WILLAMETTE VALLEY VINEYARDS, INC.
STATEMENTS OF CASH FLOWS
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|
|
|
|
|
Year ended December 31,
|
|
|
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2012
|
|
|
2011
|
|
|
|
(audited)
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|
|
(audited)
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CASH FLOWS FROM OPERATING ACTIVITIES OF CONTINUING OPERATIONS
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|
|
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Net income from continuing operations
|
|
$
|
1,360,234
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|
|
$
|
1,432,731
|
|
Adjustments to reconcile net income to net cash from operating activities:
|
|
|
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|
|
|
|
|
Depreciation and amortization
|
|
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725,286
|
|
|
|
747,144
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|
Loss on disposition of property & equipment
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22,243
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|
|
|
6,293
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|
Stock based compensation expense
|
|
|
18,000
|
|
|
|
9,002
|
|
Deferred rent liability
|
|
|
(10,806
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)
|
|
|
(6,956
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)
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Deferred income taxes
|
|
|
(51,000
|
)
|
|
|
295,000
|
|
Deferred revenue-distribution agreement
|
|
|
(142,860
|
)
|
|
|
952,380
|
|
Deferred gain
|
|
|
(32,095
|
)
|
|
|
(32,095
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
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Accounts receivable
|
|
|
(101,959
|
)
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182,503
|
|
Inventories
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|
|
(383,071
|
)
|
|
|
64,953
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|
Prepaid expenses and other current assets
|
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|
48,879
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|
|
|
(56,141
|
)
|
Distribution agreement receivable
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|
|
250,000
|
|
|
|
(750,000
|
)
|
Income taxes receivable
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|
220,603
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|
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|
(114,274
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)
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Other assets
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|
4,456
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|
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-
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Grapes payable
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150,351
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116,022
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Accounts payable
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427,428
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|
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(447,645
|
)
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Accrued expenses
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|
35,793
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|
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(156,214
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)
|
Income taxes payable
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|
|
17,659
|
|
|
|
-
|
|
Net cash from operating activities
|
|
|
2,559,141
|
|
|
|
2,242,703
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|
|
|
|
|
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CASH FLOWS FROM INVESTING ACTIVITIES OF CONTINUING OPERATIONS
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Additions to property and equipment
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(1,545,836
|
)
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|
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(1,746,998
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)
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Additions to vineyard development
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(246,064
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)
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(56,298
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)
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Proceeds from sale of property and equipment
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7,385
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|
|
|
4,301
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|
Payments received on note receivable
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57,537
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53,104
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|
Net cash from investing activities
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|
(1,726,978
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)
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|
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(1,745,891
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)
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CASH FLOWS FROM FINANCING ACTIVITIES OF CONTINUING OPERATIONS
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|
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Payments on long-term debt
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|
(182,352
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)
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|
|
(470,722
|
)
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Borrowings on long-term debt
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|
-
|
|
|
|
1,400,000
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|
Payment of debt issuance costs
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|
|
-
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|
(19,055
|
)
|
Proceeds from stock options exercised
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6,180
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|
|
|
-
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|
Repurchase of common stock
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|
|
(319,215
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)
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|
|
-
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|
Net cash from financing activities
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|
|
(495,387
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)
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|
|
910,223
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|
|
|
|
|
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CASH FLOWS FROM DISCONTINUED OPERATIONS
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Net cash from operating activities of discontinued operations
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|
756,305
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|
|
|
477,095
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|
Net cash from investing activities of discontinued operations
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|
|
48,740
|
|
|
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8,298
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|
Net cash from discontinued operations
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|
805,045
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485,393
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|
|
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|
|
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NET CHANGE IN CASH AND CASH EQUIVALENTS
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1,141,821
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1,892,428
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CASH AND CASH EQUIVALENTS, beginning of year
|
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3,411,292
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|
|
|
1,518,864
|
|
|
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|
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CASH AND CASH EQUIVALENTS, end of year
|
|
$
|
4,553,113
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|
|
$
|
3,411,292
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|
The accompanying notes are an integral part of the financial statements.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 1 – SUMMARY OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
Organization and operations
–
Willamette Valley Vineyards, Inc. (the “Company”) owns and operates vineyards and a winery located in the state of Oregon, and produces and distributes premium, super premium, and ultra-premium wines, primarily Pinot Noir, Pinot Gris, Chardonnay, and Riesling.
The Company includes direct-to-consumer sales and national sales to distributors. These sales channels have mostly similar economic characteristics, offer comparable products to customers and utilize similar processes and shared resources for production, selling and distribution.
On June 30, 2012, the Company discontinued their in-state distribution division, Bacchus Fine Wines. The Company had been in the process of winding down Bacchus operations since September 2011, when they entered into an agreement with Young’s Market of Oregon, LLC to distribute produced wines in-state. Since then, purchased wine inventories have been completely liquidated, and all Company in-state distribution activity has ceased. In-state distribution activities are now reported as discontinued operations.
Direct-to-consumer sales represented approximately 27.0% and 23.9% of revenue from continuing operations for 2012 and 2011, respectively.
Sales of Company-produced wines in Oregon represented approximately 27.7% and 28.1% of revenue from continuing operations for 2012 and 2011, respectively.
