UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File number 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) (Zip Code)
Issuer's telephone number, including area code: (503) 588-9463
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock
(Title of class)
Check whether the issuer (1)filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant 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 dice,
rights and privileges, and shall comply with all regulations, rules,
ordinances, statutes, orders and decrees of any governmental or quasi-
governmental authority or court applicable to Borrower and Borrower's business
activities.
Assumed Business Names. Borrower has filed or recorded all documents or
filings required by law relating to all assumed business names used by
Borrower. Excluding the name of Borrower, the following is a complete list of
all assumed business names under which Borrower does business: None.
Authorization. Borrower's execution, delivery, and performance of this
Agreement and all the Related Documents have been duly authorized by all
necessary action by Borrower and do not conflict with, result in a violation
of, or constitute a default under (1) any provision of (a) Borrower's articles
of incorporation or organization, or bylaws, or (b) any agreement or other
instrument binding upon Borrower or (2) any law, governmental regulation,
court decree, or order applicable to Borrower or to Borrower's properties.
Financial Information. Each of Borrower's financial statements supplied to
Lender truly and completely disclosed Borrower's financial condition as of the
date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
Legal Effect. This Agreement constitutes, and any instrument or agreement
Borrower is required to give under this Agreement when delivered will
constitute legal, valid, and binding obligations of Borrower enforceable
against Borrower in accordance with their respective terms.
Properties. Except as contemplated by this Agreement or as previously
disclosed in Borrower's financial statements or in writing to Lender and as
accepted by Lender, and except for property tax liens for taxes not presently
due and payable, Borrower owns and has good title to all of Borrower's
properties free and clear of all Security Interests, and has not executed any
security documents or financing statements relating to such properties. All of
Borrower's properties are titled in Borrower's legal name, and Borrower has
not used or filed a financing statement under any other name for at least the
last five (5) years.
Hazardous Substances. Except as disclosed to and acknowledged by Lender in
writing, Borrower represents and warrants that: (1) During the period of
Borrower's ownership of the Collateral, there has been no use, generation,
manufacture, storage, treatment, disposal, release or threatened release of
any Hazardous Substance by any person on, under, about or from any of the
Collateral. (2) Borrower has no knowledge of, or reason to believe that there
has been (a) any breach or violation of any Environmental Laws; (b) any use,
generation, manufacture, storage, treatment, disposal, release or threatened
release of any Hazardous Substance on, under, about or from the Collateral by
any prior owners or occupants of any of the Collateral; or (c) any actual or
threatened litigation or claims of any kind by any person relating to such
matters. (3) Neither Borrower nor any tenant, contractor, agent or other
authorized user of any of the Collateral shall use, generate, manufacture,
store, treat, dispose of or release any Hazardous Substance on, under, about
or from any of the Collateral; and any such activity shall be conducted in
compliance with all applicable federal, state, and local laws, regulations,
and ordinances, including without limitation all Environmental Laws. Borrower
authorizes Lender and its agents to enter upon the Collateral to make such
inspections and tests as Lender may deem appropriate to determine compliance
of the Collateral with this section of the Agreement. Any inspections or tests
made by Lender shall be at Borrower's expense and for Lender's purposes only
and shall not be construed to create any responsibility or liability on the
part of Lender to Borrower or to any other person. The representations and
warranties contained herein are based on Borrower's due diligence in
investigating the Collateral for hazardous waste and Hazardous Substances.
Borrower hereby (1) releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower becomes liable for cleanup or
other costs under any such laws, and (2) agrees to indemnify and hold harmless
Lender against any and all claims, losses, liabilities, damages, penalties,
and expenses which Lender may directly or indirectly sustain or suffer
resulting from a breach of this section of the Agreement or as a consequence
of any use, generation, manufacture, storage, disposal, release or threatened
release of a hazardous waste or substance on the Collateral, or as a result of
a violation of any Environmental Laws. The provisions of this section of the
Agreement, including the obligation to indemnify, shall survive the payment of
the Indebtedness and the termination, expiration or satisfaction of this
Agreement and shall not be affected by Lender's acquisition of any interest in
any of the Collateral, whether by foreclosure or otherwise.
Litigation and Claims. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which may
materially adversely affect Borrower's financial condition or properties,
other than litigation, claims, or other events, if any, that have been
disclosed to and acknowledged by Lender in writing.
Taxes. To the best of Borrower's knowledge, all of Borrower's tax returns and
reports that are or were required to be filed, have been filed, and all taxes,
assessments and other governmental charges have been paid in full, except
those presently being or to be contested by Borrower in good faith in the
ordinary course of business and for which adequate reserves have been provided.
Lien Priority. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or permitted
the filing or attachment of any Security Interests on or affecting any of the
Collateral directly or indirectly securing repayment of Borrower's Loan and
Note, that would be prior or that may in any way be superior to Lender's
Security Interests and rights in and to such Collateral.
Binding Effect. This Agreement, the Note, all Security Agreements (if any),
and all Related Documents are binding upon the signers thereof, as well as
upon their successors, representatives and assigns, and are legally enforceable
in accordance with their respective terms.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, so long
as this Agreement remains in effect, Borrower will:
Notices of Claims and Litigation. Promptly inform Lender in writing of (1) all
material adverse changes in Borrower's financial condition, and (2) all
existing and all threatened litigation, claims, investigations, administrative
proceedings or similar actions affecting Borrower or any Guarantor which could
materially affect the financial condition of Borrower or the financial
condition of any Guarantor.
Financial Records. Maintain its books and records in accordance with GAAP,
applied on a consistent basis, and permit Lender to examine and audit
Borrower's books and records at all reasonable times.
Financial Statements. Furnish Lender with the following:
Annual Statements. As soon as available, but in no event later than one-
hundred-twenty (120) days after the end of each fiscal year, Borrower's balance
sheet and income statement for the year ended, audited by a certified public
accountant satisfactory to Lender.
Interim Statements. As soon as available, but in no event later than 45 days
after the end of each fiscal quarter, Borrower's balancsclosure 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 registrant'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].
Issuer's revenues for its most recent fiscal year: $9,387,141
Aggregate market value of the voting stock held by non-affiliates of the
Issuer based upon the closing bid price of such stock as of March 31, 2005:
$14,086,913
Number of shares of Common Stock outstanding: 4,486,278
DOCUMENTS INCORPORATED BY REFERENCE: None
Transitional Small Business Disclosure Format: YES [ ] No [X]
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.
In October 2004, the Company sold the approximate 75.3 acre Meadowview parcel
for $726,675, one of two parcels for sale at its Tualatin Estate Vineyard.
Pursuant to the sale leaseback agreement, the Company will continue to farm
and develop the vineyard acres of this parcel. This parcel includes 15.7
acres of established vineyard, which the Company has agreed to lease for
between 14 and 29 years, including three five year renewal terms, at the
Company's option. The purchaser has agreed to fund the development of 30
acres of new vineyard on the property which the Company has agreed to lease.
