UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File No 0-21522
WILLAMETTE VALLEY VINEYARDS, INC.
(Name of Small Business Issuer in Its Charter)
OREGON 93-0981021
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
8800 Enchanted Way, S.E.
Turner, OR 97392
(Address of principal executive offices,
including zip code)
(503) 588-9463
(Issuer's telephone number, including area code)
_______________________________________
Securities registered pursuant to Section 12(b) of the Act: Common
Stock
Securities registered pursuant to Section 12(g) of the Act: None
Check whether the Issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the past 12 months (or for such shorter period that
the Issuer was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES [X] NO [ ]
Check if there is no disclosure of delinquent filers pursuant to
Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of the Issuer's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB [X].
As of December 31, 1998
Issuer's revenues for its most recent fiscal year: $6,132,355
Aggregate market value of the voting stock held by
non-affiliates of the Issuer based upon the closing
bid price of such stock: $8,200,819
Number of shares of Common Stock outstanding: 4,232,681
Transitional Small Business Disclosure Format: YES [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
ITEM 1. DESCRIPTION OF BUSINESS
Introduction
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).
Willamette Valley Vineyards was originally established as a sole
proprietorship by Oregon winegrower Jim Bernau in 1983. 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.
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, Dry Riesling,
Gewurztraminer and Oregon Blossom (blush blend). As a convenience
to our restaurant customers the Company produces some of its
products in larger sized packages.
The Company currently produces and sells small quantities of
Oregon's Nog -- a seasonal holiday product.
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. Currently, the
Company has four varieties under this label; Merlot, Syrah, Pinot
Gris and Pinot Noir. The Company expects to add some additional
varieties.
Market Overview
Wine Consumption Trends. Wine consumption in the United States
declined from 1987 to 1994 due to increased consumer health
concerns and a growing awareness of alcohol abuse. That decline
was led by sharp reductions in the low-cost non-varietal ("jug")
wine and wine cooler segments of the market which, prior to 1987,
were two of the fastest growing market segments. Beginning in
1994, per capita wine consumption once again began to rise. The
Company estimates that premium, super premium and ultra premium
wine consumption will experience a moderate increase over the next
few years. Consumers have restricted their drinking of alcoholic
beverages and view premium, super premium and ultra premium wines
as a beverage of moderation. The Company believes this change in
consumer preference from low quality, inexpensive wines to
premium, super premium and ultra premium wines reflects, in part,
a growing emphasis on health and nutrition as a principal element
of the contemporary lifestyle as well as an increased awareness of
the risks associated with alcohol abuse.
The Oregon Wine Industry. Oregon is a relatively new wine
producing region in comparison to California and France. In 1966,
there were only two commercial wineries licensed in Oregon. By
contrast, in 1998, there were 130 commercial wineries licensed in
Oregon and over 9,000 acres of wine grape vineyards, 7,100 acres
of which are currently producing. Total production of Oregon
wines in 1998 is estimated by the Company to be approximately
753,000 cases. Oregon's entire 1998 production would have an
estimated retail value of approximately $75 million, assuming a
retail price of $100 per case, and a FOB value of approximately
one-half of the retail value, or $37.5 million.
Because of climate, soil and other growing conditions, the
Willamette Valley in western Oregon is ideally suited to growing
superior quality Pinot Noir, Chardonnay, Pinot Gris and Riesling
wine grapes. Some of Oregon's Pinot Noir and Chardonnay wines
have developed outstanding reputations, winning numerous national
and international awards.
Oregon wine producers enjoy certain cost advantages over their
California and French competitors due to lower costs for grapes,
vineyard land and winery sites. For example, the average cost of
unplanted vineyard land in Napa County, California is
approximately $40,000 per acre as compared to approximately $4,300
per acre in Oregon. In the Burgundy region of France, virtually
no new vineyard land is available for planting.
Oregon does have certain disadvantages, however. As a new wine
producing region, Oregon's wines are relatively little-known to
consumers worldwide and the total wine production of Oregon
wineries is small relative to California and French competitors.
Greater worldwide label recognition and larger production levels
give Oregon's competitors certain financial, marketing,
distribution and unit cost advantages. Furthermore, Oregon's
Willamette Valley has an unpredictable rainfall pattern in early
autumn. If significantly above-average rains were to occur just
prior to the autumn grape harvest, the quality of harvested grapes
could materially diminish thereby affecting that year's wine
quality. Finally, phylloxera, an aphid-like insect that feeds on
the roots of grapevines, has been found in at least 14 commercial
vineyards in Oregon. Contrary to the California experience, most
Oregon phylloxera infestations have expanded very slowly and done
only minimal damage. Nevertheless, phylloxera does constitute a
significant risk to Oregon vineyards. Prior to the discovery of
phylloxera in Oregon, all vine plantings in the Company's Vineyard
were with non-resistant rootstock. As of December 31, 1998, the
Company has not detected any phylloxera at its Turner site.