Out-of-state sales represented approximately 44.8% and 48.0% of revenue from continuing operations for 2012 and 2011, respectively. Foreign sales represent less than 1% of total sales.
Basis of presentation
–
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, which require management to make certain estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances at the time. Actual results could differ from those estimates under different assumptions or conditions.
Financial instruments and concentrations of risk
– The Company has the following financial instruments: cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, grapes payable and long-term debt. The carrying value of these instruments approximate fair value.
Cash and cash equivalents are maintained at four financial institutions. Deposits held with these financial institutions may exceed the amount of insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with a financial institution of reputable credit and therefore bear minimal credit risk.
In 2012, sales to one distributor represented approximately 18.6% of total Company revenue. In 2011, no one customer represented greater than 10.0% of company revenue.
Other comprehensive income
– The nature of the Company’s business and related transactions do not give rise to other comprehensive income.
Cash and cash equivalents
–
Cash and cash equivalents include highly liquid short-term investments with an original maturity of less than 90 days.
Accounts receivable
–
The Company performs ongoing credit evaluations of its customers and does not require collateral. A reserve is maintained for potential credit losses. The allowance for doubtful accounts is based on an assessment of the collectability of customer accounts. The Company regularly reviews the allowance by considering factors such as historical experience, credit quality, the age of the accounts receivable balances, and current economic conditions that may affect a customer’s ability to pay. The Company has credit risk associated with uncollateralized trade accounts receivable from all operations
totaling $1,088,550 and $1,078,597 as of December 31, 2012 and 2011, of which $0 and $92,006 are related to discontinued operations, respectively. The allowance for doubtful accounts is further discussed in Note 2.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 1 – SUMMARY OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
- continued
Notes receivable
–
The notes receivable balance relates to a note entered into in 2007 with one of the Company’s key grape suppliers with whom the Company purchase grapes from under contract. The purpose of the note was to provide the grower with the capital necessary for their vineyard land development. The original amount of the note was $250,000. The note accrues interest at 8.5% per year and is payable in semi-annual payments through March 2013.
Inventories –
For Company produced wines, after a portion of the vineyard becomes commercially productive, the annual crop and production costs relating to such portion are recognized as work-in-process inventories. Such costs are accumulated with related direct and indirect harvest costs, wine processing and production costs, and are transferred to finished goods inventories when the wine is produced, bottled, and ready for sale. For purchased wines distributed through the Company’s in-state distribution division, Bacchus Fine Wines, the supplier invoiced costs of the wine, including freight, are recognized into finished goods inventories at the point of receipt. As of December 31, 2012, the Company no longer carries any purchased wine inventory.
The cost of finished goods is recognized as cost of sales when the wine product is sold. Inventories are stated at the lower of first-in, first-out (“FIFO”) cost or market by variety.
In accordance with general practices in the wine industry, wine inventories are generally included in current assets in the accompanying balance sheets, although a portion of such inventories may be aged for more than one year (Note 3).
Vineyard development costs
–
Vineyard development costs consist primarily of the costs of the vines and expenditures related to labor and materials to prepare the land and construct vine trellises. The costs are capitalized until the vineyard becomes commercially productive, at which time annual amortization is recognized using the straight-line method over the estimated economic useful life of the vineyard, which is estimated to be 30 years. Accumulated amortization of vineyard development costs aggregated $882,398 and $806,729 at December 31, 2012 and 2011, respectively.
Amortization of vineyard development costs are included in capitalized crop costs that in turn are included in inventory costs and ultimately become a component of cost of goods sold. For the year ending December 31, 2012 and 2011, approximately $75,669 and $75,044, respectively, was amortized into inventory costs.
Property and equipment
–
Property and equipment are stated at cost and are depreciated on the straight-line basis over their estimated useful lives. Land improvements are depreciated over 15 years. Winery buildings are depreciated over 30 years. Equipment is depreciated over 3 to 10 years, depending on the classification of the asset. Depreciation is discussed further in Note 4.
Expenditures for repairs and maintenance are charged to operating expense as incurred. Expenditures for additions and betterments are capitalized. When assets are sold or otherwise disposed of, the cost and related accumulated depreciation are removed from the accounts, and any resulting gain or loss is included in operations. The Company reviews the carrying value of investments for impairment whenever events or changes in circumstances indicate the carrying amounts may not be recoverable.
Debt issuance costs
–
Debt issuance costs are amortized on the straight-line basis, which approximates the effective interest method, over the life of the debt. The Company incurred an additional $19,055 of debt issuance costs in 2011 related to the new long-term debt from NW Farm Credit Service. For the years ended December 31, 2012 and 2011, amortization of debt issuance costs was approximately $3,383 and $741 respectively. Debt issuance amortization costs are scheduled at $3,383 for each of the next five years, and $30,454 thereafter.