Seven of those acres were planted and trellised in 2004 with French Dijon
clone 777 Pinot noir on disease resistant rootstock. The Company will begin
paying rent on new acreage when the vines are commercially productive in 2008
for between 11 and 26 years, including three five year renewal terms, at the
Company's option. The Company continues to offer the remaining property and
equipment on the same type of sale/leaseback arrangement. The remaining parcel
contains the Tualatin Estate winery plus 115 acres, including approximately 48
acres of developed vineyards, and is priced at $1,605,000.
Products
Under its Willamette Valley Vineyards label, the Company produces and sells
the following types of wine in 750 ml bottles: Pinot noir, the brand's
flagship and its largest selling varietal in 2004, $15 to $50 per bottle;
Chardonnay, $14 to $25 per bottle; Pinot gris, $14 to $18 per bottle; Riesling
and Oregon Blossom (blush blend), $10 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, $10 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,
$16 per bottle; Late Harvest Gewurztraminer, $20 per bottle; and Pinot blanc,
$15 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.
Under its Griffin Creek label, a joint effort between the Company and Quail
Run Vineyards, the Company produces and sells the following types of wine in
750 ml bottles: Merlot, the brand's flagship, $30 per bottle; Syrah, $35 per
bottle; Cabernet Sauvignon, $35 per bottle; Cabernet Franc, $30 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 me sheet and profit and
loss statement for the period ended, compiled by a certified public accountant
satisfactory to Lender.
All financial reports required to be provided under this Agreement shall be
prepared in accordance with GAAP, applied on a consistent basis, and certified
by Borrower as being true and correct.
Additional Information. Furnish such additional information and statements, as
Lender may request from time to time.
Financial Covenants and Ratios. Comply with the following covenants and ratios:
Minimum Income and Cash flow Requirements. Borrower shall comply with the
following cash flow ratio requirements: Cash Flow / Current Maturity (LTD)
Ratio. Maintain a ratio of Cash Flow / Current Maturity (LTD) in excess of
1.250 to 1.000. The ratio "Cash Flow / Current Maturity (LTD)" means Borrower's
Net Profits plus Depreciation, Depletion and Amortization divided by Borrower's
Current Portion of Long Term Indebtedness. This coverage ratio will be
evaluated as of year-end.
Tangible Net Worth Requirements. Maintain a minimum Tangible Net Worth of not
less than: $6,500,000.00. Other Net Worth requirements are as follows:
Evaluated as of year end. In addition, Borrower shall comply with the following
net worth ratio requirements:
Debt / Worth Ratio. Maintain a ratio of Debt / Worth not in excess of 2.500 to
1.000. The ratio "Debt / Worth" means Borrower's Total Liabilities divided by
Borrower's Tangible Net Worth. This leverage ratio will be evaluated as of
year-end.
Except as provided above, all computations made to determine compliance with
the requirements contained in this paragraph shall be made in accordance with
generally accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
Insurance. Maintain fire and other risk insurance, public liability insurance,
and such other insurance as Lender may require with respect to Borrower's
properties and operations, in form, amounts, coverages and with insurance
companies acceptable to Lender. Borrower, upon request of Lender, will deliver
to Lender from time to time the policies or certificates of insurance in form
satisfactory to Lender, including stipulations that coverages will not be
cancelled or diminished without at least ten (10) days prior written notice to
Lender. Each insurance policy also shall include an endorsement providing that
coverage in favor of Lender will not be impaired in any way by any act,
omission or default of Borrower or any other person. In connection with all
policies covering assets in which Lender holds or is offered a security
interest for the Loans, Borrower will provide Lender with such lender's loss
payable or other endorsements as Lender may require.
Insurance Reports. Furnish to Lender, upon request of Lender, reports on each
existing insurance policy showing such information as Lender may reasonably
request, including without limitation the following: (1) the name of the
insurer; (2) the risks insured; (3) the amount of the policy; (4) the
properties insured; (5) the then current property values on the basis of
which insurance has been obtained, and the manner of determining those values;
and (6) the expiration date of the policy. In addition, upon request of Lender
(however not more often than annually), Borrower will have an independent
appraiser satisfactory to Lender determine, as applicable, the actual cash
value or replacement cost of any Collateral. The cost of such appraisal shall
be paid by Borrower.
Other Agreements. Comply with all terms and conditions of all other agreements,
whether now or hereafter existing, between Borrower and any other party and
notify Lender immediately in writing of any default in connection with any
other such agreements.
Loan Proceeds. Use all Loan proceeds solely for Borrower's business operations,
unless specifically consented to the contrary by Lender in writing.
Taxes, Charges and Liens. Pay and discharge when due all of its indebtedness
and obligations, including without limitation all assessments, taxes,
governmental charges, levies and liens, of every kind and nature, imposed upon
Borrower or its properties, income, or profits, prior to the date on which
penalties would attach, and all lawful claims that, if unpaid, might become a
lien or charge upon any of Borrower's properties, income, or profits.
Performance. Perform and comply, in a timely manner, with all terms,
conditions, and provisions set forth in this Agreement, in the Related
Documents, and in all other instruments and agreements between Borrower and
Lender. Borrower shall notify Lender immediately in writing of any default in
connection with any agreement.
Operations. Maintain executive and management personnel with substantially the
same qualifications and experience as the present executive and management
personnel; provide written notice to Lender of any change in executive and
management personnel; conduct its business affairs in a reasonable and prudent
manner.
Environmental Studies. Promptly conduct and complete, at Borrower's expense,
all such investigations, studies, samplings and testings as may be requested
by Lender or any governmental authority relative to any substance, or any
waste or by-product of any substance defined as toxic or a hazardous substance
under applicable federal, state, or local law, rule, regulation, order or
directive, at or affecting any property or any facility owned, leased or used
by Borrower.
Compliance with Governmental Requirements. Comply with all laws, ordinances,
and regulations, now or hereafter in effect, of all governmental authorities
applicable to the conduct of Borrower's properties, businesses and operations,
and to the use or occupancy of the Collateral, including without limitation,
the Americans With Disabilities Act. Borrower may contest in good faith any
such law, ordinance, or regulation and withhold compliance during any
proceeding, including appropriate appeals, so long as Borrower has notified
Lender in writing prior to doing so and so long as, in Lender's sole opinion,
Lender's interests in the Collateral are not jeopardized. Lender may require
Borrower to post adequate security or a surety bond, reasonably satisfactory
to Lender, to protect Lender's interest
.
Inspection. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records and
to make copies and memoranda of Borrower's books, accounts, and records. If
Borrower now or at any time hereafter maintains any records (including
without limitation computer generated records and computer software programs
for the generation of such records) in the possession of a third party,
Borrower, upon request of Lender, shall notify such party to permit Lender
free access to such records at all reasonable times and to provide Lender with
copies of any records it may request, all at Borrower's expense.
