SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________________
FORM 10-QSB
___________________________________________________________
Quarterly Report Pursuant to Section 13 or 15 (d) of the
Securities Exchange Act of 1934
For the Quarter Ended June 30, 1998
Commission File Number 0-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Exact name of registrant as specified in charter)
Oregon 93-0981021
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
___________________________________________________________
8800 Enchanted Way, S.E., Turner, Oregon 97392
(503)-588-9463
(Address, including Zip code, and telephone number,
including area code, of registrant's principal executive
offices)
___________________________________________________________
Indicate by check mark whether the registrant (1) has filed,
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 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.
[X] YES [ ] NO
Number of shares of common stock outstanding
as of June 30, 1998
4,232,681 shares, no par value
Transitional Small Business Disclosure Format
[ ] YES [X] NO
WILLAMETTE VALLEY VINEYARDS, INC.
INDEX TO FORM 10-Q
Part I - Financial Information
Item 1--Balance Sheet
Statement of Operations
Cash Flow
Notes to Consolidated Financial Statements
Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II - Other Information
Item 4--Exhibits and Reports of Form 8-K
Signature
WILLAMETTE VALLEY VINEYARDS, INC.
Balance Sheet
June 30, December 31,
1998 1997
ASSETS (unaudited) ____________
Current Assets:
Cash and cash
equivalents $ 500,592 $ 13,541
Accounts receivable
trade, net 555,203 820,526
Income taxes receivable 24,436 24,436
Other receivable - 3,122
Inventories 3,870,117 4,171,027
Prepaid expenses 145,570 75,171
Deferred income taxes 94,813 94,813
_______ _________
Total current assets 5,190,731 5,202,636
Vineyard development
cost, net 1,666,477 1,506,906
Property and equipment,
net 6,748,002 6,859,835
Investments 33,584 105,040
Notes receivable 153,861 148,448
Debt issuance costs, net 123,552 122,870
_________ _________
Total assets $ 13,916,207 $ 13,945,735
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Line of credit $ 1,837,667 $ 1,517,297
Current portion
of long term debt 124,192 124,192
Accounts payable 341,985 363,419
Accrued commissions
and payroll 173,250 225,297
Grapes payable - 501,238
________ ________
Total current
liabilities 2,477,094 2,731,443
Long-term debt 4,216,543 3,920,751
Deferred income taxes 188,275 188,275
_________ ________
Total liabilities 6,881,912 6,840,469
Shareholders' equity
Common stock, no par value - 10,000,000
shares authorized, 4,232,681 shares issued
outstanding 6,781,255 6,779,067
Retained earnings 253,040 326,199
________ ________
Total shareholders'
equity 7,034,295 7,105,266
Total liabilities and
shareholders' equity $ 13,916,207 $ 13,945,735
The accompanying notes are an integral part of this
financial statement
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Operations
(Unaudited)
Three months ended Six months ended
June 30, June 30,
1998 1997 1998 1997
Net Revenues
Case Revenue $ 1,338,836 $ 1,260,179 $2,445,721 $2,077,301
Bulk Revenue 88,393 - 323,645 -
Total Revenue 1,427,229 1,260,179 2,769,366 2,077,301
Cost of Sales
Case 599,336 580,512 1,099,293 937,291
Bulk 95,135 - 306,314 -
Total Cost of
Sales 694,471 580,512 1,405,607 937,291
Gross Margin 732,758 679,667 1,363,759 1,140,010
Selling, general and administrative
expense 639,533 585,835 1,207,074 1,087,035
Net operating
income 93,225 93,832 156,685 52,975
Other income
(expense)
Interest income 12,696 8,374 16,265 19,732
Interest expense(123,899) (104,399) (249,756) (184,312)
Other income - 6,323 3,647 8,126
Net loss before
income taxes (17,978) 4,130 (73,159) (103,479)
Income tax benefit - - - -
Net loss (17,978) 4,130 (73,159) (103,479)
Retained earnings beginning
of period 271,018 150,728 326,199 258,337
Retained earnings end
of period 253,040 154,858 253,040 154,858
Basic loss per
common share - - .02 .02
Diluted loss per
common share - - .02 .02
Weighted average number of
basic common shares
outstanding 4,232,681 4,226,096 4,232,681 4,226,096
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Cash Flows
(unaudited)
Six Months Ended June 30,
1998 1997 .
