June 24, 1999
United States Securities and
Exchange Commission
450 5th Street, NW
Washington, DC 20549
Re: Willamette Valley Vineyards, Inc.
Filing of Proxy Materials
To Whom it May Concern:
The following proxy materials are being filed electronically
via EDGAR for Willamette Valley Vineyards, Inc.
1. The proxy statement and form of proxy;
2. The proxy statement cover sheet;
3. Amendment to the Willamette Valley Vineyards, Inc.
1992 Stock Incentive Plan, see "Approval of Amendment to the
1992 Stock Incentive Plan" in Proxy Statement
The 1998 Annual Report will be filed, for informational
purposes only, in paper format since no parts of such Annual
Report are incorporated by reference into the Definitive
Proxy Soliciting materials.
The Company confirms that, following approval of the
amendment to the Willamette Valley Vineyards, Inc. 1992
Stock Option Plan, the Company will file a Registration
Statement of Form S-R with the Commission prior to the
issuance of such shares thereunder.
Thank you for your assistance.
Sincerely,
James Ellis
Vice President of Corporate
Willamette Valley Vineyards, Inc.
United States
Securities and Exchange Commission
Washington, DC 20549
Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934
Filed by the Registrant [ x ]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as
permitted by Rule 14a -6(e)(2))
[ x ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to section 240, 14a-
11(c) or Section 240, 14a-12
Willamette Valley Vineyards, Inc.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (check the appropriate box):
[ x ] No fee required
[ ] Fee computed on table below per Exchange Act Rules
14a-6(1)(1) and 0-11
1) Title of each class of securities to
which transaction applies;
2) Aggregate number of securities to which
transaction applies;
3) Per unit price or other underlying value
of transaction computed pursuant to
Exchange Act Rule 0-11 (set forth the
amount of which the filing fee is
calculated and state how it was
determined);
4) Proposed maximum aggregate value of
transaction;
5) Total Fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as
provided by Exchange Act Rule 0-11(a)(2) and
identify the filing for which the offsetting
fee was paid previously. Identify the previous
filing by registration statement number, or the
Form or Schedule and the date of its filing,
1) Amount Previously Paid;
2) Form, Schedule or Registration Statement
No.;
3) Filing Party;
4) Date Filed:
Notice of Annual Meeting of Shareholders
July 25, 1999
1:00 PM, Pacific Daylight Time
Turner Oregon
June 17, 1999
Dear Shareholder:
You are cordially invited to the Annual Meeting of
Shareholders (the "Annual Meeting") of Willamette Valley
Vineyards, Inc. (the "Company"), which will be held on
Sunday, July 25, 1999 at 1:00 PM, Pacific Daylight Time on
the grounds of the Company's Tualatin Estate Vineyards,
10850 NW Seavey Road, Forest Grove, Oregon 97116. We look
forward to seeing as many of our shareholders as possible
and hope that you will attend the meeting. Enclosed, for
your review, are the Company's Proxy Statement (including
the Proxy Ballot), the Annual Report and, as usual, a Wine
Order Form.
The Annual Meeting is being held for the following purposes:
1. To elect a Board of Directors to hold office until
the next Annual Meeting of Shareholders or until
their respective successors have been elected or
appointed;
2. To approve an amendment to the Company's 1992 Stock
Incentive Plan, that would allow the participation
of the Company's distributors and their salespersons
in the Plan as a sales incentive;
3. To ratify the appointment by the Board of Directors
of PricewaterhouseCoopers LLP as the Company's
independent auditors for the fiscal year ending
December 31, 1999; and
4. To transact such other business as may properly come
before the Annual Meeting or any adjournment or
postponement thereof.
These items are fully discussed in the Proxy Statement.
Only shareholders of record at the close of business on June
11th, 1999, the record date established by the Board of
Directors, will be entitled to vote at the Annual Meeting.
A list of shareholders entitled to vote will be available
for inspection at the Company's offices for a period
commencing two days after the date of this Notice and
lasting until the Annual Meeting.
Shareholders are requested to complete, date, sign, and
return the enclosed Proxy Ballot as promptly as possible.
Whether or not you attend the Annual Meeting, it is
important that your shares be represented and voted at the
meeting. If you decide to attend the Annual Meeting and
vote in person, you will have the opportunity.
The Board of Directors
By: James L. Ellis
Board Secretary
Table of Contents
Notice of Annual Meeting Front Cover
Proxy Statement 1
Annual Report to Shareholders 7
Financial Statement 16
Charts and Graphs 17
Audited Financials F1-F17
Report of Independent Accounts F1
Balance Sheet F2
Statement of Operations F3
Statement of Shareholder's Equity F4
Statement of Cash Flows F5
Notes to Financial Statements F6-F17
WILLAMETTE VALLEY VINEYARDS
8800 ENCHANTED WAY SE * TURNER, OR 97392
(503)588-9463 * (800)344-9463
FAX (503)588-8894 * WWW.WVV.COM
PROXY STATEMENT
for
ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON JULY 25, 1999
INTRODUCTION
General
This Proxy Statement (the "Proxy Statement") is being
furnished to the shareholders of Willamette Valley
Vineyards, Inc., an Oregon corporation ("the Company"), as
part of the solicitation of proxies by the Company's Board
of Directors (the "Board of Directors") from holders of the
outstanding shares of the Company's Common Stock, no par
value (the "Common Stock"), for use at the Company's Annual
Meeting of Shareholders to be held on July 25, 1999, and at
any adjournments or postponements thereof, (the "Annual
Meeting"). At the Annual Meeting, shareholders will be
asked to (i) elect seven members of the Board of Directors,
(ii) approve an amendment to the 1992 Stock Incentive Plan,
(iii) ratify the appointment by the Board of Directors of
PricewaterhouseCoopers LLP as independent auditors of the
Company for the year ending December 31, 1999, and (iv)
transact such other business as may properly come before the
meeting or any adjournments thereof. This Proxy Statement,
together with the enclosed Proxy Ballot, is first being
mailed to the Company's shareholders on or about June 20,
1999.
Solicitation, Voting and Revocability of Proxies
The Board of Directors has fixed the close of business on
June 11, 1999 as the record date for the determination of
the shareholders entitled to notice of and to vote at the
Annual Meeting. Accordingly, only holders of record of
shares of Common Stock at the close of business on such date
will be entitled to vote at the Annual Meeting, with each
such share entitling its owner to one vote on all matters
properly presented at the Annual Meeting. On the record
date, there were approximately 4,000 beneficial holders of
the 4,232,096 shares of Common Stock then outstanding. The
presence, in person or by proxy, of a majority of the total
number of outstanding shares of Common Stock entitled to
vote at the Annual Meeting is necessary to constitute a
quorum at the Annual Meeting.
If the enclosed form of proxy is properly executed and
returned in time to be voted at the Annual Meeting, the
shares represented thereby will be voted in accordance with
the instructions marked thereon. Executed but unmarked
proxies will be voted FOR the election of the nominees for
election to the Board of Directors, FOR the amendment to the
1992 Stock Incentive Plan, and FOR the ratification of the
appointment of PricewaterhouseCoopers LLP as the Company's
independent auditors for the year ending December 31, 1999.
The Board of Directors does not know of any matters other
than those described in the Notice of Annual Meeting that
are to come before the Annual Meeting. If any other matters
are properly brought before the Annual Meeting, the persons
named in the proxy will vote the shares represented by such
proxy upon such matters as determined by a majority of the
Board of Directors.
The presence of a shareholder at the Annual Meeting will not
automatically revoke such shareholder's proxy. A
shareholder may, however, revoke a proxy at any time prior
to its exercise by filing a written notice of revocation
with, or by delivering a duly executed proxy bearing a later
date to: Board Secretary, Willamette Valley Vineyards, Inc.,
8800 Enchanted Way S.E., Turner, Oregon 97392, or by
attending the Annual Meeting and voting in person. However,
a shareholder who attends the meeting need not revoke a
previously executed proxy and vote in person unless the
shareholder wishes to do so. All valid, unrevoked proxies
will be voted at the Annual Meeting.
ELECTION OF DIRECTORS
At the Annual Meeting, seven Directors will be elected, each
for a one-year term. Unless otherwise specified on the
proxy, it is the intention of the persons named in the proxy
to vote the shares represented by each properly executed
proxy for the election as Directors the persons named below
as nominees. The Board of Directors believes that the
nominees will stand for election and will serve if elected
as Directors. However, if any of the persons nominated by
the Board of Directors fails to stand for election or is
unable to accept election, the proxies will be voted for the
election of such other person as the Board of Directors may
recommend. There is no cumulative voting for election of
Directors.
1
Information regarding Nominees. The following table sets
for the names of the Board of Directors nominees for
election as a Director, and each such person's age at May
31, 1999 and position with the Company.
Name Position(s) with the Company Age
James W. Bernau *** Chairperson of the Board,45
President/CEO and Director
James L. Ellis *** Vice-President/Secretary 54
and Director
Betty M. O'Brien* Director 56
Daniel S. Smith Director 59
Delna L. Jones** **** Director 58
Stan G. Turel * ** *** **** Director 51
William H. Malkmus * Director 64
___________________
*Member of the Compensation Committee
**Member of the Audit Committee
***Executive Committee
****Affiliated Transaction Committee
All Directors hold office until the next annual meeting of
Shareholders or until their successors have been elected and
qualified. Executive officers are appointed by the Board of
Directors and serve at the pleasure of the Board of
Directors. Set forth below is additional information as to
each Director and executive officer of the Company.
James W. Bernau. Mr. Bernau has been President and
Chairperson of the Board of Directors of the Company since
its inception in May 1988. Mr. Bernau began to develop the
vineyard in 1983, and co-founded the Company in 1988 with
Salem winegrape grower, Donald Voorhies. From 1981 to
September 1989, Mr. Bernau was Director of the Oregon
Chapter of the National Federation of Independent Businesses
("NFIB"), an association of 15,000 independent businesses in
Oregon. After founding and serving as President and
Chairman of several regional brewing companies (See "Certain
Relationships and Related Transactions") between 1992 and
1997, Mr. Bernau elected in September of 1997 to turn his
full time attention and effort to the Company.
James L. Ellis. Mr. Ellis has served as a Director since
July 1991 and Secretary since June 1997. Mr. Ellis has
served as the Company's Director of Human Resources from
January 1993. From 1993 to 1997 he also served as the
Director of Human Resources for several regional brewing
companies (see "Certain Relationships and Related
Transactions) founded by Mr. Bernau. Mr. Ellis returned
full time to the Company in September of 1997 and was
appointed Vice President/Corporate in January of 1998. From
1990 to 1992, Mr. Ellis was a partner in Kenneth L. Fisher,
Ph.D. & Associates, a management consulting firm. From 1980
to 1990, Mr. Ellis was Vice President and General Manager of
R.A. Kevane & Associates, a Pacific Northwest personnel
consulting firm. From 1962 to 1979, Mr. Ellis was a member
of and administrator for the Christian Brothers of
California, owner of Mont La Salle Vineyards and producer of
Christian Brothers wines and brandy.
Betty M. O'Brien. Ms. O'Brien has served as a Director
since July 1991. Ms. O'Brien has been employed by
Willamette University as its Director of Communications
since 1988. Ms. O'Brien is a partner in Elton Vineyards, a
commercial vineyard located in Eola Hills in Yamhill County,
Oregon. She is a member of the Oregon Winegrowers
Association, having previously served as its President and
Treasurer as well as a director.
Daniel S. Smith. Mr. Smith has served as a Director since
July 1991. Since 1973, Mr. Smith has been an owner in and
the manager of Danco Company, a commercial refrigeration
business. Mr. Smith owns 65-acres of commercial vineyards
near Eugene, Oregon.
Delna L. Jones. Ms. Jones has served as a Director since
November 1994. Ms. Jones presently serves as a Washington
County, Oregon, County Commissioner; she was elected to this
position in 1998. From 1985 to 1990, Ms. Jones served as
Director of Economic Development with US West
Communications. From 1990 to 1998, she served as project
director for the CAPITAL Center, an education and business
consortium. Beginning in 1982, she was elected six times to
the Oregon House as the State Representative for District 6.
During her tenure, she served as the Assistant Majority
Leader; she also chaired the Revenue and School Finance
committee, and served on the Legislative Rules and
Reorganization committee and the Business and Consumer
Affairs committee. In addition, Ms. Jones presently serves
on many community and business boards and advisory panels.
Stan G. Turel. Mr. Turel has served as a Director since
November of 1994. Mr. Turel is part owner and the CEO of
Columbia Turel, Inc., (formerly Columbia Bookkeeping, Inc.)
a position he has held since 1974. Columbia Turel, Inc. has
sixteen offices in Oregon and Washington, servicing 4,000
small business and 26,000 tax clients annually. Mr. Turel
is a licensed tax consultant, a member of the National
Association of Public Accountants, a private pilot, and a
former delegate to the White House Conference on Small
Business. In addition, Mr. Turel serves his community on a
number of advisory boards and panels.
William H. Malkmus. Mr. Malkmus has served as a Director
since April of 1997. Mr. Malkmus spent over 20 years as an
investment banker in San Francisco. For six years,
following his banking career and until his retirement in
1995, Mr. Malkmus was the Chief Financial Officer of Vivea
2
Inc., a healthcare service company listed on the New York
Stock Exchange. In 1973, Mr. Malkmus co-founded Tualatin
Vineyards, one of Oregon's original wineries, and was
President/Treasurer until Tualatin merged with Willamette
Valley Vineyards, Inc. in 1997.
