10QSB 1 0001.txt US SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ___________________________________________________________ FORM 10-QSB ___________________________________________________________ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarter Ended June 30, 2000 Commission File Number 0-21522 WILLAMETTE VALLEY VINEYARDS, INC. (Exact name of registrant as specified in charter) Oregon 93-0981021 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ___________________________________________________________ 8800 Enchanted Way, S.E., Turner, Oregon 97392 (503)-588-9463 (Address, including Zip code, and telephone number, including area code, of registrant's principal executive offices) ___________________________________________________________ Indicate by check mark whether the registrant (1) has filed, all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Number of shares of common stock outstanding as of June 30, 2000 4,253,431 shares, no par value Transitional Small Business Disclosure Format [ ] YES [X] NO WILLAMETTE VALLEY VINEYARDS, INC. INDEX TO FORM 10-Q Part I - Financial Information Item 1--Balance Sheet Statement of Operations Cash Flow Notes to Consolidated Financial Statements Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations Part II - Other Information Item 6--Exhibits and Reports of Form 8-K Signature 811709 WILLAMETTE VALLEY VINEYARDS, INC. ITEM 1 Balance Sheet June 30, December 31, 2000 1999 ASSETS (unaudited) ____________ Current Assets: Cash and cash equivalents $ 2,265 $ 219,041 Accounts receivable trade, net 587,066 429,495 Inventories 6,208,069 6,142,697 Prepaid expenses and other Current assets 54,117 79,102 Deferred income taxes 100,798 100,798 _________ _________ Total current assets 6,952,315 6,971,133 Vineyard development cost, net 1,436,267 1,381,163 Property and equipment, net 6,105,440 6,402,023 Investments 4,974 4,974 Notes receivable 50,002 52,975 Debt issuance costs, net 63,298 72,107 Other assets 141,655 141,655 ________ _________ Total assets $ 14,753,951 $ 15,026,030 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Line of credit $ 2,400,584 $ 1,685,584 Current portion of long term debt 198,618 213,502 Accounts payable 644,289 960,479 Accrued commissions and payroll 97,743 126,375 Income tax payable 185 42,429 Grapes payable 402,696 827,843 ________ ________ Total current liabilities 3,744,115 3,856,212 Long-term debt 3,484,654 3,583,007 Deferred Gain 486,978 508,054 Deferred income taxes 100,798 100,798 _________ ________ Total liabilities 7,816,545 8,048,071 Shareholders' equity Common stock, no par value - 10,000,000 shares authorized, 4,237,481 shares issued outstanding 6,815,972 6,815,972 Retained earnings 121,434 161,987 ________ ________ Total shareholders' equity 6,937,406 6,977,959 Total liabilities and shareholders' equity $ 14,753,951 $ 15,026,030 The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. Statement of Operations (Unaudited) Three months ended, Six months ended June 30, June 30, 2000 1999 2000 1999 Net Revenues Case Revenue $ 1,583,302 $ 1,230,405 $ 2,840,723 $ 2,346,641 Bulk Revenue - - - - Total Revenue 1,583,302 1,230,405 2,840,723 2,346,641 Cost of Sales Case 771,593 528,741 1,405,962 1,030,446 Bulk - - - - Total Cost of Sales 771,593 528,741 1,405,962 1,030,446 Gross Margin 811,709 701,664 1,434,761 1,316,195 Selling, general and administrative expense 649,049 678,432 1,241,372 1,324,441 Net operating income (loss) 162,660 23,232 193,389 (8,246) Other income (expense) Interest income 961 2,480 1,922 4,506 Interest expense (130,359) (122,507) (249,535) (232,430) Other income 6,655 833 13,671 1,022 Net income (loss) before Income taxes 39,917 (95,962) (40,553) (235,148) Income tax benefit - - - - Net income (loss) 39,917 (95,962) (40,553) (235,148) Retained earnings beginning of period 81,517 115,033 161,987 254,219 Retained earnings end of period 121,434 19,071 121,434 19,071 Basic gain (loss) per common share .01 (.02) (.01) (.06) Diluted gain (loss) per common share .01 (.02) (.01) (.06) Weighted average number of basic common shares outstanding 4,253,431 4,237,231 4,253,431 4,237,231 WILLAMETTE VALLEY VINEYARDS, INC. Statement of Cash Flows (unaudited) Six Months Ended June 30, 2000 1999 . Cash flows from operating activities: Net loss $ (40,553) $ (242,589) Reconciliation of net loss to net cash used for operating activities: Depreciation and amortization 376,599 361,948 Equity Change - 7,800 Changes in assets and liabilities: Accounts receivable trade ,net (157,571) 133,933 Inventories (65,372) (478,214) Prepaid expenses and other current 24,986 8,554 Grapes payable (425,147) (366,620) Accounts payable (316,190) 322,604 Income Tax payable (42,244) - Accrued commissions and payables (28,632) (31,042) Net cash provided (used) by operating activities (674,124) (283,626) Cash Flow from investing activities Construction expenditures and purchases of equipment (50,217) (192,381) Vineyard