Cash flows from operating activities:
Net loss $ (73,159) $ (103,479)
Reconciliation of net loss to net cash used
for operating activities:
Depreciation and amortization 278,219 233,022
Equity change 2,188 -
Changes in assets and liabilities:
Accounts receivable trade 261,862 (91,588)
Other receivable 6,583 11,623
Inventories 300,910 (722,923)
Prepaid expenses (70,399) (35,330)
Grape payable (501,238) (552,079)
Accounts payable (21,434) 449,358
Taxes payable - (15,000)
Accrued liabilities (52,047) (97,656)
Net cash provided (used) by
operating activities 131,485 (924,052)
Cash Flow from investing activities
Construction expenditures and purchases
of equipment (138,396) (866,680)
Vineyard development expenditures (187,561) (87,138)
Cash received for investments 71,456 (27,868)
Notes receivable (5,413) (4,718)
Net cash used by investing
activities (259,914) (986,404)
Cash Flows from financing activities:
Line of credit borrowings
(repayment) 320,370 620,001
Debt issuance cost (682) (109,881)
Increase in long term debt 295,792 854,417
Net cash provided by financing
activities 615,480 1,364,537
Net increase in cash and cash
equivalents 487,051 (545,919)
Cash and cash equivalents:
Beginning of period 13,541 794,885
End of period 500,592 248,966
The accompanying notes are an integral part of this
financial statement
WILLAMETTE VALLEY VINEYARDS, INC
NOTES TO FINANCIAL STATEMENTS
(unaudited)
1) BASIS OF PRESENTATION
The interim financial statements have been prepared by the
Company, without audit and subject to year-end adjustment,
in accordance with generally accepted accounting principles,
except that certain information and footnote disclosures
made in the latest annual report have been condensed or
omitted for the interim statements. Certain costs are
estimated for the full year and are allocated to interim
periods based on estimates of operating time expired,
benefit received, or activity associated with the interim
period. The financial statements reflect all adjustments
which are, in the opinion of management, necessary for fair
presentation.
Forward Looking Statement:
This Management's Discussion and Analysis of Financial
Condition and Results of Operation and other sections of this
Form 10Q contain forward-looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995.
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. 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. Therefore, 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, successful
assimilation of Tualatin Vineyards Inc.'s business with that
of the Company and other risks detailed below as well as those
discussed elsewhere in this Form 10Q and from time to time in
the Company's Securities and Exchange Commission filings and
reports. In addition, such statements could be effected by
general industry and market conditions and growth rates, and
general domestic economic conditions.
2) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS
FOLLOWS:
June 30, December 31,
1998 1997
Winemaking and packaging
materials $ 109,724 $ 189,062
Work-in-progress (costs relating
to unprocessed and/or bulk
wine products 1,433,850 1,725,910
Finished goods (bottled wines
and related products) 2,326,543 2,256,055
__________ _________
$ 3,870,117 $ 4,171,027
3) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
June 30, December 31,
1998 1997
Land and improvements $ 1,039,742 $ 1,031,115
Winery building and hospitality
center 4,502,037 4,506,344
Equipment 3,397,709 3,263,633
_________ _________
8,939,488 8,801,092
Less accumulated depreciation (2,191,486) (1,941,257)
__________ _________
6,748,002 6,859,835
Management's Discussion and Analysis of
Financial Condition and Results of Operation
RESULTS OF OPERATIONS
Revenue
The Management changes and cost controls instituted late
last year is to bearing fruit. Operating income is up 196%
for the first six months of this year compared with the
first six months of last year.
Price increases combined with sales commission reductions
for in-state sales went into effect July 1. The goal of
this change is to generate a 10% after tax return from
wholesale sales in Oregon. Price increases for out-of-state
sales with the same net return goal go into effect September
1st, due to the lead time needed by the Company's
distributors. Retail prices for all products and
hospitality services, which account for 22% of the Company's
net revenues, were increased by like amounts July 1.
The Management believes the market will accept these price
increases, in large part, due to the high demand for the
Company's wines. Pinot Noir has been on allocation for
several years. Both Pinot Noir and Pinot Gris have had
their release dates advanced several years consecutively due
to high demand. Additionally, the Company's wine prices
were below its competitors for wines of equal quality and
production methods.