During 1998, the Board of Directors held seven meetings.
All incumbent Directors attended more than 75% of the
aggregate of the total number of meetings held by the Board
of Directors and the total number of meetings held by all
committees of the Board on which he or she served during
1998. See "Management-Executive Compensation" for certain
information regarding compensation for Directors.
Board of Directors Committees. The Board of Directors acts
as a nominating committee for selecting nominees for
election as Directors. The Board of Directors has appointed
a standing Audit Committee which, during the year ended
December 31, 1998, conducted one meeting. The elected
members of the Audit Committee are Delna L. Jones and Stan
G. Turel. The Audit Committee reviews the scope of the
independent annual audit, the independent public
accountants' letter to the Board of Directors concerning the
effectiveness of the Company's internal financial and
accounting controls and the Board of Directors' response to
that letter, if deemed necessary. The Board of Directors
also has appointed a Compensation Committee which reviews
executive compensation and makes recommendations to the full
Board regarding changes in compensation, and also
administers the Company's 1992 Stock Incentive Plan. During
the fiscal year ended December 31, 1998, the Compensation
Committee held two meetings. The members of the
Compensation Committee currently are Betty M. O'Brien,
Chair, Stan Turel, and William Malkmus. In 1994, the Board
of Directors created an Affiliated Transactions Committee
that reviewed transactions deemed to involve a potential
conflict of interest between the Company and its former
affiliates. Current members of the Affiliated Transaction
Committee are Delna Jones and Stan Turel. The Committee
held no meetings in 1998. In 1997 the Board appointed an
Executive Committee, members are: James Bernau, James Ellis,
and Stan Turel. The Executive Committee may exercise the
authority of the Board between Board meetings, except to the
extent that the Board has delegated authority to another
Committee or to other persons, and except as limited by
Oregon law. The Executive Committee met six times during
1998.
The Board of Directors unanimously recommend that
shareholders vote FOR the election of its nominees for
Director. If a quorum is present, the Company's bylaws
provide that Directors are elected by a plurality of the
votes cast by the shares entitled to vote. Abstention and
broker non-votes are counted for purposes of determining
whether a quorum exists at the Annual Meeting, but are not
counted and have no effect on the determination of whether a
plurality exists with respect to a given nominee.
MANAGEMENT / EXECUTIVE OFFICERS
Name Position Age
James W. Bernau President, Director and Chairperson 45
of the Board of Directors
Information concerning the principle occupation of Mr.
Bernau is set forth under "Election of Directors".
EXECUTIVE COMPENSATION
Summary of Cash and Certain Other Compensation
The following table provides certain summary information
concerning compensation paid or accrued by the Company, to
or on behalf of the Company's Chief Executive Officer, James
W. Bernau (the "named executive officer") for the years
ending December 31, 1996, 1997, and 1998.
Annual Compensation
Name & Principle Position Year Salary ($) Bonus
James W. Bernau 1996 $6,500 $ -0-
President and Chairperson of 1997 $19,345 $ -0-
the Board of Directors 1998 $84,865 $10,000
As discussed under "Election of Directors," until 1997, Mr.
Bernau previously served as President of certain affiliates
of the Company. Each of these companies paid a pro rata
portion of Mr. Bernau's monthly salary based on the amount
of time that Mr. Bernau devoted to the respective company's
business in that month. However, Mr. Bernau has now turned
his full time attention and effort to the Company's
business. In addition to his salary, Mr. Bernau may receive
an annual bonus from the Company based on the Company's
performance and Mr. Bernau's contribution to the Company as
determined solely by the Company's Board of Directors.
Bernau Employment Agreement
The Company and Mr. Bernau are parties to an employment
agreement dated August 3, 1988 and amended in February, 1997
and again amended in January of 1998. Under the present
agreement, Mr. Bernau is paid an annual salary of $90,000
with annual increases tied to increases in the consumer
price index. Pursuant to the terms of the employment
agreement, the Company must use its best efforts to provide
Mr. Bernau with housing on the Company's property. Mr.
Bernau and his family will live in the house free of rent
and must continue to reside there for the duration of his
employment in order to provide additional security and lock-
up services for late evening events at the Winery and
Vineyard. The employment agreement provides that Mr.
Bernau's employment may be terminated only for cause which
is defined as non-performance of his duties or conviction of
a crime.
3
Stock Options
In order to reward performance and retain high-quality
employees, the Company often grants stock options to its
employees. The Company does not ordinarily grant shares of
stock to its employees. Options are typically issued at a
per share exercise price equal to the closing price as
reported by NASDAQ at the time the option is granted. The
options vest to the employee over time. Three months
following termination of the employee's employment with the
Company, any and all unexercised options return to the
Company. In January 1998, 75,000 stock options at a strike
price of $1.65 vesting over two years were granted to the
named executive officer during the year ended December 31,
1998 under the Company's 1992 Stock Incentive Plan. Said
option represented 29% of all options granted to all
employees in fiscal year 1998. Based on an assumed
appreciation of 5% and 10% in the price of the Company's
stock price, the projected value of said option over the ten
year term of the option is $59,500 and $168,046
respectively.
Option Exercises and Holdings
The following table provides information, with respect to
the named executive officer, concerning exercised options
during the last fiscal year and unexercised options held as
of December 31, 1998.
Options Exercised in the last fiscal year
Number Value
Name of shares Realized(1)
James W. Bernau -0- -0 -
Number of Securities Underlying
Unexercised Options at FY-End
James W. Bernau 15,000(3) -0-
37,500 37,500 (1.65)
Exercisable Unexercisable
Value of Unexercised In-the-Money
Options at FY-End(2)
James W. Bernau Exercisable Unexercisable
$10,762 $10,762
______________________________
(1) The value realized is based on the difference between
the market price at the time of exercise of the options and
the applicable exercise price.
(2) Options are "in the money" at the fiscal year-end if the
fair market value of the underlying securities on such date
exceeds the exercise price of the option. The amounts set
forth represent the difference between the fair market value
of the securities underlying the options on December 31,
1998 ($1.94 per share based on the NASDAQ closing price for
the Company's Common Stock on that date), and the exercise
price of the option ($1.65 per share), multiplied by the
applicable number of options.
(3) Represents a 15,000 share warrant exercisable at $3.42
per share issued to Mr. Bernau in 1992. See "Certain
Transactions".
Director Compensation
The members of the Company's Board of Directors do not
receive cash compensation for their service on the Board,
but are reimbursed for out-of-pocket and travel expenses
incurred in attending Board meetings. Under the Company's
Stock Incentive Plan adopted by the shareholders in 1992 and
further amended by the shareholders in 1996, beginning in
1997 an option to purchase 1,500 shares of Common Stock was
granted to each Director for service on the Board during the
year. In addition, each Director receives 50 shares of
Common Stock for each Board or committee meeting attended.
Section 16 Reports
Section 16(a) of the Securities Exchange Act of 1934, as
amended (the "1934 Act") requires the Company's Directors
and officers, and persons who own more than 10% of a
registered class of the Company's equity securities, to file
initial reports of ownership and reports of changes in
ownership with the Securities and Exchange Commission. Such
persons also are required to furnish the Company with copies
of all Section 16(a) reports they file. Based on reports
filed by such persons, the Company believes that all filing
requirements applicable to its Directors, officers and
persons who own more than 10% of the Company's Common Stock
have been complied with for 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During 1998 and 1997, the Company purchased grapes from
Elton Vineyards for $77,097 and $95,594, respectively.
Betty M. O'Brien, a Director of the Company, is a principle
owner of Elton Vineyards. Also during 1998 and 1997, the
Company purchased grapes from Sweet Cheeks Vineyards owned
by Director, Daniel S. Smith, for $29,215 and $128,460.
On June 1, 1992, the Company granted Mr. Bernau a warrant to
purchase 15,000 shares of the Company's Common Stock as
consideration for his personal guarantee of the Real Estate
Loan and the Line of Credit from Farm Credit Services
pursuant to which the Company borrowed $1.2 million. The
warrant is exercisable anytime through June 1, 2012, at an
exercise price of $3.42 per share.
4
Each of the following companies-Nor'Wester Brewing,
Willamette Valley Inc.-Microbreweries across America
(WVIMAA), Aviator Ales, Mile High Brewing, Bayhawk Ales and
North Country Brewing was affiliated with the Company in
that James W. Bernau, the Company's founder, President and
Chairperson of the Board of Directors, was also President
and Chairperson of the Board of Directors of each such
affiliated company. Mr. Bernau was also a significant
shareholder in Nor'Wester and WVIMAA.
During 1993 and through June 1994, the Company provided
management services to Nor'Wester and WVI. The management
services consisted of secretarial, accounting, marketing,
administrative, stock transfer and warehousing services
which were provided on a cost-plus-fees basis. Beginning in
July 1994, such services were performed primarily by WVI
employees. The Company provided services to the affiliated
companies on a limited basis. For the years ended December
31, 1995 and 1994, charges to the Company for such
management services aggregated approximately $230,000 and
$58,000, respectively, and are included in selling, general
and administrative expenses in the accompanying statement of
operations. In addition, the Company entered into a beer
sale and distribution contract with Nor'Wester. No sales
were made under the terms of this contract in 1996 or 1995.
In 1996, the Company began contracting for these services
with Nor'Wester under a general services agreement.
Nor'Wester, WVI, and the Company each provided various
administrative and stock offering services to the affiliated
companies. During 1996, total amounts charged to the
Company by Nor'Wester and WVI aggregated $47,025; amounts
charged by the Company to the various affiliated companies
aggregated $86,450. As a result of these and other
transactions, the Company aggregate payable balance of
$7,221 is netted against other receivables in the
accompanying balance sheet. During 1997, charges to the
Company aggregated $164,716; amounts charged by the Company
aggregated $92,600. The charges to the Company were
composed of reimbursements for combined purchases of health
insurance and telephone services which were paid through the
former affiliates. In the fall of 1997, the Company ceased
all transactions with these affiliated companies due to the
fact that these affiliated companies ceased doing business
or were no longer providing services. At December 31, 1998,
the Company has no receivables or payables from the former
affiliates. In 1997, the Company wrote off $14,000 of
receivables from the former affiliates. The Company will
continue its efforts to collect these receivables.
On December 3, 1992, James W. Bernau borrowed $100,000 from
the Company. The loan is secured by Mr. Bernau's stock in
the Company, and is payable, together with interest at a
rate of 7.35% per annum, on March 14, 2009. At December 31,
1998, the outstanding balance of the loan was $46,937.
The Company believes that the transactions set forth above
were made on terms no less favorable to the Company than
could have been obtained from unaffiliated third parties.
All future transactions between the Company and its
officers, Directors, and principal shareholders will be
approved by a disinterested majority of the members of the
Affiliated Transactions Committee of the Company's Board of
Directors, and will be on terms no less favorable to the
Company than could be obtained from unaffiliated third
parties.
SECURITY OWNERSHIP OF CERTAIN BENEFICAL OWNERS AND
MANAGEMENT
The following table sets forth certain information with
respect to beneficial ownership of the Company's Common
Stock as of May 31, 1999, by (i) each person who
beneficially owns more than 5% of the Company's Common Stock
(ii) each Director of the Company (iii) each of the
Company's named executive officers, and (iv) all Directors
and executive officers as a group.
Number of Shares Percent of Shares
Outstanding Beneficially
Stock Owned
James W. Bernau, President/CEO, Chair of the Board
2545 Cloverdale Road 1,059,353.5 (1) 25%
Turner, OR 97392
James L. Ellis, Secretary, Director
7850 S.E. King Road 32,523 (2) **
Milwaukie, OR 97222
Delna L. Jones, Director
PO Box 5969 4,700 (3) **
Aloha, OR 97006
Betty M. O'Brien, Director
22500 Ingram Lane NW 9,950 (4) **
Salem, OR 97304
Daniel S. Smith, Director
26978 Briggs Hill Road 30,234 (5) **
Eugene, OR 97405
Stan G. Turel, Director
13909 S.E. Stark Street 102,885 (6) 2%
Portland, OR 97233
5
Number of Shares Percent of Shares
Outstanding Beneficially
Stock Owned
William H. Malkmus, Director
415 Manzanita Way 173,328 (7) 4%
Woodside, CA 94062
Donald Voorhies
78356 Golden Reed Drive. 212,518 5%
Palm Desert, CA 92211
All Directors and executive 1,625,491.5 38%
officers as a group and persons owning
5% or more as a group (8 persons)
_________________________
** Less than one percent.
(1) Includes 15,000 shares issuable upon the exercise of an
outstanding warrant and 78,000 shares issuable upon the
exercise of options
(2) Includes 27,428 shares issuable upon the exercise of
options.
(3) Includes 3,600 shares issuable upon the exercise of
options.
(4) Includes 6,000 shares issuable upon the exercise of
options.
(5) Includes 6,000 shares issuable upon the exercise of
options
(6) Includes 3,600 shares issuable upon the exercise of
options
(7) Includes 3,000 shares issuable upon the exercise of
options
APPROVAL OF AMENDMENT TO THE 1992 STOCK INCENTIVE PLAN
The Board of Directors adopted a plan in April of 1998 to
incentivise the Company's Distributors and their
Salespersons with small awards of Common Stock of the
Company. The Board wishes to issue such shares under the
1992 Stock Incentive Plan as amended and therefore wishes to
change the definition of "consultant" in the Plan to
accommodate such issuance subject to the ratification and
approval by the Company's shareholders. Now therefore,
subject to such ratification and approval, Section 2 (f) of
the Plan is amended effective April 15, 1999 to read as
follows:
"Consultant" shall mean (i) any person who is engaged by
the Company or any Subsidiary to render consulting or other
services as an independent contractor, including, without
limitation, distributors of the Company's or Subsidiary's
products, (ii) any vendor who provides products to or for
the Company or any Subsidiary and, with respect to both (i)
and (ii), is compensated for such services and/or products,
and (iii) any Director of the Company, whether or not
compensated for his or her services. (see new language in
bold italics.)
