10QSB 1 wvv013q10q.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 September 30, 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 September 30, 2001 4,456,981 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 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 Item 5--Other Information Signatures PART 1 FINANCIAL INFORMATION ITEM 1 Financial Statements WILLAMETTE VALLEY VINEYARDS Balance Sheet September 30, December 31, 2001 2000 (unaudited) ASSETS. _________ _________ Current Assets: Cash and cash equivalents $ 347,358 $ 252,876 Accounts receivable trade, net 897,237 564,020 Inventories 6,604,900 6,921,014 Prepaid expenses and other current assets 106,951 45,954 Deferred income taxes 118,951 118,951 _________ _________ Total current assets 8,075,397 7,902,815 Vineyard development cost, net 1,594,818 1,608,365 Property and equipment, net 5,731,215 5,989,169 Investments 9,974 4,974 Notes receivable 72,131 56,869 Debt issuance costs, net 66,698 50,061 Other assets 206,507 185,619 __________ __________ Total assets $ 15,756,740 $ 15,797,872 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Line of credit $ 1,350,000 $ 2,616,549 Notes Payable 1,500,000 - Current portion of long term debt 220,921 220,921 Accounts payable 794,279 847,883 Accrued commissions and payroll 155,021 143,662 Grapes payable 540,865 914,366 _________ _________ Total current liabilities 4,561,086 4,743,381 Long-term debt 3,274,279 3,406,681 Deferred rent liability 53,203 31,634 Deferred gain 455,957 474,695 Deferred income taxes 146,819 146,819 _________ _________ Total liabilities 8,491,344 8,803,210 Shareholders' equity Common stock, no par value - 10,000,000 shares authorized, 4,356,981 and 4,254,481 shares issued and outstanding at June 30, 2001 and December 31, 2000 7,139,597 6,817,613 Retained earnings 125,799 177,049 __________ __________ Total shareholders' equity 7,265,396 6,994,662 Total liabilities and shareholders' equity $ 15,756,740 $ 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, Nine months ended September 30, September 30, 2001 2000 2001 2000 Net Revenues Case Revenue $ 1,792,161 $ 1,469,903 $ 4,775,397 $ 4,310,626 Bulk Revenue 121,810 112,655 345,611 112,655 _________ _________ _________ _________ Total Revenue 1,913,971 1,582,558 5,121,008 4,423,281 Cost of Sales Case 898,648 743,897 2,326,532 2,149,784 Bulk 116,783 170,774 297,099 170,849 _________ ________ _________ _________ Total Cost of Sales 1,015,431 914,671 2,623,631 2,320,633 Gross Margin 898,540 667,887 2,497,377 2,102,648 Selling, general and administrative expenses 771,544 730,366 2,222,655 1,971,737 _________ ________ _________ _________ Net operating income 126,996 (62,479) 274,722 130,911 _________ ________ _________ _________ Other income (expense) Interest income 1,304 971 3,464 2,893 Interest expense (98,927) (137,027) (352,311) (386,562) Other income 6,632 118,453 22,898 134,481 Other expense (23) - (23) (2,263) _________ ________ _________ _________ Net income (loss) before Income taxes 35,982 (80,082) (51,250) (120,540) Income tax expense - (79) - (79) _________ ________ _________ _________ Net income (loss) $ 35,982 $ (80,161) $ (51,250) $(120,619) _________ ________ _________ _________ Retained earnings beginning of period 89,817 121,429 177,049 161,987 Retained earnings end of period $125,799 $ 41,368 $125,799 $ 41,368 Basic gain (loss) per common share $ .01 $ (.02) $ (.01) $ (.03) Diluted gain (loss) per common share $ .01 $ (.02) $ (.01) $ (.03) Weighted average number of basic common shares outstanding 4,516,257 4,253,431 4,323,968 4,253,431 The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. Statement of Cash Flows (unaudited) Nine Months Ended September 30, 2001 2000 ________ ________ Cash flows from operating activities: Net loss $ (51,250) $ (120,619) Reconciliation of net loss to net cash used for operating activities: Depreciation and amortization 549,310 570,092 Stock issued for compensation 3,984 - Changes in assets and liabilities: Accounts receivable trade (333,217) (59,728) Inventories 316,114 (173,502) Prepaid expenses and other current assets (60,997) 31,199 Other assets (20,888) - Accounts payable (53,604) (227,297) Accrued commissions and payroll 11,359 (21,488) Income tax payable - (42,500) Grapes payable (373,501) (480,844) Deferred rent liability 21,569 - Deferred gain (18,738) (53,748) ________ ________ Net cash used for operating activities (9,859) (578,435) ________ ________ Cash flow from investing activities Construction expenditures and purchases of equipment (243,385) (173,430) Vineyard development expenditures (34,424) (58,306) Notes receivable (15,262) 2,001 Investments (5,000) - ________ ________ Net cash used by investing activities (298,071) (229,735) ________ ________ Cash flows from financing activities: Line of credit borrowings (repayment) (1,266,549) 715,000 Notes Payable 1,500,000 Debt issuance cost (16,637) 10,226 Proceeds from issuance of common stock 318,000 - Decrease in long term debt (132,402) (133,626) ________ ________ Net cash provided by financing activities 402,412 591,600 ________ ________ Net increase/(decrease) in cash And cash equivalents 94,482 (216,570) Cash and cash equivalents: Beginning of period 252,876 219,041 ________ ________ End of period $ 347,358 $ 2,471 ________ ________ The accompanying notes are an integral part of this financial statement. NOTES TO FINANCIAL STATEMENTS 1) BASIS OF PRESENTATION The interim financial statements have been prepared by the Company, without audit and subject to year-end adjustment, in accordance with generally accepted accounting principles, except that certain information and footnote disclosure made in the latest annual report have been condensed or omitted for the interim statements. Certain costs are estimated for the full year and are allocated to interim periods based on estimates of operating time expired, benefit received, or activity associated with the interim period. The financial statements reflect all adjustments, which are, in the opinion of management, necessary for fair presentation. 2) INVENTORIES BY MAJOR CLASSIFICATION ARE SUMMARIZED AS FOLLOW: September 30, December 31, 2001 2000 Winemaking and packaging materials $ 863,084 $ 273,189 Work-in-progress (costs relating to unprocessed and/or bulk wine products) 802,243 2,415,006 Finished goods (bottled wines 4,939,573 4,232,819 and related products) _________ __________ $6,604,900 $6,921,014 ========= ========== 3) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING: September 30, December 31, 2001 2000 Land and improvements $ 984,954 $ 965,309 Winery building and hospitality center 4,557,839 4,549,081 Equipment 4,500,567 4,285,585 _________ __________ $10,043,360 $ 9,799,975 Less accumulated depreciation (4,312,145) (3,810,806) _________ __________ $ 5,731,215 $5,989,169 ========= ========== 4) SUBSEQUENT EVENTS: None. ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations Forward Looking Statements: 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 The Company's positive Third Quarter results stem from a combination of the following: - Significantly higher out-of-state sales resulting from the efforts of the new National Sales Manager and new distribution network headed by the Charmer Sunbelt Group, one of the nation's leading wine distributors. - Significantly higher retail sales due to an expanded key customer service program. - Both increases in out-of-state and retail sales exceeded a decline in in- state wholesale sales from the previous Third Quarter due to the lack of product availability for direct sales to our largest customer. The Company experienced a short crop of Riesling the previous year due to an unusual spring frost. - The Company's shift to higher quality, higher margin products and the recognition the winery is receiving for highly rated wines. The Company continued implementing the new national distribution agreement in the Third Quarter and is now experiencing higher depletions overall from the new network in those markets. While the time required to meet state licensing requirements, transfer inventories and integrate the Company's products into the new distribution network has been lengthy, resulting in high distributor inventories of the Company's products, Management expects significantly higher depletions from the distributors to the retail trade in the future. Management expects a period where the new distribution network will need to sell through its current inventories before the higher sales to retail they are experiencing are reflected in consistently larger orders to the winery. RESULTS OF OPERATIONS Revenue Winery Operations The Company's revenues from winery operations are summarized as follows: Three Months ended Nine Months ended September 30, September 30, 2001 2000 2001 2000 Tasting Room Sales and Rental Income $ 406,326 $ 279,168 $ 943,616 $ 680,594 On-site and off-site festivals 50,868 64,114 150,174 273,603 In state sales 645,963 766,312 1,855,883 1,931,841 Out of state sales 741,703 418,016 1,972,191 1,589,716 Bulk wine/ Misc. sales 121,810 112,655 345,611 112,655 _________ _________ _________ _________ Total Revenue 1,966,670 1,640,265 5,267,475 4,588,409 Less Excise Taxes 52,699 57,707 146,467 165,128 _________ _________ _________ _________ Net Revenue $ 1,913,971 $ 1,582,558 $ 5,121,008 $ 4,423,281 _________ _________ _________ _________ Tasting Room sales and rental income for the three months ending September 30, increased 46% to $406,326 in 2001 from $279,168 for the same period in 2000. For the first nine months of 2001, sales increased 39% over the same period in 2000. Retail sales increased during the third quarter of 2001 due in part to the Preferred Customer Representatives who are 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 third quarter of 2001 decreased 21% to $50,868 from $64,114 over the third quarter of 2000. During the first nine months of 2001, sales in this category decreased 45% over the same period in 2000. This decrease in festival revenues is primarily due to a change in focus from event driven sales to retail outlet sales. The Company has focused on retail sales that provide higher margins and lower associated costs. Sales in the state of Oregon, through the Company's independent sales force, increased 18% to $577,957 in the third quarter of 