The fundamental issues affecting the Company's profitability
are the products it makes and the positioning of those
products in the marketplace. Although the Company's cost of
making and selling wine by the case is nearly the same as
its more profitable competitors, the average collected
revenue per case is considerably less. The Company needs to
make more high margin varietals, especially Pinot Noir, and
less low margin white and blush, off-dry wines. The Company
discontinued its past practice of making and selling low
margin "Lot 27 and 28" Pinot Noir and Chardonnay and
successfully converted Oregon grocery store shelf placements
to higher quality, higher margin "Vintage Series" Pinot Noir
and Chardonnay.
The Management has recently prepared a detailed Five Year
Plan by brand, variety and package size. The Management's
goal is to signicantly increase average gross margins. This
is to be done by re-positioning Willamette Valley Vineyards
branded products, eliminating lower margin products that
interfere with its strategy and take up valuable production
capacity, revitalizing Tualatin with a re-positioning of the
new Tualatin Estate products made in limited quantities and
sold at higher price points and introducing a Southern
Oregon brand of warm climate varieties of Merlot, Syrah,
etc. branded Griffin Creek.
The new Willamette Valley Vineyards Signature Cuvee Pinot
Noir was introduced at the International Pinot Noir
Celebration and selected by Oregon's most prominent
restaurant as one of Oregon's top '96 vintage Pinots. This
wine will retail for $48 per bottle. The '96 Founders'
Reserve Pinot Noir was released at $28 per bottle, up from
$18 the previous vintage, is selling briskly and is expected
to sell out before the '97 vintage is ready to release.
Next year, the new '97 Single Vineyard Designated Pinots
will be released at $35 per bottle.
The Tualatin Brand has been revitalized with better wines
and a new label, Tualatin Estate. Its flagship Pinot Noir
will be launched as the '97 Vintage in April 1999 and will
retail for $21.50 per bottle, up from $12.50 under the
previous ownership. The Tualatin White Riesling previously
selling for $5 per bottle, has been replaced with a dry
Tualatin Estate Riesling retailing for $8.50 per bottle.
The Griffin Creek Merlot will be released in September 1998
and will retail for $30 per bottle.
Other issues that are affecting profits are the production
facilities at Tualatin and the sizable investment in
Hospitality and Retail facilities at Willamette Valley
Vineyards. Management is pursuing ways to lease the
mothballed wine production facilities at Tualatin Estate and
increase the paid usage of the Hospitality facilities at
Willamette Valley Vineyards.
The Company's ability to make more and better Pinot Noir is
constrained by fruit supply. Management has planted all the
remaining acreage at Tualatin Estate (46 acres) in Pinot
Noir this year, which will provide 150 more tons at full
production. Tualatin is the only vineyard in Oregon to have
won the Governor's Trophy, the state's most prestigious wine
award, two years consecutively for its Pinot Noir.
Management believes Tualatin Estate's soil and climate
produces among the highest quality Pinot Noir in Oregon.
Winery Operations
The Company's revenues from winery operations before the
deduction of excise taxes are summarized as follows:
Three Months ended Six Months ended
June 30, June 30,
1998 1997 1998 1997
Tasting Room Sales and
Rental Income $ 223,549 $ 211,304 $ 378,329 $ 351,902
On-site and off-site
festivals 107,596 92,391 225,500 178,013
In state sales 575,834 462,258 1,001,897 779,222
Out of state sales 499,648 510,175 936,838 808,301
Bulk wine sales 88,393 37,724 323,645 37,724
Total Revenue $1,495,020 $1,313,852 $2,866,209 $2,155,162
Less Excise Taxes 67,791 53,673 96,843 77,861
Net Revenue $1,427,229 $1,260,179 $2,769,366 $2,077,301
Tasting Room sales and rental income for the three months
ended June 30, 1998 increased 6% over the same period in
1997. For the first six months of 1998, the sales
increased 8% over the same period in 1997. To promote
continual growth in revenue in the hospitality and rental
program, the Company has contracted its hospitality and
catering service to an outside company. This move has saved
the Company the annual salary of one employee plus offering
the customer a more complete set of services. The Company
will utilize this savings to hire a data entry person to
focus on improving the Company's customer data base which
will improve the Company's efforts in targeting and further
developing direct mail and telephone sales.
On-site and off-site festival sales for the three months
ended June 30, 1998 increased 16% over the second quarter of
1997. For the first half of 1998, sales in this category
increased 27% over the same period in 1997. During the
second quarter of 1998, the Company initiated a phone and
direct mail campaign to obtain orders from the its customer
data base. Additional revenues from on site phone and mail
orders amounted to $28,000 in the second quarter over the
same period last year.