The amendment, as described above, will not provide any
additional benefits to the Company's officers, employees, or
Directors.
Expect as provided herein and as previously amended, the
plan, as amended, shall remain unchanged and in full force
and effect.
The Board of Directors unanimously recommend a vote FOR the
proposal. The proposal must be approved by the holders of
at least a majority of the outstanding shares of Common
Stock. Abstentions and broker non-votes are treated as "no"
votes in determining whether the proposal is approved. The
proxies will be voted for or against the proposal, or as an
abstention, in accordance with the instruction specified on
the proxy form. If no instructions are given, proxies will
be voted for approval of the amendment to the Plan as
described above.
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed PricewaterhouseCoopers
LLP to act as independent auditors for the Company for the
year ending December 31, 1999, subject to ratification of
such appointment by the Company's shareholders.
PricewaterhouseCoopers LLP was the Company's independent
auditor for the fiscal year which ended December 31, 1998.
Unless otherwise indicated, properly executed proxies will
be voted in favor of ratifying the appointment of
PricewaterhouseCoopers LLP to audit the books and accounts
of the Company for the fiscal year ending December 31, 1999.
No determination has been made as to what action the Board
of Directors would take if the shareholders do not ratify
the appointment.
A representative of PricewaterhouseCoopers LLP has been
invited to attend the Annual Meeting at his own expense and
will be given an opportunity to make a statement if he
desires to do so and will be available to respond to
appropriate questions.
The Board of Directors unanimously recommends a vote FOR
this proposal.
6
DATE FOR SUBMISSION OF SHAREHOLDER PROPOSALS
Any shareholder proposal intended for inclusion in the proxy
statement and form of proxy relating to the Company's 2000
annual meeting of shareholders must be received by the
Company not later than February 24, 2000, pursuant to the
proxy soliciting regulations of the Securities and Exchange
Commission (the "SEC"). Nothing in this paragraph shall be
deemed to require the Company to include in its proxy
statement and form of proxy for such meeting any shareholder
proposal which does not meet the requirements of the SEC in
effect at the time.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of
Directors does not know of any other matters to be presented
for action by the shareholders at the 1999 Annual Meeting.
If, however, any other matters not now known are properly
brought before the meeting, the persons named in the
accompanying proxy will vote such proxy in accordance with
the determination of a majority of the Board of Directors.
COST OF SOLICITATION
The cost of soliciting proxies will be borne by the Company.
In addition to use of the mails, proxies may be solicited
personally or by telephone by Directors, officers and
employees of the Company, who will not be specially
compensated for such activities.
ADDITIONAL INFORMATION
A copy of the Company's Annual Report to Shareholders for
the fiscal year ended December 31, 1998 accompanies this
Proxy Statement. The Company is required to file an Annual
Report on Form 10-KSB with the Securities and Exchange
Commission. Shareholders may obtain, free of charge, a copy
of the Form 10-KSB by writing to James L. Ellis, Secretary,
Willamette Valley Vineyards, Inc., 8800 Enchanted Way S.E.,
Turner, Oregon 97392. Or they may access a copy through
links provided on the Company's web site: www.wvv.com.
By Order of the Board of Directors,
James W. Bernau
Chairperson of the Board
Turner, Oregon
June 17, 1999
Annual Report to Shareholders
DESCRIPTION OF BUSINESS
Willamette Valley Vineyards, Inc. (the "Company") was formed
in May 1988 to produce and sell premium, super premium and
ultra premium varietal wines (i.e., wine which sells at
retail prices of $3 to $7, $7 to $14 and over $14 per
bottle, respectively). The Company's wines are made from
grapes grown at its vineyard (the "Vineyard") and from
grapes purchased from other nearby vineyards. The grapes
are crushed, fermented and made into wine at the Company's
winery (the "Winery") and the wines are sold principally
under the Company's Willamette Valley Vineyards label. The
Company's Vineyard and Winery are located on 75 acres of
Company-owned land adjacent to Interstate 5, approximately
two miles south of Salem, Oregon.
In 1996, the Company owned 50 acres of planted vineyards-39
acres producing and 11 acres in development. In April
1997,the Company acquired 100 percent of the outstanding
stock of Tualatin Vineyards, Inc. (TVI), adding 83 acres of
producing vineyard, 60 more plantable acres and an
additional 20,000 cases of wine making capacity. The
purchase price paid by the Company to the Tualatin Valley
shareholders in exchange for their shares was $1,824,000
plus Tualatin Vineyards current assets minus their current
and long term liabilities as reflected in their balance
sheet dated April 15, 1997. The Company paid 35 percent of
the purchase price in the form of cash with the balance paid
through the issuance of shares of the Company's Common Stock
at an agreed price per share. The final purchase price was
$1,988,601 paid to the Tualatin Vineyard, Inc. shareholders.
The Company also leased O'Connor Vineyards on a ten-year
contract adding an additional 48 producing acres. All of
these highly regarded vineyards are within the Willamette
Valley Appellation.
7
Products
Under its Willamette Valley Vineyards label, the Company
currently produces and sells the following types of wine in
750 ml bottles: Pinot Noir, the Company's flagship and its
largest selling varietal in 1998; Chardonnay, Pinot Gris,
Riesling, Gewurztraminer and Oregon Blossom (blush blend).
As a convenience to our restaurant customers, the Company
produces some of our products in larger sized packages.
The Company also, currently produces and sells small
quantities of Oregon's Nog - a seasonal holiday product.
During 1998, the Company began to reintroduce the Tualatin
brand as Tualatin Estate, with new packaging and a more
focused line of products. A new product, Tualatin Estate
Sparkling Muscat was added to the line.
In November 1998, the Company released a new label under the
Griffin Creek brand name. This represents a joint effort
between the Company and Quail Run Vineyards to develop a new
brand of wines from the Southern Oregon growing region
(Rogue Valley Appellation). Currently, the Company has four
varieties under this label: Merlot, Syrah, Pinot Gris, and
Pinot Noir. The Company expects to add a limited number of
additional varieties under this brand name in the future.
Vineyard
The Property. The Company's estate vineyard at the Turner
site currently has 50 acres planted and 39 acres producing
which includes 17 acres of Pinot Noir and 8 acres of
Riesling grape vines planted in 1985, now grafted with new
Dijon clones of Pinot Noir. The Company planted 8 acres of
Pinot Gris vines in May 1992 and 6 acres of Chardonnay
(Espiguette clone) vines in 1993. In 1996, the Company
planted its remaining 11 acres in Chardonnay (Dijon clones)
and Pinot Gris. Grapevines do not bear commercial
quantities until the third growing season and do not become
fully productive until the fifth to eighth growing season.
Vineyards generally remain productive for 30 to 100 years,
depending on weather conditions, disease and other factors.
The Vineyard uses an elaborate trellis design known as the
Geneva Double Curtain. The Company has incurred the
additional expense of constructing this trellis because it
doubles the number of canes upon which grape clusters grow
and spreads these canes for additional solar exposure and
air circulation. Research and practical applications of
this trellis design indicate that it will increase
production and improve grape quality over traditional
designs.
In April of 1997, the Company purchased Tualatin Vineyards,
Inc. which added 83 acres of additional producing vineyards
and some 60 acres of bare land for future plantings. In
1997, the Company planted 19 acres at the Tualatin site and
planted another 41 acres in 1998, the majority being Pinot
Noir which is the Company's flagship varietal. All of the
new planting will be available to harvest in the next three
to five years.
Also in 1997, the Company entered into a 10 year lease with
O'Connor Vineyards (48 acres) located near Salem to manage
and obtain the supply of grapes from O'Connor Vineyards. In
1998 as in 1997, the Company received a portion of the
grapes produced at O'Connor due to the phase out of certain
preexisting grape sales contracts.
The Company now controls 241 acres (including 41 planted in
1998) of vineyard land. At full production, these vineyards
should enable the Company to grow approximately 30% of the
grapes needed to meet the Winery's ultimate production
capacity of 298,000 gallons (124,000 cases).
Grape Supply. In 1998, the Company's 39 acres of producing
estate vineyards yielded approximately 86 tons of grapes for
the Winery's tenth crush. Tualatin Vineyards produced 174
tons of grapes in 1998. O'Connor Vineyards produced 99 tons
of which about 40% were sold to other wineries because of
previous commitments. An additional 849 tons of grapes were
purchased from other growers in 1998. However, the Company
sold about 87 tons of the grapes and juice harvested from
its vineyards or purchased from contracted vineyards in 1998
in an effort to optimize inventory levels and improve wine
quality by processing fewer tons than the Company originally
projected it would need for the year. The Company expects
to produce 171,256 gallons in 1999 (72,032 cases) from its
1998 crush. The Winery's 1998 total wine production was
183,220 gallons (77,064 cases) from its 1997 crush. The
Vineyard can not and will not provide the sole supply of
grapes for the Winery's near-term production requirements.
The Company has also entered into grape purchase contracts
with certain Directors of the Company. See Proxy Statement:
"CERTAIN TRANSACTIONS".
The Company fulfills its remaining grape needs by purchasing
grapes from other nearby vineyards at competitive prices.
The Company believes high quality grapes will be available
for purchase in sufficient quantity to meet the Company's
requirements except in the Pinot Noir varietal, where there
is increasing demand. The grapes grown on the Company's
vineyards establish a foundation of quality upon which the
purchase of additional grapes is built. In addition, wine
produced from grapes grown in the Company's own vineyards
may be labeled as "Estate Bottled" wines. These wines
traditionally sell at a premium over non-estate bottled
wines.
Winery
Wine Production Facility. The Company's Winery is
structurally capable of producing up to 250,000 gallons
(104,000 cases) of wine per year, depending on the type of
wine produced. With the addition of Tualatin Vineyards, the
Company added 50,000 gallons (20,000 cases) of capacity.
However, the Tualatin production facility is not in use at
this time because the Executive Committee of the Company
decided that the production capacity at Tualatin was not
needed to meet near-term production requirements.
8
Beginning with the Company's first vintage in 1989, the
Company's annual grape harvest and wine production are as
follows:
Crush Tons of Production Gallons Case
Year Grapes Crushed Year Produced Equivalents
1989 203 - - -
1990 206 1990 31,383 13,200
1991 340 1991 31,900 13,400
1992 565 1992 52,600 22,100
1993 633 1993 90,908 38,237
1994 590 1994 97,822 41,145
1995 885 1995 96,077 40,411
1996 1290 1996 127,655 53,693
1997 1426 1997 199,353 83,850
1998 1109 1998 169,652 71,357
The quantity of grapes crushed in 1997 does not include 228
tons of grapes that were purchased and resold on the open
market because the Company had contracted for more grapes
than were needed. The Company was unable to sell
approximately 270 tons of grapes before crush; this tonnage
converts to 44,000 gallons of bulk wine which the Company
sold in 1998.
Company Strategy
The Company, as one of the largest wineries in Oregon,
believes its success is dependent upon its ability to: (1)
grow and purchase high quality vinifera wine grapes; (2)
vinify the grapes into premium, super premium and ultra
premium wine; and (3) achieve significant brand recognition
for its wines, first in Oregon and then nationally and
internationally. The Company's goal is to continue as one
of Oregon's largest wineries, gaining a reputation for
producing some of Oregon's finest, most sought after wines.
Based upon several highly regarded surveys of the US wine
industry, the Company believes that successful wineries
exhibit the following four key attributes: (i) focus on
production of high-quality premium, super premium and ultra
premium varietal wines; (ii) achieve brand positioning
that supports high bottle prices for its high quality wines;
(iii) build brand recognition by emphasizing restaurant
sales; and (iv) develop strong marketing advantages (such
as a highly visible winery location and successful self-
distribution).
The Company has designed its strategy to address each of
these attributes.
To successfully execute this strategy, the Company has
assembled a team of accomplished winemaking professionals,
and has constructed and equipped a 22,934 square foot state-
of-the-art Winery and a 12,500 square foot outdoor
production area for the crushing, pressing and fermentation
of wine grapes.
The Company's marketing strategy is to sell its premium,
super premium and ultra premium cork finished wine through a
combination of (i) direct sales at the Winery, (ii) self-
distribution to local and regional restaurants and retail
outlets, and (iii) sales through independent distributors
and wine brokers who market the Company's wine in specific
targeted areas where self-distribution is not economically
feasible. Most of the Company's wines are sold under its
Willamette Valley Vineyards label.
The Company believes the location of its Winery next to
Interstate 5, Oregon's major north-south freeway,
significantly increases direct sales to consumers and
facilitates self-distribution of the Company's products.
The Company believes this location provides high visibility
for the Winery to passing motorists, thus enhancing
recognition of the Company's products in retail outlets and
restaurants. The Company's Hospitality Center has further
increased the Company's direct sales and enhanced public
recognition of its wines.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq Small Cap
Market under the symbol "WVVI". As of December 31, 1998,
there were 3,503 holders of record of the Common Stock.