Distribution agreement receivable
– Effective September 1, 2011, the Company entered into an agreement with Young’s Market Company for distribution of Company-produced wines in Oregon and Washington. The terms of this contract include exclusive rights to distribute Willamette Valley Vineyard’s wines in Oregon and Washington for seven years. In an effort to facilitate the transition with as little disruption as possible,
Young’s Market Company has agreed to compensate Willamette Valley Vineyards for ongoing Oregon sales and branding efforts. As a result, the Company is due to receive $250,000 per year starting on September 2011 for each of the next four years for a total of $1,000,000. As of December 31, 2012 and 2011, the Company has recorded a distribution agreement receivable in the amount of $500,000 and $750,000, respectively, with $250,000 being current for each of the years reported. The total amount of $1,000,000 to be received by the Company related to this agreement is being recognized as revenue on a straight line basis over the seven year life of the agreement. For the year ended December 31, 2012 and 2011, the Company has recognized revenue related to this agreement in the amount of $142,860 and $47,619, respectively, recorded to other income.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 1 – SUMMARY OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
- continued
Income taxes
–
Income taxes are recognized using enacted tax rates, and are composed of taxes on financial accounting income that is adjusted for requirements of current tax law, and deferred taxes. Deferred taxes are estimated using the asset and liability approach whereby deferred income taxes are calculated for the expected future tax consequences of temporary differences between the book basis and tax basis of the Company’s assets and liabilities.
The Company had no unrecognized tax benefits as of December 31, 2012 or 2011. The Company recognizes interest assessed by taxing authorities as a component of tax expense. The Company recognizes any penalties assessed by taxing authorities as a component of tax expense. Interest and penalties for the years ended December 31, 2012 and 2011 were not material.
The Company files U.S. federal income tax returns with the Internal Revenue Service (“IRS”) as well as income tax returns in Oregon. The Company may be subject to examination by the IRS for tax years 2009 through 2012. Additionally, the Company may be subject to examinations by state taxing jurisdictions for tax years 2009 through 2012. The Company is currently not under examination by the IRS or the Oregon Department of Revenue.
Deferred rent liability
–
The Company leases land under a sale-leaseback agreement. The long-term operating lease has minimum lease payments that escalate every year. For accounting purposes, rent expense is recognized on the straight-line basis by dividing the total minimum rents due during the lease by the number of months in the lease. In the early years of a lease with escalation clauses, this treatment results in rental expense recognition in excess of rents paid, and the creation of a long-term deferred rent liability. As the lease matures, the deferred rent liability will decrease and the rental expense recognized will be less than the rents actually paid. For the years ended December 31, 2012 and 2011, rent costs paid in excess of amounts recognized totaled $10,806 and $6,956, respectively.
Revenue recognition
–
The Company recognizes revenue when the product is shipped and title passes to the customer. The Company’s standard terms are ‘FOB’ shipping point, with no customer acceptance provisions. The cost of price promotions and rebates are treated as reductions of revenue. No products are sold on consignment. Credit sales are recorded as trade accounts receivable and no collateral is required. Revenue from items sold through the Company’s retail locations is recognized at the time of sale. Net revenue reported herein are shown net of sales allowances and excise taxes.
The Company has price incentive programs with its distributors to encourage product placement and depletions. In accordance with FASB ASC 605-50,
Revenue Recognition – Customer Payments and Incentives
, when recording a sale to the customer, an incentive program liability is recorded to accrued liabilities and sales are reported net of incentive program expenses. Incentive program payments are made when completed incentive program payment requests are received from the customers. Incentive payments to a customer reduces the incentive program accrued liability. For the years ended December 31, 2012 and 2011, the Company recorded incentive program expenses of $306,924 and $599,004, respectively, as a reduction in sales on the income statement. As of December 31, 2012 and 2011, the Company has recorded an incentive program liability in the amount of $62,428 and $91,449, respectively, which is included in accrued expenses on the balance sheet.
Cost of goods sold
–
Costs of goods sold include costs associated with grape growing, external grape costs, packaging materials, winemaking and production costs, vineyard and production administrative support and overhead costs, purchasing and receiving costs and warehousing costs.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 1 – SUMMARY OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
- continued
Administrative support, purchasing, receiving and most other fixed overhead costs are expensed as selling, general and administrative expenses without regard to inventory units. Warehouse and winery production and facilities costs, which make up approximately 10 percent of total costs, are allocated to inventory units on a per gallon basis during the production of wine, prior to bottling the final product. No further costs are allocated to inventory units after bottling.
Selling, general and administrative expenses
–
Selling, general and administrative expenses consist primarily of non-manufacturing administrative and overhead costs, advertising and other marketing promotions. Advertising costs are expensed as incurred or the first time the advertising takes place. For the years ended December 31, 2012 and 2011, advertising costs incurred were approximately $70,000 and $54,000 respectively.
The Company provides an allowance to distributors for providing sample of products to potential customers. For the years ended December 31, 2012 and 2011, these costs, which are included in selling, general and administrative expenses, totaled approximately $137,300 and $89,600, respectively.
Shipping and handling costs
–
Amounts paid by customers to the Company for shipping and handling costs are included in the net revenue. Costs incurred for shipping and handling charges are included in selling, general and administrative expense. For the years ended December 31, 2012 and 2011, such costs totaled approximately $325,800 and $375,600, respectively. The Company’s gross margins may not be comparable to other companies in the same industry as other companies may include shipping and handling costs as a cost of goods sold.
Excise taxes
–
The Company pays alcohol excise taxes based on product sales to both the Oregon Liquor Control Commission and to the U.S. Department of the Treasury, Alcohol and Tobacco Tax and Trade Bureau. The Company is liable for the taxes upon the removal of product from the Company’s warehouse on a per gallon basis. The federal tax rate is affected by a small winery tax credit provision which declines based upon the number of gallons of wine production in a year rather than the quantity sold. The Company also pays taxes on the grape harvest on a per ton basis to the Oregon Liquor Control Commission for the Oregon Wine Advisory. For the years ended December 31, 2012 and 2011, excise taxes incurred were approximately $305,000 and $391,000 respectively.
