10QSB 1 wvv01-2q10qsb.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 June 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 June 30, 2001 4,356,981 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 Item 5--Other Information Signatures PART 1 FINANCIAL INFORMATION ITEM 1 Financial Statements WILLAMETTE VALLEY VINEYARDS Balance Sheet (unaudited) June 30, December 31, 2001 2000 ASSETS. ____________ Current Assets: Cash and cash equivalents $184,190 $ 252,876 Accounts receivable trade, net 654,265 564,020 Inventories 6,573,070 6,921,014 Prepaid expenses and other current assets 112,520 45,954 Deferred income taxes 118,951 118,951 _________ _________ Total current assets 7,642,996 7,902,815 Vineyard development cost, net 1,609,742 1,608,365 Property and equipment, net 5,706,769 5,989,169 Investments 9,974 4,974 Notes receivable 71,984 56,869 Debt issuance costs, net 58,485 50,061 Other assets 211,878 185,619 _________ _________ Total assets $ 15,311,828 $ 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 546,806 847,883 Accrued commissions and payroll 105,087 143,662 Grapes payable 566,971 914,366 ________ ________ Total current liabilities 4,289,785 4,743,381 Long-term debt 3,296,594 3,406,681 Deferred rent liability 46,013 31,634 Deferred gain 462,203 474,695 Deferred income taxes ___146,819 ___146,819 Total liabilities 8,241,414 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 6,980,597 6,817,613 Retained earnings 89,817 177,049 __________ __________ Total shareholders' equity 7,070,414 6,994,662 Total liabilities and shareholders' equity $ 15,311,828 $ 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, Six months ended June 30, June 30, 2001 2000 2001 2000 Net Revenues Case Revenue $ 1,519,404 $ 1,583,302 $ 2,996,682 $ 2,840,723 Bulk Revenue - - 210,355 - Total Revenue 1,519,404 1,583,302 3,207,037 2,840,723 Cost of Sales Case 710,638 771,593 1,427,884 1,405,962 Bulk - - 180,316 - Total Cost of Sales 710,638 771,593 1,608,200 1,405,962 Gross Margin 808,766 811,709 1,598,837 1,434,761 Selling, general and administrative expenses 732,151 649,049 1,451,110 1,241,372 Net operating income 76,615 162,660 147,727 193,389 Other income (expense) Interest income 1,130 961 2,160 1,922 Interest expense (127,418) (130,359) (253,384) (249,535) Other income 9,863 6,655 16,265 13,671 Net income (loss) before Income taxes (39,810) 39,917 (87,232) (40,553) Income tax benefit - - - - Net income (loss) (39,810) 39,917 (87,232) (40,553) Retained earnings beginning of period 129,627 81,517 177,049 161,971 Retained earnings end of period 89,817 121,434 89,817 121,434 Basic gain (loss) per common share (.01) .01 (.02) (.01) Diluted gain (loss) per common share (.01) .01 (.02) (.01) Weighted average number of basic common shares outstanding 4,356,981 4,253,431 4,281,981 4,253,431 The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. Statement of Cash Flows (unaudited) Six Months Ended June 30, 2001 2000 Cash flows from operating activities: Net loss $ (87,232) $ (40,553) Reconciliation of net loss to net cash used for operating activities: Depreciation and amortization 352,651 376,599 Stock issued for compensation 3,984 - Changes in assets and liabilities: Accounts receivable trade (90,245) (157,571) Inventories 347,944 (65,372) Prepaid expenses and other current assets (66,566) 24,986 Other assets (26,259) - Accounts payable (301,077) (316,190) Accrued commissions and payroll (38,575) (28,632) Income tax payable - (42,244) Grapes payable (347,395) (425,147) Deferred rent liability 14,379 - Deferred gain (12,492) (21,077) Net cash used for operating activities (250,883) (692,228) Cash flow from investing activities Construction expenditures and purchases of equipment (46,963) (50,217) Vineyard development expenditures (33,089) (84,903) Notes receivable (15,115) 2,973 Investments (5,000) - Net cash used by investing activities (100,167) (135,120) Cash flows from financing activities: Line of credit borrowings (repayment) (1,266,549) 715,000 Notes Payable 1,500,000 Debt issuance cost - 8,809 Proceeds from issuance of common stock 159,000 - Decrease in long term debt (110,087) (113,237) Net cash provided by financing activities 282,364 610,572 Net decrease in cash and cash equivalents (68,686) (216,776) Cash and cash equivalents: Beginning of period 252,876 219,041 End of period 184,190 2,265 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: June 30, December 31, 2001 2000 Winemaking and packaging materials $ 654,937 $ 273,189 Work-in-progress (costs relating to unprocessed and/or bulk wine products) 1,906,874 2,415,006 Finished goods (bottled wines 4,011,259 4,232,819 and related products) _________ __________ $ 6,573,070 $6,921,014 ========= ========== 3) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING: June 30, December 31, 2001 2000 Land and improvements $ 965,909 $ 965,309 Winery building and hospitality center 4,552,321 4,549,081 Equipment 4,328,708 4,285,585 _________ __________ $ 9,846,938 $9,799,975 Less accumulated depreciation (4,140,169) (3,810,806) _________ __________ $ 5,706,769 $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 produced a net loss in the Second Quarter, we made positive gains in gross profit due to improved sales of higher margin products. Management expects sales volumes to improve during the remainder of the year, particularly in states other than Oregon, continuing the increase in gross profit. The first half 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 created a new top management position of National Sales Manager to oversee the new distribution network and filled the position in January increasing sales salary, travel, and marketing expenses. The Company has seen some benefits of the new relationship in the increased out of state sales achieved in the quarter, though not in the volumes expected. Management considers the adoption of the consolidated distribution network to be a very positive shift in our business practices. This shift will provide the Company a central focus on product sales, and shared perspective on problems and solutions. This change, though positive, does involve risks. Weaknesses in revenue generation will develop