The table below sets forth for the quarters indicated the
high and low sales prices for the Company's Common Stock as
reported on the Nasdaq Stock Market. The Company's Common
Stock began public trading on September 13, 1994.
Quarter Ended
3/31/98 6/30/98 9/30/98 12/31/98
High $1.94 $3.62 $2.88 $2.25
Low $1.38 $1.56 $1.75 $1.50
3/31/97 6/30/97 9/30/97 12/31/97
High $3.63 $3.50 $3.25 $2.25
Low $2.25 $2.00 $1.75 $1.19
The Company has not paid any dividends on the Common Stock,
and it is not anticipated that any dividends will be paid by
the Company in the foreseeable future.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward Looking Statements
This Management's discussion and Analysis of Financial
Condition and Results of Operation and other sections of
this discussion and analysis 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 Vineyard Inc.'s business
with that of the Company and other risks detailed below as
well as those discussed elsewhere in this Annual Report and
from time to time in the Company's Securities and Exchange
Commission filing and reports. In addition, such statements
could be affected by general industry and market conditions
and growth rates, and general domestic economic conditions.
Discussion and Analysis
Beginning in the third quarter of 1997, the Company
fundamentally changed its direction and returned to its
historically conservative approach to growth and focus on
producing the highest quality varietal wines. In late 1996,
the Company had embarked on an aggressive growth plan aimed
at addressing several major issues. First, sales demand
exceeded supply of certain varietals, requiring allocation
of certain products and decreasing the time for bottle aging
to speed release into the market. Second, sales and
production growth made the Company highly dependent upon
outside sources of grapes, which were at higher market
prices and becoming more difficult to secure. Third,
growers were forcing the Company to purchase lower demanded
grapes not needed by the Company in order to purchase the
high demand grapes like Pinot Noir. Fourth, the previous
management's internal sales projections indicated the
Company needed more winemaking capacity than was available
at its Turner site and significantly more wine storage.
As a result of positive reviews by national wine writers and
critics over the last several years, the Company experienced
high demand for some of its products. For example, Wine
Enthusiast Magazine named Willamette Valley Vineyards as
"One of America's Great Pinot Noir Producers", noted wine
critic Robert Parker stated, "Willamette Valley Vineyards
Whole Berry Fermented Pinot Noir may be the world's most
delicious and accessible Pinot. It has been a knockout in
some vintages." With the Company's 1996 Pinot Gris, noted
Wine Spectator writer Matt Kramer stated, "In short, it's a
winner."
The May 15,1998, issue of the Wine Spectator rated the
Company's '96 Chardonnay as the leading "World Chardonnay
Value" and featured the '96 Pinot Gris as the best match
with poached salmon in a full page color layout. On a
number of occasions, the Wine Spectator rated the Company's
wines as "Best Buys". As a result of this coverage and the
attractive prices of the Company's wines, the Company
experienced shortages in the marketplace, requiring
allocation of available supply to distributors.
In 1996 and early 1997, the Company planted the remaining 11
acres of available land and added 29,000 cases of winemaking
capacity at its Turner site, purchased Tualatin Vineyards to
add additional vineyard (83 acres in production and 60
available for planting) and winemaking capacity (20,000
cases), leased O'Connor Vineyards (48 producing acres) and
constructed a 20,000 sq. ft. warehouse on its Turner
property (capable of storing 180,000 cases). In a very
short time period, the Company increased its vineyard
capacity from 40 to 241 acres, its winemaking capacity from
75,000 cases to 124,000 cases, its barrel aging capacity
from 25,000 cases to 50,000 cases and its finished case
storage capacity from 30,000 cases to 200,000 cases. This
growth was financed by debt rising from $2.24 million at the
beginning of 1996 to $5.95 million by the end of 1998, an
increase of 166% and the issuance of the Company's Common
Stock of over 440,00 shares (part of Tualatin purchase)
increasing the shares outstanding by 12%.
Problems resulting from this aggressive expansion showed up
quickly. The Company's actual sales in the period after the
Tualatin acquisition did not meet the previous management's
internal sales projections on which its expansion activities
were premised. Operating expenses were exceeding budget.
The prices of the Company's products had not kept pace with
rising costs. Low priced, fast moving products (Lot 27 &
28) were being introduced that were inconsistent with the
Willamette Valley Vineyards brand positioning and were being
sold at a loss. The Board of Directors moved quickly in
April 1997 by appointing an Executive Committee to work with
the General Manager on operational issues. The Executive
Committee later worked with the co-founder and Vice
President in operating the Company after the General Manager
resigned at the end of July 1997. In connection with the
Company's restructuring efforts, co-founder and current CEO,
Jim Bernau returned to operate the Company beginning mid
September of 1997. Activity at its Tualatin winery facility
was limited, the Tualatin Estate Tasting Room was re-opened,
a number of mid-level manager positions eliminated and
budget discipline was reinstated. The Company experienced a
dramatic turn-around in the Fourth Quarter of 1997,
generating $316,314 in operating income, enough to erase the
record losses experienced in the first three quarters of
1997.
However, the Company continued to be confronted by the costs
of the expansion. In 1997, the Company borrowed an
additional $1.3 million to support the Tualatin acquisition
and provide cash required to pay the front end lease payment
of the O'Connor Vineyard and cover vineyard operating
expenses for both new properties. These new borrowings
significantly increased the reliance on the Company's line
of credit, which in turn increased interest payments, as did
the completion of the $750,000 warehouse at the Turner site.
The Company believes its overall debt load is comparable
with wineries its size, and therefore that its debt service
obligations were not the ultimate cause of the Company's
lack of profitability during this period. Rather, the
Company believes that its unprofitability was primarily the
result of underpricing its products.
10
While costs have climbed dramatically, especially for Pinot
Noir grapes (increasing by 15% per year), the Company hadn't
raised most of its wine prices since 1995. The Company
implemented price increases combined with sales commission
reductions for Oregon sales in July 1998. 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 went into effect September 1,
1998, due to the lead time needed by the Company's out-of-
state distributors. Retail prices for all products and
hospitality services, which accounted for 24% of the
Company's net revenues in 1998, were increased by like
amounts in July 1998. These price increases were instituted
after the excessive inventories built in 1996 and early 1997
were significantly reduced.
The fundamental issues affecting the Company's profitability
are product mix 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
profitable competitors, the average collected revenue per
case is considerably less. The Company has determined to
make more high margin varietals, especially Pinot Noir, and
less low margin white, blush and off-dry wines. The Company
discontinued making and selling a low margin "Lot 27 and 28"
Pinot Noir and Chardonnay (retailing for $7-$8 per bottle)
and successfully converted Oregon grocery store shelf
placements to higher quality, higher margin "Vintage
Selection" Pinot Noir and Chardonnay (retailing for $12-$15
per bottle).
The Company has prepared a detailed five year plan by brand,
variety, and package size. The Company's goal is to
significantly increase average gross margins, by re-
positioning Willamette Valley Vineyards branded products,
eliminating lower margin products that are inconsistent with
its brand strategy and take up valuable production capacity.
The Company also plans to revitalize its Tualatin brand with
a re-positioning of the new Tualatin Estate products made in
limited quantities and sold at higher price points. The
Company expects the introduction of a high margin Southern
Oregon brand of warm climate varieties such as of Merlot and
Syrah, etc., under the brand of Griffin Creek will help to
increase gross margins.
For example, Willamette Valley Vineyards now offers a
Vintage Selection Pinot Noir and Whole Cluster Fermented
Pinot Noir for $15 per bottle retail (up from $10), a
Founders' Reserve for $28 per bottle (up from $18), a Single
Vineyard Designate for $35 per bottle and a Signature Cuvee
for $48 per bottle. The two top end offerings will be
released in 1999 and replace the "OVB" label designation
which retailed for $35 per bottle. The Signature Cuvee has
already been named by Clive Coats, Master of Wine in The
Vine as the leading Oregon Pinot Noir of the 1996 Vintage.
Management retained Oregon's top wine label design firm,
Anstey Healy, who upgraded the Willamette Valley Vineyards
label beginning with the release of the '97 Vintage. The
main purpose of the redesign was to support the
repositioning effort.
The Tualatin brand has been revitalized with better wines
and a new label, Tualatin Estate, prepared by the design
firm Anstey Healy. Its flagship Pinot Noir will be launched
as the '97 Vintage in the fall of 1999 and will retail for
$21.50 per bottle, up from $12.50. The Tualatin Riesling,
previously selling for $5 per bottle, has been replaced by a
dry Tualatin Estate Riesling retailing for $8 per bottle. A
new variety, Pinot Blanc has been released with a retail
price of $15 per bottle and has already earned four stars
and a plus from the Restaurant Wine Magazine. A Semi-
Sparkling Muscat has been released for $14 per bottle.
Since the Pinot Noir and Chardonnay were not ready to
release in 1998, management conducted a limited brand roll-
out with the Semi-Sparkling Muscat and Riesling resulting in
marketing expenses of approximately $4,900 in the Fourth
Quarter. Distribution is currently being established for
this brand. The Company did not meet its budgeted depletion
rates for Tualatin Estate inventories in 1998 due to delays
in the projected release dates for the Tualatin Estate wines
and the generally poor condition of the Tualatin
distribution network. Both the Willamette Valley Vineyards
and Griffin Creek brands exceeded goal.
The Griffin Creek Merlot retailing for $35 per bottle and
Pinot Gris retailing for $17 per bottle were released in the
Fourth Quarter of 1998. The brand roll-out for Griffin
Creek resulted in a one-time marketing expense of
approximately $25,000 in the Fourth Quarter. The Syrah and
Pinot Noir, both retail for $35 per bottle, are expected to
be released in mid year 1999. The Merlot has garnered a
score of "91" from Wine Spectator, the highest score ever
given an Oregon Merlot and the Pinot Noir earned a Gold
Medal at the prominent Dallas Morning News judging in Texas
and was selected at the Atwater's Restaurant/Brotherhood of
Wine tasting as one of the top Oregon Pinots.
The Gross Profit Margin improved from 49% in the Fourth
Quarter of 1997 to 57% in the Fourth Quarter of 1998.
Profits from retail operations improved 24% and
Wholesale/FOB operations improved 6% for the year. The
Company regards this as good progress given the large amount
of inventory which had been built up in 1996 and 1997 which
needed to be sold at less than target prices to bring
inventory levels back in line with orderly distributor
depletion rates. In 1998, the Company saved $42,917 in
production labor over 1997 or a reduction of 12% over the
previous period. Although selling, general and
administration costs increased in 1998 over 1997, targeted
selling, general, and administration costs were reduced from
the previous year. For example in 1998, dues and
publications were reduced by $11,764, a 37% reduction,
office supplies by $36,587, a 61% reduction, legal fees by
$2,508, a 6% reduction and in-state sales commissions by
$46,178, a 9% reduction.
The loss the Company experienced in 1998 is due to one-time
occurrences. Resulting from the price paid for the Tualatin
wine inventory relative to its sale price, the Company
experienced an 83% cost of goods on the Tualatin wine sold
in 1998 because of sales of lower margin product. The
Tualatin operation contributed a loss of $87,352 to the
Company. A reserve for the doubtful collection of a $81,000
sale made to the Company's United Kingdom agent in 1997 was
established for the year end 1998 financial statements. The
agent was involuntarily placed in "administration" in
September 1998, a British form of bankruptcy, and has been
permitted to emerge from "administration" and continue in
business by a vote of the creditors including the Company.
The Company continues to make a concerted effort to collect
these funds. After deducting the year end reserve
adjustments (reserve for impaired inventory and doubtful
collection of the receivable from the United Kingdom) and
the loss from Tualatin, the income from operations would
have been $543,009 or a 17% increase over the $465,501
operating income in 1997.
The profitability of the Company is dependent principally
upon the level of success it achieves in getting market
acceptance of its higher prices and the level of
distribution it achieves for its higher margin brands and
products. The Company has professionalized its Central and
11
East Coast representation by accepting the retirement of its
agents, winery stockholders who grew into the agent
positions. A Sales Manager for that territory, recruited
from one of the winery's top distributors, Winebow of New
Jersey and New York began in January of 1999. A West Coast
Sales Manager was recruited from Oregon's largest wine
distributor, Columbia Distributing and began in February of
1999. Two top winery employees were recently reassigned to
direct sales positions in key Oregon markets to call upon
target prospects for the purpose of increasing the placement
of the Company's high end wines.
Other issues that are affecting profits are the production
facilities at Tualatin and the sizable investment in
facilities at Willamette Valley Vineyards. The Company is
pursuing ways to lease the wine production facilities at
Tualatin Estate and increase paid usage of the facilities at
its Turner site.
The Company's ability to make more and better Pinot Noir is
constrained by fruit supply. The Company has completed
planting all remaining acreage at Tualatin Estate (41 acres)
in Pinot Noir, which will provide 150 more tons at full
production (9,750 additional cases) when in full production
in the next three to five years. Tualatin is the only
vineyard in Oregon to have won the Governor's Trophy, the
state's most prestigious wine award, two years consecutively
in 1993 and 1994 for its Pinot Noir. Tualatin is the only
vineyard in the world to have captured the Best of Show in
the red and white categories at the 1980 London
International Wine Judging in the same year. The Company
believes Tualatin Estate's soil and climate produces among
the highest quality Pinot Noir in Oregon.