Stock based compensation
–
The Company expenses stock options on a straight line basis over the options’ related vesting term. For the years ended December 31, 2012 and 2011, the Company recognized pretax compensation expense related to stock options of $18,000 and $9,002, respectively.
Basic and diluted net income per share
–
Basic earnings per share are computed based on the weighted-average number of common shares outstanding each year. Diluted earnings per share are computed using the weighted average number of shares of common stock and potentially dilutive securities assumed to be outstanding during the year. Potentially dilutive shares from stock options and other common stock equivalents are excluded from the computation when their effect is anti-dilutive.
Options to purchase 311,200 shares of common stock were outstanding at December 31, 2012 and diluted weighted-average shares outstanding at December 31, 2012 include the effect of 6,593 stock options. Options to purchase 356,200 shares of common stock were outstanding at December 31, 2011 and diluted weighted-average shares outstanding at December 31, 2011 include the effect of 3,991 stock options.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 1 – SUMMARY OF OPERATIONS, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
- continued
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
|
|
|
Average
|
|
|
Earnings
|
|
|
|
|
|
|
Shares
|
|
|
per
|
|
|
|
|
|
Shares
|
|
|
per
|
|
|
|
Income
|
|
|
Outstanding
|
|
|
Share
|
|
|
Income
|
|
|
Outstanding
|
|
|
Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1,202,849
|
|
|
|
4,849,163
|
|
|
$
|
0.25
|
|
|
$
|
857,755
|
|
|
|
4,892,977
|
|
|
$
|
0.18
|
|
Options
|
|
|
-
|
|
|
|
6,593
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,991
|
|
|
|
-
|
|
Warrant
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1,202,849
|
|
|
|
4,855,756
|
|
|
$
|
0.25
|
|
|
$
|
857,755
|
|
|
|
4,896,968
|
|
|
$
|
0.18
|
|
Statement of cash flows –
Supplemental disclosure of cash flow information:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Income tax paid
|
|
$
|
467,000
|
|
|
$
|
309,000
|
|
Interest paid
|
|
$
|
236,000
|
|
|
$
|
217,000
|
|
Supplemental schedule of noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and
|
|
|
|
|
|
|
|
|
equipment included in accounts payable
|
|
$
|
176,000
|
|
|
$
|
7,715
|
|
Recently issued accounting standards
–
In June 2011, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance that revises the manner in which entities present comprehensive income in their financial statements. The guidance requires entities to report comprehensive income in either a single, continuous statement or two separate but consecutive statements. This guidance will become effective for fiscal years beginning after December 15, 2011. The Company expects the adoption of this new guidance will have no impact on its financial condition and results of operations.
In May 2011, the FASB issued authoritative guidance to amend the fair value measurement and disclosure requirements. The guidance requires the disclosure of quantitative information about unobservable inputs used, a description of the valuation processes used and a qualitative discussion around the sensitivity of the measurements. The guidance will become effective for the Company at the beginning of the Company’s second quarter of fiscal 2012. The Company expects the adoption of this new guidance will have no impact on its financial condition and results of operations.
NOTE 2 – ACCOUNTS RECEIVABLE
The Company’s accounts receivable balance is net of an allowance for doubtful accounts of $12,908 and $20,285 at December 31, 2012 and 2011, respectively. Changes in the allowance for doubtful accounts are as follows:
|
|
Year ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Balance at Beginning of Period
|
|
$
|
20,825
|
|
|
$
|
11,931
|
|
Charged to costs and expenses
|
|
|
16,210
|
|
|
|
8,894
|
|
Charged to other accounts
|
|
|
-
|
|
|
|
-
|
|
Write-offs, net of recoveries
|
|
|
(24,127
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Balance at End of Period
|
|
$
|
12,908
|
|
|
$
|
20,825
|
|
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 3 – INVENTORIES
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Winemaking and packaging materials
|
|
$
|
454,612
|
|
|
$
|
248,350
|
|
Work-in-process (costs relating to
|
|
|
|
|
|
|
|
|
unprocessed and/or unbottled wine products)
|
|
|
3,891,754
|
|
|
|
3,535,028
|
|
Finished goods (bottled wine and related products)
|
|
|
4,880,518
|
|
|
|
5,889,816
|
|
Obsolescence reserve
|
|
|
-
|
|
|
|
(54,049
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
9,226,884
|
|
|
|
9,619,145
|
|
|
|
|
|
|
|
|
|
|
Less inventories from discontinued operations
|
|
|
-
|
|
|
|
(775,332
|
)
|
|
|
|
|
|
|
|
|
|
Current inventories from continuing operations
|
|
$
|
9,226,884
|
|
|
$
|
8,843,813
|
|
NOTE 4 – PROPERTY AND EQUIPMENT
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Construction in progress
|
|
$
|
1,227,008
|
|
|
$
|
333,162
|
|
Land and improvements
|
|
|
2,892,108
|
|
|
|
2,610,374
|
|
Winery buildings and hospitality center
|
|
|
6,795,799
|
|
|
|
6,727,419
|
|
Equipment
|
|
|
6,299,500
|
|
|
|
6,285,135
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,214,415
|
|
|
$
|
15,956,090
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation
|
|
|
(8,908,799
|
)
|
|
|
(8,717,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8,305,616
|
|
|
$
|
7,238,437
|
|
Depreciation expense was $646,333 and $671,359 during the years ended December 31, 2012 and 2011, respectively.
