10QSB 1 wvv022q10q.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, 2002 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, 2002 4,466,981 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 on Form 8-K Signatures PART 1 FINANCIAL INFORMATION ITEM 1 Financial Statements WILLAMETTE VALLEY VINEYARDS, INC. Balance Sheet March 31, December 31, 2002 2001 (unaudited) ASSETS. __________ __________ Current Assets: Cash and cash equivalents $ 185,192 $ 504,510 Accounts receivable trade, net 718,478 746,678 Inventories 7,029,528 6,905,865 Prepaid expenses and other current assets 69,938 87,512 Deferred income taxes 146,054 146,054 __________ __________ Total current assets 8,149,190 8,390,619 Vineyard development cost, net 1,702,404 1,697,452 Inventories 584,925 584,925 Property and equipment, net 5,493,910 5,652,067 Notes receivable 67,155 77,378 Debt issuance costs, net 63,122 64,910 Other assets 201,424 205,884 __________ __________ Total assets $16,262,130 $16,673,235 ========== ========== LIABILITIES AND SHAREHOLDERS EQUITY Current liabilities Line of credit $ 1,500,000 $ 1,352,500 Current portion of long term debt 242,649 242,649 Accounts payable 901,978 1,002,501 Accrued commissions and payroll 119,856 138,486 Income taxes payable 17,969 17,969 Grapes payable 813,356 1,136,487 __________ __________ Total current liabilities 3,595,808 3,890,592 Long-term debt 3,120,293 3,184,031 Distributor obligation 1,500,000 1,500,000 Deferred rent liability 66,845 60,392 Deferred gain 443,465 449,711 Deferred income taxes 209,968 209,968 __________ __________ Total liabilities 8,936,379 9,294,694 __________ __________ Shareholders' equity Common stock, no par value - 10,000,000 shares authorized, 4,466,981 and 4,464,981 shares issued and outstanding at March 31, 2002 and December 31, 2001 7,153,222 7,142,647 Retained earnings 172,529 235,894 __________ __________ Total shareholders' equity 7,325,751 7,378,541 __________ __________ Total liabilities and shareholders' equity $16,262,130 $16,673,235 ========== ========== The accompanying notes are an integral part of this financial statement. WILLAMETTE VALLEY VINEYARDS, INC. Statement of Operations (unaudited) Three months ended March 31, 2002 2001 __________ __________ Net Revenues Case Revenue $ 1,257,640 $ 1,477,278 Bulk Revenue - 210,355 __________ __________ Total Revenue 1,257,640 1,687,633 Cost of Sales Case 595,787 717,246 Bulk - 180,316 __________ __________ Total Cost of Sales 595,787 897,562 Gross Margin 661,853 790,071 Selling, general and administrative expense 643,977 718,960 __________ __________ Net operating income 17,876 71,111 Other income (expense) Interest income 1,106 1,030 Interest expense (88,593) (125,966) Other income 6,246 6,403 __________ __________ Net loss before income taxes (63,365) (47,422) Income tax - - __________ __________ Net loss (63,365) (47,422) Retained earnings beginning of period 235,894 177,049 __________ __________ Retained earnings end of period $ 172,529 $ 129,627 ========== ========== Basic loss per common share $ (.01) $ (.01) Diluted loss per common share $ (.01) $ (.01) Weighted average number of basic common shares outstanding 4,466,981 4,393,844 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, 2002 2001 __________ __________ Cash flows from operating activities: Net loss $ (63,365) $ (47,422) Reconciliation of net loss to net cash used for operating activities: Depreciation and amortization 188,397 186,489 Stock issued for compensation - 3,984 Changes in assets and liabilities: Accounts receivable trade 28,200 (263,270) Inventories (123,663) 258,286 Prepaid expenses and other current assets 17,574 (77,473) Notes receivable 10,223 (1,030) Other assets 4,460 (43,863) Accounts payable (100,523) 68,810 Accrued commissions and payroll (18,630) (14,176) Grapes payable (323,131) (294,318) Deferred rent liability 6,453 7,190 Deferred gain (6,246) (6,246) __________ __________ Net cash used for operating activities (380,251) (223,039) __________ __________ Cash flows from investing activities; Construction expenditures and purchases of equipment (11,534) (19,733) Vineyard development expenditures (21,870) (24,150) __________ __________ Net cash used by investing activities (33,404) (43,883) __________ __________ Cash flows from financing activities: Line of credit borrowings 147,500 83,451 Proceeds from options exercised 10,575 - Decrease in long term debt (63,738) (54,864) __________ __________ Net cash provided by financing activities 94,337 28,587 __________ __________ Net decrease in cash and cash equivalents (319,318) (238,336) Cash and cash equivalents: Beginning of period 504,510 252,876 __________ __________ End of period $ 185,192 $ 14,541 ========== ========== 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, 2002 2001 Winemaking and packaging materials $ 223,492 $ 252,828 Work-in-progress (costs relating to unprocessed and/or bulk wine products) 3,137,767 2,941,755 Finished goods (bottled wines 4,253,194 4,296,207 and related products) __________ __________ Total 7,614,453 7,490,790 Less: amounts designated for distributor (584,925) (584,925) __________ __________ Current inventories $ 7,029,528 $ 6,905,865 ========== ========== 3) PROPERTY AND EQUIPMENT CONSIST OF THE FOLLOWING: March 31, December 31, 2002 2001 Land and improvements $ 984,954 $ 984,954 Winery building and hospitality center 4,561,118 4,561,118 Equipment 4,610,910 4,599,377 __________ __________ 10,156,982 10,145,449 Less accumulated depreciation (4,663,072) (4,493,382) __________ __________ $ 5,493,910 $ 5,652,067 ========== ========== 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. Critical Accounting Policies: The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition, collection of accounts receivable, valuation of inventories, and amortization of vineyard development costs. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. A description of our critical accounting policies and related judgments and estimates that affect the preparation of our financial statements is set forth in our Annual Report on Form 10-K for the year ended December 31, 2001. New Accounting Pronouncements In October 2001, the FASB issued SFAS 144, "Accounting for the Disposal of Long-Lived Assets," which supersedes SFAS 121, "Accounting for the Impairment Of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS 144 retains the fundamental provisions of SFAS 121 regarding the recognition and measurement of the impairment of long-lived assets to be held and used and the measurement of long-lived assets to be disposed by sale, but provides additional definition and measurement criteria for determining when an impairment has occurred. Goodwill and financial assets are excluded from the scope of SFAS 144, however amortizable intangible assets fall within its scope. The adoption of this statement in the first quarter of 2002 did not have a material impact on our consolidated financial statements. In May 2002, the FASB issued SFAS 145, "Rescission of FAS Nos. 4, 44, and 64, Amendment of FAS 13, and Technical Corrections." Among other things, SFAS 145 rescinds various pronouncements regarding early extinguishment of debt and allows extraordinary accounting treatment for early extinguishment only when the provisions of Accounting principles Board Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" are met. SFAS 145 provisions regarding early extinguishment of debt are generally effective for fiscal years beginning after May 15, 2002. The Company expects to adopt this statement during 2002. Management believes that the adoption of SFAS 145 would not have an impact on the Company's consolidated financial statements as of March 31, 2002. Management's Discussion and Analysis of Financial Condition and Results of Operations The Company has always produced a net loss in the First Quarter, the weakest quarter in the industry, and the First Quarter of 2002 was no exception. The Company made positive gains in gross profit as a percentage of sales during the First Quarter over the prior year. Management expects sales volumes to improve during the remainder of the year, particularly in states other than Oregon, continuing the increase in gross profit. During the first quarter of 2002 the trend of higher depletions (wine sales) from distributor to the retail trade, continued. This helped the Company and its distributors sell through much of the excess inventories resulting from lower than expected depletions in the prior year. Management expects the higher depletions to equate to higher sales volumes during the remainder of the year, particularly in states other than Oregon. Our products continued to receive numerous accolades during this first quarter. The Company's '99 Willamette Valley Vineyards Hoodview Vineyard Pinot Noir, and '01 Tualatin Estate Vineyards (TEV) Semi-sparkling Muscat received Gold Medals at the McMinnville Wine Classic. The Company's '99 Willamette Valley Vineyards Estate Vineyard Pinot Noir also received a Silver Medal at the McMinnville Wine Classic. At the Newport Seafood and Wine Festival, the '00 Founders Reserve Pinot Gris received a Gold Medal. At the Dallas Morning News National Wine Competition in Dallas, Texas, the Company's '00 Griffin Creek Viognier received a gold Medal, and '99 Griffin Creek Syrah received a Bronze Medal. RESULTS OF OPERATIONS Revenue Winery Operations The Company's revenues from winery operations are summarized as follows: Three months ended March 31, 2002 2001 __________ __________ Tasting Room sales & Rental Income $ 340,062 $ 223,301 On-site and off-site festivals 45,826 50,170 In state sales 540,008 614,686 Out of state sales 367,878 633,356 Bulk wine /misc sales - 210,355 __________ __________ Gross Revenue 1,293,774 1,731,868 Less Excise Taxes 36,134 44,235 __________ __________ Net Revenues $ 1,257,640 $ 1,687,633 ========== ========== Tasting room and retail sales, and rental income for the three months ending March 31, increased 52% to $340,062 in 2002 from $223,301 for the same period in 2001. Tasting room and retail sales increased during the first quarter of 2002 due in part to management's focus on retail performance, and the continued success of the Key Customer Service program. On-site and off-site festival sales for the first quarter of 2002 decreased 9% to $45,826 from $50,170 over the first quarter of 2001. This decrease is due primarily to the continuing focus away from on-site and off-site events, and towards telephone, mail order and retail sales. Sales in the state of Oregon, through the Company's independent sales force and through direct sales from the winery, decreased 12% to $540,008 in the first quarter of 2002 from $614,686 in the first quarter of 2001. The decline was due to a 65% decrease in sales to one large retailer from $195,781 in 2001, to $68,281 in the first quarter of 2002. This sales decline was due to a harvest shortage of Riesling faced by the Company due