development expenditures (84,903) (72,730) Cash received for investments - - Notes receivable 2,973 (1,710) Net cash used by investing activities (132,147) (266,821) Cash Flows from financing activities: Line of credit borrowings 715,000 600,000 Debt issuance cost 8,809 (969) Deferred gain (21,077) - Increase (decrease) in long term debt (113,237) (62,059) Net cash provided by financing activities 589,495 536,972 Net increase (decrease) in cash and cash equivalents (216,776) (13,475) Cash and cash equivalents: Beginning of period 219,041 149,401 End of period 2,265 135,926 The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. NOTES TO FINANCIAL STATEMENTS (unaudited) 1) BASIS OF PRESENTATION The interim financial statements have been prepared by the Company, without audit and subject to year-end adjustment, in accordance with generally accepted accounting principles, except that certain information and footnote disclosures made in the latest annual report have been condensed or omitted for the interim statements. Certain costs are estimated for the full year and are allocated to interim periods based on estimates of operating time expired, benefit received, or activity associated with the interim period. The financial statements reflect all adjustments which are, in the opinion of management, necessary for fair presentation. Forward Looking Statement: This Management's Discussion and Analysis of Financial Condition and Results of Operation and other sections of this Form 10-QSB contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve risks and uncertainties that are based on current expectations, estimates and projections about the Company's business, and beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to: availability of financing for growth, availability of adequate supply of high quality grapes, successful performance of internal operations, impact of competition, changes in wine broker or distributor relations or performance, impact of possible adverse weather conditions, impact of reduction in grape quality or supply due to disease, impact of governmental regulatory decisions, successful assimilation of Tualatin Vineyards Inc.'s business with that of the Company and other risks detailed below as well as those discussed elsewhere in this Form 10-QSB and from time to time in the Company's Securities and Exchange Commission filings and reports. In addition, such statements could be effected by general industry and market conditions and growth rates, and general domestic economic conditions. 2) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOWS: June 30, December 31, 2000 1999 Winemaking and packaging materials $ 269,910 $ 276,571 Work-in-progress (costs relating to unprocessed and/or bulk wine products 2,642,210 2,463,709 Finished goods (bottled wines 3,295,949 3,402,417 and related products) _________ __________ $ 6,208,069 $ 6,142,697 3) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING: June 30, December 31, 2000 1999 Land and improvements $ 938,990 $ 938,990 Winery building and hospitality center 4,534,385 4,527,573 Equipment 4,132,703 4,089,297 _________ _________ 9,606,078 9,555,860 Less accumulated depreciation (3,500,638) (3,153,837) _________ _________ $ 6,105,440 $ 6,402,023 Management's Discussion and Analysis of Financial Condition and Results of Operation RESULTS OF OPERATIONS The Company's positive Second Quarter results stem from a combination of the following: - elimination of the two Sales Manager positions (West Coast and East Coast) which reduced payroll, travel and entertainment expenses. A portion of this sales effort was replaced by adding lower cost, in-office sales administrative support. The CEO and Winemaker are now traveling to the Company's distributors' trade shows and making in-market sales presentations. - increased sales focus resulting from stronger administrative staff support. - the introduction of the much anticipated '98 vintage of Pinot Noir, the Company's flagship varietal. A sixty day introductory period where the new vintage is offered at the current price caused some distributors to make large purchases to obtain a savings before the price increase became effective July 1 for the new vintage. - - cost savings by hiring a Marketing Director to supervise retail operations and expenditures. This change allowed the company to internalize preparation of the majority of its marketing materials, resulting in significant savings. Management is uncertain about the negative effect the '98 vintage price increase may have upon depletions from wholesale to retail. Through the first six months depletions are ahead of the previous year for the same period by 16%, where last year they were down 9% from the previous year. The Company is experiencing increases in wholesaler to retailer depletions with its flagship Pinot Noir and decreases with Chardonnay and Pinot Gris. Management has been successful in finding institutional