NOTE 5 – LINE OF CREDIT FACILITY
In December of 2005 the Company entered into a revolving line of credit agreement with Umpqua Bank that allows borrowings of up to $2,000,000 against eligible accounts receivables and inventories as defined in the agreement. The revolving line bears interest at prime, is payable monthly, and is subject to annual renewal. The Company renewed the credit agreement in June of 2012 for a period of 12 months. The interest rate was 3.25% at December 31, 2012 and 2011. At December 31, 2012 and 2011 there were no borrowings on this revolving line of credit.
The line of credit agreement includes various covenants, which among other things, requires the Company to maintain minimum amounts of tangible net worth, debt-to-equity, and debt service coverage as defined, and limits the level of acquisitions of property and equipment. As of December 31, 2012, the Company was in compliance with these covenants.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 6 – LONG-TERM DEBT
Long-term debt consists of:
|
|
December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Northwest Farm Credit Services Loan #1
|
|
$
|
1,377,827
|
|
|
$
|
1,437,557
|
|
Northwest Farm Credit Services Loan #2
|
|
|
1,306,945
|
|
|
|
1,370,215
|
|
Northwest Farm Credit Services Loan #3
|
|
|
1,331,999
|
|
|
|
1,386,145
|
|
Other long term debt
|
|
|
9,467
|
|
|
|
14,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,026,238
|
|
|
|
4,208,590
|
|
Current portion
|
|
|
(209,327
|
)
|
|
|
(197,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,816,911
|
|
|
$
|
4,010,654
|
|
The Company has three agreements with Northwest Farm Credit Services (“FCS”). Loan #1 requires monthly payments of $12,266, bears interest at a rate of 5.90%, is collateralized by real estate and equipment, and matures in 2026. Loan #2 requires monthly payments of $13,232, bears interest at a rate of 6.70%, is collateralized by real estate and equipment, and matures in 2024. Loan #3 requires monthly payments of $12,004, bears interest at a rate of 6.25%, is collateralized by real estate and equipment, and matures in 2026.
The loan agreements contain covenants, which require the Company to maintain certain financial ratios and balances. At December 31, 2012, the Company was in compliance with these covenants. In the event of future noncompliance with the Company’s debt covenants, FCS would have the right to declare the Company in default, and at FCS’ option without notice or demand, the unpaid principal balance of the loan, plus all accrued unpaid interest thereon and all other amounts due shall immediately become due and payable.
Future minimum principal payments of long-term debt mature as follows for the years ending December 31:
2013
|
|
$
|
209,327
|
|
2014
|
|
|
221,298
|
|
2015
|
|
|
232,115
|
|
2016
|
|
|
247,166
|
|
2017
|
|
|
263,194
|
|
Thereafter
|
|
|
2,853,138
|
|
|
|
|
|
|
|
|
$
|
4,026,238
|
|
The weighted-average interest rates on the aforementioned borrowings for the fiscal years ended December 31, 2012 and 2011 was 6.3%.
NOTE 7 – SHAREHOLDERS’ EQUITY
The Company is authorized to issue 10,000,000 shares of its common stock. Each share of common stock is entitled to one vote. At its discretion, the Board of Directors may declare dividends on shares of common stock, although the Board does not anticipate paying dividends in the foreseeable future.
NOTE 8 – STOCK INCENTIVE PLAN
The Company has a stock incentive plan, originally created in 1992, most recently amended in 2001. No additional grants may be made under the plan. All stock options have an exercise price that is equal to the fair market value of the Company’s stock on the date the options were granted. Administration of the plan, including determination of the number, term, and type of options granted, resides with the Board of Directors or a duly authorized committee of the Board of Directors. Options were generally granted based on employee performance with vesting periods ranging from date of grant to seven years. At the date of the grant, the maximum term before expiration is ten years.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 8 – STOCK INCENTIVE PLAN
- continued
The following table presents information on stock options outstanding for the periods shown:
|
|
2012
|
|
|
2011
|
|
|
|
Weighted Average Exercise
|
|
|
Weighted Average Exercise
|
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
|
|
356,200
|
|
|
$
|
3.71
|
|
|
|
208,700
|
|
|
$
|
4.12
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
155,000
|
|
|
|
3.17
|
|
Exercised
|
|
|
(2,000
|
)
|
|
|
3.09
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(43,000
|
)
|
|
|
3.31
|
|
|
|
(7,500
|
)
|
|
|
4.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
311,200
|
|
|
$
|
3.76
|
|
|
|
356,200
|
|
|
$
|
3.71
|
|
The following table presents information on stock options outstanding for the periods shown:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Intrinsic value of options exercised in the period
|
|
$
|
1,023
|
|
|
$
|
-
|
|
Stock options fully vested and expected to vest
|
|
|
311,200
|
|
|
|
356,200
|
|
Weighted average exercise price
