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 March 31, 1999
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 March 31,
1999
4,237,231 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
Item 1 FINANCIAL STATEMENTS
WILLAMETTE VALLEY VINEYARDS, INC.
Balance Sheet
March 31, December 31,
1999 1998
ASSETS (unaudited)
___________ ____________
Current Assets:
Cash and cash equivalents $ 128,570 $ 149,401
Accounts receivable trade,
net 360,778 371,537
Income taxes receivable 24,436 24,436
Inventories 4,821,002 4,601,808
Prepaid expenses and other
current assets 109,602 86,986
Deferred income taxes 234,203 234,203
_______ _________
Total current assets 5,678,591 5,468,371
Vineyard development cost,
net 1,921,382 1,892,538
Property and equipment, net 6,747,092 6,790,985
Investments 4,974 4,974
Notes receivable 47,788 46,937
Debt issuance costs, net 116,661 119,244
Other assets 67,813 67,813
_________ _________
Total assets $ 14,584,301 $ 14,390,862
=========== ===========
LIABILITIES AND SHAREHOLDERS EQUITY
Current liabilities
Line of credit $ 1,952,667 $ 1,652,667
Current portion of
long term debt 191,176 191,176
Accounts payable 519,271 315,185
Accrued commissions
and payroll 108,161 213,210
Grapes payable 519,363 581,294
________ ________
Total current liabilities 3,290,638 2,953,532
Long-term debt 4,089,491 4,101,772
Deferred income taxes 300,083 300,083
_________ ________
Total liabilities 7,680,212 7,355,387
Shareholders' equity
Common stock, no par value - 10,000,000
shares authorized, shares issued
outstanding 6,789,056 6,781,256
Retained earnings 115,033 254,219
________ ________
Total shareholders' equity 6,904,089 7,035,475
Total liabilities and
shareholders' equity $ 14,584,301 $ 14,390,862
The accompanying notes are an integral part of this
financial statement
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Operations
(Unaudited)
Three months ended March 31,
1999 1998
Net Revenues
Case Revenue $ 1,116,236 $ 1,106,885
Bulk Revenue - 235,252
___________ ___________
Total Revenue 1,116,236 1,342,137
Cost of Sales
Case 501,705 499,957
Bulk - 211,179
___________ ___________
Total Cost of Sales 501,705 711,136
Gross Margin 614,531 631,001
Selling, general and
administrative expense 646,009 567,541
___________ ___________
Net operating income (31,478) 63,460
___________ ___________
Other income (expense)
Interest income 2,026 3,569
Interest expense (109,923) (125,857)
Other income 189 3,647
___________ ___________
Net loss before income taxes (139,186) (55,181)
Income tax benefit - -
___________ ___________
Net loss (139,186) (55,181)
___________ ___________
Retained earnings beginning of
period 254,219 326,199
Retained earnings end of period 115,033 271,018
Basic gain (loss) per
common share (.03) (.01)
Diluted loss per common share (.03) (.01)
Weighted average number of
basic common shares
outstanding 4,237,231 4,232,681
WILLAMETTE VALLEY VINEYARDS, INC.
Statement of Cash Flows
(unaudited)
Three Months Ended March 31,
1999 1998
___________ ___________
Cash flows from operating activities:
Net loss $ (139,186) $ (55,181)
Reconciliation of net
loss to net cash used
for operating activities:
Depreciation and
amortization 176,686 119,440
Changes in assets and
liabilities:
Accounts receivable trade 10,759 36,089
Other receivable - (4,590)
Inventories (219,194) 209,599
Prepaid expenses (22,616) (47,529)
Grape payable (61,931) (114,387)
Accounts payable 204,087 (16,619)
Accrued liabilities (105,049) (73,049)
___________ ___________
Net cash provided (used)
by operating activities (156,444) 53,773
Cash Flow from investing activities
Construction expenditures
and purchases of equipment(115,735) (13,124)
Vineyard development
expenditures (45,903) (67,419)
Cash received for
investments - -
Notes receivable (851) (2,701)
__________ _________
Net cash used by
investing activities (162,489) (83,244)
__________ _________
Cash Flows from financing activities:
Line of credit
borrowings (repayment) 300,000 150,000
Debt issuance cost 2,583 (600)
Equity change 7,800 2,189
Increase in long term debt (12,281) 286,489
__________ _________
Net cash provided by
financing activities 298,102 438,048
__________ _________
Net increase in cash and
cash equivalents (20,831) 408,577
Cash and cash equivalents:
Beginning of period 149,401 13,541
__________ _________
End of period 128,570 422,188
========= =======
The accompanying notes are an integral part of this
financial statement
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 disclosure 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 10QSB 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 10QSB and from
time to time in the Company's Securities and Exchange
Commission filings and reports. In addition, such statements
could be affected by general industry and market conditions
and growth rates, and general domestic economic conditions.
2) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS
FOLLOW:
March 31, December 31,
1999 1998
Winemaking and packaging materials $ 311,649 $ 211,550
Work-in-progress (costs relating
to unprocessed and/or bulk
wine products 2,215,833 1,923,852
Finished goods (bottled wines 2,293,520 2,466,406
and related products) _________ _________
$ 4,821,002 $4,601,808
========= =========
3) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING:
March 31, December 31,
1999 1998
Land and improvements $ 1,041,634 $ 1,041,326
Winery building and hospitality
center 4,530,576 4,539,821
Equipment 3,840,284 3,715,612
_________ _________
$ 9,412,494 $9,296,759
Less accumulated depreciation (2,665,402) (2,505,774)
_________ _________
$ 6,747,092 $6,790,985
========= =========
4) SUBSEQUENT EVENTS:
ITEM 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The first quarter of 1999 marks a dramatic shift in the
Company's brand and sales strategy. These changes began in
1998 with a shift toward higher quality, higher margin
wines. Most of these new wines, like the 1996 Signature
Cuvee Pinot Noir and the Griffin Creek Merlot, are now just
being introduced into the Company's distribution system by a
new professional sales staff. During the first quarter of
1999, the Company made the transition from using stockholder
agents to higher compensated Eastern and Western Sales
Managers. In addition, the Company's management, including
the President, Winemaker, Western and Eastern Sales
Managers, made personal visits and sales presentations to
its top distributors in many parts of the country in the
first quarter of 1999.
While the Company has always produced a net loss in the
first quarter, the weakest quarter in the industry, these
losses were higher than normal due to the costs of the
changes in sales organization noted above, delays in
receiving labels from its outside vendor which prevented the
releases of key high margin products and the lower than
expected retail sales due to a longer than expected period
of poor weather.
The Company's focus on making the best wines from Oregon is
working. Clive Coats, Master of Wine, in his January issue
of THE VINE rated the 1996 Signature Cuvee Pinot Noir the
best of the 1996 vintage of Oregon Pinot Noirs. THE WINE
SPECTATOR, in the May 31, 1999 issue, gave a 91 score to the
1996 Griffin Creek Merlot, the highest score ever received
by an Oregon Merlot.
The higher quality, higher margin wines are nearing their
release dates. The Tualatin Estate 1997 Chardonnay will be
released in June, and the 1997 Pinot Noir in the late fall.
The Griffin Creek 1997 Syrah, Viognier and Merlot will be
released this fall. The new Single Vineyard Designated
Willamette Valley Vineyards Pinot Noirs will also be ready
to release this fall.
The Company continues to work on integrating the wine
acquired as part of the acquisition of Tualatin Estate
Vineyards. The older vintages of Tualatin Estate Chardonnay
do not meet the quality standards for the new Tualatin
Estate label. In addition, the depreciation from the
Tualatin facility, which is not currently operating, is now
charged directly to the costs of goods of the Tualatin wine
sold in the first quarter of 1999, thereby reducing the
gross margin from a profitable 55% down to an unprofitable
26%.
Revenue
Winery Operations
The Company's revenues from winery operations are summarized
as follows:
Three Months Ended
March 31,
1999 1998
Tasting Room sales & Rental Income $ 150,497 $ 154,780
On-site and off-site festivals 114,415 117,904
In state sales 415,895 426,063
Out of state sales 457,619 437,190
Bulk wine sales 16,965 235,252
_________ _________
Gross Revenue $1,155,391 $ 1,371,189
Less Excise Taxes 39,155 29,052
Net Revenues 1,116,236 1,342,137
========= =========
Tasting Room sales and rental income for the three months
ended March 31, 1999 decreased 3% to $150,497 in 1999 from
$154,780 for the same period in 1998. Sales in the Tasting
Room increased slightly during the first quarter of 1999.
The rental income received during the quarter from the
Company's Hospitality Facility decreased by $5,000 in the
first quarter of 1999 over the same period in 1998. The
Company contracts out its hospitality and catering service
in order to reach a greater number of clientele and to
service the customer with a wider variety of products.