Sales in the state of Oregon, through the Company's
independent sales force, increased 25% in the three months
ending June 30, 1998 over the same period in 1997. For the
first half of 1998, the sales increased 29% over the same
period in 1997. The sales of White Riesling in a special
package in the first and second quarters of 1998 led to
increases of $71,000 and $27,000 respectively over the same
periods in 1997. The Company's focus on the sale of higher
margin products achieved significant increases in sales of
Pinot Gris and Pinot Noir in the first half of 1998 as
compared to sales in the same period for 1997. The Company
also started a program to place its wine in the top 48
restaurants in the Portland area. So far it has been placed
in about 50% of these restaurants where the Company's wine
had not previously appeared on their wine list. This is a
substantial move in making the Willamette Valley Vineyards
brand the significant player in the largest population
center in Oregon. The Company has also initiated a program
to do a shelf survey at different locations around the state
regarding competitor pricing and the location of the
Company's wine on the shelves of supermarkets. This data
will be used to prepare a marketing program to strengthen
the Company's position in markets where its wine is not
currently found.
The May 15, 1998, issue of the Wine Spectator magazine rated
the 1996 Willamette Valley Vineyards Chardonnay as a leading
"top pick\best buy" in the world class category. The
article also quoted Harvey Steiman, editor at large,
"Willamette Valley Vineyards, Oregon's second largest
winery, is on its way to becoming that state's most reliable
producer of widely available wine...The best is yet to
come." With that great endorsement, the Company spent a
considerable amount of funds in advertising to project the
Company's Chardonnay image as a best value in its class.
The funds were spent to project the Company's brand as a
leading brand of Oregon wineries. In the months of May and
June, the Company sold 1,563 cases of Chardonnay as compared
to 808 cases in the prior year.
Out-of-state sales in the three months ending June 30, 1998,
decreased 2% over the same period in 1997. For the first
half of 1998, sales increased 16% over the same period in
1997. The slight decrease in sales was due to a selling off
of inventory by distributors purchased in the fourth quarter
of 1997 and the first quarter of 1998. The Company now sells
wine in 39 states as compared to 33 states in the first half
of 1997. The Company experienced growth in the first half of
1998 in two varieties of wine: Pinot Noir and Pinot Gris.
The programmed price reduction of Pinot Gris increased the
number of cases sold in the first half of 1998 to 1,829
cases as compared to 709 cases in the same period in 1997.
Pinot Noir sales increased to 7,520 cases in the first half
of 1998 as compared to 6,079 for the same period in 1997.
This increase in the Pinot Noir variety reaffirms that sales
of the Company's flagship wine remain quite strong.
Bulk wine sales were made in the first half of 1998 to
further reduce excess inventories from the large harvest of
1997.
Excise taxes
The Company reports its excise taxes as a deduction of sales
revenue to equal net revenue (as shown on the Statement of
Operations). The amount for the first half of 1998 was
$96,843. For the same period in 1997, the excise taxes
collected was $77,861.
Gross Margin
Winery Operations
As a percentage of revenue, gross margin for the winery
operations decreased to 51% for the quarter ending June 30,
1998 as compared to 54% in the second quarter of 1997. For
the first half of 1998, the gross margin decreased to 49%
as compared to 55% for the first half of 1997. After
adjusting for the lower margin bulk wine sales, the gross
margin would have been 55% for the quarter ending June 30,
1998 as compared to 54% for the same period in 1997. For the
first half of 1998, the adjusted gross margin would have
been 55% as compared to 56% in the first half of 1997. The
slight decrease in margin for the first six months of 1998
was due to the depletion allowances designed to stimulate
sales and reduce excess inventory. The Company expects the
gross margins to remain near this level through 1998. In
the past few years, the Company has experienced higher
production costs, specifically in the price of grapes that
it purchases from other vineyards. In order to keep
margin's at a sustained level, the Company has expanded its
marketing efforts to sell higher priced wines which have a
greater profit margin.
Selling, General and Administrative Expense
Selling, general and administrative expenses increased 9% to
$639,533 in the second quarter of 1998 from $585,835 in the
second quarter of 1997. For the first half of 1998,
selling, general and administrative expenses increased 11%
to $1,207,074 from $1,087,035 in the first half of 1997.
The increase was principally attributed to higher costs due
to operating at a higher sales level. The Company pays its
in-state sales representatives by commission and this is
included as a selling expense. Thus, as sales in state
increase, the dollar expenditure for commissions increases
at the same rate. Since commissions are based on a fixed
percentage, there is no adverse effect to margin. The total
commissions expense for the first half of 1998 was $93,000
more than the same period in 1997.