|
|
$
|
3.76
|
|
|
$
|
3.71
|
|
Aggregate intrinsic value
|
|
$
|
84,400
|
|
|
$
|
8,440
|
|
Weighted average contractual term of options
|
|
3.54 years
|
|
|
5.09 years
|
|
Stock options vested and currently exercisable
|
|
|
223,200
|
|
|
|
208,700
|
|
Weighted average exercise price
|
|
$
|
3.99
|
|
|
$
|
4.12
|
|
Aggregate intrinsic value
|
|
$
|
40,870
|
|
|
$
|
8,440
|
|
Weighted average contractual term of options
|
|
2.90 years
|
|
|
3.64 years
|
|
Weighted-average options outstanding and exercisable at December 31, 2012 are as follows:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
Average
|
|
|
Weighted
|
|
|
Number
|
|
|
Weighted
|
|
|
|
|
Outstanding at
|
|
|
Remaining
|
|
|
Average
|
|
|
Exercisable at
|
|
|
Average
|
|
Exercise
|
|
|
December 31,
|
|
|
Contractual
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Exercise
|
|
Price
|
|
|
2012
|
|
|
Life
|
|
|
Price
|
|
|
2012
|
|
|
Price
|
|
$
|
2.31
|
|
|
|
12,000
|
|
|
|
1.40
|
|
|
$
|
2.31
|
|
|
|
12,000
|
|
|
$
|
2.31
|
|
|
2.99
|
|
|
|
16,000
|
|
|
|
2.12
|
|
|
|
2.99
|
|
|
|
16,000
|
|
|
|
2.99
|
|
|
3.09
|
|
|
|
35,000
|
|
|
|
8.56
|
|
|
|
3.09
|
|
|
|
7,000
|
|
|
|
3.09
|
|
|
3.24
|
|
|
|
80,000
|
|
|
|
3.55
|
|
|
|
3.24
|
|
|
|
20,000
|
|
|
|
3.24
|
|
|
3.76
|
|
|
|
91,000
|
|
|
|
2.58
|
|
|
|
3.76
|
|
|
|
91,000
|
|
|
|
3.76
|
|
|
5.00
|
|
|
|
77,200
|
|
|
|
2.99
|
|
|
|
5.00
|
|
|
|
77,200
|
|
|
|
5.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.31 - $ 5.00
|
|
|
|
311,200
|
|
|
|
3.54
|
|
|
$
|
3.76
|
|
|
|
223,200
|
|
|
$
|
3.99
|
|
All share-based compensation is measured at the grant date based on the fair value of the award, and is recognized as an expense in earnings over the requisite service period. The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes based stock option valuation model. This model uses the assumptions listed in the table below. Expected volatilities are based on implied volatilities from the Company’s stock, historical volatility of the Company’s stock, and other factors. Expected dividends are based on the Company’s plan not to pay dividends for the foreseeable future. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. There were no stock options granted during the year ended December 31, 2012. The assumptions applied to stock options granted during the year ended December 31, 2011 are as follows: Risk-free interest rate of 1.37%; Expected lives of 5.2 years, and; Expected volatility of 33%.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 9 – INCOME TAXES
The provision for income taxes consists of:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
|
|
|
|
|
Federal
|
|
$
|
581,483
|
|
|
$
|
196,890
|
|
State
|
|
|
123,458
|
|
|
|
23,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
704,941
|
|
|
|
219,926
|
|
|
|
|
|
|
|
|
|
|
Deferred tax expense (benefit)
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(45,512
|
)
|
|
|
258,888
|
|
State
|
|
|
(5,488
|
)
|
|
|
36,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,000
|
)
|
|
|
295,000
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
653,941
|
|
|
$
|
514,926
|
|
The effective income tax rate differs from the federal statutory rate as follows:
|
|
Year Ended December 31,
|
|
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Federal statutory rate
|
|
|
34.00
|
%
|
|
|
34.00
|
%
|
State taxes, net of federal benefit
|
|
|
4.10
|
%
|
|
|
4.74
|
%
|
Permanent differences
|
|
|
-1.96
|
%
|
|
|
0.36
|
%
|
Prior period adjustment
|
|
|
-0.94
|
%
|
|
|
-1.60
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
35.2
|
%
|
|
|
37.5
|
%
|
Permanent differences consist primarily of nondeductible meals and entertainment, nondeductible life insurance premiums, and tax deductions for domestic production activity.
Deferred tax assets and (liabilities) at December 31 consist of:
|
|
2012
|
|
|
2011
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
5,000
|
|
|
$
|
8,000
|
|
Deferred gain on sale-leaseback
|
|
|
83,000
|
|
|
|
97,000
|
|
Stock compensation
|
|
|
11,000
|
|
|
|
-
|
|
Other
|
|
|
53,000
|
|
|
|
40,000
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
152,000
|
|
|
|
145,000
|
|
|
|
|
|
|
|
|
|
|
Prepaids
|
|
|
(34,000
|
)
|
|
|
(54,000
|
)
|
Inventories
|
|
|
(883,000
|
)
|
|
|
(851,000
|
)
|
Depreciation
|
|
|
(289,000
|
)
|
|
|
(345,000
|
)
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
(1,206,000
|
)
|
|
|
(1,250,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liability
|
|
$
|
(1,054,000
|
)
|
|
$
|
(1,105,000
|
)
|
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 10 – RELATED PARTY TRANSACTIONS
The Company provided living accommodations in a manufactured home on the Company’s premises for the Company’s President as additional compensation for security and lock-up services the president provides. Over the years the Company has recorded annual expenses less than $12,000 related to the housing provided for its president. In 2012, the manufactured home was demolished and a new home is being built on the same site, to be used both as a residence for the Company’s President and to accommodate overnight stays for Company guests.
