10QSB 1 wvv01-1q10qsb.txt SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 ___________________________________________________________ FORM 10-QSB ___________________________________________________________ Quarterly Report Pursuant to Section 13 or 15 (d) of the Securities Exchange Act of 1934 For the Quarter Ended March 31, 2001 Commission File Number 0-21522 WILLAMETTE VALLEY VINEYARDS, INC. (Exact name of registrant as specified in charter) Oregon 93-0981021 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ___________________________________________________________ 8800 Enchanted Way, S.E., Turner, Oregon 97392 (503)-588-9463 (Address, including Zip code, and telephone number, including area code, of registrant's principal executive offices) ___________________________________________________________ Indicate by check mark whether the registrant (1) has filed, all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. [X] YES [ ] NO Number of shares of common stock outstanding as of March 31, 2001 4,256,981 shares, no par value Transitional Small Business Disclosure [ ] YES [X] NO WILLAMETTE VALLEY VINEYARDS, INC. INDEX TO FORM 10-QSB Part I - Financial Information Item 1-Financial Statements Balance Sheet Statement of Operations Statement of Cash Flows Notes to Consolidated Financial Statements Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations Part II - Other Information Item 1--Exhibits and Reports of Form 8-K Signatures PART 1 FINANCIAL INFORMATION ITEM 1 Financial Statements WILLAMETTE VALLEY VINEYARDS Balance Sheet (unaudited) March 31, December 31, 2001 2000 ASSETS. ____________ Current Assets: Cash and cash equivalents $ 14,541 $ 252,876 Accounts receivable trade, net 827,290 564,020 Inventories 6,662,728 6,921,014 Prepaid expenses and other current assets 123,427 45,954 Deferred income taxes 118,951 118,951 _________ _________ Total current assets 7,746,937 7,902,815 Vineyard development cost, net 1,616,858 1,608,365 Property and equipment, net 5,839,858 5,989,169 Investments 4,974 4,974 Notes receivable 57,899 56,869 Debt issuance costs, net 48,273 50,061 Other assets 229,482 185,619 _________ _________ Total assets $ 15,544,281 $ 15,797,872 LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Line of credit $ 2,700,000 $ 2,616,549 Current portion of long term debt 220,921 220,921 Accounts payable 916,693 847,883 Accrued commissions and payroll 129,486 143,662 Grapes payable 620,048 914,366 ________ ________ Total current liabilities 4,587,148 4,743,381 Long-term debt 3,351,817 3,406,681 Deferred rent liability 38,824 31,634 Deferred gain 468,449 474,695 Deferred income taxes ___146,819 ___146,819 Total liabilities 8,593,057 8,803,210 Shareholders' equity Common stock, no par value - 10,000,000 shares authorized, 4,256,981 and 4,254,481 shares issued and outstanding at March 31, 2001 and December 31, 2000 6,821,597 6,817,613 Retained earnings 129,627 177,049 __________ __________ Total shareholders' equity 6,951,224 6,994,662 Total liabilities and shareholders' equity $ 15,544,281 $ 15,797,872 The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. Statement of Operations (unaudited) Three months ended March 31, 2001 2000 Net Revenues Case Revenue $ 1,477,278 $ 1,257,421 Bulk Revenue 210,355 - Total Revenue 1,687,633 1,257,421 Cost of Sales Case 717,246 634,369 Bulk 180,316 - Total Cost of Sales 897,562 634,369 Gross Margin 790,071 623,052 Selling, general and administrative expense 718,960 592,322 Net operating income 71,111 30,730 Other income (expense) Interest income 1,030 961 Interest expense (125,966) (119,176) Other income 6,403 7,015 Net loss before income taxes (47,422) (80,470) Income tax - - Net loss (47,422) (80,470) Retained earnings beginning of period 177,049 161,987 Retained earnings end of period 129,627 81,517 Basic gain (loss) per common share (.01) (.02) Diluted loss per common share (.01) (.02) Weighted average number of basic common shares outstanding 4,256,981 4,253,431 The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. Statement of Cash Flows (unaudited) Three Months Ended March 31, 2001 2000 Cash flows from operating activities: Net loss $ (47,422) $ (80,470) Reconciliation of net loss to net cash used for operating activities: Depreciation and amortization 186,489 185,852 Stock issued for compensation 3,984 - Changes in assets and liabilities: Accounts receivable trade (263,270) (8,079) Inventories 258,286 (37,305) Prepaid expenses and other current assets (77,473) (10,970) Notes receivable (1,030) 3,809 Other assets (43,863) (27,089) Accounts payable 68,810 (273,889) Accrued commissions and payroll (14,176) - Income tax payable - (42,429) Grapes payable (294,318) (395,898) Deferred rent liability 7,190 - Deferred gain (6,246) (6,351) Net cash used for operating activities (223,039) (692,819) Cash Flow from investing activities Construction expenditures and purchases of equipment (19,733) (23,344) Vineyard development expenditures (24,150) (1,599) Net cash used by investing activities (43,883) (24,943) Cash Flows from financing activities: Line of credit borrowings (repayment) 83,451 555,000 Debt issuance cost - 8,406 Increase (decrease) in long term debt (54,864) (63,583) Net