to an unusual frost during the spring of 2000. With a very successful 2001 harvest, the Company is refocusing sales efforts on this customer in an attempt to regain the higher sales volumes of the prior year. Sales through the Company's independent sales force for the first quarter of 2002 increased 13% to $471,727 from $418,905 over the first quarter of 2001. Out-of-state sales in the first quarter of 2002 decreased 42% to $367,878 from $633,354 in the first quarter of 2001. As a result of temporary loss of depletions and slower than expected sales during 2001, the Company had high inventory levels in its distribution houses that resulted in lower sales from the winery. The Company's distributors experienced higher depletions during the first quarter of 2002 and worked through much of their excess inventories. Management has begun engaging local professional wine brokers, paid on performance, to assist distributors with account placements, local sales programs, and continued increased depletions. Excise taxes The Company's excise taxes decreased in the first quarter of 2002 to $36,134 from $44,235 the same period in 2001. 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 2002, 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 first quarter of 2002 as compared to 47% in the first quarter of 2001. After adjusting for the sale of bulk Pinot Gris in the first quarter of 2001, the gross margin would have been 51% in the first quarter of 2001. The Company is continuing its focus on, and improved distribution of, higher margin products, as well as continuing to reduce grape and production costs. The Company was able to eliminate some of its problem inventory in 2001 by accepting lower margins and turning the inventory into cash. This helped bring inventory closer to what management considers a desirable operation level, and improved the gross margin for the first quarter of 2002. Selling, General and Administrative Expense Selling, general and administrative expenses decreased 10% to $643,977 in the first quarter of 2002 from $718,960 in the first quarter of 2001. As a percentage of revenue from winery operations, selling, general and administrative expenses increased to 51% in the first quarter of 2002 from 43% in the first quarter of 2001. The Company decreased its spending in the first quarter of 2002 in several categories. In the first quarter of 2002, the Company substantially reduced its fixed sales costs by eliminating the national sales manager position, thereby reducing sales payroll expenditures, and sales and marketing travel expenses. Interest Income, Other Income and Expense Interest income increased to $1,106 for the first quarter of 2002 from $1,030 for the first quarter of 2001. Interest expense decreased to $88,593 in the first quarter of 2002 from $125,966 in 2001. Interest costs were lower because the Company paid interest on a lower balance on its line of credit. Other income decreased to $6,246 for the first quarter 2002 from $6,403 for the first quarter of 2001. Income Taxes As in prior years, the Company experienced a net loss for the first three months in 2002. Therefore, no income tax expense was accrued. Liquidity and Capital Resources At March 31, 2002, the Company had a working capital balance of $4.5 million and a current ratio of 2.3:1. At December 31, 2001, the Company had a working capital balance of $4.5 million and a current ratio of 2.2:1. The Company had a cash balance of $185,192 at March 31, 2002. At March 31, 2002, the line of credit balance was $1,500,000. On March 1, 2002, 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 March 1, 2002 to June 1, 2002. The Company is currently negotiating an agreement with another financial institution and management expects a final agreement to be in place in the near future. Management expects the financing agreement to provide for maximum borrowings of $2,700,000 with an interest rate of the bank's prime plus .8 percent. Management also expects the agreement to include, among other things, certain restrictive financial covenants with respect to total equity, debt-to-equity and debt coverage. As of March 31, 2002, the Company had a total long-term debt balance of $3,362,942 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, 2001, the Company was in violation of 1 of 5 of its debt coverage covenants. Farm Credit Services has signed a waiver letter to the Company for these covenants. At March 31, 2002, the Company owed $813,356 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. The Company believes that cash flow from operations and funds available under credit facilities will be sufficient to meet the Company's liquidity requirements for the next 12 months. As discussed above the Company is currently negotiating with a financial institution to refinance the existing line of credit. The Company is also negotiating the sale/leaseback for a parcel of Tualatin Estate, the sale of which would generate significant cash to meet the Company's liquidity requirements for the next 12 months. If the Company is unable to extend or refinance the Farm Credit Services debt with another institution and/or sell the real estate, the Company may be unable to continue its normal operations, except to the extent permitted by Northwest Farm Credit Services. 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: May 15, 2002 By /s/ James W. Bernau James W. Bernau President Date: May 15, 2002 By /s/ Sean M. Cary Sean M. Cary Controller