In February 2007 the Company entered into a lease agreement for 59 acres of vineyard land at Elton Vineyards. This lease is for a 10-year term with four five-year renewals at the Company’s option and a first right of refusal in the event of the vineyard’s sale. For 2012, the annual costs of this lease were $114,631. For subsequent years there is an escalation provision tied to the CPI not to exceed 2% per annum. Betty M. O’Brien, a Director of the Company, is a principal owner of Elton Vineyards.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
Litigation
–
From time to time, in the normal course of business, the Company is a party to legal proceedings. Management believes that these matters will not have a material adverse effect on the Company’s financial position, results of operations or cash flows, but, due to the nature of the litigation, the ultimate outcome cannot presently be determined.
Operating leases
– In December 1999, under a sale-leaseback agreement, the Company sold approximately 79 acres of the Tualatin Vineyards property with a net book value of approximately $1,000,000 for approximately $1,500,000 cash and entered into a 20-year operating lease agreement. The gain of approximately $500,000 is being amortized over the life of the lease. This property is referred to as the Peter Michael Vineyard, and includes approximately 69 acres of producing vineyards.
In December 2004, under a sale-leaseback agreement, the Company sold approximately 75 acres of the Tualatin Vineyards property with a net book value of approximately $551,000 for approximately $727,000 cash and entered into a 14-year operating lease agreement for the vineyard portion of the property. Approximately $99,000 of the total gain of $176,000 has been deferred and is being amortized over the life of the lease. This property is referred to as the Meadowview Vineyard, and includes approximately 45 acres of producing vineyards.
The amortization of the deferred gain totals approximately $25,000 per year for the 1999 sale-leaseback agreement and $7,000 for the 2004 sale-leaseback agreement, and is recorded as an offset to the related lease expense in selling, general and administrative expenses.
In February 2007 the Company entered into a lease agreement for 59 acres of vineyard land at Elton Vineyards. This lease is for a 10 year term with four five-year renewals at the Company’s option and a first right of refusal in the event of the vineyard’s sale. For 2012, the annual costs of this lease were $114,631. For subsequent years there is an escalation provision tied to the CPI not to exceed 2% per annum. Betty M. O’Brien, a Director of the Company, is a principal owner of Elton Vineyards. The terms of the lease currently call for a monthly payment of $9,631 with the annual adjustment ending January 2017 unless renewed.
In July 2008 the Company entered into a 34-year lease agreement with a property owner in the Eola Hills for approximately 109 acres adjacent to the existing Elton Vineyards site. These 109 acres will be developed into vineyards in the future. Terms of this agreement contain rent escalation that rises as the vineyard is developed. The current terms call for monthly payments of $274.
The Company has entered into three long-term grape purchase agreements with one of its Willamette Valley wine grape growers. These contracts, entered into in 2004, 2006 and 2007, expire in 2015, 2016 and 2016, respectively. With these contracts, the Company is obligated to purchase, at pre-determined prices, 100% of the crop produced within the strict quality standards and crop loads, equating to maximum payments of approximately $1,500,000 per year. The Company cannot calculate the minimum payment as such a calculation is dependent in large part on an unknown – the amount of grapes produced that meet the strict quality standards in any given year. If no grapes are produced that meet the contractual quality levels, the
grapes may be refused and no payment would be due. The Company received $325,977 and $262,411 worth of grapes from these long-term contracts during the years ended December 31, 2012 and 2011, respectively.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 11 – COMMITMENTS AND CONTINGENCIES
- continued
As of December 31, 2012, future minimum lease payments are as follows for the years ending December 31:
2013
|
|
$
|
345,731
|
|
2014
|
|
|
343,361
|
|
2015
|
|
|
349,879
|
|
2016
|
|
|
356,549
|
|
2017
|
|
|
363,372
|
|
Thereafter
|
|
|
1,200,091
|
|
|
|
|
|
|
Total
|
|
$
|
2,958,983
|
|
The Company is also committed to lease payments for various pieces of office equipment. Total rental expense for these operating leases amounted to $10,000 and $12,800 in 2012 and 2011, respectively. In addition, payments for the leased vineyards have been included in inventory or vineyard developments costs and aggregate approximately $327,837 and $323,270 for the years ended December 31, 2012 and 2011, respectively.
Vineyard development
–
The Company has approximately 183 acres of undeveloped vineyard land at December 31, 2012. This estimated cost to develop this for grape production is approximately $18,000 per acre or $3.29 million in total. The Company estimates that this acreage will be developed as projected sales demand dictates the need for increased grape supply.
NOTE 12 – EMPLOYEE BENEFIT PLAN
In February 2006, the Company instituted a 401(k) profit sharing plan covering all eligible employees. Employees who participate may elect to make salary deferral contributions to the Plan up to 100% of the employees’ eligible payroll subject to annual Internal Revenue Code maximum limitations. The Company may make a discretionary contribution to the entire qualified employee pool, in accordance with the Plan. For the years ended December 31, 2012 and 2011 there were $37,195 and $0 contributions made by the Company to the 401(k) plan, respectively.