cash provided by financing activities 28,587 499,823 Net increase (decrease)in cash and cash equivalents (238,336) (217,939) Cash and cash equivalents: Beginning of period 252,876 219,041 End of period 14,541 1,102 The accompanying notes are an integral part of this financial statement. NOTES TO CONSOLIDATED FINANCIAL STATEMENT 1) BASIS OF PRESENTATION The interim financial statements have been prepared by the Company, without audit and subject to year-end adjustment, in accordance with generally accepted accounting principles, except that certain information and footnote disclosure made in the latest annual report have been condensed or omitted for the interim statements. Certain costs are estimated for the full year and are allocated to interim periods based on estimates of operating time expired, benefit received, or activity associated with the interim period. The financial statements reflect all adjustments, which are, in the opinion of management, necessary for fair presentation. 2) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOW: March 31, December 31, 2001 2000 Winemaking and packaging materials $ 481,608 $ 273,189 Work-in-progress (costs relating to unprocessed and/or bulk wine products) 2,003,253 2,415,006 Finished goods (bottled wines 4,177,867 4,232,819 and related products) _________ __________ $ 6,662,728 $6,921,014 ========= ========== 3) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING: March 31, December 31, 2001 2000 Land and improvements $ 965,309 $ 965,309 Winery building and hospitality center 4,552,321 4,549,081 Equipment 4,302,078 4,285,585 _________ __________ $ 9,819,708 $9,799,975 Less accumulated depreciation (3,979,850) (3,810,806) _________ __________ $ 5,839,858 $5,989,169 ========= ========== 4) SUBSEQUENT EVENTS: None. ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 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, 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 affected by general industry and market conditions and growth rates, and general domestic economic conditions. Management's Discussion and Analysis of Financial Condition and Results of Operations While the Company has always produced a net loss in the First Quarter, the weakest quarter in the industry, our losses are lower than the previous year due to improved sales in Oregon and in other states. Management expects continued improvements in sales volumes during the remainder of the year, particularly in states other than Oregon. The first quarter of 2001 marked the Company's transition from numerous independent distributors supported by a network of brokers to a single network of affiliated distributors in over half of the national market. The Company has experienced numerous growing pains from this transition, including increased sales salary and travel expenses, high distributor bill-backs resulting from the termination of the old distributors and final billings from terminated brokers. However, the Company has seen the benefits of the new relationship in the increased out of state sales achieved in the quarter. During this first quarter, our products received numerous accolades. The Company's '98 Willamette Valley Vineyards Hoodview Vineyard Pinot Noir received a Gold Medal, and a first ever Best of Show, at the McMinnville Wine Classic. The Company's '00 Tualatin Estate Vineyards (TEV) Semi-sparkling Muscat also received a Gold Medal at the McMinnville Wine Classic. At the Newport Seafood and Wine Festival, the '00 Whole Cluster Pinot Noir, the '99 Pinot Gris, and the '98 Tualatin Estate Vineyards Pinot Blanc received Gold Medals, as well as the Best of Show for the TEV Pinot Blanc. The Company continued to deal with the issue of white wine grape contracts established in early 1997 which were in excess of sales distribution capabilities. The sale of bulk Pinot Gris in early 2001 resulted in a sales margin below normal, but still at a profit. The first quarter of 2001 marked the end of numerous multiple year grape contracts that contributed to the problem and management believes there will be fewer problems regarding excess grapes in the future. RESULTS OF OPERATIONS Revenue Winery Operations The Company's revenues from winery operations are summarized as follows: Three Months Ended March 31, 2001 2000 Tasting Room sales & Rental Income $ 163,959 $ 146,411 On-site and off-site festivals 109,512 133,046 In state sales 614,686 443,056 Out of state sales 633,356 578,034 Bulk wine /misc sales 210,355 6,280 _________ _________ Gross Revenue $1,731,868 $ 1,306,827 Less Excise Taxes 44,235 49,406 Net Revenues 1,687,633 1,257,421 ========== ========== Tasting Room sales and rental income for the three months ending March 31, increased 12% to $163,959 in 2001 from $146,411 for the same period in 2000. Sales in the tasting room increased during the first quarter of 2001 due in part to management's focus on the retail performance. On-site and off-site festival sales for the first quarter of 2001 decreased 18% to $109,512 from $133,046 over the first quarter of 2000. In January 2001, the Company continued the tradition of holding its successful Crab Festival at its winery 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. Sales