Beginning with the Company's plantings in May 1992, only
phylloxera-resistant rootstock was planted until 1997, when the
previous management planted non-resistant root stock on
approximately 10 acres at the Tualatin Vineyard. In 1997, the
Company purchased Tualatin Vineyards, which has phylloxera at its
site. Since the Third Quarter of 1997, all plantings have been
and all future planting will be on phylloxera resistant root
stock. The Company takes all necessary precautions to prevent the
spread of phylloxera to its Turner site. Also phylloxera is
active at the O'Connor Vineyard for which the Company has a 10
year lease. Any care and training of new plants at the O'Connor
will be at the expense of the Company but at this time the Company
has chosen not to approve any additional plantings at O'Connor
vineyard.
Several significant developments in the Oregon wine industry have
taken place over the past ten years. Robert J. Drouhin, a well-
known producer of French wines, purchased vineyard land near
Dundee, Oregon on which he has planted a vineyard and constructed
a winery. Napa Valley's Girard and Stag's Leap Wineries have
formed a partnership and purchased vineyard land in the Willamette
Valley where they have planted a vineyard and begun harvesting
Pinot Noir grapes. Brian Croser (a noted Australian winemaker),
in partnership with Cal Knudsen (an original investor in Erath
Vineyards) and the French Champagne firm, Taittinger, established
the Dundee Wine Company. Their wines, under the Argyle label,
have received recognition for sparkling wines, Dry Riesling,
Chardonnay and Pinot Noir. In 1992, a vineyard consisting of over
200 acres of Pinot Noir grapes was planted by a California
vineyard investor across Interstate 5 and within sight of the
Company's Winery.
In 1994, the largest development in the Oregon wine industry is
King Estate Winery was completed. The facility which is located
22 miles southwest of Eugene, is approximately 100,000 square feet
in size surrounded by a 180 acre vineyard. The Company estimated
King Estate's wine production in 1996 to be 250,000 gallons. King
Estate is focused on serving the national market. The Company
views King Estate as a welcome addition to the Oregon wine
industry and believes they could have the same positive effect on
wine exports as St. Michelle Winery has had on the Washington wine
industry. The most recent high-profile move in Oregon was the
Benziger family's purchase of 65 acres, including 32 producing
acres of vineyard, near Scholls. The Benziger family created the
huge Glen Ellen wine brand in California, before selling it off to
Brown-Forman. The Company believes that further investments by
other experienced wine producers will continue, ultimately
benefiting the Company and the Oregon wine industry as a whole by
bringing increased international recognition to the quality of
Oregon wines.
As a result of these factors, the Company believes that long-term
prospects for growth in the Oregon wine industry are excellent.
The Company believes that over the next 20 years the Oregon wine
industry will grow at a faster rate than the overall domestic wine
industry, and that much of this growth will favor producers of
premium, super premium and ultra premium wines such as the
Company's.
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, and
establish 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) development of the
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 and sells 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.
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. 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 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 acres 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
vineyard 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. In 1998,
the Company purchased an additional 849 tons of grapes from other
growers. 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
cannot 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 "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.
Viticultural Conditions. Oregon's Willamette Valley is recognized
as a premier location for growing certain varieties of high
quality wine grapes, particularly Pinot Noir, Chardonnay, Riesling
and Pinot Gris. The Company believes that the Vineyard's growing
conditions including its soil, elevation, slope, rainfall, evening
marine breezes and solar orientation are among the most ideal
conditions in the United States for growing certain varieties of
high-quality wine grapes. The Vineyard's grape growing conditions
compare favorably to those found in some of the famous
viticultural regions of France. Western Oregon's latitude
(42 -46 North) and relationship to the eastern edge of a major
ocean is very similar to certain centuries-old wine grape growing
regions of France. These conditions are unduplicated anywhere
else in the world except the great wine grape regions of Northern
Europe. The Company's property is located at the same latitude as
the famous Haut Brion vineyards in Bordeaux, France.
The Vineyard's soil type is Jory/Nekia, a dark reddish-brown silky
clay loam over basalt bedrock noted for being well drained,
acidic, of adequate depth, retentive of appropriate levels of
moisture and particularly suited to growing high quality wine
grapes.
The Vineyard's elevation ranges from 533 feet to 700 feet above
sea level with slopes from 2 percent to 30 percent (predominately
12-20 percent). The Vineyard's slope is oriented to the south,
southwest and west. Average annual precipitation at the Vineyard
is 41.3 inches, average annual air temperature is 52 to 54 degrees
Fahrenheit, and the length of each year's frost-free season
averages from 190 to 210 days. These conditions compare favorably
with conditions found throughout the Willamette Valley
viticultural region and other domestic and foreign viticultural
regions which produce high quality wine grapes.