Compliance Certificates. Unless waived in writing by Lender, provide Lender at
least annually, with a certificate executed by Borrower's chief financial
officer, or other officer or person acceptable to Lender, certifying that the
representations and warranties set forth in this Agreement are true and
correct as of the date of the certificate and further certifying that, as of
the date of the certificate, no Event of Default exists under this Agreement.
Environmental Compliance and Reports. Borrower shall comply in all respects
with any and all Environmental Laws; not cause or permit to exist, as a result
of an intentional or unintentional action or omission on Borrower's part or on
the part of any third party, on property owned and/or occupied by Borrower,
any environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit ioderate
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 2004, there were 247 commercial wineries licensed in
Oregon and over 13,700 acres of wine grape vineyards, 11,100 acres of which
are currently producing. Total production of Oregon wines in 2004 is estimated
to be approximately 1,174,749 cases. Oregon's entire 2004 production would
have an estimated retail value of approximately $234.9 million, assuming a
retail price of $200 per case, and a FOB value of approximately one-half of
the retail value, or $117.5 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 $7,500 per acre in Oregon. In the Burgundy region of France,
virtually no new vineyard land is available for planting.
Oregon does have certain disadvantages, however. As a new wine-producing
region, Oregon's wines are relatively little known to consumers worldwide and
the total wine production of Oregon wineries is small relative to California
and French competitors. Greater worldwide label recognition and larger
production levels give Oregon's competitors certain financial, marketing,
distribution and unit cost advantages.
Furthermore, Oregon's Willamette Valley has an unpredictable rainfall pattern
in early autumn. If significantly above-average rains 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, 2004, 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.
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 by volume, 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
44 acres planted and 41 acres producing, which includes 14 acres of Pinot noir
and 7 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 9 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 ssued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice, summons,
lien, citation, directive, letter or other communication from any governmental
agency or instrumentality concerning any intentional or unintentional action or
omission on Borrower's part in connection with any environmental activity
whether or not there is damage to the environment and/or other natural
resources.
Additional Assurances. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, assignments, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including
any request or policy not having the force of law) shall impose, modify or
make applicable any taxes (except federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements
or other obligations which would (A) increase the cost to Lender for extending
or maintaining the credit facilities to which this Agreement relates, (B)
reduce the amounts payable to Lender under this Agreement or the Related
Documents, or (C) reduce the rate of return on Lender's capital as a
consequence of Lender's obligations with respect to the credit facilities to
which this Agreement relates, then Borrower agrees to pay Lender such
additional amounts as will compensate Lender therefore, within five (5) days
after Lender's written demand for such payment, which demand shall be
accompanied by an explanation of such imposition or charge and a calculation
in reasonable detail of the additional amounts payable by Borrower, which
explanation and calculations shall be conclusive in the absence of manifest
error.
LENDER'S EXPENDITURES. If any action or proceeding is commenced that would
materially affect Lender's interest in the Collateral or if Borrower fails to
comply with any provision of this Agreement or any Related Documents,
including but not limited to Borrower's failure to discharge or pay when due
any amounts Borrower is required to discharge or pay under this Agreement or
any Related Documents, Lender on Borrower's behalf may (but shall not be
obligated to) take any action that Lender deems appropriate, including but not
limited to discharging or paying all taxes, liens, security interests,
encumbrances and other claims, at any time levied or placed on any Collateral
and paying all costs for insuring, maintaining and preserving any Collateral.
All such expenditures incurred or paid by Lender for such purposes will then
bear interest at the rate charged under the Note from the date incurred or
paid by Lender to the date of repayment by Borrower. All such expenses will
become a part of the Indebtedness and, at Lender's option, will (A) be payable
on demand; (B) be added to the balance of the Note and be apportioned among
and be payable with any installment payments to become due during either (1)
the term of any applicable insurance policy; or (2) the remaining term of the
Note; or (C) be treated as a balloon payment which will be due and payable at
the Note's maturity.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent
of Lender:
Indebtedness and Liens. (1) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this Agreement,
create, incur or assume indebtedness for borrowed money, including capital
leases, (2) sell, transfer, mortgage, assign, pledge, lease, grant a security
interest in, or encumber any of Borrower's assets (except as allowed as
Permitted Liens), or (3) sell with recourse any of Borrower's accounts, except
to Lender.
Continuity of Operations. (1) Engage in any business activities substantially
different than those in which Borrower is presently engaged, (2) cease
operations, liquidate, merge, transfer, acquire or consolidate with any other
entity, change its name, dissolve or transfer or sell Collateral out of the
ordinary course of business, or (3) pay any dividends on Borrower's stock
(other than dividends payable in its stock), provided, however that
notwithstanding the foregoing, but only so long as no Event of Default has
occurred and is continuing or would result from the payment of dividends, if
Borrower is a "Subchapter S Corporation" (as defined in the Internal Revenue
Code of 1986, as amended), Borrower may pay cash dividends on its stock to its
shareholders from time to time in amounts necessary to enable the shareholders
to pay income taxes and make estimated income tax payments to satisfy their
liabilities under federal and state law which arise solely from their status
as Shareholders of a Subchapter S Corporation because of their ownership of
shares of Borrower's stock, or purchase or retire any of Borrower's
outstanding shares or alter or amend Borrower's capital structure.
Loans, Acquisitions and Guaranties. (1) Loan, invest in or advance money or
assets to any other person, enterprise or entity, (2) purchase, create or
acquire any interest in any other enterprise or entity, or (3) incur any
obligation as surety or guarantor other than in the ordinary course of
business.
Agreements. Borrower will not enter into any agreement containing any
provisions which would be violated or breached by the performance of
Borrower's obligations under this Agreement or in connection herewith.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds
if: (A) Borrower or any Guarantor is in default under the terms of this
Agreement or any of the Related Documents or any other agreement that Borrower
or any Guarantor has with Lender; (B) Borrower or any Guarantor dies, becomes
incompetent or becomes insolvent, files a petition in bankruptcy or similar
proceedings, or is adjudged a bankrupt; (C) there occurs a material adverse
change in Borrower's financial condition, in the financial condition of any
Guarantor, or in the value of any Collateral securing any Loan; or (D) any
Guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
Guarantor's guaranty of the Loan or any other loan with Lender; or (E) Lender
in good faith deems itself insecure, even though no Event of Default shall
have occurred.
RIGHT OF SETOFF. To the extent permitted by applicable law, Lender reserves a
right of setoff in all Borrower's accounts with Lender (whether checking,
savings, or some other account). This includes all accounts Borrower holds
jointly with someone else and all accounts Borrower may open in the future.
However, this does not include any IRA or Keogh accounts, or any trust
accounts for which setoff would be prohibited by law. Borrower authorizes
Lender, to the extent permitted by applicable law, to charge or setoff all
sums owing on the Indebtedness against any and all such accounts, and, at
Lender's option, to administratively freeze all such accounts to allow Lender
to protect Lender's charge and setoff rights provided in this paragraph.
DEFAULT. Each of the following shall constitute an Event of Default under this
Agreement:
Payment Default. Borrower fails to make any payment when due under the Loan.