in the state of Oregon, through the Company's independent sales force, increased 39% to $614,687 in the first quarter of 2001 from $443,056 in the first quarter of 2000. The increase was due in part to a large buy-in by customers before the price for Riesling was increased, and in part to the continued strong efforts of management to motivate the independent sales force to improve. Out-of-state sales in the first quarter of 2001 increased 10% to $633,356 from $578,034 in the first quarter of 2000. In the first quarter of 2001, the Company began a transition to a new network of affiliated nationwide distributors. This change included the hiring of a new Executive Vice-President of Sales to oversee the distributor relationship, increasing out of state sales expenses by 51%. Expenses also increased due to the termination of old distributors as many distributors sent in invoices in their efforts to become current on all of the depletion and sample allowances owed them by the Company. The Company also sold 784 cases of its 1997 Tualatin Estate Riesling at a substantially lower margin. This wine had been moving slowly due to its direct competition with the more popular Willamette Valley brand of Riesling. The net effect of this sale was to generate an additional $24,000 in cash. Excise taxes The Company's excise taxes decreased in the first quarter of 2001 to $44,235 from $49,406 the same period in 2000. This was due in part to the increased sales of high margin products, and decreased case depletions of lower margin products in the first quarter of 2001, decreasing overall sales volumes and taxes paid by volume. Gross Profit Winery Operations As a percentage of revenue, gross profit for the winery operations decreased to 47% in the first quarter of 2001 as compared to 50% in the first quarter of 2000. After adjusting for the sale of bulk Pinot Gris and 1997 TEV Riesling as described above, the gross margin would have been 52% in the first quarter of 2001. The Company expects the gross margins in 2001 to be higher than in 2000 due to the Company's focus on, and improved distribution of, higher margin products. The Company plan to continue to eliminate some of its problem inventory by accepting lower margins and turning the inventory into cash. This will help bring inventory to what management considers a desirable operation level, but could depress the gross margin. Selling, General and Administrative Expense Selling, general and administrative expenses increased 21% to $718,960 in the first quarter of 2001 from $592,322 in the first quarter of 2000. As a percentage of revenue from winery operations, selling, general and administrative expenses decreased to 43% in the first quarter of 2001 from 47% in the first quarter of 2000. The Company increased its spending in the first quarter of 2001 in several categories. In the first quarter of 2001, the Company invested in its new distribution agreement through increased sales payroll expenditures, and sales and marketing travel expenses. Interest Income, Other Income and Expense Interest income increased to $1,030 for the first quarter of 2001 from $961 for the first quarter of 2000. Interest expense increased to $125,966 in the first quarter of 2000 from $119,176 in 2000. Interest costs were higher because the Company paid additional interest on a higher balance on its line of credit. Other income decreased to $6,403 for the first quarter 2001 from $7,015 for the first quarter of 2000. Income Taxes As in prior years, the Company experienced a net loss for the first three months in 2001. Therefore, no income tax expense was accrued. Liquidity and Capital Resources At March 31, 2001, the Company had a working capital balance of $3.2 million and a current ratio of 1.7:1. At December 31, 2000, the Company had a working capital balance of $3.2 million and a current ratio of 1.7:1. The Company had a cash balance of $14,541 at March 31, 2001. At March 31, 2001, the line of credit balance was $2,700,000. On February 1, 2001, the Company obtained an extension of its line of credit from Farm Credit Services. This extended the maturity date of the line of credit from February 1, 2001 to May 1, 2001. As of this date, Farm Credit Services has extended the Company's line of credit until August 1, 2001. The Company is researching alternate financing sources and expects to have a new line of credit in place by the August 1, 2001, the maturity date of the current line of credit. As of March 31, 2001, the Company had a total long-term debt balance of $3,572,738 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, 2000, the Company was in violation of 3 of 5 of its debt coverage covenants. Farm Credit Services has signed a waiver letter to the Company for these covenants. At March 31, 2001, the Company owed $620,048 on grape contracts. A large portion is owed to a single grape grower, which will be paid as the wine made from those grapes is sold. PART II. OTHER INFORMATION Item 1 Exhibits and Reports on Form 8-K. (a) No Exhibits SIGNATURES Pursuant to the requirements of the Security Exchange Act of 1934, as amended, 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/ Sean M. Cary Sean M. Cary Controller