In the Willamette Valley, permanent vineyard irrigation is not
required. The average annual rainfall provides sufficient
moisture to avoid the need to irrigate the Vineyard. However, if
the need should arise, the Company's property contains one water
well which can sustain sufficient volume to meet the needs of the
Winery and to provide auxiliary water to the Vineyard for new
plantings and unusual drought conditions.
Winery
Wine Production Facility. The Company's Winery and production
facilities, built at an initial cost of approximately $1,500,000,
were originally capable of producing up to 75,000 cases of wine
per year, depending on the type of wine produced. In 1996 the
Company invested an additional $750,000 to increase its capacity
from 75,000 cases to its present capacity of 104,000 cases
(250,000 gallons). It added one large press, six stainless steel
fermenters, and handling equipment to increase its capacity to the
new level. It also expanded the size of its crush pad to meet the
needs of the additional tons of grapes crushed. In 1998, the
Winery produced 183,220 gallons (77,064 cases) of wine from its
1997 crush. The Winery is 12,784 square feet in size and contains
areas for the processing, fermenting, aging and bottling of wine,
as well as an underground wine cellar, a tasting room, a retail
sales room and administrative offices. A 12,500 square foot
outside production area was added for the crushing, pressing and
fermentation of wine grapes. In 1993, a 4,000 square foot
insulated storage facility with a capacity of 30,000 cases of wine
was constructed at a cost of approximately $70,000. This facility
has now been converted to barrel storage in order to accommodate
an additional 750 barrels for aging wines. This change increases
the Company's barrel aging capacity at the Turner site. The
production area is equipped with a settling tank and sprinkler
system for disposing of waste water from the production process in
compliance with environmental regulations. The settling tank and
sprinkler system were installed at a total cost of approximately
$20,000.
In 1997, the Company constructed a 20,000 square foot storage
building to store all of its bottled product at an approximate
cost of $750,000. In the past, the Company rented a storage
facility with an annual rental cost to the Company of $96,000.
With the purchase of Tualatin Vineyards, Inc., the Company added
20,000 square feet of additional production capacity. Although
the Tualatin facility was constructed over twenty years ago, it
will add 20,000 cases of wine production capacity to the Company
which the Company felt at the time of purchase was needed.
However due to lower sales forecasts of higher priced wines, the
facility is not needed at this time. The Company decided to move
current production to its Turner site to meet short term
production requirements. The capacity at Tualatin is still
available to the Company to meet any future production expansion
needs. The book value of the assets at Tualatin facility is less
than the original appraised value at the time of the purchase of
Tualatin Vineyards.
Construction of Hospitality Facility. In May 1995, the Company
completed construction of a large tasting and hospitality facility
of 19,470 square feet (the "Hospitality Center"). The first floor
of the Hospitality Center includes retail sales space and a "great
room" designed to accommodate approximately 400 persons for
gatherings, meetings, weddings and large wine tastings. An
observation tower and decking around the Hospitality Center will
enable visitors to enjoy the view of the Willamette Valley and the
Company's Vineyard. The Hospitality Center is joined with the
present Winery by an underground cellar tunnel. The facility
includes a basement cellar of 10,150 square feet (including the
2,460 square foot underground cellar tunnel) to expand storage of
the Company's wine in a proper environment. The cellar provides
the Winery with ample space for storing up to 3,000 barrels of
wine for aging.
Just outside the Hospitality Center, the Company has planned a
landscaped park setting consisting of one acre of terraced lawn
for outdoor events and five wooded acres for picnics and social
gatherings. The area between the Winery and the Hospitality
Center forms a 20,000 square foot quadrangle. As designed, the
quadrangle can be covered by a removable fabric top making it an
all-weather outdoor facility to promote sale of the Company's
wines through outdoor festivals and social events.
The Company believes the addition of the Hospitality Center and
the park and quadrangle will make the Winery an attractive
recreational and social destination for tourists and local
residents, thereby enhancing the Company's ability to sell its
wines.
Mortgages on Properties. The Company's winery facilities are
subject to two mortgages. The facility at Turner had a principal
balance of $2,937,479 on December 31, 1998. In 1997, the Company
entered into a second separate mortgage to fund the Tualatin
acquisition and development of its vineyards. This separate
mortgage, secured by Tualatin assets, had a principal balance of
$1,299,908 on December 31, 1998. The Company's total mortgages
had a balance of $4,237,387 on December 31, 1998, as compared to
the principal balance of $4,044,943 December 31, 1997 These
mortgages are payable in annual aggregate installments including
interest of approximately $510,000 through 2012. After 2012, the
Company's annual aggregate mortgage payment including interest
will be $144,000 until the year 2014.
Wine Production. The Company operates on the principle that
winemaking is a natural but highly technical process requiring the
attention and dedication of the winemaking staff. The Company's
Winery is equipped with the latest technical innovations and uses
modern laboratory equipment and computers to monitor the progress
of each wine through all stages of the winemaking process.