Other Defaults. Borrower fails to comply with or to perform any other term,
obligation, covenant or condition contained in this Agreement or in any of the
Related Documents or to comply withdoubles 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 of
Dijon in Burgundy which 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 Pinot noir 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 7 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, and 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.
Also in 1997, the Company entered into a 10-year lease with O'Connor Vineyards,
now known as Belle Provenance, (53 acres) located near Salem to manage and
obtain the supply of grapes from Belle Provenance Vineyards. In 2004, the
Company informed Belle Provenance Vineyards that the Company will terminate the
current lease at the end of the initial 10-year term.
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 2004, the Company's 41 acres of producing estate vineyard
yielded approximately 104 tons of grapes for the Winery's fourteenth crush.
Tualatin Vineyards produced 480 tons of grapes in 2004. Belle Provenance
Vineyards produced 140 tons of grapes in 2004. In 2004, the Company purchased
an additional 241 tons of grapes from other growers. The Winery's 2004 total
wine production was 174,064 gallons (73,212 cases) from its 2002 and 2003
crushes. The Company expects to produce 153,612 gallons in 2004 (64,610 cases)
from its 2004 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 ITEM 12. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS.
In 2004, the Company entered into a long-term grape purchase agreement with
one of its Willamette Valley wine grape growers whereby the grower agreed to
plant 40 acres of Pinot gris and 50 acres of Riesling and the Winery agreed to
purchase the yield at fixed contract prices through 2015. The wine grape
grower must meet strict quality standards for the wine grapes to be accepted
by the Winery at time of harvest and delivery. This new long-term grape
purchase agreement will increase the Company's supply of high quality wine
grapes and provide a long-term grape supply, at fixed prices.
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. The grapes grown on the Company's vineyards establish
a foundation of quality, through the Company's best farming practices, upon
which the quality of the Company's wines 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 in 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 are
capable of producing up to 104,000 cases (250,000 gallons) of wine per year,
depending on the type of wine produced. In 2004, the Winery produced 174,064
gallons (73,212 cases) from its 2002 and 2003 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. There is a 12,500 square foot
outside production area for crushing, pressing and fermenting wine grapes, and
a 4,000 square foot insulated storage facility with a capacity of 30,000 cases
of wine. The Company also has a 20,000 square foot storage building to store
its inventory or to perform any term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
False Statements. Any warranty, representation or statement made or furnished
to Lender by Borrower or on Borrower's behalf under this Agreement or the
Related Documents is false or misleading in any material respect, either now
or at the time made or furnished or becomes false or misleading at any time
thereafter.
Insolvency. The dissolution or termination of Borrower's existence as a going
business, the insolvency of Borrower, the appointment of a receiver for any
part of Borrower's property, any assignment for the benefit of creditors, any
type of creditor workout, or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against Borrower.
Defective Collateralization. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any collateral
document to create a valid and perfected security interest or lien) at any
time and for any reason.
Creditor or Forfeiture Proceedings. Commencement of foreclosure or forfeiture
proceedings, whether by judicial proceeding, self-help, repossession or any
other method, by any creditor of Borrower or by any governmental agency
against any collateral securing the Loan. This includes a garnishment of any
of Borrower's accounts, including deposit accounts, with Lender. However, this
Event of Default shall not apply if there is a good faith dispute by Borrower
as to the validity or reasonableness of the claim which is the basis of the
creditor or forfeiture proceeding and if Borrower gives Lender written notice
of the creditor or forfeiture proceeding and deposits with Lender monies or a
surety bond for the creditor or forfeiture proceeding, in an amount determined
by Lender, in its sole discretion, as being an adequate reserve or bond for
the dispute.
Events Affecting Guarantor. Any of the preceding events occurs with respect to
any Guarantor of any of the Indebtedness or any Guarantor dies or becomes
incompetent, or revokes or disputes the validity of, or liability under, any
Guaranty of the Indebtedness. In the event of a death, Lender, at its option,
may, but shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure any Event of Default.
Change in Ownership. Any change in ownership of twenty-five percent (25%) or
more of the common stock of Borrower.
Adverse Change. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Loan is impaired.
Insecurity. Lender in good faith believes itself insecure.
Right to Cure. If any default, other than a default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given a
notice of a similar default within the preceding twelve (12) months, it may be
cured if Borrower or Grantor, as the case may be, after receiving written
notice from Lender demanding cure of such default: (1) cure the default within
fifteen (15) days; or (2) if the cure requires more than fifteen (15) days,
immediately initiate steps which Lender deems in Lender's sole discretion to
be sufficient to cure the default and thereafter continue and complete all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except
where otherwise provided in this Agreement or the Related Documents, all
commitments and obligations of Lender under this Agreement or the Related
Documents or any other agreement immediately will terminate (including any
obligation to make further Loan Advances or disbursements), and, at Lender's
option, all Indebtedness immediately will become due and payable, all without
notice of any kind to Borrower, except that in the case of an Event of Default
of the type described in the "Insolvency" subsection above, such acceleration
shall be automatic and not optional. In addition, Lender shall have all the
rights and remedies provided in the Related Documents or available at law, in
equity, or otherwise. Except as may be prohibited by applicable law, all of
Lender's rights and remedies shall be cumulative and may be exercised
singularly or concurrently. Election by Lender to pursue any remedy shall not
exclude pursuit of any other remedy, and an election to make expenditures or
to take action to perform an obligation of Borrower or of any Grantor shall
not affect Lender's right to declare a default and to exercise its rights and
remedies.
ATTORNEY FEES AND EXPENSES. The undersigned agrees to pay on demand all of
Lender's costs and expenses, including Lender's attorney fees and legal
expenses, incurred in connection with enforcement of this Agreement. Lender
may hire or pay someone else to help enforce this Agreement. Lender may also
use attorneys who are salaried employees of Lender to enforce this Agreement.
The undersigned shall pay all costs and expenses of all such enforcement. In
the event arbitration, suit, action or other legal proceeding is brought to
interpret or enforce this Agreement, the undersigned agrees to pay all
additional sums as the arbitrator or court may adjudge reasonable as Lender's
costs, disbursements, and attorney fees at hearing, trial, and on any and all
appeals. As used in this paragraph "Agreement" means the loan agreement,
promissory note, guaranty, security agreement, or other agreement, document,
or instrument in which this paragraph is found, even if this document is also
described by another name. Whether or not an arbitration or court action is
filed, all reasonable attorney fees and expenses Lender incurs in protecting
its interests and/or enforcing this Agreement shall become part of the
Indebtedness evidenced or secured by this Agreement, shall bear interest at
the highest applicable rate under the promissory note or credit agreement, and
shall be paid to Lender by the other party or parties signing this Agreement
on demand. The attorney fees and expenses covered by this paragraph include
without limitation all of Lender's attorney fees (including the fees charged
by Lender's in-house attorneys, calculated at hourly rates charged by
attorneys in private practice with comparable skill and experience), Lender's
fees and expenses for bankruptcy proceedings (including efforts to modify,
vacate, or obtain relief from any automatic stay), fees and expenses for
Lender's post-judgment collection activities, Lender's cost of searching lien
records, searching public record databases, on-line computer legal research,
title reports, surveyor reports, appraisal reports, collateral inspection
reports, title insurance, and bonds issued to protect Lender's collateral, all
to the fullest extent allowed by law.