NOTE 13 – SEGMENT REPORTING
With the conclusion of the Bacchus Distribution wind-down, the Company now consists of a single operating segment relating to the production and sale of Company wines.
NOTE 14 – DISCONTINUED OPERATIONS
On June 30, 2012, the Company completed the wind-down of Bacchus Distribution. Bacchus Distribution was the Company’s Oregon distribution division, selling both Company produced wines and wines and merchandise purchased from other sources. The decision to wind-down these distribution activities was made due to the increasingly higher regulatory and overhead costs of maintaining Bacchus as an operating unit. Distribution of Company produced wines in Oregon are now performed by an independent distribution company. All sales of purchased wines, and sale of merchandise to retailers, are considered discontinued operations.
Net sales from discontinued operation by Bacchus for the years ended December 31, 2012 and 2011 were $623,557 and $3,337,540, respectively. Cash flows from discontinued operations were $805,045 and $485,393 for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, all purchased wine inventory has been liquidated, and the Company does not expect any further cash flows from discontinued operations.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2012 AND 2011
NOTE 15 – QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Following is a summary of unaudited quarterly financial information for fiscal 2012 and 2011:
|
|
Condensed Consolidated Statements of Income
|
|
Year ended December 31, 2012
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,723
|
|
|
$
|
2,851
|
|
|
$
|
3,156
|
|
|
$
|
3,797
|
|
Gross profit
|
|
|
1,613
|
|
|
|
1,699
|
|
|
|
1,792
|
|
|
|
2,170
|
|
Income from operations
|
|
|
453
|
|
|
|
485
|
|
|
|
581
|
|
|
|
680
|
|
Net income from continuing operations
|
|
|
281
|
|
|
|
276
|
|
|
|
273
|
|
|
|
517
|
|
Net income (loss) from discontinued operations
|
|
|
(95
|
)
|
|
|
(57
|
)
|
|
|
(5
|
)
|
|
|
12
|
|
Net income
|
|
|
185
|
|
|
|
220
|
|
|
|
268
|
|
|
|
530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
$
|
0.10
|
|
Diluted net income per share
|
|
$
|
0.04
|
|
|
$
|
0.05
|
|
|
$
|
0.06
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,887,487
|
|
|
|
4,871,303
|
|
|
|
4,821,084
|
|
|
|
4,813,025
|
|
Diluted
|
|
|
4,891,725
|
|
|
|
4,877,145
|
|
|
|
4,828,038
|
|
|
|
4,822,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed Consolidated Statements of Income
|
|
Year ended December 31, 2011
|
|
Q1
|
|
|
Q2
|
|
|
Q3
|
|
|
Q4
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
2,737
|
|
|
$
|
2,861
|
|
|
$
|
3,423
|
|
|
$
|
3,215
|
|
Gross profit
|
|
|
1,471
|
|
|
|
1,678
|
|
|
|
1,885
|
|
|
|
1,935
|
|
Income from operations
|
|
|
255
|
|
|
|
591
|
|
|
|
821
|
|
|
|
753
|
|
Net income from continuing operations
|
|
|
123
|
|
|
|
310
|
|
|
|
498
|
|
|
|
499
|
|
Net loss from discontinued operations
|
|
|
(96
|
)
|
|
|
(138
|
)
|
|
|
(125
|
)
|
|
|
(213
|
)
|
Net income
|
|
|
27
|
|
|
|
172
|
|
|
|
373
|
|
|
|
286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
Diluted net income per share
|
|
$
|
0.01
|
|
|
$
|
0.04
|
|
|
$
|
0.08
|
|
|
$
|
0.05
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares used in calculation of net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,892,977
|
|
|
|
4,892,977
|
|
|
|
4,892,977
|
|
|
|
4,892,977
|
|
Diluted
|
|
|
4,898,236
|
|
|
|
4,897,150
|
|
|
|
4,896,865
|
|
|
|
4,896,968
|
|
NOTE 16 – SUBSEQUENT EVENTS
In December 2012, the Board of Directors approved a significant remodel and expansion of the Winery’s hospitality center. The Board approved a total project cost of up to $4.5 million. Features of the remodeled and expanded facility include additional barrel storage capacity, a club-members tasting room, a larger general public tasting area, enhanced kitchen services, new spaces for hosting smaller parties, expanded deck seating to capitalize on views from the winery, and a new lawn terrace for large, outdoor events. Management believes that these enhancements will be critical in supporting the future growth of direct-to-consumer sales of Company wines. Construction began in February 2013, and is expected to be finished before the end of 2013.
During March of 2013, the Company entered into a new, $2,000,000 construction loan agreement with Farm Credit Services. The proceeds from the loan will be used to pay for construction costs of the hospitality center remodel and expansion. The Company expects to draw on the construction loan during 2013. Repayment of the loan will be made in equal monthly payments, estimated at approximately $15,500, over the 15 year life of the loan. The loan bears interest at a rate of 4.75%, and is collateralized by real estate and equipment.
The loan is subject to the same covenants as the existing debt to Farm Credit Services.