do not own at least a majority of the outstanding shares of
F-20
Willamette Valley Vineyards, Inc.
Notes to Financial Statements, Continued
capital stock of the surviving entity. Assuming the $12 million threshold is
met and the distributor meets certain sales goals, the distributor will be
entitled to incentive compensation equal to 20% of the total proceeds from
the sale or transaction and up to 17.5% of the difference between the
transaction value and approximately $8.5 million.
13. Restatement of Financial Information
In February and March 2004, the Alcohol and Tobacco Tax and Trade Bureau of the
U.S. Treasury Department audited the Company's excise tax for 2003, 2002 and
2001. This audit resulted in additional excise taxes owing for those periods
due principally to the Company's incorrect application of the federal small
winery tax credit. The Company originally recorded a liability as of December
31, 2003 and a related expense in the year then ended of the estimated excise
taxes owing of $80,000. The Company has restated its financial statements for
the years ended December 31, 2003, 2002, and 2001 and the quarterly periods
within each of those years, to reflect the correct excise tax for each of the
annual periods of $25,135, $38,615 and $16,250, respectively, and to record the
estimated interest and penalties of $7,418, $3,911 and $893, respectively, with
respect to the related estimated excise tax liability.
In addition, the Company previously capitalized certain label and package
design costs totaling $71,528 and was amortizing them over a 5 year period
through 2004. Amortization expense of $14,400 was included in selling,
general and administrative expenses in 2003, 2002 and 2001. It has been
determined that such costs should be expensed as incurred. Accordingly,
the Company has restated its financial statements for the years ended
December 31, 2003, 2002 and 2001 and for each of the quarters in the years
then ended to adjust for the previously capitalized costs and related
amortization.
The effect of these restatements is to increase net income for the year ended
December 31, 2003 by $35,508 ($.01 per share) and to decrease net income for
the years ended December 31, 2002 and 2001 by $17,729 ($- per share) and
$1,840 ($- per share), respectively.
In addition, the Company has restated its financial statements for the years
ended December 31, 2002 and 2001 and for each of the quarters therein, and for
the quarters ended March 31, June 30 and September 30, 2003, to reflect the
reclassification of amortization of deferred gain arising from a sales-
leaseback transaction from other income to an offset of the related lease
expense included in selling, general and administrative expenses. The
Company has also restated the three and six month periods ended June 30, 2003
and the nine month period ended September 30, 2003 to reflect the
reclassification of an expense from other expense to cost of goods sold.
There was no change to previously reported net income as a result of these
reclassifications.
The following sets forth the effects of the aforementioned restatements to the
Company's Balance Sheet at December 31, 2003 and 2002, and its Statements
of Operations for the years ended December 31, 2003, 2002 and 2001. There was
no change to previously reported net cash provided by (used for) operating
activities, net cash used in investing activities, or net cash (used in)
provided by financing activities.
December 31, 2003
As Reported Adjustments Restated
Current assets $ 8,648,453 $ 2,241 $ 8,650,694
------------ ------------ ------------
Other assets $ 215,148 $ (13,928) $ 201,220
------------ ------------ ------------
Total assets $ 15,942,839 $ (11,687) $ 15,931,152
============ ============ ============
Current liabilities $ 3,261,959 $ 12,222 $ 3,274,181
------------ ------------ ------------
Deferred income taxes $ 300,856 $ (5,571) $ 295,285
------------ ------------ ------------
Total liabilities $ 8,264,661 $ 6,651 $ 8,271,312
Stockholders' equity 7,678,178 (18,338) 7,659,840
------------ ------------ ------------
Total liabilities and
Stockholders' equity $ 15,942,839 $ (11,687) $ 15,931,152
============ ============ ============
December 31, 2002
As Reported Adjustments Restated
Other assets $ 238,647 $ (28,328) $ 210,319
------------ ------------ ------------
Total assets $ 16,547,253 $ (28,328) $ 16,518,925
============ ============ ============
Current liabilities $ 3,777,154 $ 36,849 $ 3,814,003
------------ ------------ ------------
Deferred income taxes $ 287,127 $ (11,331) $ 275,796