VENUE. The loan transaction that is evidenced by this Agreement has been
applied for, considered, approved and made in the State of Oregon. If there is
a lawsuit relating to this Agreement, the undersigned shall, at Lender's
request, submit to the jurisdiction of the courts of Lane, Douglas or
Washington County, Oregon, as selected by Lender, in its sole discretion,
except and only to the extent of procedural matters related to Lender's
perfection and enforcement of its rights and remedies against the collateral
for the loan, if the law requires that such a suit be brought in another
jurisdiction. As used in this paragraph, the term "Agreement" means the
promissory note, guaranty, security agreement or other agreement, document or
instrument in which this paragraph is found, even if this document is
described by another name, as well.
COMMITMENT LETTER. The terms and provisions of this Agreement, the Note and
the Related Documents supersede any inconsistent terms and conditions of
Lender's loan commitment letter to Boof bottled product. 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.
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.
Hospitality Facility. The Company has 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 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 that can cover the quadrangle, making it an all-weather
outdoor facility to promote sale of the Company's wines through outdoor
festivals and social events. 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 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 $2,534,901 at December 31, 2004. The
mortgages are payable in annual aggregate installments, including principal
and 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 $1,941,034 on December 31, 2004. 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
$593,867 on December 31, 2004.
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.
The Company's recent annual grape harvest and wine production are as follows:
Tons of
Grapes Production Cases
Crush Year Crushed Year Produced
2000 1223 2000 98,936
2001 1859 2001 85,554
2002 1091 2002 110,063
2003 917 2003 92,208
2004 994 2004 73,212
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 2004, direct sales
were approximately 17% 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 some deliveries primarily
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, 2004. 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 has expanded to the Oregon coast and southern Oregon.
For 2004, approximately 53% 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 knowlrrower, provided that all obligations of
Borrower under the commitment letter to pay any fees to Lender or any costs
and expenses relating to the Loan or the commitment shall survive the
execution and delivery of this Agreement. Borrower's failure to perform any
such obligation shall constitute an Event of Default under this Agreement.
SWEEP ACCOUNT. Throughout the term of this Agreement, Borrower shall maintain
with Lender a demand deposit operating account, with a minimum balance of
average collected funds that is established by Lender after consulting with
Borrower (the "Peg Balance"). If the account balance is less than the Peg
Balance, then, to the extent available, an Advance on the Loan shall be
deposited to the Operating account in the amount of that difference. If the
account balance exceeds the Peg Balance, the excess shall be withdrawn by
Lender from that account and applied on the Loan.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
Amendments. This Agreement, together with any Related Documents, constitutes
the entire understanding and agreement of the parties as to the matters set
forth in this Agreement. No alteration of or amendment to this Agreement shall
be effective unless given in writing and signed by the party or parties sought
to be charged or bound by the alteration or amendment.
Arbitration. Borrower and Lender agree that all disputes, claims and
controversies between them whether individual, joint, or class in nature,
arising from this Agreement or otherwise, including without limitation
contract and tort disputes, shall be arbitrated pursuant to the Rules of the
American Arbitration Association in effect at the time the claim is filed,
upon request of either party. No act to take or dispose of any Collateral
shall constitute a waiver of this arbitration agreement or be prohibited by
this arbitration agreement. This includes, without limitation, obtaining
injunctive relief or a temporary restraining order; foreclosing by notice and
sale under any deed of trust or mortgage; obtaining a writ of attachment or
imposition of a receiver; or exercising any rights relating to personal
property, including taking or disposing of such property with or without
judicial process pursuant to Article 9 of the Uniform Commercial Code. Any
disputes, claims, or controversies concerning the lawfulness or reasonableness
of any act, or exercise of any right, concerning any Collateral, including any
claim to rescind, reform, or otherwise modify any agreement relating to the
Collateral, shall also be arbitrated, provided however that no arbitrator
shall have the right or the power to enjoin or restrain any act of any party.
Judgment upon any award rendered by any arbitrator may be entered in any court
having jurisdiction. Nothing in this Agreement shall preclude any party from
seeking equitable relief from a court of competent jurisdiction. The statute
of limitations, estoppel, waiver, laches, and similar doctrines which would
otherwise be applicable in an action brought by a party shall be applicable in
any arbitration proceeding, and the commencement of an arbitration proceeding
shall be deemed the commencement of an action for these purposes. The Federal
Arbitration Act shall apply to the construction, interpretation, and
enforcement of this arbitration provision.
Expenses. If Lender institutes any suit or action to enforce any of the terms
of this Agreement, Lender shall be entitled to recover such sum as the court
may adjudge reasonable. Whether or not any court action is involved, and to
the extent not prohibited by law, all reasonable expenses Lender incurs that
in Lender's opinion are necessary at any time for the protection of its
interest or the enforcement of its rights shall become a part of the Loan
payable on demand and shall bear interest at the Note rate from the date of
the expenditure until repaid. Expenses covered by this paragraph include,
without limitation, however subject to any limits under applicable law,
Lender's expenses for bankruptcy proceedings (including efforts to modify or
vacate any automatic stay or injunction), appeals, and any anticipated post-
judgment collection services, to the extent permitted by applicable law.
Borrower also will pay any court costs, in addition to all other sums provided
by law.
Caption Headings. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions of
this Agreement.
Consent to Loan Participation. Borrower agrees and consents to Lender's sale
or transfer, whether now or later, of one or more participation interests in
the Loan to one or more purchasers, whether related or unrelated to Lender.
Lender may provide, without any limitation whatsoever, to any one or more
purchasers, or potential purchasers, any information or knowledge Lender may
have about Borrower or about any other matter relating to the Loan, and
Borrower hereby waives any rights to privacy Borrower may have with respect to
such matters. Borrower additionally waives any and all notices of sale of
participation interests, as well as all notices of any repurchase of such
participation interests. Borrower also agrees that the purchasers of any such
participation interests will be considered as the absolute owners of such
interests in the Loan and will have all the rights granted under the
participation agreement or agreements governing the sale of such participation
interests. Borrower further waives all rights of offset or counterclaim that
it may have now or later against Lender or against any purchaser of such a
participation interest and unconditionally agrees that either Lender or such
purchaser may enforce Borrower's obligation under the Loan irrespective of the
failure or insolvency of any holder of any interest in the Loan. Borrower
further agrees that the purchaser of any such participation interests may
enforce its interests irrespective of any personal claims or defenses that
Borrower may have against Lender.
Governing Law. This Agreement will be governed by federal law applicable to
Lender and, to the extent not preempted by federal law, the laws of the State
of Oregon without regard to its conflicts of law provisions. This Agreement
has been accepted by Lender in the State of Oregon.