Beginning with the Company's first vintage in 1989, the Company's
annual grape harvest and wine production are as follows:
Tons of
Grapes Production Case
Crush Year Crushed Year Gallons 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 270 tons of grapes before
crush, this tonnage converts to 44,000 gallons of bulk wine which
the Company sold in 1998.
Sales and Distribution
Marketing Strategy. The Company markets and sells its wines
through a combination of direct sales at the Winery, sales
directly and indirectly through its shareholders, self-
distribution to local restaurants and retail outlets in Oregon,
directly through mailing lists, and through distributors and wine
brokers who sell in specific targeted areas outside of the state
of Oregon. As the Company has increased production volumes and
achieved greater brand recognition, sales to other domestic
markets have increased both in terms of absolute dollars and as a
percentage of total Company sales.
Direct Sales. The Company's Winery is located adjacent to the
state's major north-south freeway (Interstate 5), approximately 2
miles south of the state's third largest metropolitan area
(Salem), and 50 miles in either direction from the state's first
and second largest metropolitan areas (Portland and Eugene,
respectively). The Company believes the Winery's unique location
along Interstate 5 has resulted in a greater amount of wines sold
at the Winery as compared to the Oregon industry standard. Direct
sales from the Winery are an important distribution channel and an
effective means of product promotion. To increase brand
awareness, the Company offers educational Winery tours and product
presentations by trained personnel.
The Company holds eight major festivals and events at the Winery
each year. In addition, open houses are held at the Winery during
major holiday weekends such as Memorial Day, Independence Day,
Labor Day and Thanksgiving, where barrel tastings and cellar tours
are given. Numerous private parties, wedding receptions,
political and other events are also held at the Winery. Finally,
the Company participates in many wine and food festivals
throughout Oregon. Each of these events results in direct sales
of the Company's wines and promotion of its label to event
attendees.
Direct sales are profitable because the Company is able to sell
its wine directly to consumers at retail prices rather than to
distributors or retailers at wholesale prices. Sales made
directly to consumers at retail prices result in an increased
profit margin equal to the difference between retail prices and
distributor or wholesale prices, as the case may be. For 1998,
direct sales make up approximately 24% of the Company's revenue.
Self-Distribution. The Company has established a self-
distribution system to sell its wines to restaurant and retail
accounts located primarily in Oregon. The self-distribution
program is currently carried out by 17 sales representatives who
market the Company's wine exclusively, take wine orders and make
deliveries on a commission-only basis. The Company believes this
program of self-representation and delivery has allowed its
relatively new wines to gain a strong presence in the Oregon
market with over 1,000 restaurant and retail accounts established
as of December 31, 1998. The Company further believes that the
location of its Winery along Interstate 5 facilitates self-
distribution throughout the entire Willamette Valley where
approximately 70% of Oregon's population resides.
The Company has expended significant resources to establish its
self-distribution system. The system initially focused on
distribution in the Willamette Valley, but then expanded to the
Oregon coast, and then into southern Oregon. For 1998,
approximately 37% of the Company's net revenues were attributable
to self-distribution.
Distributors and Wine Brokers. The Company uses both independent
distributors and wine brokers primarily to market the Company's
wines in specific targeted areas where self-distribution is not
feasible. Only those distributors and wine brokers who have
demonstrated a knowledge of and a proven ability to market
premium, super premium, and ultra premium wines are utilized.
Shareholders. As a consumer-owned company, the Company has a
unique marketing opportunity available to only a few of its
competitors. The Company has approximately 3500 shareholders of
record which represents approximately 5,000 wine consumers since
many shares are held jointly by family members. The Company
believes its shareholders, as a group, purchase a significant
portion of the Company's cork-finished wines directly from the
Winery.
The Company encourages its shareholders to enjoy the Winery's
products and promote them to their friends and business
associates. The Company's shareholders have been very active
throughout the Winery's operations, providing valuable assistance
at little or no cost. Throughout the year, shareholders have
helped with cellaring duties. Over 300 shareholders have
qualified with the Oregon Liquor Control Commission as licensed
wine servers and have poured wine at various Winery events. The
Winery's tasting facilities are often staffed with volunteer
shareholders. With their own personalized Company business cards,
shareholders have made numerous contacts with restaurants and
retail outlets interested in selling the Company's wines. The
Company views its shareholders as an army of volunteer marketers
promoting the Company's products to their friends and
acquaintances in both social and business settings. On an ongoing
basis, shareholders provide valuable leads and feedback to the
Company's management and staff.
Tourists. Oregon wineries are experiencing an increase in on-site
visits by consumers. In California, visiting wineries is a very
popular leisure time activity. Napa Valley is California's
second-largest tourist attraction with over 2.5 million visitors
in 1987. Wineries in Washington are also experiencing strong
interest from tourists. Chateau Ste. Michelle, located near
Woodinville, Washington, attracts approximately 200,000 visitors
per year.