buyers for the Pinot Gris which increased winery depletions but at lower than standard margins. Winery Operations The Company's revenues from winery operations before the deduction of excise taxes are summarized as follows: Three Months ended Six Months ended June 30, June 30, 2000 1999 2000 1999 Tasting Room Sales and Rental Income $ 255,016 $ 226,785 $ 401,427 $ 377,282 On-site and off-site festivals 76,443 85,920 209,489 200,335 In state sales 722,473 497,269 1,165,529 913,164 Out of state sales 587,385 451,238 1,165,419 908,857 Bulk wine/ Misc. sales - 12,754 6,280 29,719 Total Revenue $ 1,641,317 $ 1,273,966 $ 2,948,144 $ 2,429,357 Less Excise Taxes 58,015 43,561 107,421 82,716 Net Revenue $ 1,583,302 $ 1,230,405 $ 2,840,723 $ 2,346,641 Tasting Room sales and rental income for the three months ended June 30, 2000, increased 12% over the same period in 1999. For the first six months of 2000, the sales increased 6% over the same period in 1999. Retail sales in the tasting room increased in the second quarter of 2000 which helped bring the total revenue in the first six months of 2000 over last years total. The Company has hired a Preferred Customer Representative who is solely responsible to contact and promote sale of wine to valued customers who have made significant purchases in the past. On-site and off-site festival sales for the three months ended June 30, 2000 decreased 11% over the second quarter of 1999. For the first half of 2000, sales in this category increased 5% over the same period in 1999. During the first half of 2000, the Company's revenue from its two largest festivals increased over last year. In January 2000, the Company held a successful Crab and Chowder Festival at its facility to pair its wines with crab and local seafood. The Company also joined forces with a local seafood restaurant to educate its customers on the pairing of wine with popular seafood found at local restaurants. The result of festival increased revenue for on-site festivals in January by $16,000. The other largest event, Memorial Day Weekend, increased to $24,000 in 2000 from $20,000 in 1999. Sales in the state of Oregon, through the Company's independent sales force, increased 45% in the three months ending June 30, 2000 over the same period in 1999. For the first half of 2000, the sales increased 28% over the same period in 1999. The number of White Riesling cases sold in the first half of 2000, increased significantly over the same period in 1999. Also, sales in the Griffin Creek higher-priced and higher-margin wines grew from $32,823 in the first six months of 1999 to $90,728 in the first six months of 2000. Out-of-state sales in the three months ending June 30, 2000, increased 30% over the same period in 1999. For the first half of 2000,out-of- state sales increased 28% over the same period in 1999. In the month of June 2000, the Company sold 1,897 cases of 1998 vintage Pinot Noir which was one of its largest month in sales for this product in the history of the winery. In June 2000, the Company offered its out-of-state distributors a sixty day lower price for the 1998 vintage because the Company raised the price of Pinot Noir over the 1997 vintage. This resulted in a large buy-in by the distributors to beat the new price increases. Also in the first half of 2000, the Company made several large sales to institutional buyers. One of these buyers purchased 3,328 cases of Pinot Gris at a price below the Company's FOB standard price. This increased the number of cases of Pinot Gris sold in the first quarter of 2000 over 1999. The Company also sold 926 cases of its 1997 Tualatin Estate Riesling at a substantially lower margin. This wine had been moving slowly due to the fact that it directly competed with the more popular Willamette Valley brand of Riesling. Excise taxes The Company reports its excise taxes as a deduction of sales revenue to equal net revenue (as shown on the Statement of Operations). The amount for the first half of 2000 was $107,421. For the same period in 1999, the excise taxes collected was $82,716. Gross Margin Winery Operations As a percentage of revenue, gross margin for the winery operations decreased to 51% for the quarter ending June 30, 2000 as compared to 57% in the second quarter of 1999. For the first half of 2000, the gross margin decreased to 51% as compared to 56% for the first half of 1999. In the first six months of 2000, the Company sold a significant amount of Pinot Gris and Tualatin Estate Riesling at a price lower than its standard FOB price thus lowering the overall gross margin. The lower- priced White Riesling also contributed to the lower margin in the first six months of 2000 as compared to the same period in 1999. Selling, General and Administrative Expense Selling, general and administrative expenses decreased 4% to $649,049 in the second quarter of 2000 from $678,432 in the second quarter of 1999. For the first half of 