The Company is also developing alternative approaches to
increasing Pinot Noir grapes supply without incurring
capital expenses, like working with winegrowers on
increasing planting, grafting over current low demand
varieties and assisting owners of desirable vineyard sites
to develop their property. The Griffin Creek brand grape
supply comes from a winegrowing family in the Rogue Valley,
who are paid a small portion of the fruit costs after
harvest and the remainder when the wine is sold. This
"grower financing" approach provides the winery with a long
term supply for the brand and the winegrower with a long
term market for the grapes and the potential to earn a
higher than market price for their grapes depending upon the
average price the wine receives.
Results of Operations
Seasonal and Quarterly Results. The Company has
historically experienced and expects to continue
experiencing seasonal fluctuations in its revenues and net
income. In the past, the Company has reported a net loss or
modest net income during its First Quarter and expects this
trend to continue in future First Quarters, including the
First Quarter of 1999. Sales volumes increase
progressively beginning in the Second Quarter through the
Fourth Quarter because of consumer buying habits.
The following table sets forth certain information regarding
the Company's revenues from Winery operations for each of
the last eight fiscal quarters:
Fiscal 1998 Quarter Ended
(in thousands)
3/31 6/30 9/30 12/31
Tasting room and retail sales $155 $224 $274 $284
On-site and off-site festivals 118 108 132 207
In-state sales 426 575 530 747
Bulk/Grape sales 235 88 0 131
Out-of-state sales 437 500 811 376
Total winery revenues 1,371 1,495 1,747 1,745
Fiscal 1997 Quarter Ended
(in thousands)
3/31 6/30 9/30 12/31
Tasting room and retail sales $140 $212 $244 $272
On-site and off-site festivals 86 92 145 177
In-state sales 317 462 552 827
Bulk/Grape sales 0 38 19 408
Out-of-state sales 298 510 400 727
Total winery revenues 841 1,314 1,360 2,411
Period to Period Comparisons
Revenue. The following table sets forth, for the periods
indicated, select revenue data from Company operations:
Year Ended December 31
(in thousands)
1998 1997 1996
Tasting room and retail sales $ 937 $ 868 $ 982
On-site and off-site festivals 565 500 474
In-state sales 2,278 2,158 1,765
Bulk /Grape Sales 454 465 0
Out-of-state sales 2,124 1,935 1,113
Revenues from winery operations $6,358 $5,926 $4,334
Less Excise Taxes 226 212 99
Net Revenue $6,132 $5,714 $4,235
12
1998 Compared to 1997. Tasting room sales for the year
ended December 31, 1998 increased 8% to $936,585 from
$868,531 for the same period in 1997. The Company has begun
to track the buying habits of the customers who visit the
tasting room. In the past several years, the Company did
not track customers buying habits which means the tasting
room did not focus on a targeted group of customers to
increase its sales. In 1996 and early 1997 the previous
management allowed the Wholesale Division to sell wine that
in previous years has been exclusively sold in the tasting
room. In 1998, the Company returned to the practice of
selling certain exclusive wines in the tasting room at
higher profit margins. The tasting room had additional
higher value products added in 1998. Specifically, a
Founders' Pinot Noir, a Merlot from Griffin Creek and a
Founders' Reserve Cabernet were available to the customers
at a higher average price. In 1998, the Company contracted
its hospitality and catering services to an outside company.
This allowed the Company to reduce one full time position
and offer a more complete set of services. The Company
experienced an increase in revenue during 1998 in
Hospitality rental income (included in the tasting room and
retail sales category) over the same period in 1997. The
total of rental income and related wine sales was $209,856
in 1998 as compared to $187,257 in 1997. This rental income
comes primarily through weddings, business meetings and
educational conferences held at the Winery's Hospitality
Center.
On-site and off-site festival sales and telephone sales for
the year ended December 31, 1998 increased 13% to $564,828
from $500,124 for the same period in 1997. The most
significant change in operations for this group was that the
Company paid commissions to several employees to solicit
sales by phone. The Company increased its sales by phone
solicitation in 1998 to $252,000 in 1998 from $132,000 in
1997. The Company eliminated several on and off site
festivals by analyzing each event to determine if the event
was going to return a certain profit percentage.
Wholesale sales in the state of Oregon for the year ended
December 31, 1998, through the Company's independent sales
force, increased 6% to $2,277,676 from $2,157,896 for the
same period in 1997. This increase is not as significant as
in previous years due to the 1998 price increases but the
Company still maintains a strong presence in its own home
state. Costco, a large retailer, remains the largest in-
state customer of the Company. The sales to Costco were
$463,000 in 1998, up from $409,000 in 1997. During the last
part of 1997, the Company added an in-state sales manager
whose main focus was to increase in-state sales. Beginning
July 1, 1998, the Company increased the price of its wine by
an average of 8% in state. In July and August of 1998,
sales decreased 7% and 8% respectively over 1997. In the
Fourth Quarter of 1998, sales were down by 10% but the
Company expects sales to rebound in 1999. Part of the
decrease in sales in the Fourth Quarter was due to the
Company's decision to reduce the quantity of its lower
priced Holiday wine. Its sales for this product decreased
from nearly 4,000 cases in 1997 to 2,100 cases in 1998.
The Company contracted in early 1997 for more grapes than
were needed to meet the revised sales forecasts in the next
few years. The Company sold some of its own grapes and some
of its contracted grapes for $465,030 in 1997 and $454,281
in 1998.
Out-of-state sales for the year ended December 31, 1998,
increased 10% to $2,124,826 from $1,934,877 for the same
period in 1997. The Company now sells wine in 39 states.
The Pinot Noir variety led sales in 1998. The Vintage and
Whole Cluster Pinot Noir products increased in case sales
10% in 1998 over 1997. Pinot Noir, which now constitutes
about one-third of the Company's production, is among the
fastest growing wine varietals. Positive press, regarding
the healthful use of wine, continues to stimulate demand.
The Company expects demand for its wines to continue to
increase. However, the Company notes that new formidable
entries into the Oregon wine industry from out of state will
increase competition and put additional pressure on Pinot
Noir grape supplies.
In addition, the Company believes the industry in Oregon,
Washington, and California will experience crush volumes in
future years higher than annual consumption rate increases,
thus potentially putting pressure on prices and margins.
For the first half of 1998, out-of-state sales increased 16%
over 1997. A large part of the increase was due to
favorable pricing offered to distributors to reduce the
Company's excess inventory. 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." Based on this 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 through September, the Company sold
5,722 cases of Vintage Chardonnay as compared to 1,516 cases
in the prior year.
Effective September 1st, the Company raised its price to all
out-of-state distributors which caused the distributors to
make large purchases in August to beat the price increase.
The out-of-state revenue in August 1998 exceeded August 1997
by $262,000. The price increase was followed by declining
out-of-state revenues in the Fourth Quarter of 1998.
The Company reclassified its income statement to subtract
excise taxes from its gross revenue to equal a net revenue
since the Company only collects the excise tax on behalf of
the Bureau of Alcohol, Tobacco, and Firearms, and Oregon
Liquor Control Board. The total excise taxes collected in
1998 were $225,842 as compared to $212,402 in 1997. Before
1996, excise taxes were included in the "selling, general,
and administrative expenses". Sales data in the discussion
above is quoted before the exclusion of excise taxes.
Gross Margin
As a percentage of net revenue (i.e., gross sales less
related excise taxes), gross margin for all winery
operations was 50% for fiscal year 1998 as compared to 51%
for 1997. The sales of bulk juice and grapes at harvest at
a slim margin reduced the gross margin in 1997 and 1998.
After adjusting for these sales, the gross margin would be
54% in 1998 as compared to 54% in 1997. The sales of
existing Tualatin product at lower margins reduced the
margin in 1997 and 1998, as well as, promotional pricing of
certain Willamette Valley products to reduce inventory in
late 1997 and the first half of 1998. The price increases
in July of 1998 for in state customers and September of 1998
for out-of-state customers are expected to increase the
gross margin next year.
Selling, general, and administrative expenses for the year
ended December 31, 1998, increased to $2,694,488 compared to
$2,434,867 for the same period in 1997. As a percentage of
revenue from winery operations, the selling, general, and
administrative expenses were 44% in 1998 as compared to 43%
13
in 1997. Management has taken significant steps to control
expenses in this category in 1998. All key managers are
required to review their monthly expenses against budget and
make appropriate changes to bring their budgets into
balance. The Company employs an "open book" policy as to
its accounting records and ensures that key managers and
employees understand and can adjust their spending habits as
needed.
The largest part of the increase in expenses in 1998 over
1997 was a reserve for the doubtful collection of a $81,000
sale made to the Company's United Kingdom agent in 1997.
The agent was involuntarily placed in "administration" in
September 1998, a British form of bankruptcy, and has been
permitted to emerge from "administration" and continue in
business by a vote of the creditors including the Company.
The Management continues to make a concerted effort to
collect these funds.
Other income for the year ended December 31, 1998 was
$10,013 as compared to $19,471 for the year ended December
31, 1997. Interest income decreased to $22,967 in fiscal
year 1998 from $31,296 in fiscal year 1997. Interest
expense increased to $493,901 in fiscal year 1998 from
$396,118 in fiscal year 1997. The increase in the interest
expense was the result of the Company taking on more long
term debt to finance the purchase of Tualatin Vineyards,
Inc., plant additional land at Tualatin, and fund increases
in inventory.
The provision for income taxes and the Company's effective
tax rate were $(27,581) and (28)% in fiscal year 1998 with
$52,288 or 44% of pre-tax income recorded for fiscal year
1997.
As a result of the above factors, net income/(loss)
decreased to $(71,980) in fiscal 1998 from $67,862 for the
fiscal year of 1997. Earnings per share were $(.02), $.02,
and $.05 in fiscal years 1998, 1997 and 1996, respectively.
1997 Compared to 1996. Tasting room sales for the year
ended December 31, 1997 decreased 12% to $868,531 from
$981,804 for the same period in 1996. The Company has seen
a drop in the average tasting room "ring" which means that
the customer is purchasing the wine elsewhere as witnessed
by increased sales in the in-state sales category. In the
last part of 1997, management has begun to track the buying
habits of the customers who visit the tasting room. In the
past several years, the Company did not track customers
buying habits which means the tasting room did not focus on
a targeted group of customers to increase its sales. In the
past year, the Company has allowed the Wholesale Division to
sell wine that in previous years has been exclusively sold
in the tasting room. In 1998, the Company will return to
the practice of selling certain exclusive wines in the
tasting room at higher profit margins. The Company
experienced an increase in revenue during 1997 in
Hospitality rental income over the same period in 1996. The
total of rental income and related wine sales was $187,257
in 1997 as compared to $159,741 in 1996. This rental income
comes primarily through weddings, business meetings and
educational conferences held at the Winery's Hospitality
Center.
On-site and off-site festival sales for the year ended
December 31, 1997 increased 5% to $500,199 from $474,405 for
the same period in 1996. One off-site event, "The Bite of
Salem", had an increase in revenue of $11,500 over last
year's event, but it had a sponsor's fee of $8,000 which
made the event unprofitable. The Company has reinstituted a
strict policy of requiring a cost/benefit analysis for each
event before the decision is made to participate in the
event. The Company plans to reduce its overhead in the
Retail Department by only participating in events that
return to the Company a positive cash flow.
Wholesale sales in the state of Oregon for the year ended
December 31, 1997, through the Company's independent sales
force, increased 22% to $2,157,896 from $1,765,340 for the
same period in 1996. PriceCostco, a large retailer, placed
the Company's products in several new locations in 1997
which resulted in $277,000 additional sales to that chain.
The Company has seen a significant increase in the sales of
its White Riesling product line which nearly doubled in
sales in 1997, resulting in an increase of approximately
$235,000 in sales over 1996, most of which was sold to the
above mentioned chain store. During the last part of 1997,
the Company added an in-state sales manager whose main focus
was to increase in-state sales. This increased focus by the
Company resulted in record breaking sales in the fourth
quarter of 1997.
The Company contracted in early 1997 for more grapes than
what was needed to meet the revised sales forecasts in the
next few years. The Company sold some of its own grapes and
some of its contracted grapes for $465,030 and generated a
small profit in doing so. Because of certain multi-year
contracts, the Company intends to sell additional grapes in
1998 without incurring a loss.
Out-of-state sales for the year ended December 31, 1997,
increased 74% to $1,934,877 from $1,112,690 for the same
period in 1996. The Company now sells wine in 39 states as
compared to 28 states in 1996. The Pinot Noir variety led
the way in increased sales in 1997. The vintage and whole
berry Pinot Noir product lines sold 6,097 more cases in 1997
resulting in a $439,000 increase in sales.
Pinot Noir, which now constitutes about one-third of the
Company's production, is among the fastest growing wine
varietals. New consumers are coming into the wine category.
Positive press, regarding the healthful use of wine,
continues to stimulate demand. The Company expects demand
for its wines to continue to increase. However, the Company
notes that new formidable entries into the Oregon wine
industry from out of state will increase competition and put
additional pressure on Pinot Noir grape supplies. In
addition, the industry in Oregon, Washington, and California
has experienced crush volumes in 1997 higher than annual
consumption rate increases, thus potentially putting
pressure on prices and margins.
The Company reclassified its income statement to subtract
excise taxes from its gross revenue to equal a net revenue.
Since the Company only collects the excise tax on behalf of
the Bureau of Alcohol, Tobacco, and Firearms, and Oregon
Liquor Control Board, these taxes should not be considered
as a legitimate expense for the Company. The total excise
taxes collected in 1997 were $212,402 as compared to $99,219
in 1996. Before 1996, excise taxes were included in the
"selling, general, and administrative expenses".