------------ ------------ ------------
Total liabilities $ 9,019,722 $ 25,518 $ 9,045,240
Stockholders' equity 7,527,531 (53,846) 7,473,685
------------ ------------ ------------
Total liabilities and
stockholders' equity $ 16,547,253 $ (28,328) $ 16,518,925
============ ============ ============
For the year ended December 31, 2003
As Reported Adjustments Restated
Net revenues $ 7,301,781 $ 54,865 $ 7,356,646
Cost of sales 3,827,526 - 3,827,526
------------ ------------ ------------
Gross margin 3,474,255 54,865 3,529,120
Selling general and administrative
expenses 3,018,164 (10,354) 3,007,810
------------ ------------ ------------
Net operating income 456,091 65,219 521,310
Other income
(expense), net (213,606) (3,372) (216,978)
------------ ------------ ------------
Income before
income taxes 242,485 61,847 304,332
Income tax 104,265 26,339 130,604
------------ ------------ ------------
Net income $ 138,220 $ 35,508 $ 173,728
For the year ended December 31, 2002
As Reported Adjustments Restated
Net revenues $ 5,989,456 $ (38,615) $ 5,950,841
Cost of sales 2,754,824 - 2,754,824
------------ ------------ ------------
Gross margin 3,234,632 (38,615) 3,196,017
Selling general and administrative
expenses 2,685,023 (37,251) 2,647,772
------------ ------------ ------------
Net operating income 549,609 (1,364) 548,245
Other income
(expense), net (322,297) (26,762) (349,059)
------------ ------------ ------------
Income before
income taxes 227,312 (28,126) 199,186
Income tax 90,837 (10,397) 80,440
------------ ------------ ------------
Net income $ 136,475 $ (17,729) $ 118,746
For the year ended December 31, 2001
As Reported Adjustments Restated
Net revenues $ 7,030,791 $ (16,250) $ 7,014,541
Cost of sales 3,560,853 - 3,560,853
------------ ------------ ------------
Gross margin 3,469,938 (16,250) 3,453,688
Selling general and administrative
expenses 2,978,799 (38,897) 2,939,902
------------ ------------ ------------
Net operating income 491,139 22,647 513,786
Other income
(expense), net (378,279) (25,390) (403,669)
------------ ------------ ------------
Income before
income taxes 112,860 (2,743) 110,117
Income tax 54,015 (903) 53,112
------------ ------------ ------------
Net income $ 58,845 $ (1,840) $ 57,005
14. Quarterly Results (Unaudited)
The following are the quarterly results of operations as previously reported
and as restated for the matters discussed in Note 13.
Year ended December 31, 2003
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
__________ __________ __________ __________
Net revenues
reported $ 1,493,361 $ 1,554,346 $ 1,923,323 $ 2,330,751
restated 1,487,077 1,548,062 1,917,039 2,404,468
Gross margin
reported 747,617 832,563 980,600 913,475
restated 741,333 796,856 974,316 1,016,615
Income from operations
reported 117,207 156,141 229,398 (46,655)
restated 119,758 129,269 231,949 40,334
Net income
reported 38,141 29,331 149,154 (78,406)
restated 35,014 26,204 146,027 (33,517)
Income per common share
Basic
reported $ 0.01 $ 0.01 $ 0.03 $ (0.02)
restated $ 0.01 $ 0.01 $ 0.03 $ (0.01)
Diluted
reported $ 0.01 $ 0.01 $ 0.03 $ (0.02)
restated $ 0.01 $ 0.01 $ 0.03 $ (0.01)
Year ended December 31, 2002
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
__________ __________ __________ __________
Net revenues
reported $ 1,257,640 $ 1,369,593 $ 1,511,502 $ 1,850,721
restated 1,247,986 1,359,939 1,501,848 1,841,068
Gross margin
reported 661,853 760,989 814,150 997,640
restated 652,199 751,335 804,496 987,987
Income from operations
reported 17,876 85,612 163,005 283,116
restated 17,535 85,271 162,664 282,775
Net income
reported (63,365) 3,817 81,407 114,616
restated (67,797) (615) 76,975 110,183
Income per common share
Basic
reported $ (0.01) $ - $ 0.02 $ 0.03
restated $ (0.02) $ - $ 0.02 $ 0.03
Diluted
reported $ (0.01) $ - $ 0.02 $ 0.03
restated $ (0.02) $ - $ 0.02 $ 0.03
Year ended December 31, 2001
1st 2nd 3rd 4th
Quarter Quarter Quarter Quarter
__________ __________ __________ __________
Net revenues
reported $ 1,687,633 $ 1,519,404 $ 1,913,971 $ 1,909,783
restated 1,683,571 1,515,342 1,909,909 1,905,719
Gross margin
reported 790,071 808,766 898,540 972,561
restated 786,009 804,704 894,478 968,497
Income from operations
reported 71,111 76,615 126,996 216,417
restated 76,773 82,277 132,658 222,078
Net income
reported (47,422) (39,810) 35,982 110,095
restated (47,882) (40,270) 35,522 109,635
Income per common share
Basic
reported $ (0.01) $ (0.01) $ 0.01 $ 0.02
restated $ (0.01) $ (0.01) $ 0.01 $ 0.02
Diluted
reported $ (0.01) $ (0.01) $ 0.01 $ 0.02
restated $ (0.01) $ (0.01) $ 0.01 $ 0.02