No Waiver by Lender. Lender shall not be deemed to have waived any rights
under this Agreement unless such waiver is given in writing and signed by
Lender. No delay or omission on the part of Lender in exercising any right
shall operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any of
Borrower's or any Grantor's obligations as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the granting
of such consent by Lender in any instance shall not constitute continuing
consent to subsequent instances where such consent is required and in all
cases such consent may be granted or withheld in the sole discretion of Lender.
Notices. Any notice required to be given under this Agreement shall be given
in writing, and shall be effective when actually delivered, when actually
received by telefacsimile (unless otherwise required by law), when deposited
with a nationally recognized overnight courier, or, if mailed, when deposited
in the United States mail, as first class, certified or registered mail
postage prepaid, directed to the addresses shown near the beginning of this
Agreement. Any party may change its address for notices under this Agreement
by giving formal written notice to edge of and a proven ability to market
premium, super premium, and ultra premium wines are utilized. Outside of
Oregon, the Company's products are distributed in 37 states and the District
of Columbia.
In connection with its ongoing transition to a national network of affiliated
distributors, the Company has 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 by 2006.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.
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.
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 3.54 million visitors in 2003. 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 U.S.
Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau 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 150,000 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.
Employees
As of December 31, 2004 the Company had 70 full-time employees and 6 part-time
employees. In addition, the Company hires additional employees for seasonal
work as required. The Company's employees are not represented by any
collective bargaining unit. The Company believes it maintains positive
relations with its employees.
Additional Information
The Company files quarterly and annual reports withe other parties, specifying that the
purpose of the notice is to change the party's address. For notice purposes,
Borrower agrees to keep Lender informed at all times of Borrower's current
address. Unless otherwise provided or required by law, if there is more than
one Borrower, any notice given by Lender to any Borrower is deemed to be
notice given to all Borrowers.
Severability. If a court of competent jurisdiction finds any provision of this
Agreement to be illegal, invalid, or unenforceable as to any circumstance,
that finding shall not make the offending provision illegal, invalid, or
unenforceable as to any other circumstance. If feasible, the offending
provision shall be considered modified so that it becomes legal, valid and
enforceable. If the offending provision cannot be so modified, it shall be
considered deleted from this Agreement. Unless otherwise required by law, the
illegality, invalidity, or unenforceability of any provision of this Agreement
shall not affect the legality, validity or enforceability of any other
provision of this Agreement.
Subsidiaries and Affiliates of Borrower. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used in this Agreement shall include all of Borrower's subsidiaries and
affiliates. Notwithstanding the foregoing however, under no circumstances
shall this Agreement be construed to require Lender to make any Loan or other
financial accommodation to any of Borrower's subsidiaries or affiliates.
Successors and Assigns. All covenants and agreements by or on behalf of
Borrower contained in this Agreement or any Related Documents shall bind
Borrower's successors and assigns and shall inure to the benefit of Lender
and its successors and assigns. Borrower shall not, however, have the right
to assign Borrower's rights under this Agreement or any interest therein,
without the prior written consent of Lender.
Survival of Representations and Warranties. Borrower understands and agrees
that in extending Loan Advances, Lender is relying on all representations,
warranties, and covenants made by Borrower in this Agreement or in any
certificate or other instrument delivered by Borrower to Lender under this
Agreement or the Related Documents. Borrower further agrees that regardless
of any investigation made by Lender, all such representations, warranties and
covenants will survive the extension of Loan Advances and delivery to Lender
of the Related Documents, shall be continuing in nature, shall be deemed made
and redated by Borrower at the time each Loan Advance is made, and shall
remain in full force and effect until such time as Borrower's Indebtedness
shall be paid in full, or until this Agreement shall be terminated in the
manner provided above, whichever is the last to occur.
Time is of the Essence. Time is of the essence in the performance of this
Agreement.
DEFINITIONS. The following capitalized words and terms shall have the
following meanings when used in this Agreement. Unless specifically stated to
the contrary, all references to dollar amounts shall mean amounts in lawful
money of the United States of America. Words and terms used in the singular
shall include the plural, and the plural shall include the singular, as the
context may require. Words and terms not otherwise defined in this Agreement
shall have the meanings attributed to such terms in the Uniform Commercial
Code. Accounting words and terms not otherwise defined in this Agreement shall
have the meanings assigned to them in accordance with generally accepted
accounting principles as in effect on the date of this Agreement:
Account. The word "Account" means a trade account, account receivable, other
receivable, or other right to payment for goods sold or services rendered
owing to Borrower (or to a third party grantor acceptable to Lender).
Advance. The word "Advance" means a disbursement of Loan funds made, or to be
made, to Borrower or on Borrower's behalf under the terms and conditions of
this Agreement.
Agreement. The word "Agreement" means this Business Loan Agreement (Asset
Based), as this Business Loan Agreement (Asset Based) may be amended or
modified from time to time, together with all exhibits and schedules attached
to this Business Loan Agreement (Asset Based) from time to time.
Borrower. The word "Borrower" means Willamette Valley Vineyards, Inc and
includes all co-signers and co-makers signing the Note.
Borrowing Base. The words "Borrowing Base" mean as determined by Lender from
time to time, the lessor of (1) $2,000,000.00 or (2) 80% of all aggregate
amount of Eligible Accounts (not to exceed in corresponding Loan amount based
on Eligible Accounts $2,000,000.00), plus (ii) 50% of the aggregate of
Eligible Inventory (not to exceed in corresponding Loan amount based on
Eligible Inventory $2,000,000.00).
Business Day. The words "Business Day" mean a day on which commercial banks
are open in the State of Oregon.
Collateral. The word "Collateral" means all property and assets granted as
collateral security for a Loan, whether real or personal property, whether
granted directly or indirectly, whether granted now or in the future, and
whether granted in the form of a security interest, mortgage, collateral
mortgage, deed of trust, assignment, pledge, crop pledge, chattel mortgage,
collateral chattel mortgage, chattel trust, factor's lien, equipment trust,
conditional sale, trust receipt, lien, charge, lien or title retention
contract, lease or consignment intended as a security device, or any other
security or lien interest whatsoever, whether created by law, contract, or
otherwise. The word Collateral also includes without limitation all
collateral described in the Collateral section of this Agreement.
Eligible Accounts. The words "Eligible Accounts" mean at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable to
Lender. The net amount of any Eligible Account against which Borrower may
borrow shall exclude all returns, discounts, credits, and offsets of any
nature. Unless otherwise agreed to by Lender in writing, Eligible Accounts do
not include:
(1) Accounts with respect to which the Account Debtor is employee or agent of
Borrower.
(2) Accounts with respect to which the Account Debtor is a subsidiary of, or
affiliated with Borrower or its shareholders, officers, or directors.
(3) Accounts with respect to which goods are placed on consignment, guaranteed
sale, or other terms by reason of which the payment by the Account Debtor may
be conditional.