More importantly, as a percentage of revenue from winery
operations, selling, general and administrative expenses
decreased to 45% in the second quarter of 1998 from 46% in
the second quarter of 1997. For the first half of 1998, as
a percentage of revenue from winery operations, selling,
general and administrative expenses decreased to 44% from
52% in the second quarter of 1997. The effect of reduction
in staff personnel in the latter part of 1997 is partially
reflected in a lower percentage of expenses against
revenue. In addition, the reorganization of delivery routes
in the remote areas of Oregon resulted in the elimination of
two vans and accompanying costs. Also, in the first quarter
of 1998, the Company highlighted certain expenses on a
"target list" due to excess spending in 1997 in these
accounts. The most significant cost reduction in the first
quarter of 1998 was a $17,000 reduction in legal fees over
last year's first quarter. Other targeted areas for reduced
spending include telephones, office supplies, dues and
publications, and printing and postage. The Company closely
monitors all expenses in the selling, general, and
administration and measures all departments strictly against
their own budgets.
Interest Income, Other Income and Expense
Interest income/other income decreased to $12,696 for the
second quarter of 1998 from $14,697 for the second quarter
of 1997 because the Company no longer receives interest
income from invested funds set aside for the completion of
the storage facility. For the first half of 1998, interest
income/other income decreased to $19,912 from $27,858 for
the first half of 1997.
Interest expense increased to $123,899 in the second quarter
of 1998 from $104,399 in 1997. For the first half of 1998,
interest expense increased to $249,756 from $184,312 for
the second half of 1997. Interest costs in the first half
rose as the Company borrowed more funds to process and
bottle wine from its 1996 and 1997 crushes ; to finance the
construction of a 20,000 square foot warehouse; and
purchase Tualatin Vineyards Inc., in 1997. Additional cash
needs have resulted from the Company becoming a larger
grower of grapes which means the company needs more cash
prior to the actual harvest of grapes for labor and
chemicals costs not needed previously.
Income Taxes
As in prior years, the Company has operated with a seasonal
net loss for the first six months in 1998, but expects to
show a profit by the end of 1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had a working capital balance
of $2.7 million and a current ratio of 2.1:1. At December
31, 1997, the Company had a working capital balance of $2.5
million and a current ratio of 1.9:1.
The Company has a cash balance of $500,592 at June 30, 1998.
Of the total cash available, the Company has set aside funds
in reserve or various future commitments. It has committed
$61,000 for a dispute with a contractor over the completion
of the storage facility built in 1997. The Company is
retaining the funds until the contractor corrects several
problems in the building. Also, at June 30, 1998, the
Company has held $170,000 in reserve to complete the
planting of 60 acres at Tualatin Vineyards. This amount
remained from a $1.3 million loan taken out in April of 1997
to purchase Tualatin Vineyards and to plant additional
acreage at Tualatin. The remaining cash will be used as
operating funds in the next month.
The Company obtained a line of credit of $2,000,000 from
Farm Credit Services in May, 1997 and renewed in May 1998
for a one year term. At June 30, 1998, the line of credit
balance was $1,837,667.
The Company has a total long term debt balance of $4,340,735
owed to Farm Credit Services. This debt was used to finance
the Hospitality Center, invest in winery equipment to
increase capacity, complete the storage facility, and
purchase Tualatin Vineyards. The long term debt increased
in the first half of 1998 as Farm Credit disbursed the
remaining funds to plant additional vineyards at Tualatin.
Since May of 1998, the company meets all compliances on its
long term loan with Farm Credit Services.
At June 30, 1998, the Company has paid all grape contracts
for the 1997 fall production crop and has contracted
approximately $1.1 million for the 1998 harvest.
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.
(a) Status of Computer Software for the year 2000.
The Company uses Platinum SQL software for all of
its financial reporting. The Company's software manufacture
has reported in writing that all of its products are in
compliance for use in the year 2000 and has been since its
inception. Platinum SQL will operate correctly with dates in
the year 2000 and beyond.
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of
1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
Date: By /s/ James W Bernau
James W Bernau
President
Date: By /s/ John Moore
John Moore
Controller
SIGNATURES
Pursuant to the requirements of the Security Exchange Act of
1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
Date: ______________________
By James W Bernau
President
Date: ______________________
By John Moore
Controller
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