The Winery is located less than one mile from The Enchanted
Forest, a gingerbread village/forest theme park which, in 1985,
was Oregon's eleventh most visited tourist attraction (fifth among
those charging admission). The Enchanted Forest, which operates
from March 15 to September 30 each year, attracts approximately
200,000 paying visitors per year. Adjacent to the Enchanted
Forest is the Thrillville Amusement Park and the Forest Glen
Recreational Vehicle Park which contains approximately 110
overnight recreational vehicle sites. The Company believes that
some of the visitors to the Enchanted Forest and RV Park do visit
the Winery. More importantly, the Company believes its convenient
location, adjacent to Interstate 5, enables the Winery to attract
a significant number of visitors.
Competition
The wine industry is highly competitive. In a broad sense, wines
may be considered to compete with all alcoholic and nonalcoholic
beverages. Within the wine industry, the Company believes that
its principal competitors include wineries in Oregon, California
and Washington, which, like the Company, produce premium, super
premium, and ultra premium wines. Wine production in the United
States is dominated by large California wineries which have
significantly greater financial, production, distribution and
marketing resources than the Company. Currently, no Oregon winery
dominates the Oregon wine market. Several Oregon wineries,
however, are older and better established and have greater label
recognition than the Company.
The Company believes that the principal competitive factors in the
premium, super premium, and ultra premium segment of the wine
industry are product quality, price, label recognition, and
product supply. The Company believes it competes favorably with
respect to each of these factors. The Company has received good
reviews in tastings of its wines and believes its prices are
competitive with other Oregon wineries. Large production is
necessary to satisfy retailers' and restaurants' demand and the
Company believes that its current level of production is adequate
to meet that demand. Furthermore, the Company believes that its
ultimate forecasted production level of 298,000 gallons (124,000
cases) per year will give it significant competitive advantages
over most Oregon wineries in areas such as marketing, distribution
arrangements, grape purchasing, and access to financing. The
current production level of most Oregon wineries is generally much
smaller than the projected production level of the Company's
Winery. With respect to label recognition, the Company believes
that its unique structure as a consumer-owned company will give it
a significant advantage in gaining market share in Oregon as well
as penetrating other wine markets.
Governmental Regulation of the Wine Industry
The production and sale of wine is subject to extensive regulation
by the Federal Bureau of Alcohol, Tobacco and Firearms and the
Oregon Liquor Control Commission. The Company is licensed by and
meets the bonding requirements of each of these governmental
agencies. Sale of the Company's wine is subject to federal
alcohol tax, payable at the time wine is removed from the bonded
area of the Winery for shipment to customers or for sale in its
tasting room. The current federal alcohol tax rate is $1.07 per
gallon; however, wineries that produce not more than 250,000
gallons during the calendar year are allowed a graduated tax
credit of up to $0.90 per gallon on the first 100,000 gallons of
wine (other than sparkling wines) removed from the bonded area
during that year. The Company also pays the state of Oregon an
excise tax of $0.67 per gallon on all wine sold in Oregon. In
addition, all states in which the Company's wines will be sold
impose varying excise taxes on the sale of alcoholic beverages.
As an agricultural processor, the Company is also regulated by the
Oregon Department of Agriculture and, as a producer of waste
water, it is regulated by the Oregon Department of Environmental
Quality. The Company has secured all necessary permits to operate
its business.
Prompted by growing government budget shortfalls and public
reaction against alcohol abuse, Congress and many state
legislatures are considering various proposals to impose
additional excise taxes on the production and sale of alcoholic
beverages, including table wines. Some of the excise tax rates
being considered are substantial. The ultimate effects of such
legislation, if passed, cannot be assessed accurately since the
proposals are still in the discussion stage. Any increase in the
taxes imposed on table wines can be expected to have a potentially
adverse impact on overall sales of such products. However, the
impact may not be proportionate to that experienced by producers
of other alcoholic beverages and may not be the same in every
state. Recently, there have been national efforts to reduce the
legal blood alcohol level to .08 to combat driving under the
influence. The Company believes that if such legislation is
passed, it may discourage wine consumption in restaurants.
Although the .08 rule is in effect in Oregon, the Company's
principal sales territory, it has not yet affected local
restaurant sales although it is possible that it will on a
national level.
Employees
As of December 31, 1998 the Company had 41 full-time employees and
9 part-time employees. In addition, the Company hires additional
employees for seasonal work as required. The Company's employees
are not represented by any collective bargaining unit. The
Company believes its relations with its employees are good.
ITEM 2. DESCRIPTION OF PROPERTY
See "DESCRIPTION OF BUSINESS -- Winery" and "-- Vineyard".
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the
Company is a party or to which any of its property is subject, and
the Company's management does not know of any such action being
contemplated.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders
during the Company's Fourth Quarter ended December 31, 1998.