On-site and off-site festival sales for the first quarter of
1999 decreased 3% to $114,415 from $117,904 over the first
quarter of 1998. In January 1999, the Company held an
initial successful Crab Festival at its facility to pair its
Chardonnay wine with crab. The Company joined forces with a
local seafood restaurant to educate its customers on the
pairing of wine with a popular seafood. The Company plans
to hold similar events in the future where it will pair
certain types of wine with local food products. Sales for
the quarter dropped due to the festival in March which was
poorly attended because of weather and resulted in a drop in
overall revenue in this category.
Sales in the state of Oregon, through the Company's
independent sales force, decreased 2% to $415,895 in the
first quarter of 1999 from $426,063 over the first quarter
of 1998. Although the revenue was down 2%, the actual
number of cases decreased by 15% from the first quarter of
1999 over the first quarter of 1998. The decrease was
offset, in part, by the increase in the average sales price
per case resulting from a price increase in July of 1998.
The Company's sales from secondary Lot 27 and Lot 28 brands
of Chardonnay and Pinot Noir also decreased in the first
quarter of 1999 as compared to the same quarter in 1998.
The Company made a decision to replace both brands with its
higher priced vintage series in all of its major chain
stores. This resulted in slower sales but the Company
revenues were not greatly effected. The overall effect of
this action increased the average sales price, but still
resulted in a 2% decrease in sales.
Out-of-state sales in the first quarter of 1999 increased 5%
to $457,619 from $437,190 over the first quarter of 1998.
In September of 1998, the Company increased its prices to
all out-of-state distributors in order to strengthen its
profitability. The Company expected a reduction in case
sales but believed the increase in price would offset slower
sales. The Company's strategy is to increase the average
sales price per case in 1999.
Bulk wine sales were made in the first quarter of 1998 to
further reduce excess inventories from the large harvest of
1997. The Company did not have any excessive inventory from
its 1998 crush thus there was a reduction in bulk sales in
the first quarter of 1999.
Excise taxes
The Company reports its excise taxes as a deduction of sales
revenue to equal net revenue (that is shown on the Statement
of Operations). The amount for the first quarter of 1999
was $39,155. For the same period in 1998, the excise taxes
collected were $29,052.
Gross Profit
Winery Operations
As a percentage of revenue, gross profit for the winery
operations decreased to 55% in the first quarter of 1999 as
compared to 47% in the first quarter of 1998. After
adjusting for the sale of lower margin bulk wine, the gross
margin was 55% in the first quarter of 1998. The Company
expects the gross margins to remain near this level through
1999. In the past few years, the Company has experienced
higher production costs, specifically in the price of grapes
that it purchases from other vineyards and the cost to
upgrade its labels and the package presentation of its
product. In order to keep margins 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 14%
to $646,009 in the first quarter of 1999 from $567,541 in
the first quarter of 1998. As a percentage of revenue from
winery operations, selling, general and administrative
expenses increased to 58% in the first quarter of 1999 from
42% in the first quarter of 1998. The increase was
principally attributed to higher costs due to implementing a
more effective sales organization. In the first quarter of
1999, the Company hired East Coast and West Coast Sales
Managers, which increased its selling cost significantly.
The largest expenditures came in travel and entertainment
expenses, which increased by $25,000 as each manager made
personal visits to the distributors in their assigned areas.
Also there was a direct salary expense increase of $21,000
over the same period in 1998. During this same time period,
the Company continued to pay commissions to its sales
representatives who were not terminated until April, 1999.
Throughout the rest of 1999, the Company expects the cost of
hiring these Sales Managers will be offset by the
commissions savings which would have been paid to the now
terminated sales representatives. The Company recognized and
budgeted for these additional expense in the first quarter
of 1999 because it needed to invest in a more professional
staff, which the Company believes will better represent the
Company and its products leading to additional sales
volumes.
Interest Income, Other Income and Expense
Interest income/other income decreased to $2,215 for the
first quarter of 1999 from $7,216 for the first quarter of
1999. Interest expense decreased to $109,923 in the first
quarter of 1999 from $125,857 in 1998. Interest costs were
lower because to the Company paid additional interest in
1998 to renegotiate its long term loans to lower its rates
over the term of the loans. Also in the first quarter of
1999, the Company capitalized $7,258 of interest cost to
vineyard development for money borrowed to plant grapes at
Tualatin Estate. It is the Company's goal to reduce its
debt over time to ease the heavy burden of interest cost and
provide better financial flexibility.
Income Taxes
As in prior years, the Company has operated with a net loss
for the first three months in 1999 but expects to show a
profit by the end of 1999.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had a working capital balance
of $2.4 million and a current ratio of 1.7:1. At December
31, 1998, the Company had a working capital balance of $2.5
million and a current ratio of 1.9:1.