(4) Accounts with respect to which the Account Debtor is not a resident of the
United States, except to the extent such Accounts are supported by insurance,
bonds or other assurances satisfactory to Lender.
(5) Accounts with respect to which Borrower is or may become liable to the
Account Debtor for goods sold or services rendered by the Account Debtor to
Borrower.
(6) Accounts which are subject to dispute, counterclaim, or setoff.
(7) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account Debtor.
(8) Accounts with respect to which Lender, in its sole discretion, deems the
creditworthiness or financial condition of the Account Debtor to be
unsatisfactory.
(9) Accounts of any Account Debtor who has filed or has had filed against it a
petition in bankruptcy or an application for relief under any provision of any
state or federal bankruptcy, insolvency, or debtor-in-relief acts; or who has
had appointed a trustee, custodian, or receiver for the assets of such Account
Debtor; or who has made an assignment for the benefit of creditors or has
become insolvent or fails generally to pay its debts (including its payrolls)
as such debts become due.
(10) Accounts with respect to which the Account Debtor is the United States
government or any departmth 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".
The Company carries Property and Liability insurance coverage in amounts
deemed adequate by Management.
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, 2004.
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, 2004, there were 3,029 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
3/31/04 6/30/04 9/30/04 12/31/04
High $2.52 $2.54 $2.50 $3.98
Low $2.00 $2.07 $1.87 $2.06
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
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.
Equity Compensation Plan Information
Number of
securities
Number of remaining available
Securities to be for future issuance
issued upon Weighted-average under equity
exercise of exercise price of compensation
outstanding outstanding plans (excluding
options, warrants options, warrants securities reflected
and rights and rights in common (a))
Plan Category (a) (b) (c)
Equity compensation
plans approved by 284,200 $1.90 604,300
security holders
Equity compensation
plans not approved - $ - -
By security holders
Total 284,200 $1.90 604,300
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 increases in future sales. 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.
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, 45 or 60 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 inventorent or agency of the United States.
(11) That portion of the Accounts of any single Account Debtor which exceeds
10.000% of all of Borrower's Accounts.
(12) Accounts which have not been paid in full within 90 days from the invoice
date. The entire balance of any Account of any single Account Debtor will be
ineligible whenever the portion of the Account which has not been paid within
90 days from invoice date is in excess of $10,000.00 of the total amount
outstanding on the Account.
13) Accounts with respect to which Account Debtor has received the goods but
has no requirement to pay until a date forecasted in the future.
14) Accounts with respect to which Account Debtor has retained a percentage
of payment pending approval of goods.
15) Accounts with respect to which Account Debtor has been submitted with a
progress billing.
Eligible Inventory. The words "Eligible Inventory" mean, at any time, all of
Borrower's Inventory as defined below, except:
(1) Inventory which is not owned by Borrower free and clear of all security
interests, liens, encumbrances, and claims of third parties.
(2) Inventory which Lender, in its sole discretion, deems to be obsolete,
unsalable, damaged, defective, or unfit for further processing.
(3) Cased and Bulk Wine, will be reduced by Trade Payables and to include
Grower Payables.
(4) Wholesale values for collateral purposes wil be "borrower's declared";
with bottled wine capped at $90.00 per case; calculated on a per item basis.
(5) Eligible bulk wine will only include Willamette Valley Vineyard's own
grapes of the last of the last two most recent years, with a sub-limit advance
cap of $500,000.00.
(6) Eligible bottled wine will only include that of years 2000 to the present.
Environmental Laws. The words "Environmental Laws" mean any and all state,
federal and local statutes, regulations and ordinances relating to the
protection of human health or the environment, including without limitation
the Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"), the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq., the
Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et seq., or
other applicable state or federal laws, rules, or regulations adopted pursuant
thereto or intended to protect human health or the environment.
Event of Default. The words "Event of Default" mean any of the events of
default set forth in this Agreement in the default section of this Agreement.
Expiration Date. The words "Expiration Date" mean the date of termination of
Lender's commitment to lend under this Agreement.
GAAP. The word "GAAP" means generally accepted accounting principles.
Grantor. The word "Grantor" means each and all of the persons or entities
granting a Security Interest in any Collateral for the Loan, including
without limitation all Borrowers granting such a Security Interest.
Guarantor. The word "Guarantor" means any guarantor, surety, or accommodation
party of any or all of the Loan.
Guaranty. The word "Guaranty" means the guaranty from Guarantor to Lender,
including without limitation a guaranty of all or part of the Note.
Hazardous Substances. The words "Hazardous Substances" mean materials that,
because of their quantity, concentration or physical, chemical or infectious
characteristics, may cause or pose a present or potential hazard to human
health or the environment when improperly used, treated, stored, disposed of,
generated, manufactured, transported or otherwise handled. The words
"Hazardous Substances" are used in their very broadest sense and include
without limitation any and all hazardous or toxic substances, materials or
waste as defined by or listed under the Environmental Laws. The term
"Hazardous Substances" also includes, without limitation, petroleum and
petroleum by-products or any fraction thereof and asbestos.
Indebtedness. The word "Indebtedness" means the indebtedness evidenced by the
Note or Related Documents, including all principal and interest together with
all other indebtedness and costs and expenses for which Borrower is
responsible under this Agreement or under any of the Related Documents.
Inventory. The word "Inventory" means all of Borrower's raw materials, work in
process, finished goods, merchandise, parts and supplies, of every kind and
description, and goods held for sale or lease or furnished under contracts of
service in which Borrower now has or hereafter acquires any right, whether
held by Borrower or others, and all documents of title, warehouse receipts,
bills of lading, and all other documents of every type covering all or any
part of the foregoing. Inventory includes inventory temporarily out of
Borrower's custody or possession and all returns on Accounts.
Lender. The word "Lender" means Umpqua Bank, its successors and assigns.
Loan. The word "Loan" means any and all loans and financial accommodations
from Lender to Borrower whether now or hereafter existing, and however
evidenced, including without limitation those loans and financial
accommodations described herein or described on any exhibit or schedule
attached to this Agreement from time to time.
Note. The word "Note" means the Note executed by Willamette Valley Vineyards,
Inc in the principal amount of $2,000,000.00 dated December 29, 2004, together
with all renewals of, extensions of, modifications of, refinancings of,
consolidations of, and substitutions for the note or credit agreement.
Permitted Liens. The words "Permitted Liens" mean (1) liens and security
interests securing Indebtedness owed by Borrower to Lender; (2) liens for
taxes, assessments, or similar charges either not yet due or being contested
in good faith; (3) liens of materialmen, mechanics, warehousemen, or carriers,
or other like liens arising in the ordinary course of business and securing
obligations which are not yet delinquent; (4) purchase money liens or purchase
money security interests upon or in any property acquired or held by Borrower
in the ordinary course of business to secure indebtedness outstanding on the
date of this Agreement or permitted to be incurred under the paragraph of this
Agreement titled "Indebtedness and Liens"; (5) liens and security interests
which, as of the date of this Agreement, have been disclosed to and approved
by the Lender in writing; and (6) those liens and security interests which in
the aggregate constitute an immaterial and insignificant monetary amount with
respect to the net value of Borrower's assets.