2000, selling, general and administrative expenses decreased 6% to $1,241,372 from $1,324,441 in the first half of 1999.. As a percentage of revenue from winery operations, selling, general and administrative expenses decreased to 41% in the second quarter of 2000 from 55% in the second quarter of 1999. For the first half of 2000, as a percentage of revenue from winery operations, selling, general and administrative expenses decreased to 44% from 56% in the second quarter of 1999. The company experienced savings in its selling, general, and administrative expenses in two significant categories. By the elimination of its East and West Coast sales managers, the Company reduces its related travel and entertainment cost in the first half of 2000 compared to the same six months period in 1999. The Company saved a total of $53,000 in the first six months of 2000 over the same period in 1999. The other category was in the saving in the expenses arising from on-site events held at the winery. By closing monitoring its revenues verses expenses for each on-site event, the Company was able to reduce its spending by $27,000 in the first six months of 2000 as compared to the same six months in 1999. Interest Income, Other Income and Expense Interest income/other income increased to $7,616 for the second quarter of 2000 from $3,313 for the second quarter of 1999. For the six months of 2000, interest income/other income increased to $15,593 from $5,528 for the first half of 1999. Interest expense increased to $130,359 in the second quarter of 2000 from $122,507 in 1999. For the first six months of 2000, interest expense increased to $249,535 from $232,430 for the second half of 1999. LIQUIDITY AND CAPITAL RESOURCES At June 30, 2000, the Company had a working capital balance of $3.2 million and a current ratio of 1.9:1. At December 31, 1999, the Company had a working capital balance of $3.1 million and a current ratio of 1.8:1. The Company had a cash balance of $2,265 at June 30, 2000. At June 30, 2000, the line of credit balance was $2,400,584. On March 31, 1999, the Company obtained an increase in its line of credit from Farm Credit Services. The Company increased the maximum amount that may be borrowed under the line of credit to $2,500,000 from $2,000,000 to meet the Company cash needs in 1999 until renewal in May 2000. In March of 2000, Farm Credit Services has agreed to extend the Company's line of credit until February 1, 2001. The interest rate will be 10% as compared to the old base of 8.25%. The maximum amount that may be borrowed under the line of credit was increased to $2,750,000 from $2,500,000 less $50,000 commitment. The Company is subject to two borrowing deadlines. If the balance on the line is greater than $2,273,000 on September 30, 2000, the lender will increase the rate by .5% to 10.5%. If the balance on the line is greater than $2,292,000 on December 31, 2000, the interest rate will be at 11%. If the Company meets these loan requirements it will not be charged the additional interest rate. If the balance on the line of credit is less than the amounts set forth above on the applicable dates, the interest rate will remain at 10%. As of June 30, 2000, the Company had a total long-term debt balance of $3,484,654 owed with the majority owed to Farm Credit Services. This debt was used to finance the Hospitality Center, invest in winery equipment to increase the Company's winemaking capacity, complete the storage facility, and purchase Tualatin Vineyards. At December 31, 1999, the Company was in violation of one of its debt coverage covenants. Farm Credit Services has temporarily released the Company from complying with this one covenant. The covenants will be reviewed for compliance at the end of the year. In December 1999, the Company sold one partial of land and leased it back from the purchaser. This result created a liability account called deferred gain of $486,978. According to general accepted accounting rules, this gain must be recognized over the life of the 20-year lease. This allows the Company to record $6,350 as other income each quarter for the duration of the 20-year lease. At June 30, 2000, the Company owed $402,696 on grape contracts. A large portion is owed to a grape grower, which will be paid as the wine is sold. At June 30, 2000, the Company has contracted or is in the final stage to contract the purchase of approximately $1 million of grapes for its 2000 harvest. PART II. OTHER INFORMATION Other Item 6 Exhibits and Reports on Form 8-K. No exhibits or reports. SIGNATURES Pursuant to the requirements of the Security Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. WILLAMETTE VALLEY VINEYARDS, INC. Date: By /s/ James W Bernau James W Bernau President Date: By /s/ John Moore John Moore Controller SIGNATURES Pursuant to the requirements of the Security Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: By James W Bernau President Date: By John Moore Controller