As a percentage of net revenue after removing the excise
taxes, gross margin for all winery operations was 51% for
fiscal year 1997 as compared to 56% for 1996. The sales of
bulk juice and grapes at harvest at a slim margin reduced
the gross margin in 1997. After adjusting for these sales,
14
the gross margin would be 54% as compared to 56% in 1996.
The sales of existing Tualatin product at lower margins
reduced the margin in 1997, as well as, promotional pricing
of certain Willamette Valley products to reduce inventory.
Selling, general, and administrative expenses for the year
ended December 31, 1997, increased 25% to $2,434,867
compared to $1,951,120 for the same period in 1996. As a
percentage of revenue from winery operations, the selling,
general, and administrative expenses were 43% in 1997 as
compared to 46% in 1996.
During the year of 1997, increased sales revenues over 1996
resulted in increased commissions paid to our independent
sales force. Commissions are paid to the sales force on a
specified percentage of revenue resulting in no adverse
affect on the net income ratio. The commissions paid in
1997 amounted to $642,709 as compared to $504,125 in 1996.
The Company has experienced increased expenses relating to
samples, travel, point-of-sale expenses, and shipping
charges for the development of new markets and the expansion
of sales outside of the state. The out-of-state sales
representatives are allowed a set percentage of revenue for
wine samples and point-of-sale material. Thus, as the gross
revenues increase, the actual dollar expenditures for wine
samples and point-of-sale material increases, as well.
Other income for the year ended December 31, 1997 was
$19,471 as compared to $28,241 for the year ended December
31, 1996. Interest income increased to $31,296 in fiscal
year 1997 from $25,145 in fiscal year 1996. Interest
expense increased to $396,118 in fiscal year 1997 from
$214,380 in fiscal year 1996. The increase in the interest
expense was the result of the Company taking on more long
term debt to finance the purchase of Tualatin Vineyards,
Inc., plant additional land at Tualatin, and fund increases
in inventory.
The provision for income taxes and the Company's effective
tax rate were $52,288 and 44% in fiscal year 1997 with
$98,685 or 37% of pre-tax income recorded for fiscal year
1996.
As a result of the above factors, net income decreased 60%
to $67,862 in fiscal 1997 from $170,430 for the fiscal year
of 1996. Earnings per share were $.02, $.05 and $.002 in
fiscal years 1997, 1996 and 1995, respectively.
Liquidity and Capital Resources
Willamette Valley Vineyards was originally established as a
sole proprietorship by Oregon winegrower Jim Bernau in 1983.
The Company was organized on May 2, 1988, and sold its first
wine in late April 1990. Prior to April 1990, the Company's
working capital and Vineyard development and Winery
construction costs were principally funded by cash
contributed by James Bernau and Donald Voorhies, the
Company's co-founders, and by $1,301,354 in net proceeds
received from the Company's first public stock offering,
which began in September 1988 and was completed in June 1989
with the sale of 882,352 shares at a price of $1.70 per
share pursuant to Federal Regulation A.
Since April 1990, the Company has operated on revenues from
the sale of its wine and related products and the net
proceeds from three additional stock offerings. The
Company's second public stock offering began in July 1990
and was completed in July 1991 with the sale of 731,234
shares at prices of $2.65 and $2.72 per share exclusively to
Oregon residents, resulting in net proceeds to the Company
of $1,647,233.
In 1992, the Company conducted two stock offerings pursuant
to Federal Regulation A. The Company commenced an offering
on July 18, 1992 which was completed on September 30, 1992,
with the sale of 428,216 shares of Common Stock at a price
of $3.42 per share and net proceeds to the Company of
$1,290,364. On October 2, 1992, as a result of the
oversubscription of the first offering in 1992, the Company
commenced another offering of Common Stock which was
completed on October 31, 1992 with the sale of 258,309
shares at a price of $3.42 per share, resulting in net
proceeds to the Company of $775,726.
Cash and cash equivalents increased to $149,401 at December
31, 1998 from $13,541 at December 31, 1997.
Inventories increased 10% as of December 31, 1998, to
$4,601,808 from the December 31, 1997 level of $4,171,027.
Property, plant and equipment, net, decreased 1% as of
December 31, 1998, to $6,790,985 from $6,859,835 as of
December 31, 1997.
Long term debt increased to $4,292,948 as of December 31,
1998, from $4,044,943 as of December 31, 1997. The increase
in debt was the result of cash borrowings for the purchase
and vineyard expansion of Tualatin Vineyards.
At the end of the fiscal year, the Company had a line of
credit from Farm Credit Services with a limit of $2,000,000.
As of December 31, 1998 the outstanding balance of the line
was $1,652,667 as compared to $1,517,297 in 1997. These
funds were used to meet operational expenditures primarily
to fund the increase in the inventory. In early 1999, the
$2,000,000 line of credit was judged not to be sufficient to
meet the current Company needs. In March of 1999, the
Company applied to Farm Credit Services and was granted an
additional $500,000 which will be used to make the remaining
grape payments from its 1998 harvest. As of December 31,
1998, the Company was in violation of one of its debt
coverage covenants with Farm Credit. Farm Credit has
released the Company from complying to this one covenant.
However, Farm Credit has notified the Company that unless it
is able to correct the violation of 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. Farm Credit Services
has made it mandatory that the Company pay off part of the
line of credit as the year progresses. They have also added
.5% to the current interest rate.
15
YEAR 2000 COMPLIANCE
The Company began to develop its Y2K 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 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 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. Both of these
systems will be corrected if necessary by the year 2000.
From tests performed by the consultants and information
supplied by equipment manufacturers, the Company is
beginning its assessment evaluation to determine the
severity of the problem and what needs to be fixed. The
following critical items on the equipment list have been
made Y2K ready: the financial reporting system, network
communications, and the Point-of-Sale system in the tasting
room. At this time, 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.
The Company feels, due to the nature of the winemaking
business, that most of the critical needs are fulfilled now.
In January, typically, there is very little activity on the
production side of the winery. During 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 is currently testing all temperature control
systems associated with its stainless steel tanks and
expects to take any necessary action to make them readily
compliant for the year 2000.
The Company has completed a short survey and has mailed to
its primary vendors and all of its distributors to inquire
as to their abilities for compliance in the year 2000. The
surveys were sent out in the first part of April 1999. From
the returned surveys, the Company will determine any
additional 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 us that their business is Y2K ready.
FINANCIAL HIGHLIGHTS
(in thousands, except for per share amounts)
Year ended December 31
1998 1997 1996 1995 1994 1993 1992
______________________________________________________
Revenue from winery operations
$6,132 $5,714 $4,235 $3,638 $2,869 $2,264 $1,818
Net income (loss)
(72) 68 170 6 170 116 19
Net income (loss) per share
(.02) .02 0.05 0.00 0.04 0.03 0.01
Weighted average number of common shares outstanding
4,233 4,104 3,785 3,785 3,785 3,784 3,350
As of December 31
1998 1997 1996 1995 1994 1993 1992
______________________________________________________
Selected balance sheet data:
Working capital
$2,515 $2,471 $2,696 $1,981 $1,661 $2,333 $2,472
Total assets
14,391 13,946 10,264 8,340 6,881 6,677 6,076
Long-term debt
4,293 4,044 3,170 2,008 889 910 440
Shareholders' equity
7,035 7,105 5,628 5,458 5,451 5,278 5,180
16
(Graphs unavailable for transmission so the following is a
replacement narrative.)
WVV Assets & Equity Growth
In 1997 the growth in assets and equity resulted from the
acquisition of Tualatin Vineyards, Inc.
ASSETS EQUITY
(in millions)
06/30/88 0.2 0.2
04/30/90 2.1 1.7
12/31/90 3.0 2.6
12/31/91 3.3 2.9
12/31/92 6.1 5.2
12/31/93 6.7 5.3
12/31/94 6.9 5.5
12/31/95 8.3 5.5
12/31/96 10.3 5.6
12/31/97 13.9 7.1
12/31/98 14.3 7.0
WVV Gross Margin
Gross Margin is the net of net sales revenue less the
production cost of wine sold. After the elimination of
grape sales, the gross margin in 1998 remained approximately
the same compared to 1997. The 1997 and 1998 margins are a
result of prices not keeping pace with cost increases, the
sale of Tualatin wines at lower margins and promotional
pricing of certain wines to reduce excess inventory.
1990 41.21%
1991 46.37%
1992 52.07%
1993 55.66%
1994 56.40%
1995 52.48%
1996 56.22%
1997 54.19%
1998 53.69%
Distribution of Sales
This chart shows the distribution of sales between wholesale
and retail and individual elements contained in each
element.
Wholesale Retail
Festival 6%
Offsite 4%
Tasting Room 11%
Hospitality 3%
Out of State 33%
In State 36%
Bulk 7%
Totals 76% 24%
17
WVV Sales Revenue
Revenue growth continued in 1998 to $6,132,000(of
which $454,000 were sales of grapes and juice. This is up
7.3% from 1997. Wholesale sales in Oregon rose
6% in 1998 to $2,278,000. Out-of-state
wholesale sales grew at the rate of 10% over 1997 to
$2,125,000.
(in millions)
Retail Wholesale Juice
1990 0.3 .1 0
1991 0.6 .2 0
1992 0.8 1.0 0
1993 1.0 1.3 0
1994 1.3 1.6 0
1995 1.4 2.2 0
1996 1.4 2.9 0
1997 1.4 4.1 .4
1998 1.5 4.4 .4
WVV Out-of-State Sales
WVV has dramatically increased its out-of-state sales in the
past few years. We are now licensed in 39 states and
several foreign countries. Out-of-state wholesale sales
grew at the rate of 10% over 1997 reflecting the sale of
wines at higher prices.
(in millions)
1991 0.1
1992 0.1
1993 0.2
1994 0.3
1995 0.8
1996 1.1
1997 1.9
1998 2.2
18
Cases Bottled at WVV
Our barrel-aged wines average 10 months in the barrel before
they are bottled and another 6 to 8 months in our cellar
before they are released for sale. The reduction in cases
bottled reflects the balancing of production with the sale
of higher quality wines.
(in cases)
1990 5,743
1991 17,796
1992 27,336
1993 39,697
1994 40,208
1995 53,693
1996 63,178
1997 91,793
1998 77,064
Wine Inventory at WVV at Cost
A winery's development requires inventory building and
aging. At year end 1998, we had 4.6 million dollars of wine
inventory at cost.
(in millions)
1990 0
1991 0
1992 1.1
1993 1.5
1994 1.5
1995 1.9
1996 2.8
1997 4.2
1998 4.6
19
WVV Production Capacity
At Willamette Valley, our structural capacity increased from
104,000 cases to 121,250 cases in 1997. The Company
moved its case goods to a new storage facility which will
allow it to place an additional 750 oak barrels (17,250
cases)in the former storage area. In April of 1997, the
Company added 20,000 additional case capacity with the
purchase of Tualatin Vineyards.
(in cases)
Production Structural
1990 25,000 25,000
1991 40,000 40,000
1992 65,000 65,000
1993 70,000 70,000
1994 78,000 78,000
1995 80,000 80,000
1996 104,000 104,000
1997 121,250 138,000
1998 121,250 138,000
(capacity in cases)
Stainless Steel Barrel
1990 20,000 5,000
1991 32,000 8,000
1992 50,000 15,000
1993 50,000 20,000
1994 50,000 28,000
1995 50,000 30,000
1996 64,000 40,000
1997 69,000 52,000
1998 69,000 52,000
Tons Crushed at WVV
Since the sale of wine has been increasing at an annual rate
of approximately 15% over the last two years, it became
necessary to increase the 1997 harvest levels of particular
varieties to insure that the winery would have sufficient
inventory to meet future sales needs. In 1997, nearly 200
tons of grapes contracted by the Company were sold off to
reduce its excess inventory. The 1998 crush reflects the
lower yields of the vintage and the balancing of production
with the sale of higher quality wines.
(in tons)
1990 206
1991 340
1992 556
1993 633
1994 630 (1)
1995 885
1996 1,290
1997 1,426
1998 1,209
(1) 590 tons crushed plus 40 tons equivalent as purchased
bulk wines.
Oregon Wine Production
Since 1986, Oregon wine production has grown from 592,908
gallons to 1,741,722 in 1998 - an average annual increase of
14.9%
(in millions)
1986 0.6
1987 0.7
1988 0.8
1989 0.9
1990 0.9
1991 1.0
1992 1.1
1993 1.2
1994 1.4
1995 1.5
1996 1.7
1997 1.9
1998 1.7
20
PricewaterhouseCoopers LLP
121 S.W. Morrison Street
Suite 1800
Portland, OR 97204
Telephone (503) 224 9040
Facsimile (503) 223 9081
Report of Independent Accountants
To the Board of Directors and Shareholders of
Willamette Valley Vineyards, Inc.
In our opinion, the accompanying balance sheet and the
related statements of operations, of shareholders' equity
and of cash flows present fairly, in all material respects,
the financial position of Willamette Valley Vineyards, Inc.
at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in
the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial
statements are the responsibility of the Company's
management; our responsibility is to express an opinion on
these financial statements based on our audits. We
conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles
used and significant estimates made by management, and
evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
Portland, Oregon
March 12, 1999
F-1
Willamette Valley Vineyards, Inc.