should the distributors fail to perform; this impact will be magnified due to the large portion of the market covered by the new network. During this second quarter, our products continued to garner numerous accolades. The Company's '98 Willamette Valley Vineyards Hoodview Vineyard Pinot Noir and Estate Chardonnay received Gold Medals at the Tasters Guild International Wine Judging. The Company's '98 Willamette Valley Vineyards Estate Vineyard Pinot Noir received a Silver Medal at the Northwest Wine Summit. RESULTS OF OPERATIONS Revenue Winery Operations The Company's revenues from winery operations are summarized as follows: Three Months ended Six Months ended June 30, June 30, 2001 2000 2001 2000 Tasting Room Sales and Rental Income $ 314,239 $ 255,016 $ 537,290 $ 401,427 On-site and off-site festivals 48,886 76,443 99,306 209,489 In state sales 595,234 722,473 1,209,921 1,165,529 Out of state sales 597,132 587,385 1,230,487 1,165,419 Bulk wine/ Misc. sales 13,446 - 223,801 6,280 Total Revenue $ 1,568,937 $ 1,641,317 $ 3,300,805 $ 2,948,144 Less Excise Taxes 49,533 58,015 93,768 107,421 Net Revenue $ 1,519,404 $ 1,583,302 $ 3,207,037 $ 2,840,723 Tasting Room sales and rental income for the three months ending June 30, increased 23% to $314,239 in 2001 from $255,016 for the same period in 2000. For the first six months of 2001, sales increased 34% over the same period in 2000. Retail sales increased during the second quarter of 2001 due in part to improved over-the-phone sales of 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 second quarter of 2001 decreased 36% to $48,886 from $76,443 over the second quarter of 2000. During the first half of 2001, sales in this category decreased 53% 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 1% to $518,903 in the second quarter of 2001 from $513,074 in the second quarter of 2000. The Company's direct instate sales to our largest customer decreased 63% to $76,331 from $209,399 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 half of 2001, in-state sales increased 4% over the same period in 2000. This increase is due primarily to the buy-in on Riesling during the first quarter prior to the price increase. Out-of-state sales in the second quarter of 2001 increased 2% to $597,132 from $587,385 in the second quarter of 2000. In the second quarter of 2001, the Company continued to experience growing pains from the transition to a new sales structure and distribution network. During 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%. Excise taxes The Company's excise taxes decreased in the second quarter of 2001 to $49,533 from $58,015 the same period in 2000. For the first half 2001, excise taxes decreased to $93,768 from $107,421 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 half 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 53% in the second quarter of 2001 as compared to 51% in the second quarter of 2000. This 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 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 gross margins. Selling, General and Administrative Expenses Selling, general and administrative expenses increased 13% to $732,151 in the second quarter of 2001 from $649,049 in the second quarter of 2000. For the first half of 2001, selling, general and administrative expenses increased 17% to $1,451,110 from $1,241,372 in the first half of 2000. As a percentage of revenue from winery operations, selling, general and administrative expenses increased to 48% in the second quarter of 2001 from 41% in the second quarter of 2000. The Company increased its spending in the first half of 2001 in several categories. In the first half 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 $1,130 for the second quarter of 2001 from $961 for the second quarter of 2000. Interest expense decreased to $127,418 in the second quarter of 2001 from $130,359 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 quarter. Other income increased to $9,863 for the second quarter 2001 from $6,655 for the second quarter of 2000. Income Taxes The Company experienced a net loss for the first six months in 2001. No income tax benefit has been recorded. Liquidity and Capital Resources At June 30, 2001, the Company had a working capital balance of $3.4 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 $184,190 at June 30, 2001. At June 30, 2001, the line of credit balance was $1,350,000. On May 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 May 1, 2001 to August 1, 2001. As of this date, Farm Credit Services has extended the Company's line of credit until October 1, 2001. The Company is finalizing alternate financing and expects to have a new line of credit in place by October 1, 2001, the maturity date of the current line of credit. As of June 30, 2001, the Company had a total long-term debt balance of $3,517,515 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 June 30, 2001, the Company owed $566,971 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 Item 5 - Other Information In connection with its ongoing transition to a national network of affiliated distributors, the Company has entered into an agreement with fourteen affiliated distributors under which the Company's products will be distributed in certain states. As part of that agreement, the Company has agreed to pay the distributors incentive compensation if certain sales goals are met over the next five years. The incentive compensation will be paid only in the event of a transaction in excess of $12 million in value in which either the Company sells all or substantially all of its assets or a merger, sale of stock, or other similar transaction occurs, the result of which is that the Company's current shareholders do not own at least a majority of the outstanding shares of capital stock of the surviving entity. Assuming the $12 million threshold is met and the distributors meet certain sales goals, the distributors will be entitled to incentive compensation equal to 20% of the total proceeds from the sale or transaction and up to 17.5% of the difference between the transaction value and approximately $8.5 million. 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