Primary Credit Facility. The words "Primary Credit Facility" mean the credit
facility described in the Line of Credit section of this Agreement.
Related Documents. The words "Related Documents" mean all promissory notes,
credit agreements, loan agreements, environmental agreements, guaranties,
security agreements, mortgages, deeds of trust, security deeds, collateral
mortgages, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the Loan.
Security Agreement. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements, understandings
or other agreements, whether created by law, contract, or otherwise,
evidencing, governing, representing, or creating a Security Interest.
Security Interest. The words "Security Interest" mean, without limitation,
any and all types of collateral security, present and future, whether in the
form of a lien, charge, encumbrance, mortgage, deed of trust, security deed,
assignment, pledge, crop pledge, chattel mortgage, collateral chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien or title retention contract, lease or consignment
intended as a security device, or any other security or lien interest
why and our reported operating
results.
We capitalize internal vineyard development costs prior to the 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.
OVERVIEW
RESULTS OF OPERATIONS
Management is continuing its focus on the Company's core product offerings,
Vintage Pinot noir, Whole Cluster Pinot noir, Pinot gris and Riesling, and the
continued building of the instate wholesale department called Bacchus Fine
Wines, to increase revenues. Total net revenues grew by 28 percent for the
year ended December 31, 2004, compared to the prior year. Operating income
increased 94 percent for the year ended December 31, 2004, compared to the
prior year. The Company's record net income in 2004 increased primarily due
to strong sales of the core product offerings to out-of-state distributors and
Bacchus Fine Wines sales to Oregon restaurant and retail outlets.
Out-of-state sales increased primarily due to the growth in depletions (sales
from distributors to their customers) of the Company's core product offerings.
As a group, the depletions of these products from distributors to their
customers increased 21% for the year ended December 31, 2004, compared to the
prior year period, driving the 30% growth in sales from the winery to out-of-
state distributors during the year ended December 31, 2004, compared to the
prior year period. The Company increased sales expenses and distributor
support, primarily in the form of increased market visits by the winery staff,
depletion allowances and sales incentives, to spur the increase in distributor
depletions.
Sales in the state of Oregon through the Company's wholesale sales force and
through direct sales from the winery to retail licensees increased 45% for the
year ended December 31, 2004 compared to the prior year period, primarily due
to the growth of distributed wine brands. Expenses increased significantly in
the year ended December 31, 2004 compared to the prior year period as delivery
support was built up to support the additional brands rolled out in 2004.
Management considers Bacchus Fine Wines to be in a building stage where an
intense focus is being applied to the placement of purchased wine in
restaurant and retail accounts. The Company has purchased a significant
inventory of wines for resale totaling approximately $950,000, placing an
additional demand on cash and the Company's credit line. Management has taken
these steps as it believes they will improve the sales opportunities for the
Company's own wines with retail and restaurant customers and increase net
income in the future.
Retail revenues were relatively flat during the year ended December 31, 2004
compared to the prior year period but retail cost of sales expenses were lower
over the same comparable period. Although Tasting Room sales increased during
the year ended December 31, 2004 compared to the same prior year period, the
Winery experienced reductions in Key Customer sales due to staffing vacancies
during the same comparable period. In the third and fourth quarter of 2004,
Management added a Customer Service Coordinator and Key Customer Service
personnel to increase direct sales to wine consumers.
During the year ended December 31, 2004, management initiated the sale and
lease back of the 75.3 acre Meadowview parcel at the Tualatin Estate Vineyard
for $726,675, which closed on October 22, 2004. The net proceeds of the sale
were recorded in 2004 as other income for the non-vineyard acres of the parcel
not being leased back, and as deferred gain for the leased back vineyard acres.
The deferred gain will then be amortized over the life of the lease.
Pursuant to the sale leaseback agreement, the Company will continue to farm
and develop the vineyard acres of this parcel. This parcel includes 15.7
acres of established vineyard that the Company has agreed to lease for between
14 and 29 years, including three five year renewal terms, at the Company's
option. The parcel also includes 7 acres of vineyard planted in 2004 and
trellised with French Dijon clone 777 Pinot noir on disease resistant
rootstock at the purchaser's expense, and 23 additional acres of vineyard
land. The purchaser has agreed to fund the vineyard development of the 23
acres of vineyard land. The Company will begin paying rent on the 7 acres and
any plantings on the 23 acres starting when the vines become commercially
productive in 2008 for between 11 and 26 years, including three five year
renewal terms, at the Company's option. The net cash proceeds of the sale
were principally applied to reduce amounts owed under the Company's credit
line.
Revenue from the remaining owned parcel at Tualatin Estate improved in the
year ended December 31, 2004, due to renting of the winery facility to the
Company's former winemaker.
In 2004, the Company entered into a long-term grape purchase agreement with
one of its Willamette Valley wine grape growers, whereby the grower agreed to
plant 40 acres of Pinot gris and 50 acres of Riesling and the Winery agreed to
purchase the yield at fixed contract prices through 2015. The wine grape
grower must meet strict quality standards for the wine grapes to be accepted
by the Winery at time of harvest and delivery. This new long-term grape
purchase agreement will increase the Company's supply of high quality wine
grapes and provide a long-term grape supply, at fixed prices, which meet the
Winery's gross margin goals.
Wine Quality
The quality of the Company's wines continued to attract national attention,
including recommendations from chef and author Andrea Immer, Food Network's
Chef Rachael Ray and chefs Caprial and John Pence of Oregon Public
Broadcasting's Caprial and John's Kitchen.
Sales
Finished wine revenues increased 30% in the year ended December 31, 2004
compared to the previous year. Unit sales (6 and 12 bottle cases) increased
3% from the previous year. Case sales from the Winery decreased to 84,449 in
the year ended December 31, 2004 from 90,294 in 2003 for product manufactured
by the Company. The Company continued to experience increased unit sales for
products other than its own through Bacchus Fine Wines, from 5,233 in 2003 to
13,782 in 2004. The Company's distributors experienced a collective increase
of 12% in atsoever whether created by law, contract, or otherwise.
Tangible Net Worth. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks, patents,
copyrights, organizational expenses, and similar intangible items, but
including leaseholds and leasehold improvements) less total debt.
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US
(LENDER) CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR
PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE
ENFORCEABLE.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS BUSINESS LOAN
AGREEMENT (ASSET BASED) AND BORROWER AGREES TO ITS TERMS. THIS BUSINESS LOAN
AGREEMENT (ASSET BASED) IS DATED DECEMBER 29, 2004.
BORROWER:
WILLAMETTE VALLEY VINEYARDS, INC
By: ,/s/,,,,,, James W. Bernau, President of Willamette Valley Vineyards,
Inc
LENDER:
UMPQUA BANK
By: ,/s/,,,,,,, Authorized Signer