Balance Sheet
December 31, 1998 and 1997
____________________________________________________________
1998 1997
Assets
Current assets:
Cash and cash equivalents $ 149,401 $ 13,541
Accounts receivable, net (Note 3) 371,537 820,526
Income taxes receivable (Note 11) 24,436 24,436
Inventories (Note 4) 4,601,808 4,171,027
Prepaid expenses and other
current assets 86,986 78,293
Deferred income taxes (Note 11) 234,203 94,813
._________. _________
Total current assets 5,468,371 5,202,636
Vineyard development costs, net
(Notes 1 and 2) 1,892,538 1,506,906
Property and equipment, net
(Notes 1, 2 and 5) 6,790,985 6,859,835
Investments (Note 6) 4,974 105,040
Note receivable (Note 12) 46,937 148,448
Debt issuance costs 119,244 122,870
Other assets 67,813 -
._________. _________
$ 14,390,862 $ 13,945,735
=========== ===========
Liabilities and Shareholders' Equity
Current liabilities:
Line of credit (Note 7) $ 1,652,667 $ 1,517,297
Current portion of long-term debt and
capital lease obligations 191,176 124,192
(Note 8)
Accounts payable 315,185 363,419
Accrued commissions and 213,210 225,297
payroll costs
Grape payables (Note 12) 581,294 501,238
._________. _________
Total current liabilities 2,953,532 2,731,443
Long-term debt and capital
lease obligations (Note 8) 4,101,772 3,920,751
Deferred income taxes (Note 11) 300,083 188,275
._________. _________
Total liabilities 7,355,387 6,840,469
========= =========
Commitments and contingencies (Note 13)
Shareholders' equity (Note 9 and 10):
Common stock, no par value -
10,000,000 shares authorized,
4,232,681 and 4,231,431 shares
issued and outstanding at
December 31, 1998 and 1997 6,781,256 6,779,067
Retained earnings 254,219 326,199
.__________. _________
Total shareholders' equity 7,035,475 7,105,266
.__________. _________
$14,390,862 13,945,735
========== ==========
The accompanying notes are an integral part of these
financial statements
F-2
Willamette Valley Vineyards, Inc.
Statement of Operations
Years Ended December 31, 1998, 1997 and 1996
____________________________________________________________
1998 1997 1996
Net revenues $ 6,132,355 $ 5,714,132 $4,235,020
Cost of goods sold 3,076,507 2,813,764 1,853,791
._________. _________ _________
Gross margin 3,055,848 2,900,368 2,381,229
Selling, general and
administrative expenses 2,694,488 2,434,867 1,951,120
._________. _________ _________
Income from operations 361,360 465,501 430,109
._________. _________ _________
Other income (expenses):
Interest income 22,967 31,296 25,145
Interest expense ( 493,901) (396,118) (214,380)
(Note 1)
Other income 10,013 19,471 28,241
._________. _________ _________
(460,921) (345,351) (160,994)
._________. _________ _________
Income (loss) before income
taxes (99,561) 120,150 269,115
Income taxes (benefit)
provision (Note 11) (27,581) 52,288 98,685
._________. _________ _________
Net income (loss) $ (71,980) $ 67,862 $ 170,430
._________. _________ _________
Basic net income per
common share (Note 1) $ ( .02) $ .02 $ .05
._________. _________ _________
Diluted net income per
common share (Note 1) $ ( .02) $ .02 $ .04
._________. _________ _________
The accompanying notes are an integral part of these
financial statements
F-3
Willamette Valley Vineyards, Inc.
Statement of Shareholders' Equity
Years Ended December 31, 1998, 1997 and 1996
____________________________________________________________
Retained
Common stock earnings
Shares Dollars (deficit) Total
._________ _____________ _________ __________
Balances at December
31, 1995 3,785,356 $ 5,369,868 $ 87,907 $ 5,457,775
Net income - - 170,430 170,430
._________ _____________ _________ __________
Balances at December
31, 1996 3,785,356 5,369,868 258,337 5,628,205
Stock issuance for
purchase of Tualatin
Valley Vineyard 444,825 1,406,699 - 1,406,699
Stock issuance
for compensation 1,250 2,500 - 2,500
Net income - - 67,862 67,862
._________ _____________ _________ _________
Balances at December
31, 1997 4,231,431 6,779,067 326,199 7,105,266
Stock issuance
for compensation 1,250 2,189 - 2,189
Net loss - - (71,980) (71,980)
._________ _____________ _________ __________
Balances at December
31, 1998 4,232,681 6,781,256 254,219 7,035,475
========== ============= ========= =========
The accompanying notes are an integral part of these
financial statements
F-4
Willamette Valley Vineyards, Inc.
Statement of Cash Flows
Years Ended December 31, 1998, 1997 and 1996
____________________________________________________________
1998 1997 1996
Cash flows from operating
activities:
Net income (loss) $ (71,980) $ 67,862 $ 170,430
Reconciliation of net
income (loss) to net
cash (used for) provided by
operating activities:
Depreciation and
amortization 657,536 533,444 377,855
Deferred income taxes (27,582) 90,872 39,524
Bad debt expense 83,148 44,384 27,382
Loss on disposition
of assets - 895 -
Changes in assets and liabilities:
Accounts receivable 365,841 (519,198) (184,215)
Inventories (428,592) (953,956) (953,005)
Prepaid expenses and
other current assets (8,693) 29,041 (24,240)
Notes receivable 101,511 (9,937) (9,509)
Other assets (67,813) - -
Accounts payable (48,234) 90,133 (18,541)
Accrued commissions and payroll
costs (12,087) 16,593 93,832
Income taxes receivable - (24,436) -
Grape payables 80,056 (49,776) 206,372
._________ _________ _______
Net cash (used for)
operating activities 623,111 (684,079) (274,115)
._________ _________ _______
Cash flows from investing activities:
Additions to property
and equipment (458,805) (1,101,354) (931,110)
Vineyard development
expenditures (445,507) (165,794) (31,943)
Cash received upon sale
of investments 100,066 10,178 38,675
Payments to acquire
Tualatin Valley Vineyards - (684,624) -
Proceeds from sale of
property and equipment - 6,000 -
._________ __________ ______
Net cash used for
investing activities (804,246) (1,935,594) (924,378)
._________ ___________ ______
Cash flows from financing activities:
Debt issuance costs (6,707) (74,285) 20,477)
Net increase in line
of credit balance 135,370 1,037,671 318,326
Issuance of long-term
debt 312,760 982,164 1,162,127
Repayments of long-term
debt (124,428) (107,221) (66,493)
._________ ___________ _______
Net cash provided by
financing activities 316,995 1,838,329 1,393,483
._________ ___________ ________
Net (decrease) increase in
cash and cash equivalents 135,860 (781,344) 194,990
Cash and cash equivalents
Beginning of year 13,541 794,885 599,895
._________ ___________ _______
End of year $ 149,401 $ 13,541 $ 794,885
========= =========== ========
The accompanying notes are an integral part of these
financial statements
F-5
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
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 and super
premium wines, primarily pinot noir, chardonnay, and white
riesling. The majority of the Company's wine is sold to
grocery stores and restaurants in the state of Oregon
through the Company's sales force. Out-of-state and foreign
sales represented approximately 35% of revenues. The
Company also sells its wine from the hospitality room at its
winery.
Basis of presentation
The accompanying financial statements have been prepared in
accordance with generally accepted accounting principles
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and cash equivalents
Cash and cash equivalents include short-term investments
with an original maturity of less than ninety days.
Revenue recognition
The Company recognizes revenue upon the delivery of its
products to its customers. Sales are recorded as trade
accounts receivable and no collateral is required.
Inventories
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, wine processing and production costs, and are
transferred to finished goods inventories when the wine is
produced, bottled, and ready for sale. The cost of finished
goods is recognized as cost of sales when the wine product
is sold. Inventories are stated at the lower of cost or
market using the average cost method by variety and vintage
to determine the first-in, first-out (FIFO) cost of
inventories. In accordance with general practices in the
wine industry, wine inventories are included in current
assets in the accompanying balance sheet, although a portion
of such inventories may be aged for more than one year.
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 $176,067 and $116,193 at December 31, 1998
and 1997, respectively.
F-6
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
1. Summary of Operations, Basis of Presentation and
Significant
Accounting Policies (Continued)
Property and equipment
Property and equipment are stated at cost or the historical
cost basis of the contributing shareholders, as applicable,
and are depreciated on the straight-line basis over their
estimated useful lives as follows:
Land improvements 15 years
Winery building 30 years
Equipment 5-7 years
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.
Debt issuance costs
Debt issuance costs are amortized on a straight-line basis,
which approximates the effective interest method, over the
life of the debt.
Income taxes
The Company accounts for income taxes using the asset and
liability approach prescribed by Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes."
Under this approach, 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 files stand-
alone federal and state income tax returns.
Basic and diluted net income per share
The Company adopted Statement of Financial Accounting
Standards No. 128 ("SFAS 128"), "Earnings Per Share," in
1997. SFAS 128 requires disclosure of basic and diluted
earnings per share. All prior years have been restated to
reflect the adoption of SFAS 128. Basic earnings per share
are computed based on the weighted average number of common
shares outstanding each year.
1998
.______________________________________.
Weighted
average
shares Earnings
Loss outstanding per share
_________ __________ _________
Basic $(71,980) 4,232,578 $ (.02)
Options - -
Warrants - -
_________ __________ _________
Diluted $(71,980) 4,232,578 $ (.02)
========= ========== =========
1997
.______________________________________.
Weighted
average
shares Earnings
Income outstanding per share
_______ __________ _________
Basic $67,862 4,103,669 $ .02
Options - 638
Warrants - -
_______ __________ _________
Diluted $67,862 4,104,307 $ .02
======= ========== =========
1996
.______________________________________.
Weighted
average
shares Earnings
Income outstanding per share
_______ _________ _________
Basic $170,430 3,785,356 $ .05
Options - 20,532
Warrants - -
_______ _________ _________
Diluted $170,430 3,805,888 $ .04
======== ========= =========
F-7
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
1. Summary of Operations, Basis of Presentation and
Significant
Accounting Policies (Continued)
Basic and diluted net income per share (continued)
Options to purchase 402,000 shares of common stock were
outstanding at December 31, 1998, but were not included in
the computation of diluted earnings per share because the
effect would be dilutive due to the Company's loss in 1998.
Options to purchase 161,500 and 92,000 shares of common
stock were outstanding at December 31, 1997 and 1996,
respectively, but were not included in the computation of
diluted earnings per share because the options' exercise
prices were greater than the average market price of the
common shares. In addition, the warrant outstanding since
1992 (see Note 9) was not included in the computation of
diluted earnings per share in 1998, 1997 or 1996 because the
exercise price of $3.42 was greater than the average market
price of the common shares during all three years.
Statement of cash flows
Supplemental disclosure of cash flow information:
1998 1997 1996
.__________. _________ _________
Interest paid $ 556,000 $ 321,000 $ 166,000
Income taxes paid - 15,000 112,000
Supplemental schedule of noncash investing and financing
activities:
Capital leases 59,673 - -
Assets transferred from
related companies - 19,279 -
Issuance of common stock awards
to employees(Note 9) 2,189 2,500 -
Acquisition of Tualatin Valley, Inc.:
Common stock issued in connection with acquisition
Issued to stockholders
of TVI - 1,292,591 -
Fee to Acquisitions
Northwest, Inc. - 114,108 -
Tangible assets acquired, net of cash paid
Fixed assets - 143,376 -
Vineyard development - 996,000 -
Other assets acquired, net of cash acquired
Accounts receivable - 56,807 -
Inventory - 371,518 -
Prepaids - 156 -
Liabilities assumed
Accounts payable - 269,966 -
During the year ended December 31, 1996, the Company
capitalized approximately $38,000 of interest related to the
construction of its hospitality center.
Fair market value of financial instruments
The fair market values of the Company's recorded financial
instruments approximate their respective recorded balances,
as the recorded assets and liabilities are stated at amounts
expected to be realized or paid, or carry interest rates
commensurate with current rates for instruments with a
similar duration and degree of risk.
F-8
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
1. Summary of Operations, Basis of Presentation and
Significant
Accounting Policies (Continued)
Reclassifications
Certain reclassifications have been made to the 1996 and
1997 financial statements to conform with financial
statement presentation for the year ended December 31, 1998.
These reclassifications have no effect on previously
reported results of operations or shareholders' equity.
2. Acquisition
On April 15, 1997, Willamette Valley Vineyards, Inc.
("WVV") acquired the assets of Tualatin Vineyards, Inc.
("TVI"), a winery located in Oregon, for a purchase price of
$1,824,000, plus TVI's net current assets of $164,601 as of
the closing date. The acquisition was accounted for using
the purchase method of accounting, and the results of
operations include the revenues and expenses generated with
the TVI assets from the acquisition date through December
31, 1997. WVV paid 35 percent of the purchase price in cash
and the balance was paid through the issuance of WVV common
stock.
The following unaudited pro forma information represents the
results of operations of the Company as if the acquisition
had occurred as of January 1, 1997, after giving effect to
increased interest expense for debt issued related to the
acquisition, depreciation based on current costs, and the
effect of the benefit from provision for income taxes.
1997
(unaudited)
.__________.
Net revenues 5,874,733
Gross margin 2,972,077
Net loss (53,395)
3. Accounts Receivable
Oregon law prohibits the sale of wine in Oregon on credit;
therefore, the Company's accounts receivable balances are
the result of sales to out-of-state and foreign
distributors. Accounts receivable include an outstanding
balance of approximately $81,000 and $185,200 at December
31, 1998 and 1997, respectively, from a European customer to
which extended credit terms have been granted. Due to a
bankruptcy filing, the entire receivable of $81,000 has been
reserved. At December 31, 1998 and 1997, the Company's
accounts receivable balance is net of an allowance for
doubtful accounts of $111,000 and $30,000, respectively.