The Company had a cash balance of $128,570 at March 31,
1999. The Company has $119,447 in funds from Farm Credit
Services committed to complete the planting at Tualatin
Vineyards in 1999. These remaining funds are from a $1.3
million loan taken out in April of 1997 to purchase Tualatin
Vineyards and to plant additional acreage at Tualatin. The
Company receives approximately 6% interest on these funds
until the time the funds are withdrawn from Farm Credit
Services to pay for the new plantings.
On March 31, 1999 the Company obtained an increase in its
line of credit from Farm Credit Services. At March 31,
1999, the line of credit balance was $1,952,667. The
Company raised the line of credit to $2,500,000 from
$2,000,000 to meet the Company cash needs in 1999 until
renewal in March 2000.
As of March 31, 1999, the Company had a total long term debt
balance of $4,280,667 owed to Farm Credit Services. This
debt was used to finance the Hospitality Center, invest in
winery equipment to increase the Company's winemaking
capacity, complete the storage facility, and purchase
Tualatin Vineyards. At December 31, 1998 the Company was in
violation of one of its debt coverage covenants. Farm
Credit Services has released the Company from complying to
this one covenant. Farm Credit Services has notified the
Company that unless it is able to correct the violation of
the debt coverage covenant and reduce borrowing under the
line of credit to $1,900,000 at December 31, 1999 that it
can make no assurances for continued financing under the
line of credit beyond the May 1, 2000 operating loan
maturity date.
At March 31, 1999, the Company still owed $519,363 on grape
contracts for the 1998 fall harvest. Of this amount, the
Company paid $302,095 on April 1, 1999 from its line of
credit. After this payment the total amount outstanding was
$2,250,000 on its line of credit. As of April 1, 1999, a
balance of $217,268 remains payable to a grape grower, which
will be paid as the wine is sold.
YEAR 2000 COMPLIANCE
The Company began to develop its strategy in the first part
of 1998 to make itself "business ready" for the year 2000.
Its first step was to make all levels of the Company aware of
the basic problems that the Company can expect as the year
2000 approaches. Each month the Company holds an all staff
meeting. The Company began to set aside time in each meeting
to discuss the problem in detail. The Company has made
educational awareness and education a priority in 1999. The
Company's small staff makes it easy to communicate with its
employees and develop strategy plans.
In November of 1998, the Company's outside computer
consultants identified each of the different computer based
systems which support the Company's business and production
needs. Once the equipment was identified, tests were
performed to determine which equipment passed or failed the
Y2K compliance testing. A list of the equipment was made and
the Company started to replace the critical equipment
immediately. From its plan the Company expects to replace
the majority of the effected equipment by the year 2000. At
this date, there are only two pieces of equipment for which
the test results have not been received. These are the
telephone system and the tank control system. The Company
expects that both of these systems will be corrected if
necessary by the year 2000.
Based on tests performed by the consultants and on contacts
equipment manufacturers, the Company is beginning its
assessment evaluation to determine the severity of the
problem and what needs to be fixed. All critical items on
the equipment list have been addressed, including the
financial reporting, networking communications, and Point-of-
Sale system in the tasting room. As of March 31, 1999, the
Company has spent $15,000 on software and hardware upgrades
in 1998 and expects to spend an additional $30,000 in 1999 to
insure that its basic needs are taken care of by December 31,
1999.
Due to the nature of the winemaking business, the Company
feels most of the critical needs are now fulfilled. The
Company is currently testing all temperature control systems
for its stainless steel tanks and is prepared to take any
necessary action to make them compliant for the year 2000.
However, in January, typically, there is very little activity
on the production side of the winery. At this time, the wine
is aging in stainless steel tanks and oak barrels. It will
not be necessary to bottle any wine during the first few
months after January 2000 unless a need arises. The Winery's
average temperature ranges from 40 to 50 degrees in these
months so the wine will not be in danger of spoiling.
The Company has prepared a short survey to mail to its
primary vendors and all distributors to inquire as to their
abilities for compliance in the year 2000. The surveys were
sent out in the first part of May 1999 with a response
requested by May 17, 1999. From the returned survey, the
Company will determine any critical needs to be met by the
end of the year. The majority of the Company's customers in
the state of Oregon are on a cash-collected-at-delivery basis
so there is no need to see if their payable software is
compliant for the year 2000. The out-of-state customers will
need to assure the Company that their business is 2000 year
ready.
PART II. OTHER INFORMATION
Item 4 Exhibits and Reports on Form 8-K.
(a) No Exhibits
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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<PERIOD-END> MAR-31-1999
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