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11. COMMITMENTS AND CONTINGENCIES
 12 Months Ended
Dec. 31, 2012
Notes to Financial Statements  
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.

 

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.