ITEM 5. 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 stockholders of record of the Common Stock.
The table below sets forth for the quarters indicated the high and
low bids for the Company's Common Stock as reported on the NASDAQ
Small Cap Market. The Company's Common Stock began trading
publicly on September 13, 1994.
Quarter Ended
3/31/98 6/30/98 9/30/98 12/31/98
High $1.94 $3.63 $2.88 $2.25
Low $1.38 $1.56 $1.75 $1.50
Quarter Ended
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.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
Forward Looking Statement
This Management's discussion and Analysis of Financial Condition
and Results of Operation and other sections of this Form 10K
contain forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. 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. Such
forward-looking statements include, for example, statements
regarding general market trends, predictions regarding growth and
other future trends in the Oregon wine industry, expected
availability of adequate grape supplies, expected positive impact
of the Company's recently constructed Hospitality Center on direct
sales effort, expected positive impacts of recent management
changes are related to restructuring efforts on future operating
results, expected increases in future sales, expected improvements
in gross margin. 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. 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 Form 10K 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.
OVERVIEW
Beginning 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 the Company has experienced over the last several years
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 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 upon 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.
While costs to purchase grapes have climbed dramatically,
especially for Pinot Noir (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 22% 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 of which will
retail for $35 per bottle are expected to be released in mid year
1999. The Merlot has garnered a score of "90" from Wine
Enthusiast and the Pinot Noir earned a Gold Metal at the prominent
Dallas Morning News judging in Texas.
The Gross Profit Margin improved from 44% in the Fourth Quarter of
1997 to 49% 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
and 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 has 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 attaining 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 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) which will be 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 1995 and 1996 for its 1993 and
1994 Reserve Pinot Noir, respectively. Tualatin is the only
vineyard in the world to have captured the Best of Show in the red
and white categories at the 1984 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 Fiscal 1997 Quarter Ended
(in thousands) (in thousands)
3/31 6/30 9/30 12/31 3/31 6/30 9/30 12/31
Tasting room and
retail sales $155 $224 $274 $284 $140 $212 $244 $272
On-site and off-site
festivals 118 108 132 207 86 92 145 177
In-state sales 426 575 530 747 317 462 552 827
Bulk/Grape sales 235 88 0 131 0 38 19 408
Out-of-state
sales 437 500 811 376 298 510 400 727
Total winery
revenues 1,371 1,495 1,747 1,745 841 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
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 Founder Reserve Cabernet were available
to the customers at higher average prices. 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, the sales were down by 10% but the Company expects the
sales to rebound in 1999. Part of the decrease in sales in the
Fourth Quarter was due to the Company's decision to reduce
production 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 management believes the industry in Oregon,
Washington, and California will experienced 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% in 1997. The
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 increased 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. in 1997, plant additional land at Tualatin in 1997
and 1998, 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 saw a drop in the average
tasting room "ring", meaning that customers were purchasing the
wine elsewhere as witnessed by increased sales in the in-state
sales category. In the last part of 1997, the Company began
tracking 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 had 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.
On-site and off-site festival sales for the year ended
December 31, 1997 increased 5% to $500,124 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.
As a consequence, the Company reinstituted a strict policy
requiring a cost/benefit analysis for each event before the
decision is made to participate in the event and began 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 saw a
significant increase in the sales of its 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
Price Costco. 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.
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. By
the end of 1997, the Company was selling 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. 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, 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 were 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 $521,832 in 1996. The Company 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 9% 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.
The Company has 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. At the present
time the $2,000,000 line of credit is not sufficient to meet the
current Company needs. The Company has applied to Farm Credit
Services for additional $500,000 which will be used to make the
remaining grape payments from its 1998 harvest. Farm Credit
Services has given their approval to increase the line of credit.
Farm Credit Services has established credit line targets based
upon the Company's cash flow plan and will increase the interest
rate on the credit line if those targets are not met in August and
December of 1999. They have also increased their lending rate .5%
above their base rate for 1999. The Company paid a rate of 8.5%
in 1998 and will pay a lower rate of 8.25% for 1999
YEAR 2000 COMPLIANCE
The Company began to develop its strategy in the first part of
1998 to make itself business ready for the year 2000. Its first
step was to make all levels of the Company aware of the basic
problems that the Company can expect as the year 2000 approaches.
Each month the Company holds an all staff meeting. The Company
began to set aside time in each meeting to discuss the problem in
detail. The Company has made educational awareness and education
a priority in 1999. The Company's small staff makes it easy to
communicate with its employees and develop strategy plans.