F-9
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
4. Inventories
Inventories consist of:
1998 1997
.________. _________
Winemaking and packaging materials $ 211,550 $ 189,062
Work-in-process (costs relating
to unprocessed and/or unbottled
wine products) 1,923,852 1,725,910
Finished goods (bottled wine and
related products 2,466,406 2,256,055
.________. _________
$ 4,601,808 $ 4,171,027
========= =========
5. Property and Equipment
1998 1997
____________ ___________
Land and improvements $ 1,041,326 $ 1,031,115
Winery building and hospitality
center 4,539,821 4,506,344
Equipment 3,715,612 3,263,633
____________ ___________
9,296,759 8,801,092
Less accumulated depreciation (2,505,774) (1,941,257)
____________ ___________
$ 6,790,985 6,859,835
============ ===========
During 1998, the Company entered into two capital lease
arrangements for certain winery equipment. The cost of the
leased equipment and related accumulated amortization
aggregated $59,673 and $5,312, respectively, at December 31,
1998. Minimum lease payments in 1999 through 2002
approximate $13,000 per year. Subsequent minimum lease
payments aggregate approximately $8,000 per year through
2005.
6. Investments
Investments consist of:
1998 1997
_________ __________
Oregon Liquor Control Commissions and Bureau
of Alcohol, Tobacco and Firearms $ - $ 88,066
Farm Credit Securities 3,000 15,000
Other 1,974 1,974
_________ __________
$ 4,974 $ 105,040
========= ==========
F-10
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
6. Investments (Continued)
The Oregon Liquor Control Commission and the Bureau of
Alcohol, Tobacco and Firearms require restricted short-term
investments to cover future excise tax payments. During
1998, the these investments were liquidated as they were no
longer required by the agencies. Farm Credit Securities
investments are required as a condition of the Northwest
Farm Credit Service loan and line of credit facility (see
Note 7). However, in 1998, Farm Credit reduced the amount
of stock the Company was required to have on deposit. These
investments are classified as held-to-maturity investments
and are recorded at historical cost.
7. Line of Credit Facility
The Company has a $2,000,000 credit facility with Northwest
Farm Credit Services. Borrowings under this facility bear
interest at 7.75%. At December 31, 1998 and 1997,
$1,652,667 and $1,517,297 were outstanding under this
facility, respectively.
8. Long-Term Debt
Long-term debt consists of:
1998 1997
___________ __________
Northwest Farm Credit Services Loan $ 4,237,134 4,044,943
Capital lease obligations 55,814 -
4,292,948 4,044,943
Less current portion (191,176) (124,192)
___________ __________
$ 4,101,772 $ 3,920,751
=========== =========
The Company entered into an agreement with Northwest Farm
Credit Services ("NWFCS") in 1997 containing two separate
notes bearing interest at a rate of 7.96%. These notes
require monthly payments ranging from $12,171 to $30,102
until the notes are fully repaid in 2014. During 1998, the
Company renegotiated their agreement with Farm Credit to
adjust the terms to a fixed rate of 7.85%. The loan
agreements contain covenants which require the Company to
maintain certain financial ratios and balances. At December
31, 1998, the Company was not in compliance with these
covenants. However, the Company has obtained a letter dated
March 26, 1999 waiving the debt covenants through December
31, 1999.
F-11
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
8. Long-Term Debt (Continued)
Future minimum principal payments of long-term debt mature
as follows:
Year ending
December 31,
____________
1999 $ 191,176
2000 206,173
2001 223,285
2002 241,607
2003 256,752
Thereafter 3,173,955
.__________
$ 4,292,948
=========
9. 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.
Willamette Valley Vineyards, Inc.
On June 1, 1992, the Company granted its president a warrant
to purchase 15,000 shares of common stock as consideration
for his personal guarantee of the real estate loans and the
line of credit with Northwest Farm Credit Services (see
Notes 7 and 8). The warrant is exercisable through June 1,
2012 at an exercise price of $3.42 per share. As of
December 31, 1998 and 1997, no warrants had been exercised.
In each of the years ended December 31, 1998 and 1997, the
Company granted 1,250 shares of stock valued at $2,189 and
$2,500, respectively, as compensation to its winemaker. The
cost of these grants were capitalized as inventory. The
effects of these non-cash transactions have been excluded
from the cash flow statements in both periods.
10. Stock Incentive Plan
In 1992, the Board of Directors adopted a stock incentive
plan and reserved 175,000 shares of common stock for
issuance to employees, consultants, and directors of the
Company under the plan. In 1996 and 1998, the Board of
Directors reserved an additional 150,000 and 275,000 shares,
respectively. In 1998, the Board repriced options for
145,390 unvested shares with a weighted average exercise
price of $2.91 to the current market price of $1.50 on the
date of approval. Administration of the plan, including
determination of the number, term, and type of options to be
granted, lies with the Board of Directors or a duly
authorized committee of the Board of Directors.
F-12
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
10. Stock Incentive Plan (Continued)
At December 31, 1998, 1997 and 1996, the following
transactions related to stock options occurred:
1998 1997 1996
______________ _____________ ____________
Wtd Wtd Wtd
Avg Avg Avg
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
_______ _____ ______ _____ ______ ____
Outstanding at
beginning of year 173,000 $2.94 246,500 $2.87 45,000 $3.72
Granted 229,000 1.71 100,000 2.63 248,500 2.81
Exercised - - - - - -
Forfeited - - (173,500) 2.66 (47,000) 3.38
_______ _____ ______ _____ ______ ____
Outstanding at
end of year 402,000 $1.73 173,000 $2.94 246,500 $2.87
======= ===== ======= ==== ====== ====
Weighted average fair value of options granted
during the year $ .85 $ 1.47 $ 1.87
_____ ______ ______
Weighted average options outstanding and exercisable at
December 31, 1998 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 1998 life price 1998 price
_______ ________ _____ _______ _______ _____
$ 1.50 155,890 7.38 $ 1.50 39,959 1.50
1.65 75,000 9.00 1.65 37,500 1.65
1.75 143,500 9.25 1.75 28,700 1.75
2.50 1,350 7.67 2.50 1,350 2.50
2.75 9,500 7.50 2.75 9,500 2.75
3.00 10,760 7.08 3.00 10,760 3.00
3.62 4,000 6.56 3.62 4,000 3.62
4.50 2,000 6.08 4.50 2,000 4.50
_______ ________ _____ _______ _______ _____
$1.50-4.50 402,000 1.73 1.73 133,769 1.92
__________ ________ _____ _______ _______ _____
The Company adopted Statement of Financial Accounting
Standards No. 123 ("SFAS 123") in 1996 and has elected to
account for its stock-based compensation under Accounting
Principles Board Opinion 25. As required by SFAS 123, the
Company has computed for pro forma disclosure purposes the
value of options granted during each of the three years
ended December 31, 1998 using the Black-Scholes option-
pricing model with the following weighted-average
assumptions used for the grants in 1998, 1997 and 1996:
1998 1997 1996
_____ _____ _____
Risk-free interest rate 5.54% 6.31% 6.33%
Expected dividend yield - - -
Expected lives 8 years 8 years 8 years
Expected volatility 70% 57% 57%
F-13
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
10. Stock Incentive Plan (Continued)
Options were assumed to be exercised upon vesting for
purposes of this valuation. Adjustments are made for
options forfeited prior to vesting. For the years ended
December 31, 1998, 1997 and 1996, the total value of the
options granted was computed to be $192,540, $146,700 and
$371,034, respectively, which would be amortized on a
straight-line basis over the vesting period of the options.
Had compensation cost for the Company's stock option plans
been determined based on the fair value at the grant date
for awards consistent with the provisions of SFAS 123, the
Company's net earnings would have been reduced to the pro
forma amounts indicated as follows:
1998 1997 1996
_________ _______ _________
Net income (loss) - as
reported $ (71,980) $ 67,862 $ 170,430
Per share:
Basic (0.02) 0.02 0.05
Diluted (0.02) 0.02 0.04
Net income (loss) - pro forma (175,860) 41,838 116,786
Per share:
Basic (0.04) 0.01 0.03
Diluted (0.04) 0.01 0.03
The effects of applying SFAS 123 for providing pro forma
disclosures for the three years ended December 31, 1998 are
not likely to be representative of the effects on reported
net income and earnings per share for future years, because
options vest over several years and additional awards
generally are made each year.
11. Income Taxes
The provision for income taxes consists of:
1998 1997 1996
______ ______ ______
Current tax expense (benefit)
Federal $ - $ - $ 47,197
State - - 11,964
______ ______ ______
- - 59,161
______ ______ ______
Deferred tax (expense):
Federal (24,291) 46,530 35,032
State (3,291) 5,758 4,492
______ ______ ______
(27,582) 52,288 39,524
______ ______ ______
Total $ (27,582) $ 52,288 $ 98,685
======== ======= =======
F-14
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
11. Income Taxes (Continued)
During the year ended December 31, 1996, the Company
utilized its net operating loss carryforwards of
approximately $28,000 to reduce its taxable income.
The effective income tax rate differs from the federal
statutory rate as follows:
Year ended December
31
1998 1997 1996
____ ____ ____
Federal statutory rate (34.0%) 34.0%
34.0%
State taxes, net of federal benefit (4.4) 4.4 4.9
Permanent differences 9.3 3.8 0.6
Benefit of federal rate bracket - - (2.9)
Other 1.4 1.3 0.1
____ ____ ____
(27.7)% 43.5% 36.7%
====== ===== =====
Deferred tax assets and (liabilities) consist of:
December
31,
1998 1997
__________ __________
Accounts receivable $ 42,580 $ 11,508
Inventory 38,368 34,538
Net operating loss carryforwards 132,746 37,888
Other 20,509 10,879
__________ __________
Gross deferred tax assets 234,203 94,813
__________ __________
Capital assets (300,083) (188,275)
__________ __________
Gross deferred tax liability (300,083) (188,275)
__________ __________
Net deferred tax (liability) asset $ (65,880) $ (93,462)
========== ==========
12. Related Parties
In 1996, the Company began contracting for management
services with Nor'Wester Brewing Company ("Nor'Wester") and
Willamette Valley, Inc. ("WVI"), companies formerly
controlled by the Company's president, under a general
services agreement. Nor'Wester, WVI, and the Company each
provided various administrative services, including design
and print work, and stock offering services to the
affiliated companies, subsidiaries of WVI: Aviator Ales,
Inc. ("AAI"); Mile High Brewing Company ("MHBC"); Bayhawk
Ales, Inc. ("BAI"); and North Country Brewing Company, Inc.
("NCBCI"). During 1996, total amounts charged to the
Company by Nor'Wester and WVI aggregated $47,025; amounts
charged by the Company to the various affiliated companies
aggregated $86,450. As a result of these and other
transactions, the Company had an aggregate payable balance
of $7,221 which is netted against other receivables in the
accompanying balance sheet. During 1997, charges to the
Company aggregated $164,716; amounts charged by
F-15
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
12. Related Parties (Continued)
the Company aggregated $92,601. Prior to December 31, 1997,
all intercompany transactions ceased and as of December 31,
1997 all balances are zero.
During 1998, 1997 and 1996, the Company purchased grapes
from other shareholders at an aggregate price of $105,332,
$262,795 and $138,656, respectively. At December 31, 1998,
1997 and 1996, grape payables included $52,667, $130,893 and
$92,706, respectively, owed to these shareholders.
On December 3, 1992, the Company issued a loan to its
president in the amount of $100,000. The loan was due on
December 3, 1993, bearing interest at 7.35%. On March 14,
1994, the loan was extended to March 14, 2009. The loan is
secured by the common stock of the Company held by its
president. This note, including the related interest
receivable, is classified as a long-term note receivable in
the accompanying balance sheet.
13. 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 of the Company's financial position or results of
operations, but due to the nature of the litigation, the
ultimate outcome cannot presently be determined.
Operating leases
The Company entered into a lease agreement for
approximately 45 acres of vineyards and related equipment in
1997. The Company is also committed to lease payments for
various office equipment. As of December 31, 1997, the
Company was obligated under various long-term operating
leases requiring future minimum lease payments as follows:
Year ending
December 31,
___________________
1999 $ 92,984
2000 92,702
2001 83,827
2002 83,827
2003 83,827
Thereafter 251,481
________
Total minimum payments required $ 688,648
========
Total rental expense for all operating leases excluding
the vineyards, amounted to $30,647 and $17,827 in 1998 and
1997, respectively. In addition, payments for the leased
vineyards have been included in inventory and aggregate
approximately $77,000 and $60,000, respectively, for each of
the years ended December 31, 1998 and 1997.
F-16
Willamette Valley Vineyards, Inc.
Notes to Financial Statements
December 31, 1998, 1997 and 1996
____________________________________________________________
13. Commitments and Contingencies (continued)
Susceptibility of vineyards to disease
The Tualatin vineyard purchased during 1997 and the leased
vineyards are known to be infested with phylloxera, an
aphid-like insect which can destroy vines. Although
management has begun planting with phylloxera-resistant
rootstock, a portion of the vines at the Tualatin vineyard
are susceptible to
phylloxera. The Company has not detected any phylloxera at
its Turner vineyard.
F-17