2001 from $489,438 in the third quarter of 2000. This increase was the result of a continued effort by management and the Instate Sales Force to increase market share. The Company's direct instate sales to our largest customer decreased 75% to $68,006 from $276,874 in 2000. This decrease was primarily the result of a price increase for Riesling because of the low 2000 harvest, due to a late frost, and resulting lack of volume. For the first nine months of 2001, in-state sales decreased 4% over the same period in 2000. This decrease is due primarily to the decreased sales to the largest instate customer. Out-of-state sales in the third quarter of 2001 increased 77% to $741,703 from $418,016 in the third quarter of 2000. In the third quarter of 2001, the Company experienced a large increase in sales to the new distribution network. During the first quarter of 2001, the Company began a transition to a new network of affiliated nationwide distributors. The long-term goal of this change was to increase out-of-state sales, and the Company is beginning to see the positive results. Bulk wine sales increased 8% in the third quarter of 2001 to $121,810 from $112,655. For the first nine months of 2001, sales increased 207% over the same period in 2000. The Company overcame the excess supply of grapes contracted for in previous years through bulk wine sales. These sales, unlike in previous years resulted in positive revenue. Management believes all contracts resulting in excess grapes have ended, with the remaining over supply resulting from white varieties off a leased vineyard, entered into in early 1997 with a ten-year term. Excise taxes The Company's excise taxes decreased in the third quarter of 2001 to $52,699 from $57,707 the same period in 2000. For the first nine months of 2001, excise taxes decreased to $146,467 from $165,128 for 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 nine months 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 increased to 47% in the third quarter of 2001 as compared to 42% in the third quarter of 2000. The gross profit for the winery operations, excluding bulk wine sales increased to 50% in the third quarter of 2001 as compared to 49% in the third quarter of 2000. This increase is due in part to the reduction in bulk wine sales, and the profitability of bulk wine sales in 2001. Also, the increase is a result of the lower sales of lower margin products, such as Riesling, and higher sales of higher margin products like Pinot Noirs. 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 plans to continue to eliminate some of its slow moving 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 gross margins. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 6% to $771,544 in the third quarter of 2001 from $730,366 in the third quarter of 2000. For the first nine months of 2001, selling, general and administrative expenses increased 13% to $2,222,655 from $1,971,737 in the first nine months of 2000. As a percentage of revenue from winery operations, selling, general and administrative expenses decreased to 40% in the third quarter of 2001 from 46% in the third quarter of 2000. The Company increased its spending in the first nine months of 2001 in several categories. In the first nine months of 2001, the Company invested in its new distribution agreement through increased sales payroll expense, sales, marketing, and travel expenses. Interest Income and Expense, Other Income and Expense Interest income increased to $1,304 for the third quarter of 2001 from $971 for the third quarter of 2000. Interest expense decreased to $98,927 in the third quarter of 2001 from $137,027 in 2000. Interest costs were lower because the Company paid lower interest rates on its line of credit, and because the company paid down half of its line of credit during the second quarter of 2001. Other income decreased to $6,632 for the third quarter 2001 from $118,453 for the third quarter of 2000. This large decrease was due to the settlement in the Company's favor of a lawsuit initiated by the company in 2000 that led to $60,000, and rebates from Farm Credit Services for $37,000 of other income. Income Taxes The Company experienced a net loss for the first nine months in 2001. No income tax benefit has been recorded. Liquidity and Capital Resources At September 30, 2001, the Company had a working capital balance of $3.5 million and a current ratio of 1.8:1. 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 $347,358 at September 30, 2001. At September 30, 2001, the line of credit balance was $1,350,000. On August 2, 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 August 1, 2001 to October 1, 2001. As of October 1, 2001, Farm Credit Services has extended the Company's line of credit until December 1, 2001. The Company is exploring alternate financing with the goal to have a new line of credit in place for the new year. As of September 30, 2001, the Company had a total long-term debt balance of $3,495,200 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 September 30, 2001, the Company owed $540,865 on grape contracts. This amount 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