In November of 1998, the Company's outside computer consultants
identified each of the different computer based systems which
support the Company's business and production needs. Once the
equipment was identified, tests were performed to determine which
equipment passed or failed the Y2K compliance testing. A list of
the equipment was made and the Company started to replace the
critical equipment immediately. From its plan the Company expects
to replace the majority of the 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 contacting equipment
manufacturers, the Company is beginning its assessment evaluation
to determine the severity of the problem and what needs to be
fixed. All critical items on the equipment list have been taken
care of, which would be the financial reporting, networking
communications, and 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,
most of the critical needs are fulfilled now. The Company is
currently testing all temperature control systems for its
stainless steel tanks and is prepared to take any necessary action
to make them compliant for the year 2000. However, in January,
typically, there is very little activity on the production side of
the winery. At this time, the wine is aging in stainless steel
tanks and oak barrels. It will not be necessary to bottle any
wine during the first few months after January 2000 unless a need
arises. The Winery's average temperature ranges from 40 to 50
degrees in these months so the wine will not be in danger of
spoiling.
The Company has prepared a short survey to mail to its primary
vendors and all distributors to inquire as to their abilities for
compliance in the year 2000. The surveys will be sent out in the
first part of April 1999 with a response requested by May 1, 1999.
From the returned survey, the Company will determine any critical
needs to be met by the end of the year. The majority of the
Company's customers in the state of Oregon are on a cash-
collected-at-delivery basis so there is no need to see if their
payable software is compliant for the year 2000. The out-of-state
customers will need to assure us their business is 2000 year
ready.
ITEM 7. FINANCIAL STATEMENTS
The financial statements required by this item are presented at
page F-1.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS
Directors, nominees for election as a director, and each such
person's age at June 30, 1999 and position with the Company.
Name Position(s) with the Company Age
James W. Bernau *** Chairperson of the Board,
President and Director 45
James L. Ellis *** Secretary and Director 54
Betty M. O'Brien* Director 56
Daniel S. Smith Director 59
Delna L. Jones** **** Director 59
Stan G. Turel * ** *** **** Director 51
William H. Malkmus * Director 64
_______________________________
*Member of the Compensation Committee
**Member of the Audit Committee
***Member of the Executive Committee
****Member of the 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. Willamette Valley Vineyards was originally established as a
sole proprietorship by Oregon winegrower Jim Bernau in 1983, and
he co-founded the Company in 1988 with Salem grape 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 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. 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 News and Publications 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 was elected in 1998 and now serves as a County
Commissioner for Washington county, Oregon. Ms. Jones has served
as project director for the CAPITAL Center, an education and
business consortium from 1990 to 1998. From 1985 to 1990, Ms.
Jones served as Director of Economic Development with US West
Communications. 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
August 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 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.
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 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 met six times
during 1998.
ITEM 10. 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.
Name and Principle Position Year Annual Compensation
Salary ($) Bonus
James W. Bernau 1996 $ 6,500 -
President and Chairperson of 1997 19,385 -
the Board of Directors 1998 84,865 10,000
As discussed under "Election of Directors", 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 amended 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.
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. No stock options were granted to the named
executive officer during the year ended December 31, 1998 under
the Company's 1992 Stock Incentive Plan.
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 Number of Value of
Exercised Securities Unexercised
in the last Underlying In-the-Money
fiscal year Unexercised Options
Number Value Options at FY-End at FY-End(2)
Name of shares Realized(1) Exer- Unexer- - Exer- Unexer-
cisable cisable cisable cisable
James W. Bernau -0- -0 - 37,500 37,500($1.65) 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 the
NASDAQ Small Cap Market on that date), and the exercise price of
the option ($3.42 per share), multiplied by the applicable number
of options.
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 is 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(a) Beneficial Ownership Reporting Compliance
None
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The following table sets forth certain information with respect to
beneficial ownership of the Company's Common Stock as of March 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.
Shares Beneficially Owned
. Number of Percent of
Shares Outstanding Stock
James W. Bernau President/CEO, Chair of the Board
2545 Cloverdale Road 1,057,203.5 (1) 25.0%
Turner, OR 97392
James L. Ellis Secretary, Director
7850 S.E. King Road 30,373.5 (2) **
Milwaukie, OR 97222
Delna L. Jones Director
PO Box 5969 2,800 (3) **
Aloha, OR 97006
Betty M. O'Brien Director
22500 Ingram Lane NW 8,000 (4) **
Salem, OR 97304
Daniel S. Smith Director
26978 Briggs Hill Road 28,384 (5) **
Eugene, OR 97405
Stan G. Turel Director
13909 S.E. Stark Street 100,635 (6) 2.3%
Portland, OR 97233
William H. Malkmus Director
415 Manzanita Way 171,378 4.0%
Woodside, CA 94062
Donald Voorhies
78356 Golden Reed Dr 212,518 5.0%
Palm Desert, CA 92211
All Directors, executive 1,611,292 38.0%
officers 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 76,500 shares issuable upon exercise of
options.
(2) Includes 25,928.5 shares issuable upon the exercise of
options.
(3) Includes 2,100 shares issuable upon the exercise of
options.
(4) Includes 4,500 shares issuable upon the exercise of
options.
(5) Includes 4.500 shares issuable upon the exercise of
options.
(6) Includes 2,100 shares issuable upon the exercise of
options.
ITEM 12. 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 principal 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.
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 receivable 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 1998,
the Company recovered $3,100 of receivables from the former
affiliates.
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 including accrued
interest.
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.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(3) Articles of Incorporation and Bylaws:
(a) Articles of Incorporation of
Willamette Valley Vineyards, Inc.
(incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(b) Bylaws of Willamette Valley Vineyards,
Inc.(incorporated by reference from the
Company's Regulation A Offering Statement on
Form 1-A [File No. 24S-2996])
(10) Material Contracts
(a) Employment Agreement between
Willamette Valley Vineyards, Inc. and James
W. Bernau dated August 3, 1988 (incorporated
by reference from the Company's Regulation A
Offering Statement on Form 1-A [File No. 24S-
2996])
(b) Indemnity Agreement between Willamette
Valley Vineyards, Inc. and James W. Bernau
dated May 2, 1988 (incorporated by reference
from the Company's Regulation A Offering
Statement on Form 1-A [File No. 24S-2996])
(c) Indemnity Agreement between Willamette
Valley Vineyards, Inc. and Donald E. Voorhies
dated May 2, 1988 (incorporated by reference
from the Company's Regulation A Offering
Statement on Form 1-A [File No. 24S-2996])
(d) Shareholders Agreement among
Willamette Valley Vineyards, Inc. and its
founders, James Bernau and Donald Voorhies,
dated May 2, 1988 (incorporated by reference
from the Company's Regulation A Offering
Statement on Form 1-A [File No. 24S-2996])
(h) Revolving Note and Loan Agreement
dated May 28, 1992 by and between Northwest
Farm Credit Services, Willamette Valley
Vineyards, Inc. and James W. and Cathy Bernau
(incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(i) Founders' Escrow Agreement among
Willamette Valley Vineyards, Inc., James W.
Bernau, Donald Voorhies and First Interstate
Bank of Oregon, N.A. dated September 20, 1988
(incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(j) Amendment to Founders' Escrow
Agreement dated September 20, 1988
(incorporated by reference from the Company's
Regulation A Offering Statement on Form 1-A
[File No. 24S-2996])
(k) Stock Escrow Agreement among
Willamette Valley Vineyards, Inc., Betty M.
O'Brien and Charter Investment Group, Inc.
dated July 7, 1992 (incorporated by reference
from the Company's Regulation A Offering
Statement on Form 1-A [File No. 24S-2996])
(l) Stock Escrow Agreement among
Willamette Valley Vineyards, Inc., Daniel S.
Smith and Piper Jaffray & Hopwood, Inc. dated
July 7, 1992 (incorporated by reference from
the Company's Regulation A Offering Statement
on Form 1-A [File No. 24S-2996])
(m) Acquisition of Tualatin Vineyards,
Inc. dated April 15, 1997. (File No. )
(b) Reports on Form 8-K
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
WILLAMETTE VALLEY VINEYARDS, INC.
(Registrant)
Date: March 30, 1999. By:__________________________________
James W. Bernau,
Chairperson of the Board,
President
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signature Title Date
_____________________ Chairperson of the Board, March 30, 1999
James W. Bernau President
(Principal Executive Officer)
_____________________ Controller March 30, 1999
John E. Moore (Principal Accounting Officer)
_____________________ Director and Vice-President March 30, 1999
James L. Ellis and Secretary
_____________________ Director March 30, 1999
Betty M. O'Brien
_____________________ Director March 30, 1999
Daniel S. Smith
_____________________ Director March 30, 1999
Stan G. Turel
_____________________ Director March 30, 1999
William H. Malkmus
_____________________ Director March 30, 1999
Delna Jones
Willamette Valley
Vineyards, Inc.
Report and Financial Statements
December 31, 1998, 1997 and 1996
Willamette Valley Vineyards, Inc.
Index to Financial Statements
Report of Independent Accountants F-1
Balance Sheet F-2
Statement of Operation F-3
Statement of Shareholders' Equity F-4
Statement of Cash Flows F-5
Notes to Financial Statements F-6
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 (Note 8) 191,176 124,192
Accounts payable 315,185 363,419
Accrued commissions and payroll costs 213,210 225,297
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
.__________. _________
$14,290,862 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 (Note 1)(493,901) (396,118) (214,380)
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
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
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
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
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
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
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
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
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
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
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
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
1
2
- -
- 5 -
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<PERIOD-END> DEC-31-1998
<CASH> 149,401
<SECURITIES> 0
<RECEIVABLES> 482,537
<ALLOWANCES> (111,000)
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<SALES> 6,132,355
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<INCOME-PRETAX> (99,561)
<INCOME-TAX> (27,581)
<INCOME-CONTINUING> (71,980)
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